Back to GetFilings.com
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19092
------------------------
ROSS SYSTEMS, INC.
TWO CONCOURSE PARKWAY
SUITE 800
ATLANTA, GEORGIA 30328
(770) 351-9600
(INCORPORATED IN DELAWARE) (I.R.S. EMPLOYER IDENTIFICATION
NO. 94-2170198)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NONE NAME OF EACH EXCHANGE ON: NONE
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
$0.001 PAR VALUE; PREFERRED SHARES PURCHASE RIGHTS
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / /
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. / /
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT, BASED UPON THE CLOSING SALE PRICE OF THE
COMMON STOCK ON SEPTEMBER 20, 1999 IN THE OVER-THE-COUNTER MARKET AS REPORTED BY
NASDAQ, WAS APPROXIMATELY $58,692,000. SHARES OF VOTING STOCK HELD BY EACH
OFFICER AND DIRECTOR AND BY EACH PERSON WHO OWNS 5% OR MORE OF THE OUTSTANDING
COMMON STOCK HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY BE DEEMED TO BE
AFFILIATES. THIS DETERMINATION OF AFFILIATE STATUS IS NOT NECESSARILY A
CONCLUSIVE DETERMINATION FOR OTHER PURPOSES.
As of September 20, 1999, the Registrant had outstanding 22,904,312 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain items in Part III of this form 10-K Report are incorporated by
reference to the Registrant's Proxy Statement for the Registrant's 1999 Annual
Meeting of Stockholders to be held November 17, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1999
TABLE OF CONTENTS
PAGE NO.
-------------
PART I
Item 1. Business............................................................................ 1
Item 2. Properties.......................................................................... 6
Item 3. Legal Proceedings................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders................................. 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............... 7
Item 6. Selected Financial Data............................................................. 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 8
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk.......................... 18
Item 8. Financial Statements and Supplementary Data......................................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................ 19
PART III
Item 10. Directors and Executive Officers of the Registrant.................................. 20
Item 11. Executive Compensation.............................................................. 21
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 21
Item 13. Certain Relationships and Related Transactions...................................... 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................... 22
SIGNATURES............................................................................................. 23
PART I
ITEM 1. BUSINESS
THIS REPORT ON FORM 10-K (THE "REPORT") CONTAINS FORWARD LOOKING STATEMENTS
REGARDING FUTURE EVENTS WITH RESPECT TO ROSS SYSTEMS, INC. ACTUAL EVENTS OR
RESULTS COULD DIFFER MATERIALLY DUE TO A NUMBER OF FACTORS, INCLUDING THOSE
DESCRIBED HEREIN AND IN DOCUMENTS INCORPORATED HEREIN BY REFERENCE, AND THOSE
FACTORS DESCRIBED UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS".
GENERAL
The following description of business is qualified in its entirety by, and
should be read in conjunction with the more detailed information and financial
data, including the financial statements and notes thereto, appearing elsewhere
in this Report. Unless otherwise stated in this document, references to (a) the
"Company" or (b) "Ross" shall mean Ross Systems, Inc., a Delaware corporation,
and its subsidiaries.
The Company believes that it is a leading supplier of enterprise-wide
business systems and related services to companies installing open
systems/internet enabled software products, in particular in the process
manufacturing markets. Customers are primarily medium-sized companies (with
annual sales of $50 million to $2 billion) upgrading internal systems to improve
profitability through the availability of timely and accurate information, as
well as large companies modernizing their management information systems
operations in order to reduce costs or provide business to business linkage with
suppliers and customers. The Company licenses its products to customers through
a direct sales force in North America and Western Europe as well as independent
distributors in other markets worldwide. Since the company's inception in 1988,
the Company has licensed approximately 13,000 software products to an installed
base of over 3,300 customers worldwide.
PRODUCTS
The Company markets a broad range of sophisticated business application
software that addresses the financial, manufacturing, distribution, supply chain
management, business to business electronic commerce, and human resource needs
of manufacturers, healthcare providers and not-for-profit institutions. In
addition, the Company supports a large installed base of companies, which
utilize the Company's financial and human resource software products
exclusively. The Company's software product license fees are based on the
modules licensed, and the number of concurrent users supported by the hardware
on which the modules operate.
GENERAL BUSINESS AND MANUFACTURING PRODUCTS
The Company has developed a series of products designed for the open
systems/internet enabled environment, which allows users to access and
manipulate data from their desktop personal computers. These products
incorporate an integrated, modular, on-line, feature-rich and user-friendly
operating environment. The integration of these products allows the sharing of
data between application products with a common user interface. User-friendly
features include the "point-and-click" selection of information. The Company's
open systems applications function in a relational database management system
("RDBMS") environment that provides for a high degree of data availability and
integrity. Additionally, because the Company's Renaissance CS financial,
manufacturing and distribution applications were developed with the GEMBASE
fourth generation language ("4GL"), the Company believes they are easily
modified and expanded. 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
1
hardware and RDBMS platforms. Because the Renaissance CS financial,
manufacturing and distribution products were developed in GEMBASE, customers
often find it easy to customize their own applications. The Renaissance CS
Financial Series combines these higher productivity technologies with the
feature set found in the Company's traditional, award winning Renaissance
products.
The Company offers a comprehensive Enterprise Resource Planning ("ERP")
solution including financials, manufacturing, distribution, maintenance,
transportation management and human resources. In addition, the Company has
delivered functionality specifically tailored to the unique formula and
specifications-based requirements of process manufacturers, including food,
consumer packaged goods, pharmaceutical and biotechnology, chemical, primary
metals, and pulp and paper companies. The Company believes that this native
functionality is superior to the alternative presented by many of the Company's
competitors, which is to adapt systems designed primarily for the discrete
manufacturing sector.
The Company also markets a strategic management tool called Strategic
Application Modeler that helps companies define and map their business processes
to industry best practices, which are included in the modeler's library. The
Company believes that this product shortens the implementation time period of
application software systems and allows users to manage those applications
throughout their life cycle.
The Company's Renaissance CS Human Resource Series is a comprehensive, human
resource management system including payroll processing. The client component
has a Windows and NT graphical user interface, which includes the customizable
toolbar feature. The host server processing is COBOL based, to efficiently
provide for the heavy batch processing requirements of payroll.
The Renaissance CS server applications run on Microsoft's Windows NT (with
support for both the Intel and Alpha chips); Compaq Corporation's ("Compaq")
Alpha, UNIX, and Open VMS operating systems; International Business Machines
Corporation's ("IBM") RS/6000; Hewlett-Packard Company's ("HP") HP-UX; and
Fujitsu's DS-90 UNIX. The Renaissance CS currently supports four RDBMSs: Oracle
Systems Corporation's Oracle 7, Oracle 8, RDB, and Microsoft's SQL Server 7.
The Company believes that its client components have the "look and feel" of
Microsoft Windows PC applications, complete with scroll bars, buttons, pop-up
menus, dialog boxes and dynamic data exchange links to popular spreadsheets and
word processors. The Renaissance CS architecture enables customers to capitalize
on the power of the PC.
The Company's Renaissance classic line of general business accounting
applications are feature-rich and well-integrated. The Company has continued to
enhance these applications to serve existing customers and has delivered support
for customers that use Oracle's RDB RDBMS. The Company will continue to market
the Renaissance classic products to its installed base of customers, as well as
to accounts that want to operate exclusively in a Compaq/DEC proprietary
environment. To provide a long-term growth path for Renaissance classic
customers, the Company now offers them the ability to easily upgrade to its new
products inexpensively. The Company's migration product, "Biz2000," allows
Renaissance classic customers to use the Company's client/server applications
while maintaining their Renaissance classic general ledger and management
reports. Biz2000 is designed to allow the Company's customers to migrate to full
client/server computing at their own pace.
The Company introduced support for the Microsoft NT operating environment at
the end of fiscal 1997. At the close of fiscal 1999, approximately seventy
percent of the new product licenses were sold on the Microsoft NT environment.
The Company believes that it continues to match the marketplace in the growth of
new technologies while focusing on maintaining superior functionality.
THIRD-PARTY PRODUCTS
The Company resells complementary software products licensed from third
parties, including programs module for custom reporting of information
maintained by the Company's programs (Business
2
Objects, Speedware and FRx), systems management software, and certain
middle-ware products. Additionally, the Company has entered into agreements
which enable it to resell RDBMS products and other products that are sublicensed
to end users in conjunction with certain of the Company's open systems products.
License revenues from the products described in this paragraph constituted less
than 10% of total software product license revenues in fiscal 1999.
SERVICES
The Company's worldwide services operation complements its open systems and
internet enabled growth initiative. The Company offers a broad selection of
services to install and optimize each available software product. Services
provided by the Company fall into two broad categories, Professional Services
and Client Support. In addition, the Company has established professional
service relationships with large international information systems consulting
firms to provide independent service offerings to customers who may prefer a
consulting alternative for their project implementation.
PROFESSIONAL SERVICES
The Company's Professional Services organization provides business
application experience, technical expertise and product knowledge to complement
the Company's products and to provide solutions to clients' business
requirements. The major types of services provided include the following:
Management Consulting involves in-depth analysis of the client's specific
needs and the preparation of detailed plans that list step-by-step actions and
procedures necessary to achieve a timely and successful implementation of the
Company's software products. Management Consulting services are generally
offered on a time and materials basis.
Technical Consulting involves evaluating and managing the client's needs by
supplying custom systems, custom interfaces, data conversions, and system
conversions. These consultants participate in a wide range of activities,
including requirements definition, and software design, development and
implementation. These consultants also provide advanced technology services
focused on networking, and database administration and tuning. These services
are generally offered on a time and materials basis.
Education Services are offered to clients either at the Company's education
facilities or at the client's location, as either standard or customized
classes. These classes are priced at either fixed daily rates or on a per class
basis.
Third party consulting partners have been established to take advantage of
specific industry expertise and to support the implementation demands of the
company's growing customer base. The Company has developed relationships with
Deloitte & Touche, Higman Health Care, Andersen Consulting,
PriceWaterhouseCoopers, and RSM McGladrey to support client implementation
service needs worldwide in key vertical markets.
CLIENT SUPPORT
The Company's Client Support functions include web-based support, telephone
support, technical publications and product support guides, which are provided
under the Company's standard maintenance agreements, under which most of the
Company's installed customers are supported. The annual maintenance fee for
these services is based upon a percentage of the then-current list price for the
licensed software. The standard maintenance agreement entitles clients to new
product releases and product enhancements.
MARKETING AND SALES
The Company sells its products and services primarily through its direct
sales force. At June 30, 1999, there were 139 sales and marketing employees. In
support of its sales force, the Company conducts
3
comprehensive marketing programs which include telemarketing, direct mailings,
advertising, promotional material, seminars, trade shows, public relations and
on-going customer communication.
One aspect of the Company's marketing strategy is to maintain strong working
relationships with Microsoft, Compaq, HP and IBM. The Company at times conducts
joint advertising, co-operative training and sales seminars with these
companies. During fiscal 1998, the Company also entered into relationships with
several large consulting and implementation firms. The Company classifies its
consulting alliances in two categories based on the nature of the relationship
and type of service delivered: strategic and specialist. Strategic allies
include Andersen Consulting, Deloitte & Touche LLP and Higman Healthcare.
Specialist consulting allies provide unique knowledge of an aspect of an
enterprise software system and include such companies as Raytheon Systems,
Motherwell Information Systems and Walsh Automation. The Company believes that
these relationships will help generate new joint business opportunities,
increase the value of total projects licensed and provide added resource for the
implementation of the Company's products.
The Company is headquartered in Atlanta, Georgia, with sales, service and
support centers in the major U.S. business locations of: Framingham (Boston),
Chicago, Dallas, Costa Mesa (Los Angeles), Teaneck (New York City), Redwood City
(San Francisco) and Escondido (San Diego). The Company has subsidiaries in
Brussels, Belgium; Toronto and Ottawa, Canada; Paris, France; Berlin, Germany;
Utrecht, the Netherlands; Barcelona and Madrid, Spain; Lisbon, Portugal and
Northampton, the United Kingdom.
The Company has distribution arrangements with distributors in the following
countries: Argentina, Australia, Brazil, Chile, Colombia, Czech Republic,
Germany, Hong Kong, Hungary, India, Indonesia, Ireland, Italy, Japan, Jordan,
Lebanon, Malaysia, Mexico, New Zealand, Pakistan, Peru, Poland, Rumania, Russia,
Saudi Arabia, Singapore, Slovak Republic, Taiwan, Thailand, Uruguay and
Venezuela. These distributors pay the Company royalties from the marketing of
the Company's products and maintenance services.
International revenues (from foreign operations and export sales)
represented approximately 33%, 31% and 33% of the Company's revenues in fiscal
1999, 1998 and 1997, respectively. The Company intends to broaden its presence
in international markets by expanding its international sales force and by
entering into additional distribution agreements.
PRODUCT DEVELOPMENT AND ACQUISITIONS
To meet the increasingly sophisticated needs of its customers and address
potential new markets, the Company continually strives to enhance its existing
product functionality and add new product features. The Company surveys the
needs of its customers annually through ballots and at its user conference and
incorporates many of their recommendations into its products. The Company also
conducts a variety of forms of market research with industry analyst groups and
targeted industries to determine strategies for new features and functions. The
Company is committed to achieving advances in computer systems technology and to
expanding the breadth of its product line. The key elements of this strategy
are:
NEW OPERATING ENVIRONMENTS
The Company intends to expand its potential markets by enabling its products
to operate in additional open systems computing environments. In fiscal 1997,
the Company released a Microsoft Windows NT version of its products and in
fiscal 1999 began to support Microsoft's new release of SQL Server 7, and the
Sun Microsystems, Inc. Solaris Operating System.
PRODUCT LINE EXPANSION
The Company intends to expand its potential markets by developing new
products which address the needs of additional prospective customers, including
those in key international markets related to both
4
language, currency and local accounting custom and procedure. In fiscal 1999,
the Company introduced EMU (European Monetary Unit) capabilities to it's product
lines.
PRODUCT ACQUISITION AND ALLIANCES
In support of its product line expansion strategy, the Company intends to
acquire products or develop relationships with providers of complementary
software to supplement its existing product offerings. The Company believes that
the acquired software components will extend the functionality and overall value
of the core product line, while third party software components will both
enhance the usability and presentation of the data provided by the system and
provide specialized functional extensions. The Company has agreements with FRx
Software Corporation, Business Objects, Inc., Speedware, SRC Software, Inc., The
Cimulation Centre, Citrix Systems, Inc., Logility, Inc., Numetrix Limited and
Optical Technology Group, Inc. In 1998, the Company acquired Bizware, Inc.
("Bizware"), a software service provider specializing in Ross implementation and
upgrade conversions. In 1999, the Company likewise acquired Hipoint Systems
Corporation, a Canadian software service provider. Both acquisitions were
primarily non-cash, stock transactions.
COMPETITION
The business applications software market is intensely competitive. The
Company competes with a broad range of applications software companies. The
Company's competitors include the following: general business application
software providers, such as Baan Company NV, Oracle Corporation, J.D. Edwards,
and SAP AG; as well as business applications software providers in specific
vertical markets that offer products that compete with the Company's in process
manufacturing products. In the human resource market, the Company competes with
various business applications software providers, including PeopleSoft, Inc.
Many of the Company's competitors have greater financial and business resources
than the Company.
The principal competitive factors in the market for business application
software include product reputation, product functionality, performance, quality
of customer support, size of installed base, financial stability, hardware and
software platforms supported, price, and timeliness of installation. The Company
believes it competes effectively with respect to these factors.
PROPRIETARY RIGHTS AND LICENSES
The Company provides its products to end users generally under nonexclusive,
nontransferable licenses, which generally have terms of at least 20 years. Under
the general terms and conditions of the Company's standard license agreements,
the licensed software may be used solely for internal operations on designated
computers at specific sites. The Company makes source code available for certain
portions of its products.
The Company has registered "RENAISSANCE", "RENAISSANCE CS", "COMMAND",
"PROMIX", "CROSSVIEW", "MAPS" and "ROSS SYSTEMS" as trademarks in the United
States. The Company has also secured registration of its copyrights in the
United States for 19 of its products. Although the Company takes steps to
protect its trade secrets, there can be no assurance that misappropriation may
nevertheless occur and copyright and trade secret protection may not be
available in certain countries.
The Company does not hold any patents, and currently relies on a combination
of trade secret, copyright and trademark laws, and license agreements to protect
its proprietary rights in its products. The Company believes its products,
trademarks, copyrights and other proprietary rights do not infringe the rights
of third parties. If it is determined that the Company infringes the proprietary
rights of third parties, such determination may harm the company's business and
operating results.
5
EMPLOYEES
As of June 30, 1999, the Company employed a total of 643 full time
employees, including 139 in sales and marketing, 120 in product development, 324
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 57,000 square feet. The Company also
maintains a regional office in Redwood City, California, which occupies
approximately 36,500 square feet, for research and development, sales and
consulting; a regional office in Waltham, Massachusetts, which occupies
approximately 4,300 square feet for research and development and consulting; and
a regional office in Teaneck, New Jersey, which occupies approximately 15,000
square feet for sales, consulting and support. Space is also rented by the
Company in Alameda, California for certain research and development, consulting
and support activities, and in Escondido, California for certain research and
development, sales, consulting and support activities.
The Company also leases additional regional offices in Chicago, Illinois;
Costa Mesa, California and Irving, Texas. International offices are maintained
in Berlin, Germany; London, England; Northampton, England; Paris, France;
Utrecht, Netherlands; Barcelona and Madrid, Spain; Lisbon, Portugal; Zaventem,
Belgium; Ottawa and Mississauga, Canada. The Company believes its facilities are
adequate for its current needs and that the Company can obtain suitable
additional space as required.
ITEM 3. LEGAL PROCEEDINGS
As of and for the fiscal year ended June 30, 1999, the Company is not a
party to any pending litigation other than ordinary routine litigation that is
incidental to the operations of the business, the Company is not aware of any
threatened litigation. For a discussion of litigation's and litigation
settlements pre-fiscal 1999 and fiscal 1999 accounting adjustments for such
settlement amounts, See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Litigation Settlements and Expenses."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 1999 and 1998. The Company's Common Stock trades under the
NASDAQ symbol ROSS.
FISCAL 1999 HIGH LOW
- ----------------------------------------------------------------------------------------------------- ------- -------
First quarter........................................................................................ $ 5 1/16 $ 2 3/8
Second quarter....................................................................................... $ 4 3/8 $ 2 13/32
Third quarter........................................................................................ $ 4 1/2 $ 2 5/8
Fourth quarter....................................................................................... $ 3 $ 1 13/16
FISCAL 1998 HIGH LOW
- ---------------------------------------------------------------------------------------------------- ------- -------
First quarter....................................................................................... $ 5 1/8 $ 3 1/8
Second quarter...................................................................................... $ 4 15/16 $ 2 15/16
Third quarter....................................................................................... $ 3 21/32 $ 2
Fourth quarter...................................................................................... $ 5 13/32 $ 2 3/4
The Company has never declared or paid cash dividends on its Common Stock,
and the Company does not plan to declare or pay dividends in the future. The
Company intends to use 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 20, 1999, the approximate number of stockholders of record of the
Company's Common Stock was 423.
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ----------
STATEMENTS OF OPERATIONS DATA:
Total revenues........................................... $ 101,791 $ 91,684 $ 78,773 $ 69,789 $ 72,470
Operating earnings (loss)................................ $ (3,936) $ 4,140 $ (622) $ (177) $ (15,487)
Net earnings (loss)...................................... $ (5,626) $ 2,595 $ (2,353) $ (1,541) $ (15,528)
Diluted net earnings (loss) per share.................... $(.25) $0.13 $(0.13) $(0.10) $(1.28)
Shares used in computing diluted net earnings (loss) per
share.................................................. 22,232 20,390 18,515 15,089 12,105
BALANCE SHEET DATA:
Working capital.......................................... $ (3,745) $ 5,544 $ (8,273) $ (8,535) $ (16,023)
Total assets............................................. 83,185 78,189 69,715 58,049 55,061
Long-term debt, less current portion..................... 3,705 8,918 394 36 228
Redeemable preferred stock............................... -- -- 1,053 -- --
Total shareholders' equity............................... 29,257 30,774 22,060 18,792 8,922
Prior years' Results of Operations have been reclassified to conform with
the fiscal 1999 presentation.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WHICH EXPRESS THAT THE COMPANY "BELIEVES",
"ANTICIPATES", OR "PLANS TO" AS WELL AS OTHER STATEMENTS WHICH ARE NOT
HISTORICAL FACT, ARE FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY AS A RESULT OF THE RISKS AND UNCERTAINTIES DESCRIBED HEREIN
AND ELSEWHERE INCLUDING, IN PARTICULAR THOSE FACTORS DESCRIBED UNDER "BUSINESS"
SET FORTH IN PART I OF THIS REPORT AS WELL AS IN OTHER RISKS AND UNCERTAINTIES
IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE.
OVERVIEW
The Company's software product license revenues can fluctuate from quarter
to quarter depending upon, among other things, such factors as overall trends in
the United States and international economies, new product introductions by the
Company, hardware vendors and other software vendors as well as customer buying
patterns. Because the Company typically ships software products within a short
period after orders are received, and therefore maintains a relatively small
backlog, any weakening in customer demand can have an almost immediate adverse
impact on revenues and operating results. Moreover, a substantial portion of the
revenues for each quarter is attributable to a limited number of sales and tends
to be realized in the latter part of the quarter. Thus, even short delays or
deferrals of sales near the end of a quarter can cause substantial fluctuations
in quarterly revenues and operating results. Finally, certain agreements signed
during a quarter may not meet the Company's revenue recognition criteria
resulting in deferral of such revenue to future periods. Because the Company's
operating expenses are based on anticipated revenue levels and a high percentage
of the Company's expenses are relatively fixed, a small variation in the timing
of the recognition of specific revenues can cause significant variation in
operating results from quarter to quarter.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 1999, 1998, AND 1997
The following table sets forth certain items reflected in the Company's
consolidated statements of operations as a percentage of total revenues for the
periods indicated, and a comparison of such statements is shown as a percentage
increase or decrease from the prior year's results:
PERCENTAGE OF
REVENUE
YEAR ENDED
JUNE 30,
------------------
1999 1998 1997
---- ---- ----
Revenues:
Software product licenses........................................... 32% 41% 39%
Consulting and other services....................................... 40 31 29
Maintenance......................................................... 28 28 32
---- ---- ----
Total revenues.................................................. 100% 100% 100%
---- ---- ----
---- ---- ----
PERCENTAGE
INCREASE(DECREASE)
---------------------
1999/1998 1998/1997
--------- ---------
Revenues:
Software product licenses........................................... (15)% 24%
Consulting and other services....................................... 46 24
Maintenance......................................................... 11 --
--- ---
Total revenues.................................................. 11% 16%
--- ---
--- ---
8
PERCENTAGE OF
REVENUE
YEAR ENDED
JUNE 30,
------------------
1999 1998 1997
---- ---- ----
Operating expenses:
Costs of software product licenses.................................. 4% 4% 4%
Costs of consulting, maintenance and other services................. 46 39 36
Software product license sales and marketing........................ 31 30 30
Product development................................................. 12 12 15
General and administrative.......................................... 8 8 10
Provision for uncollectible accounts................................ 2 2 4
Provision for settlement of litigation claim........................ 0 0 1
Amortization of other assets........................................ 1 1 1
---- ---- ----
Total operating expenses........................................ 104 96 101
---- ---- ----
Operating earnings (loss)....................................... (4) 4 (1)
Other expense, net.................................................... (1) (1) (1)
---- ---- ----
Earnings (loss) before income taxes............................. (5) 3 (2)
Income tax benefit (expense).......................................... (1) 0 (1)
---- ---- ----
Net earnings (loss)............................................. (6)% 3% (3)%
---- ---- ----
PERCENTAGE
INCREASE(DECREASE)
---------------------
1999/1998 1998/1997
--------- ---------
Operating expenses:
Costs of software product licenses.................................. (1)% 22%
Costs of consulting, maintenance and other services................. 16 27
Software product license sales and marketing........................ 4 16
Product development................................................. (2) 1
General and administrative.......................................... 3 (10)
Provision for uncollectible accounts................................ 19 (48)
Provision for settlement of litigation claim........................ 0 0
Amortization of other assets........................................ 11 38
--- ---
Total operating expenses........................................ 8 10
--- ---
Operating earnings (loss)....................................... (210) 0
Other expense, net.................................................... (10) 26
--- ---
Earnings (loss) before income taxes............................. (323) (293)
Income tax benefit (expense).......................................... (24) (53)
--- ---
Net earnings (loss)............................................. (284)% 0%
--- ---
REVENUES. Total revenues increased 11%, to $101,791,000, in fiscal 1999
from $91,684,000 in 1998. Fiscal 1998 revenues represented a 16% increase from
revenues of $78,773,000 in fiscal 1997. Software product license revenues
decreased 15% from fiscal 1998 to 1999 and increased 24% from fiscal 1997 to
1998. Consulting revenues increased 46% from fiscal 1998 to 1999 and increased
24% from fiscal 1997 to 1998. Maintenance revenues from first year and renewed
maintenance agreements, both of which are recognized ratably over the
maintenance period, increased 11% from fiscal 1998 to 1999 and were virtually
unchanged from fiscal 1997 to 1998.
Fiscal 1999 European software product license revenues increased from fiscal
1998's results by 26% or $2,223,000. This increase was offset by decreases in
software product license revenues in the North American and Asia/Pacific Rim
markets of 30% and 6% or $7,847,000 and $198,000, respectively. The Company
believes that the decrease in the North America market is principally a result
of an industry-wide slowdown in customers willingness to purchase new software
because of issues related to the year 2000 date recognition problem (Y2K). The
Y2K issue arises because certain electronic data processing systems use two
digits rather than four to define the applicable year which may preclude proper
date recognition after December 31, 1999. The Company believes that the decrease
in the Asia/Pacific Rim markets was due to the continued depressed economic
conditions that exist in this area. The Company believes that the increase in
the European market is largely a result of its increased marketing and sales
effort in this region during fiscal 1999 in order to maintain presence and
increase market share in this area. Software product license revenues in France,
U.K., and other European countries increased 157%, 88%, and 74% or $1,758,000,
$1,241,000, and $1,113,000, respectively. These increases were somewhat offset
by decreases in the Spanish and German Markets. The Company's open systems
applications represented approximately 93% of software product license revenues
for fiscal 1999, 1998, and 1997.
Fiscal 1998 North American and European software product license revenues
increased from fiscal 1997's results by 32% and 30%, or $6,336,000 and
$1,986,000, respectively. This increase was offset by a decrease in software
product license revenues from the Asia/Pacific Rim market of $842,000, or 20%.
The Company believes that the decrease in Asia/Pacific Rim market was largely a
result of depressed economic conditions in that area. The Company believes the
increase in North American revenues was principally a result of increased demand
for the Company's Open-Systems products during fiscal 1998. The Company
9
believes that increased North American demand is attributable to several
factors, including increased marketing focus on Client Server applications by
the Company during fiscal 1998, and the release of new functionality in the
Company's 4.x version of Renaissance CS. European revenues increased principally
as a result of the addition of the Company's Spanish subsidiary and one large
agreement that significantly impacted revenues in Germany. Software product
license revenues in Spain and Germany increased 184% and 853%, or $2,347,000 and
$768,000, respectively. These increases were somewhat offset by declines in the
Benelux and UK markets.
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
1999 consulting and other services revenues increased 46%, or $13,047,000, over
fiscal 1998 results. The Company experienced growth in the North American and
European markets of 51% and 40%, respectively. A fiscal 1999 decline of 6% in
Asia/Pacific Rim consulting revenues offset the North American and European
gains. The Company believes that the decrease in the Asia/Pacific Rim market was
due largely to the continued depressed economic conditions in that area. The
Company believes that the North American gains are largely a result of the
Company's acquisitions of Bizware in fiscal 1998 and Hipoint in the early part
of fiscal 1999, as well as continued management focus on increasing revenues in
this product line. Furthermore, the company believes that the European gains are
attributable largely to the increase in software product license revenues over
the prior fiscal year. Additionally, the Company has increased its consulting
capacity by expanding the number of outside consultants used to perform
implementations, consulting and other professional services. These consultants
normally cost more and generate lower gross margins than services performed by
Company employees, but are necessary to meet the growing demand for consulting
services related to the Company's products. Fiscal 1998 consulting and other
services revenues increased 24%, or $5,393,000 from fiscal 1997 results. For the
year, North American and European consulting revenues increased 29% and 17%, or
$4,270,000 and $1,315,000, respectively. The Company also had consulting
services revenue in the Pacific Rim of $505,000 in fiscal 1998. The Company
believes that consulting revenues increased during fiscal 1998 as a result of
the increase in software product license revenue over fiscal 1997.
Maintenance agreements are renewed annually by most of the Company's
maintenance customers. Maintenance revenues increased 11%, or $2,882,000, from
fiscal 1998 to fiscal 1999. Maintenance revenues were virtually unchanged from
fiscal 1997 to 1998. Maintenance revenues have increased slightly over the past
three years as a net result of increases in the Company's Renaissance CS
maintenance revenues offset to a lesser extent by some maintenance contracts
which have expired without renewal.
As a percentage of total revenues, the Company's international operations
have remained relatively consistent at 33%, 31% and 33% in fiscal years 1999,
1998 and 1997, respectively. In fiscal 1999, the Company experienced growth in
Europe, partially offset by a decrease in Asia/Pacific Rim revenues. European
revenues for fiscal 1999 increased 25%, or $6,011,000, offset by a decrease in
Asia/Pacific Rim of 7%, or $295,000.
The Company's large Pacific Rim contract represents a distributor agreement
with a Japanese company (the "Distributor") whereby the Distributor has an
exclusive license to reproduce and sell certain Ross products in the Pacific
Rim. In exchange for this distribution right, the agreement, which is renewable
annually, called for the Company to receive at least a "minimum annual royalty"
equal to $2.5 million in fiscal 1997 and 1998, $4 million in fiscal 1999 and
$4.5 million in fiscal 2000. These royalty payments are based on sales quotas
for the period that the Distributor agrees to meet or exceed in order to keep
its exclusive distributorship. The Distributor met its quota for fiscal 1997,
1998 and 1999. In August 1998 the Distributor agreed to renew its exclusive
distributor relationship with the Company for fiscal 1999. The Company
recognizes revenue at the greater of the annual minimum royalty amount or a
contractually defined amount determined from licenses sold by the distributor.
However, due to economic conditions in Asia/Pacific Rim, the Company and the
Distributor renegotiated the distributor agreement for fiscal 1999
10
to an annual minimum royalty of $2.5 million. Furthermore, the Company expects
to recognize $2.0 million from the Distributor in fiscal 2000.
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 1999, 1998
or 1997.
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 third-party 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 1999 increased by 10% to $3,895,000 from $3,536,000 in fiscal 1998. This
increase was due to a greater amount of third-party products being bundled with
the Company's product. Costs of software product licenses for fiscal 1998
increased by 22% from $2,905,000 in fiscal 1997. The 1998 over 1997 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 1999 was 88%, a decrease from 91%
in fiscal 1998 and a decrease from 90% in fiscal 1997. Increases in third party
royalty expenses led to the decline in these margins from fiscal 1997 to 1998.
The margin increased slightly in fiscal 1998 from fiscal 1997 as a result of
selling a different mix of third party products resulting in higher margins for
the Company.
COSTS OF CONSULTING, MAINTENANCE AND OTHER SERVICES. Costs of consulting,
maintenance and other services include expenses related to consulting and
training personnel, personnel providing customer support pursuant to maintenance
agreements, and other costs of sales. The Company also uses outside consultants
to supplement Company personnel in meeting peak customer consulting demands.
Costs of consulting, maintenance and other services increased 29% to $46,410,000
in fiscal 1999 from $36,106,000 in fiscal 1998. These cost increases related
directly to increased consulting revenues which were attributable to the full
year effect of the Bizware acquisition and the 10 month effect of the Hipoint
Systems acquisition. Furthermore, the Company experienced some consulting
revenue increases from software license agreements entered into during fiscal
1998. Fiscal 1998 costs of consulting, maintenance and other services increased
27% from $28,511,000 in fiscal 1997. As software license activity increased in
fiscal 1998 over fiscal 1997, more internal and outside consultants were
required by the Company to service these new customers. The increase in costs
over the prior year is largely a result of the additional fiscal 1998 expenses
related to the Company's fiscal 1997 acquisition of its Spanish subsidiary and
the fiscal 1998 acquisition of its business partner Bizware, as well as
additional services personnel hired by the company during fiscal 1998. The
additional fiscal 1998 expenses related to the Spanish and Bizware subsidiaries
were approximately $3,158,000. The fiscal 1998 increase was principally a result
of increased personnel-related expenses of $3,558,000 (including the increases
from the acquisition of the Spanish and Bizware subsidiaries), increases in
costs related to outside consultants of $2,601,000 and increased travel
expenditures of $485,000 compared to the prior year. While the Company trained
its additional staff, it incurred higher outside consulting expenses to meet
short-term customer demands.
GROSS PROFIT MARGINS. The Company's gross profit margins resulting from
consulting, maintenance and other services revenues for fiscal 1999, 1998 and
1997 were 33%, 32% and 41%, respectively. The increase in gross profit margins
from fiscal 1998 to 1999 was due largely to better management of variable
expenses. Furthermore, the consulting revenues represent a larger portion of the
revenue mix and lower gross profit.
11
Additionally, in order to meet increasing customer demands and fill services and
consulting personnel vacancies, there were increases in personnel expenses
related to the hiring and training of new services and consulting personnel who
must undergo training before beginning to generate revenue. The deterioration in
the gross profit margin from fiscal 1997 to 1998 was due largely to the increase
in personnel expenses related to the hiring and training of new services and
consulting personnel and the time required until these new personnel begin to
generate revenue.
SOFTWARE PRODUCT LICENSE SALES AND MARKETING EXPENSES. Software product
license sales and marketing expenses increased 16% in fiscal 1999 over 1998, and
increased 13% in fiscal 1998 over 1997. The increases for fiscal 1999 over
fiscal 1998, are directly related an increased headcount, as well as increased
sales and marketing efforts. Employee related expenses, including compensation
increased approximately $3,200,000, travel and trade show related expenses
increased approximately $475,000 and advertising related expenses increased
approximately $400,000. A portion of the increase for fiscal 1998 over fiscal
1997, was due to the aforementioned acquisition of the Spanish subsidiary at the
end of the second quarter of fiscal 1997 and the acquisition of Bizware in
January 1998. Additionally, the Company experienced a general increase in
personnel-related expenses, along with the additional commission expenses
related to the aforementioned increases in software product license revenue from
fiscal 1997 to 1998. For fiscal 1998, the additional expenses attributable to
the Spanish and Bizware subsidiaries were approximately $1,226,000 over the same
period of the prior year. Also for fiscal 1998, personnel-related expenses
including salaries and commissions increased approximately $2,097,000,
facilities expenses increased approximately $315,000 and travel-related expenses
increased approximately $526,000 from the same period in the prior year as a
result of increases in sales and marketing personnel (inclusive of the Spanish
and Bizware increases).
PRODUCT DEVELOPMENT EXPENSES. A summary of the components of product
development expenditures for the past three years follows (in thousands):
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
Expenses......................................................................... 11,959 $ 10,960 $ 10,880
Amortization of previously capitalized software development costs................ (8,806) (7,520) (7,112)
--------- --------- ---------
Expenses, net of amortization.................................................... 3,153 3,440 3,768
Capitalized software development costs........................................... 11,572 10,055 8,879
--------- --------- ---------
Total expenditures........................................................... $ 14,725 $ 13,495 $ 12,647
--------- --------- ---------
Total expenditures as a percent of total revenues................................ 14% 15% 16%
--------- --------- ---------
Capitalized software, net of amortization, as a percent of total expenditures.... 19% 19% 14%
--------- --------- ---------
As a percentage of total revenues, fiscal 1999 as well as fiscal 1998
product development expenditures decreased from 1997 expenditures. This decrease
is largely attributable to the growth in revenues experienced during fiscal 1999
and 1998. Total development expenditures increased slightly from fiscal 1997
levels. Product development expenditures during fiscal 1999 and fiscal 1998 have
been primarily focused on continued enhancements to existing products and
developing new products. During fiscal 1999 and fiscal 1998, software
development costs capitalized included amounts attributable to the development
of additional international features for the Company's Renaissance CS products,
developing the 4.X series of Renaissance CS, and developing Y2K compliance for
the Company's Renaissance Classic products. The Company does not expect to have
any additional expenditures related to the Y2K compliance upgrade on its
Renaissance Classic products. The Company believes that its Renaissance CS
products have been Y2K compliant since their introduction in 1992.
12
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 15% to $8,337,000 in fiscal 1999 from $7,258,000 in fiscal 1998.
Fiscal 1998 represented an decrease of 10% from $8,050,000 in fiscal 1997. The
increase from 1998 to 1999 was due to several factors. Primarily, expenses
related to upgrading the Company's computer systems and communications systems
related to Y2K increased by approximately $368,000. Travel expenses increased
approximately $200,000 as a result of increased management focus on the
Company's European operations. Legal and Professional expenses increased
approximately $185,000 primarily due to the Company's re-incorporation during
fiscal 1999 as well the adoption of the shareholders rights agreement during
fiscal 1999. Furthermore, employee expense related to severance increased
approximately $172,000. Finally, rent expense increased approximately $154,000
as a result of standard rent escalations as well as the full year effect of
certain acquired leases related to business acquisitions and office relocations.
The major cause of the decrease in fiscal 1998 related to personnel and travel
related expenses. During fiscal 1997, the Company moved its finance and
administrative headquarters to Atlanta from California and therefore incurred an
increased level of employee and travel costs.
PROVISION FOR DOUBTFUL ACCOUNTS AND RETURNS. In fiscal 1999, 1998 and 1997,
the Company recorded provisions of $2,421,000, $1,830,000, and $3,534,000,
respectively. These provisions represent management's best estimate of the
doubtful accounts for each period.
LITIGATION SETTLEMENTS AND EXPENSES. The fiscal 1998 litigation settlement
amount represents an adjustment to the charge that was recorded during fiscal
1997. During fiscal 1997, the Company settled a dispute with a customer with the
understanding that the settlement and related legal fees would be covered under
the Company's business insurance. The Company subsequently learned that the
insurer took exception to the Company's settlement with its customer and
withheld payment on the claim, pending arbitration. In June 1997, the Company
recorded a charge of $615,000, pending settlement with its insurer, to cover the
potential settlement and legal fees. In fiscal 1998, the insurer paid the
Company $381,000 in settlement of the previously accrued claim.
AMORTIZATION OF OTHER ASSETS. Amortization of intangible assets resulted in
charges of $1,263,000, $1,024,000, and $742,000 in fiscal 1999, 1998 and 1997,
respectively. These charges related to the purchase of the Company in 1988 and
its subsequent acquisitions of other products and companies. During fiscal 1999,
the Company purchased HiPoint Systems Inc. The related intangible assets are
being amortized over periods ranging from two to seven years. Increases in
fiscal 1999 are directly related to the acquisition of Hipoint Systems. During
fiscal 1998, the Company purchased Bizware, Inc. The related intangible assets
are being amortized over periods ranging from two to seven years. Also during
fiscal 1998, the Company capitalized approximately $431,000 of debt issuance
costs related to the receipt of $10,000,000 of convertible debenture financing.
For a description of the convertible debenture financing, see "Liquidity and
Capital Resources." These costs are being amortized over five years. During
fiscal 1997, the Company acquired its Spanish distributor. The related goodwill
of $1,541,000 is being amortized over seven years.
OTHER INCOME AND EXPENSE. Fiscal 1999, 1998 and 1997 other income is
composed largely of interest income of $195,000, $100,000 and $110,000,
respectively. Fiscal 1999 interest income increased from 1998 as a result of
higher invested cash balances compared to fiscal 1998. Fiscal 1998 interest
income declined from 1997 as a result of lower invested cash balances compared
to fiscal 1997. Interest expense increased from fiscal 1997 to 1998 and
increased from fiscal 1998 to fiscal 1999 as a result of increased borrowings
under the Company's revolving credit facilities and increased capital lease
activities.
13
INCOME TAXES. The Company recorded income tax expense of $321,000 during
fiscal 1999. This expense relates to a refund received for a carryback of
certain net operating losses against prior period income ($414,000), foreign
withholding taxes expensed during the year ($473,000), an accrual for federal
alternative minimum taxes ($89,000) and accruals for other state taxes payable
($173,000). At June 30, 1999, the Company had net income taxes payable of
$145,000, related primarily to various taxing jurisdictions in North America,
principally Canada where the Company has used all of its net operating loss
carryforwards. The Company anticipates recording significant future foreign
withholding tax expenses related to the aforementioned Japanese distributorship
agreement, representing 10% of future annual royalty payments from this
agreement. The Company recorded income tax expense of $382,000 during fiscal
1998. This expense relates to foreign withholding taxes expensed during the year
($337,000), and accruals for other state taxes payable ($45,000). At June 30,
1998, the Company had net income taxes payable of $397,000, related primarily to
various taxing jurisdictions in North America, principally Canada where the
Company has used all of its net operating loss carryforwards. The Company
recorded income tax expense of $809,000 during fiscal 1997. This expense relates
to foreign withholding taxes paid during the year ($722,000) and accruals for
other state taxes payable ($87,000). At June 30, 1997, the Company had income
taxes payable of approximately $199,000, which primarily related to taxes
payable to various taxing jurisdictions within North America. At June 30, 1999,
the Company had net operating loss carryforwards of approximately $31,555,000,
$10,331,000, and $26,146,000 for federal, California and foreign tax purposes,
respectively. These carryforwards, if not utilized, will expire between fiscal
2000 and 2014, with the majority expiring in 2009 and 2010.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1999, net cash provided by operating activities decreased
$5,742,000 compared to the prior year. An aggregate net increase in the non-cash
charges for depreciation, amortization and provisions for bad debt of $1,741,000
and an aggregate increase in the cash effect of accounts payable of $6,412,000
were offset by decreased Company earnings of $8,008,000, an extraordinary charge
of $213,000 and cash used to fund increased accounts receivable and other assets
and liabilities of $5,674,000. The increased receivables portfolio was a result
of timing of revenues recognized, payment terms of longer than normal but less
than a year on some contracts and some degradation of the receivables turnover
in Europe. Management feels that the risk of uncollectibility has been
appropriately assessed and reflected in the consolidated financial statements.
During fiscal 1999, the Company required $13,091,000 for investing
activities versus $11,618,000 in the prior year, an increase of $1,473,000.
Investment in property and equipment increased by $571,000 over the prior year
as a result of the Company's continued expansion in Europe and Y2K preparedness
activities. The worldwide growth in its consultancy organization also
necessitated increased investment. Capitalized computer software costs increased
by $1,517,000 due to timing of development work performed. Other investment
items including payment of debt issuance cost and expenses related to
acquisitions and divestitures decreased by $615,000. The Company financed its
continuing operations during fiscal 1999 through cash generated from operations
and available credit facilities.
Cash flows from financing activities increased by $3,066,000 versus the
prior fiscal year. The cash used in the convertible debenture redemption of
$2,667,000 face amount of the debentures was offset by increased cash provided
by borrowing under the Company's existing credit facility, which was also
necessary to fund the decrease in the net cash provided from operating
activities. Other financing activities resulted in an increase in cash of
approximately $611,000. The lack of convertible debenture issuance in fiscal
1999 resulted in a decrease in cash of $10,000,000.
At June 30, 1999, the Company had $6,294,000 of cash and cash equivalents.
The Company also has a revolving credit facility with an asset-based lender with
a maximum credit line of $15,000,000, a maturity date of October 31, 2000, and
an interest rate equaling the Prime Rate plus 2%. Borrowings under the credit
facility are collateralized by substantially all assets of the Company. At June
30, 1999, the Company
14
had $11,981,000 outstanding against the $15,000,000 revolving credit facility,
and based on the eligible accounts receivable at June 30, 1999, the Company's
cash and remaining borrowing capacity under the revolving credit facility total
approximately $6,344,000.
On December 29, 1995, the Company entered into a Subscription Agreement (the
"Agreement") with a foreign institutional investor pursuant to which the
investor purchased 500,000 shares of the Company's Series A Mandatory Redeemable
Convertible Preferred Stock for an aggregate purchase price of $2,000,000. In
connection with this transaction, the investor granted the Company options (the
"Options") to require the investor to purchase shares of the Company's Mandatory
Redeemable Convertible Preferred Stock with an aggregate value of $4,000,000
during the period from and including July 1, 1996 through and including December
30, 1998. The Company created and reserved 500,000 shares of its Series B
Mandatory Redeemable Convertible Preferred Stock and 500,000 shares of its
Series C Mandatory Redeemable Convertible Preferred Stock for issuance and sale
to the investor upon exercise of the Options. In addition, the Company granted
the investor a warrant (the "Warrant") to purchase 400,000 shares of the
Company's Common Stock at an exercise price of $5.576 per share during the
period from and including July 1, 1997 through and including December 29, 2000.
Pursuant to the Agreement, the Company exercised its first Option on July 8,
1996. Concurrently, the investor also agreed to invest an additional $2,000,000
under terms similar to those in the Agreement. In exchange for the additional
investment, the Company granted the investor a warrant for an additional 640,000
shares of the Company's Common Stock. This warrant was exercisable during the
period from and including July 1, 1997 through and including December 29, 2000,
at a maximum price of $8.00 per share. The gross proceeds from the July 1996
transactions were $4,000,000. The Company exercised its final Option to require
the investor to invest $2,000,000 on January 6, 1997 when the investor purchased
200 shares of the Company's newly created Series E Redeemable Preferred Stock.
During fiscal 1996, the investor converted all of their Series A Mandatory
Redeemable Convertible Preferred Stock to common stock. During fiscal 1997, the
investor converted all of their Series B and Series C Mandatory Redeemable
Convertible Preferred Stock and 93 shares of their Series E Mandatory Redeemable
Convertible Preferred Stock to common stock.
On April 23, 1998, the Company issued and sold 353,000 shares of its Common
Stock to this investor upon the exercise of the warrant to purchase 640,000
shares of the Company's Common Stock mentioned above. The Company and the
investor also agreed to cancel the remaining 287,000 shares of Common Stock
subject to the warrant. The aggregate exercise price paid by this investor was
$1,141,946, representing a per share exercise price of $3.23. The Company and
the investor agreed to reduce the exercise price from that set forth in the
warrant certificate, dated July 3, 1996, representing the warrant in
consideration for the cancellation. The Company has used the proceeds from this
exercise to fund its current operations. On April 24, 1998, the Company issued
286,633 shares of it's Common Stock to this investor upon the conversion of the
remaining 107 shares of the Series E Mandatory Redeemable Convertible Preferred
Stock. Because this transaction involved the exchange of one security for
another security, the investor paid no additional consideration to the Company
On February 6, 1998, the Company closed a private placement of up to
$10,000,000 of convertible subordinated debentures to certain institutional
investors (the "Investors") pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The Investors invested $6,000,000 on
February 6, 1998 and $4,000,000 on June 11, 1998. The material agreements
between the Company and each Investor have been filed as exhibits to the Current
Report on Form 8-K filed with the Securities and Exchange Commission by the
Company on February 12, 1998. $8,461,000 and $3,033,000 of these debentures
remained outstanding at June 30, 1998 and June 30, 1999, respectively. With the
exception of the redemption described below, the difference between the original
$10,000,000 borrowing and amounts outstanding at the above mentioned dates
represents conversion of the debt into shares of the Company's Common Stock at
various conversion prices as determined in accordance with the convertible
debenture
15
agreement. The Company notified the Investors that it would redeem $4,000,000 of
the convertible subordinated debentures on October 7, 1998 (the "Redemption
Date") at a redemption price of $4,320,000 (108 percent of the face value of the
redeemed debentures) plus interest accrued through the redemption date. On the
Redemption Date, the Company actually redeemed $2,667,000 of the convertible
subordinated debentures at a redemption price of $2,880,000. The difference
between the face amount of debentures redeemed and the total redemption price
paid represents the conversion premium which has been reported as an
extraordinary item during fiscal 1999. The company and the Investor holding the
convertible subordinated debenture that was not redeemed negotiated certain
changes to the conversion features of the debenture that, among other things,
precludes conversion prior to October 7, 1999.
The Company's ability to meet its cash requirements for operations and
recurring capital expenditures will depend upon funds expected to be generated
from operations, the remaining proceeds from the aforementioned convertible
debentures, and amounts available under its line of credit facility. However,
the Company may be required to seek additional financing. The company may raise
additional funds through public or private financing or other arrangements. The
company cannot assure you that additional funding, if sought, will be available
on favorable terms. Furthermore, any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may involve restrictive
covenants. The company's failure to raise capital when needed may harm its
business and operating results.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("Statement 133"). Statement 133 establishes accounting
and reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Statement 133 is required to be adopted
for the Company's fiscal year 2000. The Company does not anticipate that
Statement 133 will have a significant impact on its financial statements or
financial statement disclosures.
OTHER MATTERS
On September 1, 1998, the Board of Directors of the Company approved a
Preferred Shares Rights Agreement dated September 4, 1998, whereby the Board has
declared a dividend distribution of one Preferred Shares Purchase Right (the
"Rights") on each outstanding share of the Company's Common Stock. Each Right
will entitle stockholders to buy 1/1000(th) of a share of the Company's Series B
Participating Preferred Stock at an exercise price of $21.75. The Rights will
become exercisable following the tenth day after a person or group announces the
acquisition of 15% or more of the Company's Common Stock or announces
commencement of a tender offer the consummation of which would result in
ownership by the person or group of 15% or more of the Common Stock. The Company
will be entitled to redeem the Rights at $.01 per Right at any time on or before
the tenth day following acquisition by a person or group of 15% or more of the
Company's Common Stock.
On September 18, 1998 the Board of Directors of the Company approved an
adjustment to the exercise price for certain outstanding stock options held by
all current employees, which have an exercise price of $3.00 and above. In
consideration for this repricing offer, officers of the Company participating in
the option repricing were required to forfeit 10% of the shares subject to each
option being repriced, while non-officer employees participating in the option
repricing are subject to a one year limitation on the exercisability of repriced
options subject to certain exceptions. The one year limitation on ability to
exercise will expire on September 28, 1999. The revised exercise price was
established by reference to the closing price of the Company's Common Stock on
September 28, 1998, which was approximately $2.59. Approximately 90 employees
participated in the repricing with approximately 1,336,000 options being
repriced. Of the stock options repriced, options to purchase approximately
831,000 shares were held by executive officers of the Company.
16
On January 7, 1999, the Company entered into employment agreements with each
of J. Patrick Tinley, the Company's President and Chief Operating Officer and
member of the Board of Directors, and Dennis V. Vohs, the Company's Chairman of
the Board of Directors and Chief Executive Officer (the Employment Agreements).
In addition to a salary and benefits, each employment agreement provides the
employee with a continuation of salary and benefits for a twenty-four month
period immediately following the employee's termination of employment by the
Company "without cause" (as that term is defined in the Employment Agreement).
In addition, if within the first nine months following a "change of control" of
the Company the employee terminates his employment of the surviving corporation
for "good reason" or the surviving corporation terminates the employee's
employment for any reason other than "cause" or "disability" (as each of these
terms in quotes is defined in the Employment Agreements), the employee shall
then be entitled to a continuation of then applicable salary for the twenty-four
month period immediately following the termination date and all unvested stock
options and similar rights shall become vested and exercisable. Mr. Tinley's and
Mr. Vohs Employment Agreements have been filed as Exhibit 10.3 and Exhibit 10.4,
respectively to the Company's Quarterly Report on Form 10-Q for the third
quarter of fiscal 1999, filed May 17, 1999.
On September 17, 1999, the Company entered into an employment agreement with
Robert B. Webster, the Chief Financial Officer and Secretary of the Company.In
addition to a salary and benefits, the employment agreement provides the
employee with a continuation of salary and benefits for a twelve month period
immediately following the employee's termination of employment by the Company
"without cause" (as that term is defined in the Employment Agreement). In
addition, if within the first nine months following a "change of control" of the
Company the employee terminates his employment of the surviving corporation for
"good reason" or the surviving corporation terminates the employee's employment
for any reason other than "cause" or "disability" (as each of these terms in
quotes is defined in the Employment Agreements), the employee shall then be
entitled to a continuation of then applicable salary for the twelve month period
immediately following the termination date and all unvested stock options and
similar rights shall become vested and exercisable. Mr. Webster's Employment
Agreement has been filed as Exhibit 10.5 to Company's Annual Report on this Form
10-K.
YEAR 2000 IMPLICATIONS
OVERVIEW
The Year 2000 issue arises because certain electronic data processing
systems use two digits rather than four to define the applicable year which may
preclude proper date recognition after December 31, 1999.
During fiscal 1998 and 1997, the Company empowered key individuals as
responsible for identifying and resolving Year 2000 dysfunction. These efforts
include identification and review of internal operating systems and
applications, customer projects and services, and discussions with suppliers to
the business. At this time, based upon the efforts taken to date and those yet
to be taken, the Company does not expect any disruptions in its business
operations and, therefore, does not anticipate any material negative effect upon
its revenues or earnings as a result of the Year 2000 issue. Remediation costs
for problems identified thus far are not expected to be material to the
Company's consolidated financial position, liquidity or results of operations.
The Company has established a timetable for resolving Year 2000 issues so as not
to interrupt ongoing operations.
THE COMPANY'S STATE OF READINESS
The Year 2000 project plan, including assessment, improvement, testing and
implementation, has been established. The implementation phase is 99% complete
and should be finalized in September 1999 upon receipt of all remaining supplier
Year 2000 readiness inquiries and completed migration of certain internal
systems.
17
Assessment of the Year 2000 compliance of third parties with whom the
Company has material relationships is in process. The Company's material third
party relationships include the following:
(a) Software vendors: The Company has upgraded all purchased software
to a Year 2000 compliant version and has completed the testing phase;
(b) Equipment vendors: The response to the Year 2000 readiness
inquiries from equipment vendors, which includes all embedded chip
equipment, is at 95%; and
(c) Service providers: The response to the Year 2000 readiness
inquiries from third party service providers, which includes utilities,
phone service and all facility related services, is at 100%.
Thus far, the responses received, from the Company's third party vendors and
suppliers indicate compliance on or before November 1999.
The preliminary assessment of internal information technology and
non-information technology systems has been completed. Internal non-compliant
items have been identified and prioritization of internal non-compliant items is
in process. A system for tracking Remediation has been established and
non-compliant items identified are expected to be completed in September 1999.
Based on the findings of the planning and assessment phases completed to date,
the Company does not believe independent verification or validation processes
will be necessary.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The current estimate of the cost of Remediation and equipment and software
replacement ranges between $330,000 and $350,000, of which approximately
$330,000 has been incurred to date, and is summarized as follows:
Code modification and testing: $260,000-$275,000
Personal computer, software and other upgrades $70,000-$75,000
Less than 1% of the product development for 1998 and 1999 has been allocated
for code modification. Such costs are funded through cash flows from operations
and are expensed as incurred. The personal computer and purchased software
upgrades are costs incurred in the ordinary course of business and are,
therefore, typically capitalized costs.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES AND THE COMPANY'S CONTINGENCY PLANS
A most reasonably likely worst case Year 2000 scenario is not known at this
time. This determination will be made after the receipt of the remaining
material third party questionnaires. However, the shipment of software to
customers is expected to continue with no interruption and no material loss of
revenues is anticipated. The Year 2000 project has had minimal impact on the
schedule of other major information technology projects.
The contingency plan, which is largely a subset of the company's existing
disaster recovery plan, is designed to ensure that the necessary backup measures
for computer processing are identified.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE: The Company has a world-wide presence and as such
maintains offices and derives revenues from sources overseas. For fiscal 1999,
International revenues as a percentage of total revenues was approximately 33%.
The Company's international business is subject to typical risks of an
international business, including, but not limited to: differing economic
conditions, changes in political climates, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors. The effect of foreign exchange rate fluctuations on
the Company in fiscal 1999 was not material.
18
INTEREST RATES: The Company's exposure to interest rates relates primarily
to the Company's cash equivalents and certain debt obligations. The Company
invests in financial instruments with original maturities of three months or
less. Any interest earned on these investments is recorded as interest income on
the Company's statement of operations. Because of the short maturity of our
investments, a near-term change in interest rates would not materially effect
our financial position, results of operations, or cash flows. Certain of the
Company's debt obligations include a variable rate of interest. A significant,
near-term change in interest rates could materially effect our financial
position, results of operations or cash flows.
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) of this Form 10-K Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company filed a Current Report on Form 8-K/A dated July 2, 1998 which
reported under Item 4, that the Company terminated, by dismissal, its
relationship with Coopers & Lybrand L.L.P. as principal accountants. At the same
time, the Company announced the engagement of Arthur Andersen L.L.P. as its
principal accountants. The decision to change accountants was approved by the
Audit Committee of the Board of Directors. The Company also stated that there
were no disagreements between Coopers & Lybrand L.L.P. and the Company.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages at June 30, 1999 are as
follows:
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Dennis V. Vohs....................................... 55 Chairman of the Board and Chief Executive Officer
J. Patrick Tinley.................................... 51 President, Chief Operating Officer and Director
Robert B. Webster.................................... 51 Vice President, Chief Financial Officer and Secretary
Joseph L. Southworth................................. 49 Exec. Vice President Product Development & Support
Donald F. Campbell................................... 48 Vice President, Worldwide Marketing
Malcolm Marais....................................... 43 Vice President, Professional Services
Peter Van Houten..................................... 46 Vice President, North American Sales
Oscar Pierre......................................... 43 Vice President, European and Latin American
Operations
The executive officers are elected by and serve at the discretion of the
Board of Directors. There are no family relationships among the executive
officers of the Company.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors to file initial reports of share ownership and
report changes in ownership with the Securities and Exchange Commission (the
"SEC"). Such persons are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the Company
and written representations from certain reporting persons, the Company believes
that all filing requirements applicable to the Company's executive officers and
directors were complied with.
MR. VOHS has served as Chairman of the Board and Chief Executive Officer
since November 1988. Prior to joining the Company, Mr. Vohs held various
executive positions with Management Science America, Inc. over an 18 year
period. Prior to MSA, he held various technical positions at IBM. Mr. Vohs
received a Bachelors of Science in Industrial Engineering from Georgia Tech
University.
MR. TINLEY joined the Company in November 1988 as Executive Vice President,
Business Development and has served as Executive Vice President, Product
Development and Executive Vice President, Product Development & Client Services.
Mr. Tinley was promoted to President and Chief Operating Officer in 1995 and has
been a director of the Company since 1993. Prior to 1988, Mr. Tinley held
management positions with Management Science of America, Inc. and Royal Crown
Companies. Mr. Tinley received a Bachelors in Science from Columbus College.
MR. WEBSTER joined the Company in June 1998 as Vice President, Chief
Financial Officer and Secretary. Prior to joining the Company, Mr. Webster
served, since February 1995, as Executive Vice President/CFO of Americom
Holdings, Inc. a direct mail marketing company and prior to that as Vice
President/CFO of Sunds Defibrator, Inc. a pulp and paper process machinery and
technology supplier. Mr. Webster is a Certified Public Accountant in the State
of Georgia. Mr. Webster received both a Bachelor of Science in
20
Accounting and Computer Science as well as a Masters of Business Administration
in Information Systems from the Jesuit College of New Jersey, St.Peter's
College.
MR. SOUTHWORTH joined the Company in 1988 and has served as the Executive
Vice President, Development and Support since May 1996. Prior to 1996, Mr.
Southworth served as Vice President, Advanced Technology Consulting, Vice
President, Worldwide Marketing and Vice President, Consulting Services. Prior to
joining the Company, he was Director of Information Technology at Coopers &
Lybrand. Mr. Southworth received a Bachelors of Arts in Economics from The
College of William & Mary.
MR. CAMPBELL joined the Company in November 1994 as Vice President,
Worldwide Marketing. Prior to joining the Company, Mr. Campbell served as the
Senior Vice President, Marketing for Comdata Corporation from August 1989 to
April 1994. From April 1994 to November 1994, Mr. Campbell was an independent
consultant. Mr. Campbell received a Bachelor of Arts from Hartwick College.
MR. MARAIS has served as Vice President Professional Services since June of
1998. Prior to that, he was Director of Client Services Marketing from December
1996 to June 1998. For the period May 1995 to December 1996, he worked as a
Director of Business Development for a unit of Deloitte & Touche Consulting
Services Group. For the prior two years, he was independently employed as a
consultant. Mr. Marais has diplomas from overseas universities in the areas of
Management and Computer Science.
MR. VANHOUTEN was promoted to Vice President, North American Sales in
January 1996. From January 1987 to January 1996, Mr. Van Houten served in
various sales capacities, most recently as Regional Vice President, Northeastern
Sales. Prior to joining the Company, he served for the company as Vice President
of Sales & Marketing at Lifelines Technologies. Mr. VanHouten received a
Bachelors of Arts Degree in Business Administration from William Paterson
College. Mr. VanHouten also received a Masters in Business Administration from
Pace University.
MR. PIERRE joined the Company in 1997 as Vice President, European and Latin
American Operations following the company's acquisition of its Spanish
subsidiary. Prior to the acquisition, he was the majority shareholder of the
Company's Spanish subsidiary. From April 1990 to 1995, Mr. Pierre was founder
and majority shareholder of Software International S.A. Mr. Pierre received a
degree in Industrial Engineering overseas from The University Technical School
of Barcelona.
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.
21
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 1999 and 1998 Report of Arthur Andersen LLP, Independent Public Accountants............... F-1
Fiscal 1997 Report of Coopers & Lybrand L.L.P., Independent Accountants.......................... F-2
Consolidated Balance Sheets as of June 30, 1999 and 1998......................................... F-3
Consolidated Statements of Operations--Years Ended June 30, 1999, 1998, and 1997................. F-4
Consolidated Statements of Cash Flows--Years Ended June 30, 1999, 1998, and 1997................. F-5
Consolidated Statements of Shareholders' Equity--Years Ended June 30, 1999, 1998, and 1997....... F-6
Notes to Consolidated Financial Statements....................................................... F-7
2. FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule
of Ross Systems, Inc. for the Years Ended June 30, 1999, 1998, and 1997
is filed as part of this Report and should be read in conjunction with
the Consolidated Financial Statements of Ross Systems, Inc.
SCHEDULE PAGE
- ------------------------------------------------------------------------- ----
II Valuation and Qualifying Accounts..................................... S-1
Schedules not listed above have been omitted because they are not applicable
or are not required, or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
3. EXHIBITS. The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as part
of, or incorporated by reference into, this Report.
(B) REPORTS ON FORM 8-K.
On July 2, 1998, the Company filed a report of Form 8-K which reported under
item 4, that the Company had appointed Arthur Andersen LLP as its auditor for
the fiscal year ended June 30, 1998. This change was due to the pending July 1,
1998 merger of Coopers & Lybrand L.L.P. with Price Waterhouse & Company. The
merger would have created a potential independence conflict since the Company's
President and Chief Operating Officer has a brother who is a partner in the
Atlanta office of Price Waterhouse & Company.
On July 23, 1998, the Company filed a report on Form 8-K/A which amended the
June 29, 1998 filing above to correctly identify the Company's state of
incorporation as Delaware rather than California.
On July 24, 1998, the Company filed a report of Form 8-K which reported
under item 5, that, effective June 25, 1998, the Company had merged with Ross
Systems Inc., a California corporation, with the Company being the surviving
entity for the purposes of effecting a change in domicile from California to
Delaware.
On April 2, 1999, the Company filed a report on form 8-K which stated under
item 5 that the Company had made a press release with regards to the financial
results of its third quarter of fiscal 1999, ended March 31, 1999.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on the 28th day of September, 1999.
ROSS SYSTEMS, INC.
By: /s/ DENNIS V. VOHS
-----------------------------------------
Dennis V. Vohs
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dennis V. Vohs his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that the said attorney-in-fact,
or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board and
/s/ DENNIS V. VOHS Chief Executive Officer
- ------------------------------ (Principal Executive September 28, 1999
Dennis V. Vohs Officer)
Vice President, Finance
and Administration,
/s/ ROBERT B. WEBSTER Chief Financial Officer
- ------------------------------ (Principal Financial and September 28, 1999
Robert B. Webster Accounting Officer) and
Secretary
/s/ J. WILLIAM GOODHEW
- ------------------------------ Director September 28, 1999
J. William Goodhew
/s/ MARIO M. ROSATI
- ------------------------------ Director September 28, 1999
Mario M. Rosati
/s/ BRUCE J. RYAN
- ------------------------------ Director September 28, 1999
Bruce J. Ryan
/s/ J. PATRICK TINLEY
- ------------------------------ President, Chief Operating September 28, 1999
J. Patrick Tinley Officer and Director
23
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1999
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
3.1 Certificate of the Registrant, as amended (1)
3.2 Certificate of Designation of Rights, Preferences and Privileges of Series B Preferred Stock of the
Registrant (3)
3.4 Certificate of Amendment to the Bylaws of the Registrant
4.3 Form of the subordinated debenture agreement due February 6, 2003 issued by the Registrant to each
investor (3)
4.4 Registration Rights Agreement between the Registrant and each Investor (3)
10.1 Preferred Share Rights Agreement, dated September 4, 1999 between the Registrant and BankBoston N.A. (2)
10.2A Extension Agreement and Amendment to Loan Documents dated March 21, 1997 between Registrant and Coast
Business Credit, a division of Southern Pacific Thrift and Loan Association. (4)
10.2B Extension Agreement and Amendment to Loan Documents dated August 18, 1995 between Registrant and
CoastFed Business Credit Corporation ("Coast") (4)
10.2C First Amendment to Loan and Security Agreement dated June 30, 1995 between Registrant and Coast (4)
10.2D Loan and Security Agreement dated October 11, 1994 between Registrant and Coast (4)
10.3 Employment Agreement dated January 7, 1999, between Mr. Patrick Tinley and the
Registrant (5)
10.4 Employment Agreement dated January 7, 1999, between Mr. Dennis Vohs and the
Registrant (5)
10.5 Employment Agreement dated September 13, 1999, between Mr. Robert B. Webster and the Registrant
21.1 Listing of Subsidiaries of Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PriceWaterhouseCoopers LLP
24.1 Power of Attorney (included on signature page)
27 Financial Data Schedule
- ------------------------
(1) Incorporated by reference to the exhibit filed with the Registrant's current
Report on Form 8-K filed July 24, 1998.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's current
report on Form 8-K filed February 12, 1998.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 10-K/A filed April 30, 1998.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 filed May
17, 1999.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ross Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Ross Systems,
Inc. and subsidiaries as of June 30, 1999 and 1998 and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. The consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ross Systems, Inc. and subsidiaries as of June 30, 1999 and 1998 and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Atlanta, Georgia
August 20, 1999
F-1
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
----------------------
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 6,294 $ 7,248
Accounts receivable, less allowance for doubtful accounts and returns of $2,884 and
$1,974 in 1999 and 1998, respectively................................................. 37,593 34,878
Prepaid and other current assets........................................................ 2,591 1,915
---------- ----------
Total current assets.................................................................. 46,478 44,041
Property and equipment.................................................................... 5,172 5,885
Computer software costs................................................................... 27,261 24,339
Other assets.............................................................................. 4,274 3,924
---------- ----------
Total assets.......................................................................... $ 83,185 $ 78,189
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt............................................................ $ 12,536 $ 4,607
Accounts payable........................................................................ 10,232 6,359
Accrued expenses........................................................................ 8,743 8,950
Income taxes payable.................................................................... 145 397
Deferred revenues....................................................................... 18,567 18,184
---------- ----------
Total current liabilities............................................................. 50,223 38,497
Long-term debt, less current installments................................................. 3,705 8,918
---------- ----------
Total liabilities..................................................................... 53,928 47,415
---------- ----------
Shareholders' equity:
Common stock, $0.001 par value; 35,000,000 shares authorized; 22,904,312 and 21,106,867
shares issued and outstanding at June 30, 1999 and 1998, respectively................. 23 21
Preferred stock, no par value 5,000,000 shares authorized; 0 shares issued and
outstanding............................................................................. -- --
Additional paid-in capital.............................................................. 84,261 79,646
Accumulated deficit..................................................................... (53,372) (47,745)
Accumulated other comprehensive income (deficit)........................................ (1,655) (1,148)
---------- ----------
Total shareholders' equity............................................................ 29,257 30,774
---------- ----------
Total liabilities and shareholders' equity................................................ $ 83,185 $ 78,189
---------- ----------
See accompanying Notes to Consolidated Financial Statements.
F-3
The Board of Directors and Shareholders
Ross Systems, Inc.:
We have audited the consolidated balance sheets of Ross Systems, Inc. and
subsidiaries (the "Company") as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedules for
the years ended June 30, 1997 and 1996. These consolidated financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits. We
did not audit the combined balance sheets of Ross Systems (UK) Ltd., Ross
Systems France S.A., Ross Systems Deutschland GmbH, Ross Systems Europe N.V.,
and Ross Systems Nederland B.V. (the "foreign entities"), wholly-owned
subsidiaries of the Company, as of June 30, 1996 and the related combined
statements of operations and shareholders' equity for the year then ended, which
statement reflects total assets and revenues constituting 22 percent and 29
percent, respectively, of the related consolidated totals. We also did not audit
the combined foreign entities' financial statement schedule for the year ended
June 30, 1996. Those combined financial statements and financial statement
schedule were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for the foreign
entities is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Ross Systems, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles. Also in our opinion, based on our audits and the report
of the other auditors, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
August 21, 1997
F-2
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
Revenues:
Software product licenses...................................................... $ 32,207 $ 38,029 $ 30,549
Consulting and other services.................................................. 41,258 28,211 22,818
Maintenance.................................................................... 28,326 25,444 25,406
--------- --------- ---------
Total revenues............................................................... 101,791 91,684 78,773
--------- --------- ---------
Operating expenses:
Costs of software product licenses............................................. 3,895 3,536 2,905
Costs of consulting, maintenance and other services............................ 46,410 36,106 28,511
Software product license sales and marketing................................... 31,442 27,211 24,158
Product development............................................................ 11,959 10,960 10,880
General and administrative..................................................... 8,337 7,258 8,050
Provision for uncollectible accounts........................................... 2,421 1,830 3,534
Provision / settlement of litigation claim..................................... -- (381) 615
Amortization of other assets................................................... 1,263 1,024 742
--------- --------- ---------
Total operating expenses..................................................... 105,727 87,544 79,395
--------- --------- ---------
Operating earnings (loss).................................................... (3,936) 4,140 (622)
Other income (expense):
Interest income................................................................ 196 100 110
Interest expense............................................................... (1,352) (1,263) (1,032)
--------- --------- ---------
Earnings (loss) before income taxes.......................................... (5,092) 2,977 (1,544)
Extraordinary Item, net of tax................................................... (213) -- --
Income tax expense............................................................... 321 382 809
--------- --------- ---------
Net earnings (loss).......................................................... $ (5,626) $ 2,595 $ (2,353)
--------- --------- ---------
--------- --------- ---------
Net earnings (loss) per common share--basic (Note 1)............................. $ (0.25) $ 0.13 $ (0.13)
--------- --------- ---------
--------- --------- ---------
Net earnings (loss) per common share--diluted (Note 1)........................... $ (0.25) $ 0.13 $ (0.13)
--------- --------- ---------
--------- --------- ---------
Shares used in per share computation--basic (Note 1)............................. 22,232 19,734 18,515
--------- --------- ---------
--------- --------- ---------
Shares used in per share computation--diluted (Note 1)........................... 22,232 20,390 18,515
--------- --------- ---------
--------- --------- ---------
See accompanying Notes to Consolidated Financial Statements.
F-4
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net earnings (loss)............................................................. $ (5,413) $ 2,595 $ (2,353)
Adjustments to reconcile net earnings (loss) to net cash (used in) provided by
operating activities:
Extraordinary loss on early debt extinguishment............................... (213) -- --
Litigation settlements and expenses........................................... -- -- 615
Depreciation and amortization of property and equipment....................... 2,526 2,902 2,220
Amortization of computer software costs....................................... 8,806 7,520 7,112
Amortization of other assets.................................................. 1,263 1,024 742
Provision for uncollectible accounts.......................................... 2,422 1,830 3,534
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable......................................................... (5,394) (4,225) (8,306)
Prepaid and other current assets............................................ (721) 320 (624)
Income taxes recoverable/payable............................................ (256) 188 582
Accounts payable............................................................ 3,811 (2,601) 2,025
Accrued expenses............................................................ (732) 521 (677)
Deferred revenues........................................................... 350 2,207 (1,638)
Other, net.................................................................. 4 (86) (13)
--------- --------- ---------
Net cash provided by (used in) operating activities....................... 6,453 12,195 3,219
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment............................................. (1,813) (1,242) (1,677)
Computer software costs capitalized............................................. (11,572) (10,055) (8,879)
Acquisitions and divestitures................................................... -- 69 (48)
Other........................................................................... 294 (390) 311
--------- --------- ---------
Net cash used in investing activities..................................... (13,091) (11,618) (10,293)
--------- --------- ---------
Cash flows from financing activities:
Net line of credit activity..................................................... 8,576 (7,856) 3,381
Capital lease payments.......................................................... (432) (263) (58)
Payment of debt issuance costs.................................................. (2,667) (431) --
Proceeds from issuance of convertible debentures................................ -- 10,000 --
Proceeds from issuance of common stock.......................................... 301 1,262 254
Proceeds from private equity financings, net.................................... -- -- 5,720
--------- --------- ---------
Net cash provided by financing activities................................. 5,778 2,712 9,297
--------- --------- ---------
Effect of exchange rate changes on cash........................................... (94) (51) (75)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. (954) 3,238 2,148
--------- --------- ---------
Cash and cash equivalents at beginning of fiscal year............................. 7,248 4,010 1,862
--------- --------- ---------
Cash and cash equivalents at end of fiscal year................................... $ 6,294 $ 7,248 $ 4,010
--------- --------- ---------
--------- --------- ---------
See accompanying Notes to Consolidated Financial Statements
F-5
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------------------ PAID IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INCOME(DEFICIT) EQUITY
----------- ----------- --------- ------------ --------------- -------------
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)
----------- ----------- --------- ------------ ------- -------------
Comprehensive income (deficit)....
Balances as of June 30, 1997...... 19,245 $ 73,756 -- $ (50,340) $ (1,356) $ 22,060
Exercise of stock options......... 11 35 -- -- -- 35
Exercise of common stock
warrants........................ 353 1,142 -- -- -- 1,142
Conversion of preferred stock..... 287 1,053 -- -- -- 1,053
Conversion of convertible
debentures...................... 392 1,616 -- -- -- 1,616
Issuance of stock for
acquisition..................... 703 2,057 -- -- -- 2,057
Issuance of stock pursuant to
employee stock purchase plan.... 116 301 -- -- -- 301
Stock issuance costs.............. -- (293) -- -- -- (293)
Effect of foreign currency
translation..................... -- -- -- -- 208 208
Reincorporation................... -- (79,646) 79,646 -- -- --
Net earnings...................... -- -- -- 2,595 -- 2,595
----------- ----------- --------- ------------ ------- -------------
Comprehensive income (deficit)....
Balances as of June 30, 1998...... 21,107 $ 21 $ 79,646 $ (47,745) $ (1,148) $ 30,774
----------- ----------- --------- ------------ ------- -------------
Exercise of stock options......... 92 104 -- -- 104
Issuance of stock for
acquisition..................... 467 1 1,546 -- -- 1,547
Issuance of stock pursuant to
employee stock purchase plan.... 122 -- 322 -- -- 322
Stock issuance costs.............. -- (52) -- -- (52)
Effect of foreign currency
translation..................... -- -- -- (507) (507)
Conversion of convertible
debentures...................... 1,116 1 2,694 2,695
Net loss.......................... -- -- -- (5,626) -- (5,626)
----------- ----------- --------- ------------ ------- -------------
Comprehensive income (deficit)....
Balances as of June 30, 1999...... 22,904 $ 23 $ 84,260 $ (53,371) $ (1,655) $ 29,257
----------- ----------- --------- ------------ ------- -------------
----------- ----------- --------- ------------ ------- -------------
COMPREHENSIVE
INCOME
---------------
Balances as of June 30, 1996......
Exercise of stock options.........
Issuance of stock for purchase of
distributor.....................
Issuance of stock in private
equity financings, net..........
Issuance of stock pursuant to
employee stock purchase plan....
Effect of foreign currency
translation..................... (700)
Net loss.......................... (2,353)
-------
Comprehensive income (deficit).... (3,053)
-------
-------
Balances as of June 30, 1997......
Exercise of stock options.........
Exercise of common stock
warrants........................
Conversion of preferred stock.....
Conversion of convertible
debentures......................
Issuance of stock for
acquisition.....................
Issuance of stock pursuant to
employee stock purchase plan....
Stock issuance costs..............
Effect of foreign currency
translation..................... 208
Reincorporation...................
Net earnings...................... 2,595
-------
Comprehensive income (deficit).... 2,803
-------
-------
Balances as of June 30, 1998......
Exercise of stock options.........
Issuance of stock for
acquisition.....................
Issuance of stock pursuant to
employee stock purchase plan....
Stock issuance costs..............
Effect of foreign currency
translation..................... (507)
Conversion of convertible
debentures......................
Net loss.......................... (5,627)
-------
Comprehensive income (deficit).... (6,134)
-------
-------
Balances as of June 30, 1999......
See accompanying Notes to Consolidated Financial Statements.
F-6
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS OF THE COMPANY
Ross Systems, Inc. (the "Company") develops and markets proprietary
financial, manufacturing, distribution and human resources software packages,
complemented by a relational fourth generation programming environment. It also
provides services such as professional consulting services, custom application
development, education and on-line support. The Company operates in one business
segment and no individual customer accounted for more than 10% of total
revenues. The Company does not have a concentration of credit risk in any one
industry or geographic region.
(B) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is accumulated using
the straight-line and declining balance methods over the estimated useful lives
of the respective assets, generally three to seven years. Leasehold improvements
and equipment under capital leases are amortized using the straight-line method
over the shorter of the terms of the related leases or the respective useful
lives of the assets.
(E) NET EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings (loss) per common share are computed by dividing net earnings
or net loss by the weighted average number of common shares outstanding during
the period. Diluted earnings per common and common equivalent share is computed
by dividing net earnings by the weighted average number of common and common
equivalent shares outstanding during the period. Common stock equivalents are
not considered in the calculation of net loss per share when their effect would
be antidilutive.
The following is a reconciliation of the numerators of diluted earnings
(loss) per share.
FOR THE YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
Net earnings (loss)............................................ $ (5,626) $ 2,595 $ (2,353)
Payment in kind interest on convertible debentures............. -- 77 --
--------- --------- ---------
Net earnings (loss) for use in per share calculations.......... $ (5,626) $ 2,672 $ (2,353)
--------- --------- ---------
--------- --------- ---------
When the company is profitable, the only difference between the denominator
for basic and diluted net earnings per share is the effect of common stock
equivalents. In years of a loss, the denominator does not change because it
would be anti-dilutive.
F-7
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(F) AMORTIZATION OF OTHER ASSETS
The other assets described in Note 4 are amortized using the straight-line
method over the following estimated useful lives:
Acquired software technology................. 3 to 5 years
Covenants not to compete..................... 3 to 5 years
Goodwill..................................... 7 to 10 years
Other assets have generally resulted from business combinations accounted
for as purchases and are recorded at the lower of unamortized cost or fair
value. The Company annually reviews the carrying amounts of these assets for
indications of impairment, based on expected undiscounted cash flows related to
the acquired entities or products. Impairment of value, if any, is recognized in
the period it is determined.
(G) REVENUE RECOGNITION
The Company recognizes revenues from licenses of computer software provided
that a noncancelable license agreement has been signed, the software and related
documentation have been shipped, there are no material uncertainties regarding
customer acceptance, collection of the resulting receivable is deemed probable,
and no significant other vendor obligations exist. The revenue associated with
any license agreements containing cancellation or refund provisions is deferred
until such provisions lapse. Where the Company has future obligations, if such
obligations are insignificant, related costs are accrued immediately. When the
obligations are significant, the software product license revenues are deferred.
Future contractual obligations can include software customization, requirements
to provide additional products in the future and porting products to new
platforms. Contracts which require significant software customization are
accounted for on the percentage-of-completion basis. Revenues related to
significant obligations to provide future products or to port existing products
are deferred until the new products or ports are completed.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance revenues,
including revenues bundled with original software product license revenues, are
deferred and recognized over the related contract period, generally 12 months.
The Company's revenue recognition policies are designed to comply with American
Institute of Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition" (SOP 97-02).
(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
F-8
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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, 1999 and 1998, capitalized computer software
costs approximated $69,698,000 and $57,885,000, respectively, and related
accumulated amortization totaled $42,437,000 and $33,546,000, respectively.
Software costs related to the development of new products incurred prior to
establishing technological feasibility or after general release are expensed as
incurred.
(I) INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109,
"ACCOUNTING FOR INCOME TAXES" ("Statement 109"), the Company utilizes the asset
and liability method of accounting for income taxes. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
established to recognize the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
(J) FOREIGN OPERATIONS AND CURRENCY TRANSLATION
The local currencies of the Company's foreign subsidiaries are the
functional currencies. Assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at current exchange rates, and the resulting
translation gains and losses are included as an adjustment to shareholders'
equity. Transaction gains and losses relate to U.S. dollar denominated
intercompany receivables recorded in the financial statements of the Company's
foreign subsidiaries and are reflected in income. Where related intercompany
balances have been designated as long-term, gains and losses are included as an
adjustment to shareholders' equity. Net gains and losses arising from foreign
currency transactions for all periods have not been significant.
(K) RECLASSIFICATIONS
Certain 1998 and 1997 amounts have been reclassified to conform with the
1999 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, 1999, 1998 and 1997 were $2,360,682,
$1,819,535 and $1,617,494, respectively.
F-9
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(N) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" as of July 1, 1998. SFAS 130 requires
disclosure of total non-shareholder changes in equity in interim periods and
additional disclosures of the components of shareholder changes on an annual
basis. Total non-shareholder changes in equity include all changes in equity
during a period except those resulting from investments by and distributions to
shareholders. The Company has restated information for all prior periods
reported below to conform to this standard (in thousands):
FOR THE YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
Net earnings (loss)............................................ $ (5,626) $ 2,595 $ (2,353)
Foreign currency translation adjustments....................... (507) 208 (700)
--------- --------- ---------
Total Comprehensive income (loss).............................. $ (6,133) $ 2,803 $ (3,053)
--------- --------- ---------
--------- --------- ---------
(O) SEGMENT INFORMATION
The Company has adopted the Financial Accounting Standards Board's statement
of Financial Accounting Standards No. 131, or SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information," effective for fiscal years
beginning after December 15, 1997. SFAS 131 supersedes Statement of Financial
Accounting standards No. 14, or SFAS 14, Financial Reporting for Segments of a
Business Enterprise. SFAS 131 changes current practice under SFAS 14 by
establishing a new framework on which to base segment reporting and also
requires interim reporting of segment information.
The Company markets its products and related services primarily in North
America, Europe and Asia and primarily measures its business performance based
upon geographic results of operations. Selected balance sheet and income
statement information pertaining to the various significant geographic areas of
operation are as follows:
As of and for the fiscal year ended June 30, 1999:
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------- --------- ----------- ----------------- -------------
Belgium.................................... 720 1,400 (1,873) 63 28
Netherlands................................ 1,553 4,409 (480) 76 44
France..................................... 4,691 6,616 (3,709) 73 47
Germany.................................... 281 1,533 (68) 6 0
Spain...................................... 5,028 6,615 (4,226) 492 727
United Kingdom............................. 4,505 9,355 (1,098) 232 155
North America.............................. 66,407 71,863 5,828 1,584 812
------ --------- ----------- ----- -----
Total...................................... 83,185 101,791 (5,626) 2,526 1,813
------ --------- ----------- ----- -----
------ --------- ----------- ----- -----
F-10
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
As of and for the year ended June 30, 1998:
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------- --------- ----------- ----------------- -------------
Belgium.................................... 786 1,947 (248) 46 38
Netherlands................................ 1,284 3,649 (789) 84 77
France..................................... 3,429 3,127 (2,447) 21 51
Germany.................................... 508 1,952 376 9 14
Spain...................................... 5,035 5,858 (515) 356 329
United Kingdom............................. 3,406 7,111 (2,588) 218 164
North America.............................. 63,741 68,040 8,806 2,168 569
------ --------- ----------- ----- -----
Total...................................... 78,189 91,684 2,595 2,902 1,242
------ --------- ----------- ----- -----
------ --------- ----------- ----- -----
As of and for the year ended June 30, 1997:
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------- --------- ----------- ----------------- -------------
Belgium.................................... 1,424 1,877 (74) 54 39
Netherlands................................ 2,580 4,678 (789) 115 72
France..................................... 3,134 2,485 505 62 56
Germany.................................... 445 345 (107) 13 9
Spain...................................... 3,562 2,643 (347) 56 558
United Kingdom............................. 5,077 8,011 (695) 251 182
North America.............................. 53,493 58,734 (846) 1,669 760
------ --------- ----------- ----- -----
Total...................................... 69,715 78,773 (2,353) 2,220 1,677
------ --------- ----------- ----- -----
------ --------- ----------- ----- -----
The Company has no customers that represent ten percent or more of annual
revenues.
(P) NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("Statement 133"). Statement 133 establishes accounting
and reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. Statement 133 is required to be adopted
for the Company's fiscal year 2000. The Company does not anticipate that
Statement 133 will have a significant impact on its financial statements or
financial statement disclosures.
(2) ACQUISITIONS AND DIVESTITURES
On August 26, 1998, the Company acquired a 100% ownership interest in
HiPoint Systems Corporation ("HiPoint"), a privately held computer consulting
firm based in Ontario, Canada, in exchange for shares of the Company's Common
Stock valued at approximately $1,547,000. HiPoint had been a consulting partner
on many of the Company's software implementation and consulting projects over
the past several years. The acquisition has been 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 from the
F-11
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DIVESTITURES (CONTINUED)
date of acquisition. The pro forma effects on total revenues, net earnings
(loss), and net earnings (loss) per share of including this subsidiary in the
Company's Consolidated Statement of Operations from the beginning of fiscal 1999
and 1998 are not significant to the Company as a whole.
On January 6, 1998, the Company acquired the assets of its business partner,
Bizware Corporation, in exchange for shares of the Company's common stock valued
at approximately $2.0 million. The acquisition was accounted for as a purchase,
and accordingly, the results of operations of the acquired business have been
included in the Company's results of operations since the date of acquisition.
The pro forma effects on total revenues, net earnings, and net earnings per
share of including this subsidiary in the Company's consolidated statement of
operations are not significant.
On December 30, 1996, the Company acquired a 100% ownership interest in Ross
Iberica, its distributor in Spain and Portugal for the past five years, in
exchange for shares of the Company's common stock valued at approximately
$1,400,000. The acquisition was accounted for as a purchase, and accordingly,
the results of operations of the acquired business have been included in the
Company's results of operations since the date of acquisition. The pro forma
effects on total revenues, net earnings, and net earnings per share of including
this subsidiary in the Company's consolidated statement of operations are not
significant.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
JUNE 30,
----------------------
1999 1998
---------- ----------
(IN THOUSANDS)
Computer equipment.................................................... $ 14,209 $ 12,596
Furniture and fixtures................................................ 3,025 3,009
Leasehold improvements................................................ 1,819 1,635
---------- ----------
19,053 17,240
---------- ----------
Less accumulated depreciation and amortization........................ (13,881) (11,355)
---------- ----------
$ 5,172 $ 5,885
---------- ----------
---------- ----------
F-12
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) OTHER ASSETS
A summary of other assets follows:
JUNE 30,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
Covenants not to compete................................................. $ 1,285 $ 1,285
Goodwill................................................................. 7,479 5,461
Other.................................................................... 2,153 2,590
--------- ---------
10,917 9,336
Less accumulated amortization............................................ (6,643) (5,412)
--------- ---------
$ 4,274 $ 3,924
--------- ---------
--------- ---------
(5) ACCRUED EXPENSES
A summary of accrued expenses follows:
JUNE 30,
--------------------
1999 1998
--------- ---------
(IN THOUSANDS)
Accrued vacation and other employee benefits............................... $ 1,120 $ 876
Accrued commissions........................................................ 2,125 3,144
Deferred rent.............................................................. 120 136
Sales and use taxes payable................................................ 1,807 1,429
Interest payable........................................................... 100 115
Professional fees.......................................................... 101 110
Royalties.................................................................. 696 1,326
Other...................................................................... 2,674 1,814
--------- ---------
$ 8,743 $ 8,950
--------- ---------
--------- ---------
During fiscal 1997, the Company settled a dispute with a customer with the
understanding that the settlement and related legal fees would be covered under
the Company's business insurance. The Company subsequently learned that the
insurer took exception to the Company's settlement with its customer and
withheld payment on the claim, pending arbitration. In fiscal 1997, the Company
recorded a charge of $615,000 to cover the potential settlement and legal fees.
During fiscal 1998, the Company received a reimbursement from the insurance
company of $381,000 which it recorded as a credit to operating expenses.
(6) DEBT
The Company has a $15,000,000 revolving credit facility which is
collateralized by substantially all assets of the Company. The revolving credit
facility expires on October 31, 2000, carries an interest rate at the prime rate
plus 2% (9.75% at June 30, 1999), 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
F-13
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEBT (CONTINUED)
would prevent loan repayment and (c) any of these events are not remedied by the
Company within allowable periods. At June 30, 1999 and 1998, $11,981,000 and
$3,770,000 were outstanding under the Company's revolving credit facility,
respectively.
Long term debt consists of convertible debentures. (See note 8.)
As of June 30, 1999 and 1998, the Company had outstanding capital lease
obligations aggregating $267,000 and $421,000, respectively. As of June 30, the
Company's future obligations under capital leases are as follows (in thousands):
1999 1998
--------- ---------
Fiscal Year:
2000..................................................................... $ 205 $ 205
2001..................................................................... 132 119
--------- ---------
Total future capital lease payments...................................... 337 324
Less amounts representing interest....................................... 70 66
--------- ---------
$ 267 $ 258
--------- ---------
--------- ---------
(7) COMMITMENTS AND CONTINGENCIES
The Company leases facilities and certain equipment under operating leases
which expire at various dates through fiscal 2016. Certain leases include
renewal options and rental escalation clauses to reflect changes in price
indices, real estate taxes, and maintenance costs. As of June 30, 1999, future
minimum lease payments under noncancelable operating leases were as follows (in
thousands):
FISCAL YEAR
- -----------------------------------------------------------------------------------
2000............................................................................... $ 3,355
2001............................................................................... 2,763
2002............................................................................... 1,783
2003............................................................................... 933
2004............................................................................... 839
Thereafter......................................................................... 2,770
---------
Total future minimum lease payments................................................ $ 12,443
---------
---------
The Company has an irrevocable letter of credit outstanding in the amount of
$670,000 which was issued in exchange for a waiver of an event of default under
an operating lease covenant in 1997. Rent expense approximated $3,829,000
$3,510,000, and $3,084,000, for fiscal 1999, 1998, and 1997, respectively.
Included in fiscal 1999 rent expense is income from certain noncancelable
subleases of approximately $190,000.
F-14
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) CAPITAL STOCK
(A) MANDITORILY REDEEMABLE PREFERRED STOCK
In fiscal 1991, the Company authorized a new class of no par value preferred
stock consisting of 5,000,000 shares. The Board of Directors is authorized to
issue the preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions of such stock, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the shareholders. All preferred stock was issued with a mandatory redemption
factor. As of June 30, 1999 and 1998, the Company had no shares of its
Manditorily redeemable convertible preferred stock outstanding.
(B) PRIVATE EQUITY FINANCING AND WARRANTS
During fiscal 1996, the Company completed two private placements of equity
securities. On January 2, 1996, the Company received approximately $1,820,000 in
cash proceeds, net of offering expenses, for the issuance of 500,000 shares of
the Company's Series A Manditorily redeemable convertible preferred stock. In
addition, on February 28, 1996, the Company received approximately $4,575,000 in
cash proceeds, net of offering expenses, for the issuance of 500 shares of the
Company's Series D Manditorily redeemable convertible preferred stock.
During fiscal 1997, the Company completed two additional private placements
of equity securities with the same investor who had purchased and converted the
Company's Series A Manditorily redeemable convertible preferred stock. On July
8, 1996, the Company received approximately $3,737,000 in cash proceeds, net of
offering expenses, for the issuance of 500,000 shares of the Company's Series B
Manditorily redeemable convertible preferred stock and 500,000 shares of the
Company's Series C Manditorily redeemable convertible preferred stock.
Additionally, on January 6, 1997, the Company received approximately $1,983,000
in cash proceeds, net of offering expenses, for the issuance of 200 shares of
the Company's Series E Manditorily redeemable convertible preferred stock. All
of the Series A, B, C, D and 93 shares of the Series E Manditorily redeemable
convertible preferred stock were converted to common stock by June 30, 1997.
Therefore, as of June 30, 1997, 107 shares of the Company's Series E Redeemable
Manditorily redeemable convertible preferred stock remained outstanding. These
remaining shares were converted in April 1998, and the Company issued 286,633
shares of common stock.
In connection with the issuance of the Company's Series A Manditorily
redeemable convertible preferred stock and the subsequent issuance's of the
Company's Series B and Series C Manditorily redeemable convertible preferred
stock, the Company granted a warrant to the investor to purchase 400,000 shares
of the Company's Common Stock at an exercise price of $5.576 per share during
the period from and including July, 1, 1997 through and including December 29,
2000. Additionally, in connection with the subsequent issuance of the Company's
Series E Manditorily redeemable convertible preferred stock, the Company granted
another warrant to the investor to purchase 640,000 shares of the Company's
Common Stock at a maximum exercise price of $8.00 per share during the period
from and including July, 1, 1997 through and including December 29, 2000.
On April 23, 1998, the Company issued and sold 353,000 shares of its Common
Stock to this investor upon the exercise of the warrant to purchase 640,000
shares of the Company's Common Stock mentioned above. The Company and the
investor also agreed to cancel the remaining 287,000 shares of Common Stock
subject to the warrant. The aggregate exercise price paid by this investor was
$1,141,946, representing a per share exercise price of $3.234975. The Company
and the investor agreed to reduce the exercise
F-15
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) CAPITAL STOCK (CONTINUED)
price from that set forth in the warrant certificate, dated July 3, 1996,
representing the warrant in consideration for the cancellation.
(C) CONVERTIBLE DEBENTURES
On February 6, 1998, the Company closed a private placement of up to
$10,000,000 of convertible subordinated debentures to certain institutional
investors (the "Investors") pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The investors invested $6,000,000 on
February 6, 1998 and $4,000,000 on June 11, 1998. As of June 30, 1999, the
remaining balance after conversions and redemption's is $3,033,000. The material
agreements between the Company and each Investor have been filed as exhibits to
the Current Report on Form 8-K filed with the Securities and Exchange Commission
by the Company on February 12, 1998. The salient points of the convertible
subordinated debenture agreement are as follows:
INTEREST: The interest rate is four percent per annum for the first six
months after the original issuance date of the convertible debenture and six
percent per annum thereafter, subject to increases (up to the legal maximum
rate) if the Company is in default under the convertible debenture. Accrued
interest is due and payable in shares of the Company's Common Stock
semi-annually on the last day of June and December of each year. The value for
such shares of Common Stock is the average of the two lowest closing bid prices
for the Company's Common Stock as reported by the Bloomberg Service for the
thirty trading days immediately before the interest payment date.
CONVERSION PRICE: The conversion price for the convertible debentures is
(P+I) divided by the Conversion Date Market Price where P equals the outstanding
principal amount of the convertible debenture submitted for conversion, I equals
accrued but unpaid interest as of the conversion date and Conversion Date Market
Price equals the lesser of the maximum conversion price (as defined below) or
101% of the average of the two lowest closing bid prices for the Company's
Common Stock as reported by the Bloomberg Service for the thirty trading days
immediately before the conversion date. The maximum conversion price is (i)
until December 31, 1998, $7.00 subject to a downward adjustment if the Company
issues shares in a private placement financing transaction at a per share price
less than $7.00 and (ii) commencing January 1, 1999, 115% of the average closing
bid price of the Common Stock as reported by the Bloomberg Service over the 1998
calendar year. A portion of the convertible debentures issued in June 1998 (the
"Second Closing Debentures") were redeemed by the Company.
During fiscal 1999 and fiscal 1998, through the issuance of additional
common shares, the Company paid interest in kind of $270,354 and $77,000,
respectively, related to these debentures. When the company is profitable, this
payment in kind interest is added back to net earnings in the determination of
diluted earnings per share. In years of loss, this amount in not added back as
it would be anti-dilutive. (See note 1.)
(D) REINCORPORATION
In June, 1998, the Company effected a change in its legal domicile from
California to Delaware by creating a Delaware corporation which was the
surviving entity of a merger with the California corporation. With this
reincorporation, the shares of the Delaware corporation have a stated par value
of $0.001 per share.
F-16
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EMPLOYEE STOCK PLANS
At June 30, 1999, the Company had three stock-based compensation plans,
which are described below. The Company applies Accounting Principles Board
opinion no. 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its Stock Option Plan
and its Stock Purchase Plan. Had compensation cost for the Company's Stock
Option and Stock Purchase Plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of Statement
123, the Company's net earnings (loss) and net earnings (loss) per share would
have been the pro forma amounts indicated below (in thousands, except per share
data):
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
Net earnings (loss):
As reported.................................................. $ (5,626) $ 2,595 $ (2,353)
Pro forma.................................................... (7,087) 951 (4,414)
Net earnings (loss) per share:
As reported basic............................................ $(0.25) $0.13 $(0.13)
As reported diluted.......................................... (0.25) 0.13 (0.13)
Pro forma basic.............................................. (0.32) 0.08 (0.24)
Pro forma diluted............................................ (0.32) 0.08 (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") and 1,900,000 shares of common stock
for issuance under its 1998 Incentive Stock Plan. Under the Plan, the Company
may issue options to purchase shares of the Company's common stock to eligible
employees, officers, directors, independent contractors and consultants. The
term of the options issued under the Plan cannot exceed ten years from the date
of grant. Options granted to date generally become exercisable over four to five
years based on the grantees' continued service with the Company.
On September 18, 1998 the Board of Directors of the Company approved an
adjustment to the exercise price for certain outstanding stock options held by
all current employees, which have an exercise price of $3.00 and above. In
consideration for this repricing offer, officers of the Company participating in
the option repricing were required to forfeit 10% of the shares subject to each
option being repriced, while non-officer employees participating in the option
repricing are subject to a one year limitation on the exercisability of repriced
options subject to certain exceptions. The revised exercise price was
established by reference to the closing price of the Company's Common Stock on
September 28, 1998, which was approximately $2.59. Approximately 90 employees
participated in the repricing with approximately 1,336,000 options being
repriced. Of the stock options repriced, options to purchase approximately
831,000 shares were held by executive officers of the Company.
F-17
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, 1999, 1998 and
1997 and activity for the fiscal years then ended is presented below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISABLE
----------- ----------------- -----------
Balance as of June 30, 1996...................... 1,249,000 $ 4.43
Granted (at fair value).......................... 584,000 $ 5.62
Exercised........................................ (44,000) $ 3.47
Canceled......................................... (239,000) $ 4.56
-----------
Balance as of June 30, 1997...................... 1,550,000 $ 4.88 620,000
Granted (at fair value).......................... 728,000 $ 4.46
Exercised........................................ (78,000) $ 3.59
Canceled......................................... (312,000) $ 5.02
-----------
Balance as of June 30, 1998...................... 1,888,888 $ 4.76 749,000
Granted (at fair value).......................... 1,731,000 $ 2.79
Exercised........................................ (25,000) $ 2.59
Canceled......................................... (1,808,000) $ 4.66
-----------
Balance as of June 30, 1999...................... 1,786,000 $ 2.97 860,000
-----------
-----------
The weighted average estimated grant date fair value of options granted
during fiscal 1999, 1998 and 1997 was $2.79, $3.76 and $3.38, respectively.
The following table summarizes information about the stock options
outstanding at June 30, 1999:
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING ------------------------------
SHARES CONTRACTUAL WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------------------------- ----------- ---------------- ----------------- ----------- -----------------
$2.03--$2.03............................ 56,000 9.8 years $ 2.03 0 0
$2.59--$2.59............................ 1,213,000 7.6 years 2.59 675,000 2.59
$2.75--$3.50............................ 189,000 8.0 years 2.84 73,000 2.90
$3.63--$3.88............................ 199,000 8.5 years 3.82 47,000 3.77
$4.13--$5.13............................ 48,000 6.7 years 4.82 13,000 4.87
$5.25--$5.25............................ 9,000 5.4 years 5.25 9,000 5.25
$5.50--$5.50............................ 10,000 7.2 years 5.50 6,000 5.50
$6.50--$6.50............................ 39,000 7.4 years 6.50 22,000 6.50
$6.75--$6.75............................ 22,000 7.1 years 6.75 15,000 6.75
Totals.................................. 1,786,000 7.7 years $ 2.97 860,000 $ 2.94
----------- -------- ----- ----------- -----
F-18
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,
----------------------
1999 1998
---------- ----------
Expected life............................................................ 2.7 years 4.5 years
Expected volatility...................................................... 79.9% 75.1%
Risk-free interest rate.................................................. 5.8% 5.8%
Expected dividend yield.................................................. * *
* Not applicable
(B) EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 800,000 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 121,861 shares, 116,000 shares and 57,803 shares to
employees in fiscal 1999, 1998 and 1997, respectively. The weighted average fair
value of those purchase rights granted in fiscal 1999 and 1998 was $1.64 and
$1.21, respectively. As of June 30, 1999, 738,000 shares had been issued under
the ESPP.
The following weighted average assumptions for the Company's ESPP were used
to determine the pro forma amounts noted above:
YEAR ENDED JUNE 30,
----------------------
1999 1998
---------- ----------
Expected life............................................................ 0.5 years 0.5 years
Expected volatility...................................................... 74.7% 75.5%
Risk-free interest rate.................................................. 5.6% 5.5%
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, 1999, 10,000 shares had been issued under the plan.
(10) INCOME TAXES
Earnings (losses) before income taxes include foreign losses before income
taxes of approximately $11,450,000, $6,200,000, and $1,377,000 for fiscal 1999,
1998 and 1997, respectively. During fiscal 1999, the Company forgave
approximately $6,702,000 in intercompany debt, but elected to treat the
forgiveness as an infusion of capital at the subsidiary level. During fiscal
1997, the Company forgave approximately $4,200,000 of intercompany debt owed
from its foreign subsidiaries. This forgiveness resulted in lower fiscal 1997
losses among the subsidiaries.
F-19
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, 1999, 1998 and
1997 consists of the following (in thousands):
1999 1998 1997
--------- --------- ---------
Current:
Federal............................................................. $ (325) $ -- $ --
Foreign............................................................. 473 337 722
State............................................................... 173 45 87
--------- --------- ---------
321 382 809
--------- --------- ---------
Deferred:
Federal............................................................. -- -- --
Foreign............................................................. -- -- --
State............................................................... -- -- --
--------- --------- ---------
-- -- --
--------- --------- ---------
$ 321 $ 382 $ 809
--------- --------- ---------
--------- --------- ---------
For the years ended June 30, 1999, 1998 and 1997, the reconciliation between
the amounts computed by applying the United States federal statutory tax rate of
34% to earnings (loss) before income taxes and the actual tax expense follows
(in thousands):
1999 1998 1997
--------- --------- ---------
Income tax (benefit) expense at statutory rate.................. $ (1,804) $ 1,012 $ (525)
State income tax (benefit) expense, net of federal income tax
benefit....................................................... (159) 46 58
Change in beginning of year valuation allowance................. 1,437 (1,604) (908)
Losses for which no benefit is recognized....................... 538 395 1,081
Rate differential related to foreign income and foreign tax
withholdings.................................................. 473 339 951
Amortization of other assets and other permanent differences.... 326 209 167
Federal income tax benefit from net operating loss carryback.... (414)
--------- --------- ---------
Other........................................................... (76) (15) (15)
--------- --------- ---------
$ 321 $ 382 $ 809
--------- --------- ---------
--------- --------- ---------
F-20
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, 1999
and 1998 were as follows (in thousands):
1999 1998
---------- ----------
Accruals and reserves................................................. $ 868 $ 1,164
Net operating loss carryforward (federal)............................. 10,728 12,368
Net operating loss carryforward (state)............................... 887 97
Net operating loss carryforward (foreign)............................. 8,890 5,035
Foreign tax and research credit carryforwards......................... 3,453 2,914
---------- ----------
Total gross deferred tax assets................................... 24,826 21,578
Less valuation allowance.......................................... (13,902) (12,465)
---------- ----------
Net deferred tax assets........................................... 10,924 9,113
---------- ----------
Capitalized computer software costs................................... (10,649) (8,492)
Undistributed earnings of subsidiary.................................. (234) (271)
Fixed assets depreciation differences................................. (41) (350)
---------- ----------
Total gross deferred liabilities.................................. (10,924) (9,113)
---------- ----------
Net deferred taxes.................................................... $ -- $ --
---------- ----------
---------- ----------
The net change in total valuation allowance for the year ended June 30, 1999
was an increase of $1,437,000. The valuation allowance has been established to
recognize the uncertainty of utilizing loss and credit carryovers and certain
deferred assets.
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $31,555,000, $10,331,000 and $26,146,000 for federal, California
and foreign tax purposes, respectively. At June 30, 1999, the Company also had
unused research and other credit carryforwards of approximately $2,899,000 and
$554,000 for federal and California tax purposes, respectively. The loss and
research credit carryforwards, if not utilized, will expire between fiscal 2000
and 2014.
(11) EXTRAORDINARY ITEMS
During October 1998, the Company redeemed $2,667,000 aggregate principle
amount of the then outstanding Second Closing Debentures. In accordance with the
redemption option of the convertible subordinated debenture agreement outlined
above, the Company incurred a one time extraordinary charge of approximately
$213,000, or 8% of the aggregate principle amount of the Second Closing
Debentures redeemed.
F-21
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended June 30, 1999, 1998
and 1997 follows (in thousands):
1999 1998 1997
--------- --------- ---------
Cash payments:
Interest....................................................... $ 1,289 $ 1,321 $ 1,013
Income taxes................................................... $ 686 $ 187 $ 435
Noncash investing and financing activities:
Conversion of preferred stock.................................. -- $ 1,053 $ 4,667
Product purchased in exchange for distribution agreement....... -- -- $ 1,300
Acquisition of equipment under capital lease obligations....... -- $ 479 $ 29
Conversion of convertible debentures........................... $ 2,761 $ 1,539 --
Issuance of stock in settlement of litigation.................. -- -- --
Issuance of stock for product/business acquisitions............ $ 2,067 $ 2,057 $ 3,727
Acquisition of distributor's customer base..................... -- -- --
In June 1997, the Company entered into a license agreement with a
distributor whereby the distributor received a license, valued at $1.3 million,
to distribute the Company's Renaissance CS product. The Company recognized this
revenue in June 1997. Simultaneously, the Company received certain software
products and components from this distributor in exchange for the aforementioned
license agreement. The value of the license agreement was ascribed to the assets
received in this nonmonetary transaction. These assets are included in
capitalized software costs and are being amortized over four years.
(13) SELECTED UNAUDITED QUARTERLY INFORMATION
Selected unaudited quarterly financial information for the years ended June
30, 1999 and 1998 follows (in thousands, except per share data):
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1999 1999 1998 1997
--------- ----------- --------- ---------
Total revenues................................... $ 25,747 $ 24,371 $ 26,154 $ 25,519
Operating earnings (loss)........................ $ (3,755) $ (2,126) $ 568 $ 1,377
Net earnings (loss).............................. $ (4,180) $ (2,414) $ 157 $ 811
Net earnings (loss) per common share............. $(0.19) $(0.11 ) $0.01 $0.04
JUNE 30, MARCH 31, DEC. 31, SEPT. 30,
1998 1998 1997 1997
--------- ----------- --------- ---------
Total revenues................................... $ 27,526 $ 24,314 $ 20,025 $ 19,819
Operating earnings (loss)........................ $ 2,049 $ 2,079 $ (897) $ 909
Net earnings (loss).............................. $ 1,852 $ 1,678 $ (1,283) $ 348
Net earnings (loss) per common share............. $.10 $.08 $(0.07) $0.02
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, 1999 allowance for doubtful
accounts and returns......................... $ 1,974 $ 2,421 $ -- $ 1,511 $ 2,884
----------- ----------- --------- ------ ------
Year ended June 30, 1998 allowance for doubtful
accounts and returns......................... $ 3,495 $ 1,830 $ -- $ 3,351 $ 1,974
----------- ----------- --------- ------ ------
Year ended June 30, 1997 allowance for doubtful
accounts and returns......................... $ 2,634 $ 3,534 $ -- $ 2,673 $ 3,495
----------- ----------- --------- ------ ------
- ------------------------
(1) Represents net charge-offs of specific receivables.
S-1