<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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.
------------------
(Exact name of registrant as specified in its charter)
California 94-2170198
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Two Concourse Parkway, Suite 800, Atlanta, Georgia 30328
-------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
(770) 351-9600
--------------
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
OUTSTANDING
CLASS APRIL 30,1997
- ----- -------------
Common stock, no par value 18,854,747
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This is page 1 of 17 pages.
Index to exhibits is on page 16.
<PAGE>
ROSS SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 1997
----------------------------
TABLE OF CONTENTS
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations-
Three and nine months ended March 31, 1997 and 1996 3
Condensed Consolidated Balance Sheets -
March 31, 1997 and June 30, 1996 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
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PART II OTHER INFORMATION
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
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SIGNATURES 15
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software product licenses............................... $ 6,864 $ 6,774 $ 19,823 $ 16,910
Consulting and other services........................... 5,632 5,151 16,594 14,428
Maintenance............................................. 6,520 6,206 19,224 18,272
-------- -------- -------- --------
Total revenues.................................... 19,016 18,131 55,641 49,610
-------- -------- -------- --------
Operating expenses:
Costs of software product licenses...................... 442 311 1,771 1,236
Costs of consulting, maintenance and other services..... 7,765 6,191 21,091 18,673
Sales and marketing..................................... 5,959 4,857 14,979 16,017
Product development..................................... 2,718 3,505 8,821 9,641
General and administrative.............................. 2,051 1,828 5,550 5,352
Provision for uncollectible accounts.................... 498 191 1,519 352
Amortization of other assets............................ 211 97 531 291
-------- -------- -------- --------
Total operating expenses.......................... 19,644 16,980 54,262 51,562
-------- -------- -------- --------
Operating earnings (loss)................................... (628) 1,151 1,379 (1,952)
Other expenses, net..................................... (237) (313) (627) (984)
-------- -------- -------- --------
Earnings (loss) before income taxes......................... (865) 838 752 (2,936)
Income tax expense...................................... 124 121 438 140
-------- -------- -------- --------
Net earnings (loss)......................................... $ (989) $ 717 $ 314 $ (3,076)
-------- -------- -------- --------
-------- -------- -------- --------
Net earnings (loss) per common and common equivalent share.. $ (0.05) 0.05 0.02 (0.21)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in per share computation........................ 18,815 15,876 19,159 14,463
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 2,917 $ 1,862
Accounts receivable, less allowance for
doubtful accounts and returns............ 27,921 26,430
Prepaids and other current assets.......... 2,952 1,724
Income taxes recoverable................... 221 670
--------- ---------
Total current assets.................... 34,011 30,686
Property and equipment....................... 4,703 4,022
Computer software costs...................... 20,918 19,845
Other assets................................. 4,688 3,496
--------- ---------
Total assets............................ $ 64,320 $ 58,049
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt............ $ 11,160 $ 8,743
Accounts payable........................ 6,741 5,406
Accrued expenses........................ 6,901 7,853
Deferred revenues....................... 13,207 17,219
--------- ---------
Total current liabilities........... 38,009 39,221
--------- ---------
Long-term debt, less current installments... 438 36
--------- ---------
Shareholders' equity:
Common stock............................. 72,721 67,435
Preferred stock.......................... 1,983
Accumulated deficit...................... (47,673) (47,987)
Cumulative translation adjustment........ (1,158) (656)
--------- --------
Total shareholders' equity........... 25,873 18,792
--------- ---------
Total liabilities and shareholders'
equity............................. $ 64,320 $ 58,049
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Cash flows from operating activities:
Net earnings (loss)................................................... $ 314 $ (3,076)
Adjustments to reconcile net earnings (loss) to net cash used for
operating activities:
Depreciation and amortization of property and equipment............ 1,647 1,485
Amortization of computer software costs............................ 4,971 4,298
Amortization of other assets....................................... 531 291
Provision for uncollectible accounts............................... 1,519 352
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable........................................... (2,175) 1,674
Prepaids and other current assets............................. (1,341) 220
Income taxes recoverable...................................... 168 344
Accounts payable.............................................. 894 (1,409)
Accrued expenses.............................................. (1,787) (5,418)
Deferred revenues............................................. (4,508) (3,372)
Other, net......................................................... (28) 7
--------- ---------
Net cash provided by (used for) operating activities.......... 205 (4,604)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment................................... (1,369) (704)
Computer software costs capitalized................................... (5,920) (6,163)
Acquisitions and divestitures......................................... 24 220
Other................................................................. 83 222
--------- ---------
Net cash used for investing activities........................ (7,182) (6,425)
--------- ---------
Cash flows from financing activities:
Net line of credit activity........................................... 2,242 4,359
Capital lease payments................................................ (25) (387)
Proceeds from issuance of common stock................................ 149 317
Proceeds from issuance of preferred stock............................. 5,720 6,396
--------- ---------
Net cash provided by financing activities................... 8,086 10,685
--------- ---------
Effect of exchange rate changes on cash................................... (54) (31)
--------- ---------
Net increase (decrease) in cash and cash equivalents...................... 1,055 (375)
Cash and cash equivalents at beginning of period.......................... 1,862 3,628
--------- ---------
Cash and cash equivalents at end of period................................ $ 2,917 $ 3,253
--------- ---------
--------- ---------
Noncash investing and financing activities:
Business acquisitions for common stock & forgiveness of debt.......... $ 3,727 $ 1,495
--------- ---------
--------- ---------
Conversion of preferred stock......................................... $ 3,737
---------
---------
Business acquisition for related accounts receivable.................. $ 759
---------
---------
Settlement of litigation for common stock............................. $ 990
---------
---------
Capital lease additions............................................... $ 29
---------
---------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Ross Systems, Inc. (the "Company") reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary to
present a fair statement of its financial position as of March 31, 1997,
and the results of its operations and cash flows for the interim periods
presented. The Company's results of operations for the three and nine months
ended March 31, 1997 are not necessarily indicative of the results to be
expected for the full year.
These unaudited condensed financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, certain
information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements
should be read in conjunction with the Consolidated Financial Statements
and notes thereto included in the Company's Annual Report to Shareholders
on Form 10-K for the fiscal year ended June 30, 1996.
Certain fiscal 1996 amounts have been reclassified to conform with the
fiscal 1997 financial statement presentation.
B) ACCOUNTS RECEIVABLE
As of the dates shown, accounts receivable consisted of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
---- ----
<S> <C> <C>
Trade accounts receivable $29,463 $29,064
Less allowance for doubtful accounts and returns (1,542) (2,634)
-------- --------
$27,921 $26,430
======== ========
</TABLE>
C) PROPERTY AND EQUIPMENT
As of the dates shown, property and equipment consisted of the following
(in thousands):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1997 1996
---- ----
<S>
<C>
Computer equipment $13,021 $11,506
Furniture and fixtures 3,943 3,667
Leasehold improvements 1,750 1,729
------- -------
18,714 16,902
Less accumulated depreciation and amortization (14,011) (12,880)
-------- --------
$ 4,703 $ 4,022
======== =========
</TABLE>
6
<PAGE>
D) NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation" ("Statement 123"). Statement 123 encourages,
but does not require, the recognition of expense for stock-based awards
based on their fair value on the date of grant. Upon adoption of Statement
123 on July 1, 1996, the Company has continued to account for all employee
stock-based compensation, including stock options, using the "intrinsic
value" method under APB 25 rather than the "fair value" approach encouraged
by Statement 123. However, as required by Statement 123, the Company will
provide pro forma disclosures of what net earnings and net earnings per
share would have been had the new fair value method been used.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense
is recognized.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement 128") and Statement of Financial Accounting Standards No. 129,
"Disclosure of Information About Capital Structure" ("Statement 129").
Statement 128 specifies the computation, presentation and disclosure
requirements for Earnings Per Share ("EPS"), and is designed to improve
the EPS information provided in financial statements by simplifying the
existing computational guidelines, revising the disclosure requirements,
and increasing the comparability of EPS data on an international basis.
The Company has not yet determined the effect on operating results of
implementing Statement 128, however the adoption of this statement is
not expected to have a material effect on the Company's consolidated
financial position. Statement 129 consolidates the existing requirements
to disclose certain information about an entity's capital structure and
is not expected to change the Company's current capital structure
disclosures. Statements 128 and 129 are required to be implemented no
later than the Company's fiscal year 1998.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
OVERVIEW
VARIABILITY OF QUARTERLY RESULTS
The Company's software product license revenues can fluctuate from
quarter to quarter depending upon, among other things, such factors as
overall trends in the United States and international economies, new
product introductions by the Company, hardware vendors and other software
vendors, and customer buying patterns. Because the Company typically ships
software products within a short period after orders are received, and
therefore maintains a relatively small backlog, any weakening in customer
demand can have an almost immediate adverse impact on revenues and operating
results. Moreover, a substantial portion of the revenues for each quarter is
attributable to a limited number of sales and tends to be realized in the
latter part of the quarter. Thus, even short delays or deferrals of sales
near the end of a quarter can cause substantial fluctuations in quarterly
revenues and operating results. Finally, certain agreements signed during
a quarter may not meet the Company's revenue recognition criteria resulting
in deferral of such revenue to future periods. Because the Company's
operating expenses are based on anticipated revenue levels and a high
percentage of the Company's expenses are relatively fixed, a small variation
in the timing of the recognition of specific revenues can cause significant
variation in operating results from quarter to quarter.
EQUITY FINANCING TRANSACTIONS
The Company completed a private placement of equity securities during the
quarter. Please refer to "Liquidity and Capital Resources" for a description
of this transaction.
RESULTS OF OPERATIONS
REVENUES
Total revenues for the quarter ended March 31, 1997 increased 5% to
$19,016,000 from $18,131,000 in the same quarter of fiscal 1996. Software
product license revenues increased 1%, consulting and other services revenues
increased 9%, and maintenance revenues increased 5% over the same quarter of
the prior year.
For the nine month period ended March 31, 1997, total revenues increased
12% to $55,641,000 versus $49,610,000 in the same period of fiscal 1996.
Software product license revenues increased 17%, consulting and other services
revenues increased 15%, and maintenance revenues increased 5% from prior year
results.
Software product license revenues were $6,864,000 for the quarter, an
increase of $90,000 from the same period in fiscal 1996. Software product
license revenues in the North American and the total International markets
increased from prior year results, with North America increasing 1%, or
$58,000, and Europe increasing 45%, or $501,000. The Asian/Pacific Rim
market, however, decreased 78% or $469,000. North American revenues increased
in spite of one large contract that contributed significantly to the prior
year's results. For the nine month period ended March 31, 1997, software
product license revenues increased $2,913,000, or 17%, from the prior year.
The Company experienced increases of 1%, or $159,000 in the North American
market; 7%, or $299,000 in the European market; and 220%, or $2,455,000 in
the Asian/Pacific Rim market, respectively. The Asian/Pacific Rim software
product license
8
<PAGE>
revenues for the first quarter of fiscal 1997 include one
large contract that contributed significantly to this increase.
Consulting and other services revenues for the third quarter of fiscal
1997 increased 9% to $5,632,000 from $5,151,000 in the same period of fiscal
1996. Revenues from consulting and other services (which are typically
recognized as performed) are generally correlated with software product
license revenues (which are typically recognized upon delivery), so that
when software product license revenues fluctuate, future period services
revenues generally show a corresponding fluctuation. For the quarter, North
American services revenues increased by $84,000, or 3%, over the prior year.
International services revenues increased $397,000, or 21%, principally as a
result of the addition of the Asia/Pacific Rim market which accounted for
$186,000 of the increase. For the nine month period ended March 31, 1997,
services revenues increased 15%, or $2,166,000 from the same period of the
prior year. The Company believes that the increase in consulting and other
services revenues during the nine month period was attributable to increases
in software product license revenues during fiscal 1996 and 1997.
Maintenance revenues for the quarter increased by 5%, to $6,520,000 from
$6,206,000 in the third quarter of fiscal 1996. For the nine month period
ended March 31, 1997, maintenance revenues increased $952,000, or 5%, over
fiscal 1996 results. The Company believes that the increase in maintenance
revenues for the three and nine month periods is a result of a increase in
the number of maintenance customers for the Company's newer open
systems/client-server products.
International revenues as a percentage of total revenues increased to 32%
for the third quarter of fiscal 1997 from 29% for the same period in fiscal
1996. International revenues as a percentage of total revenues for the nine
months ended March 31, 1997 increased to 36% from 32% for the same period in
fiscal 1996. This increase is due primarily to the revenues attributable to
the Asian/Pacific Rim market which increased to $4,628,000 for the nine months
ended March 31, 1997 from $1,218,000 for the same period in the prior year as
a result of the aforementioned significant contract. Overall, European revenues
as a percentage of total revenues for the nine months ended March 31, 1997
remained relatively consistent with the same period in fiscal 1996.
OPERATING EXPENSES
Costs of software product licenses include expenses related to royalties
paid and product documentation and packaging. Royalty expenses will vary from
quarter to quarter based on the mix of products being sold. Many of the
Company's newer products have royalty obligations associated with them that
had not existed previously. Costs of software product licenses for the quarter
increased by 42% to $442,000 from $311,000 in fiscal 1996. For the nine months
ended March 31, 1997, the cost of software product licenses increased 43% to
$1,771,000 from $1,236,000 in fiscal 1996. For both the three and nine month
periods ended March 31, 1997, royalty expenses increased over the same period
in the prior year by 55%. This increase is directly related to the increase
in the Company's software product license revenues for the same periods. The
Company's gross profit margin resulting from software product license revenues
for the third quarter of fiscal 1997 was 94%, down from 95% in the same quarter
of fiscal 1996. For the nine months ended March 31, 1997, the margin was 91%
as compared to 93% for the same period in the prior year. Increases in royalty
expenses led to the decline in these margins for the three and nine month
periods.
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. Costs
of consulting, maintenance and other services increased by 25% to $7,765,000
in the third quarter of fiscal 1997, as compared to
9
<PAGE>
$6,191,000 in the third quarter of fiscal 1996. The quarterly increase
principally resulted from an increase in personnel-related expenses of
approximately $750,000, increases in expenses related to outside consultants
of approximately $360,000 and increases in facilities and supplies related
expenses of approximately $400,000 over the same period in the prior year.
For the nine months ended March 31, 1997, costs of consulting, maintenance
and other services increased 13% to $21,091,000 from $18,673,000 in the same
period of fiscal 1996. The increase for the nine month period was due largely
to increases in personnel-related expenses of approximately $1,000,000,
increases in expenses related to outside consultants of approximately
$900,000, and increases in facilities and supplies related expenses of
approximately $600,000 compared to the same period in the prior year. Total
third quarter recurring costs of consulting, maintenance and other services
for Ross Spain was approximately $1,000,000. Ross Spain was purchased at the
end of the second quarter of fiscal 1997 and thus its activity is not included
in the prior year results. The inclusion of Ross Spain is a major factor in
many of the aforementioned expense increases over the previous year. The
Company uses outside consultants to supplement Company personnel in meeting
peak customer consulting demands. The Company's gross profit margin resulting
from consulting, maintenance and other services revenues for the third quarter
of fiscal 1997 was 36%, down from 45% in the same quarter of fiscal 1996. For
the nine months ended March 31, 1997, the gross profit margin was 41% as
compared to 43% for the same period of the prior year. The deterioration in
the gross profit margin for the three month and nine month periods was due
largely to the previously discussed Ross Spain acquisition, and 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.
Sales and marketing expenses for the quarter ended March 31, 1997
increased by 23%, to $5,959,000 from $4,857,000 in the prior year. For the
nine month period, sales and marketing expenses decreased by 6% from
$16,017,000 to $14,979,000. The majority of the increase was due to increases
in personnel and related compensation from fiscal 1996 to 1997 . For the
quarter ended March 31, 1997, personnel-related expenses including salaries
and commissions increased approximately $800,000 and travel-related expenses
increased approximately $200,000 from the prior year as a result of increases
in sales and marketing personnel. Additionally, there was an increase of
approximately $400,000 in marketing expenses related to the promotion of the
Company's several new products. These expense increases were partially offset
by a decrease of approximately $400,000 in facilities expenses. For the nine
months ended March 31, 1997, personnel-related expenses decreased
approximately $1,000,000 and related facilities and administration expenses
decreased approximately $700,000 from the prior year. These decreases were
partially offset by increases in travel-related expenses of approximately
$200,000 and marketing expenses of approximately $400,000. The nine month
decrease in personnel-related expenses is a direct result of the Company's
effort, over the past year, to streamline its sales and marketing efforts by
targeting a limited number of markets such as process manufacturing,
healthcare, and not-for-profit entities.
Product development expenses decreased by 22%, to $2,718,000, in the third
quarter of fiscal 1997 from $3,505,000 in the same quarter of the prior year.
For the nine month period ended March 31, 1997, these expenses decreased 9%,
or $820,000 from the same period of fiscal 1996. The following table summarizes
product development expenditures (in thousands):
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expenses $2,718 $3,505 $8,821 $9,641
Amortization of previously capitalized
software development costs (1,722) (1,583) (4,971) (4,298)
------ ------ ------ -------
Expenses, net of amortization 996 1,922 3,850 5,343
Capitalized software development costs 2,308 1,958 5,920 6,163
------ ------ ------ -------
Total expenditures $3,304 $3,880 $9,770 $11,506
------ ------ ------ -------
Total expenditures as a
percent of total revenues 17.4% 21.4% 17.6% 23.2%
----- ----- ----- -----
Capitalized software, net of amortization,
as a percent of total expenditures 17.7% 9.7% 9.7% 16.2%
----- ---- ----- -----
</TABLE>
As a percentage of total revenues, fiscal 1997 product development
expenditures decreased from 1996 expenditures. This decrease is largely
attributable to the downtime related to the relocation of much of the
Company's development functions from its California office to its Atlanta
office during fiscal 1997. Product development expenditures during fiscal
1997 have been primarily focused on continued enhancements to existing
products and developing new products. During the nine months ended
March 31, 1997, software development costs capitalized included amounts
attributable to the development of Renaissance CS Financial and Human
Resource series, developing and enhancing versions of GEMBASE, the Company's
fourth generation language, the porting of Renaissance CS to operate with
the Windows NT platform, and the development of an object-oriented release
of Renaissance CS.
General and administrative expenses for the quarter ended March 31, 1997
increased by 12%, to $2,051,000 from $1,828,000 in the prior year. For the
nine month period, total general and administrative expenses increased by 4%,
to $5,550,000 from $5,352,000 for the same period in the prior year. A major
cause of the increase in these expenses from the same quarter in the prior
year was personnel, travel, and other costs related to the move of the
Company's finance and administrative headquarters from California to Georgia.
These costs, including payroll, travel, temporary employees and leased
equipment, increased approximately $240,000. Related rent and telephone
expenses also increased approximately $100,000. These increases were
partially offset by a reduction of approximately $100,000 in legal expenses.
The same explanation also applies to the increase for the nine month period
over the prior year.
In the three month period ended March 31, 1997, the Company recorded a
provision for uncollectible accounts of $498,000. The provision consisted of
the following components: (a) $300,000 for specific customer accounts
receivable which the Company identified as being potentially uncollectible
as a result of payment history or possible disputes, and (b) $198,000 in
adjustments to the Company's general allowance for uncollectible accounts.
For the comparable period in fiscal 1996, the Company recorded a provision
for uncollectible accounts of $191,000. The provision consisted of the
following components: (a) $215,000 for (i) specific customer accounts
receivable which the Company identified as being potentially uncollectible
as a result of payment history or possible disputes, and (ii) adjustments
to the Company's general allowance for uncollectible accounts; (b) credits
of $102,000 issued by the Company; and (c) a decrease of $126,000 for the
resolution of other customer disputes for which the Company had previously
established reserves.
Amortization of other assets increased to $211,000 in the third quarter
of fiscal 1997 from $97,000 in the same period last year. For the nine month
period, amortization of other assets was $531,000, compared to $291,000 in
the same period of the prior year. Amortization related to
11
<PAGE>
the purchase of the Company in 1988 and its subsequent acquisitions of other
products and companies. During fiscal 1996, the Company acquired a former
distributor's customer base for approximately $749,000. The related asset is
being amortized over three years. At the end of the second quarter of fiscal
1997, the Company purchased its Spanish distributor. The related goodwill of
$1,469,000 is being amortized over seven years.
OTHER EXPENSE, NET
Other expense for the three months ended March 31, 1997 was $237,000, as
compared to $313,000 in the same period of fiscal 1996. For the nine month
period ended March 31, 1997, other expense was $627,000, as compared to other
expense of $984,000 in the same period of fiscal 1996. Fiscal 1997 amounts
primarily consisted of interest expense. The decrease was due to lower
average debt balances during fiscal 1997 further impacted by declines in
interest rates.
INCOME TAX EXPENSE
During the third quarter of fiscal 1997, the Company recorded income tax
expense of $124,000 compared with an income tax expense of $121,000 recorded
during the same period in fiscal 1996. For the nine months ended
March 31, 1997, the Company recorded income tax expense of $438,000 as
compared to an income tax expense of $140,000 in the same period of fiscal
1996. Income tax expense for both periods include withholding taxes accrued
in certain foreign jurisdictions where the Company had no available net
operating losses. The increase in fiscal 1997 is due largely to significant
foreign sales resulting in withholding taxes and a provision for alternative
minimum taxes in North America.
LIQUIDITY AND CAPITAL RESOURCES
While the Company required $7,182,000 for investing activities (primarily
capitalized software costs), the Company financed its continuing operations
for the nine months ended March 31, 1997 through cash generated from
operations and funds received in private equity financings and available
credit facilities. The increased age of the Company's accounts receivable is
primarily attributable to the longer contract terms that are necessitated by
the larger sales contracts that have been entered into during the year.
During the quarter ended March 31, 1997, the Company amended its existing
revolving credit facility. The effects of this amendment included increasing
the Company's maximum credit line to $15,000,000, extending the facility's
maturity date to October 31, 2000 and changing the interest rate to the
Prime Rate plus 2%. At March 31, 1997, the Company had $2,917,000 of cash and
cash equivalents and $10,614,000 outstanding against the $15,000,000 revolving
credit facility. Borrowings under the credit facility are collateralized by
substantially all assets of the Company.
On December 29, 1995, the Company entered into a Subscription Agreement
(the "Agreement") with a foreign institutional investor pursuant to which the
investor purchased 500,000 shares of the Company's Series A Preferred Stock
for an aggregate purchase price of $2,000,000. In connection with this
transaction, the investor granted the Company options (the "Options") to
require the investor to purchase shares of the Company's Preferred Stock with
an aggregate value of $4,000,000 during the period from and including July 1,
1996 through and including December 30, 1998. The Company created and reserved
500,000 shares of its Series B Preferred Stock and 500,000 shares of its
Series C Preferred Stock for issuance and sale to the investor upon exercise
of the Options. In addition, the Company granted the investor a warrant
(the "Warrant") to purchase 400,000 shares of the Company's Common Stock at
an exercise price of $5.576 per share during the period from and including
July 1, 1997 through and including December 29, 2000.
12
<PAGE>
Pursuant to the Agreement, the Company exercised its first Option on
July 8, 1996. Concurrently, the investor also agreed to invest an additional
$2,000,000 under terms similar to those in the Agreement. In exchange for the
additional investment, the Company granted the investor a warrant for an
additional 640,000 shares of the Company's Common Stock. This warrant is
exercisable during the period from and including July 1, 1997 through and
including December 29, 2000, and will be exercisable at a price between
$6.46 and $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 Preferred Stock. Refer to
Part II, Item 2, "Changes in Securities."
The Company's ability to meet its cash requirements for operations and
recurring capital expenditures will depend upon funds expected to be generated
from operations, amounts available under its line of credit facility, and the
funds received from the private equity financing described above. The Company
is also presently investigating alternative sources of capital available to
strengthen its balance sheet and improve its liquidity. The Company believes
it is likely that any amounts raised in connection with these investigations
would require the issuance of additional shares of its Common Stock.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("Statement 123"). Statement 123 encourages, but does not
require, the recognition of expense for stock-based awards based on their
fair value on the date of grant. Upon adoption of Statement 123 on July 1,
1996, the Company has continued to account for all employee stock-based
compensation, including stock options, using the "intrinsic value" method
under APB 25 rather than the "fair value" approach encouraged by Statement 123.
However, as required by Statement 123, the Company will provide pro forma
disclosures of what net earnings and net earnings per share would have been
had the new fair value method been used.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant, no compensation expense
is recognized.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("Statement 128") and Statement of Financial Accounting Standards No. 129,
"Disclosure of Information About Capital Structure" ("Statement 129").
Statement 128 specifies the computation, presentation and disclosure
requirements for Earnings Per Share ("EPS"), and is designed to improve the
EPS information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements, and increasing
the comparability of EPS data on an international basis. The Company has not
yet determined the effect on operating results of implementing Statement 128,
however the adoption of this statement is not expected to have a material
effect on the Company's consolidated financial position. Statement 129
consolidates the existing requirements to disclose certain information about
an entity's capital structure and is not expected to change the Company's
current capital structure disclosures. Statements 128 and 129 are required to
be implemented no later than the Company's fiscal year 1998.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
---------------------
On January 6, 1997, the Company sold 200 shares of its Series E Preferred
Stock to a foreign institutional investor for an aggregate purchase price of
$2 million. The Series E Preferred Stock has rights, preferences and
privileges that are senior to the Company's Common Stock, as more fully
described in the Certificate of Determination for the Series E Preferred
Stock and the Subscription Agreement, both previously filed. See Part I,
Item 2, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Exhibit 11--Computation of Net Earnings Per Share
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K with the Securities and Exchange
Commission dated January 21, 1997 which reported under Item 5, that the
Company issued a press release announcing the preliminary results for the
second quarter of fiscal 1997 ending December 31, 1996.
The Company filed a Report on Form 8-K with the Securities and Exchange
Commission dated February 24, 1997 which reported under Item 9, that on
February 24, 1997, the Company issued 200,000 shares of its common stock,
with an additional 16,470 shares to be held in escrow for one year, to three
Spanish citizens in consideration for purchase of Ross Iberica. These
shares were registered on Form S-3/A and filed with the Securities and
Exchange Commission on January 21, 1997.
Items 1, 3, 4 and 5 have been omitted as they are not applicable.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROSS SYSTEMS, INC.
DATE: MAY 14, 1997 /S/ JAMES A. WATTS, JR.
--------------------------------
JAMES A. WATTS, JR.
VICE PRESIDENT, FINANCE AND ADMINISTRATION
AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
AND DULY AUTHORIZED OFFICER)
15
<PAGE>
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ------------------------------ ----
<S> <S> <C>
<C>
3.1 Restated Articles of Incorporation of Registrant (1)................ --
3.2 Certificate of Determination of Rights, Preferences and Privileges of
Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock of Ross Systems, Inc.(2)............................. --
3.3 Bylaws, as amended (3)............................................... --
3.4 Certificate of Determination of Rights, Preferences and Privileges of
Series E Preferred Stock of Ross Systems, Inc. (5)................... --
10.1 Subscription Agreement dated June 28, 1996 between Registrant and
Fletcher International Limited (4)................................... --
10.2 Amendment No. 1 dated July 8, 1996 to the December 29, 1995
Subscription Agreement and the June 28, 1996 Subscription
Agreement between Registrant and Fletcher International Limited (4)
11.1 Statement regarding Computation of Per Share Earnings................ 17
27 Financial Data Schedule.............................................. --
---
</TABLE>
- -------------------------------------------------------------------------------
(1) Incorporated by reference to the exhibit filed with Registrant's Quarterly
Report on Form 10-Q for the period ended December 31, 1995, as amended by
the exhibits filed by the Registrant's Current Report on Form 8-K dated
February 13, 1996.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended March 31, 1996 filed
May 6, 1996.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Annual Report on Form 10-K filed September 27, 1993.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q filed November 8, 1996.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q filed February 13, 1997.
16
<PAGE>
EXHIBIT 11
ROSS SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION
OF NET EARNINGS (LOSS) PER SHARE
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
------------------------ -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary Earnings:
Net earnings (loss) $ (989) $ 717 $ 314 $ (3,076)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding
during the period 18,815 14,746 18,376 14,463
Common and common stock equivalent
shares using the treasury stock method (**) -- 1,130 783 --
--------- --------- --------- ---------
Total shares outstanding for purposes of
calculating primary earnings (loss) per share 18,815 15,876 19,159 14,463
--------- --------- --------- ---------
--------- --------- --------- ---------
Primary earnings (loss) per common
and common stock equivalent share $ (0.05) $ 0.05 $ 0.02 $ (0.21)
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully Diluted Earnings: (*)
Net earnings (loss) $ (989) $ 717 $ 314 $ (3,076)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding
during the period 18,815 14,746 18,376 14,463
Common and common stock equivalent
shares using the treasury stock method (**) -- 1,130 744 --
--------- --------- --------- ---------
Total shares outstanding for purposes of calculating
fully diluted earnings (loss) per share 18,815 15,876 19,120 14,463
--------- --------- --------- ---------
--------- --------- --------- ---------
Fully diluted earnings (loss) per common and
common stock equivalent share $ (0.05) $ 0.05 $ 0.02 $ (0.21)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
(*) This calculation for FY 1996 is submitted in accordance with Securities
Exchange Act of 1934 Release No. 9083 although not required by footnote 2 to
paragraph 14 of APB Opinion No. 15 because it results in dilution of less
than 3%.
(**) Due to the net loss for the three months ended March 31, 1997 and the
nine months ended March 31, 1996, only the weighted average shares outstanding
during the period will be used in calculating the loss per share.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1997 FINANCIAL STATEMENTS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q
FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 2,917
<SECURITIES> 0
<RECEIVABLES> 29,463
<ALLOWANCES> 1,542
<INVENTORY> 0
<CURRENT-ASSETS> 34,011
<PP&E> 18,714
<DEPRECIATION> 14,011
<TOTAL-ASSETS> 64,320
<CURRENT-LIABILITIES> 38,009
<BONDS> 0
0
1,983
<COMMON> 72,721
<OTHER-SE> (48,831)
<TOTAL-LIABILITY-AND-EQUITY> 64,320
<SALES> 19,016
<TOTAL-REVENUES> 19,016
<CGS> 442
<TOTAL-COSTS> 8,207
<OTHER-EXPENSES> 10,939
<LOSS-PROVISION> 498
<INTEREST-EXPENSE> 237
<INCOME-PRETAX> (865)
<INCOME-TAX> 124
<INCOME-CONTINUING> (989)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (989)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
