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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 December 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.
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(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 January 31, 1998
-------------------------- ----------------
Common stock, no par value 19,859,808
This is page 1 of 22 pages.
Index to exhibits is on page 20.
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ROSS SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Three and six months ended December 31, 1997 and 1996 3
Condensed Consolidated Balance Sheets -
December 31, 1997 and June 30, 1997 4
Condensed Consolidated Statements of Cash Flows -
Six months ended December 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
- --------------------------------------------------------------------------------
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of the Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
- --------------------------------------------------------------------------------
SIGNATURES 19
</TABLE>
<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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues:
Software product licenses....................... $ 7,065 $ 6,162 $ 15,530 $ 12,959
Consulting and other services................... 6,721 5,967 11,949 10,962
Maintenance..................................... 6,239 6,426 12,365 12,704
--------- --------- --------- ---------
Total revenues................................ 20,025 18,555 39,844 36,625
--------- --------- --------- ---------
Operating expenses:
Costs of software product licenses.............. 726 855 1,185 1,329
Costs of consulting, maintenance
and other services............................ 8,666 6,927 16,065 13,326
Sales and marketing............................. 6,453 4,611 12,483 9,307
Product development............................. 2,689 2,937 5,543 5,816
General and administrative...................... 2,015 1,598 3,694 3,499
Provision for uncollectible accounts............ 158 367 806 1,021
Litigation settlement........................... -- -- (381) --
Amortization of other assets.................... 215 160 437 320
--------- --------- --------- ---------
Total operating expenses...................... 20,922 17,455 39,832 34,618
--------- --------- --------- ---------
Operating earnings (loss)......................... (897) 1,100 12 2,007
Other expenses, net............................. (314) (201) (620) (390)
--------- --------- --------- ---------
Earnings (loss) before income taxes............... (1,211) 899 (608) 1,617
Income tax expense.............................. 72 92 327 314
--------- --------- --------- ---------
Net earnings (loss)............................... $ (1,283) $ 807 $ (935) $ 1,303
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings (loss) per share--basic & diluted.... $ (0.07) $ 0.04 $ (0.05) $ 0.07
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in per share computation.............. 19,252 19,384 19,246 19,044
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 2,051 $ 4,010
Accounts receivable, less allowance
for doubtful accounts and returns........ 28,739 31,700
Prepaids and other current assets.......... 1,815 2,225
------- -------
Total current assets..................... 32,605 37,935
Property and equipment....................... 4,170 4,540
Computer software costs...................... 23,044 21,666
Other assets................................. 4,868 5,574
------- -------
Total assets................................. $64,687 $69,715
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt............... $11,965 $12,310
Accounts payable........................... 8,335 9,188
Accrued expenses........................... 5,766 8,393
Income taxes payable....................... 561 199
Deferred revenues.......................... 15,734 16,118
------- -------
Total current liabilities................ 42,361 46,208
------- -------
Long-term debt, less current installments.... 443 394
------- -------
Redeemable preferred stock................... 1,053 1,053
------- -------
Shareholders' equity:
Common stock............................... 73,879 73,756
Accumulated deficit........................ (51,275) (50,340)
Cumulative translation adjustment.......... (1,774) (1,356)
------- -------
Total shareholders' equity............... 20,830 22,060
------- -------
Total liabilities and shareholders'
equity.................................. $64,687 $69,715
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------------
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................................. $ (935) $ 1,303
Adjustments to reconcile net earnings (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization of property and equipment......... 1,365 973
Amortization of computer software costs......................... 3,730 3,249
Amortization of other assets.................................... 437 320
Provision for uncollectible accounts............................ 806 1,021
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable.......................................... 2,047 (2,491)
Prepaids and other current assets............................ 381 (185)
Income taxes payable / recoverable........................... 340 267
Accounts payable............................................. (988) 545
Accrued expenses............................................. (2,683) (2,172)
Deferred revenues............................................ (410) (2,923)
Other, net...................................................... (46) (17)
------- --------
Net cash provided by (used for) operating activities....... 4,045 (110)
------- --------
Cash flows from investing activities:
Purchases of property and equipment................................. (443) (1,036)
Computer software costs capitalized................................. (5,222) (3,612)
Acquisitions and divestitures....................................... -- 54
Other............................................................... (70) 185
------- --------
Net cash used for investing activities................................ (5,735) (4,409)
------- --------
Cash flows from financing activities:
Net line of credit activity......................................... (322) 787
Capital lease payments.............................................. (30) (113)
Proceeds from issuance of common stock, net......................... 123 179
Proceeds from issuance of preferred stock, net...................... -- 3,737
------- --------
Net cash provided by (used for) financing activities.................. (229) 4,590
------- --------
Effect of exchange rate changes on cash............................... (40) 18
------- --------
Net increase (decrease) in cash and cash equivalents.................. (1,959) 89
Cash and cash equivalents at beginning of period...................... 4,010 1,862
------- --------
Cash and cash equivalents at end of period............................ $ 2,051 $ 1,951
------- --------
------- --------
Noncash investing and financing activities:
Business acquisitions for common stock & forgiveness of debt........ $ 3,727
--------
--------
Conversion of preferred stock....................................... $ 3,737
--------
--------
Capital lease additions............................................. $ 56 $ 29
------- --------
------- --------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
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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 December 31, 1997, and the results of
its operations and cash flows for the interim periods presented. The Company's
results of operations for the six months ended December 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, 1997.
Certain fiscal 1997 amounts have been reclassified to conform with the
fiscal 1998 financial statement presentation.
B) ACCOUNTS RECEIVABLE
As of the dates shown, accounts receivable consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ---------
<S> <C> <C>
Trade accounts receivable $ 30,679 $ 35,195
Less allowance for doubtful
accounts and returns (1,940) (3,495)
------------ ---------
$ 28,739 $ 31,700
------------ ---------
------------ ---------
</TABLE>
C) PROPERTY AND EQUIPMENT
As of the dates shown, property and equipment consisted of the following
(in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1997 1997
------------ ---------
<S> <C> <C>
Computer equipment $ 12,469 $ 13,186
Furniture and fixtures 3,603 3,833
Leasehold improvements 1,575 1,935
------------ ---------
17,647 18,954
Less accumulated depreciation
and amortization (13,477) (14,414)
------------ ---------
$ 4,170 $ 4,540
------------ ---------
------------ ---------
</TABLE>
6
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D) SUBSEQUENT EVENTS
On January 5, 1998, the Company acquired a 100% ownership interest in
Bizware Corporation, a privately held computer consulting firm based in New
Jersey, in exchange for shares of the Company's common stock valued at
approximately $2,000,000. Bizware Corporation had been a 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 will be included in the
Company's results of operations from 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 from the
beginning of fiscal 1998 and 1997 are not significant to the Company as a whole.
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 will invest $4,000,000 four months after such date if
certain conditions are met. 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.
E) NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "EARNINGS PER SHARE" ("Statement
128") and Statement of Financial Accounting Standards No. 129, "DISCLOSURE OF
INFORMATION ABOUT CAPITAL STRUCTURE" ("Statement 129"). Statement 128 specifies
the computation, presentation and disclosure requirements for Earnings Per Share
("EPS"), and is designed to improve the EPS information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements, and increasing the comparability of EPS data on an
international basis. Per the requirements of Statement 128, the Company has
adopted Statement 128 for the three and six month periods ending December 31,
1997. Statement 129 consolidates the existing requirements to disclose certain
information about an entity's capital structure, and its adoption has not
changed the Company's current capital structure disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "REPORTING COMPREHENSIVE INCOME"
("Statement 130") and Statement of Financial Accounting Standards No. 131
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
("Statement 131"). Statement 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Statement 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. Statements 130
and 131 are
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required to be adopted in the Company's fiscal year 1999. The Company has not
yet determined the impact of Statements 130 and 131 on its future financial
statement disclosures.
In December 1997, the American Institute of Certified Public Accountants
issues Statement of Position No. 97-2 "SOFTWARE REVENUE RECOGNITION" ("SOP
97-2"). This SOP provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. The requirements of
SOP 97-2 are effective for transactions entered into in the Company's fiscal
year 1999. The Company has not yet determined the impact of SOP 97-2 on its
future Statements of Operations and Financial Position.
8
<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.
RESULTS OF OPERATIONS
REVENUES
Total revenues for the quarter ended December 31, 1997 increased 8% to
$20,025,000 from $18,555,000 in the same quarter of fiscal 1997. Software
product license revenues increased 15% and consulting and other services
revenues increased 13%, while maintenance revenues decreased 3% from the same
quarter of the prior year.
For the six month period ended December 31, 1997, total revenues increased
9% to $39,844,000 from $36,625,000 in the same period of fiscal 1997. Software
product license revenues increased 20% and services revenues increased 9%, while
maintenance revenues decreased 3% from prior year results.
Software product license revenues were $7,065,000 during the quarter ended
December 31, 1997, an increase of $903,000, or 15%, from the same period in
fiscal 1997. The Company experienced an increase over the same quarter of
fiscal 1997 in the North American market of approximately $698,000, or 20%. Of
this North American increase, approximately $718,000 relates to increases in
Canadian revenues due largely to three significant agreements recorded during
the quarter; this was partially offset by a decrease of approximately $20,000 in
U.S. revenues. The Company also experienced a total increase of $205,000, or
8%, in the European, Asian and Pacific Rim ("International") markets over the
same period in fiscal 1997. While the Asia/Pacific Rim markets experienced a
$320,000, or 64% decrease in revenues from the same
9
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period in the prior year due largely to the depressed economic conditions in
that area, European revenues increased 24% over the same period in the prior
year due largely to the acquisition of the Company's Spanish subsidiary during
fiscal 1997 and one large agreement that significantly impacted revenues in
Germany. The Company's Client Server/Open Systems products represented 92% of
total software product license revenues for the first quarter of fiscal 1998
compared to 96% in the same quarter of fiscal 1997. Of these Client Server
products, the Company experienced growth in the Renaissance CS Manufacturing and
Human Resource products, which increased 3% and 218%, respectively, over fiscal
1997 results. This growth was partially offset by a decrease in revenue
associated with the Renaissance CS Financials product of 29% from the same
quarter in fiscal 1997. During fiscal 1998, the Company has increased its
marketing focus for its Renaissance products on the process manufacturing and
healthcare sectors, resulting in approximately $943,000 of new software license
revenue compared to the same quarter of fiscal 1997. Software product license
revenues from sales of the Company's products to process manufacturing customers
increased 45% over the second quarter of fiscal 1997 and represented 75% of the
Company's total software product license revenues for the quarter.
Additionally, software product license revenues from sales to healthcare
customers increased approximately $340,000 over the second quarter of fiscal
1997 and represented 8% of the Company's total software product license revenues
for the current quarter. For the six month period ended December 31, 1997,
software product license revenues increased $2,571,000, or 20%, from the same
period in the prior year. The Company experienced increases of 33%, or
$2,075,000, and 28%, or $899,000, in the North American and European markets,
respectively, partially offset by decreases in the Asia/Pacific Rim markets of
$403,000, or 12%. As noted above, the European increase was largely the result
of the addition of the Company's Spanish subsidiary and one large agreement that
significantly impacted revenues in Germany. Also as noted above, the decrease
in the Asia/Pacific Rim market was due largely to the depressed economic
conditions in that area. The Company's open systems/client-server products
represented approximately 96% of total software product license revenues for the
six month periods ended December 31, 1997 and 1996.
Consulting and other services revenues for the second quarter of fiscal
1998 increased 13% to $6,721,000 from $5,967,000 in the same period of fiscal
1997. 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 ended December 31, 1997,
North American services revenues increased by $291,000, or 7% which is
attributable largely to the increase in software product license revenue during
previous quarters. International services revenues increased $463,000 or 22%,
principally as a result of the aforementioned German agreement and Spanish
subsidiary. This increase was partially offset by a $40,000 decrease in the
Asia/Pacific Rim region. For the six month period ended December 31, 1997,
services revenues increased 9%, or $987,000, from the same period in the prior
year. The fluctuations for the North American and International regions for the
six month period results were similar to those for quarterly results mentioned
above.
Maintenance revenues for the quarter declined by 3%, to $6,239,000 from
$6,426,000 in the second quarter of fiscal 1997. For the six month period ended
December 31, 1997, maintenance revenues also declined by 3%, or $339,000, from
fiscal 1997 results. The small decreases in maintenance revenues were
principally the result of customers with older products
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not renewing their maintenance contracts, the general decline of European
currencies against the dollar, and the increased volume of distributor sales
during fiscal 1998. Maintenance contracts sold by third party distributors are
included by the Company in software product license revenues. This overall
decline was partially offset by new maintenance contracts related to the
increase in software product licenses during the previous four fiscal quarters.
During the second quarter of fiscal 1998, the Company experienced a small
increase in North American maintenance revenues and a decrease in International
maintenance revenues relative to the second quarter of fiscal 1997. North
American maintenance revenues increased 1%, or approximately $30,000.
International maintenance revenues declined $216,000, or 12%, due largely to
decreases in the U.K., France, Germany, Belgium and the Netherlands totaling
$376,000. These decreases were partially offset by increased activity in Spain
and the Asian/Pacific Rim markets which accounted for a total increase of
$160,000.
International revenues as a percentage of total revenues remained
relatively constant for the second quarters of fiscal 1998 (35%) and 1997 (36%).
International revenues as a percentage of total revenues for the six months
ended December 31, 1997 (37%) also remained relatively consistent with the same
period of fiscal 1997 (38%). While the addition of the Spanish subsidiary
accounted for an increase in total revenues of $1,505,000 in the second quarter
of fiscal 1998 over the second quarter of fiscal 1997, and an increase of
$2,755,000 in the six months ended December 31, 1997 versus the six months ended
December 31, 1996, these increases were matched by similar increases in total
North American revenues. The majority of the North American increase was the
result of increases in Canadian revenues of $803,000 in the second quarter of
fiscal 1998 over the second quarter of fiscal 1997, and $2,230,000 in the six
months ended December 31, 1997 versus the six months ended December 31, 1996.
Several significant Canadian agreements in the first and second quarters of
fiscal 1998 accounted for this increase.
OPERATING EXPENSES
Costs of software product licenses include expenses related to royalties
paid to third parties and product documentation and packaging. Third party
royalty expenses will vary from quarter to quarter based on the mix of products
being sold. Major third party products sold by the Company include Oracle and
Sybase databases, The Cobre Group's Strategic Application Modeler (SAM), and
other optional software including Business Objects from Business Objects, Inc.
and FRx reporting software from FRx Software Corp. Costs of software product
licenses for the second quarter of fiscal 1998 decreased by 15% to $726,000 from
$855,000 in the second quarter of fiscal 1997. For the six months ended December
31, 1997, the cost of software product licenses decreased 11% to $1,185,000 from
$1,329,000 for the same period in fiscal 1997. As a percentage of software
product license revenue, the costs of software product licenses decreased to 10%
in the second quarter of fiscal 1998 compared to 14% in the same quarter of
fiscal 1997. There was also a similar decrease in the percentage for the
six-month period ended December 31, 1997. These decreases were due to increases
in software product license revenues (see preceding "Revenues" discussion),
several significant agreements during the periods that contained only a minor
amount of third party products, and the licensing of certain products during the
periods which were third party products in the first and second quarters of
fiscal 1997 but which were subsequently purchased from such third parties by the
Company.
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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 by 25% to $8,666,000 in the second quarter of fiscal 1998, as
compared to $6,927,000 in the second quarter of fiscal 1997. For the six months
ended December 31, 1997, costs of consulting, maintenance and other services
increased 21% to $16,065,000 from $13,326,000 in the same period of fiscal 1997.
The increase in these costs for the three and six month periods correlates with
the Company's increased software license activity. As software license activity
has increased over the prior year, more internal and outside consultants were
required by the Company to service these new customers. The increase in costs
over the periods in the prior year is largely the result of the additional
fiscal 1998 expenses related to the Company's Spanish subsidiary, as well as 60
additional services personnel employed by the Company as of December 31, 1997.
For the three and six month periods ended December 31, 1997, the additional
expenses attributable to the Spanish subsidiary were approximately $1,000,000
and $1,700,000, respectively. For the second quarter of fiscal 1998 as compared
to the second quarter of fiscal 1997, the increased headcount (including the
increase resulting from the acquisition of the Spanish subsidiary) resulted in
additional personnel-related expenses of approximately $690,000, additional
facilities and supplies expenses of approximately $150,000, and additional
business travel expenses of approximately $150,000. Additionally, the costs
associated with the retaining and maintenance of outside consultants increased
approximately $750,000. For the six month period ended December 31, 1997 as
compared to the same period in fiscal 1997, the increased headcount (including
the increase resulting from the acquisition of the Spanish subsidiary) resulted
in additional personnel-related expenses of approximately $1,450,000, additional
facilities and supplies expenses of approximately $250,000, and additional
business travel expenses of approximately $245,000. Additionally, the costs
associated with the retaining and maintenance of outside consultants increased
approximately $775,000. The Company's gross profit margin resulting from
consulting, maintenance and other services revenues for the second quarter of
fiscal 1998 was 33%, down from 44% in the same quarter of fiscal 1997. For the
six months ended December 31, 1997, the gross profit margin was 34% as compared
to 44% for the same period of the prior year. The deterioration in the gross
profit margin for the three and six month periods was due largely to the
increased retaining and maintenance of outside consultants, whose work results
in lower margins for the Company. Additionally, there were increases in
personnel expenses related to the hiring and training of new services and
consulting personnel who must undergo such training before beginning to generate
revenue.
Sales and marketing expenses for the quarter ended December 31, 1997
increased by 40%, to $6,453,000 from $4,611,000 in the same quarter of the prior
year. For the six month period ended December 31, 1997, sales and marketing
expenses increased by 34% from $9,307,000 to $12,483,000. The majority of the
increase was due to the aforementioned Spanish subsidiary and increases in
personnel and related compensation expenses from fiscal 1997 to 1998. The
number of sales and marketing personnel (including the increase resulting from
the acquisition of the Spanish subsidiary) increased from 113 at December 31,
1996 to 139 at December 31, 1997. For the three and six month periods ended
December 31, 1997, the additional expenses attributable to the Spanish
subsidiary were approximately $340,000 and $600,000, respectively. For the
quarter ended December 31, 1997, personnel-related expenses, including salaries
and commissions, increased approximately $980,000 and travel-related
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expenses increased approximately $260,000 from the prior year as a result of
increases in sales and marketing personnel. Additionally, there was an increase
of approximately $600,000 in marketing expenses related to the promotion of
several of the Company's new products such as the Windows NT and Polaris
versions of Renaissance CS, additional supply chain functionality such as
Transportation Management, and third party implementation and productivity tools
such as SAM and FRx. For the six month period ended December 31, 1997,
personnel-related expenses including salaries and commissions increased
approximately $1,450,000, facilities expenses increased approximately $315,000
and travel-related expenses increased approximately $700,000 from the prior year
as a result of increases in sales and marketing personnel. Additionally, for the
six month period, there was an increase of approximately $1,000,000 in marketing
expenses related to the promotion of several of the Company's aforementioned new
products.
Product development expenses decreased by 8%, to $2,689,000, in the second
quarter of fiscal 1998 from $2,937,000 in the same quarter of the prior year.
For the six month period ended December 31, 1997, these expenses decreased by
5%, to $5,543,000, from $5,816,000 in the same period last year. The following
table summarizes product development expenditures (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
Expenses $ 2,689 $ 2,937 $ 5,543 $ 5,816
Amortization of previously capitalized
software development costs (1,869) (1,662) (3,730) (3,249)
------- ------- ------- --------
Expenses, net of amortization $ 820 $ 1,275 $ 1,813 $ 2,567
Capitalized software development costs 2,533 2,166 5,222 3,612
------- ------- ------- --------
Total expenditures $ 3,353 $ 3,441 $ 7,035 $ 6,179
------- ------- ------- --------
Total expenditures as a
percent of total revenues 16.7% 18.5% 17.7% 16.9%
------- ------- ------- --------
Capitalized software, net of amortization,
as a percent of total expenditures 19.8% 14.6% 21.2% 5.9%
------- ------- ------- --------
</TABLE>
As a percentage of revenues, product development expenditures for the six
month period ended December 31, 1997 increased over expenditures in the same
period of the prior year. Product development expenditures during fiscal 1998
have been primarily focused on continued enhancements to existing products and
developing new products. During the six months ended December 31, 1997,
software development costs capitalized included amounts attributable to the
development of additional international features for the Company's Renaissance
CS products, developing a new architecture for GEMBASE, the Company's fourth
generation language, and developing year 2000 compliance for the Company's
Renaissance Classic products. The Company does not expect to have any
additional expenditures related to the year 2000 compliance upgrade on its
Renaissance Classic products.
General and administrative expenses for the quarter ended December 31, 1997
increased by 26%, to $2,015,000 from $1,598,000 in the same quarter of the prior
year. For the six month period ended December 31, 1997, total general and
administrative expenses increased by 6%, to
13
<PAGE>
$3,694,000 from $3,499,000 in the same period of the prior year. The major
reasons for the increase in these expenses from the same quarter in the prior
year was an increase in employee expenses of approximately $135,000 due to
increased accounting and administrative staffing in the new Atlanta
headquarters; an increase in rent expense of approximately $155,000 due largely
to the opening of the second Atlanta office; and approximately $120,000 in
additional foreign currency transaction losses.
In the three month period ended December 31, 1997, the Company recorded a
provision for doubtful accounts of $158,000, as compared to $367,000 recorded in
the second quarter of fiscal 1997. The fiscal 1998 provision consisted entirely
of specific customer accounts receivable for which the Company either promised a
credit or identified as being potentially uncollectible. The prior year's
amount included $167,000 for specific customer accounts receivable and an
additional $200,000 in adjustments to the Company's general allowance for
doubtful accounts and returns.
The litigation settlement amount for the six month period ended December
31, 1998 represents a first quarter 1998 adjustment to the charge that was
recorded during the fourth quarter of 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 September 1997, the Company received $381,000 in settlement from its
insurer.
Amortization of other assets increased to $215,000 in the second quarter of
fiscal 1998 from $160,000 in the same period last year. For the six month
period, amortization of other assets was $437,000, compared to $320,000 in the
same period of the prior year. This amortization relates to the purchase of the
Company in 1988 and its subsequent acquisitions of other products and companies.
During fiscal 1997, the Company acquired its Spanish distributor. The related
goodwill of $1,541,000 is being amortized over seven years.
OTHER EXPENSE, NET
Other expense for the three months ended December 31, 1997 was $314,000, as
compared to $201,000 in the same period of fiscal 1997. For the six month
period ended December 31, 1997, other expense was $620,000, as compared to other
expense of $390,000 in the same period of fiscal 1997. Fiscal 1998 amounts
primarily consisted of interest expense. The increase was due to higher average
debt balances in fiscal 1998 due to the increase in the Company's available line
of credit during fiscal 1997 from $10,000,000 to $15,000,000 further impacted by
an increase in the interest rate on the line of credit during fiscal 1997.
INCOME TAX EXPENSE
During the second quarter of fiscal 1998, the Company recorded income tax
expense of $72,000 compared with an income tax expense of $92,000 recorded
during the same period in fiscal 1997. For the six months ended December 31,
1997, the Company recorded income tax expense of $327,000 as compared to an
income tax expense of $314,000 in the same period of
14
<PAGE>
fiscal 1997. Income tax expense for both periods include withholding taxes
accrued in certain foreign jurisdictions where the Company had either no
available net operating losses or had to pay treaty-based taxes.
LIQUIDITY AND CAPITAL RESOURCES
While the Company required $5,735,000 for investing activities (primarily
capitalized software costs), the Company financed its continuing operations for
the six months ended December 31, 1997 through cash generated from operations
and available credit facilities.
The Company 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%. At December 31, 1997, the
Company had $2,100,000 of cash and cash equivalents and $11,300,000 outstanding
against the $15,000,000 revolving credit facility. Borrowings under the credit
facility are collateralized by substantially all assets of the Company.
On December 29, 1995, the Company entered into a Subscription Agreement
(the "Agreement") with a foreign institutional investor pursuant to which the
investor purchased 500,000 shares of the Company's Series A Preferred Stock for
an aggregate purchase price of $2,000,000. In connection with this transaction,
the investor granted the Company options (the "Options") to require the investor
to purchase shares of the Company's Preferred Stock with an aggregate value of
$4,000,000 during the period from and including July 1, 1996 through and
including December 30, 1998. The Company created and reserved 500,000 shares of
its Series B Preferred Stock and 500,000 shares of its Series C Preferred Stock
for issuance and sale to the investor upon exercise of the Options. In addition,
the Company granted the investor a warrant (the "Warrant") to purchase 400,000
shares of the Company's Common Stock at an exercise price of $5.576 per share
during the period from and including July 1, 1997 through and including
December 29, 2000.
Pursuant to the Agreement, the Company exercised its first Option on
July 8, 1996. Concurrently, the investor also agreed to invest an additional
$2,000,000 under terms similar to those in the Agreement. In exchange for the
additional investment, the Company granted the investor a warrant for an
additional 640,000 shares of the Company's Common Stock. This warrant is
exercisable during the period from and including July 1, 1997 through and
including December 29, 2000, and will be exercisable at a maximum price of $8.00
per share. The gross proceeds from the July 1996 transactions were $4,000,000.
The Company exercised its final Option to require the investor to invest
$2,000,000 on January 6, 1997 when the investor purchased 200 shares of the
Company's newly created Series E Redeemable Preferred Stock.
During fiscal 1996, the investor converted all of their Series A Preferred
Stock. During fiscal 1997, the investor converted all of their Series B and
Series C Preferred Stock and 93 shares of their Series E Redeemable Preferred
Stock. As of December 31, 1997, the investor holds 107 shares of the Company's
Series E Redeemable Preferred Stock. Unless converted earlier, this stock is
mandatorily redeemable by the Company on January 6, 2000 or earlier if certain
conditions of the Agreement are met.
15
<PAGE>
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 will invest $4,000,000 four months after such date if
certain conditions are met. 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 Company's ability to meet its cash requirements for operations and
recurring capital expenditures will depend upon funds expected to be generated
from operations and amounts available under its line of credit facility. 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 February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "EARNINGS PER SHARE" ("Statement
128") and Statement of Financial Accounting Standards No. 129, "DISCLOSURE OF
INFORMATION ABOUT CAPITAL STRUCTURE" ("Statement 129"). Statement 128 specifies
the computation, presentation and disclosure requirements for Earnings Per Share
("EPS"), and is designed to improve the EPS information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements, and increasing the comparability of EPS data on an
international basis. Per the requirements of Statement 128, the Company has
adopted Statement 128 for the three and six month periods ending December 31,
1997. Statement 129 consolidates the existing requirements to disclose certain
information about an entity's capital structure, and its adoption has not
changed the Company's current capital structure disclosures.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "REPORTING COMPREHENSIVE INCOME"
("Statement 130") and Statement of Financial Accounting Standards No. 131
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
("Statement 131"). Statement 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Statement 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. Statements 130
and 131 are required to be adopted in the Company's fiscal year 1999. The
Company has not yet determined the impact of Statements 130 and 131 on its
future financial statement disclosures.
In December 1997, the American Institute of Certified Public Accountants
issues Statement of Position No. 97-2 "SOFTWARE REVENUE RECOGNITION" ("SOP
97-2"). This SOP provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. The requirements of
SOP 97-2 are effective for transactions entered into in the Company's fiscal
year 1999. The Company has not yet determined the impact of SOP 97-2 on its
future Statements of Operations and Financial Position.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on November 19, 1997.
The following table shows voting information for each item voted upon:
<TABLE>
<CAPTION>
WITHHELD/
FOR AGAINST ABSTAINED
---------- ---------------- ----------
NOMINEES FOR
ELECTION AS DIRECTORS
- -----------------------
<S> <C> <C> <C>
Dennis V. Vohs 16,316,105 1,262,343
Mario M. Rosati 16,600,658 977,790
Bruce J. Ryan 16,592,388 986,060
J. Patrick Tinley 16,593,065 985,383
J. William Goodhew 16,586,908 991,540
APPROVAL OF
REINCORPORATION
FROM CALIFORNIA
TO DELAWARE 16,114,012 1,312,874 151,562
APPROVAL OF THE
1998 INCENTIVE STOCK
OPTION PLAN 15,727,297 1,558,844 292,307
CONFIRMATION OF
AUDITORS 17,296,390 142,419 159,639
</TABLE>
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 11.1 - Computation of Per Share Earnings
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
ITEMS 1, 2, 3 AND 5 HAVE BEEN OMITTED AS THEY ARE NOT APPLICABLE.
18
<PAGE>
SIGNATURE
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: February 13, 1998 /S/ STAN F. STOUDENMIRE
---------------------------------------
Stan F. Stoudenmire
Vice President, Finance and
Administration and Chief Financial
Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
19
<PAGE>
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Description Page
- -------- ------------------------------------------ -------------
<S> <C> <C>
3.1 Article of Incorporation, as amended (1).. ---
3.2 Bylaws, as amended (3).................... ---
4.1 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)......................... ---
4.2 Certificate of Determination of Rights,
Preferences and Privileges of Series E
Preferred Stock of Ross Systems, Inc. (4). ---
4.3 Form of Convertible Securities Agreement
between the Registrant and each Investor (9) ---
4.4 Form of Subordinated Debenture Due February
6, 2003 issued by the Registrant to each
Investor (9).............................. ---
4.5 Registration Rights Agreement among the
Registrant and each Investor (9).......... ---
10.1 Subscription Agreement dated December 29,
1995 between Registrant and Fletcher
International Limited (5)................. ---
10.2 Subscription Agreement dated June 28, 1996
between Registrant and Fletcher
International Limited (6)................. ---
10.3 Amendment No. 1 dated July 8, 1996 to the
December 29, 1995 Subscription Agreement
and the June 28, 1996 Subscription Agreement
between Registrant and Fletcher International
Limited (6)............................... ---
10.4 Amendment No. 2 dated June 10, 1997 to the
December 29, 1995 Subscription Agreement
and the June 28, 1996 Subscription Agreement
between Registrant and Fletcher International
Limited (7)................................ ---
10.5 The Ross Systems, Inc. 1998 Incentive Stock
Option Plan (8)........................... ---
11.1 Statement regarding Computation of Per Share
Earnings ................................. 22
27 Financial Data Schedule................... ---
</TABLE>
20
<PAGE>
(1) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended December 31, 1995, as
amended by the exhibits filed with the Registrant's Current Report on Form
8-K dated February 13, 1996; and as further amended by the exhibit filed
with the Registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997 filed September 29, 1997.
(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 for the fiscal year ended June 30, 1993 filed
September 27, 1993.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended December 31, 1996 filed
February 13, 1997.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended December 31, 1995 filed
February 14, 1996.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1996 filed
November 8, 1996.
(7) Incorporated by reference to the exhibit filed with the Registrant's Annual
Report on Form 10-K for the year ended June 30, 1997 filed September 29,
1997.
(8) Incorporated by reference to Exhibit D of the Registrant's Definitive Proxy
Statement filed October 8, 1997 for the Annual Meeting of Shareholders held
on November 19, 1997.
(9) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K filed February 12, 1998.
21
<PAGE>
EXHIBIT 11.1
ROSS SYSTEMS, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION
OF NET EARNINGS PER SHARE
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 30, DECEMBER 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
Basic earnings per share computation:
Net earnings.............................................................. $ (1,283) $ 807 $ (935) $ 1,303
--------- --------- --------- ---------
--------- --------- --------- ---------
Common shares outstanding at the beginning of the period.................. 19,249 17,855 19,245 17,847
Weighted average common shares added during the period.................... 3 616 1 314
--------- --------- --------- ---------
Weighted average common shares outstanding at the end of the period....... 19,252 18,471 19,246 18,161
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings per share.................................................. $ (0.07) $ 0.04 $ (0.05) $ 0.07
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings per share computation:
Net earnings.............................................................. $ (1,283) $ 807 $ (935) $ 1,303
--------- --------- --------- ---------
--------- --------- --------- ---------
Common shares outstanding at the beginning of the period.................. 19,249 17,855 19,245 17,847
Weighted average common shares added during the period.................... 3 616 1 314
--------- --------- --------- ---------
Weighted average common shares outstanding at the end of the period....... 19,252 18,471 19,246 18,161
Effect of dilutive securities and common stock equivalents................ 341 913 340 883
--------- --------- --------- ---------
Adjusted weighted average common shares outstanding at the end of the
period.................................................................. 19,593 19,384 19,586 19,044
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings per share................................................ $ (0.07) $ 0.04 $ (0.05) $ 0.07
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the December
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> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,051
<SECURITIES> 0
<RECEIVABLES> 30,679
<ALLOWANCES> 1,940
<INVENTORY> 0
<CURRENT-ASSETS> 32,605
<PP&E> 17,647
<DEPRECIATION> 13,477
<TOTAL-ASSETS> 64,687
<CURRENT-LIABILITIES> 42,361
<BONDS> 0
1,053
0
<COMMON> 73,879
<OTHER-SE> (53,049)
<TOTAL-LIABILITY-AND-EQUITY> 64,687
<SALES> 39,844
<TOTAL-REVENUES> 39,844
<CGS> 1,185
<TOTAL-COSTS> 17,250
<OTHER-EXPENSES> 21,776
<LOSS-PROVISION> 806
<INTEREST-EXPENSE> 620
<INCOME-PRETAX> (608)
<INCOME-TAX> 327
<INCOME-CONTINUING> (935)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (935)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
