<PAGE>
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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 SEPTEMBER 30, 1998
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)
<TABLE>
<CAPTION>
DELAWARE 94-2170198
<S> <C>
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) Number)
</TABLE>
TWO CONCOURSE PARKWAY, SUITE 800, ATLANTA, GEORGIA 30328
(Address of principal executive offices)
(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:
<TABLE>
<CAPTION>
Outstanding October 30,
Class 1998
- ----------------------------- ---------------------------
<S> <C>
Common Stock, $0.001 par
value........................ 21,876,880
</TABLE>
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This is page 1 of 21 pages.
Index to exhibits begins on page 19.
<PAGE>
ROSS SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements........................................................................
Condensed Consolidated Statements of Operations--Three months ended September 30, 1998 and
1997...................................................................................... 3
Condensed Consolidated Balance Sheets--September 30, 1998 and June 30, 1998................. 4
Condensed Consolidated Statements of Cash Flows--Three months ended September 30, 1998 and
1997...................................................................................... 5
Notes to Condensed Consolidated Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 16
PART II OTHER INFORMATION
Item 2. Changes in Securities....................................................................... 17
Item 6. Exhibits and Reports on Form 8-K............................................................ 19
SIGNATURES.............................................................................................. 18
</TABLE>
2
<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
SEPTEMBER 30,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Revenues:
Software product licenses................................................................. $ 10,262 $ 8,465
Consulting and other services............................................................. 8,299 5,228
Maintenance............................................................................... 6,958 6,126
--------- ---------
Total revenues........................................................................ 25,519 19,819
--------- ---------
Operating expenses:
Costs of software product licenses........................................................ 1,356 459
Costs of consulting, maintenance and other services....................................... 9,862 7,399
Sales and marketing....................................................................... 6,914 6,030
Product development....................................................................... 3,332 2,854
General and administrative................................................................ 2,075 1,679
Provision for uncollectible accounts...................................................... 283 648
Litigation settlement..................................................................... (381)
Amortization of other assets.............................................................. 320 222
--------- ---------
Total operating expenses.............................................................. 24,142 18,910
--------- ---------
Operating earnings.......................................................................... 1,377 909
Other income (expense), net............................................................... (161) (306)
--------- ---------
Earnings before income taxes................................................................ 1,216 603
Income tax expense........................................................................ 405 255
--------- ---------
Net earnings................................................................................ $ 811 $ 348
--------- ---------
--------- ---------
Net earnings per share--basic............................................................... $ 0.04 $ 0.02
--------- ---------
--------- ---------
Net earnings per share--diluted............................................................. $ 0.04 $ 0.02
--------- ---------
--------- ---------
Shares used in per share computation--basic................................................. 21,498 19,245
--------- ---------
--------- ---------
Shares used in per share computation--diluted............................................... 24,306 19,613
--------- ---------
--------- ---------
</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)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 8,302 $ 7,248
Accounts receivable, less allowance for doubtful accounts and returns................. 36,399 34,878
Prepaids and other current assets....................................................... 2,039 1,915
------------- ---------
Total current assets.............................................................. 46,740 44,041
Property and equipment.................................................................. 4,427 4,409
Computer software costs................................................................. 24,753 24,339
Other assets............................................................................ 6,855 5,400
------------- ---------
Total assets...................................................................... $ 82,775 $ 78,189
------------- ---------
------------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt.......................................................... $ 8,337 $ 4,607
Accounts payable...................................................................... 6,553 6,359
Accrued expenses...................................................................... 7,471 8,950
Income taxes payable.................................................................. 285 397
Deferred revenues..................................................................... 17,578 18,184
------------- ---------
Total current liabilities......................................................... 40,224 38,497
------------- ---------
Long-term debt, less current installments............................................... 8,165 8,918
------------- ---------
Stockholders' equity:
Common stock, $.0001 par value........................................................ 21 21
Additional paid in capital............................................................ 82,299 79,646
Accumulated deficit................................................................... (46,934) (47,745)
Cumulative translation adjustment..................................................... (1,000) (1,148)
------------- ---------
Total stockholders' equity........................................................ 34,386 30,774
------------- ---------
Total liabilities and shareholders' equity........................................ $ 82,775 $ 78,189
------------- ---------
------------- ---------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Cash flows from operating activities:
Net earnings................................................................................. $ 811 $ 348
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization of property and equipment.................................... 937 656
Amortization of computer software costs.................................................... 2,381 1,861
Amortization of other assets............................................................... 320 222
Provision for uncollectible accounts....................................................... 283 648
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable...................................................................... (1,766) 3,458
Prepaids and other current assets........................................................ (121) (39)
Income taxes payable/recoverable......................................................... (110) 17
Accounts payable......................................................................... 198 (2,717)
Accrued expenses......................................................................... (1,949) (1,970)
Deferred revenues........................................................................ (593) (715)
Other, net................................................................................. 2 3
--------- ---------
Net cash provided by operating activities................................................ 393 1,772
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment.......................................................... (699) (194)
Computer software costs capitalized.......................................................... (2,622) (2,689)
Other........................................................................................ (139) 101
--------- ---------
Net cash used for investing activities................................................... (3,460) (2,782)
--------- ---------
Cash flows from financing activities:
Net line of credit activity.................................................................. 3,875 (270)
Capital lease payments....................................................................... (20) (41)
Proceeds from issuance of common stock, net.................................................. 220 (18)
--------- ---------
Net cash provided (used) by financing activities......................................... 4,075 (329)
--------- ---------
Effect of exchange rate changes on cash........................................................ 46 (38)
--------- ---------
Net increase (decrease) in cash and cash equivalents........................................... 1,054 (1,377)
Cash and cash equivalents at beginning of period............................................... 7,248 4,010
--------- ---------
Cash and cash equivalents at end of period..................................................... $ 8,302 $ 2,633
--------- ---------
--------- ---------
Noncash investing and financing activities:
Business acquisitions for common stock & forgiveness of debt................................. $ 2,067 $ 0
--------- ---------
--------- ---------
Conversion of convertible debentures......................................................... $ 878
---------
---------
Capital lease additions...................................................................... $ 0 $ 13
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30, 1998, and the results of
its operations and cash flows for the interim periods presented. The Company's
results of operations for the three months ended September 30, 1998 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 Stockholders on Form 10-K for the fiscal year ended
June 30, 1998. Certain fiscal 1998 amounts have been reclassified to conform to
the fiscal 1999 financial statement presentation.
B) PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
C) ACCOUNTS RECEIVABLE
As of the dates shown, accounts receivable consisted of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ---------
<S> <C> <C>
Trade accounts receivable........................................... $ 38,196 $ 36,852
Less allowance for doubtful accounts and returns.................... (1,797) (1,974)
------------- ---------
$ 36,399 $ 34,878
------------- ---------
------------- ---------
</TABLE>
D) PROPERTY AND EQUIPMENT
As of the dates shown, property and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
------------- ---------
<S> <C> <C>
Computer equipment.................................................. $ 9,634 $ 9,186
Furniture and fixtures.............................................. 3,113 3,009
Leasehold improvements.............................................. 1,671 1,635
------------- ---------
14,418 13,830
Less accumulated depreciation and amortization...................... (9,991) (9,421)
------------- ---------
$ 4,427 $ 4,409
------------- ---------
------------- ---------
</TABLE>
E) BUSINESS ACQUIRED
On August 26, 1998, the Company acquired a 100% ownership interest in
HiPoint Systems Corporation ("HiPoint"), a privately held computer consulting
firm based in Ontario, Canada, in exchange for
6
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
shares of the Company's Common Stock valued at approximately $1,900,000. Hi
Point 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 have been 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 1999 and 1998
are not significant to the Company as a whole.
F) CONVERTIBLE DEBT
During fiscal 1998, the Company closed a private placement of $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 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. On
September 18, 1998, the Company notified the investors that it would redeem
$4,000,000 of the convertible subordinated debentures on October 1, 1998 (the
"Redemption Date") at a redemption price of $4,320,000 (108 percent of the face
value of the redeemed debentures) plus interest accrued through the Redemption
Date. On the Redemption Date, the Company actually redeemed $2,667,000 of the
convertible subordinated debentures at a redemption price of $2,880,000, plus
accrued interest. The Company and the Investor holding the convertible
subordinated debenture that was not redeemed are currently negotiating certain
changes to the conversion features of the debenture.
G) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" as of July 1, 1998. SFAS 130 requires
disclosure of total non-stockholder changes in equity in interim periods and
additional disclosures of the components of non-stockholder changes on an annual
basis. Total non-stockholder changes in equity include all changes in equity
during a period except those resulting from investments by and distributions to
stockholders. The Company has restated information for all prior periods
reported below to conform to this standard (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Net earnings............................................................ $ 811 $ 348
Foreign currency translation adjustments................................ 148 (100)
--------- ---------
Other comprehensive income.............................................. $ 959 $ 248
--------- ---------
--------- ---------
</TABLE>
H) NET EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings (loss) per common share are computed by dividing net earnings
or net loss by the weighted average number of common shares outstanding during
the period. Diluted earnings per common and common equivalent share is computed
by dividing net earnings by the weighted average number of common and common
equivalent shares outstanding during the period. Common stock equivalents are
not considered in the calculation of net loss per share when their effect would
be antidilutive.
7
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following is a reconciliation of the numerators of diluted earnings
(loss) per share, (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
<CAPTION>
(THOUSANDS)
<S> <C> <C>
Net earnings...................................................... $ 811 $ 348
Payment in kind interest on convertible debentures................ 104 --
--------- ---------
$ 915 $ 348
--------- ---------
--------- ---------
</TABLE>
The only difference between the denominator for basic and diluted net
earnings per share for the three months ended September 30, 1998 is the effect
of common stock equivalents.
I) SUBSEQUENT EVENT
See footnote F regarding convertible debt for a description of the Company's
redemption of convertible subordinated debentures on the redemption date.
J) OTHER MATTERS
On September 1, 1998, the Board of Directors of the Company approved a
Preferred Shares Rights Agreement dated September 4, 1998, whereby the Board has
declared a dividend distribution of one Preferred Shares Purchase Right (the
"Rights") on each outstanding share of the Company's Common Stock. Each Right
will entitle stockholders to buy 1/1000(th) of a share of the Company's Series B
Participating Preferred Stock at an exercise price of $21.75. The Rights will
become exercisable following the tenth day after a person or group announces the
acquisition of 15% or more of the Company's Common Stock or announces
commencement of a tender offer the consummation of which would result in
ownership by the person or group of 15% or more of the Common Stock. The Company
will be entitled to redeem the Rights at $.01 per Right at any time on or before
the tenth day following acquisition by a person or group of 15% or more of the
Company's Common Stock.
On September 18, 1998 the Board of Directors of the Company approved an
adjustment to the exercise price for certain outstanding stock options held by
all current employees, which have an exercise price of $3.00 and above. In
consideration for this repricing offer, officers of the Company participating in
the option repricing were required to forfeit 10% of the shares subject to each
option being repriced, while non-officer employees participating in the option
repricing are subject to a one year limitation on the exercisability of repriced
options subject to certain exceptions. The revised exercise price was
established by reference to the closing price of the Company's Common Stock on
September 28, 1998, which was approximately $2.59. Approximately 90 employees
participated in the repricing with approximately 1,336,000 shares being
repriced. Of the repriced shares, approximately 831,000 belonged to executive
officers of the Company.
K) NEW ACCOUNTING PRONOUNCEMENTS
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
8
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. Both statements have been adopted for the
Company's 1999 fiscal year. Disclosures pursuant to Statement 130 are included
under item G, above. Disclosures pursuant to Statement 131 are annual in nature
and, therefore, not contained herein.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position No. 97-2 "SOFTWARE REVENUE RECOGNITION" ("SOP
97-2"). SOP 97-2 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 and the financial statements contained herein have been prepared in
accordance with the requirements of SOP 97-2.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WHICH EXPRESS THAT THE COMPANY "BELIEVE",
"ANTICIPATES", OR "PLANS TO..." AS WELL AS OTHER STATEMENTS WHICH ARE NOT
HISTORICAL FACT, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY AS A RESULT OF THE RISKS AND UNCERTAINTIES DESCRIBED HEREIN
AND ELSEWHERE INCLUDING, IN PARTICULAR, THOSE FACTORS DESCRIBED UNDER "BUSINESS"
SET FORTH IN PART I OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED JUNE 30, 1998.
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 September 30, 1998 increased 29% to
$25,519,000 from $19,819,000 in the same quarter of fiscal 1998. Software
product license revenues increased 21% and consulting and other services
revenues increased 59%, while maintenance revenues increased 14% from the same
quarter in the prior year.
Software product license revenues were $10,262,000 during the quarter ended
September 30, 1998, an increase of $1,797,000, or 21%, from the same period in
fiscal 1998. The Company experienced an increase over the same quarter of fiscal
1998 in the North American market of approximately $1,148,000, or 28%. This
North American increase relates to an increase of approximately $785,000 in U.S.
revenues and $363,000 in Canadian revenues due to a higher volume of contracts
recorded during the quarter than in the same quarter of the prior year. The
Company also experienced a net increase of $649,000, or 15%, in the European,
Asian and Pacific Rim ("International") market over the same quarter in fiscal
1998. The Asia/ Pacific Rim markets experienced a $205,000, or 7% decrease in
revenues from the same quarter in the prior year due largely to one large
agreement in Singapore that significantly impacted prior year revenues in the
Asia/Pacific Rim markets. European revenues increased $854,000, or 59%, over the
same quarter in the prior year. This was due largely to increases in the UK of
$480,000, France of $746,000, and other European countries of $116,000 partially
offset by decreases in Germany of $488,000. The Company's Client Server/Open
Systems products represented 94% and 95% of total software product license
revenues
10
<PAGE>
for both the first quarters of fiscal 1999 and fiscal 1998, respectively.
Software license revenues for the Company's Renaissance CS products increased
approximately 20% or $1,608,000 in the first quarter of fiscal 1999 as compared
to the same quarter of fiscal 1998. The Company believes that the increase is
largely attributable to the Company's increased industry specific marketing
focus on its Client Server/Open Systems products during fiscal 1998 and fiscal
1999.
Consulting and other services revenues for the first quarter of fiscal 1999
increased 59% to $8,299,000 from $5,228,000 in the same quarter of fiscal 1998.
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 September 30, 1998, North
American services revenues increased by $2,633,000, or 74% over the same quarter
in the prior year which is attributable largely to the increase in software
product license revenues during previous quarters. Additionally, the Company has
increased its services capacity with the acquisitions of Bizware Corporation and
HiPoint during the third quarter of fiscal 1998 and the first quarter of fiscal
1999, respectively. Bizware Corporation and HiPoint deliver services and
consulting and had worked with several of the Company's customers prior to
acquisition. The Company has also expanded the number of outside consultants
used to perform implementations, consulting and other professional services.
These consultants normally cost more and generate lower gross margins than
services performed by Company employees, but are necessary to meet the growing
demand for consulting services related to the Company's products. International
services revenues increased $438,000, or 26% over the same quarter in the prior
year.
Maintenance revenues for the first quarter increased $832,000 or 14% in
fiscal 1999 versus the same period in the prior year. As compared to the same
period of the previous fiscal year, maintenance revenues increased 8% in North
America and 31% in Europe. There were insignificant declines in Asia. Increases
are principally attributable to increased software licensing activity during
fiscal 1998, while any decreases are typically due to customers with older
installations not renewing their contracts. Maintenance contracts sold by third
party distributors are included by the Company in software product license
revenues because the Company has no support obligations to any of the
distributor's customers.
International revenues as a percentage of total revenues for the first
quarter of fiscal 1999 decreased to 36% from 38% for the same quarter in fiscal
1998. However, international revenues increase $1,496,000 or 20% over the same
period in the prior year. The Company's French subsidiary accounted for an
increase of $956,000, while the UK subsidiary experienced increased revenues of
$430,000 and the Benelux and Spanish subsidiaries experienced increases of
$234,000 and $203,000, respectively. The remaining European countries had a net
decrease of $105,000 and Asia experienced a decline of $222,000 due primarily to
continued economic uncertainty in that region as well as revenues recognized on
one significant contract in Singapore during the first quarter of fiscal 1998.
The aggregate increase in international revenues is 41% for software licenses,
29% for consulting services and 30% for maintenance revenue.
North American revenues comprised 64% of the first quarter 1999 total
revenues, up from 62% in the same period of the prior year. North America
experienced a 34% growth versus the same period of the previous fiscal year. The
aggregate increase of $4,204,000 is comprised 27% software licenses, 63%
consulting services and 10% maintenance revenues. Of the North American growth,
approximately 94% is related to United States revenues. The increase is
attributable to several significant new software agreements as well as the
revenue generated from acquired companies and the increased focus on consulting
services.
11
<PAGE>
OPERATING EXPENSES
Costs of software product licenses include expenses related to royalties
paid to third parties, product documentation and packaging. Third party royalty
expenses will vary from quarter to quarter based on the number of third party of
products being sold. Major third party products sold by the Company include
Oracle databases and other optional software including implementation, reporting
and productivity tools. Costs of software product licenses for the first quarter
of fiscal 1999 increased by 295% to $1,356,000 from $459,000 in the first
quarter of fiscal 1998. As a percentage of software product license revenue, the
costs of software product licenses increased to 13% in the first quarter of
fiscal 1999 compared to 5% in the same quarter of fiscal 1998. The quarterly
increase was due to the large number of agreements entered into in the first
quarter of fiscal 1999 which contained a significant amount of third party
software resulting in third party royalty expenses incurred by the Company.
Costs of consulting, maintenance and other services include expenses related
to training new consultants and employees, 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 33% to $9,862,000 in the first quarter of fiscal 1999, as compared to
$7,399,000 in the first quarter of fiscal 1998. The increase in these costs
relates to the Company's increased software license and services 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 same period in the prior year is largely the
result of the additional fiscal 1999 year-to-date expenses related to the newly
acquired companies, Bizware and HiPoint, which were both purchased subsequent to
the first quarter of fiscal 1998 as well as additional services personnel
employed by the Company as of September 30, 1998 versus September 30, 1997. For
the three-month period ended September 30, 1998, the additional expenses
attributable to Bizware and HiPoint were approximately $771,000. For the first
quarter of fiscal 1999 as compared to the first quarter of fiscal 1998, the
increased sales volume necessitated greater headcount that resulted in
additional facilities and travel related expenses of approximately $378,000.
Further, the costs associated with outside consultants increased approximately
$1,244,000 and other expense categories increased $70,000 over the same quarter
in the prior year. The Company's gross profit margin resulting from consulting,
maintenance and other services revenues for the first quarter of fiscal 1998 was
35% which was consistent with the same quarter of fiscal 1998.
Sales and marketing expenses for the quarter ended September 30, 1998
increased by 15%, to $6,914,000 from $6,030,000 in the same quarter of the prior
year. For the quarter ended September 30, 1998, personnel-related expenses,
including salaries and commissions, increased approximately $579,000 over the
same quarter of the prior year, while travel related expenditures necessary to
support the increased sales volume rose $253,000. At the same time, other
expense categories experienced a net $52,000 increase. Product development
expenses increased by 17%, to $3,332,000, in the first quarter of
12
<PAGE>
fiscal 1999 from $2,854,000 in the same quarter of the prior year. The following
table summarizes product development expenditures (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Expenses.......................................................................... $ 3,332 $ 2,854
Amortization of previously capitalized software development costs................. (2,381) (1,861)
--------- ---------
Expenses, net of amortization..................................................... 951 993
Capitalized software development costs............................................ 2,622 2,689
--------- ---------
Total expenditures................................................................ $ 3,573 $ 3,682
--------- ---------
--------- ---------
Total expenditures as a percent of total revenues................................. 14.0% 18.6%
--------- ---------
--------- ---------
Capitalized software, net of amortization, as a percent of total expenditures..... 6.7% 22.5%
--------- ---------
--------- ---------
</TABLE>
Product development expenditures during fiscal 1999 have been primarily
focused on continued enhancements to existing products and developing new
products. During the three months ended September 30, 1998, software development
costs capitalized included amounts attributable to the development of additional
international features for the Company's Renaissance CS products and the ongoing
development of the 4.x series of Renaissance CS. The Company does not expect to
have any additional expenditures related to the year 2000 compliance upgrade on
its Renaissance Classic products. The Company believes that its Renaissance CS
products have been year 2000 compliant since their introduction in 1992.
General and administrative expenses for the quarter ended September 30, 1998
increased by 24%, to $2,075,000 from $1,679,000 in the same quarter of the prior
year. However, as a percentage of revenues, they decreased from 8.5% in the
first quarter of fiscal 1998 to 8.1% in the first quarter of fiscal 1999. The
major reasons for the increase in these expenses from the same quarter in the
prior year was an increase in employee and travel related expenses. Salary and
healthcare benefits costs were up $217,000, travel costs increased $127,000
while other expense categories had a net increase of $52,000.
In the three month period ended September 30, 1998, the Company recorded a
provision for doubtful accounts of $283,000, as compared to $648,000 recorded in
the first quarter of fiscal 1998. This decrease in the provision was a function
of several specific accounts requiring reservation in the first quarter of
fiscal 1998.
The litigation settlement amount for the three month period ended September
30, 1998 represents a first quarter fiscal 1998 adjustment of $381,000 related
to a 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, which offset a portion of the
previously established reserve. There were no litigation settlement expenses in
the first quarter of fiscal 1999.
Amortization of other assets increased to $320,000 in the first quarter of
fiscal 1999 from $222,000 in the same period last year. This amortization
relates to the purchase of the Company in 1988 and its subsequent acquisitions
of other products and companies. During fiscal 1998, the Company purchased
Bizware Corporation and in the first quarter of fiscal 1999, the Company
purchased HiPoint Systems Corporation. The related intangible assets are being
amortized over periods ranging from two to seven years. Also during fiscal 1998,
the Company capitalized approximately $431,000 of debt issuance costs
13
<PAGE>
related to the receipt of the $10,000,000 convertible debenture financing. For a
description of the convertible debenture financing, see Liquidity and Capital
Resources. These costs are being amortized over five years.
OTHER EXPENSE, NET
Other expense for the three months ended September 30, 1998 was $161,000, as
compared to $306,000 in the same quarter of fiscal 1998. These amounts primarily
consisted of interest expense. The decrease was due primarily to the Company
executing a private placement of convertible debentures in the third quarter of
fiscal 1998 which bears a lower interest rate than the Company's existing line
of credit which was used as the primary source of borrowing during the first
quarter of fiscal 1998.
INCOME TAX EXPENSE
During the first quarter of fiscal 1999, the Company recorded income tax
expense of $405,000 compared with an income tax expense of $255,000 recorded
during the same quarter in fiscal 1998. Income tax expense for both periods
include a provision for alternative minimum taxes in North America and
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 $3,460,000 for investing activities (primarily
capitalized software costs), the Company financed its continuing operations for
the three months ended September 30, 1998 through cash generated from operations
and borrowings under available credit facilities.
At September 30, 1998, the Company had $8,302,000 of cash and cash
equivalents. The Company also has a revolving credit facility with an
asset-based lender with a maximum credit line of $15,000,000, a maturity date of
October 31, 2000, and an interest rate equaling the Prime Rate plus 2%.
Borrowings under the credit facility are collateralized by substantially all
assets of the Company. At September 30, 1998, the Company had $7,451,000
outstanding against the $15,000,000 revolving credit facility, and based on the
eligible accounts receivable at September 30, 1998, the Company's cash and
remaining borrowing capacity under the revolving credit facility totaled
approximately $13,160,000.
On February 6, 1998, the Company closed a private placement of up to
$10,000,000 of convertible subordinated debentures to certain institutional
investors (the "Investors") pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The Investors invested $6,000,000 on
February 6, 1998 and $4,000,000 on June 11, 1998. The material agreements
between the Company and each Investor have been filed as exhibits to the Current
Report on Form 8-K filed with the Securities and Exchange Commission by the
Company on February 12, 1998. $8,461,000 and $7,583,000 of these debentures
remained outstanding at June 30, 1998 and September 30, 1998, respectively. The
difference between the original $10,000,000 borrowing and amounts outstanding at
the above mentioned dates represents conversion of the debt to the Company's
Common Stock at a conversion price as determined in accordance with the
convertible debenture agreement. The Company notified the investors that it
would redeem $4,000,000 of the convertible subordinated debentures on October 7,
1998 (the "Redemption Date") at a redemption price of $4,320,000 (108 percent of
the face value of the redeemed debentures) plus interest accrued through the
Redemption Date. On the Redemption Date, the Company actually redeemed
$2,667,000 of the convertible subordinated debentures at a redemption price of
$2,880,000. The Company and the Investor holding the convertible subordinated
debenture that was not redeemed are currently negotiating certain changes to the
conversion features of such debenture.
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.
14
<PAGE>
YEAR 2000 IMPLICATIONS
The Company believes that the current release level of its "Renaissance
Classic" and "Renaissance C/ S" application software are fully compliant with
year 2000 functional requirements. The Company has conducted a complete
assessment and is currently implementing a plan to address potential year 2000
compatibility issues of computer programs and information systems across its
entire operation by December 31, 1998. The Company has, as a result of its
audit, identified specific areas that have the potential to impact on the
ability of certain of the Company's computerized information systems to
accurately process information that is date-sensitive. The Company has made
implementation of this plan a priority, but the Company believes that this
effort will not have a material adverse impact on the Company's operations or
its financial condition.
15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the first quarter of fiscal 1999, the Investors converted an
aggregate principal amount of $878,000 plus accrued interest through the date of
conversion into 236,000 shares of the Company's Common Stock through several
transactions which were priced and executed in accordance with the convertible
debenture agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On July 2, 1998, the Company filed a report of Form 8-K which reported under
Item 4, that the Company had appointed Arthur Andersen LLP as its auditor for
the fiscal year ended June 30, 1998. This change was due to the pending July 1,
1998 merger of Coopers & Lybrand L.L.P. with Price Waterhouse & Company. The
merger would have created a potential independence conflict since the Company's
President and Chief Operating Officer has a brother who is a partner in the
Atlanta office of Price Waterhouse & Company. There were no disagreements on
accounting matters between Coopers & Lybrand and the Company.
ITEMS 1, 3, 4 AND 5 HAVE BEEN OMITTED, AS THEY ARE NOT APPLICABLE.
17
<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.
<TABLE>
<S> <C> <C>
ROSS SYSTEMS, INC.
Date: November 16, 1998 By: /s/ ROBERT B. WEBSTER
-----------------------------------------
Robert B. Webster
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
By: /s/ DENNIS V. VOHS
-----------------------------------------
Dennis V. Vohs
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER PRINCIPAL EXECUTIVE OFFICER
</TABLE>
18
<PAGE>
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger of the Registrant and Ross Systems, Inc., a California corporation (1)
3.1 Certificate of Incorporation of the Registrant, as amended (1)
3.2 Certificate of Designation of Rights, Preferences and Privileges of Series B Preferred Stock of the
Registrant (2)
3.3 Bylaws of the Registrant (1)
4.3 Form of the subordinated debenture due February 6, 2003 issued by the Registrant to each Investor (3)
4.4 Registration rights agreement between the Registrant and each Investor (3)
10.5 Preferred Shares Rights Agreement, dated as of September 4, 1998, between the Registrant and BankBoston,
N.A. (2)
27 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to the exhibit filed with the Registrant's current
Report on Form 8-K filed July 24, 1998.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's Current
Report on Form 8-K filed February 12, 1998.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,302
<SECURITIES> 0
<RECEIVABLES> 38,196
<ALLOWANCES> (1,797)
<INVENTORY> 0
<CURRENT-ASSETS> 46,740
<PP&E> 14,418
<DEPRECIATION> (9,991)
<TOTAL-ASSETS> 82,775
<CURRENT-LIABILITIES> 40,224
<BONDS> 8,165
0
0
<COMMON> 21
<OTHER-SE> 34,365
<TOTAL-LIABILITY-AND-EQUITY> 82,775
<SALES> 0
<TOTAL-REVENUES> 25,519
<CGS> 0
<TOTAL-COSTS> 24,142
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 283
<INTEREST-EXPENSE> 161
<INCOME-PRETAX> 1,216
<INCOME-TAX> 405
<INCOME-CONTINUING> 811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 811
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
