<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, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19092
ROSS SYSTEMS, INC.
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 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 OCTOBER 29, 1999
----- ----------------
Common stock, $0.001 par value 23,334,992
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This is page 1 of 23 pages.
Index to exhibits is on page 23.
<PAGE>
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ROSS SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
--------------------------------
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 months ended September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheets -
September 30, 1999 and June 30, 1999 4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
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PART II OTHER INFORMATION
Item 2. Changes in Securities 20
Item 6. Exhibits and Reports on Form 8-K 20
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SIGNATURES 22
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</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)
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues:
Software product licenses $ 5,970 $ 10,262
Consulting and other services 10,201 8,299
Maintenance 7,092 6,958
----------- ----------
Total revenues 23,263 25,519
----------- ----------
Operating expenses:
Costs of software product licenses 1,001 1,356
Costs of consulting,
maintenance and other services 11,030 9,862
Sales and marketing 5,214 6,914
Product development 2,454 3,332
General and administrative 1,998 2,075
Provision for uncollectible accounts 401 283
Amortization of other assets 260 320
----------- ----------
Total operating expenses 22,358 24,142
----------- ----------
Operating earnings 905 1,377
Other expenses, net (351) (161)
----------- ----------
Earnings before taxes 554 1,216
Income tax expense 208 405
----------- ----------
Net earnings $ 346 $ 811
=========== ==========
Net earnings per common share - basic $ 0.02 $ 0.04
=========== ==========
Net earnings per common share - diluted $ 0.02 $ 0.04
=========== ==========
Shares used in per share computation - basic 22,973 21,498
=========== ==========
Shares used in per share computation - diluted 23,532 24,306
=========== ==========
</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, EXCEPT SHARE RELATED DATA)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,219 $ 6,294
Accounts receivable, less allowance
for doubtful accounts and returns 35,807 37,593
Prepaids and other current assets 1,943 2,591
------------------- -----------------
Total current assets 40,969 46,478
Property and equipment 4,670 5,172
Computer software costs 28,364 27,261
Other assets 3,998 4,274
------------------- -----------------
Total assets $ 78,001 $ 83,185
=================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt $ 10,556 $ 12,536
Accounts payable 8,815 10,232
Accrued expenses 8,467 8,743
Income taxes payable 106 145
Deferred revenues 16,922 18,567
------------------- -----------------
Total current liabilities 44,866 50,223
------------------- -----------------
Long-term debt, less current installments 2,774 3,705
------------------- -----------------
Shareholders' equity:
Common stock, $.001 par value; 35,000,000 shares 23 23
authorized, 23,334,992 and 22,904,312 shares issued
and outstanding at September 30, 1999 and June 30, 1999,
respectively. Preferred stock, no par value; 5,000,000
shares authorized, 0 outstanding.
Additional paid-in capital 85,083 84,261
Accumulated deficit (53,026) (53,372)
Accumulated comprehensive income (deficit) (1,719) (1,655)
------------------- -----------------
Total shareholders' equity 30,361 29,257
------------------- -----------------
Total liabilities and shareholders' equity $ 78,001 $ 83,185
=================== =================
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated balance sheets.
4
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 346 $ 811
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 663 937
Amortization of computer software costs 1,861 2,381
Amortization of other assets 260 320
Provision for uncollectible accounts 401 283
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 1,342 (1,766)
Prepaids and other current assets 628 (121)
Income taxes payable / recoverable (40) (110)
Accounts payable (1,461) 198
Accrued expenses (273) (1,949)
Deferred revenues (1,697) (593)
Other, net (1) 2
----------- ----------
Net cash provided by operating activities 2,029 393
----------- ----------
Cash flows from investing activities:
Purchases of property and equipment (223) (699)
Computer software costs capitalized (3,002) (2,622)
Other 105 (139)
----------- ----------
Net cash used for investing activities (3,120) (3,460)
----------- ----------
Cash flows from financing activities:
Net line of credit activity (1,979) 3,875
Capital lease payments (110) (20)
Proceeds from issuance of common stock, net 0 220
----------- ----------
Net cash provided (used) by financing activities (2,089) 4,075
----------- ----------
Effect of exchange rate changes on cash 105 46
----------- ----------
Net increase (decrease) in cash and cash equivalents (3,075) 1,054
Cash and cash equivalents at beginning of period 6,294 7,248
----------- ----------
Cash and cash equivalents at end of period $ 3,219 $ 8,302
=========== ==========
Noncash investing and financing activities:
Business acquisitions for common stock & forgiveness
of debt $ 0 $ 2,067
=========== ==========
Conversion of convertible debentures $ 822 $ 878
=========== ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial sheets.
5
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Ross Systems, Inc. (the "Company") reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary to present a
fair statement of its financial position as of September 30, 1999, 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, 1999
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, 1999 filed with the Securities and Exchange Commission on September 28,
1999.
Certain fiscal 1999 amounts have been reclassified to conform to the
fiscal 2000 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) CAPITALIZED COMPUTER SOFTWARE COSTS AND OTHER ASSETS
It is the Company's policy to follow paragraph 8 of SFAS 86 in the
computation of annual amortization expense of software costs. The straight-line
method has historically yielded the greatest annual expense when compared to the
ratio of current gross revenues to current and anticipated future gross
revenues. Accordingly, the straight-line method is generally used to amortize
previously capitalized software costs.
It is the Company's policy to assess all its long-lived assets and
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable.
Impairment losses, if applicable, would be calculated as the difference between
the carrying value of the asset and the sum of anticipated future undiscounted
cash flows. The calculation would be performed on an individual item basis.
6
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
D) ACCOUNTS RECEIVABLE
As of the dates shown, accounts receivable consisted of the following
(in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
---- ----
<S> <C> <C>
Trade accounts receivable $37,867 $40,477
Less allowance for doubtful accounts and returns (2,060) (2,884)
-------- --------
$35,807 $37,593
======== ========
</TABLE>
E) PROPERTY AND EQUIPMENT
As of the dates shown, property and equipment consisted of the
following (in thousands):
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
---- ----
<S> <C> <C>
Computer equipment $14,349 $14,209
Furniture and fixtures 3,079 3,025
Leasehold improvements 1,852 1,819
-------- --------
19,280 19,053
Less accumulated depreciation and amortization (14,610) (13,881)
-------- --------
$ 4,670 $ 5,172
======== ========
</TABLE>
F) 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 shares of the
Company's Common Stock valued at approximately $1,900,000. HiPoint had been a
consulting partner on many of the Company's software implementation and
consulting projects over the past several years. The acquisition has been
accounted for as a purchase and, accordingly, the results of operations of
the acquired business have been included in the Company's results of
operations from the 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.
G) CONVERTIBLE DEBT
On February 6, 1998, the Company closed a private placement of up to
$10,000,000 of convertible subordinated debentures to certain institutional
investors (the "Investors") pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The investors invested $6,000,000 on
February 6, 1998 and $4,000,000 on June 11, 1998. As of September 30, 1999, the
remaining balance after conversions and redemptions is $2,233,000. The material
agreements between the Company and each Investor have been filed as exhibits to
the Current Report on Form 8-K
7
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
filed with the Securities and Exchange Commission by the Company on February
12, 1998. The salient points of the convertible subordinated debenture
agreement are as follows:
INTEREST: The interest rate is four percent per annum for the first six months
after the original issuance date of the convertible debenture and six percent
per annum thereafter, subject to increases (up to the legal maximum rate) if the
Company is in default under the convertible debenture. Accrued interest is due
and payable in shares of the Company's Common Stock semi-annually on the last
day of June and December of each year. The value for such shares of Common Stock
is the average of the two lowest closing bid prices for the Company's Common
Stock as reported by the Bloomberg Service for the thirty trading days
immediately before the interest payment date.
CONVERSION PRICE: The conversion price for the convertible debentures is (P + I)
divided by the Conversion Date Market Price where P equals the outstanding
principal amount of the convertible debenture submitted for conversion, I equals
accrued but unpaid interest as of the conversion date and Conversion Date Market
Price equals the lesser of the maximum conversion price (as defined below) or
101% of the average of the two lowest closing bid prices for the Company's
Common Stock as reported by the Bloomberg Service for the thirty trading days
immediately before the conversion date. The maximum conversion price is (i)
until December 31, 1998, $7.00 subject to a downward adjustment if the Company
issues shares in a private placement financing transaction at a per share price
less than $7.00 and (ii) commencing January 1, 1999, 115% of the average closing
bid price of the Common Stock as reported by the Bloomberg Service over the 1998
calendar year. A portion of the convertible debentures issued in June 1998 (the
"Second Closing Debentures") were redeemed by the Company. See paragraph (H)
below and "Part I, Item 2 of this Quarterly Report on Form 10-Q Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
description of the company's redemption of a portion of the second closing
debentures.
H) 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):
8
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Three months ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Net earnings $346 $811
Foreign currency translation adjustments (64) 148
----- ----
Total comprehensive income $282 $959
===== ====
</TABLE>
I) NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings per common share are computed by dividing net earnings
or net loss by the weighted average number of common shares outstanding during
the period. Diluted earnings per common and common equivalent share is computed
by dividing net earnings by the weighted average number of common and common
equivalent shares outstanding during the period. Common stock equivalents are
not considered in the calculation of net loss per share when their effect would
be antidilutive.
The following is a reconciliation of the numerators of diluted earnings per
share, (in thousands):
<TABLE>
<CAPTION>
Three months ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Net earnings $346 $811
Payment in kind interest on
convertible debentures 44 76
---- ---
Numerator for diluted calculation $390 $887
==== ====
</TABLE>
The only difference between the denominator for basic and diluted earnings per
share for the three month periods ended September 30, 1999 and 1998 is the
effect of common stock equivalents.
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 1/1000th 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
9
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
repricing are subject to a one year limitation on the exercisability of repriced
options subject to certain exceptions. The one year limitation on ability to
exercise will expire on September 28, 1999. The revised exercise price was
established by reference to the closing price of the Company's Common Stock on
September 28, 1998, which was approximately $2.59. Approximately 90 employees
participated in the repricing with approximately 1,336,000 options being
repriced. Of the stock options repriced, options to purchase approximately
831,000 shares were held by executive officers of the Company.
On January 7, 1999, the Company entered into employment agreements with
each of J. Patrick Tinley, the Company's President and Chief Operating Officer
and member of the Board of Directors, and Dennis V. Vohs, the Company's Chairman
of the Board of Directors and Chief Executive Officer (the Employment
Agreements). In addition to a salary and benefits, each employment agreement
provides the employee with a continuation of salary and benefits for a
twenty-four month period immediately following the employee's termination of
employment by the Company "without cause" (as that term is defined in the
Employment Agreement). In addition, if within the first nine months following a
"change of control" of the Company the employee terminates his employment of the
surviving corporation for "good reason" or the surviving corporation terminates
the employee's employment for any reason other than "cause" or "disability" (as
each of these terms in quotes is defined in the Employment Agreements), the
employee shall then be entitled to a continuation of then applicable salary for
the twenty-four month period immediately following the termination date and all
unvested stock options and similar rights shall become vested and exercisable.
Mr. Tinley's and Mr. Vohs Employment Agreements have been filed as Exhibit 10.3
and Exhibit 10.4, respectively to the Company's Quarterly Report on Form 10-Q
for the third quarter of fiscal 1999, filed May 17, 1999.
On September 17, 1999, the Company entered into an employment agreement
with Robert B. Webster, the Chief Financial Officer and Secretary of the
Company. In addition to a salary and benefits, the employment agreement provides
the employee with a continuation of salary and benefits for a twelve-month
period immediately following the employee's termination of employment by the
Company "without cause" (as that term is defined in the Employment Agreement).
In addition, if within the first nine months following a "change of control" of
the Company the employee terminates his employment of the surviving corporation
for "good reason" or the surviving corporation terminates the employee's
employment for any reason other than "cause" or "disability" (as each of these
terms in quotes is defined in the Employment Agreements), the employee shall
then be entitled to a continuation of then applicable salary for the twelve
month period immediately following the termination date and all unvested stock
options and similar rights shall become vested and exercisable. Mr. Webster's
Employment Agreement has been filed as Exhibit 10.5 to the Company's Annual
Report on Form 10-K for the fiscal year 1999, filed September 28, 1999.
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
10
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. Both statements have been adopted for the Company's 1999 fiscal
year. Disclosures pursuant to Statement 130 are included under the note
regarding Comprehensive Income, 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.
11
<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 September 30, 1999 decreased 9% to
$23,263,000 from $25,519,000 in the same quarter of fiscal 1999. Software
product license revenues decreased 42%, while consulting and other services
revenues increased 23%, and maintenance revenues increased 2% from the same
quarter of the prior year.
Software product license revenues were $5,970,000 during the quarter
ended September 30, 1999, a decrease of $4,292,000, or 42%, from the same
quarter in fiscal 1999. The Company experienced a decrease over the same quarter
of fiscal 1999 in the North American market of approximately $3,141,000, or 59%.
This North American decrease relates to a decrease of approximately $1,533,000
in U.S. revenues and $1,608,000 in Canadian revenues due to a fewer number of
contracts recorded during the quarter than in the same quarter of the prior
year. The Company experienced a net decrease of $1,151,000, or 23%, in the
European, Asian and Pacific Rim ("International") markets over the same quarter
in fiscal 1999. The Asia/Pacific Rim markets experienced a $599,000, or 23%
decrease in revenues from the same quarter in the prior year due largely to a
fewer number of contracts closed. European revenues decreased $551,000 or 24%
over the same quarter in the prior year. This was due largely to decreases in
France of $521,000, other European countries of $255,000, Benelux of $153,000,
and UK of $98,000 partially offset by increases in Spain of $476,000. The
company believes that the decrease in software product licenses is principally a
result of an industry-wide slowdown in customers willingness to purchase new
software because of issues related to the year 2000 date recognition
12
<PAGE>
problem (Y2K). The Y2K issue arises because certain electronic data
processing systems use two digits rather than four to define the applicable
year which may preclude proper date recognition after December 31, 1999.
Consulting and other services revenues for the first quarter of fiscal
2000 increased 23% to $10,201,000 from $8,299,000 in the same quarter of fiscal
1999. 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, 1999,
North American services revenues increased by $1,345,000, or 22%, over the same
quarter in the prior year which is attributable largely to software product
licensing activity during the previous quarters. Additionally, the Company has
increased its service capacity with the acquisition of HiPoint during the first
quarter of fiscal 1999. HiPoint delivers services and consulting and had worked
with several of the Company's customers prior to the acquisitions. During the
first quarter of fiscal 2000, the Company has reduced the number of outside
consultants used to perform implementations, consulting, and other professional
services. The outside consultants normally cost more and generate lower gross
margins than services performed by Company employees. International services
revenues increased $557,000, or 26% over the same quarter in the prior year.
Maintenance revenues for the first quarter increased by $134,000, or 2%
in fiscal 2000 versus the same quarter in the prior year. As compared to the
same quarter of the previous fiscal year, maintenance revenues increased
$188,000, or 4% in North America offset by decreases in the Europe and
Asia/Pacific Rim Markets of $5,000, or 1% and $49,000 or 43%, respectively.
Increases are principally attributable to software licensing activity during
fiscal 1999, and 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
distributors' customers.
International revenues as a percentage of total revenues for the first
quarter of fiscal 2000 increased to 36% from 35% for the same quarter in fiscal
1999. International revenues decreased $648,000 or 7% over the same quarter in
the prior year. The Company's Spanish subsidiary accounted for an increase of
$388,000. The remaining countries all experienced net decreases as follows;
Asia/Pacific Rim markets $621,000, France $129,000, and other European countries
of $286,000. These fluctuations are related to the quantity, scope and timing of
contracts closed. The aggregate first quarter increase (decrease) in
international revenues over the same quarter of fiscal 1999 is (23%) for
software licenses, 26% for consulting services and (3%) for maintenance revenue.
North American revenues comprised 64% of the first quarter 1999 total
revenues down from 65% in the same quarter of the prior year. North American
revenues decreased 10% over the same quarter of the previous fiscal year. The
aggregate decrease of $1,608,000 is comprised of a 59% decrease in software
licenses, offset by increases of 22% and 4% for consulting services and
maintenance revenues, respectively. Decreases are due to reduction of the number
of software agreements entered into during the current quarter. The increases in
13
<PAGE>
consulting services and maintenance revenues are a result of the revenue
generated from acquired companies and the increased focus on consulting
services.
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 number of
third party products being sold by the Company. 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 2000 decreased by 26% to $1,001,000
from $1,356,000 in the first quarter of fiscal 1999. As a percentage of software
product license revenue, the costs of software product licenses increased to 17%
in the first quarter of fiscal 2000 compared to 13% in the same quarter of
fiscal 1999. The increase in these items for the three month period was
primarily due to the number of agreements entered into in fiscal 2000 which,
when compared to the prior year, contained a greater amount of third party
software resulting in increased third party royalty expenses incurred by the
Company.
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 12% to $11,030,000 in the first quarter of fiscal 2000, as
compared to $9,862,000 in the first quarter of fiscal 1999. The increase in
these costs for the three month period relates in part to the Company's
increased services activity, resulting in the Company hiring more internal
consultants. Additionally, during the first quarter of fiscal 1999, the Company
acquired Hipoint. For the first quarter of fiscal 2000, the incremental expenses
attributable to HiPoint are $659,000. The Company's gross profit margin
resulting from consulting, maintenance and other services revenues for the first
quarter of fiscal 2000 was 36%, up from 35% in the same quarter of fiscal 1999.
The improvement in the gross profit margin for the three month period was due
largely to better utilization rates of consultants and the related decrease in
non-billable travel expenses.
Sales and marketing expenses for the quarter ended September 30, 1999
decreased by 25%, to $5,214,000 from $6,914,000 in the same quarter of the prior
year. For the quarter ended September 30, 1999, travel related expenditures
decreased by $759,000 over the same period of the prior year. Additionally,
personnel-related expenses, including salaries and commissions decreased
approximately $476,000 over the same period of the prior year. Furthermore,
communications costs related to telemarketing efforts and facilities related
expenses decreased $117,000 for the three month period versus the same period of
the prior year. Likewise, for the quarter ended September 30, 1999, supplies and
outside services related expenses decreased approximately $135,000 over the same
quarter of the prior year. Media and advertising expenses for the three month
period ended September 30,1999 decreased $80,000 as compared to the same period
of the prior year. Finally, other expense categories experienced a net decrease
of $133,000 for the three-month period versus the prior year. These decreases
were primarily a result of decreased headcount combined with an increased
control of discretionary spending.
14
<PAGE>
Product development (research and development) expenses decreased by
26%, to $2,454,000 in the first quarter of fiscal 2000 from $3,332,000 in the
same quarter of the prior year. The following table summarizes product
development expenditures (in thousands):
<TABLE>
<CAPTION>
Three months ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Gross Expenditures for Product Development $3,595 $3,573
Less: Expenses capitalized (3,002) (2,622)
Plus: Amortization of previously
capitalized amounts 1,861 2,381
------ -----
Total Product Development Expenses $2,454 $3,332
====== ======
</TABLE>
As a percentage of total revenues, product development expenditures for
the three-month period ended September 30, 1999 increased over expenditures in
the same period of the prior year. Product development expenditures during
fiscal 2000 have been primarily focused on continued enhancements to existing
products and developing new products. During the three months ended September
30, 1999, software development costs capitalized included amounts attributable
to the development of the Company's new e-business architecture known as
iRenaissance Internet Applications (RNA), and the new browser based version of
it's core product known as iRenaissance. 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,
1999 decreased by 4%, to $1,998,000 from $2,075,000 in the same quarter of the
prior year. The major reasons for the decrease in these expenses from the same
period in the prior year was due to renegotiated telecommunications contracts
and the resultant savings, thereof.
In the three month period ended September 30, 1999, the Company
recorded a provision for doubtful accounts of $401,000, as compared to $283,000
recorded in the first quarter of fiscal 1999. The fiscal 2000 and 1999
provisions consisted primarily of specific customer accounts identified as being
potentially uncollectible.
Amortization of other assets decreased to $260,000 in the first quarter
of fiscal 2000 from $320,000 in the same quarter of the prior year. This
amortization relates to the purchase of the Company in 1988 and its subsequent
acquisitions of other products and companies. The decrease is attributable to
previously purchased products and companies becoming fully amortized.
OTHER EXPENSE, NET
Other expense for the quarter ended September 30, 1999 was $351,000, as
compared to $161,000 in the same quarter of fiscal 1999. These amounts primarily
consisted of interest
15
<PAGE>
expense related to the increased borrowing by the Company under its existing
line of credit facility during the three month period ended September 30,
1999 versus the same period of fiscal 1999.
INCOME TAX EXPENSE
During the first quarter of fiscal 2000, the Company recorded income
tax expense of $208,000 compared with an income tax expense of $405,000 recorded
during the same quarter in fiscal 1999. Income tax expense includes 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
In the first three months of fiscal 2000, net cash provided by
operating activities increased $1,636,000 compared to the same period of the
prior year. An aggregate net decrease in the non-cash charges for depreciation,
amortization and provisions for bad debt of $736,000 and an aggregate decrease
in the combined cash effect of accounts payable and accrued expenses changes of
$1,090,000 and by decreased Company earnings of $465,000 were offset by cash
provided by decreased accounts receivable of $3,108,000. The decrease in
accounts payable and certain other current liabilities is a function of the
timing of the business cycle. The decreased receivables portfolio was a result
of timing of revenues recognized, increased collection efforts, and some
improvement of the receivables turnover in Europe. Management feels that the
risk of uncollectibility has been appropriately assessed and reflected in the
accompanying condensed, consolidated financial statements. Changes in prepaid
expenses, accrued income taxes and other miscellaneous accounts resulted in a
further increase in cash of $819,000.
In the first three months of fiscal 2000, the Company required
$3,120,000 for investing activities versus $3,460,000 over the same period of
the prior year, a decrease of $340,000. Investment in property and equipment
decreased by $476,000 over the same period of the prior year as a result of the
Company's continued expansion in Europe. The worldwide growth in its consultancy
organization also necessitated increased investment. Capitalized computer
software costs increased by $380,000 due to timing of development work
performed. Other investment items decreased by $244,000. The Company financed
its continuing operations for the three months ended September 30, 1999 through
cash generated from operations and available credit facilities.
Cash flows from financing activities decreased by $6,164,000 versus the same
three-month period of the prior fiscal year. Repayments of amounts previously
borrowed under the Company's line of credit resulted in a decrease in cash of
$5,854,000. Capital lease payments utilized an incremental $90,000 of cash
versus the same quarter of the prior year. No common stock was issued in the
first quarter of fiscal 2000 which resulted in a further decrease in cash of
$220,000 when compared to the same quarter of the prior year.
At September 30, 1999 the Company had $3,219,000 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 equal to the Prime
16
<PAGE>
Rate plus 2%. Borrowings under the credit facility are collateralized by
substantially all assets of the Company. At September 30, 1999, the Company
had $10,374,000 outstanding against the $15,000,000 revolving credit
facility, and based on eligible accounts receivable at September 30, 1999,
the Company's cash and remaining borrowing capacity under the revolving
credit facility totaled approximately $4,420,000.
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. In
the future, the Company may need to seek additional financing which may be in
the form of debt or equity. If required additional debt financing would
increase company's interest expense while additional equity financing would
increase the number shares outstanding.
YEAR 2000 IMPLICATIONS
OVERVIEW
The Year 2000 issue arises because certain electronic data processing
systems use two digits rather than four to define the applicable year which may
preclude proper date recognition after December 31, 1999.
During fiscal 1998 and 1997, the Company empowered key individuals as
responsible for identifying and resolving Year 2000 dysfunction. These efforts
include identification and review of internal operating systems and
applications, customer projects and services, and discussions with suppliers to
the business. At this time, based upon the efforts taken to date and those yet
to be taken, the Company does not expect any disruptions in its business
operations and, therefore, does not anticipate any material negative effect upon
its revenues or earnings as a result of the Year 2000 issue. Remediation costs
for problems identified thus far are not expected to be material to the
Company's consolidated financial position, liquidity or results of operations.
The Company has established a timetable for resolving Year 2000 issues so as not
to interrupt ongoing operations.
THE COMPANY'S STATE OF READINESS
The Year 2000 project plan, including assessment, improvement, testing
and implementation, has been established. The implementation phase is 99%
complete and should be finalized in November 1999 upon receipt of all remaining
supplier Year 2000 readiness inquiries and completed migration of certain
internal systems.
Assessment of the Year 2000 compliance of third parties with whom the
Company has material relationships is in process. The Company's material third
party relationships include the following:
(a) Software vendors: The Company has upgraded all purchased
software to a Year 2000 compliant version and has completed the testing
phase;
(b) Equipment vendors: The response to the Year 2000 readiness
inquiries from equipment vendors, which includes all embedded chip equipment,
is at 96%; and
(c) Service providers: The response to the Year 2000 readiness
inquiries from third party service providers, which includes utilities, phone
service and all facility related services, is at 100%.
Thus far, the responses received, from the Company's third party
vendors and suppliers indicate compliance on or before November 1999.
The preliminary assessment of internal information technology and
non-information technology systems has been completed. Internal non-compliant
items have been identified and prioritization of
17
<PAGE>
internal non-compliant items is in process. A system for tracking Remediation
has been established and non-compliant items identified was completed in
September 1999. Based on the findings of the planning and assessment phases
completed to date, the Company does not believe independent verification or
validation processes will be necessary.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The current estimate of the cost of Remediation and equipment and
software replacement ranges between $330,000 and $350,000, of which
approximately $330,000 has been incurred to date, and is summarized as follows:
<TABLE>
<S> <C>
Code modification and testing: $260,000 - $275,000
Personal computer, software and other upgrades $ 70,000 - $75,000
</TABLE>
Less than 1% of the product development for 1998 and 1999 has been
allocated for code modification. Such costs are funded through cash flows from
operations and are expensed as incurred. The personal computer and purchased
software upgrades are costs incurred in the ordinary course of business and are,
therefore, typically capitalized costs.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES AND THE COMPANY'S
CONTINGENCY PLANS
A most reasonably likely worst case Year 2000 scenario is not known
at this time. This determination will be made after the receipt of the
remaining material third party questionnaires. However, the shipment of
software to customers is expected to continue with no interruption and no
material loss of revenues is anticipated. The Year 2000 project has had
minimal impact on the schedule of other major information technology projects.
The contingency plan, which is largely a subset of the company's
existing disaster recovery plan, is designed to ensure that the necessary backup
measures for computer processing are identified.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE: The company has a world-wide presence and as much
maintains offices and derives revenues from sources overseas. For the first
quarter of fiscal 2000,. International revenues as a percentage of total
revenues was approximately 36%. The company's international business is subject
to typical risks of an international business, including, but not limited to:
differing economic conditions, changes in political climates, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, the Company's future results could be materially
adversely impacted by changes in these or other factors. The effect of foreign
exchange rate fluctuations on the Company in the first three months of fiscal
2000 was not material.
INTEREST RATES: The Company's exposure to interest rates relates
primarily to the Company's cash equivalents and certain debt obligations. The
company invests in financial instruments with original maturities of three
months or less. Any interest earned on these investments is recorded as interest
income on the Company's statement of operations. Because of the short maturity
of our investments, a near-term change in interest rates would not materially
effect our financial position, results of operations, or cash flows. Certain of
the Company's debt obligations include a variable rate of interest. A
significant, near term change in interest rates could materially effect our
financial position, results of operations or cash flows.
19
<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 $800,000 plus accrued interest through the date of
conversion into 420,000 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
(a) Exhibits:
The Exhibits listed on the accompanying Index to Exhibits are filed as
part of, or incorporated by reference into, this Report.
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of the Registrant, as amended (1)
3.2 Bylaws of the Registrant (1)
4.3 Form of the subordinated debenture agreement due February 6, 2003 issued by the
Registrant to each Investor (3)
4.4 Registration rights agreement between the Registrant and each Investor (3)
10.1 Preferred Shares Rights Agreement, dated as of September 4, 1998 between the
Registrant and BankBoston, N.A. (2)
10.2A Extension Agreement and Amendment to Loan Documents dated March 21,
1997 between Registrant and Coast Business Credit, a division of
Southern Pacific Thrift and Loan Association (4)
10.2B Extension Agreement and Amendment to Loan Documents dated August 18, 1995
between Registrant and CoastFed Business Credit Corporation ("Coast") (4)
10.2C First Amendment to Loan and Security Agreement dated June 30, 1995 between
Registrant and Coast (4)
10.2D Loan and Security Agreement dated October 11, 1994 between Registrant and Coast (4)
10.3 Employment Agreement, dated as of January 7, 1999, between Mr. Patrick Tinley and the
Registrant (5)
10.4 Employment Agreement, dated as of January 7, 1999, between Mr. Dennis Vohs and
the Registrant (5)
10.5 Employment Agreement, dated as of September 17, 1999, between Mr. Robert Webster and
the Registrant (6)
27.1 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.
20
<PAGE>
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(3) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on form 8-K filed February 12, 1998.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 10-K/A filed April 30, 1998.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-Q filed May 17,. 1999.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-K filed September 28, 1999.
(b) Reports on Form 8-K
ITEMS 1, 4 AND 5 HAVE BEEN OMITTED, AS THEY ARE NOT APPLICABLE.
21
<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: November 15, 1999 /s/ ROBERT B. WEBSTER
--------------------------
Robert B. Webster
Vice President, Finance and
Administration and Chief
Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
22
<PAGE>
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
- -----------
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,219
<SECURITIES> 0
<RECEIVABLES> 37,867
<ALLOWANCES> 2,060
<INVENTORY> 0
<CURRENT-ASSETS> 40,969
<PP&E> 19,280
<DEPRECIATION> 14,610
<TOTAL-ASSETS> 78,001
<CURRENT-LIABILITIES> 44,866
<BONDS> 2,774
0
0
<COMMON> 23
<OTHER-SE> 30,338
<TOTAL-LIABILITY-AND-EQUITY> 78,001
<SALES> 0
<TOTAL-REVENUES> 23,263
<CGS> 0
<TOTAL-COSTS> 22,358
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 401
<INTEREST-EXPENSE> 351
<INCOME-PRETAX> 554
<INCOME-TAX> 208
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 346
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
