<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 APRIL 29, 1999
----- --------------
Common stock, $0.001 par value 22,650,772
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This is page 1 of 25 pages.
Index to exhibits is on page 25.
<PAGE>
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ROSS SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 1999
TABLE OF CONTENTS
PAGE NO.
- --------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Three and nine months ended March 31, 1999 and 1998 3
Condensed Consolidated Balance Sheets -
March 31, 1999 and June 30, 1998 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 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 21
- --------------------------------------------------------------------------------
PART II OTHER INFORMATION
Item 2. Changes in Securities 22
Item 6. Exhibits and Reports on Form 8-K 22
- --------------------------------------------------------------------------------
SIGNATURES 24
- --------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
-------------------- --------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software product licenses $ 6,357 $ 10,169 $ 25,419 $ 25,721
Consulting and other services 10,908 7,632 29,542 19,581
Maintenance 7,106 6,513 21,083 18,856
--------- -------- -------- --------
Total revenues 24,371 24,314 76,044 64,158
--------- -------- -------- --------
Operating expenses:
Costs of software product licenses 713 960 2,903 2,145
Costs of consulting,
maintenance and other services 11,907 9,594 32,820 25,659
Sales and marketing 7,993 6,869 22,926 19,352
Product development 3,058 2,446 9,375 7,989
General and administrative 2,056 1,940 6,255 5,634
Provision for uncollectible accounts 442 135 968 941
Litigation settlement (381)
Amortization of other assets 328 291 977 728
--------- -------- -------- --------
Total operating expenses 26,497 22,235 76,224 62,067
--------- -------- -------- --------
Operating earnings (loss) (2,126) 2,079 (180) 2,091
Other expenses, net (329) (267) (662) (887)
--------- -------- -------- --------
Earnings (loss) before extraordinary item (2,455) 1,812 (842) 1,204
Extraordinary expense, net of tax 213
Income tax expense (benefit) (41) 134 391 461
--------- -------- -------- --------
Net earnings (loss) $ (2,414) $ 1,678 $ (1,446) $ 743
--------- -------- -------- --------
--------- -------- -------- --------
Net earnings (loss) per common share - basic $ (0.11) $ 0.08 $ (0.07) $ 0.04
--------- -------- -------- --------
--------- -------- -------- --------
Net earnings (loss) per common share - diluted $ (0.11) $ 0.08 $ (0.07) $ 0.03
--------- -------- -------- --------
--------- -------- -------- --------
Shares used in per share computation - basic 22,650 19,916 22,111 19,468
--------- -------- -------- --------
--------- -------- -------- --------
Shares used in per share computation - diluted 22,650 22,318 22,111 21,978
--------- -------- -------- --------
--------- -------- -------- --------
</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>
March 31, June 30,
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,464 $ 7,248
Accounts receivable, less allowance
for doubtful accounts and returns 40,986 34,878
Prepaids and other current assets 2,876 1,915
-------- --------
Total current assets 46,326 44,041
Property and equipment 4,619 4,409
Computer software costs 26,141 24,339
Other assets 5,715 5,400
-------- --------
Total assets $ 82,801 $ 78,189
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt $ 11,493 $ 4,607
Accounts payable 8,812 6,359
Accrued expenses 7,147 8,950
Income taxes payable 280 397
Deferred revenues 17,728 18,184
-------- --------
Total current liabilities 45,460 38,497
-------- --------
Long-term debt, less current installments 3,840 8,918
-------- --------
Shareholders' equity:
Common stock, $.001 par value; 35,000,000 shares authorized, 23 21
22,650,772 and 21,106,867 shares issued and outstanding at March 31,
1999 and June 30, 1998, respectively. Preferred stock, no par value;
5,000,000 shares authorized, 0 outstanding
Additional paid-in capital 83,946 79,646
Accumulated deficit (49,191) (47,745)
Accumulated comprehensive income (deficit) (1,277) (1,148)
-------- --------
Total shareholders' equity 33,501 30,774
-------- --------
Total liabilities and shareholders' equity $ 82,801 $ 78,189
-------- --------
-------- --------
</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>
Nine months ended
March 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss), before
extraordinary item $ (1,233) $ 743
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Extraordinary loss on early debt
extinguishment (213) --
Depreciation and amortization of property
and equipment 2,304 2,078
Amortization of computer software costs 6,888 5,432
Amortization of other assets 977 728
Provision for uncollectible accounts 969 941
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable (7,232) 63
Prepaids and other current assets (991) 589
Income taxes payable / recoverable (113) 454
Accounts payable 2,466 (2,524)
Accrued expenses (2,244) (1,373)
Deferred revenues (444) (894)
Other, net 2 (50)
-------- --------
Net cash provided by operating
activities 1,136 6,187
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,675) (740)
Computer software costs capitalized (8,574) (7,698)
Acquisitions and divestitures -- 69
Payment of debt issuance costs -- (287)
Other (182) (119)
-------- --------
Net cash used for investing
activities (10,431) (8,775)
-------- --------
-------- --------
Cash flows from financing activities:
Net line of credit activity 7,059 (1,227)
Capital lease payments (123) (42)
Retirement of convertible debentures (2,667) --
Proceeds from issuance of convertible debenture -- 6,000
Proceeds from issuance of common stock, net 286 50
-------- --------
Net cash provided by financing
activities 4,555 4,781
-------- --------
Effect of exchange rate changes on cash (44) (52)
-------- --------
Net increase (decrease) in cash and cash equivalents (4,784) 2,141
Cash and cash equivalents at beginning of period 7,248 4,010
-------- --------
Cash and cash equivalents at end of period $ 2,464 $ 6,151
-------- --------
-------- --------
Noncash investing and financing activities:
Business acquisitions for common stock
& forgiveness of debt $ 2,067 $ 2,057
-------- --------
-------- --------
Conversion of convertible debentures $ 2,461 --
-------- --------
-------- --------
Capital lease additions $ 0 $ 178
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Ross Systems, Inc. (the "Company") reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary to present a
fair statement of its financial position as of March 31, 1999, and the results
of its operations and cash flows for the interim periods presented. The
Company's results of operations for the nine months ended March 31, 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, 1998 filed with the Securities and Exchange Commission on September 28,
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) 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>
March 31, June 30,
1998 1998
--------- --------
<S> <C> <C>
Trade accounts receivable $43,074 $36,852
Less allowance for doubtful accounts and returns (2,088) (1,974)
---------- ---------
$40,986 $34,878
---------- ---------
---------- ---------
</TABLE>
E) PROPERTY AND EQUIPMENT
As of the dates shown, property and equipment consisted of the
following (in thousands):
<TABLE>
<CAPTION>
March 31, June 30,
1999 1998
--------- --------
<S> <C> <C>
Computer equipment $10,524 $9,186
Furniture and fixtures 3,105 3,009
Leasehold improvements 1,769 1,635
-------- --------
15,398 13,830
Less accumulated depreciation and amortization (10,779) (9,421)
-------- ------
$ 4,619 $ 4,409
-------- --------
-------- --------
</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 March 31, 1999, the
remaining balance after conversions and redemptions is $3,333,000. The material
agreements between the Company and each Investor have been filed as exhibits to
the Current Report on Form
7
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8-K filed with the Securities and Exchange Commission by the Company on February
12, 1998. The salient points of the convertible subordinated debenture agreement
are as follows:
INTEREST : The interest rate is four percent per annum for the first six months
after the original issuance date of the convertible debenture and six percent
per annum thereafter, subject to increases (up to the legal maximum rate) if the
Company is in default under the convertible debenture. Accrued interest is due
and payable in shares of the Company's Common Stock semi-annually on the last
day of June and December of each year. The value for such shares of Common Stock
is the average of the two lowest closing bid prices for the Company's Common
Stock as reported by the Bloomberg Service for the thirty trading days
immediately before the interest payment date.
CONVERSION PRICE: The conversion price for the convertible debentures is (P + I)
divided by the Conversion Date Market Price where P equals the outstanding
principal amount of the convertible debenture submitted for conversion, I equals
accrued but unpaid interest as of the conversion date and Conversion Date Market
Price equals the lesser of the maximum conversion price (as defined below) or
101% of the average of the two lowest closing bid prices for the Company's
Common Stock as reported by the Bloomberg Service for the thirty trading days
immediately before the conversion date. The maximum conversion price is (i)
until December 31, 1998, $7.00 subject to a downward adjustment if the Company
issues shares in a private placement financing transaction at a per share price
less than $7.00 and (ii) commencing January 1, 1999, 115% of the average closing
bid price of the Common Stock as reported by the Bloomberg Service over the 1998
calendar year. A portion of the convertible debentures issued in June 1998 (the
"Second Closing Debentures") were redeemed by the Company. 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) EXTRAORDINARY ITEM
During October 1998, the Company redeemed $2,667,000 aggregate principle
amount of the then outstanding Second Closing Debentures. In accordance with
the redemption option of the convertible subordinated debenture agreement
outlined above, the Company incurred a one time extraordinary charge of
approximately $213,000, or 8% of the aggregate principle amount of the Second
Closing Debentures redeemed.
I) 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
8
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
and distributions to stockholders. The Company has restated information for all
prior periods reported below to conform to this standard (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) $(2,414) $1,678 $(1,446) $743
Foreign currency translation adjustments (11) 93 (129) (325)
------- ------ ------- ----
Total comprehensive income (loss) $(2,425) $1,771 $(1,575) $418
------- ------ ------- ----
------- ------ ------- ----
</TABLE>
J) NET EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings (loss) per common share are computed by dividing net
earnings or net loss by the weighted average number of common shares outstanding
during the period. Diluted earnings per common and common equivalent share is
computed by dividing net earnings by the weighted average number of common and
common equivalent shares outstanding during the period. Common stock equivalents
are not considered in the calculation of net loss per share when their effect
would be antidilutive.
The following is a reconciliation of the numerators of diluted earnings (loss)
per share, (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, December 31,
1999 1998 1999 1998
------- ------ ------- ----
<S> <C> <C> <C> <C>
Net earnings (loss) $(2,414) $1,678 $(1,446) $743
Payment in kind interest on
convertible debentures _ 26 - 26
------- ------ ------- ----
Numerator for diluted calculation $(2,414) $1,704 $(1,446) $769
------- ------ ------- ----
------- ------ ------- ----
</TABLE>
The only difference between the denominator for basic and diluted earnings per
share for the three and six-month periods ended December 31, 1998 is the effect
of common stock equivalents.
K) 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
9
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
tender offer the consummation of which would result in ownership by the person
or group of 15% or more of the Common Stock. The Company will be entitled to
redeem the Rights at $.01 per Right at any time on or before the tenth day
following acquisition by a person or group of 15% or more of the Company's
Common Stock.
On September 18, 1998 the Board of Directors of the Company approved an
adjustment to the exercise price for certain outstanding stock options held by
all current employees, which have an exercise price of $3.00 and above. In
consideration for this repricing offer, officers of the Company participating in
the option repricing were required to forfeit 10% of the shares subject to each
option being repriced, while non-officer employees participating in the option
repricing are subject to a one year limitation on the exercisability of repriced
options subject to certain exceptions. The one year limitation on
excercixability 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 Operaing 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 immediatley following the termination date and all
unvested stock options and similar rights shall become vested and excersisable.
Mr. Tinley's and Mr. Vohs Employment Agreements have been filed as Exhibit
10.3 and Exhibit 10.4, respectively to this Quarterly Report on Form 10-Q.
L) 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 segments. Generally, financial information is required to
be reported on the basis that it is used internally for evaluating segment
10
<PAGE>
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 1999 increased slightly
to $24,371,000 from $24,314,000 in the same quarter of fiscal 1998. Software
product license revenues decreased 37%, while consulting and other services
revenues increased 43%, and maintenance revenues increased 9% from the same
quarter of the prior year.
For the nine-month period ended March 31, 1999, total revenues
increased 19% to $76,044,000 from $64,158,000 in the same period of fiscal 1998.
Software product license revenues decreased 1%, while consulting and other
services revenues increased 51%, and maintenance revenues increased 12% from the
same period of the prior year.
Software product license revenues were $6,357,000 during the quarter
ended March 31, 1999, a decrease of $3,812,000, or 37%, from the same quarter in
fiscal 1998. The Company experienced a decrease over the same quarter of fiscal
1998 in the North American market of approximately $4,477,000, or 58%. This
North American decrease relates to a decrease of approximately $4,213,000 in
U.S. revenues and $264,000 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 increase of $665,000, or 28%, in the
European, Asian and Pacific Rim ("International") markets over the same quarter
in fiscal 1998. The Asia/Pacific Rim markets experienced a $87,000, or 52%
decrease in revenues from the same quarter in the prior
12
<PAGE>
year due largely to a fewer number of contracts closed. European revenues
increased $752,000 or 34% over the same quarter in the prior year. This was due
largely to increases in France of $474,000, UK of $311,000, and Benelux of
$274,000, partially offset by decreases in Germany of $190,000 and other
European countries of $117,000. For the nine-month period ended March 31, 1999,
software product license revenues decreased $302,000 or 1%, from the same period
in the prior year. The Company experienced an increase of 31%, or $1,956,000 in
the European markets offset by decreases in the North American and Asia/Pacific
Rim markets of $2,018,000 or 13% and $240,000 or 7%, respectively.
Consulting and other services revenues for the third quarter of fiscal
1999 increased 43% to $10,908,000 from $7,632,000 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 March 31, 1999, North
American services revenues increased by $2,323,000, or 46%, over the same
quarter in the prior year which is attributable largely to the increase in
software product license revenues during the previous quarters. Additionally,
the Company has increased its service 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 the acquisitions. The Company has also expanded the number of outside
consultants used to perform implementations, consulting, and other professional
services. The 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 $952,000, or 37% over the same quarter
in the prior year. For the nine-month period ended March 31, 1999, services
revenues increased 51%, or $9,961,000 from the same period in the prior year.
The Company experienced increases of 62%, or $7,874,000 and 31%, or $1,984,000
in the North American and European markets, respectively, as well as an increase
in the Asia/Pacific Rim markets of 33% or $103,000.
Maintenance revenues for the third quarter increased by $593,000, or 9%
in fiscal 1999 versus the same quarter in the prior year. As compared to the
same quarter of the previous fiscal year, maintenance revenues increased
$476,000, or 10% in North America while European increases of $208,000, or 14%,
were partially offset by declines of $91,000 or 51% in the Asia/Pacific Rim
markets. Increases are principally attributable to increased software licensing
activity during fiscal 1998, 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. For the nine-month period ended March 31, 1999,
maintenance revenues also increased by 12%, or $2,227,000, from the same period
of fiscal 1998. The Company experienced increases of 10%, or $1,435,000 and 21%,
or $927,000, in the North American and European markets, respectively, partially
offset by a decrease of 32%, or $135,000, in the Asia/Pacific Rim markets.
International revenues as a percentage of total revenues for the third
quarter of fiscal 1999 increased to 34% from 27% for the same quarter in fiscal
1998. International revenues increased
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$1,734,000 or 26% over the same quarter in the prior year. The Company's French
subsidiary accounted for an increase of $987,000, while the Spanish subsidiary
experienced increased revenues of $496,000. The United Kingdom, Benelux, and
German subsidiaries experienced increases of $275,000, $205,000, and $10,000,
respectively. Both the Asia/Pacific Rim markets and other European countries had
net decreases of $161,000 and $78,000, respectively. These fluctuations are
related to the quantity, scope and timing of contracts closed. The aggregate
third quarter increase in international revenues over the same quarter of fiscal
1998 is 28% for software licenses, 37% for consulting services and 7% for
maintenance revenue. International revenues as a percentage of total revenues
for the nine months ended March 31, 1999 also increased, to 34% from 33% for the
same period of fiscal 1998.
North American revenues comprised 66% of the third quarter 1999 total
revenues down from 73% in the same quarter of the prior year. North American
revenues decreased 9% over the same quarter of the previous fiscal year. The
aggregate decrease of $1,678,000 is comprised of a 58% decrease in software
licenses, offset by increases of 46% and 10% 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
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 third quarter of fiscal 1999 decreased by 26% to $713,000 from
$960,000 in the third quarter of fiscal 1998. For the nine months ended March
31, 1999, the cost of software product licenses increased 35% to $2,903,000 from
$2,145,000 in the same period in fiscal 1998. As a percentage of software
product license revenue, the costs of software product licenses increased to 11%
in the third quarter of fiscal 1999 compared to 9% in the same quarter of fiscal
1998. For the nine-month period ended March 31, 1999, the costs of software
product licenses as a percent of software product license revenue increased from
to 11% in the current nine-month period compared to 8% in the same period of the
prior year. The increase in these items for the three and nine month period was
primarily due to the number of agreements entered into in fiscal 1999 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 24% to $11,907,000 in the third quarter of fiscal 1999, as
compared to $9,594,000 in the third quarter of fiscal 1998. For the nine months
ended March 31, 1999, costs of consulting, maintenance and other services
increased 28% to $32,820,000 from $26,659,000 in the same period of fiscal 1998.
The increase in these costs for the three and nine month periods relates in part
to the Company's increased software
14
<PAGE>
license and services activity during the preceding quarters, resulting in the
Company hiring more internal and external consultants to service these new
customers. The increase in costs over the periods 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 second quarter of fiscal 1998 as well as additional services
personnel employed by the Company as of March 31, 1999 versus March 31, 1998.
For the three and nine month period ended March 31, 1999, the additional
expenses attributable to Bizware and HiPoint were approximately $981,000 and
$3,465,000 respectively. Substantially all of the remaining increase is
attributable to increased utilization of third party consultants. The Company's
gross profit margin resulting from consulting, maintenance and other services
revenues for the third quarter of fiscal 1999 was 34%, up from 32% in the same
quarter of fiscal 1998. For the nine months ended March 31, 1999, the gross
profit margin was 35% as compared to 33% for the same period of the prior year.
The improvement in the gross profit margin for the three and nine month periods
were 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 March 31, 1999
increased by 16%, to $7,993,000 from $6,869,000 in the same quarter of the prior
year. For the nine-month period ended March 31, 1999, sales and marketing
expenses increased by 18% from $19,352,000 to $22,926,000 as compared to the
same period of the prior year. For the quarter ended March 31, 1999,
personnel-related expenses, including salaries and commissions increased
approximately $87,000 over the same period of the prior year. For the nine
months ended March 31, 1999, personnel related expenses increased approximately
$1,895,000 over the same period of the prior year. Travel related expenditures
necessary to support the increased services personnel rose by $206,000 and
$505,000 respectively, over the same periods of the prior year. Communications
costs related to increased telemarketing efforts increased $102,000 and $134,000
for the three and nine month's periods, respectively, versus the same period of
the prior year. For the quarter ended March 31, 1999, facilities related
expenses increased approximately $223,000 over the same quarter of the prior
year. For the nine months ended March 31, 1999, facilities expenses increased
$466,000 over the same period of prior year. Media and advertising expenses for
the three and nine month periods ended March 31,1999 increased $303,000 and
$465,000, respectively, as compared to the same period of the prior year. Other
expense categories experienced a net increase of $203,000 for the three-month
period versus the prior year and a net decrease of $109,000 for the nine-month
period versus the prior year.
Product development (research and development) expenses increased by
25%, to $3,058,000 in the third quarter of fiscal 1999 from $2,446,000 in the
same quarter of the prior year. For the nine-month period ended March 31, 1999,
these expenses increased by 17%, to $9,375,000, from $7,989,000 in the same
period last year. The following table summarizes product development
expenditures (in thousands):
15
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Expenses $ 3,058 $ 2,446 $ 9,375 $ 7,989
Amortization of previously capitalized
software development costs (2,126) (1,702) (6,888) (5,432)
-------- -------- -------- --------
Expenses, net of amortization $ 932 $ 744 $ 2,487 $ 2,557
Capitalized software development costs 3,541 2,476 8,574 7,698
-------- -------- -------- --------
Total expenditures $ 4,473 $ 3,220 $ 11,061 $ 10,255
-------- -------- -------- --------
-------- -------- -------- --------
Total expenditures as a
percent of total revenues 18.4% 13.2% 14.5% 16.0%
-------- -------- -------- --------
-------- -------- -------- --------
Capitalized software, net of amortization,
as a percent of total expenditures 31.6% 24.0% 15.2% 22.1%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
As a percentage of total revenues, product development expenditures for
the nine-month period ended March 31, 1999 decreased over expenditures in the
same period of the prior year. Product development expenditures during fiscal
1999 have been primarily focused on continued enhancements to existing products
and developing new products. During the nine months ended March 31, 1999,
software development costs capitalized included amounts attributable to the
development of additional international features (currency and language) 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 March 31,
1999 increased by 6%, to $2,056,000 from $1,940,000 in the same quarter of the
prior year. For the nine-month period ended March 31, 1999, total general and
administrative expenses increased by 11%, to $6,255,000 from $5,634,000 in the
same period of the prior year. The major reasons for the increase in these
expenses from the same periods in the prior year was an increase in employee and
travel related expenses. For the three and nine month periods ended March 31,
1999 Employee related expenses increased $53,000 and $602,000, Travel expenses
increased $50,000 and $126,000, while other expenses increased a net $13,000 for
the three month period ended March 31, 1999 and decreased a net $107,000 for the
nine month period ended March 31, 1999.
In the three month period ended March 31, 1999, the Company recorded a
provision for doubtful accounts of $442,000, as compared to $135,000 recorded in
the third quarter of fiscal 1998. In the nine-month periods ended March 31, 1999
and 1998, the Company recorded a provision of $969,000, and $941,000,
respectively. The fiscal 1999 and 1998 provisions consisted primarily of
specific customer accounts identified as being potentially uncollectible.
The litigation settlement amount for the nine-month period ended March
31, 1998 represents a first quarter 1998 adjustment to the charge that was
recorded during the fourth quarter of fiscal 1997. During fiscal 1997, the
Company settled a dispute with a customer with the understanding that the
settlement and related legal fees would be covered under the Company's business
insurance. The Company subsequently learned that the insurer took exception to
the Company's settlement with its customer and withheld payment on the claim,
pending arbitration. In
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<PAGE>
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 for the first nine months of fiscal 1999.
Amortization of other assets increased to $328,000 in the third quarter
of fiscal 1999 from $291,000 in the same quarter of the prior year. For the
nine-month period ended March 31, 1999, amortization of other assets was
$977,000, compared to $728,000 in the same period of the prior year. This
amortization relates to the purchase of the Company in 1988 and its subsequent
acquisitions of other products and companies. During fiscal 1997, the Company
acquired its Spanish distributor. The related goodwill of $1,541,000 is being
amortized over seven years. The incremental amortization of goodwill related to
the Bizware and HiPoint acquisitions, net of amortization decreases related to
products and companies that have become fully amortized, was $37,000 and
$249,000 for the three and nine month periods of fiscal 1999, respectively.
OTHER EXPENSE, NET
Other expense for the quarter ended March 31, 1999 was $329,000, as
compared to $267,000 in the same quarter of fiscal 1998. For the nine-month
period ended March 31, 1998, other expense was $662,000, as compared to other
expense of $887,000 in the same period of fiscal 1998. These amounts primarily
consisted of interest expense related to the increased borrowing by the Company
under its existing line of credit facility during the three and nine-month
periods ended March 31, 1999 versus the same period of fiscal 1998.
INCOME TAX EXPENSE
During the third quarter of fiscal 1999, the Company recorded income
tax benefit of $41,000 compared with an income tax expense of $267,000 recorded
during the same quarter in fiscal 1998. For the nine months ended March 31,
1999, the Company recorded income tax expense of $391,000, as compared to an
income tax expense of $461,000 in the same period of fiscal 1998. 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 nine months of fiscal 1999, net cash provided by operating
activities decreased $5,051,000 compared to the same period of the prior year.
An aggregate net increase in the non-cash charges for depreciation, amortization
and provisions for bad debt of $1,959,000 and an aggregate increase in the
combined cash effect of accounts payable and accrued expenses changes of
$4,119,000 were offset by decreased Company earnings of $1,976,000 and cash used
to fund increased accounts receivable of $7,295,000. The increased receivables
portfolio was a result of timing of revenues recognized, payment terms of longer
than normal but less than a year on some contracts and some degradation of the
receivables turnover in Europe. Management feels that the risk of
uncollectibility has been appropriately assessed and reflected in the
accompanying condensed, consolidated financial statements. Changes in prepaid
expenses, accrued income taxes and other miscellaneous accounts including an
extraordinary loss related to
17
<PAGE>
early debt extinguishment in the amount of $213,000 resulted in a further
decrease in cash of $1,858,000.
In the first nine months of fiscal 1999, the Company required
$10,431,000 for investing activities versus $8,775,000 over the same period of
the prior year, an increase of $1,656,000. Investment in property and equipment
increased by $935,000 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 $876,000 due to timing of development work
performed. Other investment items including payment of debt issuance cost and
expenses related to acquisitions and divestitures decreased by $155,000. The
Company financed its continuing operations for the nine months ended March 31,
1999 through cash generated from operations and available credit facilities.
On February 6, 1998, the Company closed a private placement of up to
$10,000,000 of convertible subordinated debentures to certain institutional
investors (the "Investors") pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The Investors invested $6,000,000 on
February 6, 1998 and $4,000,000 on June 11, 1998. The material agreements
between the Company and each Investor have been filed as exhibits to the Current
Report on Form 8-K filed with the Securities and Exchange Commission by the
Company on February 12, 1998. $8,461,000 and $3,333,000 of these debentures
remained outstanding at June 30, 1998 and March 31, 1999, respectively. With the
exception of the redemption described below, the difference between the original
$10,000,000 borrowing and amounts outstanding at the above mentioned dates
represents conversion of the debt into shares of the Company's Common Stock at
various conversion prices as determined in accordance with the convertible
debenture agreement. (See note G to the condensed, consolidated financial
statements.) 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. The company and the
Investor holding the convertible subordinated debenture that was not redeemed
negotiated certain changes to the conversion features of the debenture that,
among other things, precludes conversion prior to October 7, 1999.
Cash flows from financing activities decreased by $226,000 versus the same
nine-month period of the prior fiscal year. The cash used in the convertible
debenture redemption of $2,667,000 face amount of the debentures was offset by
increased cash provided by borrowing under the Company's existing credit
facility of $8,286,000, which was also necessary to fund the decrease in the net
cash provided from operating activities. Other financing activities resulted in
an increase in cash of approximately $155,000. The lack of convertible debenture
issuance in fiscal 1999 resulted in a decrease in cash of $6,000,000.
At March 31, 1999 the Company had $2,464,000 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 Rate plus 2%.
Borrowings under the credit facility are collateralized by substantially all
assets of the Company. At March 31, 1999, the Company had $12,245,000
outstanding against the $15,000,000 revolving credit facility, and based on
eligible accounts receivable at March 31, 1999, the
18
<PAGE>
Company's cash and remaining borrowing capacity under the revolving credit
facility totaled approximately $4,058,000.
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.
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 98%
complete and should be finalized in July 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 85%; 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 95%.
19
<PAGE>
Thus far, the responses received, from the Company's third party
vendors and suppliers indicate compliance on or before June 1999.
The preliminary assessment of internal information technology and
non-information technology systems has been completed. Internal non-compliant
items have been identified and prioritization of internal non-compliant items is
in process. A system for tracking remediation has been established and
non-compliant items identified are expected to be completed in June 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 $300,000 and $350,000, of which
approximately $270,000 has been incurred to date, and is summarized as follows:
Code modification and testing: $250,000 - $275,000
Personal computer, software and other upgrades $ 50,000 - $75,000
Less than 1% of the product development for 1998 and 1999 has been
allocated for code modification. Such costs are funded through cash flows from
operations and are expensed as incurred. The personal computer and purchased
software upgrades are costs incurred in the ordinary course of business and are,
therefore, typically capitalized costs.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES AND THE COMPANY'S CONTINGENCY
PLANS
A most reasonably likely worst case Year 2000 scenario is not known at
this time. This determination will be made after the receipt of the remaining
material third party questionnaires. However, the shipment of software to
customers is expected to continue with no interruption and no material loss of
revenues is anticipated. The Year 2000 project has had minimal impact on the
schedule of other major information technology projects.
The Company has not completed a contingency plan; however, each
facility will incorporate the Year 2000 scenario into their existing disaster
contingency plan by June 1999. The contingency plan will ensure that the
necessary backup measures for computer processing are identified.
20
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
21
<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.
During the second quarter of fiscal 1999, the Investors converted an
aggregate principal amount of $1,583,000 plus accrued interest through the date
of conversion into 671,000 shares of the Company's Common Stock through several
transactions which were priced and executed in accordance with the convertible
debenture agreement.
During the third quarter of fiscal 1999, no convertible debentures were
converted to common stock, and the remaining debenture holder is in a negotiated
lock out from conversion until October 7, 1999.
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.
3.1 Certificate of Incorporation of the Registrant, as ammended (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
10.4 Employment Agreement, dated as of January 7, 1999, between Mr. Dennis
Vohs and the Registrant
27.1 Financial Data Schedule
22
<PAGE>
(1) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 8-K filed July 24, 1998.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's
current report on form 8-K filed February 12, 1998.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 10-K/A filed April 30, 1998.
(b) Reports on Form 8-K
On April 2, 1999, the Company filed a form 8-K with the Securities and
Exchange Commission to announce preliminary results for the third quarter of
fiscal 1999 ended March 31, 1999.
ITEMS 1, 3 ,4 AND 5 HAVE BEEN OMITTED, AS THEY ARE NOT APPLICABLE.
23
<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: May 14,1999 /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)
24
<PAGE>
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
NO. -----------
-------
10.3 Employment Agreement dated as of January 7, 1999, between the
Registrant and Mr. Patrick Tinley
10.4 Employment Agreement dated as of January 7, 1999, between the
Registrant and Mr. Dennis Vohs
27.1 Financial Data Schedule
- -----------
25
<PAGE>
Exhibit 10.3
EXECUTIVE COMPENSATION AGREEMENT
THIS EXECUTIVE COMPENSATION AGREEMENT is entered into as of January 7,
1999, by and between J. PATRICK TINLEY (the "Employee") and ROSS SYSTEMS, INC.,
a Delaware corporation (the "Company").
1. TERM OF EMPLOYMENT.
(a) BASIC RULE. The Company agrees to continue the Employee's
employment, and the Employee agrees to remain in employment with the Company,
from the date hereof until the date when the Employee's employment terminates
pursuant to Subsection (b), (c) or (d) below.
(b) EARLY TERMINATION. Subject to Section 6, the Company may terminate
the Employee's employment by giving the Employee ninety (90) days' advance
notice in writing. The Employee may terminate his employment by giving the
Company thirty (30) days' advance notice in writing. The Employee's employment
shall terminate automatically in the event of his death. Any waiver of notice
shall be valid only if it is made in writing and expressly refers to the
applicable notice requirement of this Section 1.
(c) CAUSE. The Company may at any time terminate the Employee's
employment for Cause by giving the Employee notice in writing. For all purposes
under this Agreement, "Cause" shall mean:
(i) A willful act by the Employee which constitutes fraud and
which is injurious to the Company; or
(ii) Conviction of, or a plea of "guilty" or "no contest" to,
a felony; or
(iii) Employee's continuing repeated willful failure or
refusal to perform his material duties required by this Agreement which
is injurious to the Company.
No act, or failure to act, by the Employee shall be considered "willful" unless
committed without good faith and without a reasonable belief that the act or
omission was in the Company's best interest. This Agreement may not be
terminated for Cause unless Employee has first been given the opportunity,
together with his counsel, to be heard before the Company's Board of Directors.
(d) DISABILITY. The Company may terminate the Employee's active
employment due to Disability by giving the Employee ninety (90) days' advance
notice in writing. For all purposes under this Agreement, "Disability" shall
mean that Employee, at the time notice is given, has become eligible to receive
immediate long-term disability benefits under the Company's long-term disability
insurance plan or, if there is no such plan, under the federal Social Security
program. In the event that the Employee resumes the performance of
<PAGE>
substantially all of his duties hereunder before the termination of his active
employment under this Subsection (d) becomes effective, the notice of
termination shall automatically be deemed to have been revoked.
(e) RIGHTS UPON TERMINATION. Except as expressly provided in Section 6
or provided in subparagraph (f) of this Section 1, upon the termination of the
Employee's employment pursuant to this Section 1, the Employee shall only be
entitled to the compensation, benefits and reimbursements described in Sections
3, 4 and 5 for the period preceding the effective date of the termination. The
payments under this Agreement shall fully discharge all responsibilities of the
Company to the Employee upon the termination of his employment.
(f) In the event that the Company terminates the employment of the
Employee without Cause (as defined in Section 3 of this Agreement), Employee
shall be entitled to the following:
(i) an amount equal to two (2) times the Employee's annual
rate of Base Compensation as in effect at the time of such termination,
to be paid by the Company on a semi-monthly basis;
(ii) continuation of the employee benefits provided to
Employee pursuant to Section 4 hereof for a period of two (2) years
after such termination; and
(iii) a period of ninety days (90) to exercise all Incentive
Awards (as defined in Section 6(e) of this Agreement) that are vested
at the time of such termination.
(g) TERMINATION OF AGREEMENT. This Agreement shall terminate when all
obligations of the parties hereunder have been satisfied.
2. DUTIES AND SCOPE OF EMPLOYMENT.
(a) POSITION. The Company agrees to employ the Employee as its
President and Chief Operating Officer for the term of his employment under this
Agreement. At all times during the term of this Agreement, Employee shall have
powers and duties at least commensurate with his position as President and Chief
Operating Officer of the Company. The Employee shall report only to the Chairman
of the Company's Board of Directors.
(b) OBLIGATIONS. During the term of his employment under this
Agreement, the Employee shall devote his full business efforts and time to the
Company and its subsidiaries. The Employee shall not render services to any
other for-profit corporation or entity without the prior written consent of the
Company's Board. This Subsection (b) shall not preclude the Employee from
engaging in appropriate professional, educational, civic, charitable or
religious activities or from devoting a reasonable amount of time to private
investments that do not interfere or conflict with his responsibilities to the
Company.
2
<PAGE>
3. BASE COMPENSATION. During the term of his employment under this
Agreement, the Company agrees to pay the Employee as compensation for his
services a base salary at the annual rate of $255,000 or at such higher rate as
the Company may determine from time to time. Such salary shall be payable in
accordance with the Company's standard payroll procedures. Once the Company has
increased such salary, it thereafter shall not be reduced. (The annual
compensation specified in this Section 3, together with any increases in such
compensation that the Company may grant from time to time, is referred to in
this Agreement as "Base Compensation.")
4. EMPLOYEE BENEFITS. During the term of his employment under this
Agreement, the Employee shall be eligible for the fringe benefits, bonuses,
vacations, employee benefit plans and executive compensation programs maintained
by the Company for other senior executives, subject in each case to the
generally applicable terms and conditions of the plan or program in question and
to the determinations of any person or committee administering such plan or
program.
5. BUSINESS EXPENSES. During the term of his employment under this
Agreement, the Employee shall be authorized to incur necessary and reasonable
travel, entertainment and other business expenses in connection with his duties
hereunder. The Company shall reimburse the Employee for such expenses upon
presentation of an itemized account and appropriate supporting documentation,
all in accordance with the Company's generally applicable policies.
6. CHANGE IN CONTROL.
(a) DEFINITION. For all purposes under this Agreement, "Change in
Control" shall mean the occurrence of any of the following events after the date
of this Agreement:
(i) Any "person" (as such term in used in sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) by the acquisition or aggregation of securities is or becomes
the beneficial owner (within the meaning of Rule 13d-3 of the Exchange
Act), directly or indirectly, of securities of the Company representing
fifty percent (50%) or more of the combined voting power of the
Company's then outstanding securities ordinarily (and apart from rights
accruing under special circumstances) having the right to vote at
elections of directors (the "Base Capital Stock"); except that any
change in the relative beneficial ownership of the Company's securities
by any person resulting solely from a reduction in the aggregate number
of outstanding shares of Base Capital Stock, and any decrease
thereafter in such person's ownership of securities, shall be
disregarded until such person increases in any manner, directly or
indirectly, such person's beneficial ownership of any securities of the
Company;
(ii) The stockholders of the Company approve a definitive
agreement (A) to merge or consolidate the Company with or into another
corporation in which the holders of the securities of the Company
before such merger or reorganization will not, immediately following
such merger or reorganization, hold as a group on a fully diluted
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basis both the ability to elect at least a majority of the directors of
the surviving corporation and at least a majority in value of the
surviving corporation's outstanding equity securities, or (B) to sell
or otherwise dispose of all or substantially all of the assets of the
Company or dissolve or liquidate the Company; or
(b) GOOD REASON. For all purposes under this Agreement, "Good Reason"
shall mean that the Employee:
(i) Has incurred a material reduction in his powers or duties;
(ii) Has incurred one or more reductions in his Base
Compensation in the cumulative amount of five percent (5%) or more; or
(iii) Has been notified that his principal place of work will
be relocated by a distance of 50 miles or more.
(c) SEVERANCE PAYMENT. The Employee shall be entitled to receive salary
continuation payments from the Company (the "Severance Payment") if, during the
term of this Agreement and within the first nine (9) month period after the
occurrence of a Change in Control either:
(i) The Employee voluntarily resigns his employment for Good
Reason; or
(ii) The Company terminates the Employee's employment for any
reason other than Cause or Disability.
The Severance Payments shall be paid by the Company on a
semi-monthly basis; following the date of the employment termination and shall
be in an amount determined under Subsection (d) below. The Severance Pay-out
shall be in lieu of any further payments to the Employee under Section 3 and any
further accrual of benefits under Section 4 with respect to periods subsequent
to the date of the employment termination.
(d) AMOUNT. The amount of the Severance Payments shall in total equal
to two (2) times the Employee's annual rate of Base Compensation, as in effect
on the date of the employment termination.
(e) INCENTIVE PROGRAMS. If, during the term of this Agreement, a Change
in Control occurs with respect to the Company, the vesting of all of Employee's
awards heretofore or hereafter granted to him under all stock option, stock
appreciation rights, restricted stock, phantom stock or similar plans or
agreements of the Company ("Incentive Awards") shall be immediately accelerated
regardless of any provisions in such plans or agreements that do not provide for
such acceleration of vesting. In addition, Employee will have at ninety (90)
days following the date his employment is terminated to exercise all of such
Incentive Awards regardless of any provisions in any plans or agreements to the
contrary. This Agreement shall be deemed to be an amendment of such plans or
agreements to the extent required to implement this
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subsection (e) and preserve the qualified status of Employee's incentive stock
options for the longest time permitted by applicable law. (To the extent that
such plans or agreements provide for full vesting on an earlier date than does
this Agreement, or for longer post-termination of employment exercise periods,
such plans or agreements shall prevail.)
(f) INSURANCE COVERAGE. During the twenty-four (24) month period
commencing upon a termination of employment described in Subsection (c) above,
the Employee (and, where applicable, his dependents) shall be entitled to
continue participation in the group insurance plans maintained by the Company,
including life, disability and health insurance programs, as if he were still an
employee of the Company. Where applicable, the Employee's salary for purposes of
such plans shall be deemed to be equal to his Base Compensation. To the extent
that the Company finds it impossible to cover the Employee under its group
insurance policies during such twenty-four (24) month period, the Company shall
provide the Employee with individual policies which offer at least the same
level or coverage and which impose not more than the same costs on him. The
foregoing notwithstanding, in the event that the Employee becomes eligible for
comparable group insurance coverage in connection with new employment, the
coverage provided by the Company under this Subsection (f) shall terminate
immediately. Any group health continuation coverage that the Company is required
to offer under the Consolidated Omnibus Budget Reconciliation Act of 1986
("COBRA") shall commence when coverage under this Subsection (f) terminates.
(g) NO MITIGATION. The Employee shall not be required to mitigate the
amount of any payment contemplated by this Section 6 (whether by seeking new
employment or in any other manner). Except as expressly provided in Subsection
(f) above, no such payment shall be reduced by earnings that the Employee may
receive from any other source.
7. LIMITATION ON PAYMENTS.
(a) APPLICATION. This Section 7 shall apply to the Employee only if,
after the application of this Section 7, the present value of his aggregate
payments or property transfers from the Company will be greater than the present
value of his payments or property transfers from the Company would have been if:
(i) This Section 7 did not apply; and
(ii) Such present value had been reduced by the amount of the
excise tax described in section 4999 of the Internal Revenue Code of
1986, as amended (the "Code").
In all other cases, this Section 7 shall not apply to the Employee. All
determinations under this Subsection (a) shall be made by the independent
auditors retained by the Company most recently prior to the Change in Control
(the "Auditors").
(b) BASIC RULE. Any provision of this Agreement other than Subsection
(a) above to the contrary notwithstanding, in the event that the Auditors
determine that any payment or
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transfer by the Company to or for the benefit of the Employee, whether paid or
payable (or transferred or transferable) pursuant to the terms of this Agreement
or otherwise (a "Payment"), would be nondeductible by the Company for federal
income tax purposes because of the provisions concerning "excess parachute
payments" in section 280G of the Code, then the aggregate present value of all
Payments shall be reduced (but not below zero) to the Reduced Amount. For
purposes of this Section 7, the "Reduced Amount" shall be the amount, expressed
as a present value, which maximizes the aggregate present value of the Payments
without causing any Payment to be nondeductible
(c) REDUCTIONS. If the amount of the aggregate payments or property
transfers to the Employee must be reduced under this Section 7, then the Company
shall direct in which order the payments or transfers are to be reduced, but no
change in the timing of any payment or transfer shall be made without the
Employee's consent. As a result of uncertainty in the application of sections
280G and 4999 of the Code at the time of an initial determination by the
Auditors hereunder, it is possible that a payment will have been made by the
Company that should not have been made (an "Overpayment") or that an additional
payment that will not have been made by the Company could have been made (an
"Underpayment"). In the event that the Auditors, based upon the assertion of a
deficiency by the Internal Revenue Service against the Company or the Employee
that the Auditors believe has a high probability of success, determine that an
Overpayment has been made, such Overpayment shall be treated for all purposes as
a loan to the Employee that he shall repay to the Company, together with
interest at the applicable federal rate specified in section 7872 (f) (2) of the
Code; provided, however, that no amount shall be payable by the Employee to the
Company if and to the extent that such payment would not reduce the amount that
is nondeductible under section 280G of the Code or is subject to an excise tax
under section 4999 of the Code. In the event that the Auditors determine that an
Underpayment has occurred, such Underpayment shall promptly be paid or
transferred by the Company to, or for the benefit of, the Employee, together
with interest at the applicable federal rate specified in section 7872 (f) (2)
of the Code.
8. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. The Company shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets, by an agreement in substance and form
satisfactory to the Employee, to assume this Agreement and to agree expressly to
perform this Agreement in the same manner and to the same extent as the Company
would be required to perform it in the absence of a succession. The Company's
failure to obtain such agreement prior to the effectiveness of a succession
shall be a breach of this Agreement and shall entitle the Employee to all of the
compensation and benefits to which he would have been entitled hereunder if the
Company had involuntarily terminated his employment without Cause immediately
after such succession becomes effective. For all purposes under this Agreement,
the term "Company" shall include any successor to the Company's business and/or
assets which executes and delivers the assumption agreement described in this
Subsection (a) or which becomes bound by this Agreement by operation of law.
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(b) EMPLOYEE'S SUCCESSORS. This Agreement and all rights of the
Employee hereunder shall inure to the benefit of, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
9. RESTRICTIVE COVENANTS.
(a) For purposes of this Agreement, the following terms shall
have the following respective meanings:
"COMPETING BUSINESS" means a business that, wholly or partly,
directly or indirectly, is engaged in providing, selling or marketing
enterprise-wide business systems and related services to companies
installing client-server software products.
"COMPETITIVE POSITION" means: (A) Employee's direct or
indirect equity ownership (excluding ownership of less than one percent
(1%) of the outstanding common stock of any publicly held corporation)
or control of any portion of any Competing Business; (B) Employee
serving as a director, officer, consultant, lender, joint venturer,
partner, agent, advisor or independent contractor of or to any
Competing Business; or (C) any employment arrangement between Employee
and any Competing Business whereby Employee is required to perform
services for the Competing Business substantially similar to those that
Employee performed for the Company.
"RESTRICTED TERRITORY" means the United States of America and
Canada.
(b) Employee agrees that he will not, without the prior
written consent of the Board, either directly or indirectly, alone or in
conjunction with any other person or entity, accept, enter into or attempt to
enter into a Competitive Position in the Restricted Territory at any time during
his employment with the Company or, in the event the Company terminates the
employment of the Employee without Cause, for a period of two (2) years
thereafter.
(c) Employee agrees that he will not, without the prior
written consent of the Board, either directly or indirectly, alone or in
conjunction with any other person or entity, solicit, entice or induce any
customer of the Company (or any actively sought or prospective customer of the
Company) for or on behalf of any Competing Business at any time during his
employment with the Company or, in the event the Company terminates the
employment of the Employee without Cause, for a period of two (2) years
thereafter.
(d) Employee agrees that he will not, without the prior
written consent of the Board, either directly or indirectly, alone or in
conjunction with any other person or entity, solicit or attempt to solicit any
"key or material" employee, consultant, contractor or other personnel of the
Company to terminate, alter or lessen that party's affiliation with the Company
or to violate the terms of any agreement or understanding between such employee,
consultant, contractor or other person and the Company at any time during his
employment with the Company or, in the event the Company terminates the
employment of the Employee without Cause, for a period of two (2) years
thereafter. For purposes of this subsection (d), "key or
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material" employees, consultants, contractors or other personnel shall mean
those such persons or entities who have direct access to or have had substantial
exposure to Confidential Information or Trade Secrets.
(e) The provisions of Subsections (b), (c) and (d) of this
Section 9 shall not apply if, following the occurrence of a Change in Control,
(i) the Employee voluntarily resigns his employment with the Company for any
reason or (ii) the Company terminates the Employee's employment for any reason.
10. CONFIDENTIALITY.
(a) For purposes of this Agreement, the following terms shall
have the following respective meanings:
"CONFIDENTIAL INFORMATION" means all valuable proprietary and
confidential business information belonging to or pertaining to the
Company and its affiliates and subsidiaries, other than "Trade Secrets"
(as defined below), that is not generally known by or available to the
competitors of the Company but is generally known only to the Company
and those of its employees, independent contractors, customers or
agents to whom such information must be confided for internal business
purposes.
"TRADE SECRETS" means the "trade secrets" of the Company as
defined under applicable law.
(b) In recognition of the Company's need to protect its
legitimate business interests, Employee hereby covenants and agrees that he
shall regard and treat each item of information or data constituting a Trade
Secret or Confidential Information as strictly confidential and wholly owned by
the Company and that he will not use, distribute, disclose, reproduce or
otherwise communicate any such item of information or data to any person or
entity for any purpose other than in connection with his performance of his
obligations under this Agreement. The covenant contained in the preceding
sentence shall apply: (i) with respect to Confidential Information, at all times
Employee is employed by the Company and for a period of three (3) years
thereafter; and (ii) with respect to Trade Secrets, at all times such data or
information constitutes a "trade secret" under applicable law.
11. MISCELLANEOUS PROVISIONS.
(a) NOTICE. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
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(b) WAIVER. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by an authorized officer of the Company (other
than the Employee). No waiver by either party of any breach of, or of compliance
with, any condition or provision of this Agreement by the other party shall be
considered a waiver of any other condition or provision or of the same condition
or provision at another time.
(c) WHOLE AGREEMENT; AMENDMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement shall not
be modified or amended except by an instrument in writing signed by or on behalf
of the parties hereto.
(d) NO SETOFF; WITHHOLDING TAXES. There shall be no right of setoff or
counterclaim, with respect to any claim, debt or obligation, against payments to
the Employee under this Agreement. All payments made under this Agreement shall
be subject to reduction to reflect taxes required to be withheld by law.
(e) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Georgia.
(f) SEVERABILITY. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not effect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(g) ARBITRATION. Except as otherwise provided in this Agreement, any
controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled by arbitration in Atlanta, Georgia in accordance with
the Commercial Arbitration Rules of the American Arbitration Association.
Judgment on the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. All fees and expenses of the arbitrator and such
Association shall be paid as determined by the arbitrator.
(h) NO ASSIGNMENT. The rights of any person to payments or benefits
under this Agreement shall not be made subject to option or assignment, either
by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this Subsection (h) shall be void.
(i) COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall for all purposes be deemed an original, and all of such
counterparts shall together constitute one and the same agreement.
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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
----------------------------------
J. Patrick Tinley
ROSS SYSTEMS, INC.
By:
-------------------------------
Title:
----------------------------
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Exhibit 10.4
EXECUTIVE COMPENSATION AGREEMENT
THIS EXECUTIVE COMPENSATION AGREEMENT is entered into as of January 7,
1999, by and between DENNIS V. VOHS (the "Employee") and ROSS SYSTEMS, INC., a
Delaware corporation (the "Company").
1. TERM OF EMPLOYMENT.
(a) BASIC RULE. The Company agrees to continue the Employee's
employment, and the Employee agrees to remain in employment with the Company,
from the date hereof until the date when the Employee's employment terminates
pursuant to Subsection (b), (c) or (d) below.
(b) EARLY TERMINATION. Subject to Section 6, the Company may terminate
the Employee's employment by giving the Employee ninety (90) days' advance
notice in writing. The Employee may terminate his employment by giving the
Company thirty (30) days' advance notice in writing. The Employee's employment
shall terminate automatically in the event of his death. Any waiver of notice
shall be valid only if it is made in writing and expressly refers to the
applicable notice requirement of this Section 1.
(c) CAUSE. The Company may at any time terminate the Employee's
employment for Cause by giving the Employee notice in writing. For all purposes
under this Agreement, "Cause" shall mean:
(i) A willful act by the Employee which constitutes fraud and
which is injurious to the Company; or
(ii) Conviction of, or a plea of "guilty" or "no contest" to,
a felony; or
(iii) Employee's continuing repeated willful failure or
refusal to perform his material duties required by this Agreement which
is injurious to the Company.
No act, or failure to act, by the Employee shall be considered "willful" unless
committed without good faith and without a reasonable belief that the act or
omission was in the Company's best interest. This Agreement may not be
terminated for Cause unless Employee has first been given the opportunity,
together with his counsel, to be heard before the Company's Board of Directors.
(d) DISABILITY. The Company may terminate the Employee's active
employment due to Disability by giving the Employee ninety (90) days' advance
notice in writing. For all purposes under this Agreement, "Disability" shall
mean that Employee, at the time notice is given, has become eligible to receive
immediate long-term disability benefits under the Company's long-term disability
insurance plan or, if there is no such plan, under the federal Social Security
program. In the event that the Employee resumes the performance of
<PAGE>
substantially all of his duties hereunder before the termination of his active
employment under this Subsection (d) becomes effective, the notice of
termination shall automatically be deemed to have been revoked.
(e) RIGHTS UPON TERMINATION. Except as expressly provided in Section 6
or provided in subparagraph (f) of this Section 1, upon the termination of the
Employee's employment pursuant to this Section 1, the Employee shall only be
entitled to the compensation, benefits and reimbursements described in Sections
3, 4 and 5 for the period preceding the effective date of the termination. The
payments under this Agreement shall fully discharge all responsibilities of the
Company to the Employee upon the termination of his employment.
(f) In the event that the Company terminates the employment of the
Employee without Cause (as defined in Section 3 of this Agreement), Employee
shall be entitled to the following:
(i) an amount equal to two (2) times the Employee's annual
rate of Base Compensation as in effect at the time of such termination,
to be paid by the Company on a semi-monthly basis;
(ii) continuation of the employee benefits provided to
Employee pursuant to Section 4 hereof for a period of two (2) years
after such termination; and
(iii) a period of ninety (90) days to exercise all Incentive
Awards (as defined in Section 6(e) of this Agreement) that are vested
at the time of such termination.
(g) TERMINATION OF AGREEMENT. This Agreement shall terminate when all
obligations of the parties hereunder have been satisfied.
2. DUTIES AND SCOPE OF EMPLOYMENT.
(a) POSITION. The Company agrees to employ the Employee as its Chief
Executive Officer and Chairman of the Board of Directors for the term of his
employment under this Agreement. At all times during the term of this Agreement,
Employee shall have powers and duties at least commensurate with his position as
Chairman of the Board and Chief Executive Officer of the Company. The Employee
shall report only to the Company's Board of Directors.
(b) OBLIGATIONS. During the term of his employment under this
Agreement, the Employee shall devote his full business efforts and time to the
Company and its subsidiaries. The Employee shall not render services to any
other for-profit corporation or entity without the prior written consent of the
Company's Board. This Subsection (b) shall not preclude the Employee from
engaging in appropriate professional, educational, civic, charitable or
religious activities or from devoting a reasonable amount of time to private
investments that do not interfere or conflict with his responsibilities to the
Company.
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3. BASE COMPENSATION. During the term of his employment under this
Agreement, the Company agrees to pay the Employee as compensation for his
services a base salary at the annual rate of $360,000 or at such higher rate as
the Company may determine from time to time. Such salary shall be payable in
accordance with the Company's standard payroll procedures. Once the Company has
increased such salary, it thereafter shall not be reduced. (The annual
compensation specified in this Section 3, together with any increases in such
compensation that the Company may grant from time to time, is referred to in
this Agreement as "Base Compensation.")
4. EMPLOYEE BENEFITS. During the term of his employment under this
Agreement, the Employee shall be eligible for the fringe benefits, bonuses,
vacations, employee benefit plans and executive compensation programs maintained
by the Company for other senior executives, subject in each case to the
generally applicable terms and conditions of the plan or program in question and
to the determinations of any person or committee administering such plan or
program.
5. BUSINESS EXPENSES. During the term of his employment under this
Agreement, the Employee shall be authorized to incur necessary and reasonable
travel, entertainment and other business expenses in connection with his duties
hereunder. The Company shall reimburse the Employee for such expenses upon
presentation of an itemized account and appropriate supporting documentation,
all in accordance with the Company's generally applicable policies.
6. CHANGE IN CONTROL.
(a) DEFINITION. For all purposes under this Agreement, "Change in
Control" shall mean the occurrence of any of the following events after the date
of this Agreement:
(i) Any "person" (as such term in used in sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) by the acquisition or aggregation of securities is or becomes
the beneficial owner (within the meaning of Rule 13d-3 of the Exchange
Act), directly or indirectly, of securities of the Company representing
fifty percent (50%) or more of the combined voting power of the
Company's then outstanding securities ordinarily (and apart from rights
accruing under special circumstances) having the right to vote at
elections of directors (the "Base Capital Stock"); except that any
change in the relative beneficial ownership of the Company's securities
by any person resulting solely from a reduction in the aggregate number
of outstanding shares of Base Capital Stock, and any decrease
thereafter in such person's ownership of securities, shall be
disregarded until such person increases in any manner, directly or
indirectly, such person's beneficial ownership of any securities of the
Company;
(ii) The stockholders of the Company approve a definitive
agreement (A) to merge or consolidate the Company with or into another
corporation in which the holders of the securities of the Company
before such merger or reorganization will not, immediately following
such merger or reorganization, hold as a group on a fully diluted
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basis both the ability to elect at least a majority of the directors of
the surviving corporation and at least a majority in value of the
surviving corporation's outstanding equity securities, or (B) to sell
or otherwise dispose of all or substantially all of the assets of the
Company or dissolve or liquidate the Company; or
(b) GOOD REASON. For all purposes under this Agreement, "Good Reason"
shall mean that the Employee:
(i) Has incurred a material reduction in his powers or duties;
(ii) Has incurred one or more reductions in his Base
Compensation in the cumulative amount of five percent (5%) or more; or
(iii) Has been notified that his principal place of work will
be relocated by a distance of 50 miles or more.
(c) SEVERANCE PAYMENT. The Employee shall be entitled to receive salary
continuation payments from the Company (the "Severance Payment") if, during the
term of this Agreement and within the first nine (9) month period after the
occurrence of a Change in Control either:
(i) The Employee voluntarily resigns his employment for Good
Reason; or
(ii) The Company terminates the Employee's employment for any
reason other than Cause or Disability.
The Severance Payments in an amount determined under
Subsection (d) below shall be paid by the Company on a semi-monthly
basis following the date of the employment termination. The Severance
Payments shall be in lieu of any further payments to the Employee under
Section 3 and any further accrual of benefits under Section 4 with
respect to periods subsequent to the date of the employment
termination.
(d) AMOUNT. The amount of the Severance Payments shall in total equal
to two (2) times the Employee's annual rate of Base Compensation, as in effect
on the date of the employment termination.
(e) INCENTIVE PROGRAMS. If, during the term of this Agreement, a Change
in Control occurs with respect to the Company, the vesting of all of Employee's
awards heretofore or hereafter granted to him under all stock option, stock
appreciation rights, restricted stock, phantom stock or similar plans or
agreements of the Company ("Incentive Awards") shall be immediately accelerated
regardless of any provisions in such plans or agreements that do not provide for
such acceleration of vesting. In addition, Employee will have at least ninety
days (90) following the date his employment is terminated to exercise all of
such Incentive Awards regardless of any provisions in any plans or agreements to
the contrary. This Agreement shall be
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deemed to be an amendment of such plans or agreements to the extent required to
implement this subsection (e) and preserve the qualified status of Employee's
incentive stock options for the longest time permitted by applicable law. (To
the extent that such plans or agreements provide for full vesting on an earlier
date than does this Agreement, or for longer post-termination of employment
exercise periods, such plans or agreements shall prevail.)
(f) INSURANCE COVERAGE. During the twenty-four (24) month period
commencing upon a termination of employment described in Subsection (c) above,
the Employee (and, where applicable, his dependents) shall be entitled to
continue participation in the group insurance plans maintained by the Company,
including life, disability and health insurance programs, as if he were still an
employee of the Company. Where applicable, the Employee's salary for purposes of
such plans shall be deemed to be equal to his Base Compensation. To the extent
that the Company finds it impossible to cover the Employee under its group
insurance policies during such twenty-four (24) month period, the Company shall
provide the Employee with individual policies which offer at least the same
level or coverage and which impose not more than the same costs on him. The
foregoing notwithstanding, in the event that the Employee becomes eligible for
comparable group insurance coverage in connection with new employment, the
coverage provided by the Company under this Subsection (f) shall terminate
immediately. Any group health continuation coverage that the Company is required
to offer under the Consolidated Omnibus Budget Reconciliation Act of 1986
("COBRA") shall commence when coverage under this Subsection (f) terminates.
(g) NO MITIGATION. The Employee shall not be required to mitigate the
amount of any payment contemplated by this Section 6 (whether by seeking new
employment or in any other manner). Except as expressly provided in Subsection
(f) above, no such payment shall be reduced by earnings that the Employee may
receive from any other source.
7. LIMITATION ON PAYMENTS.
(a) APPLICATION. This Section 7 shall apply to the Employee only if,
after the application of this Section 7, the present value of his aggregate
payments or property transfers from the Company will be greater than the present
value of his payments or property transfers from the Company would have been if:
(i) This Section 7 did not apply; and
(ii) Such present value had been reduced by the amount of the
excise tax described in section 4999 of the Internal Revenue Code of
1986, as amended (the "Code").
In all other cases, this Section 7 shall not apply to the Employee. All
determinations under this Subsection (a) shall be made by the independent
auditors retained by the Company most recently prior to the Change in Control
(the "Auditors").
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(b) BASIC RULE. Any provision of this Agreement other than Subsection
(a) above to the contrary notwithstanding, in the event that the Auditors
determine that any payment or transfer by the Company to or for the benefit of
the Employee, whether paid or payable (or transferred or transferable) pursuant
to the terms of this Agreement or otherwise (a "Payment"), would be
nondeductible by the Company for federal income tax purposes because of the
provisions concerning "excess parachute payments" in section 280G of the Code,
then the aggregate present value of all Payments shall be reduced (but not below
zero) to the Reduced Amount. For purposes of this Section 7, the "Reduced
Amount" shall be the amount, expressed as a present value, which maximizes the
aggregate present value of the Payments without causing any Payment to be
nondeductible
(c) REDUCTIONS. If the amount of the aggregate payments or property
transfers to the Employee must be reduced under this Section 7, then the Company
shall direct in which order the payments or transfers are to be reduced, but no
change in the timing of any payment or transfer shall be made without the
Employee's consent. As a result of uncertainty in the application of sections
280G and 4999 of the Code at the time of an initial determination by the
Auditors hereunder, it is possible that a payment will have been made by the
Company that should not have been made (an "Overpayment") or that an additional
payment that will not have been made by the Company could have been made (an
"Underpayment"). In the event that the Auditors, based upon the assertion of a
deficiency by the Internal Revenue Service against the Company or the Employee
that the Auditors believe has a high probability of success, determine that an
Overpayment has been made, such Overpayment shall be treated for all purposes as
a loan to the Employee that he shall repay to the Company, together with
interest at the applicable federal rate specified in section 7872 (f) (2) of the
Code; provided, however, that no amount shall be payable by the Employee to the
Company if and to the extent that such payment would not reduce the amount that
is nondeductible under section 280G of the Code or is subject to an excise tax
under section 4999 of the Code. In the event that the Auditors determine that an
Underpayment has occurred, such Underpayment shall promptly be paid or
transferred by the Company to, or for the benefit of, the Employee, together
with interest at the applicable federal rate specified in section 7872 (f) (2)
of the Code.
8. SUCCESSORS.
(a) COMPANY'S SUCCESSORS. The Company shall require any successor
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets, by an agreement in substance and form
satisfactory to the Employee, to assume this Agreement and to agree expressly to
perform this Agreement in the same manner and to the same extent as the Company
would be required to perform it in the absence of a succession. The Company's
failure to obtain such agreement prior to the effectiveness of a succession
shall be a breach of this Agreement and shall entitle the Employee to all of the
compensation and benefits to which he would have been entitled hereunder if the
Company had involuntarily terminated his employment without Cause immediately
after such succession becomes effective. For all purposes under this Agreement,
the term "Company" shall include any successor to the Company's business and/or
assets which
6
<PAGE>
executes and delivers the assumption agreement described in this Subsection (a)
or which becomes bound by this Agreement by operation of law.
(b) EMPLOYEE'S SUCCESSORS. This Agreement and all rights of the
Employee hereunder shall inure to the benefit of, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
9. RESTRICTIVE COVENANTS.
(a) For purposes of this Agreement, the following terms shall
have the following respective meanings:
"COMPETING BUSINESS" means a business that, wholly or partly,
directly or indirectly, is engaged in providing, selling or marketing
enterprise-wide business systems and related services to companies
installing client-server software products.
"COMPETITIVE POSITION" means: (A) Employee's direct or
indirect equity ownership (excluding ownership of less than one percent
(1%) of the outstanding common stock of any publicly held corporation)
or control of any portion of any Competing Business; (B) Employee
serving as a director, officer, consultant, lender, joint venturer,
partner, agent, advisor or independent contractor of or to any
Competing Business; or (C) any employment arrangement between Employee
and any Competing Business whereby Employee is required to perform
services for the Competing Business substantially similar to those that
Employee performed for the Company.
"RESTRICTED TERRITORY" means the United States of America and
Canada.
(b) Employee agrees that he will not, without the prior
written consent of the Board, either directly or indirectly, alone or in
conjunction with any other person or entity, accept, enter into or attempt to
enter into a Competitive Position in the Restricted Territory at any time during
his employment with the Company or, in the event the Company terminates the
employment of the Employee without Cause, for a period of two (2) years
thereafter.
(c) Employee agrees that he will not, without the prior
written consent of the Board, either directly or indirectly, alone or in
conjunction with any other person or entity, solicit, entice or induce any
customer of the Company (or any actively sought or prospective customer of the
Company) for or on behalf of any Competing Business at any time during his
employment with the Company or, in the event the Company terminates the
employment of the Employee without Cause, for a period of two (2) years
thereafter.
(d) Employee agrees that he will not, without the prior
written consent of the Board, either directly or indirectly, alone or in
conjunction with any other person or entity, solicit or attempt to solicit any
"key or material" employee, consultant, contractor or other personnel of the
Company to terminate, alter or lessen that party's affiliation with the Company
or to violate the terms of any agreement or understanding between such employee,
consultant,
7
<PAGE>
contractor or other person and the Company at any time during his employment
with the Company or, in the event the Company terminates the employment of the
Employee without Cause, for a period of two (2) years thereafter. For purposes
of this subsection (d), "key or material" employees, consultants, contractors or
other personnel shall mean those such persons or entities who have direct access
to or have had substantial exposure to Confidential Information or Trade
Secrets.
(e) The provisions of Subsections (b), (c) and (d) of this
Section 9 shall not apply if, following the occurrence of a Change in Control,
(i) the Employee voluntarily resigns his employment with the Company for any
reason or (ii) the Company terminates the Employee's employment for any reason.
10. CONFIDENTIALITY.
(a) For purposes of this Agreement, the following terms shall
have the following respective meanings:
"CONFIDENTIAL INFORMATION" means all valuable proprietary and
confidential business information belonging to or pertaining to the
Company and its affiliates and subsidiaries, other than "Trade Secrets"
(as defined below), that is not generally known by or available to the
competitors of the Company but is generally known only to the Company
and those of its employees, independent contractors, customers or
agents to whom such information must be confided for internal business
purposes.
"TRADE SECRETS" means the "trade secrets" of the Company as
defined under applicable law.
(b) In recognition of the Company's need to protect its
legitimate business interests, Employee hereby covenants and agrees that he
shall regard and treat each item of information or data constituting a Trade
Secret or Confidential Information as strictly confidential and wholly owned by
the Company and that he will not use, distribute, disclose, reproduce or
otherwise communicate any such item of information or data to any person or
entity for any purpose other than in connection with his performance of his
obligations under this Agreement. The covenant contained in the preceding
sentence shall apply: (i) with respect to Confidential Information, at all times
Employee is employed by the Company and for a period of three (3) years
thereafter; and (ii) with respect to Trade Secrets, at all times such data or
information constitutes a "trade secret" under applicable law.
11. MISCELLANEOUS PROVISIONS.
(a) NOTICE. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
8
<PAGE>
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) WAIVER. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in writing
and signed by the Employee and by an authorized officer of the Company (other
than the Employee). No waiver by either party of any breach of, or of compliance
with, any condition or provision of this Agreement by the other party shall be
considered a waiver of any other condition or provision or of the same condition
or provision at another time.
(c) WHOLE AGREEMENT; AMENDMENT. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement shall not
be modified or amended except by an instrument in writing signed by or on behalf
of the parties hereto.
(d) NO SETOFF; WITHHOLDING TAXES. There shall be no right of setoff or
counterclaim, with respect to any claim, debt or obligation, against payments to
the Employee under this Agreement. All payments made under this Agreement shall
be subject to reduction to reflect taxes required to be withheld by law.
(e) CHOICE OF LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Georgia.
(f) SEVERABILITY. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not effect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(g) ARBITRATION. Except as otherwise provided in this Agreement, any
controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled by arbitration in Atlanta, Georgia in accordance with
the Commercial Arbitration Rules of the American Arbitration Association.
Judgment on the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. All fees and expenses of the arbitrator and such
Association shall be paid as determined by the arbitrator.
(h) NO ASSIGNMENT. The rights of any person to payments or benefits
under this Agreement shall not be made subject to option or assignment, either
by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this Subsection (h) shall be void.
(i) COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall for all purposes be deemed an original, and all of such
counterparts shall together constitute one and the same agreement.
9
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
--------------------------------------
Dennis V. Vohs
ROSS SYSTEMS, INC.
By:
-----------------------------------
Title:
--------------------------------
10
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0
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