UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2001,
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 (IRS 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)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 February 5, 2002
----- ----------------
Common stock, $0.001 par value 2,620,621
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1
ROSS SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED DECEMBER 31, 2001
-------------------------------
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...............................................................3
Condensed Consolidated Balance Sheets - December 31, 2001 and June 30,
2001...............................................................................3
Condensed Consolidated Statements of Operations - Three months and six
months ended December 31, 2001 and 2000............................................4
Condensed Consolidated Statements of Cash Flows - Six months ended
December 31, 2001 and 2000.........................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................18
SIGNATURE...........................................................................................20
2
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share related data)
December 31, June 30,
2001 2001
(unaudited) (audited)
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 3,303 $ 5,716
Accounts receivable, less allowance
for doubtful accounts 11,919 10,128
Prepaids and other current assets 1,706 1,874
Total current assets 16,928 17,718
-------- --------
Property and equipment, net 1,464 1,694
Computer software costs, net 26,207 27,918
Other assets 3,064 3,132
-------- --------
Total assets $ 47,663 $ 50,462
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt $ 5,222 $ 4,522
Accounts payable 2,965 4,920
Accrued expenses 4,267 4,870
Income taxes payable 192 335
Deferred revenues 10,723 12,711
-------- --------
Total current liabilities 23,369 27,358
======== ========
Shareholders' equity:
Common stock, $.001 par value; 35,000,000 shares authorized,
2,615,134 and 2,565,989 shares issued and outstanding at 26 26
December 31, 2001 and June 30, 2001, respectively
Preferred Stock, no par value; 5,000,000 authorized, 500,000 2,000 2,000
outstanding
Additional paid-in capital 87,134 87,032
Accumulated deficit (62,974) (63,876)
Accumulated comprehensive deficit (1,892) (2,078)
-------- --------
Total shareholders' equity 24,294 23,104
-------- --------
Total liabilities and shareholders' equity $ 47,663 $ 50,462
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three months ended Six months ended
December 31, December 31,
(unaudited) (unaudited)
------------------------- -------------------------
2001 2000 2001 2000
Revenues:
Software product licenses $ 2,920 $ 1,940 $ 6,100 $ 4,356
Consulting and other services 3,285 4,162 6,048 9,130
Maintenance 5,220 6,496 10,442 13,264
-------- -------- -------- --------
Total revenues 11,425 12,598 22,590 26,750
-------- -------- -------- --------
Operating expenses:
Costs of software product licenses 311 325 706 809
Costs of consulting, maintenance and other services 2,516 3,596 4,573 10,114
Software product license sales and marketing 3,505 3,463 6,993 8,506
Product development net of capitalized computer 979 853 2,026 1,629
software costs
Amortization of computer software costs 2,084 2,223 3,794 4,492
General and administrative 1,250 1,215 2,669 2,752
Provision for uncollectible accounts 261 283 546 835
Amortization of other assets -- 135 -- 360
Non-recurring costs -- -- -- 790
-------- -------- -------- --------
Total operating expenses 10,906 12,093 21,307 30,287
-------- -------- -------- --------
Operating earnings (loss) 519 505 1,283 (3,537)
Other expenses, net (146) (276) (307) (613)
-------- -------- -------- --------
Earnings (loss) before taxes 373 229 976 (4,150)
Income tax expense (benefit) (115) 62 $ 74 (122)
-------- -------- -------- --------
Net earnings (loss) $ 488 $ 167 $ 902 $ (4,028)
======== ======== ======== ========
Net earnings (loss) per common share - basic $ 0.19 $ 0.07 $ 0.35 $ (1.65)
======== ======== ======== ========
Net earnings (loss) per common share - diluted $ 0.17 $ 0.07 $ 0.31 $ (1.65)
======== ======== ======== ========
Shares used in per share computation - basic 2,592 2,569 2,577 2,443
======== ======== ======== ========
Shares used in per share computation - diluted 3,152 2,569 3,124 2,443
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
Six months ended
----------------------
December 31,
2001 2000
------- -------
Cash flows from operating activities:
Net earnings (loss) $ 902 $(4,028)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 489 875
Amortization of computer software costs 3,794 3,977
Amortization of other assets -- 360
Provision for uncollectable accounts 546 835
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (2,368) 7,813
Prepaids and other current assets 166 (885)
Income taxes payable / recoverable (146) (39)
Accounts payable (1,955) 814
Accrued expenses (601) (1,184)
Deferred revenues (1,987) (4,606)
------- -------
Net cash (used in) provided by operating activities (1,160) 3,932
------- -------
Cash flows from investing activities:
Purchases of property and equipment (259) (65)
Computer software costs capitalized (2,160) (3,732)
Other 146 408
------- -------
Net cash used for investing activities (2,273) (3,389)
------- -------
Cash flows from financing activities:
Net cash received on line of credit 700 --
Net cash paid on line of credit -- (1,491)
Net proceeds (repayments) of capital leases and long term debt -- (434)
Proceeds from issuance of common stock 102 29
------- -------
Net cash provided by (used in) financing activities 802 (1,896)
------- -------
Effect of exchange rate changes on cash 218 26
------- -------
Net decrease in cash and cash equivalents (2,413) (1,327)
Cash and cash equivalents at beginning of period 5,716 2,010
Cash and cash equivalents at end of period $ 3,303 $ 683
======= =======
Non-cash investing and financing activities:
Conversion of convertible debentures $ -- $ 584
======= =======
Supplementary disclosure:
Income taxes paid $ -- (81)
======= =======
Net interest paid $ 307 612
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1) BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
Ross Systems, Inc. (NASDAQ:ROSS), (the "Company") founded in 1972, supplies
leading enterprise solutions software designed for process manufacturing
companies. The Company offers both the award-winning iRenaissance(TM) enterprise
resource planning (ERP II) software package, as well as integrated e-business
solutions for food, beverage, biotech/pharmaceutical, chemicals, paper and
metals manufacturers. The Ross Systems family of solutions includes a broad
range of applications for advanced planning, supply-chain management (SCM),
materials management, financials, manufacturing, maintenance management,
transportation management, customer relationship management (CRM), commerce,
collaboration, and human resources/payroll. In addition to the aforementioned
software suites, the Company also provides professional consulting services for
implementation, custom application development and education. The Company offers
ongoing maintenance and support services via the Internet and telephone help
desks.
The Company operates in one business segment and no individual customer
accounts for more than 10% of total revenues. The Company does not have a
concentration of credit risk in any one industry.
The accompanying unaudited condensed consolidated financial statements of
Ross Systems, Inc reflect all adjustments of a normal recurring nature which
are, in the opinion of management, necessary to present a fair statement of its
financial position as of December 31, 2001, and the results of its operations
and cash flows for the interim periods presented. The Company's results of
operations for the three and six months ended December 31, 2001 are not
necessarily indicative of the results to be expected for the full year.
These unaudited condensed consolidated 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, 2001 which was filed with the Securities and Exchange
Commission during September 2001.
It is the Company's policy to reclassify prior year amounts to conform with the
current year presentation when necessary.
2) 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.
3) CAPITALIZED COMPUTER SOFTWARE COSTS AND OTHER ASSETS
It is the Company's policy to follow paragraph 8 of SFAS 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" 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 berecoverable.
Impairment losses, if applicable, would be calculated as the difference between
the carrying value of the asset
6
and the sum of anticipated future undiscounted cash flows. The calculation would
be performed on an individual item basis. No impairment was noted in the first
six months of fiscal 2002.
4) ACCOUNTS RECEIVABLE
As of the dates shown, accounts receivable consisted of the
following (in thousands):
December 31, June 30,
2001 2001
(unaudited)
-------- --------
Trade accounts receivable $ 14,969 $ 13,058
Less allowance for doubtful accounts and returns (3,050) (2,930)
-------- --------
$ 11,919 $ 10,128
======== ========
5) PROPERTY AND EQUIPMENT
As of the dates shown, property and equipment consisted of the
following (in thousands):
December 31, June 30,
2001 2001
(unaudited)
-------- --------
Computer equipment $ 8,169 $ 9,101
Furniture and fixtures 1,764 1,782
Leasehold improvements 1,561 1,546
-------- --------
11,494 12,429
Less accumulated depreciation and amortization (10,030) (10,735)
$ 1,464 $ 1,694
======== ========
6) OTHER INTANGIBLE ASSETS
As of December 31, 2001, Goodwill consisted of the following (in
thousands) (unaudited):
Accumulated
Asset Value Amortization Net Value
----------- ------------ ---------
Excess of purchase price over tangible asset value of acquired software
services companies $ 4,414 $(2,233) $ 2,181
======= ======= =======
The Company does not consider these assets to be impaired as of December 31,
2001 or at the date of filing this report on Form 10-Q. Presently the Company
does not anticipate any future impairment of these assets. In accordance with
the provisions of Statement on Financial Accounting Standard No. 142, "Goodwill
and Other Intangible Assets", the Company does not intend to record any future
amortization of these assets. (See Note 11)
Other intangible assets consisting of Capitalized Computer Software Costs, in
the net amount of $26,207,000, will continue to be amortized over four years.
(See Note 3.)
7
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
7) SOFTWARE REVENUE RECOGNITION
The company recognizes revenue on software transactions in accordance with
Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2). The
financial statements contained herein have been prepared in accordance with the
requirements of SOP 97-2.
8) COMPREHENSIVE INCOME
Total non-stockholder changes in equity include all changes in equity
during a period except those resulting from investments by and distributions to
stockholders. The components of comprehensive income (loss) for the three -month
and six-month periods ended December 31, 2001 and 2000 were as follows (in
thousands):
Three months ended Six months ended
December 31, December 31,
--------------------- ---------------------
2001 2000 2001 2000
------- ------- ------- -------
Net earnings (loss) $ 488 $ 167 $ 902 $(4,028)
Foreign currency translation adjustments 61 (524) 186 253
------- ------- ------- -------
Total comprehensive income (loss) $ 549 $ (357) $ 1,088 $(3,775)
======= ======= ======= =======
9) 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 per
share, (in thousands):
Three months ended Six months ended
December 31, December 31,
-------------------- ---------------------
2001 2000 2001 2000
------- ------- ------- -------
Net earnings (loss) $ 488 $ 167 $ 902 $(4,028)
Interest on convertible securities 38 13 75 0
------- ------- ------- -------
Numerator for diluted calculation $ 526 $ 180 $ 977 $(4,028)
======= ======= ======= =======
In periods when the Company is profitable, the only difference between the
denominator for basic and diluted net earnings per share is the effect of common
stock equivalents. In periods of a loss, the denominator does not change because
it would be anti-dilutive.
8
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
10) CAPITAL STOCK
(a) Mandatorily Redeemable Preferred Stock and New Private Placement
In fiscal 1991, the Company authorized a new class of no par value
preferred stock consisting of 5,000,000 shares. The Board of Directors is
authorized to issue the preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions of such stock, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the shareholders. As of June 30, 2000, the Company had no shares of
its mandatorily redeemable convertible preferred stock outstanding.
On June 29, 2001, the Company issued mandatorily convertible preferred
stock to a qualified investor in a private placement transaction. In summary,
the investor purchased 500,000 preferred shares at $4 per share yielding
$2,000,000 for the Company. This price represented a premium to the market for
the Company's common stock at the time of issuance. The average closing share
price of the Company's common stock for the 30 trading days prior to the private
placement was approximately $2.22. The preferred shares can not be converted for
one year but must be converted within three years from the issue date. The
shares earn dividends at the rate of 7.5%. In conjunction with this transaction,
the Company issued warrants to the broker who assisted in securing the investor.
These warrants were fairly valued at $60,000 on the date of issuance and the
expense has been recorded in the statement of operations as a component of other
expense (net) in the quarter ended June 30, 2001.
(b) Reverse Stock Split
On April 27, 2001, the Company executed a reverse stock split, on the basis
of 1 share for 10 shares. The split was approved by the stockholders in a
special meeting on April 26, 2001 to facilitate the Company continued listing on
the Nasdaq National Market.
11) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", effective for
transactions after June 30, 2001, and No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. The Company has adopted these
standards and has applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. As of December
31, 2002 the Company reviewed goodwill and other intangible assets for
impairment, in compliance with the six-month review provision of SFAS No. 142.
No impairment of these assets was noted. The pro-forma effects of FAS 142 on the
six months ended December 31, 2000 are such that the Company would have recorded
$360,000 less in amortization expense and would have incurred a net loss of
$3,668,000 versus the net loss of $4,028,000 actually reported. In June 2001 the
Financial Accounting Standards Board approved Statement of Accounting Standard
No. 143, "Accounting for Asset Retirement Obligations." The statement addresses
financial accounting and reporting for legal obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The statement is effective for the Company's 2003 fiscal year and is not
expected to have a material effect on the Company's financial position or
results of operations.
9
ROSS SYSTEMS, INC. AND SUBSIDIARIES
In August 2001 the Financial Accounting Standards Board approved Statement
of Accounting Standard No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets." The statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and establishes a single
accounting model for the impairment or disposal of long-lived assets. The
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long Lived Assets and for Long-lived Assets to be Disposed Of, " and supercedes
accounting and reporting under APB Opinion No. 30 for the disposal of a
business. The statement is effective for the Company's 2002 fiscal year and has
not had a material effect on the Company's financial position or results of
operations.
12) GEOGRAPHIC SEGMENT INFORMATION
The Company markets its products and related services primarily in North
America, Europe and Asia and primarily measures its business performance based
upon certain geographic results of operations. During fiscal 2001, the Company
divested its French subsidiary and adopted an indirect sales approach in the
French market.
For these management purposes, the results of the Austral-Asian operations
are included in the North American results since the costs associated with
managing that marketplace are born by the North American entities within the
Group. Selected balance sheet and income statement information pertaining to the
various significant geographic areas of operation are as follows:
As of and for the quarter ended December 31, 2001:
Net Income Depreciation Capital
Total Assets Revenue (Loss) and Amortization Expenditures
------------ -------- ------- ----------------- ------------
Belgium ........ $ 746 $ 390 $ 113 $ 2 $ 11
Netherlands .... 1,845 1,155 141 11 29
Germany ........ 178 101 (46) 1 --
Spain .......... 3,274 1,672 549 64 8
United Kingdom.. 2,246 1,089 49 16 8
North America... 39,374 7,018 (318) 2,241 140
------- ------- ------- ------- -------
Total .......... $47,663 $11,425 $ 488 $ 2,335 $ 196
======= ======= ======= ======= =======
As of and for the quarter ended December 31, 2000:
Net Income Depreciation Capital
Total Assets Revenue (Loss) and Amortization Expenditures
------------ -------- ---------- ---------------- ------------
Belgium ......... $ 562 $ 495 $ 160 $ 5 $ --
Netherland....... 1,052 581 57 10 --
Germany ......... 232 174 46 -- --
Spain ........... 3,337 1,063 27 62 --
United Kingdom .. 2,496 1,039 (193) 32 12
North America ... 46,025 9,246 70 2,573 5
------- ------- ------- ------- -------
Total ........... $53,704 $12,598 $ 167 $ 2,682 $ 17
======= ======= ======= ======= =======
10
ROSS SYSTEMS, INC. AND SUBSIDIARIES
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.
Business Summary
Description of Business
The Company markets a broad range of sophisticated business application
software (ERP II) that address business process automation functions including
procurement, collaborative planning, financial accounting and reporting,
manufacturing, distribution, supply chain management, sales, customer service,
and human resource needs of manufacturers primarily in process manufacturing
type industries. The company's product supports business-to-business (B2B)
commerce by linking internal business process and intelligence to both customers
and suppliers. In addition, the Company supports a large installed base of
companies, which utilize the Company's financial products exclusively. The
Company's software product license fees are based on the modules licensed, and
the number of concurrent users supported by the hardware on which the modules
operate. Customers are primarily medium to large-sized companies (with annual
sales of $50 million to $2 billion) upgrading internal systems to provide
competitive advantage and improve profitability through the availability of
timely and accurate information, or to modernize their management information
systems operations in order to reduce costs and provide collaboration with
suppliers, distributors, brokers and customers. The Company licenses its
products to customers through a direct sales force in North America and Western
Europe as well as independent distributors in 24 other markets worldwide. Since
the Company's inception in 1972, the Company has licensed software products to
an installed base of over 3,400 customers worldwide in fourteen languages and
has recently added the Euro to its multi-currency compliance.
The Company offers its comprehensive Enterprise Resource Planning ("ERP")
solution with functionality specifically tailored to the unique formula and
specifications-based requirements of process manufacturers, including food and
beverage, pharmaceutical and biotechnology, chemical, primary metals, and pulp
and paper companies. The Company believes that this native functionality is
superior to the alternative presented by many of the Company's competitors,
which adapt systems designed primarily for the discrete manufacturing sector.
The product may be deployed in a thin client mode to permit the greatest
performance advantage for companies using remote communications over the
Internet. The Company has developed a series of products designed for the
Internet environment which allow users to access and manipulate data from their
personal computers using a portal for functional personalization of the user's
desktop. These products incorporate an integrated, modular, feature-rich and
user-friendly operating
11
environment. The integration of these products allows the sharing of data
between application products with a common user interface while integrating
frequently visited Web sites and other software tools.
The Company continues to expand its product line in the collaborative B2B
applications. With connectivity to the ERP backbone systems over the Internet to
customers, distributors and suppliers, these products enable customers to
tightly link trading partner supply chains to achieve sustainable competitive
advantage. These applications are designed to allow companies the ability to
leverage the technology of the Internet in order to automate business processes
and effectively manage business resources. The Ross suite of fully integrated
products is branded as iRenaissance, and includes iRenaissance ERP, iRenaissance
SCM, iRenaissance CRM, iRenaissance Commerce, and iRenaissance Business
Intelligence.
The Company's open systems applications function in a relational database
management system ("RDBMS") environment that provides for a high degree of data
availability and integrity. Additionally, because the Company's iRenaissance
financial, manufacturing and distribution applications were developed with the
GEMBASE fourth generation language ("4GL"), the Company believes they are easily
modified and expanded. GEMBASE is a programming environment that delivers a
central data dictionary, complete screen painting, editing and debugging
capabilities, and links to several popular RDBMSs. GEMBASE itself is written in
the C programming language to facilitate portability across multiple hardware
and RDBMS platforms. Because the iRenaissance financial, manufacturing and
distribution products were developed in GEMBASE, customers often find it easy to
customize their own applications.
Results of Operations
Revenues
Total revenues for the quarter ended December 31, 2001 decreased 9% to
$11,425,000 from $12,598,000 in the same quarter of fiscal 2001. Normalizing the
prior year revenue comparison to exclude $1,754,000 due to the sale of the
Company's HR/Payroll product on February 28, 2001, would result in an increase
for current quarter of approximately 5% in total revenues as compared to the
prior year's same quarter.
Software product license revenues were $2,920,000 during the quarter ended
December 31, 2001, an increase of $980,000, or 51%, from the same quarter in
fiscal 2001. On a normalized basis, excluding the HR/Payroll product line from
the prior quarter's revenues, software license revenues increased by
approximately 79% in the quarter ended December 31, 2001 over the same quarter
in the prior fiscal year. The Company experienced a decrease over the same
quarter of fiscal 2001 in the North American market of approximately $409,000,
or 37%. This North American decrease is primarily due to the sale of the
company's HR/Payroll product line. The Company experienced a net increase of
$1,389,000, or 167%, in the European, Asian and Pacific Rim ("International")
markets over the same quarter in fiscal 2001. The increase in International
markets represents a general increase in demand for the Company's products.-
Consulting and other services revenues for the second quarter of fiscal
2002 decreased 21% to $3,285,000 from $4,162,000 in the same quarter of fiscal
2001. On a normalized basis, excluding the HR/Payroll product line from the
prior quarter's revenues, services revenues decreased by approximately 14% in
the quarter ended December 31, 2001 over the same quarter in the prior fiscal
year. 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), therefore, service
revenues fluctuate based upon related fluctuations in software product revenue.
For the quarter ended December 31, 2001, North American services revenues
decreased by $1,059,000, or 38%, over the same quarter in the prior year.
International services revenues increased $182,000, or 13% over the same quarter
in the prior year. The
12
ROSS SYSTEMS, INC. AND SUBSIDIARIES
decrease in North American services revenues is attributable to the absence of
revenues relating the Human Resource and Payroll product line due to the sale of
the product line in February 2001, the elimination of low margin third party
services and a general decline in services demand due a low level of license
revenues in the prior quarter. The increases in consulting and other service
revenues Internationally is attributable to the introduction of the Euro
compliant version of the product and a high level of customer acceptance of that
release.
Maintenance revenues for the second quarter decreased by $1,276,000, or 20%
in the second quarter of fiscal 2002 versus the same quarter in the prior year.
On a normalized basis, excluding the HR/Payroll product line from the prior
quarter's revenues, maintenance revenues decreased by approximately 3% in the
quarter ended December 31, 2001 over the same quarter in the prior fiscal year.
This is attributable mainly to new maintenance contract additions from prior
year software license sales at a lower rate than retirements in North America..
The increase of $145,000 or 12% in International maintenance revenues is
attributable mainly to the negotiation of new maintenance contracts, including
back-maintenance provision, for contracts which had previously cancelled but
have been reinstated on the Euro compliant version of the product. . Maintenance
contracts sold by third party distributors are included by the Company in
software product license revenues because the Company has no support obligations
to any of the distributors' customers.
International revenues as a percentage of total revenues for the second
quarter of fiscal 2002 increased to 45% in fiscal 2002 from 27% for the same
quarter in fiscal 2001. International revenues increased $1,716,000 or 50% over
the same quarter in the prior year. The aggregate net second quarter increase in
International revenues over the same quarter of fiscal 2001 is 167% for software
licenses, 13% for consulting services and 12% for maintenance revenue.
North American revenues comprised 55% of the second quarter 2002 total
revenues down from 73% in the same quarter of the prior year. North American
revenues decreased 32% over the same quarter of the previous fiscal year. The
aggregate decrease of $2,890,000 as previously mentioned is due to a reduction
in software agreements during both the current and previous periods as well as
the services and maintenance revenues relating to the Human Resource and Payroll
product line which was sold in February 2001..
The following is a table showing the comparison of revenues for the
quarter, and the six months ended December 31, 2001, with the prior year's
normalized revenue for the same periods, after deduction of approximate revenues
of the HR/Payroll product line, which was sold February 28, 2001 (in thousands):
Three months ended Six months ended
December 31, December 31,
(approximate) (approximate)
(unaudited) (unaudited)
------------------------ --------------------------
2001 2000 2001 2000
------- ------- ------- -------
Software product licenses $ 2,920 $ 1,632 $ 6,100 $ 3,896
Consulting and other services 3,285 3,836 6,048 8,320
Maintenance 5,220 5,376 10,422 11,036
======= ======= ======= =======
Total revenues $11,425 $10,844 $22,590 $23,252
======= ======= ======= =======
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 second quarter of fiscal 2002 decreased by 4% to $311,000 from
$325,000 in the second quarter of fiscal 2001. As a percentage of software
product license revenue, the costs of software product licenses decreased to 11%
in the second quarter of fiscal 2002 compared to 17% in the same quarter of
13
ROSS SYSTEMS, INC. AND SUBSIDIARIES
fiscal 2001. The decrease in costs for software product licenses for the quarter
was primarily due to the decline of third party products sold in fiscal 2002
compared to the prior year.
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 decreased by 30% to $2,516,000 in the second quarter of fiscal 2002, as
compared to $3,595,000 in the second quarter of fiscal 2001. The decrease in
these costs for the quarter relates to the Company's decreased services activity
resulting from slowed software sales activity in prior quarters. As a result of
decreased services demand, services and consulting required fewer headcount and
realized lower spending in the second quarter of fiscal 2002 compared to the
second quarter of fiscal 2001. Employee expenses including salaries and travel
decreased by $1,372,000, and administrative and facility expenses decreased by
$287,000. The Company's operating margin resulting from consulting, maintenance
and other services revenues for the second quarter of fiscal 2001 was 70%, up
from 66% in the same quarter of fiscal 2001. The improvement in the gross profit
margin for the three month period was due largely to decreased use of third
party consultants and lower spending across the services organization.
Sales and marketing expenses of $3,505,000 for the quarter ended
December 31, 2001 were almost unchanged in comparison to $3,463,000 in the
second quarter of fiscal 2001.
Product development (research and development) expenses of $3,063,000
in the second quarter of fiscal 2002 were little changed from $3,076,000 in the
same quarter of the prior year. The following table summarizes product
development expenditures (in thousands):
Three months ended
-------------------------
December 31,
2001 2000
------- -------
Gross Expenditures for Product Development .................... $ 2,159 $ 2,360
Less: Expenses capitalized .................................... (1,180) (1,507)
Plus: Amortization of previously capitalized amounts .......... 2,084 2,223
------- -------
Total Product Development Expenses ............................ $ 3,063 $ 3,076
------- -------
As a percentage of total revenues, product development expenditures for
the three-month period ended December 31, 2001 decreased over expenditures in
the same period of the prior year as a result of the lower expenses in the
second quarter of fiscal 2002. Product development expenditures decreased by 9%
to $2,159,000 in the second quarter of fiscal 2002 as compared with $2,360,000
in the same period in the prior year. Product development costs that were
capitalized decreased by $327,000 from the year ago period as a result of more
projects nearing completion during the period preceding the second quarter of
fiscal 2002 compared to the year earlier period.
General and administrative expenses for the quarter ended December 31,
2001 increased by 3%, to $1,250,000 from $1,215,000 in the same quarter of the
prior year. This increase was due to slightly higher employee benefit costs.
In the three month period ended December 31, 2001, the Company recorded
a provision for doubtful accounts of $261,000, as compared to $283,000 recorded
in the second quarter of fiscal 2001. The fiscal 2002 and 2001 provisions
consisted primarily of specific customer accounts identified as being
potentially uncollectible. These provisions represent management's best estimate
of the doubtful accounts for each period.
14
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Amortization of other assets was zero in the second quarter of fiscal
2002 from $135,000 in the same quarter of the prior year. This reflects the
change in accounting treatment due compliance with the new accounting
pronouncement, Financial Accounting Standards No. 141, Business Combinations,
and No. 142, on Goodwill and Other Intangible Assets. See Note 10 in the Notes
to the Unaudited, Condensed, Consolidated Financial Statements above.
Other Expense, Net
Other expense for the quarter ended December 31, 2001 was $146,000 as
compared to $276,000, in the same quarter of fiscal 2001. These amounts
primarily consisted of interest expense related to borrowings under the
Company's existing line of credit facility, and the reduction reflects the lower
levels of Company indebtedness.
Income Tax Expense
During the second quarter of fiscal 2002, the Company recorded an
income tax benefit of $115,000 compared with an income expense of $62,000
recorded during the same quarter in fiscal 2001. The net tax benefit recorded in
the second quarter of fiscal 2002 relates to certain tax refunds that have been
approved by associated tax jurisdictions, and a reversal of prior period
provisions for income tax in the US. This reversal was due to an increase in
deductions for doubtful accounts. The fiscal 2001 tax expense relates to
withholding taxes 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 six months of fiscal 2002, net cash provided by operating
activities decreased $5,092,000 compared to the same period of the prior year.
This included an aggregate net decrease in the non-cash charges for
depreciation, amortization and provisions for bad debt of $1,218,000 and an
aggregate decrease in the combined cash use of prepaids and other current
assets, taxes payable, accrued expenses, accounts payable and deferred revenues
of $1,377,000. In addition, provision of cash decreased by $10,181,000 in
accounts receivable in the six months ended December 31, 2002 as compared to the
same period in fiscal 2001. This net cash decrease was offset by cash provided
by an increase of Company earnings of $4,930,000 in the first six months of
fiscal 2002 as compared to the first six months of fiscal 2001. The decrease in
accounts payable of $1,955,000 in the first six months of fiscal 2002, is a
direct result of the Company's ongoing program to reduce vendor balances to more
appropriate levels. This managed reduction of accounts payable is almost
complete, with an estimated additional reduction of $541,000 to take place over
the balance of the fiscal year.
In the first six months of fiscal 2002, the Company required $2,273,000
for investing activities versus $3,389,000 over the same period of the prior
year, a decrease of $1,116,000. Investment in property and equipment was up
$194,000 to $259,000 in the first six months of fiscal 2002, from $65,000 in
same period in the prior year. Investments in capitalized computer software
costs decreased by $1,572,000 due to lower development headcount during fiscal
2002 as well as the impact of more projects being completed during the period
preceding the second quarter of fiscal 2002 compared to the year earlier period.
As previously reported, the Company divested its HR/Payroll product line
effective February 28, 2001. The nature of the product required intense
development, and keep-current activity, which are no longer required. The
majority of the developers associated with this product were released by the
Company, and hired by the purchaser. Other investment items decreased by
$262,000.
Net cash flows used for financing activities increased by $2,698,000
for the six months ended December 31, 2001, versus the same six month period of
the prior fiscal year. Cash increased by borrowing a net $700,000 under the
Company's line of credit during the six months ended December 31, 2001. In the
same period in the prior fiscal year, the Company decreased cash by net
15
ROSS SYSTEMS, INC. AND SUBSIDIARIES
repayments or $1,491,000 under the line of credit. Repayments under capital
leases decreased by $434,000. Proceeds from the issue of shares to employees
under the Employee Stock Purchase Plan amounted to $102,000.
At December 31, 2001 the Company had $3,303,000 of cash and cash
equivalents. The Company also has a revolving credit facility with an
asset-based lender with a maximum credit line for up to $5,000,000, a expiration
date of July 31, 2002, 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 December 31, 2001, the Company had $4,563,000
outstanding against the $5,000,000 revolving credit facility, and based on
eligible accounts receivable at December 31, 2001, the Company's cash and
remaining borrowing capacity under the revolving credit facility totaled
approximately $3,490,000 compared to $697,000 at December 31, 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange: The company has a world-wide presence and as such
maintains offices and derives revenues from sources overseas. For the second
quarter of fiscal 2002, international revenues as a percentage of total revenues
were approximately 45%. The Company's international business is subject to
typical risks of an international business, including, but not limited to:
differing economic conditions, changes in political climates, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, the Company's future results could be materially
adversely impacted by changes in these or other factors. The effect of foreign
exchange rate fluctuations on the Company in the first six months of fiscal 2001
was not material.
Interest Rates: The Company's exposure to interest rates relates
primarily to the Company's cash equivalents and certain debt obligations. The
Company invests in financial instruments with original maturities of three
months or less. Any interest earned on these investments is recorded as interest
income on the Company's statement of operations. Because of the short maturity
of our investments, a near-term change in interest rates would not materially
effect our financial position, results of operations, or cash flows. Certain of
the Company's debt obligations include a variable rate of interest. A
significant, near term change in interest rates could materially effect our
financial position, results of operations or cash flows.
16
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on November 15,
2001. The following table shows voting information for each item voted upon:
----------------------------------------------------- ------------------------- --------------------
FOR AGAINST
----------------------------------------------------- ------------------------- --------------------
NOMINEES FOR ELECTION AS DIRECTORS
----------------------------------------------------- ------------------------- --------------------
----------------------------------------------------- ------------------------- --------------------
Frank M. Dickerson 2,152,218 --
----------------------------------------------------- ------------------------- --------------------
J William Goodhew , III 2,152,138 --
----------------------------------------------------- ------------------------- --------------------
Bruce J. Ryan 2,152,158 --
----------------------------------------------------- ------------------------- --------------------
J. Patrick Tinley 2,150,212 --
----------------------------------------------------- ------------------------- --------------------
Robert B. Webster 2,152,208 --
----------------------------------------------------- ------------------------- --------------------
----------------------------------------------------- ------------------------- --------------------
TO INCREASE THE NUMBER OF OPTIONS AVAILABLE 340,369 135,435
UNDER THE 1998 STOCK OPTION PLAN
----------------------------------------------------- ------------------------- --------------------
----------------------------------------------------- ------------------------- --------------------
TO INCREASE THE ANNUAL NUMBER OF SHARES 351,140 124,664
AVAILABLE FOR PURCHASE BY EMPLOYEES UNDER
THE 1991 EMPLOYEE STOCK PURCHASE PLAN
----------------------------------------------------- ------------------------- --------------------
RATIFICATION OF APPOINTMENT OF 2,140,693 37,499
INDEPENDENT AUDITORS
----------------------------------------------------- ------------------------- --------------------
17
ROSS SYSTEMS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
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 amended (1)
3.2 Bylaws of the Registrant (1)
4.3 Form of the subordinated debenture agreement due February 6, 2003
issued by the Registrant to each Investor (3)
4.4 Registration rights agreement between the Registrant and each
Investor (3)
10.1 Preferred Shares Rights Agreement, dated as of September 4, 1998
between the Registrant and BankBoston, N.A. (2)
10.2A Extension Agreement and Amendment to Loan Documents dated March 21,
1997 between Registrant and Coast Business Credit, a division of
Southern Pacific Thrift and Loan Association (4)
10.2B Extension Agreement and Amendment to Loan Documents dated August 18,
1995 between Registrant and CoastFed Business Credit Corporation
("Coast") (4)
10.2C First Amendment to Loan and Security Agreement dated June 30, 1995
between Registrant and Coast (4)
10.2D Loan and Security Agreement dated October 11, 1994 between
Registrant and Coast (4)
10.2E Series A Convertible Preferred Stock Agreement dated 29 June, 2001
between Registrant and Benjamin W. Griffith III (5)
10.3 Employment Agreement, dated as of January 7, 1999, between Mr.
Patrick Tinley and the Registrant (3)
10.4 Employment Agreement, dated as of September 17, 1999, between Mr.
Robert Webster and the Registrant (4)
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 10-K/A filed April 30, 1998.
18
ROSS SYSTEMS, INC. AND SUBSIDIARIES
(3) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-Q filed May 17, 1999.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-K filed September 28, 1999.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-K filed September 27, 2001.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A/A filed October 3, 2001.
(b) Reports on Form 8-K
(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
Current Report on form 8-K filed February 12, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K filed March 16, 2001.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K/A filed May 15, 2001.
ITEMS 1, 2, 3, 4, AND 5 HAVE BEEN OMITTED, AS THEY ARE NOT APPLICABLE.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROSS SYSTEMS, INC.
Date: February 11, 2002 /s/ VEROME M. JOHNSTON
-------------------------
Verome M. Johnston
Vice President, Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
20
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------