================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(MARK ONE)
[X] SECOND AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
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.
INCORPORATED IN DELAWARE IRS EMPLOYER IDENTIFICATION NO. 94-2170198
TWO CONCOURSE PARKWAY, SUITE 800
ATLANTA, GEORGIA 30328
(770) 351-9600
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None.................................................. None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 par value; Preferred Shares Purchase Rights
------------------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT, BASED UPON THE CLOSING SALE PRICE OF THE
COMMON STOCK ON DECEMBER 31, 2002 AS REPORTED BY THE NASDAQ NATIONAL MARKET, WAS
APPROXIMATELY $19,146,780. SHARES OF VOTING STOCK HELD BY EACH OFFICER AND
DIRECTOR AND BY EACH PERSON WHO OWNS 5% OR MORE OF THE OUTSTANDING COMMON STOCK
HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY BE DEEMED TO BE AFFILIATES. THIS
DETERMINATION OF AFFILIATE STATUS IS NOT NECESSARILY A CONCLUSIVE DETERMINATION
FOR OTHER PURPOSES.
As of September 2, 2003, the Registrant had outstanding 2,815,825 shares
of Common Stock, and 500,000 Series A 7.5% convertible preference shares,
("convertible preferred stock").
================================================================================
EXPLANATORY NOTE
This amended annual report on Form 10-K/A contains modifications to certain
disclosures in the annual report on Form 10-K/A filed on January 20, 2004. No
restatements have been made to the financial results of the Company for any of
the periods reported in this document.
ROSS SYSTEMS, INC AND SUBSIDIARIES
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K/A
YEAR ENDED JUNE 30, 2003
TABLE OF CONTENTS
PAGE NO.
--------
PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 4
Item 3. Legal Proceedings.............................................................................. 5
Item 4. Submission of Matters to a Vote of Security Holders............................................ 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 7
Item 6. Selected Financial Data........................................................................ 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 9
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk..................................... 21
Item 8. Financial Statements and Supplementary Data.................................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 21
Item 9A Controls and Procedures 21
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 22
Item 11. Executive Compensation......................................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 28
Item 13. Certain Relationships and Related Transactions................................................. 30
Item 14. Principal Account Fees and Services 31
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 32
SIGNATURES................................................................................................... 33
This Annual Report on Form 10-K/A including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I Item
2, contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or
prove incorrect, could cause the results of Ross Systems to differ
materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements, including any
projections of earnings, revenue, synergies, accretion, margins or other
financial items; any statements regarding the anticipated completion of
the proposed chinadotcom merger transaction described under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors;" any statements of the plans, strategies and
objectives of management for future operations, including the execution of
integration and restructuring plans; any statement concerning proposed new
products, services, developments or industry rankings; any statements
regarding future economic conditions or performance; any statements of
belief; any statements of anticipations; and any statements of assumptions
underlying any of the foregoing. The risks, uncertainties and assumptions
referred to above include quarterly fluctuations and unpredictability of
revenues; various closing conditions and other uncertainties that might
delay or prevent the completion of the proposed chinadotcom merger
transaction; the general economic slowdown and the risk of an extended
slowdown or an increase in its intensity, the competition that we face;
the performance of contracts by customers and partners; employee
management issues; the challenge of managing asset levels; the difficulty
of aligning expense levels with revenue changes; and other risks that are
described herein under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors" beginning on page 19
and that are otherwise described from time to time in Ross Systems'
reports filed with the Securities and Exchange Commission . Ross Systems
assumes no obligation and does not intend to update these forward-looking
statements.
2
ROSS SYSTEMS, INC AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
GENERAL
The following description of business is qualified in its entirety by, and
should be read in conjunction with the more detailed information and financial
data, including the financial statements and notes thereto, appearing elsewhere
in this Report. Unless otherwise stated in this document, references to (1)
"us," "our," "we" and similar terms, (2) the "Company" or (3) "Ross" shall mean
Ross Systems, Inc., a Delaware corporation, and its subsidiaries.
Ross Systems, Inc. (NASDAQ: ROSS) delivers innovative software solutions
that help manufacturers worldwide fulfill their business growth objectives
through increased operational efficiencies, improved profitability, strengthened
customer relationships and streamlined regulatory compliance. Focused on the
food and beverage, life sciences, chemicals, metals and natural products
industries and implemented by over 1,000 customer companies worldwide, our
family of Internet-architected solutions is a comprehensive, modular suite that
spans a customer's enterprise, from manufacturing, financials and supply chain
management to customer relationship management, performance management and
regulatory compliance.
Publicly traded on the NASDAQ since 1991, Ross' global headquarters are
based in the U.S. in Atlanta, Georgia, with sales and support operations around
the world.
Our internet address is www.rossinc.com. We make available free of charge
on or through our Internet website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act, in each case as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC.
We license our products to customers through a direct sales force in North
America and Western Europe as well as independent distributors in dozens of
other markets worldwide. We also provide professional consulting services for
implementation, related custom application development and education. We offer
ongoing maintenance and support services for our products via Internet and
telephone help desks.
MERGER PROPOSAL
In early September 2003, we announced that we had entered into a
definitive agreement whereby chinadotcom Software (CDC) will acquire Ross
Systems in a merger. Both companies are listed on NASDAQ. We have not yet
determined to what extent the proposed merger will affect our financial
performance. However, we believe that CDC's Asian operations offer greater
opportunities of doing business in that region, while at the same time our
operations in North America and Europe offer many new opportunities to CDC in
our markets. Pursuant to an agreement entered into in May 2003, chinadotcom is a
licensed master distributor of our products in Greater China. Both chinadotcom
and Ross believe that the merger represents a unique opportunity to rapidly
scale the introduction of our manufacturing products into Greater China and that
the merger would assist in the realization of this strategic vision by
transforming a limited distribution partnership into an integrated group with
common objectives. It is also anticipated that chinadotcom will work with us in
selecting and pursuing business combinations with strategic software and
services companies and, in connection with those opportunities, provide
necessary access to capital. We do not have any agreements in place with
chinadotcom concerning the selection of these strategic software and services
companies or the terms and conditions of any loans or grants from chinadotcom to
us, and no specific business combinations have yet been identified. We
anticipate that preparation of specific plans for capitalizing on and creating
opportunities as a combined organization will be commenced as soon as
practicable after the merger is completed. The proposed merger will be voted on
by our stockholders at our forthcoming Annual Meeting.
1
ROSS SYSTEMS, INC AND SUBSIDIARIES
PRODUCTS
Ross offers the award-winning iRENAISSANCE(TM) family of software
solutions which is an integrated suite of enterprise resource planning (ERP II),
financials, materials management, manufacturing and distribution, supply chain
management (SCM), advanced planning and scheduling, customer relationship
management (CRM), electronic commerce, business intelligence and analytics
applications.
iRenaissance applications are known for their deep and rich functional fit
to process industry requirements, as well as their short implementation times
and cost-effective returns on investment.
TECHNOLOGY
The Company leverages contemporary Internet technologies to enable
significant benefits for its customers. Many Ross customers have benefited from
technology obsolescence protection as they have moved from older computing
platforms to current platforms by upgrading to new releases. Built on a highly
flexible technology platform, iRenaissance applications cost-effectively support
not only mid-size companies but scale effectively to support large, global
organizations in a wide range of languages and with thousands of users
processing hundreds of thousands of transactions daily. Ross customers also
benefit from the low cost of deployment and centralized maintenance afforded by
browser-based PC clients that provide secure access from any PC with Internet
access, to the system infrastructure at central locations where the software
resides and the data is managed. End-user satisfaction is enhanced by highly
configurable and easily personalized applications that provide follow-me
profiles for each user, regardless of physical location. Utilizing contemporary
standards such as XML, SOAP, Microsoft .NET and others, iRenaissance
applications can be effectively connected to any other applications or devices
via the Internet. Robust security features that leverage Internet standards
protect applications and data with both user-based and application function
profiles. The security facilities further enable companies in their effort to
achieve regulatory compliance by providing detailed audit trails for every
action taken by every user.
Because the Company's iRenaissance applications were developed with the
GEMBASE fourth generation language , 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 most popular database management systems. GEMBASE
itself is written in the C programming language to facilitate portability across
multiple hardware and database management system platforms. Because the
iRenaissance products were developed in GEMBASE, customers often find it easy to
customize their own applications.
Ongoing Development
To meet the increasingly sophisticated needs of its customers and broaden
its product offering for targeted vertical markets, the Company continually
strives to enhance its existing product functionality. The Company surveys the
needs of its customers through on-line, industry-specific discussion forums and
polling at its global user conferences, and incorporates many of their
recommendations into its products. The Company also conducts a variety of forms
of market research with industry analyst groups and targeted industry
associations to determine strategies for new features and entirely new products
for targeted vertical industries. As an example, iRENAISSANCE version 5.7
included new capabilities for streamlining the compliance and validation process
for companies regulated by the US FDA (United States Food and Drug
Administration). In fiscal 2002, the Company expanded its product suite for
targeted industries and introduced IRENAISSANCE SCM (Supply Chain Management)
and iRENAISSANCE CRM (Customer Relationship Management).
While maintaining focus on the requirements of targeted vertical markets,
the Company is expanding its potential geographic markets by developing new
product functionality to address the needs of additional prospective customers
in key international markets. These enhancements are related to local languages
and dialects, currency, accounting custom and procedures, and regulatory
requirements. As an example, through the partnership established with CDC
Software Corporation during the fourth quarter of fiscal 2003, the Company is
well advanced with its preparations for releasing additional local language
versions of its software for the Chinese markets. These
2
ROSS SYSTEMS, INC AND SUBSIDIARIES
enhancements enable the Company to leverage its iRENAISSANCE ERP products to
capitalize on the growing and largely untapped process manufacturing markets in
China.
The Company is also committed to achieving technology advances by
leveraging new Internet-based capabilities enabled by XML and Web Services.
During the 3rd quarter of fiscal 2003, the Company released the INTERNET
APPLICATION FRAMEWORK (TM) which enables the iRENAISSANCE ERP foundation with
full Internet deployment capabilities. Through the iNTERNET APPLICATION
FRAMEWORK, application users have full access to the iRENAISSANCE ERP
applications from any computer with an Internet connection and the Microsoft
Internet Explorer browser. Because no iRENAISSANCE ERP application software
needs to be deployed or maintained on user workstations, the Company's customers
have reported significant savings resulting from the use of the INTERNET
APPLICATION FRAMEWORK.
Third-Party Products
The Company resells software products licensed from third parties, which
are complementary to its product including applications for custom reporting of
information maintained by the Company's programs such as Business Objects for
executive information, and FRx for financial reporting and budgeting, as well as
certain middle-ware products. The Company resells other privately labeled
software products licensed from third parties including Prescient Systems
(rebranded as iRenaissance SCM) and Selligent (rebranded as iRenaissance CRM).
Additionally, the Company has entered into agreements which enable it to resell
database products and other products that are sublicensed to end users in
conjunction with certain of the Company's open systems products. License
revenues from the products described in this paragraph constitute approximately
26% of total software product license revenues in fiscal 2003.
Services
Our worldwide consulting services operation complements our enterprise
software and internet application offerings. We provide a broad range of
services to install and optimize each software product. These services fall into
two broad categories: Professional Services and Client Support. Income from
these activities consist of services and maintenance revenues which comprise
approximately 28% and 41% of total revenues respectively.
Professional Services
Our Professional Services organization provides business application
services, with deep and rich industry-specific experience, technical expertise
and product knowledge to complement our products and to provide solutions to
meet clients' business requirements. The major types of services provided
include the following:
Application Consulting involves in-depth analysis of the client's specific
needs and the preparation of detailed plans that list step-by-step actions and
procedures necessary to achieve a timely and successful implementation of our
software products. These services are generally offered on a time and expense
reimbursement basis.
Technical Consulting involves evaluating and managing the client's needs
by supplying custom application systems, custom interfaces, data conversions,
and system conversions. Consultants participate in a wide range of activities,
including requirements definition, and software design, development and
implementation. We also provide advanced technology services focused on
networking, database administration and tuning. These services are generally
offered on a time and expense reimbursement basis. We also provide remote
systems management, and remote applications management.
Education Services are offered to clients either at our education
facilities or at the client's location, as either standard or customized
classes.
Established relationships with third party consulting partners are
utilized around the world, to take advantage of local and specialized industry
expertise and to support our implementation demands in certain markets.
Client Support
Our Client Support functions include web-based support, telephone support,
technical publications and product support guides, which are provided under
maintenance agreements. The annual maintenance fee for these
3
ROSS SYSTEMS, INC AND SUBSIDIARIES
services is generally 20% of the price for the licensed software. The standard
maintenance agreement also entitles clients to certain new product releases and
product enhancements.
MARKETING AND SALES
We sell our products and services in the US and Western Europe primarily
through our direct sales force. At June 30, 2003, we had 44 sales and marketing
employees. In other areas of the world, we sell our products through
distributors. In support of our sales force and distributors, we conduct
comprehensive marketing programs which include telemarketing, direct mailings,
advertising, promotional material, seminars, trade shows, public relations and
on-going customer communication.
We are based in Atlanta, Georgia, with a regional direct sales force
covering all major US business locations. We have subsidiaries in Antwerp,
Belgium; Ottawa, Canada; Berlin, Germany; Utrecht, the Netherlands; Barcelona,
Spain; Northampton, United Kingdom as well as Hong Kong and Singapore.
We have business arrangements with distributors as well and language and
localization support in the following countries: Argentina, Australia, Brazil,
Chile, China, Colombia, Czech Republic, Denmark, Finland, Germany, Greece, Hong
Kong, Hungary, Indonesia, Ireland, Italy, Japan, Jordan, Lebanon, Malaysia,
Mexico, Morocco, New Zealand, Norway, Pakistan, Peru, Poland, Portugal, Rumania,
Russia, Saudi Arabia, Singapore, Slovak Republic, Sweden, Taiwan, Thailand,
Uruguay and Venezuela. These distributors pay us royalties on the sales of our
products and maintenance services.
International revenues (from foreign operations and export sales)
represented approximately 40%, 45%, and 33%, of our revenues in fiscal 2003,
2002, and 2001, respectively. International revenues include export sales to the
Asian region. However, Asian revenues are included as part of North American
revenues in the "Segment Information" in Notes to the Consolidated Financial
Statements. We intend to broaden our presence in international markets by
entering into additional distribution agreements.
PRODUCT DEVELOPMENT AND ACQUISITIONS
To meet the increasingly sophisticated needs of our customers and address
potential new markets, we continually strive to enhance our existing product
functionality. We survey the needs of our customers annually through ballots and
direct discussions at our annual user conferences, and incorporate many of their
recommendations into our products. We also conduct a variety of forms of market
research with industry analyst groups and targeted industries to determine
strategies for new features and functions. We are committed to achieving
advances in the use of computer systems technology and to expanding the breadth
of our product line. Development activity during fiscal 2003 covered a wide
range of evolving functionality enhancements to present releases of our
products. Projects in progress being carried into fiscal 2004 include several
functionality enhancements important to a broad base of our customers, and
ongoing improvements to the integration aspects of the third party applications,
which have been incorporated into our product suite.
COMPETITION
The business applications software market is intensely competitive. We
compete with a broad range of applications software companies. Our competitors
include general business application software providers, such as Peoplesoft,
Oracle Corporation, and SAP AG; as well as business applications software
providers in specific vertical markets that offer products that compete with our
process manufacturing products. The principal competitive factors in the market
for business application software include product reputation, product
functionality, performance, quality of customer support, size of installed base,
financial stability, hardware and software platforms supported, price, and
timeliness of installation. We believe that we compete effectively with respect
to these factors.
PROPRIETARY RIGHTS AND LICENSES
We provide our products to end users generally under nonexclusive,
nontransferable licenses, which generally have perpetual terms. Under the
general terms and conditions of our standard license agreements, the licensed
software may be used solely for internal operations on designated computers at
specific sites. We make source code available for certain portions of our
products.
We have registered "iRENAISSANCE", "RENAISSANCE", "RENAISSANCE CS", and
"ROSS SYSTEMS" as trademarks in the United States. We have applied for a
provisional patent with respect to systems
4
ROSS SYSTEMS, INC AND SUBSIDIARIES
and associated methods for determining availability and pricing of goods based
on attributes. We have secured registration of copyrights in the United States
for 17 of our products. Although we take steps to protect our intellectual
property, misappropriation may nevertheless occur and copyright and trade secret
protection may not be available in certain countries.
Except as noted above, we rely on a combination of trade secret, copyright
and trademark laws, and license agreements to protect our proprietary rights in
our products.
EMPLOYEES
As of June 30, 2003, we employed a total of 255 full time employees,
including 44 in sales and marketing, 48 in product development, 132 in
professional services and client support, and 31 in finance, administration and
operations. Our employees are not represented by a labor union, and we believe
that our employee relations are good.
ITEM 2. PROPERTIES
Our corporate headquarters, research and development, sales, marketing,
consulting and support facilities are located in Atlanta, Georgia, where we
occupy approximately 22,000 square feet. We also maintain a facility for product
development in San Marcos, California, which occupies 1,470 square feet.
International offices are maintained in Belgium (Antwerp); England
(Northampton); Germany (Berlin); Netherlands (Utrecht); and Spain (Barcelona).
At June 30, 2003, all facilities are leased with periods remaining to
renewal varying from nine months to twelve years. We believe our facilities are
adequate for our current needs and that we can obtain suitable additional space
as required.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may become involved in litigation
and administrative proceedings. Such matters can be time-consuming, divert
management's attention and resources and cause the accumulation of significant
expenses. Furthermore, there can be no assurance that the results of any of
these actions will not have a material adverse effect on our business, results
of operations or financial condition.
a) On June 30, 1998, we entered into a North American distribution
agreement with an existing Dutch systems integrator which entitled us to
distribute a certain project accounting product the integrator had developed.
The agreement contained certain minimum annual payments which would become due
to the distributor if we did not achieve certain minimum annual sales quotas.
The agreement also required that we use the distributor's personnel for certain
implementation and maintenance activities.
Over the next few years, the distributor, in our view, failed to
consistently successfully implement the project accounting product at multiple
sites. These failures cost us between $300,000 and $400,000 in legal fees,
uncollectible accounts receivable and settlement costs. In February 2001, we
cancelled the agreement with the distributor.
The parties were not able to reach mutual agreement regarding the terms of
a settlement, and the distributor invoked the arbitration clause of the
agreement in late 2001. The arbitration was commenced before the International
Court of Arbitration in Paris, France, with the distributor ultimately seeking
multiple damages aggregating more than $4,000,000. On November 17, 2003, the
Arbitrator announced an award in favor of the distributor of approximately
$2,000,000. We paid the award during the quarter ended December 31, 2003 out of
operating cash flows in the ordinary course of business.
b) Effective February 28, 2001, the Company completed the sale of certain
assets related to its Human Resource and Payroll product line to Now Solutions,
LLC, (NOW), a majority owned subsidiary of Vertical Computer Systems
Inc.(Vertical). Arglen Acquisitions (Arglen), was also a party to the
transaction as a minority member of NOW
5
ROSS SYSTEMS, INC AND SUBSIDIARIES
to complete the transaction. The gross asset sale price was $6,100,000. The
purchase price included cash of $5,100,000 and a note payable by NOW to Ross
of $1,000,000.
The note was non-interest bearing and was due in two installments;
$250,000 due on February 28, 2002 and $750,000 due on February 28, 2003. NOW
defaulted on the second installment of $750,000 which remains outstanding and is
accruing interest at the rate of 10%, per annum the default interest rate as
defined in the note.
On February 27, 2003, the day before the final note installment was due,
Vertical filed a derivative suit on behalf of NOW against Ross and others
alleging breach of contract, fraud, conspiracy and breach of fiduciary duty. In
summary the suit alleged that Ross failed to schedule approximately $3,600,000
of liabilities related to maintenance agreements assumed by NOW. The suit also
alleged that Ross failed to disclose to NOW a transaction brokerage fee of
$600,000 that Ross was to pay to Arglen, whose CEO signed the fee agreement and
who was also the CEO of NOW. The suit also alleges that Ross should be jointly
and severally liable for certain alleged frauds committed by other defendants in
which Ross allegedly conspired. The suit further called for a setoff against the
remaining note payment based on the above alleged damages, and the recovery of
its attorneys' fees and costs. Ross denied and contested each and every one of
Vertical's claims, and filed a motion for the Court to dismiss.
On November 18, 2003, the Supreme Court of the State of New York granted
Ross's motion to dismiss Vertical's action as against Ross based on
Vertical's failure to state claims, thereby dismissing all of Vertical's
claims against Ross. Vertical has appealed. The Company will continue to defend
this matter vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The following table sets forth the range of high and low bid prices for
our Common Stock on the NASDAQ National Market for each of the quarters of
fiscal 2003 and 2002. Our Common Stock trades under the NASDAQ symbol "ROSS."
FISCAL 2003 HIGH LOW
----------- ------ ------
First quarter (ended September 30, 2002)................................................... $ 8.35 $ 6.05
Second quarter (ended December 31, 2002) .................................................. $ 9.90 $ 4.51
Third quarter (ended March 31, 2003)....................................................... $14.95 $ 8.00
Fourth quarter (ended June 30, 2003)....................................................... $15.49 $11.10
FISCAL 2002 HIGH LOW
----------- ------ ------
First quarter (ended September 30, 2001)................................................... $ 4.08 $ 2.94
Second quarter (ended December 31, 2001)................................................... $ 6.31 $ 2.38
Third quarter (ended March 31, 2002)....................................................... $11.56 $ 5.82
Fourth quarter (ended June 30, 2002)....................................................... $11.65 $ 7.80
We have never declared or paid cash dividends on Common Stock, and we do
not plan to declare or pay dividends in the future. We intend to use earnings to
finance the expansion of our business. In addition, our line of credit agreement
with Silicon Valley Bank dated September 24, 2002, contains certain covenants
which affect our ability to pay cash dividends. This does not affect the
dividends payable on the Convertible Preferred Stock.
As of September 2, 2003, the approximate number of Common Stock,
stockholders of record was 469.
6
ROSS SYSTEMS, INC AND SUBSIDIARIES
On January 13, 2003 we issued 120,000 unregistered common shares to Oscar
Pierre Prats, pursuant to the acquisition of Ross Systems Iberica, a former
distributor. The shares were issued at $9, which was the market price of the
Company's stock on that day. As of the same date, the shares were repurchased
into treasury stock. Mr. Prats represented that he was an "accredited investor"
as defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933, and that his intention was to acquire the common shares on his own account
for investment purposes only and not with a view towards resale of the common
shares in connection with any distribution of the common shares. Legends were
affixed to the certificates representing the common shares stating that the
shares have not been registered under the Securities Act of 1933 and cannot be
transferred unless registered under the Securities Act of 1933 or transferred
under an exemption from registration. Ross did not offer the common shares
purchased by Mr. Prats by any form of general solicitation or general
advertising. For these reasons, the issuance of securities in this transaction
was exempt from registration under the Securities Act of 1933 under Rule 505 of
Regulation D. See note 2 on page F-14 in the Notes to Consolidated Financial
Statements.
On June 29, 2001, we issued mandatorily convertible preferred stock to a
qualified investor in a private placement transaction. In summary, the investor
purchased 500,000 preferred shares at $4.00 per share yielding $2,000,000 for
Ross. This price represented a premium to the market for our common stock at the
time of issuance. The preferred shares cannot be converted for two years but
must be converted within five years from the issue date. The shares earn
dividends at the rate of 7.5%. At September 3, 2003, none of the preference
shares had been converted to common stock. The shares are convertible, one for
one, at a price of $4.00 per share. The investor represented that he was an
"accredited investor" as defined in Rule 501 of Regulation D promulgated under
the Securities Act of 1933, and that his intention was to acquire the preferred
shares on his own account for investment purposes only and not with a view
towards resale of the preferred shares in connection with any distribution of
the preferred shares. Legends were affixed to the certificates representing the
preferred shares stating that the shares have not been registered under the
Securities Act of 1933 and cannot be transferred unless registered under the
Securities Act of 1933 or transferred under an exemption from registration. Ross
did not offer the preferred shares by any form of general solicitation or
general advertising. For these reasons, the issuance of securities in this
transaction was exempt from registration under the Securities Act of 1933 under
Rule 505 of Regulation D.
7
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements of Ross
Systems, and Notes thereto, and other financial information included elsewhere
in this Annual Report on Form 10-K/A. Historical results are not necessarily
indicative of results that may be expected in future periods.
CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Total revenues (1)(2) ................. $ 48,100 $ 46,053 $ 50,805 $ 83,399 $ 106,024
Operating earnings (loss) (3)(4) ...... $ 4,791 $ (8,667) $ (2,024) $ (8,143) $ (3,936)
Net earnings (loss) ................... $ 4,206 $ (9,424) $ (842) $ (9,662) $ (5,626)
Net earnings (loss) available to common
stockholders ....................... $ 4,056 $ (9,574) $ (842) $ (9,662) $ (5,626)
Diluted net earnings (loss) per share . $ 1.28 $ (3.65) $ (0.33) $ (4.15) $ (2.53)
Shares used in computing diluted net
earnings (loss) per share ....... 3,296 2,625 2,566 2,330 2,223
BALANCE SHEET DATA:
Working capital (deficit) ............. $ (943) $ (4,536) $ (9,640) $ (15,340) $ (3,745)
Total assets .......................... $ 40,211 $ 37,618 $ 50,462 $ 64,295 $ 83,185
Long-term debt, less current portion .. - - - $ 2,627 3,705
Preferred stock, no par value 5,000,000
shares authorized;
500,000 shares issued and outstanding $ 2,000 $ 2,000 $ 2,000 - -
Total shareholders' equity ............ $ 17,029 $ 13,943 $ 23,104 $ 20,890 $ 29,257
(1) Revenues and operating costs have been increased in all years by the
reclassification of Reimbursable Expenses to comply with EITF 01-14. See
notes to the Consolidated Financial Statements on page F-10.
(2) Results shown for fiscal years 2000 and 1999 include revenues and
operating costs relating to activities derived from the HR/Payroll product
line which was sold in February of 2000. Results for these two fiscal
years are therefore not directly comparable with the results of fiscal
years 2001 through 2003. See commentary on this in "Results of Operations"
on page 10.
(3) In accordance with the adoption on SFAS No. 142, the Company ceased
amortization of Goodwill beginning July 1, 2001. See notes to the
Consolidated Financial Statements on page F-10.
(4) In accordance with SFAS No. 86, the Company recorded an impairment of
Capitalized Software Costs during the year ended June 30, 2002. See notes
to the Consolidated Financial Statements on page F-13.
8
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION
Our consolidated financial statements include the accounts of Ross and our
wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. Our fiscal year ends on June
30. "Fiscal 2001," "fiscal 2002," and "fiscal 2003" mean our fiscal years ended
June 30 of each such year.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. We recognize revenues from licenses of computer
software "up-front" provided that a non-cancelable license agreement has been
signed, the software and related documentation have been shipped, there are no
material uncertainties regarding customer acceptance, collection of the
resulting receivable is deemed probable, and no significant other vendor
obligations exist. The revenue associated with any license agreements containing
cancellation or refund provisions is deferred until such provisions lapse. Where
we have future obligations, if such obligations are insignificant, related costs
are accrued immediately. If the obligations are significant, the software
product license revenues are deferred. Future contractual obligations can
include software customization, requirements to provide additional products in
the future and porting products to new platforms. Contracts that require
significant software customization are accounted for on the
percentage-of-completion basis. Revenues related to significant obligations to
provide future products or to port existing products are deferred until the new
products or ports are completed.
Our revenue recognition policies are designed to comply with American
Institute of Certified Public Accountants Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," and with SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." Revenues recognized from
multiple-element software license contracts are allocated to each element of the
contracts based on the fair values of the elements, such as licenses for
software products, maintenance, or professional services. The determination of
fair value is based on objective evidence which is specific to the Company. We
limit our assessment of objective evidence for each element to either the price
charged when the same element is sold separately, or the price established by
management having the relevant authority to do so, for an element not yet sold
separately. If evidence of fair value of all undelivered elements exists but
evidence does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the
arrangement fee is recognized as revenue.
We utilize distributors primarily in those geographic areas where we do
not maintain a physical presence. Our revenue recognition policies with respect
to sales by distributors comply with SOP 97-2 and SAB 101 in that all the
revenue recognition criteria listed above are met. In addition, distributors do
not have rights of return, price protections, rotation rights, or other features
that would preclude revenue recognition. Generally, the value of software
license sales to distributors is based on list selling prices to their customer
less a discount at a predetermined rate. Similarly, we receive revenue from
distributors based on a predetermined percentage of the maintenance fees billed
by the distributor from the end customer. The distributor typically retains any
fees earned by them for implementation services. Distributorships may or may not
be geographically exclusive, and are generally subject to annual renewals by the
Company.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance revenues,
including revenues bundled with original software product license revenues, are
deferred and recognized over the related contract period, generally 12 months.
Accounts receivable comprise trade receivables that are credit based and
do not require collateral. Generally, our credit terms are 30 days but in some
instances we offer extended payment terms to customers purchasing software
licenses. We have a history of offering extended payment terms from time to time
for competitive reasons. These terms are not offered in connection with any
contingencies related to product acceptance, implementation, or any other
service or contingency post-transaction, and we have not offered concessions as
a result of these terms. Payment arrangements in these circumstances typically
require payment of a significant portion of the total contract amount within 30
days of the sale, with 2 or 3 subsequent installments making up the balance
payable within 6 months. We have not found collectibility to be compromised as a
result of these terms. In
9
ROSS SYSTEMS, INC AND SUBSIDIARIES
no case have payment terms extended beyond 12 months. Based on historical
results, we believe that all components of SOP 97-2 are met, including that the
arrangement is fixed and determinable.
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. On an
ongoing basis, we evaluate the collectibility of accounts receivable based upon
historical collections and assessment of the collectibility of specific
accounts. We specifically review the collectibility of accounts with outstanding
accounts receivable balances in excess of 90 days outstanding. We evaluate the
collectibility of specific accounts using a combination of factors, including
the age of the outstanding balance(s), evaluation of the account's financial
condition, recent payment history, and discussions with our account executive
responsible for the specific customer and with the customer directly. Based upon
this evaluation of the collectibility of accounts receivable, an increase or
decrease required in the allowance for doubtful accounts is reflected in the
period in which the evaluation indicates that a change is necessary. If actual
results differ, this could have an impact on our financial condition, results of
operation and cash flows.
COMPUTER SOFTWARE COSTS. We capitalize computer software product
development costs incurred in developing a product once technological
feasibility has been established and until the product is available for general
release to customers. Technological feasibility is established when we either
(1) complete a detail program design that encompasses product function, feature
and technical requirements and is ready for coding and confirms that the product
design is complete, that the necessary skills, hardware and software technology
are available to produce the product, that the completeness of the detail
program design is consistent with the product design by documenting and tracing
the detail program design to the product specifications, and that the detail
program design has been reviewed for high-risk development issues and any
related uncertainties have been resolved through coding and testing or (2)
complete a product design and working model of the software product, and the
completeness of the working model and its consistency with the product design
have been confirmed by testing.
Capitalized software development costs generally relate to development
projects spanning several months. Resources are committed to these projects on a
consistent and long-term basis resulting in a generally consistent impact on the
financial results. We evaluate the extent to which the capitalized amounts are
realizable based on expected revenues from the product over the remaining
product life. Where future revenue streams are not expected to cover remaining
amounts to be amortized, we either accelerate amortization or expense remaining
capitalized amounts.
Amortization of such costs is computed as the greater of (1) the ratio of
current revenues to expected revenues from the related product sales or (2) a
straight-line basis over the expected economic life of the product (not to
exceed five years). Software costs related to the development of new products
incurred prior to establishing technological feasibility or after general
release are expensed as incurred.
RESERVES AND ESTIMATES. In the ordinary conduct of our business, we
must often use judgment and estimates regarding the recording of certain
reserves. For example, we use judgment in order to determine the amount of our
reserves for uncollectible accounts receivable. Should our estimates prove to be
incorrect, our reserves may be inadequate.
FOREIGN CURRENCIES
The financial position and the results of operations of our foreign
subsidiaries are measured using local currencies as the functional currencies.
Assets and liabilities of these subsidiaries are translated into US dollars at
the exchange rate in effect at year end. Income and expense items are translated
at average exchange rates for the year. The resulting translation adjustments
are recorded in the foreign currency translation adjustment account. The effects
of changes in foreign currency exchange rates have had minimal effect on our
financial results reported herein.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 2003, 2002, AND 2001
The following table sets forth certain items reflected in our consolidated
statements of operations as a percentage of total revenues for the periods
indicated, and a comparison of such statements is shown as a percentage increase
or decrease from the prior year's results:
10
ROSS SYSTEMS, INC AND SUBSIDIARIES
PERCENTAGE OF REVENUE
FISCAL YEAR ENDED PERCENTAGE
JUNE 30, INCREASE (DECREASE)
-------------------------------- ----------------------
2003 2002 2001 2003/2002 2002/2001
------ ------ ------ --------- ---------
Revenues:
Software product licenses ......................... 30% 28% 19% 12% 35%
Consulting and other services ..................... 28 28 32 4 (21)
Maintenance ....................................... 42 44 49 0 (19)
------ ------ ------ --------- ---------
Total revenues ............................ 100% 100% 100% 4% (9)%
------ ------ ------ --------- ---------
Operating expenses:
Costs of software product licenses (inclusive of
amortization and impairment of capitalized
computer software costs) ....................... 15% 43% 16% (65%) 139%
Costs of consulting, maintenance and other services 36 37 35 1 (3)
Software product license sales and marketing ...... 23 20 30 20 (37)
Product development ............................... 5 7 8 (17) (26)
General and administrative ........................ 9 10 9 - (7)
Provision for uncollectible accounts .............. 2 3 3 (42) (5)
Amortization of goodwill .......................... - - 1 - (100)
Non-recurring (benefit) costs ..................... - (1) 2 (100) (182)
------ ------ ------ --------- ---------
Total operating expenses .................. 90 119 104 (21) 4
------ ------ ------ --------- ---------
Operating profit (loss) ................... 10 (19) (4) - (228)
Other expense, net ................................ - (1) (2) (71) (47)
Gain on sale of product line ...................... - - 5 - -
------ ------ ------ --------- ---------
Profit (loss) before income taxes ......... 10 (21) (2) - (1,019)
Income tax benefit (expense) ...................... (1) - - 207 1,367
------ ------ ------ --------- ---------
Net profit (loss) ......................... 9% (21)% (2)% - 1,037%
====== ====== ====== ========= =========
REVENUES. Revenues were affected by the sale of the Human Resource product
line in February 2001. Fiscal 2001 therefore reflects a mix of full and partial
years of product line activity. For comparison purposes, revenues for fiscal
2001 have been adjusted to exclude the Human Resource product line activity.
This revenue is referred to as "adjusted revenue". We believe this is a useful
way to consider the trend in our reported revenues since the disposal of the
HR/Payroll product line did not qualify as a discontinued operation.
Comparisons of both adjusted revenue and total revenue follow below (in
thousands):
ADJUSTMENT TO
EXCLUDE
ESTIMATED ESTIMATED ACTUAL
ADJUSTED (NON HR/PAYROLL REVENUES
ACTUAL REVENUES GAAP) REVENUES REVENUES FISCAL YEAR
FISCAL YEAR ENDED FISCAL YEAR FISCAL YEAR ENDED
JUNE 30, ENDED JUNE 30, ENDED JUNE JUNE 30,
REVENUE COMPARISON 2003 2002 2001 30, 2001 2001
------- ------- -------------- ------------- -----------
Revenues:
Software product licenses ......... $14,589 $13,026 $ 9,130 $ 477 $ 9,607
Consulting and other services ..... 13,489 13,013 14,922 1,598 16,520
Maintenance ....................... 20,022 20,014 21,717 2,961 24,678
------- ------- -------------- ------------- -----------
Total revenues ............ $48,100 $46,053 $ 45,769 $ 5,036 $ 50,805
------- ------- -------------- ------------- -----------
11
ROSS SYSTEMS, INC AND SUBSIDIARIES
Adjustments for the sale of the HR/Payroll product line were not required
for actual revenues in fiscal years 2003, and 2002. Adjusted revenues, as
defined above, were slightly increased by $284,000 at $46,053,000 in fiscal 2002
from $45,769,000 in fiscal 2001. Adjusted software product license revenues
increased by 43% from fiscal 2001 to fiscal 2002. Adjusted consulting revenues
decreased 12% from fiscal 2001 to fiscal 2002. Since consulting revenue activity
generally occurs during the six to nine months following the software license
sales, 2002 consulting revenues were adversely affected by the low software
license revenues reported in 2001. Adjusted maintenance revenues from first year
and renewed maintenance agreements, both of which are recognized ratably over
the maintenance period, decreased 8% from fiscal 2001 to fiscal 2002. This
decrease in maintenance revenues was due to the fact that the rate of
maintenance contract cancellations in fiscal 2002 exceeded the rate at which
maintenance contracts for new customers were added to the revenue stream. The
rate of cancellations in fiscal 2002 was not abnormally high but the addition of
new maintenance contracts in fiscal 2002 was adversely affected by the low
software license sales in 2001.
Total actual revenues increased 4% from $46,053,000 for fiscal 2002 to
$48,100,000 fiscal 2003. Actual revenues decreased 9% to $46,053,000, in fiscal
2002 from $50,805,000 in fiscal 2001. Software product license revenues
increased 12 % from fiscal 2002 to fiscal 2003, and increased 36% from fiscal
2001 to fiscal 2002. Consulting revenues increased 4% from fiscal 2002 to fiscal
2003, and decreased 20% from fiscal 2001 to fiscal 2002. Maintenance revenues
from first year maintenance contracts sold with new license agreements, and
renewed maintenance agreements, both of which are recognized ratably over the
maintenance period, were flat for fiscal 2003 when compared to fiscal 2002, and
decreased 19% from fiscal 2001 to fiscal 2002.
Software product license revenues in the North American market increased
by 78% in fiscal 2003 when compared to fiscal 2002. Software product license
revenues in the North American market decreased by 18% in fiscal 2002 over
fiscal 2001. We believe that the North American decrease in software license
sales in fiscal 2002 was due to an industry-wide slowdown in North America of
sales of enterprise resource planning (ERP) software during that period. In the
aftermath of the September 11, 2001 terrorist attack, prospective customers
became more cautious in general about spending on new projects and capital items
as an atmosphere of economic uncertainty prevailed. This cautious outlook
prevailed for some time until in fiscal 2003 when we experienced a turnaround in
the volume of software sales in North America due to both a slight improvement
in the economic trading conditions in the process manufacturing sector, and
increasing benefits arising from our consistently applied marketing efforts
during fiscal 2002 and 2003. While not yet significant, total sales of
approximately $427,000 of the recently introduced iRenaissance CRM (Customer
Relationship Management) product also began to contribute to revenues in both
Europe and North America in fiscal 2003. In the European market during fiscal
2003, our software license sales grew by 8%. This increase was experienced
primarily in the United Kingdom and Northern Europe. In the United Kingdom, a
new sales director was appointed at the beginning of calendar year 2003 to
replace the country manager and he led his sales team to an immediate
improvement in software license sales. In Northern Europe software license sales
were increased mainly by gaining increased visibility of our products by
increased attendance at trade shows in the region. In fiscal 2003, sales in
Spain were down 10% on the prior year, but this was after increasing software
license revenues in fiscal 2002 by 164% over fiscal 2001. This increase was due
to our Spanish subsidiary gaining market recognition through exposure in
industry publications and entering into strategic partnerships with other
software vendors. The software license revenue performance of the Spanish
subsidiary in fiscal 2002 was the dominant cause of the overall 74% increase in
software license revenues in Europe in fiscal 2002 when compared to fiscal 2001.
European revenues in fiscal 2003 were also enhanced by approximately $2,100,000
due to more favorable foreign exchange rates on average during the year, when
compared to fiscal 2002. Software license sales in the Asia/Pacific Rim region
decreased by 71% to $841,000 in fiscal 2003 after increasing by 148% to
$2,853,000 in fiscal 2002, from $1,150,000 in fiscal 2001. The software license
revenues in fiscal 2002, of approximately $2,853,000, comprised mainly of sales
to our distributor in Japan and provided them with software product for sales to
new customers in their region. orders for new licenses from our distributor in
Japan did not recur at similar levels in fiscal 2003, thus sales to this
distributor in fiscal 2003 were confined to royalties on revenues earned from
their existing customer base, and resulted in lower revenues of approximately
$841,000 in that region.
Revenues from consulting and other services (which are recognized as
performed) correlate with software product license revenues (which are
recognized upon delivery), so that when software product license revenues
increase or decrease, future period services revenues generally increase or
decrease respectively as a result. In fiscal 2003, consulting and other services
revenues increased by 4% over fiscal 2002 revenues. This increase was the net
12
ROSS SYSTEMS, INC AND SUBSIDIARIES
result of a 37% increase in North America and an 18% decrease internationally.
The North American services revenues benefited from the steady increase in North
American software license revenues over the fiscal year, while the international
services revenues were adversely affected by the timing of the increase in
software license revenues being predominantly in the last quarter of the fiscal
year. This meant that most of the services revenues associated with these fourth
quarter license revenues will be earned in fiscal 2004. In fiscal 2002,
consulting and other services revenues decreased 20%, from fiscal 2001 results.
Fiscal 2002 consulting revenues were adversely affected by the low software
license revenues reported in 2001.
Revenues from first year maintenance contracts and renewable maintenance
were unchanged in fiscal 2003 as compared to fiscal 2002. During fiscal years
2002 and 2001, declines in maintenance revenues were experienced due to an
excess of the value of maintenance revenue contracts cancelled over the value of
new renewable maintenance revenue contracts being added to the maintenance base.
During fiscal 2003, the retention of existing renewable maintenance contracts
improved. At the same time, maintenance revenue accruing from new customers
acquired during the prior year increased in proportion to the improvement in
software license revenues in the prior fiscal year. In addition, first year
maintenance revenues benefited from the increase in software license sales in
the current fiscal year. The effect of these trends was to keep maintenance
revenues constant in fiscal 2003 as compared to fiscal 2002.
Our international operations, as a percentage of total revenues for fiscal
2003, 2002 and 2001 was 40%, 45% and 33% respectively.
No single customer accounted for more than 10% of revenues during fiscal
2003, 2002 or 2001. Our customers are evenly spread among the industry verticals
within the process manufacturing market.
COSTS OF SOFTWARE PRODUCT LICENSES (INCLUSIVE OF AMORTIZATION AND
IMPAIRMENT OF CAPITALIZED COMPUTER SOFTWARE COSTS). Costs of software product
licenses include expenses related to royalties paid to third parties and product
documentation and packaging. Third party royalty expenses will vary from quarter
to quarter based on the mix of third-party products being sold. Costs of
software product licenses for fiscal 2003 decreased by 65% to $6,997,000 from
fiscal 2002, and in fiscal 2002 increased by 139% to $19,992,000 from fiscal
2001. The decrease in fiscal 2003 reflects a substantial reduction in impairment
charges taken during fiscal 2002 and discussed more fully below, partially
offset by the continued growth of third party content in software license sales.
This is an outcome of our strategy to provide a fully rounded suite of products
that meet all our customers' needs. The largest contributor to this was sales of
iRENAISSANCE CRM (Customer Relationship Management) which is a privately labeled
product licensed from a third party. As a percent of software revenue, third
party royalties comprised 16% in fiscal 2003, 14% in fiscal 2002, and 10% for
fiscal 2001.
After a substantial reduction in the value of capitalized software
development costs in fiscal 2002, amortization of previously capitalized
software development costs decreased by $2,482,000 to $4,702,000 in fiscal 2003
as compared to $71,84,000 fiscal 2002. Amortization of capitalized software
development costs in fiscal 2002 was almost flat compared to fiscal 2001.
In the year ended June 30, 2002, an impairment charge of $10,938,000 was
incurred. This was as a result of certain events occurring during fiscal 2002,
including a change in technology direction, and developments affecting the
potential realizability of revenues relating to certain capitalized software
assets. This action had no effect on our cash position or cash flows. The
impairment charge was made up of the following four items: (1) The change in
technology direction during the fourth quarter of fiscal 2002, when the internet
related functionality of the iRenaissance product was re-directed from the
"java" based initial development used in the Resynt product line to the
Microsoft ".net" technology. A new, formal development relationship with
Microsoft was launched to support the requirements of the new technology
direction. This strategic re-direction was based on our belief that the .net
technology will serve us and our customers better in the future, due to fuller
market penetration, better standards of compatibility, and superior technical
adaptability. The result of this change was that prior development in the former
java environment became obsolete. Effective April 1, 2002, the amount of
$5,488,000, representing all unamortized software-project balances relating to
this was written off. (2) On April 23, 2002, we announced the General
Availability of Gembase Version 6.0. This version of Gembase, the 4GL language
used for the development of the iRenaissance products, contained major
functionality differences compared to prior versions, rendering all prior
versions obsolete. As a result, development and maintenance for all versions
prior to 6.0 were discontinued and no further sales of these versions were
contemplated. In addition, customers using these versions were strongly
13
ROSS SYSTEMS, INC AND SUBSIDIARIES
encouraged to upgrade to version 6.0 because we no longer supported development
of any Gembase release lower than version 6.0. Upgrades to the 6.0 version were
strongly supported and to encourage and facilitate customers' upgrading, the
product was designed to make the transition straight-forward. Since Gembase
versions lower than 6.0 would not contribute any further revenue to the Company,
even in the short-term, the related unamortized software-project balances
amounting to $943,000 were expensed. (3) On May 22, 2002 we announced the
release of iRenaissance version 5.7. This version was significantly changed from
the prior versions. Previous to this release, upgrades from any version less
than 4.4 were technically challenging resulting in an environment not conducive
to customer upgrades. Version 5.7 offered a straight-forward upgrade capability
to customers on previous versions. In addition, version 5.7 contained a new
"engine" at its core, which significantly changed the way the software operated
internally and resulted in improved operating efficiencies. Since customers on
versions lower than 4.4 could now upgrade without difficulty, we were able to
discontinue the development and support of all versions prior to 4.4. No further
sales of these versions were contemplated. This had the effect of rendering all
releases of iRenaissance which were lower than 4.4 obsolete. Since iRenaissance
versions lower than 4.4 would not contribute any further license revenue, the
related unamortized software-project balances amounting to $3,333,000 were
written off. (4) During May 2002, we terminated further work on general
enhancements of the COBOL technology based Renaissance Classic product line and
a twofold decision was made; to continue working with specific customers on
custom product development, and to introduce a general sales program of free
software license upgrade from the Classic product to the latest release of the
iRenaissance product line for customers who remain on maintenance. We continue
to support those customers who remain active users until they schedule their
upgrade conversion to iRenaissance. Since no future revenues are expected from
the general enhancements capitalized to date, the aggregate, unamortized
software-project balances amounting to $1,174,000 were written off.
COSTS OF CONSULTING, MAINTENANCE AND OTHER SERVICES. 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. From time to time we also use outside
consultants to supplement Company personnel in meeting peak customer consulting
demands. Costs of consulting, maintenance and other services, net of
reimbursable expenses, increased by 1% to $17,193,000 in fiscal 2003 from
$17,023,000 in fiscal 2002, and had decreased 3% in fiscal 2002 from $17,595,000
in fiscal 2001. Fiscal 2003 consulting revenues were relatively constant as
compared to fiscal 2002, and this resulted in the similar pattern exhibited in
the consulting, maintenance and other services costs. The lower levels of
expenditure in fiscal 2002 compared to fiscal 2001, reflects savings of
approximately $572,000 in employee related costs as a result of a headcount
reduction of approximately 127 consulting personnel early in fiscal 2001, net of
additions during fiscal 2002 of approximately 10 service personnel.
SOFTWARE PRODUCT LICENSE SALES AND MARKETING EXPENSES. Software product
license sales and marketing expenses increased by 20% to $11,384,000 in fiscal
2003, from $9,461,000 in fiscal 2002, and decreased by 37% to $9,461,000 in
fiscal 2002 from $15,026,000 in fiscal 2001. The increase in fiscal 2003 was due
to higher expenditures on sales and marketing of $531,000 in North America and
$434,000 in Europe, combined with an escalating effect attributable to a
stronger Euro Dollar and British Pound accounting for approximately $958,000 of
the increase in European expenditures. These increases were caused primarily by
increases in commissions and incentive compensation expenses. The decrease of
$5,565,000 for fiscal 2002 over fiscal 2001, was a result of lower expenditures
due primarily to reductions of sales and marketing personnel and related costs
totaling approximately 74 employees from fiscal year 2002 as compared to fiscal
2001.. Specifically, the decrease comprises approximately $3,600,000 relating to
employee base compensation and benefits costs, and other expense reductions
including approximately $514,000 in travel and entertainment, $300,000 in
incentives and commissions, $720,000 in facilities and communications, $190,000
in marketing expenses, and $241,000 in other costs.
PRODUCT DEVELOPMENT EXPENSES. Product development expenditures is a
commonly used measure in the software industry to describe the quantum of cost
relating to software development excluding the effects of any capitalization of
these costs and amortization of capitalized costs. This amount is derived by
adjusting the figures shown in the Consolidated Statements of Operations as
follows: (in thousands):
14
ROSS SYSTEMS, INC AND SUBSIDIARIES
FISCAL YEAR ENDED JUNE 30,
-------------------------------
2003 2002 2001
------- ------- -------
Product development, net of capitalized computer software costs 2,528 3,057 4,127
Software development costs capitalized during the year . 4,239 4,181 6,878
------- ------- -------
Total expenditures ............................................ $ 6,767 $ 7,238 $11,005
------- ------- -------
Total expenditures as a percent of total revenues ............. 14% 16% 22%
======= ======= =======
Product development expense declined by 17% to $2,528,000 in fiscal 2003
from $3,057,000 in fiscal 2002. During fiscal 2003, expenditure on outsourced
development was increased by approximately $300,000 while at the same time
headcount in the development department was reduced by six persons. This
strategy contributed to the overall reduction in development expense. Product
development expense was slightly down in fiscal 2002, as compared to fiscal
2001. Capitalized development costs incurred during fiscal 2003 were at a level
consistent with the prior year. In fiscal 2002, capitalized development costs
had decreased by 39% to $4,181,000 from $6,878,000 due mainly to the absence in
fiscal 2002 of development costs relating to the HR/Payroll product line which
was sold in fiscal 2001. As a percentage of total revenues, total development
expense decreased slightly to 14% in fiscal 2003 from 16% in fiscal 2002 and 22%
in fiscal 2001. Development expense is expected to continue in fiscal 2004 at a
level consistent with fiscal 2003.
During fiscal 2003, product development expenditures were focused on
expanding integrated Internet/ERP functionality and accelerating the complete
integration with the iRENAISSANCE product suite, of the privately labeled third
party products, now part of our offering. Product development expenditures
during fiscal 2002 and 2001 were primarily focused on new Internet-enabled
modules and continued enhancements to the underlying technology of released
products and developing new web enabled products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were relatively constant in the three fiscal years ending June 30, 2003, 2002
and 2001, at $4,376,000, $4,393,000 and $4,737,000 respectively. Various
cost-saving measures and controls, coupled with improved productivity through
the implementation of streamlined systems, have contributed to stability in
costs relating to our administrative infrastructure and personnel. Costs in this
area have been contained by avoiding increases in headcount, by strict control
of capital expenditures, and an overall cost consciousness promoted mainly
through management's focus on budgetary control over spending. During fiscal
2003, a decrease in property insurance of approximately $100,000, was offset by
a net increase after departmental allocations, of $121,000 in employee related
costs, in comparison to expenditures for the same expense items in fiscal 2002.
During fiscal 2002, savings of approximately $150,000 in legal costs, $114,000
in travel costs, $97,000 due to the closure of the French operation, and
$273,000 in other headcount related reductions in Europe were offset by an
increase in North American salaries and wages of approximately $208,000, when
compared to expenditures incurred for the same items in fiscal 2001. Capital
expenditures were reduced by strictly enforcing our authorization process, and
purchasing only essential items, and this helped to reduce depreciation by
approximately $70,000, and $47,000 for fiscal years 2002 and 2003 respectively
when compared to fiscal years 2001 and 2002 respectively.
PROVISION FOR DOUBTFUL ACCOUNTS. In fiscal years 2003, 2002, and 2001, we
recorded provisions for doubtful accounts of $831,000, $1,444,000, and
$1,514,000, respectively. These provisions represent management's best estimate
of the doubtful accounts for each period. The improving trend in the provision
for doubtful accounts over the three fiscal years represented, has been made
possible in part, by tighter and more effective processes over accounts
receivable collections. In general, a customer's ability to access certain of
our maintenance services is contingent on maintaining their account in good
standing, and this has encouraged customers to be current on their accounts and
resolve any outstanding issues promptly. In Europe, where the accounts
receivable collections performance has been somewhat weaker than that in North
America, we made changes to managers' compensation terms, providing incentives
on improvements in receivables collections performance. In addition, a
distributor policy
15
ROSS SYSTEMS, INC AND SUBSIDIARIES
change in Europe is slowly taking effect, whereby upon renewal of a
distributor's contract, we assume the billing of the distributor's customers,
and thereby are able to better control the receivable balances due by the
distributor and its customers.
AMORTIZATION OF OTHER ASSETS. Amortization of other assets was zero in
fiscal years 2003 and 2002 compared to $691,000 in fiscal 2001. This reflects
the change in accounting treatment due to compliance with the new accounting
pronouncement, SFAS No. 142, on Goodwill and Other Intangible Assets. See Note
(1) in the Notes to the Consolidated Financial Statements on page F-10.
Intangible assets are reviewed for impairment in value in accordance with
Statement of Financial Accounting Standards No. 142. Our recorded goodwill
relates to the acquisition of HiPoint Systems Inc. in fiscal 1999, the
acquisition of Bizware, Inc. in fiscal 1998, and the acquisition of our Spanish
distributor in fiscal 1997. After application of the principles of SFAS142, we
believe that the assets are not impaired and are properly stated at their
current carrying value.
NON-RECURRING ITEMS. The non-recurring gain reflected in fiscal 2002, was
a result of the gain of $650,000 arising from the reduction of the reserve
previously created in fiscal year 2001 for the closure of the French office.
At the end of the first quarter of fiscal 2001, we recorded an expense of
$790,000 being severance payments associated with 125 employees. Staffing levels
were scrutinized with a view towards eliminating overhead positions where
possible, and reducing the number of billable consultants in geographic regions
or areas of expertise where acceptable productivity levels were not being
regularly achieved. In North America, position eliminations comprised
approximately 21 in marketing and sales, 47 services consultants, 23 development
personnel, and 8 employees in administration and finance. In Europe, the
positions of approximately 26 employees from various functional areas were
eliminated.
16
ROSS SYSTEMS, INC AND SUBSIDIARIES
OTHER INCOME AND EXPENSE. Interest income has diminished over the fiscal
years 2001 through 2003 due to lower interest rates. Interest expense decreased
in fiscal 2003 as compared to fiscal 2002, and 2002 as compared to fiscal 2001,
due to improved cash flows from operations and the resultant lower utilization
of our revolving credit facilities. Foreign exchange benefit and expense arises
on converting foreign currency transactions or short-term balances to local
currency throughout the year. Foreign exchange losses in fiscal 2003 were
insignificant in comparison to $181,000 in fiscal 2002 which was due to net
adverse movements in currency exchange rates during that year.
INCOME TAXES. Income tax expense consists primarily of alternative minimum
tax for federal purposes, state taxes for which state operating losses do not
apply, and various foreign taxes which we incurred from time to time. As a
result we recorded net income tax expense of $405,000, $132,000, and $9,000
during 2003, 2002, and 2001 respectively. Note 11 to the Consolidated Financial
Statements details the differences between our effective income tax rate and the
statutory rate.
At June 30, 2003, we had net operating loss carryforwards of approximately
$34,370,000 $25,354,000 and $7,187,000 for federal, state and foreign tax
purposes, respectively, which expire between 2005 and 2020.
In all the years presented, we have reserved in full the deferred tax
assets which comprise primarily of net operating loss carryforwards. At which
time it is determined that it is more likely than not that they will be
utilized, the valuation reserve will be removed.
LIQUIDITY AND CAPITAL RESOURCES
Historically we have funded the operations of our business out of
operating activities. Changes in net cash provided by operating activities
generally reflect the changes in earnings plus the effect of changes in working
capital. Changes in working capital, especially trade accounts receivable, trade
accounts payable and accrued expenses, are generally the result of timing
differences between collection of fees billed and payment of operating expenses.
During fiscal 2003, net cash provided by operating activities increased by
$5,033,000 to $10,108,000 in fiscal 2003, from $5,075,000 in fiscal 2002. In
fiscal 2002, net cash provided by operating activities decreased by $8,983,000
from $14,058,000 in 2001 to $5,075,000 in 2002. After adjusting net income for
non-cash expense items only, cash provided by operating activities decreased by
$446,000 to $10,460,000 in fiscal 2003, from $11,126,000 in fiscal 2002. Cash
used due to charges in working capital only, decreased $5,479,000 in fiscal 2003
as compared with fiscal 2002 to $572,000, as compared to cash used for working
capital purposes of $6,051,000 in fiscal 2002.
Accounts receivable increased from 2002 to 2003 but to a lesser magnitude
than from 2001 to 2002. This was due to less cash being used by the increase in
accounts receivable in fiscal 2003, and resulted in a comparative increase in
cash provided by operating activities of $2,400,000 from receivables. This was
caused by continual improvements in cash collections in fiscal 2003 described
more fully above.
Increased cash flow from operations can also be attributed to the increase
in accounts payable from 2002 to 2003, which resulted in cash provided from
operations compared to cash used in operations in the previous year. This
resulted in an increase in cash provided by operating activities of $2,499,000.
The increase in accounts payable is mainly due to increased third party software
sales in the fourth quarter. During fiscal 2002, an aggregate net increase in
non-cash charges for depreciation, amortization, capitalized software cost
impairment, and provisions for uncollectible accounts of $9,384,000 was offset
by an increase in our net operating loss of $8,582,000. This
17
ROSS SYSTEMS, INC AND SUBSIDIARIES
reflected primarily the non-cash charge in fiscal 2002, of $10,938,000 for
software assets impaired which decreased our earnings but did not affect our
cash position. In fiscal 2002, an aggregate decrease in the changes in operating
assets and liabilities of $9,725,000 was due primarily to the decrease in cash
provided from accounts receivable and deferred revenues of $10,632,000, from
$6,920,000 in fiscal 2001, to ($3,712,000) in fiscal 2002.
The net cash used for investing purposes decreased in fiscal 2003 by
$792,000 to $4,111,000 from $4,903,000 in fiscal 2002, and decreased by $256,000
in fiscal 2002, from $5,159,000 in the prior year. This represents a stable
pattern of investment in capitalized software in fiscal years 2003 and 2002. In
fiscal 2001, investment in capitalized software was higher due to continued
investment in the HR/Payroll product line for eight months of the year until the
product line was sold in February 2001. In fiscal 2003 cash used in investing
was partially offset by cash of $850,000 arising from the repayment of a note
receivable from a former distributor who from whom we had acquired Ross Systems
Iberica, our Spanish subsidiary.
Cash flows used in financing activities increased $1,875,000 from net
repayments in the prior year of $604,000 to net repayment in fiscal 2003 of
$2,479,000. Of this increase, $1,345,000 represented purchases of Ross shares
into treasury stock. The repurchase of treasury stock comprised principally of a
one time purchase of $1,260,000 from a former distributor who had acquired the
shares pursuant to our purchase from him of Ross Systems Iberica, our Spanish
subsidiary. The balance of the increase in cash used in financing activities was
an increase in repayments under our credit lines of $612,000 in 2003 as compared
to $555,000 in fiscal 2002. We have reduced our use of our credit lines as
liquidity has improved. In fiscal 2002 there were no significant capital
receipts or repayments. In fiscal 2001, net repayments of capital leases and
long term debt were $1,723,000, and we received $2,000,000 in a preferred stock
issuance. We financed our continuing operations during fiscal 2003 through cash
generated from operations and available credit facilities. We expect to fund our
activities through fiscal 2004 with positive cashflows generated from continuing
operations.
At June 30, 2003, we had $8,628,000 of cash and cash equivalents. During
the first quarter of fiscal 2003, we secured a new revolving credit facility
from Silicon Valley Bank, which replaced the facility expiring in September
2002. This facility, with a maturity date of September 23, 2004, incorporates a
maximum credit line of $5,000,000, and an interest rate of prime plus 2%
(approximately 6.75% at September 2, 2003. Borrowings under the credit facility
are collateralized by substantially all assets of the Company. At June 30, 2003,
we had approximately $2,131,000 outstanding against the $5,000,000 revolving
credit facility, and based on the eligible accounts receivable at June 30, 2003,
our cash plus our remaining borrowing capacity under the revolving credit
facility totaled approximately $9,091,000. This represents an increase in total
availability of cash at June 30, 2003 of $3,558,000 from June 30, 2002.
On June 29, 2001, we issued convertible preferred stock to a qualified
investor in a private placement transaction. In summary, the investor purchased
500,000 preferred shares at $4.00 per share yielding $2,000,000 for Ross. The
shares are convertible, one for one at a price of $4.00 each, after June 29,
2002, and must be converted by June 29, 2006. The shares pay dividends at the
rate of 7.5%.
We have no off balance sheet financial arrangements.
We have certain fixed, monthly, payment commitments for leased facilities
and equipment. The facility leases and equipment operating leases expire at
various dates through fiscal 2016. Certain leases include renewal options and
rental escalation clauses to reflect changes in price indices, real estate
taxes, and maintenance costs.
18
ROSS SYSTEMS, INC AND SUBSIDIARIES
FUNDING OBLIGATIONS
As of June 30, 2003, our contractual commitments and obligations that
require funding from operations in fiscal 2004 and subsequent years were as
follows (in thousands):
TOTAL PAYMENTS LESS THAN MORE THAN 5
DUE 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
-------------- --------- --------- --------- -----------
Operating leases................... $ 5,256 $ 1,384 $ 1,450 $ 592 $ 1,830
Unconditional purchase obligations - - - - -
Debt repayment obligations ........ - - - - -
-------------- --------- --------- --------- -----------
Total future minimum cash payment
obligations .................... $ 5,256 $ 1,384 $ 1,450 $ 592 $ 1,830
============== --------- --------- --------- -----------
Operating lease payments included in the above table decline significantly
in fiscal 2005 since our real estate lease for our Atlanta office expires in
April 2004. We expect to reduce our rent, either by negotiation with our current
landlord, or by relocation within the Atlanta area. We anticipate that our new
lease will involve base rentals of $325,000 to $440,000 per year which are not
reflected in the table above since we have yet not entered into the new lease
agreement.
Certain executive employees have employment contracts containing terms
which upon termination would oblige us to make severance payments varying from
three months to three years of annual salary.
In addition to the amounts shown in the above table, we have various
agreements to purchase services, none of which are material.
RELATED PARTY TRANSACTIONS
In July 2002, we transferred the assets and liabilities of our subsidiary
Ross Systems Auckland Limited to Kauri Business Systems Limited (Kauri), a
startup company in which we retained a 20% interest. The balance of the
ownership of Kauri consists of former employees of Ross Systems Auckland
Limited. We wrote off all remaining net book value as well as the residual 20%
interest as we deemed its value to be minimal at the translation date. The new
company, based in New Zealand, provided product development and subcontracted
consulting services to us, while also managing and supporting Ross customers as
our Distributor for the Australian region. During the 11 months ended June 30,
2003, Kauri provided services to us to the value of approximately $405,000. For
the same period, we billed Kauri approximately $82,000 for royalties owed on
services and maintenance revenues earned.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
our financial position or result of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123 ("Statement 148"). This
amendment provides twO additional methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. Additionally, more prominent disclosures in both annual and
interim financial statements are required for stock-based employee compensation.
The transition guidance and annual disclosure provisions of Statement 148 are
effective for fiscal years ending after December 15, 2002. This Interim Report
complies with the requirements of Statement 148. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The adoption of Statement
148 did not have a material impact on our consolidated financial statements.
19
ROSS SYSTEMS, INC AND SUBSIDIARIES
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities which
possess certain characteristics. The Interpretation requires that if a business
enterprise has a controlling financial interest in a variable interest entity,
the assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those of
the business enterprise. This Interpretation applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. We do not
have any ownership in any variable interest entities as of June 30, 2003. We
will apply the consolidation requirement of FIN 46 in future periods if we
should own any interest in any variable interest entity.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities ("Statement 149"). This Statement amends Statement 133 for decisions
made (1) as part of the Derivatives Implementation Group process that
effectively required amendments to Statement 133, (2) in connection with other
Board projects dealing with financial instruments, and (3) in connection with
implementation issues raised in relation to the application of the definition of
a derivative, in particular, the meaning of an initial net investment that is
smaller than would be required for other types of contracts that would be
expected to have a similar response to changes in market factors, the meaning of
underlying, and the characteristics of a derivative that contains financing
components. We do not have any derivative instruments or hedging activities. The
application of Statement 149 did not have a material impact on our financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity ("Statement 150"). This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Statement 150 requires that certain mandatorily
redeemable financial instruments issued in the form of shares are to be
classified as liabilities rather than equity. We have no outstanding financial
instruments that fall into the definitions covered by this Statement. The
application of Statement 150 did not have a material impact on our financial
statements.
RISK FACTORS
OUR PROPOSED MERGER WITH CHINADOTCOM CORPORATION COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS BECAUSE PREPARATIONS FOR CLOSING WILL CONSUME OUR
MANAGEMENT'S TIME AND WILL RESULT IN MATERIAL COSTS AND EXPENSES.
On September 4, 2003, we entered into a merger agreement with chinadotcom
Corporation. Preparations for the merger will be a material expense, will
consume much of executive management's time and may result in potential
customers deferring purchasing decisions until they understand the form of and
reasons for the merger, any of which could have an adverse effect on our
business model and results of financial operations. These adverse effects will
be intensified if the merger is not completed.
OUR SOFTWARE LICENSE REVENUES CAN BE ALMOST IMMEDIATELY ADVERSELY AFFECTED
BY DECREASES IN CUSTOMER DEMAND AND EVEN RELATIVELY MINOR DELAYS IN
CUSTOMER PURCHASING DECISIONS.
Our software product license revenues can fluctuate depending upon such
factors as overall trends in the United States and International economies, new
product introductions, as well as customer buying patterns. Because we typically
ship software products within a short period after orders are received, and
therefore maintain a relatively small backlog, any weakening in customer demand
could 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.
20
ROSS SYSTEMS, INC AND SUBSIDIARIES
BECAUSE OUR OPERATING EXPENSES ARE BASED IN LARGE PART ON ANTICIPATED
REVENUES, EVEN SMALL VARIATIONS IN THE TIME AT WHICH WE RECOGNIZE REVENUES
CAN CAUSE SIGNIFICANT VARIATION IN OUR OPERATING RESULTS FROM QUARTER TO
QUARTER.
Our operating expenses are based in large part on anticipated revenue
levels, including revenue from software sales agreements that we expect to sign.
We sometimes defer our recognition of revenue from software sales agreements
that we sign during a quarter to future periods, based on our revenue
recognition criteria. Because a high percentage of our 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.
THE RECENT ECONOMIC SLOW-DOWN MAY CAUSE CUSTOMER DEMAND TO DECREASE AND
PRICE COMPETITION AMONG OUR COMPETITORS TO INTENSIFY, EITHER OF WHICH
WOULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Our business may be adversely impacted by the worldwide economic slowdown
and related uncertainties. Weak economic conditions worldwide have contributed
to the current technology industry slow-down. This may impact our business
resulting in reduced demand and increased price competition, which may result in
higher overhead costs, as a percentage of revenues. Additionally, this
uncertainty may make it difficult for our customers to forecast future business
activities. This could create challenges to our ability to profitably grow our
business. If the economic or market conditions further deteriorate, this could
have a material adverse impact on the results of operations and cash flow.
THE RAPID DEVELOPMENT AND MATURATION OF TECHNOLOGY IN OUR INDUSTRY AND THE
STRENGTHENING OUR COMPETITORS IN LIGHT OF INDUSTRY CONSOLIDATION MAY MAKE
IT DIFFICULT FOR US TO COMPETE EFFECTIVELY, WHICH WOULD HARM OUR OPERATING
RESULTS AND FINANCIAL CONDITION.
We may face increased competition and our financial performance and future
growth depend upon sustaining a leadership position in our product
functionality. Competitive challenges faced by Ross are likely to arise from a
number of factors, including: industry volatility resulting from rapid
development and maturation of technologies; industry consolidation and
increasing price competition in the face of worsening economic conditions.
Although there are fewer competitors in our target markets than previously,
failure to compete successfully against those remaining could harm our business
operating results and financial condition.
OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY DUE TO CHANGES IN
ECONOMIC CONDITIONS AND ANNOUNCEMENTS OF NEW PRODUCTS OR SIGNIFICANT
FLUCTUATIONS IN QUARTERLY RESULTS OF OUR COMPANY OR OUR COMPETITORS.
Our stock price, like that of other technology companies, is subject to
volatility because of factors such as announcement of new products, services or
technological innovations by us or by our competitors, quarterly variations in
our operating results, and speculation in the press or investment community. In
addition our stock price is affected by general economic and market conditions
and may be negatively affected by unfavorable global economic conditions.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AGAINST
UNAUTHORIZED THIRD PARTY COPYING OR USE, IN PART BECAUSE THE LAWS OF OTHER
COUNTRIES DO NOT OFFER THE SAME PROTECTION AS THE LAWS OF THE U.S., AND
ANY SUCH INABILITY COULD SIGNIFICANTLY REDUCE OUR REVENUES AND
PROFITABILITY.
Our business may suffer if we cannot protect our intellectual property. We
generally rely upon copyright, trademark and trade secret laws and contract
rights in the United States and in other countries to establish and maintain
proprietary rights in our technology and products. However, there can be no
assurance that any of our proprietary rights will not be challenged, invalidated
or circumvented. In addition, the laws of certain countries do not protect
proprietary rights to the same extent as do the laws of the United States.
Therefore, there can be no assurance that we will be able to adequately protect
our proprietary technology against unauthorized third-party copying or use,
which could adversely affect our competitive position and could significantly
reduce our revenues and profitability. Further, there can be no assurance that
we will be able to obtain licenses to any technology that may be required to
conduct our business or that, if obtainable, such technology could be licensed
at a reasonable cost.
21
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE: We have a worldwide presence and as such maintain
offices and derive revenues from sources overseas. For fiscal 2003,
international revenue as a percentage of total revenue was approximately 40%.
Our 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, our future
results could be materially adversely impacted by changes in these or other
factors. The effect of foreign exchange rate fluctuations on Ross in fiscal 2003
was not material.
INTEREST RATES: Our exposure to interest rates relates primarily to our
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 our statement of
operations. Because of the short maturity of our investments, a near-term change
in interest rates would not materially affect our financial position, results of
operations, or cash flows. Certain of our debt obligations include a variable
rate of interest. We did not engage in any derivative/hedging transactions in
fiscal 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference herein
from Part IV Item 14(a) (1) and (2) of this Form 10-K/A Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported, in July 2002, the Company dismissed Arthur
Andersen, LLP and engaged BDO Seidman LLP as its independent public accountants.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Securities and Exchange Commission rules, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this annual report. This
evaluation was carried out under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer. Based on this evaluation, these officers have concluded that
the design and operation of our disclosure controls and procedures are
effective. There were no significant changes to our internal controls during the
period covered by this annual report that materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
Disclosure controls and procedures are controls and other procedures of
Ross designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act are accumulated and communicated to management, including the
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
22
ROSS SYSTEMS, INC AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following additional information pertains to executive officers of Ross.
There are no family relationships between any director or executive officer and
any other director or executive officer. Executive officers serve at the
discretion of the Board of Directors.
EXECUTIVE OFFICERS OF ROSS SYSTEMS
NAME AGE POSITION
---- --- --------
J. Patrick Tinley...................... 55 Chairman and CEO, and Director
Robert B. Webster...................... 56 Executive Vice President Operations and
Secretary
Verome M. Johnston..................... 38 Vice President and Chief Financial Officer
Eric W. Musser......................... 38 Vice President and Chief Technology Officer
Rick Marquardt......................... 50 Senior Vice President Marketing and Sales
Mr. Tinley was promoted to Chairman and CEO in December 2000. He served as
President and Chief Operating Officer from 1995 to June 2000 and President and
CEO from July through December 2000. He has been a director of Ross since 1993.
Mr. Tinley joined Ross in November 1988 as Executive Vice President, Business
Development and has served as Executive Vice President, Product Development and
Executive Vice President, Product Development and Client Services. Prior to
1988, Mr. Tinley held management positions with Management Science of America,
Inc. and Royal Crown Companies. Mr. Tinley received a Bachelors in Science from
Columbus University.
Mr. Goodhew joined Intelligent Systems Corporation, a publicly traded
technology product and services company, as Vice President in January 1997.
Prior to that, Mr. Goodhew was President of Peachtree Software, Inc., a
privately held software company, from 1984 to 1994. In 1994, Peachtree Software
was purchased by Automatic Data Processing, Inc., a publicly traded company
providing computerized services. Mr. Goodhew remained at Peachtree Software,
Inc. in a managerial capacity until joining Intelligent Systems Corporation.
Mr. Dickerson is the Chief Operating Officer of MWH Energy &
Infrastructure, Inc., a division of MWH Global, Inc., and a member of the Board
of MWH Global, Inc. The MWH group was formed out of a merger between Montgomery
Watson and Harza Engineering, a power engineering group. Mr. Dickerson was
Chairman of the Board of Harza Engineering International and has also served as
Chief Financial Officer and General Counsel of the Group. Prior to joining Harza
in 1992, Mr. Dickerson had been Executive Vice President and Chief Financial
Officer of Long Lake Energy Company, and Vice President and Chief Financial
Officer of Texas International Company. Mr. Dickerson received his Bachelor of
Arts in Economics from Washington Square College of New York University in 1970,
his Master of Arts in Economics from the University of Chicago in 1972 and his
Juris Doctor from the University of Georgia in 1975.
Mr. Ryan has served as Executive Vice President, Finance and
Administration of Global Knowledge Network, Inc., an independent information
technology education company, since February 1998. Mr. Ryan was Executive Vice
President and Chief Financial Officer of Amdahl Corporation, a computer
solutions company. Mr.
23
ROSS SYSTEMS, INC AND SUBSIDIARIES
Ryan holds a Bachelors of Arts in Business Administration from Boston College
and an Masters of Business Administration from Suffolk University.
Mr. Webster, Executive Vice President Operations is also Secretary and a
director of Ross. Mr. Webster joined Ross in June 1998 as its CFO and was
promoted to his current role in December 2000 and later elected director in
August 2001. Mr. Webster is responsible for the consulting services function as
well as the administrative, legal, human resource and financial operations of
Ross worldwide. Mr. Webster holds a Bachelors of Science degree in Accounting
and Computer Science, as well as a Masters of Business Administration
specialized in Information Systems from St. Peter's College. Mr. Webster is a
Certified Public Accountant in the State of Georgia and a member of the AICPA.
Mr. Webster, prior to joining Ross served in a progression of more senior
financial and general management positions with both Unisys Corporation and Wang
Laboratories, Inc. over a twenty year period.
Mr. Johnston, Vice President and Chief Financial Officer, joined the
Company in July 1998 as Corporate Controller. He was promoted to Vice President
in August 1999, and to Chief Financial Officer in December 2000. Immediately
prior to joining the Company, Mr. Johnston served as Vice President and Chief
Financial Officer of Market Area North America for Sunds Defibrator, where he
had been employed since June of 1991. Prior to that, Mr. Johnston was employed
with Deloitte & Touche. Mr. Johnston maintains a CPA certificate in Georgia and
earned Bachelor of Business Administration degrees in Accounting and Finance
from Valdosta State University.
Mr. Musser joined the Company in 1993 and was promoted to CTO in May of
2000. He has served in development for over 5 years and has held the position of
Vice President, Development for the past 2 years. Mr. Musser has also held
senior positions in Marketing and has been a critical influence in changing the
Company from client/server solutions to Internet based solutions. From 1989 to
1993 Mr. Musser held IT management positions in the steel industry.
Mr. Marquardt joined the company in October 2001 as Senior Vice President
of Worldwide Sales and Marketing. Prior to joining Ross Systems he was Vice
President and General Manager - Products at Eftia OSS Solutions, a provider of
operational support system (OSS) solutions. In 2000, Mr. Marquardt was a Vice
President at NSE Inc., an international distribution and investment firm. From
1997 to 2000 Mr. Marquardt served as COO of Distinction Software a provider of
enterprise-wide supply chain-planning solutions. From 1994 to 1997 he was Vice
President of Corporate Marketing and Business Development for Datalogix
International. From 1989 to 1994, Mr. Marquardt held various positions at Ross
Systems in Sales and Marketing including Vice President of Manufacturing
Systems. Prior to 1989, Mr. Marquardt held various management positions with
Management Science America, Inc. Mr. Marquardt has a Bachelor of Science Degree
from the University of Wisconsin - Stevens Point.
BOARD MEETINGS AND COMMITTEES
The board of directors of Ross held a total of fifteen meetings including
four regularly scheduled quarterly meetings and eleven special and committee
meetings during the fiscal year ended June 30, 2003. During fiscal 2003, each
director attended at least 93% of the aggregate of (1) the total number of
meetings of the board of directors and (2) the total number of meetings held by
all committees of the board of directors on which such person served. The board
of directors has an Audit Committee, a Compensation Committee, and a Nominating
Committee, each of which is composed of external directors.
During the year ended June 30, 2003, the Audit Committee of the board
consisted of three directors Ryan, Dickerson and Goodhew, none of whom are
employees of Ross. The Audit Committee held four meetings during the fiscal year
ended June 30, 2003. Following the annual meeting, the board intends to
re-appoint directors Dickerson, Ryan and Goodhew, with director Ryan as
Committee Chairman. The primary purpose of the Audit Committee is to assist the
board of directors in fulfilling its responsibility to oversee Ross' internal
and external financial reporting processes so as to ensure the objectivity of
Ross' financial statements and its system of internal accounting controls. The
Audit Committee recommends engagement of Ross' independent auditors and is
primarily responsible for approving the services performed by Ross' independent
auditors.
The Nominating Committee consisted of directors Dickerson, Ryan, and
Goodhew. Following the annual meeting, the board intends to re-appoint
directors, Dickerson, Goodhew, and, Ryan with director Dickerson as Committee
Chairman. The Nominating Committee is responsible for making recommendations for
the nomination
24
ROSS SYSTEMS, INC AND SUBSIDIARIES
of directors for replacement of resigning members and annual nominations for
re-election where appropriate. The committee also monitors the composition of
Ross' board of directors to ensure that it meets generally acceptable standards
of competence, skills and experience. The Nominating Committee met once during
the year ended June 30, 2003. The recommendation of the committee was to
nominate existing directors, Ryan, Goodhew, Dickerson, Tinley and Webster for
re-election.
The Compensation Committee of the board consisted of directors Goodhew,
Ryan and Dickerson and held seven meetings during the fiscal year ended June 30,
2003. Following the annual meeting, the board intends to re-appoint directors,
Goodhew, Ryan and, Dickerson with director Goodhew as Committee Chairman. The
Compensation Committee makes recommendations to the board regarding Ross'
executive compensation policy and grants stock options and administers the 1998
Stock Option Plan.
COMPENSATION OF DIRECTORS
For the fiscal year ended June 30, 2003, non-employee directors were
compensated $2,000 for each board of directors meeting attended and $1,000 for
participating in any telephonic board of directors meetings which were not
regularly scheduled. In addition, directors are reimbursed for travel expenses
incurred in connection with attending board of directors meetings. Annually,
each non-employee director is automatically granted 4,000 stock options to
purchase shares of Ross' common stock pursuant to the terms of the 1998 Stock
Option Plan, or the Option Plan. Options granted to non-employee directors under
the Option Plan are not intended by Ross to qualify as incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or the Code. Pursuant to the Option Plan, on the annual meeting date,
each non-employee director who is elected or re-elected at the meeting is
granted options in accordance with the automatic grant. In addition, any
non-employee director newly elected to the Board of Directors receives an option
for 10,000 shares of Ross' common stock. The 10,000-share option vests 25% a
year over four years and the 4,000 share options are fully vested on the dates
of grant. The price of all options granted is equal to the closing price of
Ross' common stock, as quoted on the NASDAQ National Market, on the date of
grant. During fiscal 2003, outside directors were granted a total of 12,000
stock options at an exercise price of $13.16.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Exchange Act requires Ross' executive officers and
directors to file initial reports of share ownership and report changes in share
ownership with the Commission. Such persons are required by Commission
regulations to furnish Ross with copies of all Section 16(a) forms, which they
file. Based solely on Ross' review of such forms furnished to Ross and written
representations from certain reporting persons, Ross believes that for the
period July 1, 2002 to June 30, 2003, all Section 16(a) filings were made on a
timely basis, except that Mr. Oscar Pierre was late to file a Form 4 with the
Commission.
25
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 11. EXECUTIVE COMPENSATION
ROSS EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
earned during each of Ross' last three fiscal years by Ross' Chief Executive
Officer, and each of Ross' four other most highly compensated executive
officers, based on salary and bonus earned during fiscal 2003 (the "Named
Executive Officers").
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------- ----------------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL FISCAL COMPENSATION OPTIONS/ COMPENSATION
POSITION YEAR SALARY(4) BONUS(4) (1) SARs (#)(2) (3)
------------------------------- ------ --------- -------- ------------ ----------- -------------
J. Patrick Tinley.............. 2003 $ 315,000 $165,600(4) $ 12,000 100,000 $ 2,000
Chairman and Chief Executive 2002 307,500 114,000 10,400 15,000 2,000
Officer 2001 292,500 41,400 10,400 12,000 1,000
Robert B. Webster.............. 2003 $ 210,000 $110,400(4) $ 12,000 70,000 $ 2,000
Executive Vice President, 2002 205,000 100,000 12,000 10,000 2,000
and Secretary 2001 195,000 43,000 12,000 9,000 1,000
Gary Nowacki................... 2003 $ 179,800 $120,006(5) $ 10,000 5,000 $ 2,000
VP, North American Sales 2002 179,800 56,481 10,000 10,000 2,000
2001 142,000 67,500 10,000 6,500 1,000
Rick Marquardt................. 2003 $ 200,000 $ 62,540(6) $ 10,000 10,000 $ 2,000
Senior VP, World Wide Sales 2002 141,160 14,123 7,500 10,000 $ 2,000
and Marketing
Eric W. Musser................. 2003 $ 175,000 $ 44,275(4) $ 10,000 10,000 $ 2,000
VP, Development 2002 $ 178,875 50,000 10,000 10,000 $ 2,000
2001 151,125 19,000 10,000 9,000 1,000
(1) The amounts included in Other Annual Compensation include auto allowance.
(2) Ross has not granted any stock appreciation rights (SARs).
(3) Represents amounts contributed to Ross' 401(k) plan, on behalf of the
officer by Ross and premiums paid by Ross on behalf of the officer for
term life insurance.
(4) Represents a bonus earned in fiscal 2002 and paid in fiscal 2003.
(5) Includes a bonus in the amount of $22,997 earned in fiscal 2002 and paid
in fiscal 2003.
(6) Includes a bonus in the amount of $6,490 earned in fiscal 2002 and paid in
fiscal 2003.
26
ROSS SYSTEMS, INC AND SUBSIDIARIES
OPTION/SAR GRANTS IN FISCAL YEAR ENDED JUNE 30, 2003
The following table describes the grant of options to the Named Executive
Officers during fiscal 2003.
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS IN FISCAL 2003 TERM (4)
------------------------------------------ -----------------------------
NUMBER OF
SECURITIES
UNDERLYING PERCENT OF TOTAL
OPTIONS/ OPTIONS/SARS
SARs GRANTED TO EXERCISE
GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR (2) ($/sh) (3) DATE (2) 5% 10%
------- ---------- ---------------- ---------- ---------- ------- ---------
J. Patrick Tinley........ 50,000 19.8% 7.26 9/24/2012 591,289 941,529
J. Patrick Tinley........ 50,000 19.8% 7.95 12/5/2012 647,486 1,031,013
Robert B. Webster........ 50,000 19.8% 7.26 9/24/2012 591,289 941,529
Robert B. Webster........ 20,000 7.9% 7.95 12/5/2012 258,994 412,405
Rick Marquardt........... 10,000 4.0% 7.26 9/24/2012 118,258 188,306
Eric W. Musser........... 10,000 4.0% 7.26 9/24/2012 118,258 188,306
Gary Nowacki............. 5,000 2.0% 7.25 11/4/2012 59,047 94,023
(1) Ross has not granted any SARs.
(2) Based on an aggregate of 252,828 options granted to all employees during
the fiscal year. Options granted in fiscal year 2003 expire in 2012 or
2013 and typically vest annually over four years from the date of grant.
(3) All options were granted at an exercise price equal to the fair market
value based on the closing market value of Ross' common stock on the
Nasdaq National Market on the date of grant.
(4) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
terms assuming the specified compounded rates of appreciation on Ross'
common stock over the terms of the options. These numbers are calculated
based on the Commission's rules and do not reflect Ross' estimate of
future stock price appreciation. Actual gains, if any, are dependent on
the timing of option exercises and the future performance of Ross' common
stock. There can be no assurances that the rates of appreciation assumed
in this table can be achieved or that the individuals will realize the
amounts reflected.
27
ROSS SYSTEMS, INC AND SUBSIDIARIES
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table provides information related to options exercised by
the Named Executive Officers during fiscal 2002 and the number and value of
options held at June 30, 2003. Ross has not granted any SARs.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARs AT OPTIONS/SARs AT
JUNE 30, 2003 JUNE 30, 2003(2)
--------------------------- ---------------------------
SHARES
ACQUIRED VALUE
ON REALIZED
NAME EXERCISE(#) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------------- ----------- -------- ----------- ------------- ----------- -------------
J. Patrick Tinley......... - $ - 36,870 119,350 $ 58,005 $ 809,345
Robert B. Webster......... 3,750 18,900 5,300 83,200 1,760 580,490
Rick Marquardt............ - - 2,500 17,500 23,650 139,150
Eric W. Musser............ - - 11,300 23,700 51,797 164,352
Gary Nowacki.............. 1,250 14,725 5,125 16,375 26,697 144,247
(1) Based upon the fair market value of one share of Ross' common stock on the
date the option was exercised, less the exercise price per share
multiplied by the number of shares received upon exercise of the option.
(2) Value is based on the difference between the option exercise price and the
fair market value at June 30, 2003 ($14.08 per share) multiplied by the
number of shares underlying the option.
28
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Ross common
stock as of September 24, 2003 by (a) each director, (b) each of the executive
officers identified in the Summary Compensation Table, (c) all directors and
executive officers as a group and (d) each person known by Ross to beneficially
own more than 5% of any class of Ross' voting securities. Under the rules of the
Securities and Exchange Commission, or Commission, beneficial ownership includes
any shares as to which the individual has sole or shared voting power or
investment power and also any shares which the individual has the right to
acquire within 60 days of September 24, 2003 through the exercise of any stock
option.
COMMON STOCK SERIES A PREFERRED STOCK
----------------------------------- -------------------------
NUMBER OF NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
NAME SHARES(1) OPTIONS(2) OF CLASS SHARES OF CLASS
----------------------------------------- --------- ---------- ---------- --------- ----------
Alvin Johns 51,754 6,476 1.9% - -
Robert B. Webster ** 52,401 133,500 6.0% - -
J. Patrick Tinley ** 31,041 210,215 7.7% - -
Oscar Pierre Prats 3,625 5,175 * - -
Gary Nowacki 14,684 9,875 * - -
Eric W. Musser 6,346 15,950 * - -
Verome M. Johnston 3,986 10,500 * - -
Bruce J. Ryan - 9,200 * - -
Frank M. Dickerson - 13,000 * - -
J. William Goodhew, III - 9,200 * - -
Rick Marquardt 123 7,500 * - -
Richard Thomas 1,448 2,375 * - -
All officers and directors as a group (12 165,408 432,966 19.2% - -
persons)
Benjamin W. Griffith III 152,500 - 20.5% (3) 500,000 (4) 100%
*Less than 1%.
** Number of options exercisable within 60 days includes accelerated vesting of
certain options due to a change of control pursuant to the proposed merger.
(1) The table is based upon information supplied by executive officers,
directors and principal stockholders. Unless otherwise indicated, each of
the stockholders named in the table has sole voting investment and/or
dispositive power with respect to all shares of common stock shown as
beneficially owned, subject to community property laws where applicable
and to the information contained in the footnotes to this table
(2) These are options which are exercisable for common stock within 60 days of
September 24, 2003.
(3) Mr. Griffith owns 4.9% of the total number of shares of outstanding common
stock.
(4) The 7.5% Series A Convertible Preferred Stock has one vote per share and
votes with the common stock on most matters. These shares may be converted
at the rate of one preferred share for one common stock share. These
shares must be converted by June 29, 2006.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of June 30, 2003 about the
common stock of Ross that may be issued upon the exercise of options, warrants
and rights under all of Ross' existing equity compensation plans, including the
Ross Systems Inc. 1988 Incentive Stock Plan, the 1998 Stock Option Plan and the
1991 Employee Stock Purchase Plan, each as amended.
29
ROSS SYSTEMS, INC AND SUBSIDIARIES
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE (1) EQUITY COMPENSATION PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF (EXCLUDING SECURITIES
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN THE FIRST
WARRANTS AND RIGHTS WARRANT AND RIGHTS COLUMN)
PLAN CATEGORY (#) ($)(1) (#)
--------------------- ----------------------- -------------------- -------------------------
Equity compensation
plans approved by
security holders
576,063 $9.62 266,960
Equity compensation - -
plans not approved by -
security holders
Total 576,063 $9.62 266,960
(1) Pursuant to a resolution passed by Ross stockholders at the annual meeting
held November 15, 2001, the number of shares available for issuance under
the 1991 Employee Stock Purchase Plan is automatically increased annually
by the lesser of 35,000 shares or 1.5% of the outstanding shares of Ross
common stock.
30
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Under the terms of indemnification agreements with each of Ross' officers
and directors, Ross is obligated to indemnify each officer and director against
certain claims and expenses for which the director might be held liable in
connection with past or future service on behalf of Ross. In addition, Ross'
Certificate of Incorporation provide that, to the extent permitted by Delaware
law, the officers and directors shall not be liable for monetary damages for
breach of fiduciary duty as an officer or director. In fiscal 2003, Ross renewed
and modified employment agreements with J. Patrick Tinley and Robert B. Webster.
The employment agreements provide the executives with severance payments and
accelerated vesting of stock options and other incentive awards if the
executive's employment is terminated without "cause" at any time. If Mr. Tinley
is terminated without "cause," he would be entitled to (1) a severance payment
of 300% of his base compensation plus 300% of his targeted bonus, (2) employee
benefit coverage applicable to the executive at the time of termination for
three years following the termination and (3) ninety days to exercise all vested
and unvested stock options and other incentive awards. If Mr. Webster is
terminated without "cause," he would be entitled to (A) a severance payment of
200% of his base compensation plus 200% of his targeted bonus, (B) employee
benefit coverage applicable to the executive at the time of termination for two
years following the termination and (C) ninety days to exercise all vested and
unvested stock options and other incentive awards. The employment agreements
also provide the executives with severance payments and accelerated vesting of
stock options and other incentive awards if the executive terminates his
employment with Ross for "good reason" or is terminated for any reason other
than "cause" or "disability" within nine months immediately following a "change
of control" of Ross. In such a case, Mr. Tinley would be entitled to a severance
payment of 300% of his base compensation plus 300% of his targeted bonus, each
at the time of termination, and ninety days to exercise all vested and unvested
stock options and other incentive awards, and Mr. Webster would be entitled to a
severance payment of 200% of his base compensation plus 200% of his targeted
bonus, each at the time of termination, and ninety days to exercise all vested
and unvested stock options and other incentive awards. The employment agreements
define "cause" to include a willful act by the executive which constitutes fraud
and which is injurious to Ross, conviction of, or a plea of "guilty" or "no
contest" to, a felony or the executive's continuing repeated willful failure or
refusal to perform his material duties required by the employment agreement
which is injurious to Ross. The employment agreements define "good reason" to
include a material reduction in the executive's powers or duties, one or more
reductions in the executive's base compensation in the cumulative amount of five
percent (5%) or more or notifying the executive that his principal place of work
will be relocated by a distance of 50 miles or more. The employment agreements
define "disability" as the executive's eligibility to receive immediate
long-term disability benefits under Ross' long-term disability insurance plan
or, if there is no such plan, under the federal Social Security program. The
employment agreements define "change of control" to mean the occurrence of any
of the following events: (a) any "person" (as such term in used in sections
13(d) and 14(d) of 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 Ross representing
fifty percent (50%) or more of the combined voting power of Ross' then
outstanding securities ordinarily (and apart from rights accruing under special
circumstances) having the right to vote at elections of directors, referred to
as "Base Capital Stock"; except that any change in the relative beneficial
ownership of Ross' 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 Ross, or (b) the
stockholders of Ross approve a definitive agreement: - to merge or consolidate
Ross with or into another corporation in which the holders of the securities of
Ross before such merger or reorganization will not, immediately following such
merger or reorganization, hold as a group on a fully diluted 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 - to sell or otherwise dispose of all or
substantially all of the assets of Ross or dissolve or liquidate Ross.
31
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT AND RELATED FEES BILLED TO ROSS DURING FISCAL 2003 AUDIT FEES
BDO Seidman billed Ross an aggregate of $186,000 for expenses and
professional services rendered for the (1) audit of the annual consolidated
financial statements for fiscal year 2003 included in Ross' Annual Report on
Form 10-K/A and (2) the review of the consolidated financial statements included
in Ross' quarterly reports on Form 10-Q. FINANCIAL INFORMATION SYSTEMS DESIGN
AND IMPLEMENTATION FEES Ross did not engage BDO Seidman to provide advice to it
regarding financial information systems design and implementation during the
fiscal year ended June 30, 2002. ALL OTHER FEES BDO Seidman billed Ross an
aggregate of $92,000 for all other non-audit services rendered to it during
fiscal 2003. The following table summarizes the approximate aggregate accounting
fees billed to Ross for its 2003 fiscal year:
Audit fees $ 186,000
Financial information systems design and implementation fees $ -
All other fees:(1) $ 92,000
----------
Total fees $ 278,000
(1) Includes fees for assistance with Commission filings and various
accounting consultation ($11,000); various advisory services related
principally to tax preparation services and tax consultation services
associated with the development and implementation of international tax
strategies and sales taxes ($67,000); and executive compensation analysis
prepared at the request of independent board members ($14,000).
32
ROSS SYSTEMS, INC AND SUBSIDIARIES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements. The following Consolidated
Financial Statements of Ross Systems, Inc. are filed as part of this
report:
PAGE
----
Report of BDO Seidman , LLP, Independent Certified Public Accountants.......................................... F-1
Fiscal 2001, and 2000 Report of Arthur Andersen LLP, Independent Public Accountants............................ F-2
Consolidated Balance Sheets at June 30, 2003 and 2002.......................................................... F-3
Consolidated Statements of Operations--Years Ended June 30, 2003, 2002, and 2001................................ F-4
Consolidated Statements of Cash Flows--Years Ended June 30, 2003, 2002, and 2001................................ F-5
Consolidated Statements of Shareholders' Equity--Years Ended June 30, 2003, 2002, and 2001...................... F-6
Notes to Consolidated Financial Statements..................................................................... F-7
2. Financial Statement Schedule. The following financial statement
schedule of Ross Systems, Inc. for the Years Ended June 30, 2003,
2002, and 2001 is filed as part of this Report and should be read in
conjunction with the Consolidated Financial Statements of Ross
Systems, Inc.
SCHEDULE PAGE
-------- ----
II Valuation and Qualifying Accounts........................................................................ S-1
Schedules not listed above have been omitted because they are not
applicable or are not required, or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as
part of, or incorporated by reference into, this Report.
(b) Reports on Form 8-K.
None
33
ROSS SYSTEMS, INC AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Atlanta, State of Georgia, on the 22nd day of September, 2003.
ROSS SYSTEMS, INC.
By: /s/ J. Patrick Tinley
--------------------------------------------
J. Patrick Tinley
Chairman and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. Patrick Tinley his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K/A, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that the said attorney-in-fact,
or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ J. Patrick Tinley Chairman and Chief Executive Officer September 22, 2003
-------------------------------- (Principal Executive Officer)
J. Patrick Tinley
/s/ Robert B. Webster Executive Vice President Operations, Company September 22, 2003
-------------------------------- Secretary and Director
Robert B. Webster
/s/ Verome M. Johnston Vice President and Chief Financial Officer September 22, 2003
-------------------------------- (Principal Financial and Accounting
Verome M. Johnston Officer)
/s/ J. William Goodhew III Director September 22, 2003
--------------------------------
J. William Goodhew III
/s/ Frank M. Dickerson Director September 22, 2003
--------------------------------
Frank M. Dickerson
/s/ Bruce J. Ryan Director September 22, 2003
--------------------------------
Bruce J. Ryan
34
ROSS SYSTEMS, INC AND SUBSIDIARIES
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K/A
YEAR ENDED JUNE 30, 2003
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Asset Sale Agreement between Registrant and Now Solutions LLC dated
March 5, 2001 (1)
3.1 Certificate of Incorporation of the Registrant, as amended (2)
3.2 Bylaws of the Registrant, as amended (2)
3.3 Amendment to the Certificate of Incorporation of the Registrant,
dated April 26, 2001, for the 1 for 10 Reverse Stock Split.(3)
4.1 Certificate of Designation of Rights, Preferences and Privileges of
Series B Preferred Stock of the Registrant (4)
4.2 Form of the subordinated debenture agreement due February 6, 2003
issued by the Registrant to each investor (6)
4.3 Registration Rights Agreement between the Registrant and each
Investor (6)
10.1 Preferred Share Rights Agreement, dated September 4, 1999 between
the Registrant and Registrar and Transfer Company (5)
10.2 Employment Agreement dated January 7, 1999, modified March 24, 2003,
between Mr. Patrick Tinley and the Registrant (8)
10.3 Employment Agreement dated September 13, 1999, modified March 24,
2003, between Mr. Robert B. Webster and the Registrant (8)
10.4 Convertible Preferred Stock Purchase Agreement dated June 29, 2001
between Registrant and Benjamin W. Griffith, III (7)
10.5 Loan and Security Agreement dated September 24, 2002 between
Registrant and Silicon Valley Bank (3)
21.1 Listing of Subsidiaries of Registrant
23.1 Consent of BDO Seidman, LLP
24.1 Power of Attorney (included on signature page)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 8-K/A filed May 15, 2001.
(2) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 8-K filed July 24, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 10K/A filed October 2, 2002
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q filed May 6, 1996.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(6) Incorporated by reference to the exhibit filed with the Registrant's
current report on Form 8-K filed February 12, 1998.
35
ROSS SYSTEMS, INC AND SUBSIDIARIES
(7) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10K filed September 27, 2001.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 filed
May 14, 2003.
36
ROSS SYSTEMS, INC AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Ross Systems, Inc.
We have audited the accompanying consolidated balance sheets of Ross Systems,
Inc. and subsidiaries as of June 30, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. We have also audited the financial statement schedule for the years ended
June 30, 2003 and 2002 listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. The Company's consolidated financial statements
and financial statement schedule as of and for the year ended June 30, 2001,
prior to the adjustments discussed in the summary of significant accounting
policies, were audited by auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements and
schedule in their report dated August 17, 2001.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ross Systems, Inc.
and subsidiaries as of June 30, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, the 2003 and 2002 schedules present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1, during the year ended June 30, 2002 the company changed
the manner in which it records reimbursement of out-of- pocket expenses upon the
adoption of the accounting standards in of Emerging Issues Task Force Issue
01-14.
As discussed in Note 1, the Company changed the manner in which it accounts for
goodwill and other intangible assets upon adoption of the accounting standards
in Statement of Financial Accounting Standards No. 142 on July 1, 2001,
As discussed above, the financial statements of Ross Systems Inc. and
subsidiaries as of June 30, 2001, and for each of the two years in the period
ended June 30, 2001, were audited by other auditors who have ceased operations.
As described in Note 1, these financial statements have been restated to reflect
the adoption of Emerging Issues Task Force Issue 01-14 and revised to include
the transitional disclosures required by SFAS No. 142. We audited the
adjustments described in Note 1 that were applied to restate the 2001 financial
statements to reflect the adoption of Emerging Issues Task Force Issue 01-14. We
also audited the adjustments reflected in the transitional disclosures required
by SFAS No. 142. In our opinion, such adjustments are appropriate and have been
properly applied. However, we were not engaged to audit, review or apply any
procedures to the 2001 financial statements of the company, other than with
respect to such adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 financial statements taken as a whole.
/s/ BDO Seidman, LLP
Atlanta, Georgia
August 20, 2003 (Except for Note 9 as to which the date is September 4, 2003)
F - 1
ROSS SYSTEMS, INC AND SUBSIDIARIES
THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR ANDERSEN
LLP AND IT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. ARTHUR ANDERSEN LLP HAS
NOT CONSENTED TO ITS INCORPORATION BY REFERENCE INTO ROSS SYSTEMS INC.'S
PREVIOUSLY FILED REGISTRATION STATEMENTS FILE NOS: 333-65660, 333-39348,
33-42036, 33-48226, 33-56584, 33-72168, 33-89128, 333-36745, 333-44665,
333-71005, 33-89504, 333-19619, 333-06053, 333-44363, 333-47877, 333-58639, AND
333-65065. THEREFORE, AN INVESTOR'S ABILITY TO RECOVER ANY POTENTIAL DAMAGE MAY
BE LIMITED.
REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS
To Ross Systems, Inc.:
We have audited the accompanying consolidated balance sheets of ROSS
SYSTEMS, INC. (a Delaware corporation) AND SUBSIDIARIES as of June 30,
2001 and 2000* and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years ended
June 30, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ross Systems, Inc. and
subsidiaries as of June 30, 2001 and 2000*, and the results of their
operations and their cash flows for each of the three years ended June 30,
2001 in conformity with accounting principles generally accepted in the
United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements included in Item 14 is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
August 17, 2001
* The 2000 and 2001 Consolidated Balance Sheet and the 1999 and 2000
Consolidated Statement of Operations, Shareholders Equity, and Cash Flows are
not required to be present in the 2003 Annual Report.
F - 2
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
---------------------------
2003 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ............................................................ $ 8,628 $ 5,438
Accounts receivable, less allowance for doubtful accounts
of $1,532 and $3,379, at 2003, and 2002 respectively ............................. 12,880 12,319
Prepaid and other current assets ..................................................... 731 532
Note receivable from related party ................................................... - 850
-------- --------
Total current assets .............................................................. 22,239 19,139
Property and equipment, net ............................................................ 1,406 1,450
Computer software costs, net ........................................................... 13,573 14,036
Other assets ........................................................................... 2,993 2,993
-------- --------
Total assets ...................................................................... $ 40,211 $ 37,618
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short term debt ...................................................................... $ 2,800 $ 3,967
Accounts payable ..................................................................... 2,978 2,682
Accrued expenses ..................................................................... 4,940 4,476
Income taxes payable ................................................................. 261 15
Deferred revenues .................................................................... 12,203 12,535
-------- --------
Total liabilities ................................................................. 23,182 23,675
-------- --------
Commitments and Contingencies
Shareholders' equity:
Convertible Preferred stock, no par value 5,000,000 shares authorized; 500,000 shares
issued and outstanding .............................................................. 2,000 2,000
Common stock, $0.001 par value; 15,000,000 shares authorized; 2,815,603 and
2,625,378 shares issued and outstanding ........................................... 28 26
Additional paid-in capital .......................................................... 87,189 86,983
Accumulated deficit ................................................................. (69,094) (73,300)
Accumulated other comprehensive deficit ............................................. (1,749) (1,766)
Treasury stock at cost, 158,977 shares .............................................. (1,345) -
-------- --------
Total shareholders' equity ........................................................ 17,029 13,943
-------- --------
Total liabilities and shareholders' equity ............................................. $ 40,211 $ 37,618
======== ========
See accompanying Notes to Consolidated Financial Statements
F - 3
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED JUNE 30,
--------------------------------
2003 2002 2001
-------- -------- --------
Revenues:
Software product licenses ................................................................ $ 14,589 $ 13,026 $ 9,607
Consulting and other services ............................................................ 13,489 13,013 16,520
Maintenance .............................................................................. 20,022 20,014 24,678
-------- -------- --------
Total revenues ......................................................................... 48,100 46,053 50,805
-------- -------- --------
Operating expenses:
Costs of software product licenses (inclusive of amortization and impairment of
capitalized software) .................................................................. 6,997 19,992 8,349
Costs of consulting, maintenance and other services (inclusive of reimbursable expenses of
$1,180, $834, and $1,307 for 2003, 2002, and 2001, respectively, and exclusive of non
recurring expense of $353 for 2001) .................................................... 17,193 17,023 17,595
Software product license sales and marketing (exclusive of non-recurring expense of $136
for 2001) .............................................................................. 11,384 9,461 15,026
Product development, net of capitalized computer software costs (exclusive of non
recurring expense of $301 for 2001) .................................................... 2,528 3,057 4,127
General and administrative ............................................................... 4,376 4,393 4,737
Provision for uncollectible accounts ..................................................... 831 1,444 1,514
Amortization of goodwill ................................................................. - - 691
Non-recurring costs (benefit) ............................................................ - (650) 790
-------- -------- --------
Total operating expenses ............................................................... 43,309 54,720 52,829
-------- -------- --------
Operating profit (loss) ................................................................ 4,791 (8,667) (2,024)
Other income (expense):
Gain on sale of product line ............................................................. - - 2,372
Other financial, net ..................................................................... (180) (625) (1,181)
-------- -------- --------
Net income (loss) before income taxes .................................................. 4,611 (9,292) (833)
Income tax expense ....................................................................... 405 132 9
-------- -------- --------
Net income (loss) .......................................................................... 4,206 (9,424) (842)
Preferred stock dividends (150) (150) -
-------- -------- --------
Net income (loss) available to common shareholders ..................................... $ 4,056 $ (9,574) $ (842)
======== ======== ========
Net income (loss) per common share--basic .................................................. $ 1.54 $ (3.65) $ (0.33)
======== ======== ========
Net income (loss) per common share--diluted ................................................ $ 1.28 $ (3.65) $ (0.33)
======== ======== ========
Shares used in per share computation--basic ................................................ 2,641 2,625 2,566
======== ======== ========
Shares used in per share computation--diluted .............................................. 3,296 2,625 2,566
======== ======== ========
See accompanying Notes to Consolidated Financial Statements
F - 4
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
----------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net income (loss) .......................................................... $ 4,206 $ (9,424) $ (842)
Adjustments to reconcile net loss to cash provided by operating activities:
Non cash financing costs ................................................ - - 60
Non-cash stock compensation costs ....................................... 175 - -
Impairment of capitalized software costs .............................. - 10,938 -
Depreciation and amortization of property and equipment ................. 766 984 1,592
Amortization of computer software costs ................................. 4,702 7,184 7,369
Amortization of goodwill ................................................ - - 691
Provision for uncollectible accounts .................................... 831 1,444 1,514
Changes in operating assets and liabilities, net of sale of product line:
Accounts receivable ................................................... (1,246) (3,646) 9,911
Prepaid and other current assets ...................................... (121) 575 (149)
Income taxes recoverable/payable ...................................... 271 185 92
Accounts payable ...................................................... 281 (2,218) (2,178)
Accrued expenses ...................................................... 489 (881) (1,011)
Deferred revenues ..................................................... (246) (66) (2,991)
-------- -------- --------
Cash provided by operating activities ............................. 10,108 5,075 14,058
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment, net ................................... (722) (740) (277)
Computer software costs capitalized ........................................ (4,239) (4,307) (6,878)
Note receivable from related party repaid .................................. 850 - -
Sale of product line, net of assets disposed ............................... - - 1,567
Other ...................................................................... - 144 429
-------- -------- --------
Cash used in investing activities ................................. (4,111) (4,903) (5,159)
-------- -------- --------
Cash flows from financing activities:
Net cash paid on line of credit activity ................................... (1,167) (555) (5,353)
Debt and capital lease payments ............................................ - - (1,723)
Repurchase of treasury stock ............................................... (1,345) - -
Proceeds from issuance of preferred stock .................................. - - 2,000
Proceeds from issuance of common stock ..................................... 183 101 17
Preference dividend paid ................................................... (150) (150) -
-------- -------- --------
Cash used in financing activities ................................ (2,479) (604) (5,059)
-------- -------- --------
Effect of exchange rate changes on cash ....................................... (328) 154 (134)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......................... 3,190 (278) 3,706
-------- -------- --------
Cash and cash equivalents at beginning of fiscal year ......................... 5,438 5,716 2,010
-------- -------- --------
Cash and cash equivalents at end of fiscal year ............................... $ 8,628 $ 5,438 $ 5,716
======== ======== ========
See accompanying Notes to Consolidated Financial Statements
F - 5
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Accum-
ulated
Other Total
Preferred Stock Common Stock Treasury Stock Accum- Compre- Share- Comprehen
--------------- -------------- --------------- Paid in ulated hensive holders' -sive
Shares Amount Shares Amount Shares Amount Capital Deficit Deficit Equity Loss
------ ------ ------ ------ ------ ------- ------- -------- ------- -------- ---------
Balances as of June 30, 2000 - $ - 2,380 $ 24 - $ - $85,780 $(63,034) $(1,880) $ 20,890
------ ------ ------ ------ ------ ------- ------- -------- ------- --------
Conversion of debentures ... 173 2 1,175 1,177
Issuance of stock pursuant
to employee stock
purchase plan............ 13 17 17
Effect of foreign currency
translation.............. (198) (198) $ (198)
Issuance of preference
shares 500 2,000 2,000
Issuance of warrants
pursuant to cost of
financing 60 60
Net loss.................... (842) (842) (842)
---------
Comprehensive Loss.......... (1,040)
=========
------ ------ ------ ------ ------ ------- ------- -------- ------- --------
Balances as of June 30, 2001 500 2,000 2,566 26 - - 87,032 (63,876) (2,078) 23,104
====== ====== ====== ====== ====== ======= ======= ======== ======= ========
Issuance of stock pursuant
to employee stock
purchase and option
plans.................... 59 101 101
Effect of foreign currency
translation.............. 312 312 312
Net loss.................... (9,424) (9,424) (9,424)
Dividends on preferred stock (150) (150)
---------
Comprehensive Loss.......... (9,112)
=========
------ ------ ------ ------ ------ ------- ------- -------- ------- --------
Balances as of June 30, 2002 500 2,000 2,625 26 - - 86,983 (73,300) (1,766) 13,943
====== ====== ====== ====== ====== ======= ======= ======== ======= ========
Issuance of stock pursuant
to employee stock
purchase and option
plans.................... 71 1 357 358
Issuance of stock in
fulfillment of 1996
acquisition of Spanish
subsidiary 120 1 (1)
Repurchase of treasury stock (159) (1,345) (1,345)
Effect of foreign currency
translation.............. 17 17 17
Net profit (loss)........... 4,206 4,206 4,206
Dividends on preferred stock (150) (150)
---------
Comprehensive Income........ $ 4,223
=========
------ ------ ------ ------ ------ ------- ------- -------- ------- --------
Balances as of June 30, 2003 500 $2,000 2,816 $ 28 (159) $(1,345) $87,189 $(69,094) $(1,749) $ 17,029
====== ====== ====== ====== ====== ======= ======= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements
F - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business of the Company
Ross Systems, Inc. (NASDAQ: ROSS) delivers innovative software
solutions that help manufacturers worldwide fulfill their business growth
objectives through increased operational efficiencies, improved
profitability, strengthened customer relationships and streamlined
regulatory compliance. Focused on the food and beverage, life sciences,
chemicals, metals and natural products industries and implemented by over
1,000 customer companies worldwide, the company's family of
Internet-architected solutions is a comprehensive, modular suite that
spans the enterprise, from manufacturing, financials and supply chain
management to customer relationship management, performance management and
regulatory compliance.
Publicly traded on the NASDAQ since 1991, Ross' global headquarters
are based in the U.S. in Atlanta, Georgia, with sales and support
operations around the world.
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. Approximately
60% of the Company's revenues are derived from the North American market.
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in
consolidation.
Stock Based Compensation.
The company measures compensation cost for its stock incentive and
option plans using the intrinsic value-based method of accounting.
Had the company used the fair value-based method of accounting to
measure compensation expense for its stock incentive and option plans and
charged compensation cost against income over the vesting periods, based
on the fair value of options at the date of grant, net income and the
related basic and diluted per common share amounts for the twelve months
ended June 30, 2003, 2002, and 2001, would have been reduced to the
following pro forma amounts:
(In thousands, except per share data)
FISCAL YEAR ENDED JUNE 30,
---------------------------------------
2003 2002 2001
--------- --------- ---------
Net income (loss) available to common shareholders:
As reported ..................................... $ 4,056 $ (9,574) $ (842)
Add: Stock-based compensation expense included in
reported net income , net of tax ............... 175 - -
Deduct: Total stock-based employee compensation
expense under fair value-based method, net of tax (699) (406) (460)
--------- --------- ---------
Pro forma net income (loss) available to common
shareholders .................................... $ 3,532 $ (9,980) $ (1,302)
--------- --------- ---------
Basic net earnings per share:
As reported ..................................... $ 1.54 $ (3.65) $ (0.33)
Pro forma ....................................... 1.34 (3.80) (0.51)
Diluted net earnings per share:
As reported ..................................... 1.28 (3.65) (0.33)
Pro forma ....................................... 1.07 (3.80) (0.51)
F - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following weighted average assumptions for the Company's Stock
Option Plan were used to determine the pro forma amounts noted above:
YEAR ENDED JUNE 30,
---------------------------------------
2003 2002 2001
--------- --------- ---------
Expected life...................................... 5 5 5
Expected volatility................................ 48.6% 80.4% 121.6%
Risk-free interest rate............................ 3.9% 5.0% 5.3%
Expected dividend yield............................ None None None
Revenue Recognition.
In accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements,"
the Company recognizes revenues from licenses of computer software
"up-front" provided that a non-cancelable license agreement has been
signed, the software and related documentation have been shipped, there
are no material uncertainties regarding customer acceptance, collection of
the resulting receivable is deemed probable, and no significant other
vendor obligations exist. The revenue associated with any license
agreements containing cancellation or refund provisions is deferred until
such provisions lapse. Where the Company has future obligations, if such
obligations are insignificant, related costs are accrued immediately. When
the obligations are significant, the software product license revenues are
deferred. Future contractual obligations can include software
customization, requirements to provide additional products in the future
and porting products to new platforms. Contracts which require significant
software customization are accounted for on the percentage-of-completion
basis. Revenues related to significant obligations to provide future
products or to port existing products are deferred until the new products
or ports are completed.
The Company's revenue recognition policies are designed to comply
with American Institute of Certified Public Accountants Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," and with SEC Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." Revenues recognized from multiple-element software license
contracts are allocated to each element of the contracts based on the fair
values of the elements, such as licenses for software products,
maintenance, or professional services. The determination of fair value is
based on objective evidence which is specific to the Company. The Company
limits its assessment of objective evidence for each element to either the
price charged when the same element is sold separately, or the price
established by management having the relevant authority to do so, for an
element not yet sold separately. If evidence of fair value of all
undelivered elements exists but evidence does not exist for one or more
delivered elements, then revenue is recognized using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as
revenue.
The Company utilizes distributors primarily in those geographic
areas where the Company does not maintain a physical presence. The
Company's revenue recognition policies with respect to sales by
distributors complies with SOP 97-2 and SAB 101 in that all the revenue
recognition criteria listed above are met. In addition, distributors do
not have rights of return, price protections, rotation rights, or other
features that would preclude revenue recognition. Generally, the value of
software license sales to distributors is based on list selling prices to
their customer less a discount at a predetermined rate. Similarly, the
Company receives revenue from distributors based on a predetermined
percentage of the maintenance fees billed by the distributor to the end
customer. The distributor typically retains any fees earned by them for
implementation services. Distributorships may or may not be geographically
exclusive, and are generally subject to annual renewals by the Company.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance
revenues, including revenues bundled with original software product
license revenues, are deferred and recognized over the related contract
period, generally 12 months.
Computer Software Costs.
The Company capitalizes computer software product development costs
incurred in developing a product once technological feasibility has been
established and until the product is available for general release to
customers. Technological feasibility is established when the Company
either (1) completes a detail program design that
F - 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
encompasses product function, feature and technical requirements and is
ready for coding and confirms that the product design is complete, that
the necessary skills, hardware and software technology are available to
produce the product, that the completeness of the detail program design is
consistent with the product design by documenting and tracing the detail
program design to the product specifications, and that the detail program
design has been reviewed for high-risk development issues and any related
uncertainties have been resolved through coding and testing or (2)
completes a product design and working model of the software product, and
the completeness of the working model and its consistency with the product
design have been confirmed by testing. The Company evaluates realizability
of the capitalized amounts based on expected revenues from the product
over the remaining product life. Where future revenue streams are not
expected to cover remaining amounts to be amortized, the Company either
accelerates amortization or expenses remaining capitalized amounts.
Amortization of such costs is computed as the greater of (1) the ratio of
current revenues to expected revenues from the related product sales or
(2) a straight-line basis over the expected economic life of the product
(not to exceed five years). Software costs related to the development of
new products incurred prior to establishing technological feasibility or
after general release are expensed as incurred.
As of June 30, 2003 and 2002, capitalized computer software costs
approximated $63,945,000 and $61,587,000 respectively, and related
accumulated amortization totaled $50,372,000 and $47,551,000 respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
an original maturity date of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable comprise trade receivables that are credit based
and do not require collateral. Generally, the Company's credit terms are
30 days but in some instances the Company offers extended payment terms to
customers purchasing software licenses. The Company has a history of
offering extended payment terms from time to time for competitive reasons.
These terms are not offered in connection with any contingencies related
to product acceptance, implementation, or any other service or contingency
post-transaction, and the Company has not offered concessions as a result
of these terms. Payment arrangements in these circumstances typically
require payment of a significant portion of the total contract amount
within 30 days of the sale, with 2 or 3 subsequent installments making up
the balance payable within 6 months. The Company has not found
collectibility to be compromised as a result of these terms. In no case
have payment terms extended beyond 12 months. Based on historical results,
the Company believes that all components of SOP 97-2 are met, including
that the arrangement is fixed and determinable.
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers to make
required payments. On an ongoing basis, the Company evaluates the
collectibility of accounts receivable based upon historical collections
and assessment of the collectibility of specific accounts. Ross
specifically reviews the collectibility of accounts with outstanding
accounts receivable balances in excess of 90 days outstanding. The Company
evaluates the collectibility of specific accounts using a combination of
factors, including the age of the outstanding balance(s), evaluation of
the account's financial condition, recent payment history, and discussions
with the account executive responsible for the specific customer and with
the customer directly. Based upon this evaluation of the collectibility of
accounts receivable, an increase or decrease required in the allowance for
doubtful accounts is reflected in the period in which the evaluation
indicates that a change is necessary. If actual results differ, this could
have an impact on the Company's financial condition, results of operation
and cash flows.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
accumulated using the straight-line method over the estimated useful lives
of the respective assets, generally three to seven years. Leasehold
improvements and equipment under capital leases are amortized using the
straight-line method over the shorter of the terms of the related leases
or the respective useful lives of the assets.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is recognized
for the difference between the fair value and the carrying value of the
asset.
Fair Value of Financial Instruments
The carrying amounts reported on the balance sheet for accounts
receivable, notes receivable, accounts payable and short term debt
approximate their fair values.
Net Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net
earnings or net loss by the weighted average number of common shares
outstanding during the period. Shares issued or reacquired during the year
are weighted for the portion of the year that they were outstanding.
Diluted earnings (loss) per common share is computed in a manner
consistent with that of basic earnings (loss) per share while giving
effect to all potentially dilutive common shares that were outstanding
during the period. Potentially dilutive common shares used in computing
diluted earnings per share are shown in the following table. As a result
of the net losses incurred in the years ended June 30, 2002, and 2001, the
potentially dilutive common shares for these fiscal years were not
considered in the calculation as their impact would be antidilutive.
Potentially dilutive common shares excluded in 2003, 2002 and 2001 were as
follows:
FISCAL YEAR ENDED JUNE 30,
--------------------------
2003 2002 2001
---- ---- ----
Stock options ........................ 347 41 39
Warrants ............................. 47
Convertible Preferred shares ......... 500 1
--- --- ---
Total ............................... 347 588 40
--- --- ---
The following is a reconciliation from basic earnings per share to
diluted earnings per share for fiscal 2003 (in thousands) :
EARNINGS
AVAILABLE TO
COMMON WEIGHTED AVERAGE EARNINGS
SHAREHOLDERS SHARES OUTSTANDING PER SHARE
------------ ------------------ ---------
Basic ............................. $4,056 2,641 $ 1.54
Stock options ..................... 108
Warrants .......................... 47
Convertible Preferred shares ...... 150 500
------ ------ --------
Diluted ........................... $4,206 3,296 $ 1.28
------ ------ --------
Goodwill
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets, effective
for fiscal years beginning after December 15, 2001. The Company elected
early adoption and applied the provisions of this statement, effective in
the first quarter of fiscal 2002. Under the new rules, goodwill is no
longer amortized but is subject to annual impairment tests. Other
intangible assets will continue to be amortized over their useful lives.
Goodwill attributable to each of the Company's reporting units was tested
in June 2003 for impairment by comparing the fair value of each of the
reporting units with its carrying value. The fair values of these
reporting units were determined using a combination of discounted cash
flow analysis and market multiples based on
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
historical and projected financial information. It was determined that
there was no impairment to goodwill in any period subsequent to the date
the Company adopted SFAS 142.
Net loss and loss per share for fiscal 2001, adding back goodwill
amortization of $691,000 ($0.27 per basic and diluted share) would have
been $(151,000), $(0.06) per basic and diluted share. Prior to July 1,
2001, goodwill was being amortized over periods ranging from 7 to 10
years.
Reimbursable Expenses
Prior to January 1, 2002, the Company recorded reimbursement by its
customers for out-of-pocket expenses as a decrease to cost of services.
The Company's results of operations for the fiscal years June 30, 2001,
have been reclassified for comparable purposes in accordance with the
Emerging Issues Task Force release 01-14, "Income Statement
Characterization of Reimbursements Received for Out of Pocket Expenses
Incurred." The effect of this reclassification was to increase both
services revenues and cost of services by, $1,307,000 for fiscal year
2001.
Income Taxes
In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("Statement 109"), the Company utilizes
the asset and liability method of accounting for income taxes. Under the
asset and liability method of Statement 109, deferred tax assets and
liabilities are established to recognize the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Foreign Operations and Currency Translation
The local currencies of the Company's foreign subsidiaries are the
functional currencies. Assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at current exchange rates, and the resulting
translation gains and losses are included as an adjustment to
shareholders' equity as a component of comprehensive income. Transaction
gains and losses that relate to U.S. dollar denominated intercompany
short-term receivables recorded in the financial statements of the
Company's foreign subsidiaries and are reflected in income. Where related
intercompany balances have been designated as long-term, gains and losses
are included as an adjustment to shareholders' equity as a component of
comprehensive income.
Reclassifications
It is the Company's policy to reclassify prior year amounts to
conform with current year financial statement presentation when necessary.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these
estimates.
Advertising Costs
The Company generally expenses advertising costs at the time the
advertisement is published, or in the case of direct mail, when mailed.
Advertising costs for the fiscal years ended June 30, 2003, 2002, and 2001
were approximately $574,000, $437,000, and $607,000 respectively.
Segment Information
SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information" established standards for the way that public
business enterprises report information about operating segments in their
financial statements. The standard defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
how to allocate resources and in assessing performance. Based on these
standards the Company has determined that it operates in four geographical
segments: Northern Europe, Spain the United Kingdom and North America.
During fiscal 2001, the Company divested its French subsidiary and adopted
an indirect sales approach in the French market. See further discussion of
this matter under "Acquisitions and Divestitures" below.
The Company has no customers that represent ten percent or more of
annual revenues.
For management purposes, the results of the Asian operations are
included in the North American results since the costs associated with
managing the Asian marketplace are born by the North American entities
within the Group. Revenues in the Asian markets comprise less than 5% of
total revenues reported for the North American segment. Selected balance
sheet and income statement information pertaining to the various
significant geographic areas of operation are as follows:
As of and for the year ended June 30, 2003 (in thousands) :
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------ ------- ---------- ---------------- ------------
Northern Europe ......... $ 2,987 $ 5,000 $ 475 $ 60 $ 68
Spain ................... 6,220 6,902 615 306 259
United Kingdom .......... 2,569 5,545 387 54 39
North America ........... 28,435 30,653 2,729 346 356
------- ------- ------- ------- -------
Total ................... $40,211 $48,100 $ 4,206 $ 766 $ 722
======= ======= ======= ======= =======
As of and for the year ended June 30, 2002 (in thousands) :
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------ -------- ---------- ---------------- ------------
Northern Europe .... $ 2,518 $ 5,579 $ 676 $ 60 $ 159
Spain .............. 4,723 6,431 1,622 247 96
United Kingdom ..... 2,969 5,127 134 62 21
North America ...... 27,408 28,916 (11,856) 615 464
-------- -------- -------- -------- --------
Total .............. $ 37,618 $ 46,053 $ (9,424) $ 984 $ 740
======== ======== ======== ======== ========
As of and for the year ended June 30, 2001 (in thousands):
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------ ------- ---------- ---------------- -------------
Northern Europe .... $ 1,583 $ 4,947 $ (210) $ 80 $ 35
Spain .............. 2,248 4,218 (56) 182 38
United Kingdom ..... 2,985 5,162 (1,014) 126 4
North America ...... 43,646 36,478 438 1,895 200
------- ------- ------- ------- -------
Total .............. $50,462 $50,805 $ (842) $ 2,283 $ 277
======= ======= ======= ======= =======
New Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation ("FIN") No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", which clarifies
disclosure and recognition/measurement requirements related to certain
guarantees. The disclosure requirements are effective for financial
statements issued after December 15, 2002 and the recognition/measurement
requirements are effective on a prospective basis for guarantees issued or
modified after December 31, 2002. The application of the requirements of
FIN 45 did not have a significant impact on our financial position or
result of operations.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123 ("Statement 148"). This
amendment provides two additional methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. Additionally, more prominent disclosures in both
annual and interim financial statements are required for stock-based
employee compensation. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after
December 15, 2002. The Company adopted the disclosure provisions of SFAS
148 during fiscal 2003.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." This Interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
addresses consolidation by business enterprises of variable interest
entities which possess certain characteristics. The Interpretation
requires that if a business enterprise has a controlling financial
interest in a variable interest entity, the assets, liabilities, and
results of the activities of the variable interest entity must be included
in the consolidated financial statements with those of the business
enterprise. This Interpretation applied immediately to variable interest
entities created after January 31, 2003 and to variable interest entities
in which an enterprise obtains an interest after that date. The Company
does not have any ownership in any variable interest entities as of June
30, 2003.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities ("Statement 149"). This Statement amends Statement
133 for decisions made (1) as part of the Derivatives Implementation Group
process that effectively required amendments to Statement 133, (2) in
connection with other Board projects dealing with financial instruments,
and (3) in connection with implementation issues raised in relation to the
application of the definition of a derivative, in particular, the meaning
of an initial net investment that is smaller than would be required for
other types of contracts that would be expected to have a similar response
to changes in market factors, the meaning of underlying, and the
characteristics of a derivative that contains financing components. The
Company does not have any derivative instruments or hedging activities.
The application of Statement 149 did not have an impact on our financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("Statement 150"). This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many
of those instruments were previously classified as equity. Statement 150
requires that certain mandatorily redeemable financial instruments issued
in the form of shares are to be classified as liabilities rather than
equity. The Company has no outstanding financial instruments that fall
into the definitions covered by this Statement. The application of
Statement 150 did not have a significant impact on our financial
statements.
Non-recurring items
In October of 2000, the Company reorganized its European presence
and adopted an indirect sales model in France by terminating its ownership
and control of the French subsidiary due to the chronic and sustained
losses and negative cash flows suffered by the French subsidiary. At that
time, management recorded what they deemed to be adequate reserves related
to the possible future costs for the change of presence in France by
deferring the gain associated with divesting net liabilities in this
liquidating transaction. In the fourth quarter of fiscal 2002, the Company
experienced a favorable outcome relating to the French subsidiary
liquidation transaction which rendered most of the reserve unnecessary. As
a result the Company recorded a non-recurring gain of $650,000 in fiscal
year 2002, arising from the reduction of the reserve described above.
On September 12, 2000, the Company announced restructuring efforts
aimed at reducing costs and improving efficiencies. Under the
restructuring, the Company reduced 125 positions across the company as
well as accelerated efforts to eliminate unneeded office space, improve
productivity through the use of technology and focus on increased revenues
through the use of distributors. As a result of these actions, during the
first quarter of fiscal year 2001, the Company recorded a $790,000 expense
to cover the liability arising from associated employee separation costs.
The costs were accrued in accordance with EITF Issue 94-3, "Liability
Recognition for Certain
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Terminations, Benefits and Other Costs to Exit an Activity". By
March 31, 2001, all of the costs accrued in conjunction with both actions
had been paid.
Non-cash Impairment of Capitalized Software Cost
In the fourth quarter of fiscal 2002, the Company made a major
change in technology direction. The Internet-related functionality of the
iRenaissance product was re-directed from the "java" based initial
development used in the Resynt product line to the Microsoft ".net"
technology. A new, formal development relationship with Microsoft was
launched to support the requirements of the new technology direction. This
strategic re-direction was based on the Company's belief that the .net
technology will serve the Company and its customers better in the future,
due to fuller market penetration, better standards of compatibility, and
superior technical adaptability. The result of this change was that prior
development in the former java environment became obsolete. Effective
April 1, 2002, the amount of $5,488,000, representing all unamortized
software-project balances relating to this, was expensed.
On April 23, 2002, the Company announced the General Availability of
Gembase Version 6.0. This version of Gembase, the 4GL language used for
the development of the iRenaissance products, contained major
functionality differences to prior versions, rendering all prior versions
obsolete. As a result, development and maintenance of all versions prior
to 6.0 were discontinued and no further sales using these versions would
be contemplated. In addition, customers using these versions would be
strongly encouraged to upgrade to version 6.0 because the Company no
longer supports development of any Gembase release lower than version 6.0.
Upgrades to the 6.0 version would be strongly supported and to encourage
and facilitate customers' upgrading, the product was designed to make the
transition straight-forward. Since Gembase versions lower than 6.0 would
not contribute any further revenue to the Company, even in the short-term,
the related unamortized software-project balances amounting to $943,000
were expensed.
On May 22, 2002 the Company announced the release of iRenaissance
version 5.7. This version was significantly changed from the prior
versions. Previous to this release, upgrades from any version less than
4.4 to the latest version were technically challenging resulting in an
environment not conducive to customer upgrades. Version 5.7 offered a
straight-forward upgrade capability to customers on previous versions. In
addition, version 5.7 contained a new "engine" at its core, which
significantly changed the way the software operated internally, and
resulted in improved operating efficiencies. Since customers on versions
lower than 4.4 could now upgrade without difficulty, the Company was able
to discontinue the development and support of all versions prior to 4.4.
No further sales using these versions would be contemplated. This had the
effect of rendering all releases of iRenaissance which were lower than 4.4
obsolete. Since iRenaissance versions lower than 4.4 would not contribute
any further license revenue to the Company, and renewable maintenance
revenue would soon be in respect of the newly released version of the
product rather than an older version, the related unamortized
software-project balances amounting to $3,333,000 were expensed.
During May 2002, the Company terminated further work on general
enhancements of the COBOL technology based Renaissance Classic product
line. Following prolonged, unfruitful attempts to garner interest in the
proposed enhancements from the customer base, a twofold decision was made;
to continue working with specific customers on custom product development,
and to introduce a general sales program of free software license upgrade
from the Classic product to the latest release of the iRenaissance product
line for customers who remain on maintenance. The company will continue to
support those customers who remain active users until they schedule their
upgrade conversion to iRenaissance. Since no future revenue benefits are
expected from the general enhancements capitalized to date, the aggregate,
unamortized software-project balances amounting to $1,174,000 were
expensed.
The aggregate value of unamortized impaired software expensed in the
fourth quarter of fiscal 2002 was $10,938,000. This action will have the
effect of reducing software cost amortization in future years. If the
Company had not recorded this expense, additional amortization expense of
approximately $2,734,000 would be recorded during 2003.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITIONS AND NOTE RECEIVABLE FROM RELATED PARTY
On December 30, 1996, the Company acquired a 100% ownership interest
in Ross Systems Iberica, its distributor in Spain and Portugal for the
prior five years, in exchange for shares of the Company's common stock
valued at approximately $1,400,000. The acquisition was a non-cash stock
exchange which was accounted for under the purchase method of accounting.
Accordingly, the results of operations of the acquired business have been
included in the Company's results of operations since the date of
acquisition. The purchase agreement mandated that the purchase price be
guaranteed based on security prices as of a date which had been mutually
extended by the parties and coincided with the extension of the maturity
to July 8, 2003 of a non-interest bearing, recourse note receivable, owed
by the former majority shareholder of Ross Systems Iberica to the Company.
The former majority shareholder is currently an employee of the Company.
The Company, in its sole discretion, could make up any difference between
the value of the shares originally tendered and the guaranteed purchase
price of Ross Iberica either by issuing additional shares or by paying
cash. The note receivable described herein totaled $850,000 and was
satisfied in full during March 2003, in conjunction with the treasury
stock transaction discussed below.
At the time of acquisition, the seller was issued 10% of the
purchase price in unrestricted shares with the remainder of the shares
restricted. As of December 31, 2002, the former majority shareholder still
held 20,000 restricted shares which were all the restricted shares that
were issued to him at the time of acquisition. During January 2003, the
Company sought and received a unanimous written consent from its Board of
Directors to issue additional shares to the former majority shareholder to
satisfy the guaranteed purchase price agreement. On the date of the Board
consent, the share price was $9. Accordingly, the Company issued 120,000
additional shares to satisfy the purchase price agreement. Since the
guaranteed purchase price was based on security prices and was not based
on an earn out factor or any other performance measure, this share
issuance resulted only in a change in the number of common shares
outstanding.
On the same day as the issuance of these additional shares, the
Company entered into an agreement with the former majority shareholder
that allowed the Company to repurchase the former majority shareholder's
shares at $9 per share. During January, 2003, the Company purchased these
shares into treasury stock at the agreed upon $9 per share. The Company
anticipated that these treasury shares would be issued to satisfy
conversions of its outstanding mandatorily convertible preferred shares
which must occur prior to or on June 30, 2006.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands) :
JUNE 30,
-------------------------
(IN THOUSANDS)
2003 2002
------- -------
Computer equipment .................................... $ 5,747 $ 5,691
Furniture and fixtures ................................ 1,187 1,143
Leasehold improvements ................................ 838 1,508
------- -------
7,772 8,342
Less accumulated depreciation and amortization ........ (6,366) (6,892)
------- -------
$ 1,406 $ 1,450
======= =======
(4) OTHER ASSETS
A summary of other assets follows (in thousands):
JUNE 30,
-------------------------
(IN THOUSANDS)
2003 2002
------- -------
Goodwill........................... $ 4,414 $ 4,414
Note receivable ................... 750 750
Other ............................. 62 62
------- -------
5,226 5,226
Less accumulated amortization ..... (2,233) (2,233)
------- -------
$ 2,993 $ 2,993
======= =======
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
JUNE 30,
----------------------
(IN THOUSANDS)
2003 2002
------ ------
Accrued vacation, salary and related compensation costs ......... $1,583 $1,502
Sales, Use, VAT and GST taxes payable ........................... 1,334 1,159
Interest payable ................................................ 38 63
Professional fees ............................................... 244 281
Royalties ....................................................... 844 806
Other ........................................................... 897 665
------ ------
$4,940 $4,476
====== ======
(6) DEBT
The Company has a revolving credit facility with an asset-based
lender with a maximum credit line for up to $5,000,000, an expiration date
of September 23, 2004, and an interest rate equal to the Prime Rate plus
2% (6.25% at June 30, 2003). Borrowings under the credit facility are
collateralized by substantially all the assets of the Company. The
revolving credit facility may be withdrawn if, amongst other things (a)
the Company fails to pay any principal or interest amount due or (b) there
is a material impairment of the Company's business which would prevent
loan repayment and (c) any of these events are not remedied by the Company
within allowable periods. At June 30, 2003, the Company had $2,131,000
outstanding against the $5,000,000 revolving credit facility and at June
30, 2002, approximately $3,370,000 was outstanding under the Company's
revolving credit facility.
The Company maintains other credit facilities in Spain with various
expiration dates over a period of twelve months from June 30, 2003.
Interest on these facilities ranges from 6% to 8% and the facilities are
collateralized by various assets of the Spanish subsidiary. Balances
outstanding under these agreements were approximately $669,000 and
$597,000 at June 30, 2003 and 2002 respectively.
(7) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases facilities and certain equipment under operating
leases which expire at various dates through fiscal 2016. Certain leases
include renewal options and rental escalation clauses to reflect changes
in price indices, real estate taxes, and maintenance costs. As of June 30,
2003, future minimum lease payments under non-cancelable operating leases
were as follows (in thousands):
FISCAL YEAR
-----------
2004.................................................... 1,384
2005.................................................... 816
2006.................................................... 634
2007.................................................... 442
Thereafter.............................................. 1,980
------
Total future minimum lease payments..................... $5,256
======
Rent expense approximated $1,189,000, $1,236,000, and $2,267,000,
for fiscal 2003, 2002, and 2001, respectively.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation
a) On June 30, 1998, the Company entered into a distribution
agreement with an existing Dutch systems integrator which entitled Ross to
distribute a certain project accounting product the systems integrator was
developing. The agreement contained certain minimum annual payments
totaling $1,500,000 which, unless the agreement was properly canceled (as
defined in the agreement) by Ross, would become due to the systems
integrator if the Company did not achieve certain minimum annual sales
quotas. The agreement also required that the Company use the systems
integrator's personnel for certain implementation and maintenance
activities.
Over the next few years, the distributor, in Ross' view, failed to
consistently successfully implement the project accounting product at
multiple North American sites. These failures cost the Company between
$300,000 and $400,000 in legal fees, uncollectible accounts receivable and
settlement costs. In February 2001, the Company cancelled the agreement
with the systems integrator.
The parties were not able to reach mutual agreement regarding the
terms of a settlement, and the systems integrator invoked the arbitration
clause of the agreement in late 2001. The arbitration was commenced before
the International Court of Arbitration in Paris, France, with the systems
integrator ultimately seeking multiple damages aggregating more than
$4,000,000.
See note 14 for recent developments regarding the outcome of this
matter.
b) On February 28, 2001, the Company completed the sale of certain
assets related to its Human Resource and Payroll product line to Now
Solutions, LLC, (NOW), a majority owned subsidiary of Vertical Computer
Systems Inc.(Vertical). Arglen Acquisitions (Arglen), was also a party to
the transaction as a minority member of NOW. The gross asset sale price
was $6,100,000. The purchase price consisted of cash of $5,100,000 and a
note payable by NOW to Ross of $1,000,000.
The note was non-interest bearing and was due in two installments;
$250,000 due on February 28, 2002 and $750,000 due on February 28, 2003.
NOW defaulted on the second installment of $750,000 which remains
outstanding and is accruing interest at the rate of 10% per annum, the
default interest rate as defined in the note.
On February 27, 2003, the day before the final note installment was
due, Vertical filed a derivative suit on behalf of NOW against Ross and
others alleging breach of contract, fraud, conspiracy and breach of
fiduciary duty. The suit alleges that Ross failed to schedule
approximately $3,600,000 of liabilities related to maintenance agreements
assumed by NOW. The suit also alleges that Ross failed to disclose to NOW
a transaction brokerage fee of $600,000 that Ross was to pay to Arglen,
whose CEO signed the fee agreement and who was also the CEO of NOW. The
suit also alleges that Ross should be jointly and severally liable for
certain alleged frauds committed by other defendants in which Ross
allegedly conspired. The suit further seeks a setoff against the remaining
note payment based on the above alleged damages, and the recovery of its
attorneys' fees and costs. Ross denies and has contested each and every
one of Vertical's claims. The Company does not believe currently that the
outcome of range of outcomes is determinable, nor does it believe that
should the outcome be unfavorable that it would be materially detrimental
to the Company's liquidity.
See note 14 for recent developments regarding the outcome of this
matter.
(8) CAPITAL STOCK
Mandatorily Convertible Preferred Stock and 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. All
preferred stock was issued with a mandatory conversion feature.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 be converted at $4.00 per
share after June 29, 2002 but before June 29, 2006, on a one for one
basis. 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.
On April 27, 2001 the Company executed a reverse stock split on the
basis of 1 share for 10 shares.
(9) SUBSEQUENT EVENTS
Announcement of Proposed Merger
In early September 2003, the Company announced that it signed a
definitive agreement whereby chinadotcom Software (CDC) will acquire Ross
Systems in a merger.
See note 14 for recent developments regarding the merger.
(10) EMPLOYEE STOCK PLANS
(a) Stock Option Plan
The Company has reserved 210,000 shares of common stock for issuance
under its 1988 Incentive Stock Plan and 810,000 shares of common stock for
issuance under its 1998 Incentive Stock Plan (collectively the "Plans").
The 1988 Incentive Stock Plan is closed and may not be used for further
issues of options. Under the Plans, the Company may issue options to
purchase shares of the Company's common stock to eligible employees,
officers, directors, independent contractors and consultants. The term of
the options issued under the Plans cannot exceed ten years from the date
of grant. Options granted to date generally become exercisable over four
to five years based on the grantees' continued service with the Company.
A summary of the status of the Company's Plan as of June 30, 2003,
2002 and 2001 and activity for the fiscal years then ended is presented
below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISABLE
---------- ----------------- -----------
Balance as of June 30, 2000 ................. 203,600 $ 28.70 102,800
Granted (at market value) ................... 165,219 $ 4.90
Cancelled/forfeited ......................... (77,148) $ 21.80
--------
Balance as of June 30, 2001 ................. 291,671 $ 16.91 112,255
Granted (at market value) ................... 137,333 $ 4.91
Exercised ................................... (10,243) $ 2.32
Cancelled/forfeited ......................... (91,966) $ 20.34
--------
Balance as of June 30, 2002 ................. 326,795 $ 10.78 113,494
Granted (at market value) ................... 252,828 $ 8.01
Exercised ................................... (31,048) $ 3.23
Cancelled /forfeited ........................ (19,756) $ 18.27
--------
Balance as of June 30, 2003 ................. 528,819 $ 9.62 154,615
========
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average estimated grant date fair value of options
granted during fiscal 2003, 2002, and 2001 was $4.44, $3.73, and $4.49,
respectively. The following table summarizes information about the stock
options outstanding at June 30, 2003:
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING -------------------------------
RANGE OF EXERCISE SHARES CONTRACTUAL WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------ ----------- ----------- ----------------- ----------- ----------------
$1.88-$1.88 ............. 50,613 7.5 years $ 1.88 16,041 $ 1.88
$3.25-$3.25 ............. 5,738 8.1 years 3.25 5,738 3.25
$3.50-$3.50 ............. 63,441 7.4 years 3.50 12,750 3.50
$3.75-$5.40 ............. 34,514 6.5 years 4.71 26,639 4.74
$7.25-$11.88 ............ 275,428 9.1 years 7.89 9,987 9.62
$12.99-$25.00 ........... 39,615 7.0 years 16.35 25,040 17.28
$25.94-$25.94 ........... 39,350 4.1 years 25.94 39,350 25.94
$26.56-$52.50 ........... 17,715 4.1 years 33.35 16,665 33.46
$65.00-$65.00 ........... 2,100 3.5 years 65.00 2,100 65.00
$67.50-$67.50 ........... 305 1.4 years 67.50 305 67.50
------- --------- --------- ------- ---------
Totals .................. 528,819 7.8 years $ 9.62 154,615 $ 16.06
======= ========= ========= ======= =========
(b) Employee Stock Purchase Plan
The Company initially reserved 80,000 shares of common stock for
issuance under its 1991 Employee Stock Purchase Plan ("ESPP"). In fiscal
1999, the stockholders approved an amendment to the plan whereby the
number of shares reserved for issuance was increased to 95,000. An
amendment in fiscal 2002 provided that beginning in fiscal 2001 and each
year thereafter, the amount reserved for issuance is increased by the
lesser of 20,000 shares or 1% of total outstanding common stock.
Under the ESPP, the Company's employees may purchase, through
payroll deductions of 1% to 10% of compensation, shares of common stock at
a price per share that is the lesser of 85% of its fair market value as of
the beginning or end of the offering period. Under the ESPP, the Company
sold 19,507 shares, 29,146 shares, and 11,409 shares, to employees in
fiscal 2003, 2002, and 2001 respectively. The weighted average fair value
of those purchase rights granted in fiscal 2003, and 2002, was $2.85 and
$0.83, respectively. As of June 30, 2003, 182,922 shares had been issued
under the ESPP.
(11) INCOME TAXES
Gains and losses before income taxes include foreign gains before
income taxes of $1,507,000, and foreign losses before income taxes of
$30,000 for fiscal 2003. Foreign gains before income taxes were $2,425,000
for fiscal 2002 and foreign losses before income taxes were $(1,280,000)
for fiscal year 2001. Income tax expense for the years ended June 30,
2003, 2002 and 2001 consists of the following (in thousands):
2003 2002 2001
----- ----- -----
Current:
Federal .................... $ 142 $ - $(140)
Foreign .................... - 112 123
State ...................... 263 20 26
----- ----- -----
405 132 9
----- ----- -----
Deferred:
Federal .................... -- -- --
Foreign .................... -- -- --
State ...................... -- -- --
----- ----- -----
-- -- --
----- ----- -----
$ 405 $ 132 $ 9
===== ===== =====
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 30, 2003, 2002, and 2001, the
reconciliation between the amounts computed by applying the United States
federal statutory tax rate of 34% to loss before income taxes and the
actual tax expense follows (in thousands):
2003 2002 2001
------- ------- -------
Income tax expense (benefit) at statutory rate ............................ $ 1,568 $(3,159) $ (283)
State income tax expense (benefit), net of federal income tax benefit ..... 170 (13) (37)
Change in beginning of year valuation allowance ........................... (1,195) 3,028 3,063
Losses for which no benefit is recognized (foreign loss and rate) ......... - - 435
Rate differential related to foreign income and foreign tax
withholdings ........................................................... - 843 485
Amortization of other assets and other permanent differences .............. (138) (567) (3,654)
------- ------- -------
$ 405 $ 132 $ 9
======= ======= =======
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities
at June 30, 2003 and 2002 were as follows (in thousands):
2003 2002
-------- --------
Accruals and reserves ................................. $ 428 $ 670
Net operating loss carryforward (federal) ............. 11,686 11,502
Net operating loss carryforward (state) ............... 1,521 2,386
Net operating loss carryforward (foreign) ............. 2,300 2,748
Tax credit carryforwards ............................. 3,802 3,802
Fixed assets depreciation differences ................. 407 399
-------- --------
Total gross deferred tax assets ................. 20,144 21,507
Less valuation allowance ........................ (14,698) (15,893)
-------- --------
Net deferred tax assets ......................... 5,446 5,614
-------- --------
Capitalized computer software costs ................... (5,446) (5,614)
-------- --------
Total gross deferred liabilities ................ (5,446) (5,614)
-------- --------
Net deferred taxes .................................... $ - $ -
======== ========
The net change in total valuation allowance for the year ended June
30, 2003, was a decrease of approximately $1,195,000. The valuation
allowance has been established to recognize the uncertainty of utilizing
loss and credit carryovers and certain deferred assets.
At June 30, 2003, the Company had net operating loss carry-forwards
of approximately $34,370,000, $25,354,000 and $7,187,000 for federal,
state and foreign tax purposes, respectively. At June 30, 2003, the
Company also had unused research and other credit carry-forwards of
approximately $3,368,000 and $208,000 for federal and California tax
purposes, respectively. The loss and research credit carry-forwards, if
not utilized, will expire between fiscal 2005 and 2020.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended June 30,
2003, 2002, and 2001 follows (in thousands):
2003 2002 2001
------ ------ ------
Cash payments:
Interest .......................................................................... $ 349 $ 642 $1,228
Income taxes ...................................................................... $ 121 $ 319 $ 75
Non-cash investing and financing activities:
Conversion of convertible debentures into stock (non-cash transaction) ............ $ - $ - $1,177
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) SELECTED UNAUDITED QUARTERLY INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED
JUNE 30 MARCH 31 DEC.31 SEPT. 30
FISCAL YEAR 2003 2003 2003 2003 2003
------- -------- ------- --------
Total net revenues $12,988 $11,513(a) $12,173 $11,426
Cost of software product licenses 979 449 521 346
Net income 1,306 719 1,430 601
Earnings per share - basic 0.49 0.27 0.54 0.23
Earnings per share - diluted 0.40 0.22 0.45 0.20
Number of shares used in per share computation - diluted 3,362 3,387 3,260 3,267
(a) As originally stated, third quarter revenues of $11,420,000
excluded $93,000 of revenue which was recorded originally as a reduction
of Costs of consulting, maintenance and other services.
QUARTER ENDED
JUNE 30 MARCH 31 DEC.31 SEPT. 30
FISCAL YEAR 2002 2002 2002 2001 2001
-------- -------- -------- --------
Total net revenues $ 11,173 $ 11,456 $ 11,425 $ 11,165
Cost of software product licenses 761 403 311 396
Net income (loss) (10,857) 381 488 414
Charge for impairment of capitalized software (10,288) - - -
Earnings (loss) per share - basic (4.14) 0.16 0.19 0.16
Earnings (loss) per share - diluted (4.14) 0.13 0.17 0.13
Number of shares used in per share computation - diluted 2,625 3,209 3,152 3,144
(14) RECENT DEVELOPMENTS (UNAUDITED)
On November 17, 2003, the Arbitrator in the systems integrator
matter described more fully in note 7, announced an award of approximately
$2,000,000 in favor of the systems integrator. The Company paid the award
before the end of calendar 2003 by funding the payment out of operating
cash flows in the ordinary course of business. As a result, the Company
recognized a charge of approximately $1,900,000 during the quarter ending
December 31, 2003 as $104,000 was previously recorded in accordance with
the contract in its normal course.
On November 18, 2003, the Supreme Court of the State of New York
dismissed all of Vertical Computer Systems (Vertical) claims against Ross
described more fully in note 7. Vertical has filed a Notice of Appeal. The
Company will continue to defend this matter vigorously.
On January 8, 2004, the Company filed a current report on Form 8-K
to announce changes to the terms of the previously announced merger with
chinadotcom. Under the terms of the merger agreement, as amended, for each
share of Ross common stock held, stockholders of Ross Systems may elect to
receive either (i) $17.00 in cash or (ii) $19.00 in a combination of cash
and CDC common shares for each share of the Company's common stock (the
"Common Shares"). CDC common shares will be valued at the average closing
price of such shares for the 10 trading days preceding the second trading
day before the closing date. Both companies are listed on NASDAQ.
F-21
SCHEDULE II
ROSS SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
----------- --------- -------- -------- ------------- -------------
Year ended June 30, 2003 allowance for
doubtful accounts and returns ............ $3,379 $ 831 $ - $2,676 $1,532
------ ------ --- ------ ------
Year ended June 30, 2002 allowance for
doubtful accounts and returns ............ $2,930 $1,444 $ - $ 995 $3,379
------ ------ --- ------ ------
Year ended June 30, 2001 allowance for
doubtful accounts and returns ............ $3,571 $1,514 $ - $2,155 $2,930
------ ------ --- ------ ------
-------------
(1) Represents net charge-off of specific receivables.
S-1