UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001,
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-19092
ROSS SYSTEMS, INC.
----------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-2170198
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number
Two Concourse Parkway,
Suite 800, Atlanta, Georgia 30328
--------------------------- -----
(Address of principal executive offices) (Zip code)
(770) 351-9600
------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Outstanding
Class November 7 , 2001
----- -----------------
Common stock, $0.001 par value 2,592,076
ROSS SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements....................................................................................1
Condensed Consolidated Balance Sheets - September 30, 2001 and June 30, 2001............................1
Condensed Consolidated Statements of Operations - Three months ended September 30, 2001 and 2000........2
Condensed Consolidated Statements of Cash Flows - Three months ended September 30, 2001 and 2000........3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................17
PART II. OTHER INFORMATION
Item 2. Changes in Securities..................................................................................18
Item 6. Exhibits and Reports on Form 8-K.......................................................................18
SIGNATURE.............................................................................................................20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share related data)
September 30, June 30,
2001 2001
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,770 $ 5,716
Accounts receivable, less allowance
for doubtful accounts 10,443 10,128
Prepaids and other current assets 1,821 1,874
-------- --------
Total current assets 15,034 17,718
Property and equipment, net 1,519 1,694
Computer software costs, net 27,165 27,918
Other assets 3,105 3,132
-------- --------
Total assets $ 46,823 $ 50,462
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt $ 4,203 $ 4,522
Accounts payable 3,279 4,920
Accrued expenses 4,286 4,870
Income taxes payable 367 335
Deferred revenues 11,003 12,711
-------- --------
Total current liabilities 23,138 27,358
-------- --------
Shareholders' equity:
Common stock, $.001 par value; 35,000,000 shares authorized,
2,592,076 and 2,565,989 shares issued and outstanding at 26 26
September 30, 2001 and June 30, 2001, respectively
Preferred Stock, no par value; 5,000,000 authorized, 500,000
outstanding 2,000 2,000
Additional paid-in capital 87,074 87,032
Accumulated deficit (63,462) (63,876)
Accumulated comprehensive deficit (1,953) (2,078)
-------- --------
Total shareholders' equity 23,685 23,104
-------- --------
Total liabilities and shareholders' equity $ 46,823 $ 50,462
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three months ended
September 30,
-----------------------
(unaudited)
2001 2000
Revenues:
Software product licenses $ 3,180 $ 2,417
Consulting and other services 2,763 4,967
Maintenance 5,222 6,768
-------- --------
Total revenues 11,165 14,152
-------- --------
Operating expenses:
Costs of software product licenses 396 483
Costs of consulting, maintenance and other services 2,057 6,518
Software product license sales and marketing 3,437 5,043
Product development net of capitalized computer software costs 1,048 1,294
Amortization of computer software costs 1,709 1,751
General and administrative 1,469 1,537
Provision for uncollectible accounts 285 552
Amortization of other assets -- 225
Non-recurring costs -- 790
-------- --------
Total operating expenses 10,401 18,193
-------- --------
Operating earnings (loss) 764 (4,041)
Other expenses, net (162) (337)
-------- --------
Earnings (loss) before taxes 602 (4,378)
Income tax expense (benefit) 188 (183)
Net earnings (loss) $ 414 $ (4,195)
Net earnings (loss) per common share - basic $ 0.16 $ (1.74)
Net earnings (loss) per common share - diluted $ 0.16 $ (1.74)
Shares used in per share computation - basic 2,585 2,412
Shares used in per share computation - diluted 2,626 2,412
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
Three months ended
---------------------
September 30,
2001 2000
------- -------
Cash flows from operating activities:
Net earnings (loss) $ 414 $(4,195)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Loss on disposal of property and equipment (34) --
Depreciation and amortization of property and equipment 272 416
Amortization of computer software costs 1,709 1,751
Amortization of other assets -- 225
Provision for uncollectable accounts 285 552
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (598) 6,293
Prepaids and other current assets 53 (374)
Income taxes payable / recoverable 32 (47)
Accounts payable (1,635) 805
Accrued expenses (582) (920)
Deferred revenues (1,702) (3,083)
------- -------
Net cash (used in) provided by operating activities (1,786) 1,423
------- -------
Cash flows from investing activities:
Purchases of property and equipment (63) (48)
Computer software costs capitalized (974) (2,223)
Other 45 (116)
------- -------
Net cash used for investing activities (992) (2,387)
------- -------
Cash flows from financing activities:
Net line of credit activity (319) 363
Capital lease payments -- (437)
Proceeds from issuance of common stock 42 --
------- -------
Net cash used for financing activities (277) (74)
------- -------
Effect of exchange rate changes on cash 109 83
------- -------
Net decrease in cash and cash equivalents (2,946) (955)
Cash and cash equivalents at beginning of period 5,716 2,010
------- -------
Cash and cash equivalents at end of period $ 2,770 $ 1,055
======= =======
Non-cash investing and financing activities:
Conversion of convertible debentures $ -- $ 536
======= =======
Supplementary disclosure:
Income taxes paid $ 209 $ --
======= =======
Net interest paid $ 161 $ 337
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) BUSINESS OF THE COMPANY & BASIS OF PRESENTATION
Ross Systems, Inc. (NASDAQ:ROSS), (the "Company") founded in 1972,
supplies leading enterprise solutions software designed for process
manufacturing companies. The Company offers both the award-winning
iRenaissance(TM) enterprise resource planning (ERP II) software package, as well
as integrated e-business solutions for food, beverage, specialty chemical,
biotech/pharmaceutical, paper and metals manufacturers. The Ross Systems family
of solutions includes a broad range of applications for advanced planning,
supply-chain management (SCM), materials management, financials, manufacturing,
maintenance management, transportation management and human resources/payroll.
In addition to the aforementioned software suites, the Company also provides
professional consulting services for implementation, custom application
development and education. It offers ongoing maintenance and support services
via the internet and telephone help desks.
The Company operates in one business segment and no individual
customer accounts for more than 10% of total revenues. The Company does not have
a concentration of credit risk in any one industry.
The accompanying unaudited condensed consolidated financial
statements of Ross Systems, Inc reflect all adjustments of a normal recurring
nature which are, in the opinion of management, necessary to present a fair
statement of its financial position as of September 30, 2001, and the results of
its operations and cash flows for the interim periods presented. The Company's
results of operations for the three months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the full year.
These unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions for Form 10-Q and, therefore,
certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included in the Company's Annual Report to Stockholders on Form 10-K for the
fiscal year ended June 30, 2001 which was filed with the Securities and Exchange
Commission during September 2001.
It is the Company's policy to reclassify prior year amounts to conform with the
current year presentation when necessary.
2) PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated.
3) CAPITALIZED COMPUTER SOFTWARE COSTS AND OTHER ASSETS
It is the Company's policy to follow paragraph 8 of SFAS 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed" in the computation of annual amortization expense of software costs.
The straight-line method has historically yielded the greatest annual expense
when compared to the ratio of current gross revenues to current and anticipated
future gross revenues. Accordingly, the straight-line method is generally used
to amortize previously capitalized software costs.
It is the Company's policy to assess all its long-lived assets
and intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be
4
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
recoverable. Impairment losses, if applicable, would be calculated as the
difference between the carrying value of the asset and the sum of anticipated
future undiscounted cash flows. The calculation would be performed on an
individual item basis. No impairment is noted in the first quarter of fiscal
2002.
4) ACCOUNTS RECEIVABLE
As of the dates shown, accounts receivable consisted of the
following (in thousands):
September 30, June 30,
2001 2001
-------- --------
Trade accounts receivable $ 13,612 $ 13,058
Less allowance for doubtful accounts and returns (3,169) (2,930)
-------- --------
$ 10,443 $ 10,128
======== ========
5) PROPERTY AND EQUIPMENT
As of the dates shown, property and equipment consisted of the
following (in thousands):
September 30, June 30,
2001 2001
-------- --------
Computer equipment $ 9,148 9,101
Furniture and fixtures 1,782 1,782
Leasehold improvements 1,540 1,546
-------- --------
12,470 12,429
Less accumulated depreciation and amortization (10,951) (10,735)
-------- --------
$ 1,519 $ 1,694
======== ========
6) OTHER INTANGIBLE ASSETS
As of September 30, 2001, Goodwill consisted of the following (in
thousands):
Accumulated
Asset Value Amortization Net Value
----------- ------------ ---------
Excess of purchase price over tangible asset value
of acquired software services companies
$ 4,414 $(2,233) $ 2,181
======= ======= =======
The Company does not consider these assets to be impaired either September 30,
2001 or at the date of filing this report on form 10-Q. Presently the Company
does not anticipate any future impairment of these assets. In accordance with
the provisions of Statement on Financial Accounting Standard No. 142, "Goodwill
and Other Intangible Assets", the Company does not intend to record any future
amortization of these assets. (See Note 11)
Other intangible assets consisting of Capitalized Computer Software Costs, in
the net amount of $27,165,000, will continue to be amortized over four years.
(See Note 3.)
5
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7) SOFTWARE REVENUE RECOGNITION
The company recognizes revenue on software transactions in
accordance with Statement of Position No. 97-2 "Software Revenue Recognition"
("SOP 97-2). The financial statements contained herein have been prepared in
accordance with the requirements of SOP 97-2.
8) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income" as of July 1, 1998. SFAS 130
requires disclosure of total non-stockholder changes in equity in interim
periods and additional disclosures of the components of non-stockholder changes
on an annual basis. Total non-stockholder changes in equity include all changes
in equity during a period except those resulting from investments by and
distributions to stockholders. The components of comprehensive income (loss) for
the three month periods ended September 30, 2001 and 2000 were as follows (in
thousands):
Three months ended
September 30,
--------------------------
2001 2000
--------- ---------
Net earnings (loss) $ 414 $ (4,195)
Foreign currency translation adjustments 125 770
--------- ---------
Total comprehensive income (loss) $ 539 $ (3,425)
========= =========
9) NET EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings (loss) per common share are computed by dividing
net earnings or net loss by the weighted average number of common shares
outstanding during the period. Diluted earnings per common and common equivalent
share is computed by dividing net earnings by the weighted average number of
common and common equivalent shares outstanding during the period. Common stock
equivalents are not considered in the calculation of net loss per share when
their effect would be antidilutive.
The following is a reconciliation of the numerators of diluted
earnings per share, (in thousands):
Three months ended
September 30,
--------------------
2001 2000
------- -------
Net earnings (loss) $ 414 $(4,195)
Payment in kind interest on convertible debentures -- --
------- -------
Numerator for diluted calculation $ 414 $(4,195)
======= =======
In periods when the Company is profitable, the only difference between the
denominator for basic and diluted net earnings per share is the effect of common
stock equivalents. In periods of a loss, the denominator does not change because
it would be anti-dilutive.
6
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10) CAPITAL STOCK
(a) Mandatorily Redeemable Preferred Stock and New Private Placement
In fiscal 1991, the Company authorized a new class of no par
value preferred stock consisting of 5,000,000 shares. The Board of Directors is
authorized to issue the preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions of such stock, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the shareholders. As of June 30, 2000, the Company had no shares of
its mandatorily redeemable convertible preferred stock outstanding.
On June 29, 2001, the Company issued mandatorily convertible
preferred stock to a qualified investor in a private placement transaction. In
summary, the investor purchased 500,000 preferred shares at $4 per share
yielding $2,000,000 for the Company. This price represented a premium to the
market for the Company's common stock at the time of issuance. The average
closing share price of the Company's common stock for the 30 trading days prior
to the private placement was approximately $2.22. The preferred shares can not
be converted for one year but must be converted within three years from the
issue date. The shares earn dividends at the rate of 7.5%. In conjunction with
this transaction, the Company issued warrants to the broker who assisted in
securing the investor. These warrants were fairly valued at $60,000 on the date
of issuance and the expense has been recorded in the statement of operations as
a component of other expense (net) in the quarter ended June 30, 2001.
(b) Convertible Debentures
The convertible debentures referred to in this section were fully
retired in the prior fiscal year, on June 29, 2001.
On February 6, 1998, the Company closed a private placement of up
to $10,000,000 of convertible subordinated debentures to certain institutional
investors (the "Investors") pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The investors invested $6,000,000 on
February 6, 1998 and $4,000,000 on June 11, 1998 The terms of the convertible
subordinated debenture agreement are as follows:
Conversion Price: The conversion price for the convertible
debentures is (P+I) divided by the Conversion Date Market Price where P equals
the outstanding principal amount of the convertible debenture submitted for
conversion, I equals accrued but unpaid interest as of the conversion date and
Conversion Date Market Price equals the lesser of the maximum conversion price
(as defined below) or 101% of the average of the two lowest closing bid prices
for the Company's Common Stock as reported by the Bloomberg Service for the
thirty trading days immediately before the conversion date. The maximum
conversion price is (i) until December 31, 1998, $7.00 subject to a downward
adjustment if the Company issues shares in a private placement financing
transaction at a per share price less than $7.00 and (ii) commencing January 1,
1999, 115% of the average closing bid price of the Common Stock as reported by
the Bloomberg Service over the 1998 calendar year. During fiscal 2001 and fiscal
2000, through the issuance of additional common shares, the Company paid
interest in kind of $31,575 and $149,000, respectively, related to these
debentures. There were no interest payments in kind during fiscal 2001 due to
the 20% dilution rule mentioned below. The remaining portion of the convertible
debentures and accrued but unpaid interest, issued in June 1998 (the "Second
Closing Debentures"), was redeemed by the Company on June 29, 2001. When the
Company is profitable, this payment in kind interest is added back to net
earnings in the determination of diluted earnings per share. In years of loss,
this amount in not added back as it would be anti-dilutive. (See Note 9.)
7
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In December of 2000, it was determined that the investor's
aggregate conversions had reached the Nasdaq exchange imposed limit of 20% of
the total outstanding shares of the Company, calculated as of the date the
debentures were originally issued. Pursuant to the terms of the debenture
agreement, the Company requested the Nasdaq to waive the 20% dilution limit to
allow the remainder of the debentures to be converted. The Nasdaq denied this
request. Next, as required by the debenture agreement, the Company placed the
additional dilution request to a vote of the shareholders. The shareholders
denied the debenture holders' request for additional dilution. Therefore, in
accordance with the terms of the debenture agreement, the Company paid a
contractually defined premium in addition to the face amount of the debentures
then outstanding. The remaining debentures were redeemed for cash on June 29,
2001. Per the terms of the agreement, interest accrued to the date of payment
was capitalized into the face amount of the debentures outstanding and subject
to the defined cash redemption premium. The total payments to the debenture
holder were $919,000 of which approximately $114,000 represented the premium
paid to redeem the debentures in cash versus common stock. The Company expensed
the premium paid as additional interest expense during the quarter ended June
30, 2001, which is the quarter in which the redemption took place.
Interest: The interest rate is four percent per annum for the
first six months after the original issuance date of the convertible debenture
and six percent per annum thereafter, subject to increases (up to the legal
maximum rate) if the Company is in default under the convertible debenture.
Accrued interest is due and payable in shares of the Company's Common Stock
semi-annually on the last day of June and December of each year. The value for
such shares of Common Stock is the average of the two lowest closing bid prices
for the Company's Common Stock as reported by the Bloomberg Service for the
thirty trading days immediately before the interest payment date.
(c) Reincorporation
In June, 1998, the Company effected a change in its legal
domicile from California to Delaware by creating a Delaware corporation which
was the surviving entity of a merger with the California corporation. With this
reincorporation, the shares of the Delaware corporation have a stated par value
of $0.001 per share.
(d) Reverse Stock Split
On April 27, 2001, the Company executed a reverse stock split, on
the basis of 1 share for 10 shares. The split was approved by the stockholders
in a special meeting on April 26, 2001 to facilitate the Company continued
listing on the Nasdaq National Market.
11) NEW ACCOUNTING PRONOUNCEMENTS
In 1999, the staff of the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes the SEC staff's views in applying generally
accepted accounting principles to the recognition of revenues. The Company's
adoption of SAB No. 101 has not had a material impact on its consolidated
results of operations, financial position, or cash flows.
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
effective for transactions after June 30, 2001, and No. 142, "Goodwill and Other
Intangible Assets", effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill will no longer be amortized but will be
subject to annual impairment tests in
8
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
accordance with the statements. Other intangible assets will continue to be
amortized over their useful lives. The Company has adopted these standards and
has applied the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of fiscal 2002. The pro-forma effects of FAS 142
on the quarter ended September 30, 2000 are such that the Company would have
recorded $225,000 less in amortization expense and would have incurred a net
loss of $3,970,000 versus the net loss of $4,195,000 actually reported. The
pro-forma effects of FAS 142 on Earnings Per Share for the quarter ended
September 30, 2000 are such that EPS would have been reported at $1.65 loss per
share versus the $1.74 loss per share actually reported.
In June 2001 the Financial Accounting Standards Board approved
Statement of Accounting Standard No. 143, "Accounting for Asset Retirement
Obligations." The statement addresses financial accounting and reporting for
legal obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. The statement is effective for the
Company's 2003 fiscal year and is not expected to have a material effect on the
Company's financial position or results of operations.
In August 2001 the Financial Accounting Standards Board approved
Statement of Accounting Standard No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." The statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and establishes a
single accounting model for the impairment or disposal of long-lived assets. The
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long Lived Assets and for Long-lived Assets to be Disposed Of, " and supercedes
accounting and reporting under APB Opinion No. 30 for the disposal of a
business. The statement is effective for the Company's 2002 fiscal year and is
not expected to have a material effect on the Company's financial position or
results of operations.
12) GEOGRAPHIC SEGMENT INFORMATION
The Company has adopted the Financial Accounting Standards
Board's statement of Financial Accounting Standards No. 131, or SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information," effective
for fiscal years beginning after December 15, 1997. SFAS 131 supersedes
Statement of Financial Accounting Standards No. 14, or SFAS 14, Financial
Reporting for Segments of a Business Enterprise. SFAS 131 changes current
practice under SFAS 14 by establishing a new framework on which to base segment
reporting and also requires interim reporting of segment information.
The Company markets its products and related services primarily
in North America, Europe and Asia and primarily measures its business
performance based upon certain geographic results of operations. During fiscal
2001, the Company divested its French subsidiary and adopted an indirect sales
approach in the French market.
9
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For these 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. Selected balance sheet and income statement information
pertaining to the various significant geographic areas of operation are as
follows:
As of and for the quarter ended September 30, 2001:
Net Income Depreciation Capital
Total Assets Revenue (Loss) and Amortization Expenditures
------------ ------- ---------- ---------------- ------------
Belgium $ 351 $ 204 $ (41) $ 6 $ 7
Netherlands 1,090 825 219 9 1
Germany 223 118 (5) 1 2
Spain 2,800 1,323 448 60 6
United Kingdom 2,415 1,381 110 21 1
North America 39,944 7,314 (317) 1,884 46
------- ------- ------- ------- -------
Total $46,823 $11,165 $ 414 $ 2,156 $ 63
------- ------- ------- ------- -------
As of and for the quarter ended September 30, 2000:
Net Income Depreciation Capital
Total Assets Revenue (Loss) and Amortization Expenditures
------------ ------- ---------- ---------------- ------------
Belgium $ 162 $ 211 $ (200) $ 5 $ 0
Netherlands 619 504 (75) 11 0
France 1,787 362 (497) 14 0
Germany 143 200 35 0 0
Spain 3,188 634 (302) 37 6
United Kingdom 2,540 1,046 (532) 35 5
North America 48,811 11,195 (2,624) 2,065 37
------- ------- ------- ------- -------
Total $57,250 $14,152 $(4,195) $ 2,167 $ 48
------- ------- ------- ------- -------
10
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Variability of Quarterly Results
The Company's software product license revenues can fluctuate
from quarter to quarter depending upon, among other things, such factors as
overall trends in the United States and international economies, new product
introductions by the Company, hardware vendors and other software vendors, and
customer buying patterns. Because the Company typically ships software products
within a short period after orders are received, and therefore maintains a
relatively small backlog, any weakening in customer demand can have an almost
immediate adverse impact on revenues and operating results. Moreover, a
substantial portion of the revenues for each quarter is attributable to a
limited number of sales and tends to be realized in the latter part of the
quarter. Thus, even short delays or deferrals of sales near the end of a quarter
can cause substantial fluctuations in quarterly revenues and operating results.
Finally, certain agreements signed during a quarter may not meet the Company's
revenue recognition criteria resulting in deferral of such revenue to future
periods. Because the Company's operating expenses are based on anticipated
revenue levels and a high percentage of the Company's expenses are relatively
fixed, a small variation in the timing of the recognition of specific revenues
can cause significant variation in operating results from quarter to quarter.
Business Summary
Description of Business
The Company markets a broad range of sophisticated business
application software that addresses B2B electronic commerce including
procurement, collaborative planning, financial, manufacturing, distribution,
supply chain management, and human resource needs of manufacturers primarily in
process manufacturing type industries. In addition, the Company supports a large
installed base of companies, which utilize the Company's financial products
exclusively. The Company's software product license fees are based on the
modules licensed, and the number of concurrent users supported by the hardware
on which the modules operate. Customers are primarily medium to large-sized
companies (with annual sales of $50 million to $2 billion) upgrading internal
systems to improve profitability through the availability of timely and accurate
information, or to modernize their management information systems operations in
order to reduce costs and provide business-to-business (B2B) linkage with
suppliers and customers. The Company licenses its products to customers through
a direct sales force in North America and Western Europe as well as independent
distributors in 24 other markets worldwide. Since the Company's inception in
1972, the Company has licensed software products to an installed base of over
3,400 customers worldwide.
The Company has developed a series of products designed for the
Internet environment which allow users to access and manipulate data from their
personal computers using a portal for functional personalization of the user's
desktop. These products incorporate an integrated, modular, feature-rich and
user-friendly operating environment. The integration of these products allows
the sharing of data between application products with a common user interface
while integrating frequently visited Web sites and other software tools. The
Company's open systems applications function in a relational database management
system ("RDBMS") environment that provides for a high degree of data
availability and integrity. Additionally, because the Company's iRenaissance(TM)
financial, manufacturing and distribution applications were developed with the
GEMBASE fourth generation language ("4GL"), the Company believes they are easily
modified and expanded. GEMBASE is a programming environment that delivers a
central data dictionary, complete screen
11
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
painting, editing and debugging capabilities, and links to several popular
RDBMSs. GEMBASE itself is written in the C programming language to facilitate
portability across multiple hardware and RDBMS platforms. Because the
iRenaissance(TM) financial, manufacturing and distribution products were
developed in GEMBASE, customers often find it easy to customize their own
applications.
The Company offers its comprehensive Enterprise Resource Planning
("ERP") solution with functionality specifically tailored to the unique formula
and specifications-based requirements of process manufacturers, including food
and beverage, consumer packaged goods, pharmaceutical and biotechnology,
chemical, primary metals, and pulp and paper companies. The Company believes
that this native functionality is superior to the alternative presented by many
of the Company's competitors, which is to adapt systems designed primarily for
the discrete manufacturing sector. The product may be deployed in a thin client
mode to permit the greatest performance advantage for companies using remote
communications over the internet.
In fiscal 2001, the Company continued to expand its product line
in the collaborative business to business (B2B ) applications. With connectivity
to the ERP backbone systems over the internet to customers and suppliers, these
products enable customers to tightly link trading partner supply chains to
achieve sustainable competitive advantage. These applications are designed to
allow companies the ability to leverage the technology of the Internet in order
to automate business processes and effectively manage business resources. To
simplify its market identification, the Company discontinued the use of the
"Resynt" brand name and has re-branded the suite of fully integrated products as
iRenaissance(TM). The suite includes iRenaissance.portal, iRenaissance.erp,
iRenaissance.aps, and iRenaissance.cms.
12
Results of Operations
Revenues
Total revenues for the quarter ended September 30, 2001 decreased 21%
to $11,165,000 from $14,152,000 in the same quarter of fiscal 2001. Software
product license revenues increased 32%, while consulting and other services
revenues decreased 44%, and maintenance revenues decreased 23% from the same
quarter of the prior year.
Software product license revenues were $3,180,000 during the quarter
ended September 30, 2001, an increase of $763,000, or 32%, from the same quarter
in fiscal 2001. The Company experienced a decrease over the same quarter of
fiscal 2001 in the North American market of approximately $373,000, or 28%. This
North American decrease is due to a fewer number of contracts recorded during
the quarter than in the same quarter of the prior year. The Company experienced
a net increase of $1,136,000, or 104%, in the European, Asian and Pacific Rim
("International") markets over the same quarter in fiscal 2001. The increase in
International markets represents a general increase in demand for the Company's
products, resulting in a return to more normal levels of contracts signed, from
an extremely low period, the same quarter in the prior year. The majority of
this increase was $757,000 in Spain.
Consulting and other services revenues for the first quarter of
fiscal 2002 decreased 44% to $2,763,000 from $4,967,000 in the same quarter of
fiscal 2001. Revenues from consulting and other services (which are typically
recognized as performed) are generally correlated with software product license
revenues (which are typically recognized upon delivery), therefore, service
revenues fluctuate based upon related fluctuations in software product revenue.
For the quarter ended September 30, 2001, North American services revenues
decreased by $2,323,000, or 63%, over the same quarter in the prior year.
International services revenues increased $118,000, or 9% over the same quarter
in the prior year. The decrease in North American services revenues is
attributable to the absence of revenues relating the Human Resource and Payroll
product line due to the sale of the product line in February 2001, and a general
decline in services activity due to lower license revenues. The increases in
consulting and other service revenues Internationally is attributable to the
improved levels of software product licensing activity, during the previous
quarters.
Maintenance revenues for the first quarter decreased by $1,546,000,
or 23% in the first quarter of fiscal 2002 versus the same quarter in the prior
year. This is attributable mainly to a decrease of $1,280,000 or 24% in North
America due to the absence of revenues relating the Human Resource and Payroll
product line, which was sold in February 2001. The decrease of $266,000 or 18%
in International maintenance revenues is attributable mainly to non-renewals by
customers with older installations. Maintenance contracts sold by third party
distributors are included by the Company in software product license revenues
because the Company has no support obligations to any of the distributors'
customers.
International revenues as a percentage of total revenues for the
first quarter of fiscal 2002 increased to 44% in fiscal 2002 from 27% for the
same quarter in fiscal 2001. International revenues increased $988,000 or 25%
over the same quarter in the prior year. The aggregate net first quarter
increase in International revenues over the same quarter of fiscal 2001 is 104%
for software licenses, 9% for consulting services and negative (18%) for
maintenance revenue.
North American revenues comprised 56% of the first quarter 2002 total
revenues down from 73% in the same quarter of the prior year. North American
revenues decreased 39% over the same quarter of the previous fiscal year. The
aggregate decrease of $3,975,000 is comprised of a 28% decrease in software
licenses, a
13
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
decrease of 63% for consulting services and a 24% decrease in maintenance
revenues. Revenue decreases are due to a reduction in the number of software
agreements entered into during the current and previous periods and the lack of
services and maintenance revenues relating to the Human Resource and Payroll
product line which was sold in February 2001.
Operating Expenses
Costs of software product licenses include expenses related to
royalties paid to third parties and product documentation and packaging. Third
party royalty expenses will vary from quarter to quarter based on the number of
third party products being sold by the Company. Major third party products sold
by the Company include Oracle databases and other optional software including
implementation, reporting, and productivity tools. Costs of software product
licenses for the first quarter of fiscal 2002 decreased by 18% to $396,000 from
483,000 in the first quarter of fiscal 2001. As a percentage of software product
license revenue, the costs of software product licenses decreased to 12% in the
first quarter of fiscal 2002 compared to 20% in the same quarter of fiscal 2001.
The decrease in costs for software product licenses for the quarter was
primarily due to the decline of third party products sold in fiscal 2002
compared to the prior year.
Costs of consulting, maintenance and other services include expenses
related to consulting and training personnel, personnel providing customer
support pursuant to maintenance agreements, and other costs of sales. The
Company also uses outside consultants to supplement Company personnel in meeting
peak customer consulting demands. Costs of consulting, maintenance and other
services decreased by 68% to $2,057,000 in the first quarter of fiscal 2002, as
compared to $6,518,000 in the first quarter of fiscal 2001. The decrease in
these costs for the quarter relates to the Company's decreased services activity
resulting from slowed software sales activity in prior quarters. As a result of
decreased services demand, the services and consulting organization required
fewer headcount and realized lower spending in the first quarter of fiscal 2002
compared to the first quarter of fiscal 2001. Third party consulting decreased
by $444,000, employee expenses including salaries and travel decreased by
$3,403,000, and administrative and facility expenses decreased by $614,000. The
Company's gross profit margin resulting from consulting, maintenance and other
services revenues for the first quarter of fiscal 2001 was 74%, up from 44% in
the same quarter of fiscal 2001. The improvement in the gross profit margin for
the three month period was due largely to decreased use of third party
consultants and lower spending across the services organization while at the
same time, non-Human Resource and Payroll, maintenance revenues remained
relatively constant.
Sales and marketing expenses for the quarter ended September 30, 2001
decreased by 32% to $3,437,000 in the first quarter of fiscal 2002, as compared
to $5,043,000 in the first quarter of fiscal 2001. The principal categories of
decreased spending were: employee and travel costs ($1,025,000), marketing
expenses ($339,000) and other costs ($242,000).
14
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Product development (research and development) expenses decreased by
9%, to $2,757,000 in the first quarter of fiscal 2002 from $3,045,000 in the
same quarter of the prior year. The following table summarizes product
development expenditures (in thousands):
Three months ended
-----------------------
September 30,
2001 2000
Gross Expenditures for Product Development ......... $ 2,022 $ 3,517
Less: Expenses capitalized ......................... (974) (2,223)
Plus: Amortization of previously capitalized amounts 1,709 1,751
------- -------
Total Product Development Expenses ................. $ 2,757 $ 3,045
------- -------
As a percentage of total revenues, product development expenditures
for the three-month period ended September 30, 2001 decreased over expenditures
in the same period of the prior year as a result of the lower expenses in the
first quarter of fiscal 2002. Product development expenditures decreased by 42%
to $2,022,000 in the first quarter of fiscal 2002 as compared with $3,517,000 in
the same period in the prior year. Product development costs that were
capitalized decreased by $1,249,000 from the year ago period as a result of more
projects nearing completion during the period preceeding the first quarter of
fiscal Q1 2002 compared to the year earlier period. Product development
expenditures during fiscal 2001 and entering fiscal 2002, have focused on new
internet enabled modules and continued enhancements to the underlying technology
of released products.
General and administrative expenses for the quarter ended September
30, 2001 decreased by 4%, to $1,469,000 from $1,537,000 in the same quarter of
the prior year. This reflected the savings in expenditure between the periods,
arising from the cost cutting measures taken during fiscal 2001.
In the three month period ended September 30, 2001, the Company
recorded a provision for doubtful accounts of $285,000, as compared to $552,000
recorded in the first quarter of fiscal 2001. The fiscal 2002 and 2001
provisions consisted primarily of specific customer accounts identified as being
potentially uncollectible. These provisions represent management's best estimate
of the doubtful accounts for each period.
Amortization of other assets was zero in the first quarter of fiscal
2002 from $225,000 in the same quarter of the prior year. This reflects the
change in accounting treatment due compliance with the new accounting
pronouncement, Financial Accounting Standards No. 141, Business Combinations,
and No. 142, on Goodwill and Other Intangible Assets. See Note 10 in the Notes
to the Unaudited, Condensed, Consolidated Financial Statements above.
There were no non-recurring costs in the current quarter ending 30
September 2001. Non-recurring costs reported in the three month period ended
September 30, 2000 relate to strategic restructuring expenditures of $790,000
incurred due a restructuring announcement by the Company on September 12, 2000.
Other Expense, Net
Other expense for the quarter ended September 30, 2001 was $162,000
as compared to $337,000, in the same quarter of fiscal 2001. These amounts
primarily consisted of interest expense related to borrowings under the
Company's existing line of credit facility, and the reduction reflects the lower
levels of Company indebtedness.
15
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Income Tax Expense
During the first quarter of fiscal 2002, the Company recorded an
income tax expense of $188,000 compared with an income tax benefit of $183,000
recorded during the same quarter in fiscal 2001. The fiscal 2002 tax expense
relates to withholding taxes in certain foreign jurisdictions where the Company
had either no available net operating losses or had to pay treaty-based taxes.
The net tax benefit recorded in the first quarter of fiscal 2001 relates to
certain tax refunds that have been approved by associated tax jurisdictions.
Liquidity and Capital Resources
In the first three months of fiscal 2002, net cash provided by
operating activities decreased $3,209,000 compared to the same period of the
prior year. This included an aggregate net decrease in the non-cash charges for
depreciation, amortization and provisions for bad debt of $712,000 and an
aggregate decrease in the combined cash use of prepaids and other current
assets, taxes payable, accrued expenses and deferred revenues of $2,225,000. In
addition, provision of cash decreased by $9,331,000 in accounts receivable and
accounts payable in the first quarter of fiscal 2002 as compared to the same
period in fiscal 2001. This net cash decrease was offset by cash provided by an
increase of Company earnings of $4,609,000 in the first three months of fiscal
2002 as compared to the first three months of fiscal 2001. The decrease in
accounts payable of $1,635,000 in the first quarter of fiscal 2002, is a direct
result of the Company's ongoing program to reduce vendor balances to more
appropriate levels. This managed reduction of accounts payable is almost
complete, with an estimated additional reduction of $589,000 to take place over
the balance of the fiscal year.
In the first three months of fiscal 2002, the Company required
$992,000 for investing activities versus $2,387,000 over the same period of the
prior year, a decrease of $1,395,000. Investment in property and equipment was
virtually flat over the same period of the prior year. Investments in
capitalized computer software costs decreased by $1,249,000 due to lower
development headcount during fiscal 2002 as well as the impact of more projects
being completed during the period preceding the first quarter of fiscal 2002
compared to the year earlier period. As previously reported, the Company
divested its HR/Payroll product line effective February 28, 2001. The nature of
the product required intense development, and keep-current activity, which are
no longer required. The majority of the developers associated with this product
were released by the Company, and hired by the purchaser. Other investment items
increased by $161,000.
Net cash flows used for financing activities increased by $203,000
versus the same three-month period of the prior fiscal year. Repayments of
amounts previously borrowed under the Company's line of credit resulted in a
decrease in cash of $682,000, versus the same quarter of the prior year.
Repayments under capital leases decreased by $437,000. Proceeds from the issue
of shares to employees under the Employee Stock Purchase Plan amounted to
$42,000.
At September 30, 2001 the Company had $2,770,000 of cash and cash
equivalents. The Company also has a revolving credit facility with an
asset-based lender with a maximum credit line for up to $5,000,000, a expiration
date of July 31, 2002, and an interest rate equal to the Prime Rate plus 2%.
Borrowings under the credit facility are collateralized by substantially all
assets of the Company. At September 30, 2001, the Company had $3,747,000
outstanding against the $5,000,000 revolving credit facility, and based on
eligible accounts receivable at September 30, 2001, the Company's cash and
remaining borrowing capacity under the revolving credit facility totaled
approximately $3,026,000 compared to $1,349,000 at September 30, 2000.
16
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Subsequent Events
Change in Members of Board Directors
Effective October 11, 2001, Dennis V. Vohs resigned as a Director. As provided
for in the bylaws of the corporation, the remaining Board members appointed
Robert B. Webster, Executive Vice President, to serve the remainder of Mr. Vohs
unexpired term.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange: The company has a world-wide presence and as
such maintains offices and derives revenues from sources overseas. For the first
quarter of fiscal 2002, international revenues as a percentage of total revenues
were approximately 44%. The company's international business is subject to
typical risks of an international business, including, but not limited to:
differing economic conditions, changes in political climates, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, the Company's future results could be materially
adversely impacted by changes in these or other factors. The effect of foreign
exchange rate fluctuations on the Company in the first three months of fiscal
2001 was not material.
Interest Rates: The Company's exposure to interest rates relates
primarily to the Company's cash equivalents and certain debt obligations. The
company invests in financial instruments with original maturities of three
months or less. Any interest earned on these investments is recorded as interest
income on the Company's statement of operations. Because of the short maturity
of our investments, a near-term change in interest rates would not materially
effect our financial position, results of operations, or cash flows. Certain of
the Company's debt obligations include a variable rate of interest. A
significant, near term change in interest rates could materially effect our
financial position, results of operations or cash flows.
17
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART II. OTHER INFORMATION
Item 2. Changes in Securities
During the first quarter of fiscal 2001, the Investors converted
an aggregate principal amount of $536,000 plus accrued interest through the date
of conversion into 62,993 split-adjusted shares of the Company's Common Stock
through several transactions which were priced and executed in accordance with
the convertible debenture agreement. These convertible debentures were retired
during fiscal 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibits listed on the accompanying Index to Exhibits are filed as part
of, or incorporated by reference into, this Report.
3.1 Certificate of Incorporation of the Registrant, as amended (1)
3.2 Bylaws of the Registrant (1)
4.3 Form of the subordinated debenture agreement due February 6, 2003
issued by the Registrant to each Investor (3)
4.4 Registration rights agreement between the Registrant and each Investor
(3)
10.1 Preferred Shares Rights Agreement, dated as of September 4, 1998
between the Registrant and BankBoston, N.A. (2)
10.2A Extension Agreement and Amendment to Loan Documents dated March 21,
1997 between Registrant and Coast Business Credit, a division of
Southern Pacific Thrift and Loan Association (4)
10.2B Extension Agreement and Amendment to Loan Documents dated August 18,
1995 between Registrant and CoastFed Business Credit Corporation
("Coast") (4)
10.2C First Amendment to Loan and Security Agreement dated June 30, 1995
between Registrant and Coast (4)
10.2D Loan and Security Agreement dated October 11, 1994 between Registrant
and Coast (4)
10.2E Series A Convertible Preferred Stock Agreement dated 29 June, 2001
between Registrant and Benjamin W. Griffith III (5)
10.3 Employment Agreement, dated as of January 7, 1999, between Mr. Patrick
Tinley and the Registrant (3)
10.4 Employment Agreement, dated as of January 7, 1999, between Mr. Dennis
Vohs and the Registrant (3)
18
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10.5 Employment Agreement, dated as of September 17, 1999, between Mr.
Robert Webster and the Registrant (4)
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 10-K/A filed April 30, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-Q filed May 17, 1999.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-K filed September 28, 1999.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-K filed September 27, 2001.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A/A filed October 3, 2001.
(b) Reports on Form 8-K
(1) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K filed July 24, 1998
(2) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on form 8-K filed February 12, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K filed March 16, 2001.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K/A filed May 15, 2001.
ITEMS 1, 4 AND 5 HAVE BEEN OMITTED, AS THEY ARE NOT APPLICABLE.
19
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ROSS SYSTEMS, INC.
Date: November 13, 2001 /s/ VEROME M. JOHNSTON
-------------------------------------------
Verome M. Johnston
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
20
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
Exhibit
No. Description
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