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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002,
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.
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(Exact name of registrant as specified in its charter)
Delaware 94-2170198
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(State or other jurisdiction of (IRS Employer
incorporation or organization Identification Number
Two Concourse Parkway,
Suite 800, Atlanta, Georgia 30328
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(Address of principal executive offices) (Zip code)
(770) 351-9600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Outstanding
Class April 17, 2002
----- --------------
Common stock, $0.001 par value 2,624,720
Preferred stock, no par value 500,000
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ROSS SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................3
Condensed Consolidated Balance Sheets - March 31, 2002 and June 30, 2001........................3
Condensed Consolidated Statements of Operations - Three months and nine
months ended March 31, 2002 and 2001....................................................4
Condensed Consolidated Statements of Cash Flows - Nine months ended March 31, 2002 and 2001.....5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................................19
SIGNATURE........................................................................................................21
2
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share related data)
March 31, June 30,
2002 2001
(unaudited) (audited)
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 5,406 $ 5,716
Accounts receivable, less allowance
for doubtful accounts 10,868 10,460
Prepaids and other current assets 2,605 1,542
-------- --------
Total current assets 18,879 17,718
Property and equipment, net 1,472 1,694
Computer software costs, net 25,173 27,918
Other assets 2,181 3,132
-------- --------
Total assets $ 47,705 $ 50,462
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt $ 5,159 $ 4,522
Accounts payable 3,081 4,920
Accrued expenses 4,341 4,870
Income taxes payable 303 335
Deferred revenues 10,359 12,711
-------- --------
Total current liabilities 23,243 27,358
-------- --------
Shareholders' equity:
Common stock, $.001 par value; 35,000,000 shares authorized, 26 26
2,623,432 and 2,565,989 shares issued and outstanding at March
31, 2002 and June 30, 2001, respectively
Preferred Stock, no par value; 5,000,000 authorized, 500,000 2,000 2,000
shares outstanding
Additional paid-in capital 87,144 87,032
Accumulated deficit (62,593) (63,876)
Accumulated comprehensive deficit (2,115) (2,078)
-------- --------
Total shareholders' equity 24,462 23,104
-------- --------
Total liabilities and shareholders' equity $ 47,705 $ 50,462
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three months ended Nine months ended
March 31, March 31,
(unaudited) (unaudited)
------------------------ -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Software product licenses $ 3,314 $ 2,407 $ 9,414 $ 6,764
Consulting and other services 3,267 3,206 9,315 12,336
Maintenance 4,875 5,881 15,317 19,144
-------- -------- -------- --------
Total revenues 11,456 11,494 34,046 38,244
-------- -------- -------- --------
Operating expenses:
Costs of software product licenses 403 352 1,110 1,160
Costs of consulting, maintenance and other services 2,572 3,333 7,145 13,446
Software product license sales and marketing 3,537 3,038 10,529 11,544
Product development net of capitalized computer 1,048 782 3,075 2,926
software costs
Amortization of computer software costs 2,026 1,833 5,819 5,810
General and administrative 1,019 1,117 3,688 3,869
Provision for uncollectible accounts 316 245 862 1,080
Amortization of other assets -- 158 -- 518
Non-recurring costs -- -- -- 790
-------- -------- -------- --------
Total operating expenses 10,921 10,858 32,228 41,143
-------- -------- -------- --------
Operating earnings (loss) 535 636 1818 (2,899)
Other expenses, net (114) (219) (421) (833)
-------- -------- -------- --------
Earnings (loss) before taxes 421 417 1,397 (3,732)
Gain on sale of product line -- 2,372 -- 2,372
Income tax expense (benefit) 40 2 114 (119)
-------- -------- -------- --------
Net earnings (loss) $ 381 $ 2,787 $ 1,283 $ (1,241)
======== ======== ======== ========
Net earnings (loss) per common share - basic $ 0.16 $ 1.09 $ 0.54 $ (0.48)
======== ======== ======== ========
Net earnings (loss) per common share - diluted $ 0.13 $ 1.09 $ 0.44 $ (0.48)
======== ======== ======== ========
Shares used in per share computation - basic 2,607 2,565 2,596 2,565
======== ======== ======== ========
Shares used in per share computation - diluted 3,209 2,565 3,127 2,565
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (unaudited)
Nine months ended
----------------------
March 31,
2002 2001
-------- --------
Cash flows from operating activities:
Net earnings (loss) $ 1,283 $(1,241)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 730 1,282
Amortization of computer software costs 5,819 5,810
Amortization of other assets -- 517
Provision for uncollectable accounts 807 1,080
Changes in operating assets and liabilities:
Accounts receivable (1,674) 8,930
Prepaids and other current assets 68 (286)
Income taxes payable / recoverable (49) 116
Accounts payable (1,853) 140
Accrued expenses (537) (317)
Deferred revenues (2,396) (7,366)
------- -------
Net cash provided by operating activities 2,198 8,665
------- -------
Cash flows from investing activities:
Purchases of property and equipment (508) (129)
Computer software costs capitalized (3,177) (5,222)
Deposits recovered 71 112
Other 172 401
Sale of product line, net of assets disposed -- 1,567
------- -------
Net cash used for investing activities (3,442) (3,271)
------- -------
Cash flows from financing activities:
Net cash received on line of credit 637 --
Net cash paid on line of credit -- (2,608)
Net proceeds (repayments) of capital leases and long term debt -- (622)
Proceeds from issuance of common stock 112 29
------- -------
Net cash provided by (used in) financing activities 749 (3,201)
------- -------
Effect of exchange rate changes on cash 185 (31)
Net (decrease) increase in cash and cash equivalents (310) 2,162
Cash and cash equivalents at beginning of period 5,716 2,010
------- -------
Cash and cash equivalents at end of period $ 5,406 $ 4,172
======= =======
Non-cash investing and financing activities:
Supplementary disclosure:
Income taxes paid, net $ 24 --
======= =======
Net interest paid $ 308 864
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1) BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
Ross Systems, Inc. listed as (NASDAQ:ROSS) since 1991, is a global supplier
of business software solutions designed specifically for food and beverage, life
sciences, chemicals, metals, natural products and other process manufacturers.
The Company's iRenaissance family of software solutions is a comprehensive,
modular suite including enterprise resource planning (ERP II), human resources,
financials, materials management, manufacturing and distribution, supply chain
management (SCM), customer relationship management (CRM), electronic commerce,
business intelligence and analytics.
Designed for process manufacturers and implemented by more than 3000
customers worldwide, iRenaissance collaborative business applications enable
companies to leverage the Internet to optimize the management of internal
operations and external channels with suppliers, distributors, brokers and
customers. In addition to the aforementioned software suites, the Company also
provides professional consulting services for implementation, custom application
development and education. The Company offers ongoing maintenance and support
services via the Internet and telephone help desks.
The Company operates in one business segment and no individual customer
accounts for more than 10% of total revenues. The Company does not have a
concentration of credit risk in any one industry.
The accompanying unaudited condensed consolidated financial statements of
Ross Systems, Inc reflect all adjustments of a normal recurring nature which
are, in the opinion of management, necessary to present a fair statement of its
financial position as of March 31, 2002, and the results of its operations and
cash flows for the interim periods presented. The Company's results of
operations for the three and nine months ended March 31, 2002 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.
6
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
It is the Company's policy to assess all its long-lived assets and intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. Impairment losses, if
applicable, would be calculated as the difference between the carrying value of
the asset and the sum of anticipated future undiscounted cash flows. The
calculation would be performed on an individual item basis. No impairment was
noted in the first nine months of fiscal 2002.
4) ACCOUNTS RECEIVABLE
As of the dates shown, accounts receivable consisted of the following
(in thousands):
March 31, June 30,
2002 2001
(unaudited)
---------- ----------
Trade accounts receivable $ 14,092 $ 13,390
Less allowance for doubtful accounts and returns (3,224) (2,930)
---------- ----------
$ 10,868 $ 10,460
========== ==========
5) PROPERTY AND EQUIPMENT
As of the dates shown, property and equipment consisted of the following
(in thousands):
March 31, June 30,
2002 2001
(unaudited)
--------- ---------
Computer equipment $ 6,077 $ 9,101
Furniture and fixtures 1,255 1,782
Leasehold improvements 1,427 1,546
--------- ---------
8,759 12,429
Less accumulated depreciation and amortization (7,287) (10,735)
--------- ---------
$ 1,472 $ 1,694
========= =========
6) OTHER INTANGIBLE ASSETS
As of March 31, 2002, Goodwill consisted of the following (in thousands)
(unaudited):
Accumulated
Asset Value Amortization Net Value
----------- ------------ ---------
Excess of purchase price over tangible asset value of
acquired software services companies $ 4,414 $ (2,233) $ 2,181
----------- ------------ ---------
The Company does not consider these assets to be impaired as of March 31, 2002
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 12)
7
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Other intangible assets consisting of Capitalized Computer Software Costs, in
the net amount of $25,173,000, will continue to be amortized over four years.
(See Note 3.)
7) SOFTWARE REVENUE RECOGNITION
The company recognizes revenue on software transactions in accordance with
Statement of Position No. 97-2 "Software Revenue Recognition" ("SOP 97-2). The
financial statements contained herein have been prepared in accordance with the
requirements of SOP 97-2.
8) COMPREHENSIVE INCOME
Total non-stockholder changes in equity include all changes in equity
during a period except those resulting from investments by and distributions to
stockholders. The components of comprehensive income (loss) for the three -month
and nine-month periods ended March 31, 2002 and 2001 were as follows (in
thousands):
Three months ended Nine months ended
March 31, March 31,
------------------- -------------------
2002 2001 2002 2001
------- -------- ------- --------
Net earnings (loss) $ 381 $ 2,787 $ 1,283 $ (1,241)
Foreign currency translation adjustments (223) 213 (37) 466
------- -------- ------- --------
Total comprehensive income (loss) $ 158 $ 3,000 $ 1,246 $ (775)
======= ======== ======= ========
9) NET EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings (loss) per common share are computed by dividing net
earnings or net loss by the weighted average number of common shares outstanding
during the period. Diluted earnings per common and common equivalent share is
computed by dividing net earnings by the weighted average number of common and
common equivalent shares outstanding during the period. Common stock equivalents
are not considered in the calculation of net loss per share when their effect
would be antidilutive.
The following is a reconciliation of the numerators of diluted earnings per
share, (in thousands):
Three months ended Nine months ended
March 31, March 31,
------------------------ --------------------------
2002 2001 2002 2001
------- --------- --------- ---------
Net earnings (loss) $ 381 $ 2,787 $ 1,283 $ (1,241)
Interest on convertible securities 38 13 113 0
------- --------- --------- ---------
Numerator for diluted calculation $ 419 $ 2,800 $ 1,396 $ (1,241)
======= ========= ========= =========
In periods when the Company is profitable, the only difference between the
denominator for basic and diluted net earnings per share is the effect of common
stock equivalents. In periods of a loss, the denominator does not change because
it would be anti-dilutive.
8
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
10) CAPITAL STOCK
(a) Mandatorily Redeemable Preferred Stock and New Private Placement
In fiscal 1991, the Company authorized a new class of no par value
preferred stock consisting of 5,000,000 shares. The Board of Directors is
authorized to issue the preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions of such stock, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the shareholders.
On June 29, 2001, the Company issued mandatorily convertible preferred
stock to a qualified investor in a private placement transaction. In summary,
the investor purchased 500,000 preferred shares at $4 per share yielding
$2,000,000 for the Company. This price represented a premium to the market for
the Company's common stock at the time of issuance. The average closing share
price of the Company's common stock for the 30 trading days prior to the private
placement was approximately $2.22. The preferred shares can not be converted for
one year but must be converted within three years from the issue date. The
shares earn dividends at the rate of 7.5%. In conjunction with this transaction,
the Company issued warrants to the broker who assisted in securing the investor.
These warrants were fairly valued at $60,000 on the date of issuance and the
expense has been recorded in the statement of operations as a component of other
expense (net) in the quarter ended June 30, 2001.
(b) Reverse Stock Split
On April 27, 2001, the Company executed a reverse stock split, on the basis
of 1 share for 10 shares. The split was approved by the stockholders in a
special meeting on April 26, 2001. The reverse stock split facilitated the
Company's continued listing on the Nasdaq National Market.
11) Gain on Sale of Product Line
Effective February 28, 2001, the Company closed the sale of certain assets
related to its Human Resource and Payroll product line to Now Solutions, LLC, a
private company. At the same time the Company executed a distribution agreement
with Now Solutions to continue to sell the product under license from Now
Solutions as a complement to its enterprise systems for process manufacturing
companies. The gross asset sale price was $6.1 million excluding incentives.
After fees and expenses the transaction generated a gain on the sale of
approximately $2.4 million before incentives. The twofold purpose of the
transaction was to strengthen the Company's balance sheet and to enable the
Company to focus on its core competencies in the process-manufacturing sector.
Sales, services and maintenance revenues related to this product line for the
eight months ended February 28, 2001 were approximately $4,806,000. The product
line's total revenues for year ended June 30, 2000, were $8,052,000. The net
book value of the intellectual property transferred in this sale was $3,936,000,
and $4,134,000, at February 28, 2001, and June 30, 2000, respectively.
9
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
12) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", effective for
transactions after June 30, 2001, and No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. The Company has adopted these
standards and has applied the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. As of March 31,
2002 the Company reviewed goodwill and other intangible assets for impairment No
impairment of these assets was noted. The pro-forma effects of FAS 142 on the
nine months ended March 31, 2001 are such that the Company would have recorded
$517,000 less in amortization expense and would have incurred a net loss of
$724,000 versus the net loss of $1,241,000 actually reported.
In June 2001 the Financial Accounting Standards Board approved Statement of
Accounting Standard No. 143, "Accounting for Asset Retirement Obligations." The
statement addresses financial accounting and reporting for legal obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The statement is effective for the Company's 2003 fiscal
year and is not expected to have a material effect on the Company's financial
position or results of operations.
In August 2001 the Financial Accounting Standards Board approved Statement
of Accounting Standard No. 144, "Accounting for the Impairment or Disposal of
Long-lived Assets." The statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and establishes a single
accounting model for the impairment or disposal of long-lived assets. The
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long Lived Assets and for Long-lived Assets to be Disposed Of, " and supercedes
accounting and reporting under APB Opinion No. 30 for the disposal of a
business. The statement is effective for the Company's 2002 fiscal year and has
not had a material effect on the Company's financial position or results of
operations.
13) GEOGRAPHIC SEGMENT INFORMATION
The Company markets its products and related services primarily in North
America, Europe and Asia and primarily measures its business performance based
upon certain geographic results of operations. During fiscal 2001, the Company
divested its French subsidiary and adopted an indirect sales approach in the
French market.
For these management purposes, the results of the Austral-Asian operations
are included in the North American results since the costs associated with
managing that marketplace are born by the North American entities within the
Group. Selected balance sheet and income statement information pertaining to the
various significant geographic areas of operation are as follows:
10
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
As of and for the quarter ended March 31, 2002:
Net Income Depreciation Capital
Total Assets Revenue (Loss) and Amortization Expenditures
------------ ------- ---------- ---------------- ------------
Belgium ......... $ 577 $ 250 $ 14 $ -- $ 78
Netherlands...... 1,475 1,047 97 11 33
Germany ......... 98 234 89 1 --
Spain ........... 4,235 1,675 441 62 12
United Kingdom .. 2,904 1,578 146 14 20
North America ... 38,416 6,672 (406) 2,179 106
------- ------- ------- ------- -------
Total ........... $47,705 $11,456 $ 381 $ 2,267 $ 249
======= ======= ======= ======= =======
As of and for the quarter ended March 31, 2001:
Net Income Depreciation Capital
Gross Assets Revenue (Loss) and Amortization Expenditures
------------ ------- -------- ---------------- ------------
Belgium ............ $ 267 $ 155 $ (16) $ 4 $ 8
Netherlands ........ 1,109 682 65 11 14
Germany ............ 252 237 71 0 0
Spain .............. 3,861 1,221 212 41 28
United Kingdom...... 3,579 1,630 42 32 0
North America ...... 42,133 7,569 2,413 2,152 13
------- ------- ------- ------- -------
Total .............. $51,201 $11,494 $ 2,787 $ 2,240 $ 63
======= ======= ======= ======= =======
11
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Variability of Quarterly Results
The Company's software product license revenues can fluctuate from quarter
to quarter depending upon, among other things, such factors as overall trends in
the United States and international economies, new product introductions by the
Company, hardware vendors and other software vendors, and customer buying
patterns. Because the Company typically ships software products within a short
period after orders are received, and therefore maintains a relatively small
backlog, any weakening in customer demand can have an almost immediate adverse
impact on revenues and operating results. Moreover, a substantial portion of the
revenues for each quarter is attributable to a limited number of sales and tends
to be realized in the latter part of the quarter. Thus, even short delays or
deferrals of sales near the end of a quarter can cause substantial fluctuations
in quarterly revenues and operating results. Finally, certain agreements signed
during a quarter may not meet the Company's revenue recognition criteria
resulting in deferral of such revenue to future periods. Because the Company's
operating expenses are based on anticipated revenue levels and a high percentage
of the Company's expenses are relatively fixed, a small variation in the timing
of the recognition of specific revenues can cause significant variation in
operating results from quarter to quarter.
Business Summary
Description of Business
The Company markets a broad range of sophisticated business application
software (ERP II) that address business process automation functions including
procurement, collaborative planning, financial accounting and reporting,
manufacturing, distribution, supply chain management, sales, customer service,
and human resource needs of manufacturers primarily in process manufacturing
type industries. The company's product supports business-to-business (B2B)
commerce by linking internal business process and intelligence to both customers
and suppliers. In addition, the Company supports a large installed base of
companies, which utilize the Company's financial products exclusively. The
Company's software product license fees are based on the modules licensed, and
the number of concurrent users supported by the hardware on which the modules
operate. Customers are primarily medium to large-sized companies (with annual
sales of $50 million to $2 billion) upgrading internal systems to provide
competitive advantage and improve profitability through the availability of
timely and accurate information, or to modernize their management information
systems operations in order to reduce costs and provide collaboration with
suppliers, distributors, brokers and customers. The Company licenses its
products to customers through a direct sales force in North America and Western
Europe as well as independent distributors in 24 other markets worldwide. Since
the Company's inception in 1972, the Company has licensed software products to
an installed base of over 3,400 customers worldwide in fourteen languages and
has recently added the Euro to its multi-currency compliance.
The Company offers its comprehensive Enterprise Resource Planning ("ERP")
solution with functionality specifically tailored to the unique formula and
specifications-based requirements of process manufacturers, including food and
beverage, pharmaceutical and biotechnology, chemical, primary metals, and pulp
and paper companies. The Company believes that this native functionality is
superior to the alternative presented by many of the Company's competitors,
which adapt systems designed primarily for the discrete manufacturing sector.
The product may be deployed in a thin client mode to permit the greatest
performance advantage for companies using remote communications over the
Internet. The Company has developed a series of products designed for the
Internet environment which allow users to access and manipulate data from their
personal computers using a portal for functional personalization of the user's
12
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 continues to expand its product line in the collaborative B2B
applications. With connectivity to the ERP backbone systems over the Internet to
customers, distributors and suppliers, these products enable customers to
tightly link trading partner supply chains to achieve sustainable competitive
advantage. These applications are designed to allow companies the ability to
leverage the technology of the Internet in order to automate business processes
and effectively manage business resources. The Ross suite of fully integrated
products is branded as iRenaissance, and includes iRenaissance ERP, iRenaissance
SCM, iRenaissance CRM, iRenaissance Commerce, and iRenaissance Business
Intelligence.
The Company's open systems applications function in a relational database
management system ("RDBMS") environment that provides for a high degree of data
availability and integrity. Additionally, because the Company's iRenaissance
financial, manufacturing and distribution applications were developed with the
GEMBASE fourth generation language ("4GL"), the Company believes they are easily
modified and expanded. GEMBASE is a programming environment that delivers a
central data dictionary, complete screen painting, editing and debugging
capabilities, and links to several popular RDBMSs. GEMBASE itself is written in
the C programming language to facilitate portability across multiple hardware
and RDBMS platforms. Because the iRenaissance financial, manufacturing and
distribution products were developed in GEMBASE, customers often find it easy to
customize their own applications.
Results of Operations
Revenues
Total revenues for the quarter ended March 31, 2002 of $11,456,000 were
virtually unchanged from $11,494,000 in the same quarter of fiscal 2001.
Normalizing the prior year revenue comparison to exclude $790,000 due to the
sale of the Company's HR/Payroll product on February 28, 2001, would result in
an increase for current quarter of approximately 7% in total revenues as
compared to the prior year's same quarter.
Software product license revenues were $3,314,000 during the quarter ended
March 31, 2002, an increase of $907,000, or 38%, 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 $364,000, or 39%. This North American
decrease is primarily due to the continuing soft conditions in the enterprise
software market in North America. The Company experienced a net increase of
$407,000, or 28%, in the European markets over the same quarter in fiscal 2001.
The increase in European software license sales represents an increase in demand
for the Company's products primarily in Spain. Product license sales in the
Asian and Pacific rim region increased by $864,000 to $900,000 during the
quarter ended March 31, 2002, from $36,000 in the same quarter of fiscal 2001.
This primarily reflects additional license sales with the Company's Japanese
distributor.
Consulting and other services revenues for the third quarter of fiscal 2002
increased 2% to $3,267,000 from $3,206,000 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 March 31, 2002, North American services revenues were virtually
unchanged at $1,684,000 compared to $1,726,000 over the same quarter in the
prior year. International services revenues increased $103,000, or 7% over the
same quarter in the prior year. The increases in consulting and other service
13
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
revenues Internationally is attributable to services demand relating to the
improving trend of software license sales in the region as well as the
implementation of the Euro compliant version of the Company's software.
Maintenance revenues for the third quarter decreased by $1,006,000 or 17%
in the third quarter of fiscal 2002 versus the same quarter in the prior year.
On a normalized basis, excluding the HR/Payroll product line from the prior
quarter's revenues, maintenance revenues decreased by approximately 5% in the
quarter ended March 31, 2002 over the same quarter in the prior fiscal year.
This is attributable mainly to new maintenance contract additions from prior
year software license sales at a lower rate than retirements in North America.
The increase of $255,000 or 19% in International maintenance revenues is
attributable mainly to the negotiation of new maintenance contracts, including
back-maintenance provision, for contracts which had previously cancelled but
have been reinstated on the Euro compliant version of the product. Maintenance
contracts sold by third party distributors are included by the Company in
software product license revenues because the Company has no support obligations
to any of the distributors' customers.
International revenues as a percentage of total revenues for the third
quarter of fiscal 2002 increased to 51% in fiscal 2002 from 37% for the same
quarter in fiscal 2001. International revenues increased $1,629,000 or 38% over
the same quarter in the prior year. 78% of this increase was experienced in
software license revenues with small increases in services and maintenance
revenues respectively.
North American revenues comprised 49% of the third quarter 2002 total
revenues down from 63% in the same quarter of the prior year. North American
revenues decreased 23% over the same quarter of the previous fiscal year. Of the
aggregate decrease in total revenues of $1,667,000, approximately $790,000 is
due to the sale of Human Resource and Payroll product line, which was sold in
February 2001, and the balance is due to a reduction in software product license
revenues and maintenance revenues.
The following is a table showing the comparison of revenues for the
quarter, and the nine months ended March 31, 2002, with the prior year's
normalized revenue for the same periods, after deduction of approximate revenues
of the HR/Payroll product line, which was sold February 28, 2001 (in thousands):
Three months ended Nine months ended
March 31, March 31,
--------------------------------- ------------------------------
(approximate) (approximate)
(unaudited) (unaudited)
--------------------------------- ------------------------------
Normalized/Proforma 2002 2001 2002 2001
------------------------- ------- ------- ------- -------
Software product licenses $ 3,314 $ 2,390 $ 9,414 $ 6,287
Consulting and other services 3,267 9,315 11,486
3,166
Maintenance 4,875 5,148 15,317 16,183
======= ======= ======= =======
Total revenues $11,456 $10,704 $34,046 $33,956
======= ======= ======= =======
Operating Expenses
Costs of software product licenses include expenses primarily related to
royalties paid to third parties. Third party royalty expenses will vary from
quarter to quarter based on the number of third party products being sold by the
Company. Major third party products sold by the Company include Oracle databases
and other optional software including implementation, reporting, and
productivity tools. Costs of software product licenses for the third quarter of
fiscal 2002 increased by 14% to $403,000 from $352,000 in the third quarter of
fiscal 2001. As a percentage of software product license revenue, the costs of
software product licenses decreased to 12% in the third quarter of fiscal 2002
compared to 15% in the same quarter of fiscal 2001. The decrease in costs for
14
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 23% to $2,572,000 in the third quarter of fiscal 2002, as
compared to $3,333,000 in the third quarter of fiscal 2001. The decrease in
these costs for the quarter relates to the Company's improved utilization of a
reduced headcount, and a lower content of third party consultants. Employee
expenses decreased by $839,000, and administrative and facility expenses
decreased by $53,000. The Company's operating margin resulting from consulting,
maintenance and other services revenues for the third quarter of fiscal 2002 was
68%, up from 63% in the same quarter of fiscal 2001. The improvement in the
gross profit margin for the three month period was due largely to decreased use
of third party consultants and lower spending across the services organization.
Sales and marketing expenses of $3,537,000 for the quarter ended March 31,
2002 reflected an increase of 16% when compared to $3,038,000 in the third
quarter of fiscal 2001. This increase is due to the Company's initiative,
through third party influence groups and trade shows, to communicate to process
manufacturing companies the compelling advantages of using Ross software.
Product development (research and development) expenses of $3,074,000 in
the third quarter of fiscal 2002 were up from $2,615,000 in the same quarter of
the prior year. The following table summarizes product development expenditures
(in thousands):
Three months ended
March 31,
---------------------
2002 2001
--------- ----------
Gross Expenditures for Product Development...............$ 2,066 $ 2,356
Less: Expenses capitalized............................... (1,017) (1,490)
Plus: Amortization of previously capitalized amounts..... 2,026 1,833
--------- ---------
Total Product Development Expenses.......................$ 3,074 $ 2,699
--------- ---------
As a percentage of total revenues, product development expenditures for the
three-month period ended March 31, 2002 increased over expenditures in the same
period of the prior year as a result of the lower capitalized expenses, and
higher amortization of previously capitalized amounts in the third quarter of
fiscal 2002. Product development expenditures decreased by 12% to $2,066,000 in
the third quarter of fiscal 2002 as compared with $2,356,000 in the same period
in the prior year. Product development costs that were capitalized decreased by
$473,000 from the year ago period as a result of more projects nearing
completion during the period preceding the third quarter of fiscal 2002 compared
to the year earlier period. Amortization of previously capitalized amounts
increased by $193,000 to $2,076,000 in the three month period ended March 31,
2002, from $1,833,000 in the third quarter of fiscal 2001. This increase was due
to certain new and enhancement software product projects being completed during
the quarter.
General and administrative expenses for the quarter ended March 31, 2002
decreased by 9%, to $1,019,000 from $1,117,000 in the same quarter of the prior
year. This decrease was due to minor savings in several expense categories.
In the three month period ended March 31, 2002, the Company recorded a
provision for doubtful accounts of $316,000, as compared to $245,000 recorded in
the third quarter of fiscal 2001. The fiscal 2002 and 2001 provisions consisted
15
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 third quarter of fiscal 2002
compared to $158,000 in the same quarter of the prior year. This reflects the
change in accounting treatment due compliance with the new accounting
pronouncement, Statement of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, on Goodwill and Other Intangible Assets. See Note 3
in the Notes to the Unaudited, Condensed, Consolidated Financial Statements
above.
Other Expense, Net
Other expense for the quarter ended March 31, 2002 was $114,000 as compared
to $219,000, in the same quarter of fiscal 2001. These amounts primarily
consisted of interest expense related to borrowings under the Company's existing
line of credit facility, and the reduction reflects the lower levels of Company
indebtedness.
Income Tax Expense
During the third quarter of fiscal 2002, the Company recorded an income tax
expense of $40,000 compared with $2,000 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 foreign taxes were partially offset
by a tax refund which the Company accounted for on the cash basis , since the
recoverability of the refund was not previously assured.
Liquidity and Capital Resources
In the first nine months of fiscal 2002, net cash provided by operating
activities decreased $6,467,000 compared to the same period of the prior year.
This included an aggregate net decrease in the non-cash charges for
depreciation, amortization and provisions for bad debt of $1,333,000 and an
aggregate decrease in the combined cash use of prepaids and other current
assets, taxes payable, accrued expenses, accounts payable and deferred revenues
of $2,946,000. In addition, source of cash decreased by $10,604,000 in accounts
receivable in the nine months ended March 31, 2002 as compared to the same
period in fiscal 2001. This net cash decrease was offset by cash provided by an
increase of Company earnings of $2,524,000 in the first nine months of fiscal
2002 as compared to the first nine months of fiscal 2001. The increase in cash
use in accounts payable of $1,993,000 in the first nine months of fiscal 2002,
is a direct result of the Company's ongoing program to reduce vendor balances to
more appropriate levels.
In the first nine months of fiscal 2002, the Company utilized $3,442,000
for investing activities versus $3,271,000 over the same period of the prior
year, an increase of $171,000. Investment in property and equipment was up
$379,000 to $508,000 in the first nine months of fiscal 2002, from $129,000 in
same period in the prior year. Investments in capitalized computer software
costs decreased by $2,045,000 due to lower development headcount during fiscal
2002 as well as the impact of more projects being completed during the nine
month period in fiscal 2002 compared to the year earlier period.
As previously reported, the Company divested its HR/Payroll product line
effective February 28, 2001. Fiscal 2001 benefited from a non-recurring net cash
received of $1,567,000 from this sale. The nature of the product required
intense development, which is no longer required. The majority of the developers
associated with this product were released by the Company, and hired by the
purchaser.
16
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Other investment items decreased by $229,000, which was primarily due to
the profit on sale of fixed assets in the prior year period compared to nominal
sales of fixed assets in the current fiscal year.
Net cash flows used for financing activities increased by $3,950,000 for
the nine months ended March 31, 2002, versus the same nine month period of the
prior fiscal year. Cash increased by borrowing a net $637,000 under the
Company's line of credit during the nine months ended March 31, 2001. In the
same period in the prior fiscal year, the Company decreased cash by net
repayments or $2,608,000 under the line of credit. Repayments under capital
leases decreased by $622,000. Proceeds from the issue of shares to employees
under the Employee Stock Purchase Plan, and the exercise of options by
employees, amounted to $112,000.
At March 31, 2002 the Company had $5,407,000 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, an expiration date of July 31, 2002,
and an interest rate equal to the Prime Rate plus 2%. The Company is in
negotiation with various lenders to replace the credit facility. Management
believes these negotiations will be complete and a new line in place by June 30,
2002. Borrowings under the credit facility are collateralized by substantially
all assets of the Company. At March 31, 2002, the Company had $4,346,000
outstanding against the $5,000,000 revolving credit facility, and based on
eligible accounts receivable at March 31, 2002, the Company's cash and remaining
borrowing capacity under the revolving credit facility totaled approximately
$3,683,000 compared to $2,445,000 at March 31, 2001.
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 third
quarter of fiscal 2002, international revenues as a percentage of total revenues
were approximately 51%. 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 nine months of fiscal
2002 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 (Unaudited)
Item 4. Submission of Matters to a Vote of Security Holders
18
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibits listed on the accompanying Index to Exhibits are filed as part
of, or incorporated by reference into, this Report.
3.1 Certificate of Incorporation of the Registrant, as amended (1)
3.2 Bylaws of the Registrant (1)
4.3 Form of the subordinated debenture agreement due February 6,
2003 issued by the Registrant to each Investor (3)
4.4 Registration rights agreement between the Registrant and each
Investor (3)
10.1 Preferred Shares Rights Agreement, dated as of September 4,
1998 between the Registrant and BankBoston, N.A. (2)
10.2A Extension Agreement and Amendment to Loan Documents dated
March 21, 1997 between Registrant and Coast Business Credit, a
division of Southern Pacific Thrift and Loan Association (4)
10.2B Extension Agreement and Amendment to Loan Documents dated
August 18, 1995 between Registrant and CoastFed Business
Credit Corporation ("Coast") (4)
10.2C First Amendment to Loan and Security Agreement dated June 30,
1995 between Registrant and Coast (4)
10.2D Loan and Security Agreement dated October 11, 1994 between
Registrant and Coast (4)
10.2E Series A Convertible Preferred Stock Agreement dated 29 June,
2001 between Registrant and Benjamin W. Griffith III (5)
10.3 Employment Agreement, dated as of January 7, 1999, between Mr.
Patrick Tinley and the Registrant (3)
10.4 Employment Agreement, dated as of September 17, 1999, between
Mr. Robert Webster and the Registrant (4)
27.1 Financial Data Schedule
(1) Incorporated by reference to the exhibit filed with the
Registrant's Registration Statement on Form 8-A filed
September 4, 1998.
(2) Incorporated by reference to the exhibit filed with the
Registrant's Registration Statement on Form 10-K/A filed April
30, 1998.
19
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(3) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 10-Q filed May 17, 1999.
(4) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 10-K filed September 28,
1999.
(5) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 10-K filed September 27,
2001.
(6) Incorporated by reference to the exhibit filed with the
Registrant's Registration Statement on Form 8-A/A filed
October 3, 2001.
(b) Reports on Form 8-K
(1) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 8-K filed July 24, 1998
(2) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on form 8-K filed February 12,
1998.
(3) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 8-K filed March 16, 2001.
(4) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 8-K/A filed May 15, 2001.
ITEMS 1, 2, 3, 4, AND 5 HAVE BEEN OMITTED, AS THEY ARE NOT APPLICABLE.
20
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROSS SYSTEMS, INC.
Date: May 14, 2002 /s/ VEROME M. JOHNSTON
----------------------
Verome M. Johnston
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
21
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------