UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2003
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-19092
ROSS SYSTEMS, INC.
---------------
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES __ NO X__
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Outstanding
Class March 31, 2003
----- --------------
Common stock, $0.001 par value 2,801,157
Preferred stock, no par value 500,000
1
ROSS SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2003
----------------------------
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................................................3
Condensed Consolidated Balance Sheets - March 31, 2003 and June 30, 2002........................3
Condensed Consolidated Statements of Operations - Three months and nine months
ended March 31, 2003 and 2002...................................................................4
Condensed Consolidated Statements of Cash Flows - Nine months ended March 31, 2003 and 2002.....5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................25
Item 4. Controls and Procedures........................................................................26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................................27
SIGNATURE........................................................................................................29
This Quarterly Report on Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I Item 2,
contains forward-looking statements that involve risks and uncertainties, as
well as assumptions that, if they never materialize or prove incorrect, could
cause the results of Ross Systems to differ materially from those expressed or
implied by such forward-looking statements. All statements other than statements
of historical fact are statements that could be deemed forward-looking
statements, including any projections of earnings, revenue, synergies,
accretion, margins or other financial items; any statements of the plans,
strategies and objectives of management for future operations, including the
execution of integration and restructuring plans; any statement concerning
proposed new products, services, developments or industry rankings; any
statements regarding future economic conditions or performance; any statements
of belief; any statements of anticipations; and any statements of assumptions
underlying any of the foregoing. The risks, uncertainties and assumptions
referred to above include quarterly fluctuations and unpredictability of
revenues, the general economic slowdown and the risk of an extended slowdown or
an increase in its intensity, the competition that we face, the performance of
contracts by customers and partners; employee management issues; the challenge
of managing asset levels; the difficulty of aligning expense levels with revenue
changes; and other risks that are described herein under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors" beginning on page 20 and that are otherwise described from time to time
in Ross Systems' reports filed with the Securities and Exchange Commission
reports. Ross Systems assumes no obligation and does not intend to update these
forward-looking statements.
2
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,
2003 2002
ASSETS (unaudited) (audited)
Current assets:
Cash and cash equivalents $ 6,587 $ 5,438
Accounts receivable, less allowance 13,290 12,319
for doubtful accounts
Prepaid and other current assets 1,285 1,282
Note receivable from related party - 850
-------------- -------------
Total current assets 21,162 19,889
Property and equipment, net 1,524 1,450
Computer software costs, net 13,747 14,036
Other assets 2,200 2,243
-------------- -------------
Total assets $ 38,633 $ 37,618
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of debt $ 3,798 $ 3,967
Accounts payable 2,304 2,682
Accrued expenses 5,205 4,476
Income taxes payable 160 15
Deferred revenues 11,789 12,535
-------------- -------------
Total current liabilities 23,256 23,675
-------------- -------------
Shareholders' equity:
Convertible Preferred stock, no par value; 5,000,000 authorized, 2,000 2,000
500,000 shares outstanding
Common stock, $.001 par value; 15,000,000 and 35,000,000 shares 26 26
authorized, 2,801,157 and 2,625,378 shares issued and
outstanding at March 31, 2003 and June 30, 2002, respectively.
Additional paid-in capital 87,395 87,133
Treasury stock at cost; 154,945 shares at March 31, 2003 (1,426) --
Accumulated deficit (70,700) (73,450)
Accumulated comprehensive deficit (1,918) (1,766)
-------------- -------------
Total shareholders' equity 15,377 13,943
-------------- -------------
Total liabilities and shareholders' equity $ 38,633 $ 37,618
============== =============
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 share and per share data)
Three months ended Nine months ended
March 31, March 31,
------------------------------- ------------------------
(unaudited) (unaudited)
2003 2002 2003 2002
Revenues:
Software product licenses $ 2,696 $ 3,314 $ 9,903 $ 9,414
Consulting and other services 3,194 3,267 8,940 9,315
Maintenance 5,235 4,875 15,323 15,317
Reimbursable expenses 295 220 854 596
------------ ------------ --------- ---------
Total revenues 11,420 11,676 35,020 34,642
------------ ------------ --------- ---------
Operating expenses:
Costs of software product licenses 449 403 1,316 1,110
Costs of consulting, maintenance and other services 4,229 4,215 12,784 12,709
Software product license sales and marketing 2,864 2,434 8,193 6,630
Product development net of capitalized and amortized 1,816 2,782 5,363 7,978
computer software costs
General and administrative 1,016 986 3,420 3,530
Provision for uncollectable accounts 197 316 711 862
------------ ------------ --------- ---------
Total operating expenses 10,571 11,136 31,787 32,819
------------ ------------ --------- ---------
Operating earnings 849 540 3,233 1,823
Other expenses, net (29) (81) (152) (313)
Income tax expense 63 40 217 114
------------ ------------ --------- ---------
Net earnings 757 419 2,864 1,396
Preferred stock dividend (38) (38) (113) (113)
------------ ------------ --------- ---------
Net earnings available to common shareholders $ 719 $ 381 $ 2,751 $ 1,283
============ ============ ========= =========
Net earnings per common share - basic $ 0.27 $ 0.15 $ 1.05 $ 0.49
============ ============ ========= =========
Net earnings per common share - diluted $ 0.22 $ 0.13 $ 0.87 $ 0.45
============ ============ ========= =========
Shares used in per share computation - basic 2,638 2,607 2,616 2,596
============ ============ ========= =========
Shares used in per share computation - diluted 3,387 3,209 3,292 3,127
============ ============ ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine months ended
--------------------------
March 31,
2003 2002
============ ==========
(unaudited)
Cash flows from operating activities:
Net earnings $ 2,864 $ 1,396
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of property and equipment 556 730
Amortization of computer software costs 3,526 5,819
Provision for uncollectable accounts 711 807
Changes in operating assets and liabilities:
Accounts receivable (1,723) (1,674)
Prepaids and other current assets 906 68
Income taxes payable 235 (49)
Accounts payable (374) (1,853)
Accrued expenses 504 (650)
Deferred revenues (701) (2,396)
------------ ----------
Net cash provided by (used in) operating activities 6,504 2,198
------------ ----------
Cash flows from investing activities:
Purchases of property and equipment (551) (508)
Computer software costs capitalized (3,317) (3,177)
Other 44 243
------------ ----------
Net cash used in investing activities (3,824) (3,442)
------------ ----------
Cash flows from financing activities:
Net cash received on line of credit 637
Net cash paid on line of credit (169) --
Proceeds from issuance of common stock 262 112
Purchase of treasury stock (1,426) --
------------ ----------
Net cash provided by (used in) financing activities (1,333) 749
------------ ----------
Effect of exchange rate changes on cash (198) 185
Net increase (decrease) in cash and cash equivalents 1,149 (310)
Cash and cash equivalents at beginning of period 5,438 5,716
------------ ----------
Cash and cash equivalents at end of period $ 6,587 $ 5,406
============ ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 primarily in the food and beverage, life sciences, chemicals, metals
and natural products industries. The Company offers the award-winning
iRenaissance(TM) family of software solutions which is an integrated suite of
enterprise resource planning (ERP II), financials, materials management,
manufacturing and distribution, supply chain management (SCM), advanced planning
and scheduling, customer relationship management (CRM), electronic commerce,
business intelligence and analytics applications. In addition to the
aforementioned software suites, the Company also provides professional
consulting services for implementation, related custom application development
and education. The Company offers ongoing maintenance and support services for
its products via 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
the Company reflect all adjustments of a normal recurring nature which are, in
the opinion of management, necessary to present a fair statement of its
financial position as of March 31, 2003, and the results of its operations and
cash flows for the interim periods presented. The Company's results of
operations for the three months and nine months ended March 31, 2003 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/A for the
fiscal year ended June 30, 2002 which was filed with the Securities and Exchange
Commission in September 2002.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
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 the accounts of the Company
and its wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated.
3) STOCK-BASED COMPENSATION
The company measures compensation cost for its stock incentive and option
plans using the intrinsic value-based method of accounting.
Had the company used the fair value-based method of accounting to measure
compensation expense for its stock incentive and option plans and charged
compensation cost against income over the vesting periods, based on the fair
value of options at the date of grant, net income and the related basic and
7
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
diluted per common share amounts for the three months and nine months ended
March 31, 2003 and 2002, would have been reduced to the following pro forma
amounts:
(In thousands, except per share data)
Three months ended Nine months ended
March 31, March 31,
--------------------- ---------------------
2003 2002 2003 2002
--------- -------- ---------- --------
Net earnings....................................................... $ 757 $ 419 % 2,864 $ 1,396
--------- -------- ---------- -------
Net earnings available to common shareholders:
As reported...................................................... $ 719 $ 381 $ 2,751 $ 1,283
Deduct: Total stock-based employee compensation expense under
fair value-based method, net of tax (56) (97) (341) (481)
--------- -------- ---------- -------
Pro forma........................................................ 663 284 2,410 802
--------- -------- ---------- -------
Basic net earnings per share:
As reported ..................................................... $ 0.27 $ 0.15 $ 1.05 $ 0.49
Pro forma ....................................................... 0.25 0.11 0.92 0.31
Diluted net earnings per share:
As reported ..................................................... 0.22 0.13 0.87 0.45
Pro forma ....................................................... 0.21 0.10 0.77 0.29
4) CAPITALIZED COMPUTER SOFTWARE COSTS AND OTHER ASSETS
It is the Company's policy to follow paragraph 8 of Statement of Financial
Accounting Standards ("SFAS") No, 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 Company capitalizes computer
software product development costs incurred in developing a product once
technological feasibility has been established and until the product is
available for general release to customers. Technological feasibility is
established when the Company either (i) completes a detail program design that
encompasses product function, feature and technical requirements and is ready
for coding and confirms that the product design is complete, that the necessary
skills, hardware and software technology are available to produce the product,
that the completeness of the detail program design is consistent with the
product design by documenting and tracing the detail program design to the
product specifications, and that the detail program design has been reviewed for
high-risk development issues and any related uncertainties have been resolved
through coding and testing or (ii) completes a product design and working model
of the software product, and the completeness of the working model and its
consistency with the product design have been confirmed by testing. The Company
evaluates realizability of the capitalized amounts based on expected revenues
from the product over the remaining product life. Where future revenue streams
are not expected to cover remaining amounts to be amortized, the Company either
accelerates amortization or expenses remaining capitalized amounts. Amortization
of such costs is computed as the greater of (1) the ratio of current revenues to
expected revenues from the related product revenues or (2) a straight-line basis
over the expected economic life of the product (not to exceed five years).
Other assets have generally resulted from business combinations accounted
for as purchases and are recorded at the lower of unamortized cost or fair
value. The Company annually reviews the carrying amounts of these assets for
indications of impairment, in accordance with SFAS No. 142, "Goodwill and Other
Tangible Assets." Impairment of value, if any, is recognized in the period it is
determined.
8
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
There was no impairment of these assets during the third quarter of fiscal 2003.
5) PROPERTY AND EQUIPMENT
As of the dates shown, property and equipment consisted of the following
(in thousands):
March 31, June 30,
2003 2002
--------- --------
Computer equipment $ 5,707 5,691
Furniture and fixtures 1,190 1,143
Leasehold improvements 819 1,508
7,716 8,342
Less accumulated depreciation and amortization (6,192) (6,892)
--------- --------
$ 1,524 $ 1,450
========= ========
6) OTHER ASSETS
Other assets is primarily comprised of goodwill. At March 31, 2003, other
assets consisted of the following (in thousands):
March 31, June 30,
2003 2002
--------- --------
Goodwill $ 2,181 $ 2,181
Other 19 62
--------- --------
$ 2,200 $ 2,243
========= ========
The Company does not consider these assets to be impaired at either March 31,
2003 or as of the filing date of this report on form 10-Q. In accordance with
the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", the
Company will not record any future amortization on these assets.
7) SOFTWARE REVENUE RECOGNITION
In accordance with Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", the Company recognizes revenues from licenses of computer software
"up-front," provided that a non-cancelable license agreement has been signed,
the software and related documentation have been shipped, there are no material
uncertainties regarding customer acceptance, collection of the resulting
receivable is deemed probable, and no significant other vendor obligations
exist. The revenue associated with any license agreements containing
cancellation or refund provisions is deferred until such provisions lapse. Where
the Company has future obligations, if such obligations are insignificant,
related costs are accrued immediately. When the obligations are significant, the
software product license revenues are deferred. Future contractual obligations
can include software customization, requirements to provide additional products
in the future and porting products to new platforms. Contracts which require
significant software customization are accounted for on the
9
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
percentage-of-completion basis. Revenues related to significant obligations to
provide future products or to port existing products are deferred until the new
products or ports are completed.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance revenues,
including revenues bundled with original software product license revenues, and
future unspecified enhancements to the Company's products, are deferred and
recognized over the related contract period, generally 12 months. The Company's
revenue recognition policies are designed to comply with American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2,
"Software Revenue Recognition" and Statement of Position ("SOP") 98-8, "Software
Revenue Recognition With Respect to Certain Transactions".
Prior to January 1, 2002, the Company recorded reimbursement by its
customers for out-of-pocket expenses as a decrease to cost of services. The
Company's results of operations for the third quarter of fiscal year 2002, and
the nine months ended March 31, 2002, have been reclassified for comparable
purposes in accordance with the Emerging Issues Task Force ("EITF") release
01-14, "Income Statement Characterization of Reimbursements Received for Out of
Pocket Expenses Incurred". The effect of this reclassification was to increase
both services revenues and cost of services by $220,000 for the third quarter of
fiscal year 2002, and by $596,000 for the nine months ended March 31, 2002.
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 and
nine -month periods ended March 31, 2003 and 2002 were as follows (in
thousands):
Three months ended Nine months ended
March 31, March 31,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- -------- ---------
Net earnings available to common shareholders $ 719 $ 381 $ 2,751 $ 1,283
Foreign currency translation adjustments 86 (223) (152) (37)
--------- --------- -------- ---------
Total comprehensive income $ 805 $ 158 $ 2,599 $ 1,246
========= ========= ======== =========
9) NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings per common share are computed by dividing net earnings
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per common share is computed in
a manner consistent with that of basic earnings per share while giving effect to
all potentially dilutive common shares that were outstanding during the period.
10
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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,
------------------- -------------------
2003 2002 2003 2002
--------- ------- --------- -------
Net earnings - basic $ 719 $ 381 $ 2,751 $ 1,283
Dividend on convertible securities 38 38 113 113
--------- ------- --------- -------
Net earnings - diluted $ 757 $ 419 $ 2,864 $ 1,396
========= ======= ========= =======
The following is a reconciliation of the denominators of diluted earnings
per share, (in thousands):
Three months ended Nine months ended
March 31, March 31,
------------------ -----------------
2003 2002 2003 2002
------- ------- ----- --------
Weighted average shares outstanding - basic 2,638 2,607 2,616 2,596
Conversion of preferred stock 500 500 500 500
"In the money" stock options, warrants and
contingent securities 249 102 176 31
------- ------- ----- --------
Weighted average shares outstanding - diluted 3,387 3,209 3,292 3,127
======= ======= ===== =========
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
potentially dilutive common shares. In periods of a loss, the denominator does
not change because it would be antidilutive.
10) CAPITAL STOCK
In fiscal 1991, the Company authorized 5,000,000 shares of a new class of
no par value preferred stock. The Board of Directors is authorized to issue the
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions of such stock, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the shareholders.
All preferred stock was issued with a mandatory conversion factor.
On June 29, 2001, the Company issued mandatorily convertible preferred
stock to a qualified investor in a private placement transaction. In summary,
the investor purchased 500,000 preferred shares at $4 per share yielding
$2,000,000 for the Company. This price represented a premium to the market for
the Company's common stock at the time of issuance. The average closing share
price of the Company's common stock for the 30 trading days prior to the private
placement was approximately $2.22. The preferred shares can be converted at
$4.00 per share after June 29, 2002 but before June 29, 2006, on a one for one
basis. The shares earn dividends at the rate of 7.5% per annum.
On December 30, 1996, the Company acquired a 100% ownership interest in
Ross Systems Iberica, its distributor in Spain and Portugal for the prior five
years, in exchange for shares of the Company's common stock valued at
approximately $1,400,000. The acquisition was a non-cash stock exchange which
was accounted for under the purchase method of accounting. Accordingly, the
results of operations of the acquired business have been included in the
Company's results of operations since the date of acquisition. The purchase
agreement mandated that the purchase price be guaranteed based on security
prices as of a date which had been mutually extended by the parties and
coincided with the extension of the maturity to July 8, 2003 of a non-interest
bearing, recourse note receivable, owed by the former majority shareholder of
Ross Systems Iberica to the Company. The former majority shareholder is
currently an employee of the Company. The Company, in its sole discretion, could
make up any difference between the value of the shares originally tendered and
the guaranteed purchase price of Ross Iberica either by issuing additional
shares or by paying cash. The note receivable described herein totaled $850,000
and was satisfied in full during March, 2003.
11
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
At the time of acquisition, the seller was issued 10% of the purchase price
in unrestricted shares with the remainder of the shares restricted. As of
December 31, 2002, the former majority shareholder still held 20,000 restricted
shares which were all the restricted shares that were issued to him at the time
of acquisition. During January 2003, the Company sought and received a unanimous
written consent from its Board of Directors to issue additional shares to the
former majority shareholder to satisfy the guaranteed purchase price agreement.
On the date of the Board consent, the share price was $9. Accordingly, the
Company issued 120,000 additional shares to satisfy the guaranteed purchase
price agreement. Since the guaranteed purchase price was based on security
prices and was not based on an earn out factor or any other performance measure,
this share issuance resulted only in a change in the number of common shares
outstanding.
Simultaneous with the issuance of these additional shares, the Company
entered into an agreement with the former majority shareholder that allowed the
Company to repurchase the former majority shareholder's shares at $9 per share.
During March, 2003, the Company did repurchase these shares into treasury stock
at the agreed upon $9 per share. The Company anticipates that these treasury
shares will be issued to satisfy conversions of its outstanding manditorily
convertible preferred shares over the remaining term of the preferred shares
which term ends on June 30, 2006.
The Board of Directors has approved the repurchase from employees of
nominal lots of shares acquired through the 1991 Employee Stock Purchase Plan or
one of the Company's stock option plans. These shares are placed into treasury
stock as they are repurchased.
11) RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. We have determined that the adoption of SFAS No. 146 will not
have an impact on our financial statements.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
our financial position or result of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123 ("Statement 148"). This
amendment provides two additional methods of transition for a voluntary change
12
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
to the fair value based method of accounting for stock-based employee
compensation. Additionally, more prominent disclosures in both annual and
interim financial statements are required for stock-based employee compensation.
The transition guidance and annual disclosure provisions of Statement 148 are
effective for fiscal years ending after December 15, 2002. This Interim Report
complies with the requirements of Statement 148. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The adoption of Statement
148 did not have a material impact on the Company's consolidated financial
statements.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities which
possess certain characteristics. The Interpretation requires that if a business
enterprise has a controlling financial interest in a variable interest entity,
the assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those of
the business enterprise. This Interpretation applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. We do not
have any ownership in any variable interest entities as of March 31, 2003. We
will apply the consolidation requirement of FIN 46 in future periods if we
should own any interest in any variable interest entity.
11) 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.
For management purposes, the results of the Australasian operations are
included in the North American results since the costs associated with managing
that marketplace are born by the North American entities within the group.
Selected balance sheet and income statement information pertaining to the
various significant geographic areas of operation are as follows:
As of and for the quarter ended March 31, 2003, in thousands:
Capital
Net Earnings Expenditures
Available to (not including
Common Depreciation capitalized
Total Assets Revenue Shareholders and Amortization software)
----------- -------- ------------ ---------------- --------------
Northern Europe........ $ 2,622 $ 1,041 $ (34) $ 16 $ 2
Spain.................. 6,399 1,647 225 59 --
United Kingdom......... 3,428 1,559 143 15 --
North America.......... 26,184 7,173 385 1,281 114
---------- -------- -------------- ---------------- --------------
Total.................. $ 38,633 $ 11,420 $ 719 $ 1,371 $ 116
========== ======== ============== ================ ==============
13
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
As of and for the quarter ended March 31, 2002 in thousands:
Capital
Net Earnings Expenditures
Available to (not including
Common Depreciation capitalized
Total Assets Revenue Shareholders and Amortization software)
------------ --------- ------------ ---------------- ---------
Northern Europe .............. $ 2,150 $ 1,531 $ 200 $ 12 $ 111
Spain......................... 4,235 1,675 441 62 12
United Kingdom................ 2,904 1,578 146 14 20
North America................. 38,416 6,892 (406) 2,179 106
------------ --------- ------------ ---------------- ---------
Total......................... $ 47,705 $ 11,676 $ 381 $2,267 $ 249
============ ========== =========== ================ =========
As of and for the nine months ended March 31, 2003 in thousands:
Capital
Net Earnings Expenditures
Available to (not including
Common Depreciation capitalized
Revenue Shareholders and Amortization software)
-------- ------------ ---------------- --------------
Northern Europe................. $ 3,479 $ 278 $ 47 $ 25
Spain........................... 4,667 635 208 148
United Kingdom.................. 4,171 338 40 39
North America................... 22,703 1,500 3,787 339
-------- ------------ --------------- --------------
Total........................... $ 35,020 $ 2,751 $4,082 $ 551
======== ============ =============== ==============
As of and for the nine months ended March 31, 2002:
Capital
Net Earnings Expenditures
Available to (not including
Common Depreciation capitalized
Revenue Shareholders and Amortization software)
-------- ------------ ---------------- --------------
Northern Europe ............... $ 4,324 $ 582 $ 41 $ 168
Spain........................... 4,671 1,438 185 9
United Kingdom.................. 4,048 305 51 29
North America................... 21,599 (1,042) 6,272 302
-------- ------------ --------------- --------------
Total........................... $ 34,642 $ 1,283 $ 6,549 $ 508
======== ============ =============== ==============
14
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Variability of Quarterly Results
The Company's software product license revenues can fluctuate from quarter
to quarter depending upon, among other things, such factors as overall trends in
the United States and international economies, new product introductions by the
Company, 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 applications
that solve complex business problems for process manufacturers including
collaborative planning, financial, manufacturing, distribution, supply chain
management, and customer resource management. Specifically, these applications
are designed to address the unique requirements of manufacturers in the food and
beverage, life sciences, chemicals, metals and natural products industries. In
addition, the Company supports an 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 users supported by the
hardware on which the modules operate.
More than 1,000 companies around the world use Ross Systems solutions on a
wide range of popular databases, including Oracle and Microsoft, as well as
operating systems including NT and UNIX. Ross Systems and its distributors have
more than 25 offices globally, to serve customers. Customers are primarily
medium-sized companies (with annual revenues of $50 million to $1 billion)
upgrading internal systems to improve profitability through the availability of
timely and accurate information, ensure compliance with regulatory requirements
such as those imposed by the FDA and USDA, and to collaborate effectively with
customers and suppliers.
The Company licenses its products to customers through a direct sales force
in North America and Western Europe as well as independent distributors in
dozens of other markets worldwide.
The Company offers the award-winning iRenaissance(TM) family of software
solutions which is an integrated suite of enterprise resource planning (ERP II),
financials, materials management, manufacturing and distribution, supply chain
management (SCM), advanced planning and scheduling, customer relationship
management (CRM), electronic commerce, business intelligence and analytics
applications.
iRenaissance applications are known for their deep and rich functional fit
to process industry requirements, as well as their short implementation times
and cost-effective returns on investment.
15
ROSS SYSTEMS, INC. AND SUBSIDIARIES
The Company leverages contemporary Internet technologies to enable
significant benefits for its customers. Many Ross customers have benefited from
technology obsolescence protection as they have moved from older computing
platforms to current platforms by upgrading to new releases. Built on a highly
flexible technology platform, iRenaissance applications cost-effectively support
not only mid-size companies but scale effectively to support large, global
organizations in a wide range of languages and with thousands of users
processing hundreds of thousands of transactions daily. Ross customers also
benefit from the low cost of deployment and centralized maintenance afforded by
browser-based PC clients that provide secure access from any PC with Internet
access, to the system infrastructure at central locations where the software
resides and the data is managed. End-user satisfaction is enhanced by highly
configurable and easily personalized applications that provide follow-me
profiles for each user, regardless of physical location. Utilizing contemporary
standards such as XML, SOAP, Microsoft .NET and others, iRenaissance
applications can be effectively connected to any other applications or devices
via the Internet. Robust security features that leverage Internet standards
protect applications and data with both user-based and application function
profiles. The security facilities further enable companies in their effort to
achieve regulatory compliance by providing detailed audit trails for every
action taken by every user.
Because the Company's iRenaissance applications were developed with the
GEMBASE fourth generation language , the Company believes they are easily
modified and expanded. GEMBASE is a programming environment that delivers a
central data dictionary, complete screen painting, editing and debugging
capabilities, and links to most popular database management systems. GEMBASE
itself is written in the C programming language to facilitate portability across
multiple hardware and database management system platforms. Because the
iRenaissance products were developed in GEMBASE, customers often find it easy to
customize their own applications.
Critical Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements", the Company recognizes revenues from licenses of computer
software "up-front" provided that a non-cancelable license agreement has been
signed, the software and related documentation have been shipped, there are no
material uncertainties regarding customer acceptance, collection of the
resulting receivable is deemed probable, and no significant other vendor
obligations exist. The revenue associated with any license agreements containing
cancellation or refund provisions is deferred until such provisions lapse. Where
the Company has future obligations, if such obligations are insignificant,
related costs are accrued immediately. When the obligations are significant, the
software product license revenues are deferred. Future contractual obligations
can include software customization, requirements to provide additional products
in the future and porting products to new platforms. Contracts which require
significant software customization are accounted for on the
percentage-of-completion basis. Revenues related to significant obligations to
provide future products or to port existing products are deferred until the new
products or ports are completed.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance revenues,
including revenues bundled with original software product license revenues, are
deferred and recognized over the related contract period, generally 12 months.
The Company's revenue recognition policies are designed to comply with American
Institute of Certified Public Accountants Statement of Position ("SOP") 97-2,
"Software Revenue Recognition".
Computer Software Costs
16
ROSS SYSTEMS, INC. AND SUBSIDIARIES
The Company capitalizes computer software product development costs incurred in
developing a product once technological feasibility has been established and
until the product is available for general release to customers. Technological
feasibility is established when the Company either (i) completes a detail
program design that encompasses product function, feature and technical
requirements and is ready for coding and confirms that the product design is
complete, that the necessary skills, hardware and software technology are
available to produce the product, that the completeness of the detail program
design is consistent with the product design by documenting and tracing the
detail program design to the product specifications, and that the detail program
design has been reviewed for high-risk development issues and any related
uncertainties have been resolved through coding and testing or (ii) completes a
product design and working model of the software product, and the completeness
of the working model and its consistency with the product design have been
confirmed by testing. The Company evaluates realizability of the capitalized
amounts based on expected revenues from the product over the remaining product
life. Where future revenue streams are not expected to cover remaining amounts
to be amortized, the Company either accelerates amortization or expenses
remaining capitalized amounts. Amortization of such costs is computed as the
greater of (1) the ratio of current revenues to expected revenues from the
related product sales or (2) a straight-line basis over the expected economic
life of the product (not to exceed five years). Software costs related to the
development of new products incurred prior to establishing technological
feasibility or after general release are expensed as incurred.
Results of Operations
Revenues
Total revenues for the quarter ended March 31, 2003 of $11,420,000
decreased 2% from $11,676,000 in the same quarter of fiscal 2002. Total revenues
for the nine-month period ended March 31, 2003 increased by 1% to $35,020,000
from $34,642,000 for the same nine-month period in the prior year.
International revenues as a percentage of total revenues decreased to 40%
in the third quarter fiscal 2003 from 51% for the same quarter in fiscal 2002.
International revenues decreased $1,418,000 or 24% over the same quarter in the
prior fiscal year. This decrease was due mainly to the change in the timing of
purchases relating to the Company's distributor in the Pacific Rim region.
Similar trends apply to the nine-month period ended March 31, 2003 when compare
to the same period in the prior fiscal year.
North American revenues comprised 60% of third quarter 2003 total revenues,
up from 49% in the same quarter of the prior fiscal year. North American
revenues increased 19% over the same quarter of the previous fiscal year. This
increase was due mainly to the steady growth of software licensing.
Software License Revenues
Software license revenues were $2,696,000 during the quarter ended March
31, 2003, a decrease of $618,000, or 19%, from the same quarter in fiscal 2002.
The Company experienced an increase over the same quarter of fiscal 2002 in
revenues the North American market of approximately $912,000, or 158%. The North
American increase was primarily due to continued strong market acceptance of the
Company's browser -based user interface, and features of its process
manufacturing modules as well as the absence of the after effects of the
September 11th tragedy, which had a negative impact on the third quarter of the
prior fiscal year. In addition, the improving license revenue trend is a result
of an increased visibility of the Company in the North American process software
ERP market space arising from effective marketing activities over the fiscal
year ended June 30, 2002. For the nine months ended March 31, 2003, North
American license revenues were up 137% compared to the same nine-month period in
the prior fiscal year. The Company's revenues in the European markets were down
$640,000, a decrease of 35% over the same quarter in fiscal 2002. The decrease
17
ROSS SYSTEMS, INC. AND SUBSIDIARIES
in license revenues in Europe reflected uncertainty in that market, brought on
by the prospect of war in the Middle East. For the nine-month period ended March
31, 2003, European license revenues decreased 14% to $3,920,000 from $4,583,000
for the same period in the prior fiscal year. Software license revenues in the
Asian and Pacific Rim region decreased by $890,000 to $10,000 during the quarter
ended March 31, 2003, from $900,000 in the same quarter of fiscal 2002. This
reflects a change in the timing of purchases by the principal distributor in
this region. This reasoning also applies for the nine-month period ended March
31, 2003, when compared to the same nine months in the prior fiscal year.
Consulting and other Services Revenues
Consulting and other services revenues for the third quarter of fiscal 2003
decreased 2% to $3,194,000 from $3,267,000 in the same quarter of fiscal 2002.
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) and therefore, service revenues
fluctuate based upon related fluctuations in software license revenue. For the
quarter ended March 31, 2003, North American services revenues increased 8% at
$1,816,000 compared to $1,621,000 over the same quarter in the prior year. This
primarily reflects new services work arising from the growth in software
revenues over the last fiscal year. The time taken to implement the products at
new customers has tended to shorten slightly over the past 18 months as a result
of improving implementation processes and methodologies. This improvement has
meant that services revenues have not risen in direct proportion to license
revenue increases. The nine-month period ended March 31, 2003 reflects an
increase of 14% for North American services revenues over the same period in the
prior fiscal year. International services revenues decreased $243,000, or 15%
over the same quarter in the prior fiscal year. This decrease is mainly due to
the absence of Euro dollar implementation work in the current quarter compared
to the same quarter in the prior fiscal year. A similar trend is true for the
nine-month period ended March 31, 2003, when compared to the same nine months in
the prior fiscal year.
Maintenance Revenues
Maintenance revenues increased by $360,000 or 7% in the third quarter of
fiscal 2003 versus the same quarter in the prior fiscal year. This is
attributable mainly to new maintenance contract additions from prior fiscal year
software license revenues exceeding the rate of maintenance cancellations in
North America. The increase of $317,000 or 20% in International maintenance
revenues is attributable mainly to the negotiation of new maintenance contracts,
including back-maintenance provisions, for contracts which had previously
cancelled but have been reinstated on the Euro-compliant version of the product.
Maintenance revenues for the nine-month period ended March 31, 2003 were flat at
$15,323,000 compared to $15,317,000 in the same period in the prior fiscal year.
Reimbursable Expenses
Reimbursable expenses billed were up by 34% to $295,000 for the third
quarter of fiscal 2003, from $220,000 in the same quarter in the prior fiscal
year. For the nine-month period ended March 31, 2003, an increase of $258,000 or
43% over the prior year's nine-month period reflects the impact in the prior
year's first and second quarters, of the aftermath of the September 11, 2001
tragedy, as consultants sought alternative ways to continue with customer
projects without air travel, and therefore billed the customers for less
expenses.
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
18
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Company. Major third party products sold by the Company include databases and
other optional software such as certain functional modules for CRM and SCM as
well as reporting, and productivity tools. As a percentage of software license
revenue, third party product licenses decreased to 25% in the third quarter of
fiscal 2003 compared to 30% in the same quarter of fiscal 2002. As a result, the
costs of software product licenses for the third quarter of fiscal 2003
decreased by 14% to $449,000 from $521,000 in the third quarter of fiscal 2002.
The decrease in costs for software product licenses for the quarter was
primarily due to the decrease in the proportion of third party products in total
software revenues sold in fiscal 2003 compared to the prior fiscal year. This
relative decrease in third party content in sales reflects the particular mix of
revenues in the quarter and is not related to any specific trend in software
revenues generally.
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 related costs of sales.
These costs also include outside consultants to supplement Company personnel in
meeting peak customer consulting demands.
Certain expenses previously reflected as sales and marketing have been
reclassified as costs of consulting, maintenance and other services for the
quarter ended March 31, 2003. This reclassification of expenses arose out of the
necessity to match a change in the presentation of costs in the current period.
Historically, the Company's European subsidiaries have been predominantly sales
offices and, as such, the majority of their operating costs have been reflected
in sales and marketing in the Condensed Consolidated Statements of Operations.
During the first quarter of fiscal year 2003, the Company undertook a specific
and detailed review of the cost structures of our European subsidiaries in light
of the change in sales mix and employee base over time. It was determined that
many of the costs, including salary and social costs of the employees, travel
and entertainment expenses and certain allocable common infrastructure costs
which relate to consulting and support activity were being grouped with sales
and marketing costs. The change between sales and marketing versus consulting
arose due to the maturity of the European operations and the manner in which the
operations have evolved over the last several reported accounting periods. While
the allocation of costs requires judgment, and while our employees perform
multiple tasks based upon the then current needs of the organization, management
believes that this reclassification of costs is necessary to provide the most
accurate view of the efforts expended by the European subsidiaries over the
periods reported. Therefore for the current quarter, and for the comparative
quarter in the prior fiscal year, the expenses named above which relate to
consulting and support services, have been reclassified from sales and
marketing, and are now classified as consulting, maintenance, and other
services.
19
ROSS SYSTEMS, INC. AND SUBSIDIARIES
A corresponding reclassification of costs in the prior year figures has
been effected as shown in the table below:
Three months ended Nine months ended
March 31, March 31,
2002 2002 Reclassified 2002 2002 Reclassified
----- ----------------- ----- -----------------
Costs of consulting, maintenance and other $ 2,572 $ 4,215 $ 7,145 $ 12,709
services
Software product license sales and 3,537 2,434 10,529 6,630
marketing
Product development net of capitalized and 3,074 2,782 8,894 7,978
amortized computer software costs
General and administrative 1,019 986 3,688 3,530
Less reimbursable services expenses billed (220) (596)
to customers
Other expenses 114 81 421 313
Preferred stock dividend 38 113
-------- ------------ -------- -----------------
Total subject to reclassification $ 10,316 $ 10,316 $ 30,677 $ 30,677
======== ============ ======== =================
Costs of consulting, maintenance, and other services were virtually flat at
$4,229,000 in the third quarter of fiscal 2003, as compared to $4,215,000 in the
third quarter of fiscal 2002.
For the nine-month period ended March 31, 2003, costs of consulting,
maintenance and other services have increased slightly by 1% to $12,784,000 from
$12,709,000 due to the higher utilization of outside consultants in Europe in
the first quarter of the current fiscal year.
An amount of $292,000 and an amount of $916,000 previously reflected as
product development expenses has been reclassified as costs of consulting,
maintenance and other services for the quarter and the nine months ended March
31, 2003, respectively. This reclassification of expenses arose out of the
necessity to match a change in the presentation of costs in the current period.
Certain personnel related expenses incurred in support of customer specific
activity have historically been reflected in product development expenses.
However, due to the increasing materiality of these expenses, they are now more
appropriately classified as consulting, maintenance and other services expenses.
Sales and marketing expenses of $2,864,000 for the quarter ended March 31,
2003 reflected an increase of 18% when compared to $2,434,000 in the third
quarter of fiscal 2002. This increase is a result of higher expenditure on
marketing events, higher sales commissions related to higher license sales in
North America, and increased corporate overhead allocation to the increasingly
active marketing department in North America. For the nine-month period ended
March 31, 2003, sales and marketing expenses increased by 24% to $8,193,000 from
6,630,000 reflecting the same influencing factors as for the quarterly
comparison described above.
Product development (research and development) expenses, net of capitalized
and amortized computer software costs, of $1,816,000 in the third quarter of
fiscal 2003 were down from $2,782,000 in the same quarter of the prior fiscal
year. The following table summarizes product development expenditures (in
thousands):
20
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Three months ended Nine months ended
March 31, March 31,
------------------ -------------------
2003 2002 2003 2002
------- -------- -------- -------
Gross Expenditures for Product Development................. $1,714 $ 1,773 $ 5,067 $ 5,336
Less: Expenses capitalized................................. (1,109) (1,017) (3,174) (3,177)
Plus: Amortization of previously capitalized amounts....... 1,211 2,026 3,470 5,819
------- -------- -------- -------
Total Product Development Expenses......................... $1,816 $ 2,782 $ 5,363 $ 7,978
======= ======== ======== =======
Excluding the amortization of previously capitalized amounts, as a
percentage of total revenues, gross product development expenditures both for
the three-month period ended March 31, 2003, and for the same period of the
prior year, were constant at 15%. This reflects development activity in the
current quarter consistent with that of the same quarter in the prior period.
Amortization expense decreased by 40% for both the quarter and the nine months
ended March 31, 2003, due to a charge for impairment of unamortized software
effected in the quarter ended June 30, 2002. Year to date gross expenditures for
product development decreased by 5% to $5,067,000 for the nine-months ended
March 31, 2003 from $5,336,000 for the same period in the prior fiscal year.
General and administrative expenses for the quarter ended March 31, 2003
increased by 3%, to $1,016,000 from $986,000 in the same quarter of the prior
fiscal year. This increase was due to minor cost variations in comparison to the
prior fiscal year. Minor cost savings in several administrative expense items
accounts for the 3% decrease to $3,420,000 for the nine-month period ended March
31, 2003, from $3,530,000 for the same period in the prior fiscal year. In the
three -month period ended March 31, 2003, the Company recorded a provision for
doubtful accounts of $197,000, as compared to $316,000 recorded in the third
quarter of fiscal 2002. The fiscal 2003 and 2002 provisions consisted primarily
of specific customer accounts identified as being potentially uncollectable.
These provisions represent management's best estimate of the doubtful accounts
for each period.
Other Expense, Net
Other expense for the quarter ended March 31, 2003 was $29,000 as compared
to $81,000, in the same quarter of fiscal 2002. 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 average levels of
the Company's indebtedness.
Income Tax Expense
During the third quarter of fiscal 2003, the Company recorded an income tax
expense of $63,000 compared with $40,000 recorded during the same quarter in
fiscal 2002. The fiscal 2003 and 2002 tax expense amounts relate to provisions
for minimum United States income taxes payable on profits in the respective
quarters.
Liquidity and Capital Resources
In the first nine months of fiscal 2003, net cash provided by operating
activities increased $4,306,000 compared to the same period of the prior fiscal
year. This included an aggregate net decrease in the non-cash charges for
depreciation, amortization and provisions for bad debt of $2,563,000 and an
aggregate increase in the combined cash provided by prepaids and other current
assets, taxes payable, accrued expenses, accounts payable and deferred revenues
of $5,289,000. Included in cash provided by operating activities is an increase
in prepaids and other current assets over the same prior year nine-month period,
of $838,000 for the nine-month period ended March 31, 2003. This increase was
primarily made up of the repayment of a related party note receivable of
$850,000. This net cash increase was enhanced by cash provided by an increase of
21
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Company earnings of $1,468,000 in the first nine months of fiscal 2003 as
compared to the first nine months of fiscal 2002.
In the first nine months of fiscal 2003, the Company utilized $3,824,000
for investing activities versus $3,442,000 over the same period of the prior
fiscal year, an increase of $382,000. Investment in property and equipment was
up $43,000 to $551,000 in the first nine months of fiscal 2003, from $508,000 in
same period in the prior fiscal year. Investments in capitalized computer
software costs increased by $140,000. Other items, primarily deposits, provided
$199,000 less in cash in the first nine months of this fiscal year 2003.
Net cash flows used for financing activities increased by $2,082,000 for
the nine months ended March 31, 2003, versus the same period of the prior fiscal
year. Cash movement on the Company's credit lines reflected a change of $806,000
to a net cash paid position of $169,000 for the nine months ended March 31,
2003, from a net cash received of $637,000 for the same period in the prior
fiscal year. Proceeds from the issue of shares to employees under the Employee
Stock Purchase Plan, and the exercise of options by employees, amounted to
$262,000 in the nine months ended March 31, 2003, an increase of $150,000 over
the same period in the prior fiscal year. During the third quarter of fiscal
2003, purchases of treasury stock increased by $1,394,000. This related
primarily to the related party transaction described in the notes to the
financial statements (see Note 9) whereby 120,000 shares which had been issued
to an employee of the Company, were repurchased into treasury stock by the
Company. This transaction was part of the acquisition cost of Ross Iberica, a
company formerly controlled by the employee.
At March 31, 2003, the Company had $6,587,000 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 September 23,
2004, and an interest rate equal to the Prime Rate plus 2% (approximately 6.75%
at March 31, 2003). Borrowings under the credit facility are collateralized by
substantially all the assets of the Company. At March 31, 2003, the Company had
$3,016,000 outstanding against the $5,000,000 revolving credit facility, and
based on eligible accounts receivable at March 31, 2003, the Company's combined
cash and remaining borrowing capacity under the revolving credit facility
increased by $2,904,000 to approximately $6,587,000 compared to $3,683,000 at
March 31, 2002.
Risk Factors
License revenues: The Company's software product license revenues can
fluctuate depending upon such factors as overall trends in the United States and
International economies, new product introductions by the Company, as well as
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.
Economic slowdown: The Company's business may be adversely impacted by the
worldwide economic slowdown and related uncertainties. Weak economic conditions
worldwide have contributed to the current technology industry slow-down. This
may impact the Company's business resulting in reduced demand and increased
price competition, which may result in higher overhead costs, as a percentage of
revenues. Additionally, this uncertainty may make it difficult for the Company's
customers to forecast future business activities. This could create challenges
to the Company's ability to grow its business profitably. If the economic or
22
ROSS SYSTEMS, INC. AND SUBSIDIARIES
market conditions further deteriorate, this could have a material adverse impact
on the results of operations and cash flow.
Competition: The Company may face increased competition and its financial
performance and future growth depend upon sustaining a leadership position in
our product functionality. Competitive challenges faced by the Company are
likely to arise from a number of factors, including: industry volatility
resulting from rapid development and maturation of technologies; industry
consolidation and increasing price competition in the face of worsening economic
conditions. Although there are fewer competitors in the Company's target markets
than previously, failure to compete successfully against those remaining could
harm the Company's business operating results and financial condition.
Stock price: The Company's stock price, like that of other technology
companies, is subject to volatility because of factors such as the announcement
of new products, services or technological innovations by the Company or its
competitors, quarterly variations in our operating results, and speculation in
the press or investment community. In addition, the Company's stock price is
affected by general economic and market conditions and may be negatively
affected by unfavorable global economic conditions.
Intellectual property: The Company's business may suffer if it cannot
protect our intellectual property. The Company generally relies upon copyright,
trademark and trade secret laws and contract rights in the United States and in
other countries to establish and maintain proprietary rights in its technology
and products. However, there can be no assurance that any of its proprietary
rights will not be challenged, invalidated or circumvented. In addition, the
laws of certain countries do not protect proprietary rights to the same extent
as do the laws of the United States. Therefore, there can be no assurance that
the Company will be able to adequately protect its proprietary technology
against unauthorized third-party copying or use, which could adversely affect
its competitive position. Further, there can be no assurance that the Company
will be able to obtain licenses to any technology that may be required to
conduct its business or that, if obtainable, such technology can be licensed at
a reasonable cost.
Litigation: In the ordinary course of business, the Company may become
involved in litigation and administrative proceedings. Such matters can be
time-consuming, divert management's attention and resources and cause the
accumulation of significant expenses. Furthermore, there can be no assurance
that the results of any of these actions will not have a material adverse effect
on the Company's business, results of operations or financial condition.
Key Personnel: The Company's success depends upon retaining and recruiting
highly qualified employees and management personnel. However, severe challenges
may be faced in attracting and retaining such employees. Although staff turnover
is historically low, if the Company's ability to maintain a stable workforce is
significantly handicapped, its ability to compete may be adversely affected.
Recent Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. We have determined that the adoption of SFAS No. 146 will not
have an impact on our financial statements.
23
ROSS SYSTEMS, INC. AND SUBSIDIARIES
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
our financial position or result of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123 ("Statement 148"). This
amendment provides two additional methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. Additionally, more prominent disclosures in both annual and
interim financial statements are required for stock-based employee compensation.
The transition guidance and annual disclosure provisions of Statement 148 are
effective for fiscal years ending after December 15, 2002. This Interim Report
complies with the requirements of Statement 148. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The adoption of Statement
148 did not have a material impact on the Company's consolidated financial
statements.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities which
possess certain characteristics. The Interpretation requires that if a business
enterprise has a controlling financial interest in a variable interest entity,
the assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those of
the business enterprise. This Interpretation applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. We do not
have any ownership in any variable interest entities as of March 31, 2003. We
will apply the consolidation requirement of FIN 46 in future periods if we
should own any interest in any variable interest entity.
24
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The market risks described below are not the only ones that we face.
Additional risks and uncertainties not presently known to us may also impair our
business operations. Our business, operating results or financial condition
could be materially adversely affected, and the trading price of our common
stock could decline due to any of these risks.
Foreign Exchange: The company has a worldwide presence and as such
maintains offices and derives revenues from sources overseas. For the third
quarter of fiscal 2003, international revenues, subject to foreign exchange
fluctuatuions, as a percentage of total revenues were approximately 37%. 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.
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 affect
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 affect our financial
position, results of operations or cash flows.
The Company did not engage in any derivative/hedging transactions in the
quarter ended March 31, 2003.
25
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Item 4. Controls and Procedures
Within 90 days prior to the filing date of this report, the principal
executive officer and principal financial officer carried out an evaluation,
with the participation of the Company's management of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, principal executive officer and principal financial officer
have concluded that the Company's disclosure controls and procedures (as defined
in Rules 13a-14 and 15d-14 of the Exchange Act) are effective. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect these internal controls subsequent to the
completion of their evaluation.
26
ROSS SYSTEMS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The Exhibits listed on the accompanying Index to Exhibits are filed as part
of, or incorporated by reference into, this Report.
3.1 Certificate of Incorporation of the Registrant, as amended (3)
3.2 Bylaws of the Registrant (3)
3.3 Amendment to the Certificate of Incorporation of the Registrant, dated
April 26, 2001, for the 1 for 10 Reverse Stock Split (5)
3.4 Amendment to the Certificate of Incorporation of the Registrant, dated
November 14, 2002 for the reduction of Authorized Share Capital (6)
10.1 Preferred Shares Rights Agreement, dated as of September 4, 1998
between the Registrant and Registrar and Transfer Company (2)
10.2 Loan and Security Agreement dated September 24, 2002 between
Registrant and Silicon Valley Bank (5) 10.2A Series A Convertible
Preferred Stock Agreement dated 29 June, 2001 between Registrant and
Benjamin W. Griffith III (4)
10.3 Employment Agreement, dated as of January 7, 1999, modified March 24,
2003 between Mr. Patrick Tinley = and the Registrant
10.4 Employment Agreement, dated as of September 113, 1999, modified March
24, 2003 between Mr. Robert = = Webster and the Registrant
99.1 Certification of Chief Executive Officer, and Chief Financial Officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-Q filed May 6, 1996.
(2) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-K filed July 24, 1998.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-K filed September 27, 2001.
27
ROSS SYSTEMS, INC. AND SUBSIDIARIES
(5) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-K/A filed October 2, 2002
(6) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-Q filed February 14, 2003
(b) No reports on Form 8-K were filed during the period ended March 31, 2003.
28
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 8 , 2003 /s/ Verome M. Johnston
-------------------------------------------
Verome M. Johnston
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
29
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICERS
I, J. Patrick Tinley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ross Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 8, 2003 /s/ J. Patrick Tinley
------------------------------------
J. Patrick Tinley
Chairman and Chief Executive Officer
30
ROSS SYSTEMS, INC. AND SUBSIDIARIES
I, Verome M. Johnston, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ross Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 8, 2003
/s/ Verome M. Johnston
---------------------------------------
Verome M. Johnston
Vice President, Chief Financial Officer
31