UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q (MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 Act). Yes [ ] No [X]
As of October 23, 2003, the Registrant had outstanding 2,823,097 shares of
Common Stock, and 500,000 Series A 7.5% convertible preference shares,
("convertible preferred stock").
1
ROSS SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
--------------------------------
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements..............................................................................3
Condensed Consolidated Balance Sheets - September 30, 2003 and June 30, 2003......................3
Condensed Consolidated Statements of Operations - Three months ended September 30, 2003 and 2002..4
Condensed Consolidated Statements of Cash Flows - Three months ended September 30, 2003 and 2002..5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................23
Item 4. Evaluation of Disclosure Controls and Procedures.................................................24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................25
SIGNATURE.....................................................................................................27
This Quarterly Report on Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in 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 statement containing the proposed merger with
chinadotcom corporation; 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; and any statements of
assumptions underlying any of the foregoing. The risks, uncertainties and
assumptions referred to above include 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 and that are otherwise described from time
to time in Ross Systems' Securities and Exchange Commission reports. Ross
Systems assumes no obligation and does not intend to update these
forward-looking statements.
2
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ROSS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share related data)
September 30, June 30,
2003 2003
-------------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents............................................ $ 7,935 $ 8,628
Accounts receivable, less allowance for doubtful accounts
of $1,479 and $1,532, at September 30, 2003, and June 30, 2003
respectively...................................................... 11,716 12,880
Prepaid and other current assets..................................... 595 731
-------------- ------------
Total current assets...................................... 20,246 22,239
Property and equipment, net.......................................... 1,357 1,406
Computer software costs, net......................................... 13,094 13,573
Other assets......................................................... 2,993 2,993
-------------- ------------
Total assets.............................................. $ 37,690 $ 40,211
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term debt...................................................... $ 4,511 $ 2,800
Accounts payable..................................................... 2,445 2,978
Accrued expenses..................................................... 4,075 4,940
Income taxes payable................................................. 68 261
Deferred revenues.................................................... 10,105 12,203
-------------- ------------
Total current liabilities................................. 21,204 23,182
-------------- ------------
Shareholders' equity:
Convertible Preferred stock, no par value 5,000,000 shares 2,000 2,000
authorized; 500,000 shares issued and outstanding.................
Common stock, $0.001 par value; 15,000,000 shares authorized; 28 28
2,823,097 and 2,815,603 shares issued and outstanding.............
Additional paid-in capital........................................... 87,311 87,189
Accumulated deficit ................................................. (69,802) (69,094)
Accumulated other comprehensive deficit.............................. (1,931) (1,749)
Treasury stock at cost, 133,977 and 158,973 shares................... (1,120) (1,345)
-------------- ------------
Total shareholders' equity................................ 16,486 17,029
-------------- ------------
Total liabilities and shareholders' equity................ $ 37,690 $ 40,211
============== ============
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
September 30,
----------------------
(unaudited)
2003 2002
Revenues: ---------- ----------
Software product licenses....................................... $ 2,961 $ 3,733
Consulting and other services................................... 3,556 2,770
Maintenance..................................................... 5,232 4,923
---------- ---------
Total revenues ........................................... 11,749 11,426
---------- ---------
Operating expenses:
Costs of software product licenses ............................. 344 346
Costs of consulting, maintenance and other services............. 4,999 4,401
Software product license sales and marketing.................... 2,690 2,422
Product development, net of capitalized computer software costs
and amortized computer software costs........................ 2,125 1,801
General and administrative...................................... 1,118 1,361
Provision for uncollectible accounts............................ 135 272
---------- ---------
Total operating expenses.................................. 11,411 10,603
---------- ---------
Operating profit.......................................... 338 823
Proposed merger transaction costs............................... (758) -
Other income(expense), net...................................... 15 (94)
Income tax expense.............................................. (78) (90)
---------- ---------
Net income (loss)......................................... (483) 639
Preferred stock dividend........................................ (38) (38)
---------- ---------
Net income (loss) available to common shareholders....... $ (521) $601
========== =========
Net income (loss) per common share-- basic...................... $ (0.19) $ 0.23
========== =========
Net income (loss) per common share-- diluted.................... $ (0.19) $ 0.20
========== =========
Shares used in per share computation-- basic.................... 2,685 2,646
========== =========
Shares used in per share computation-- diluted.................. 2,685 3,267
========== =========
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)
Three months ended
September 30,
(unaudited)
-----------------------
2003 2002
--------- ----------
Cash flows from operating activities:
Net income (loss)............................................................ $ (483) $ 639
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of property and equipment................... 188 206
Amortization of computer software costs................................... 1,251 1,186
Provision for uncollectible accounts ..................................... (54) 272
Changes in operating assets and liabilities:
Accounts receivable..................................................... 1,203 1,209
Prepaid and other current assets........................................ 134 141
Income taxes recoverable/payable........................................ (195) 25
Accounts payable........................................................ (540) (318)
Accrued expenses........................................................ (837) (243)
Deferred revenues....................................................... (2,123) (1,870)
--------- ----------
Cash provided by (used in) operating activities............................. (1,456) 1,247
--------- ----------
Purchases of property and equipment, net................................ (139) (205)
Computer software costs capitalized..................................... (841) (1,160)
Other................................................................... - 16
--------- ----------
Cash used in investing activities........................................... (980) (1,349)
--------- ----------
Cash flows from financing activities:
Net cash received (paid) on line of credit activity..................... 1,711 (760)
Proceeds from issuance of common stock.................................. 122 107
Preference dividend paid................................................ (38) (38)
--------- ----------
Cash provided by (used in) financing activities..................... 1,795 (691)
--------- ----------
Effect of exchange rate changes on cash......................................... (52) (57)
--------- ----------
Net decrease in cash and cash equivalents....................................... (693) (850)
Cash and cash equivalents at beginning of fiscal quarter ....................... 8,628 5,438
--------- ----------
Cash and cash equivalents at end of fiscal quarter.............................. $ 7,935 $ 4,588
========= ==========
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
1) BUSINESS OF THE COMPANY & BASIS OF PRESENTATION
Description of Business and Summary of Significant Accounting Policies
Business of the Company
Ross Systems, Inc. (the "Company" or "Ross"; NASDAQ: ROSS) delivers
innovative software solutions that help manufacturers worldwide fulfill
their business growth objectives through increased operational
efficiencies, improved profitability, strengthened customer relationships
and streamlined regulatory compliance. Focused on the food and beverage,
life sciences, chemicals, metals and natural products industries and
implemented by over 1,000 customer companies worldwide, the company's
family of Internet-architected solutions is a comprehensive, modular suite
that spans the enterprise, from manufacturing, financials and supply chain
management to customer relationship management, performance management and
regulatory compliance.
Publicly traded on the Nasdaq National Market since 1991, Ross's
global headquarters are based in the U.S. in Atlanta, Georgia, with sales
and support operations around the world.
The Company operates in one business segment and no individual
customer accounted for more than 10% of total revenues in the quarter ended
September 30, 2003. The Company does not have a concentration of credit
risk in any one industry. Approximately 63% of the Company's revenues are
derived from the North American market.
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 September 30, 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 ended September 30, 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 for the fiscal year ended June 30, 2003 which was
filed with the Securities and Exchange Commission in September 2003.
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.
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in
consolidation.
Stock Based Compensation.
The company measures compensation cost for its stock incentive and
option plans using the intrinsic value-based method of accounting.
Had the company used the fair value-based method of accounting to
measure compensation expense for its stock incentive and option plans and
charged compensation cost against income over the vesting periods, based on
the fair value of options at the date of grant, net income or loss and the
related basic and diluted per common share amounts for the three months
ended September 30, 2003 and 2002 would have been reduced to the following
pro forma amounts:
6
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
September 30,
-------------
2003 2002
--------- --------
Net income (loss) available to common shareholders:
As reported............................................ $ (521) $ 601
Deduct: Total stock-based employee compensation
expense under fair value-based method, net of tax (269) (99)
--------- ------
Pro forma net income (loss) available to common
shareholders........................................... $ (790) $ 502
--------- ------
Basic net earnings per share:
As reported ............................................ $ (0.19) $ 0.23
Pro forma .............................................. (0.29) 0.19
Diluted net earnings per share:
As reported ............................................ (0.19) 0.20
Pro forma .............................................. (0.29) 0.17
The following weighted average assumptions for the Company's Stock Option
Plan were used to determine the pro forma amounts noted above:
Three months ended
September 30,
------------------
2003 2002
------- --------
Expected life (years).............................. 5 5
Expected volatility................................ 40.1% 80.4%
Risk-free interest rate............................ 5.0% 4.97%
Expected dividend yield............................ None None
Revenue Recognition.
In accordance with Securities and Exchange Commission, or the 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.
The Company's revenue recognition policies are designed to comply with
American Institute of Certified Public Accountants Statement of Position
("SOP") 97-2, "Software Revenue Recognition," and with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." Revenues
recognized from multiple-element software license contracts are allocated
to each element of the contracts based on the fair values of the elements,
7
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
such as licenses for software products, maintenance, or professional
services. The determination of fair value is based on objective evidence
which is specific to the Company. The Company limits its assessment of
objective evidence for each element to either the price charged when the
same element is sold separately, or the price established by management
having the relevant authority to do so for an element not yet sold
separately. If evidence of fair value of all undelivered elements exists
but evidence does not exist for one or more delivered elements, then
revenue is recognized using the residual method. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining
portion of the arrangement fee is recognized as revenue.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance
revenues, including revenues bundled with original software product license
revenues, are deferred and recognized over the related contract period,
generally 12 months.
Computer Software Costs.
The Company capitalizes computer software product development costs
incurred in developing a product once technological feasibility has been
established and until the product is available for general release to
customers. Technological feasibility is established when the Company either
(1) completes a detail program design that 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, that the detail program design has been reviewed for
high-risk development issues and that any related uncertainties have been
resolved through coding and testing or (2) completes a product design and
working model of the software product, and the completeness of the working
model and its consistency with the product design have been confirmed by
testing. The Company evaluates realizability of the capitalized amounts
based on expected revenues from the product over the remaining product
life. Where future revenue streams are not expected to cover remaining
amounts to be amortized, the Company either accelerates amortization or
expenses remaining capitalized amounts. Amortization of such costs is
computed as the greater of (1) the ratio of current revenues to expected
revenues from the related product sales or (2) a straight-line basis over
the expected economic life of the product (not to exceed five years).
Software costs related to the development of new products incurred prior to
establishing technological feasibility or after general release are
expensed as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity date of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is accumulated
using the straight-line method over the estimated useful lives of the
respective assets, generally three to seven years. Leasehold improvements
and equipment under capital leases are amortized using the straight-line
method over the shorter of the terms of the related leases or the
respective useful lives of the assets.
Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is recognized
for the difference between the fair value and the carrying value of the
asset.
Fair Value of Financial Instruments
The carrying amounts reported on the balance sheet for accounts
receivable, notes receivable, accounts payable and short term debt
approximate their fair values.
8
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("Statement 109"), the Company utilizes
the asset and liability method of accounting for income taxes. Under the
asset and liability method of Statement 109, deferred tax assets and
liabilities are established to recognize the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Foreign Operations and Currency Translation
The local currencies of the Company's foreign subsidiaries are the
functional currencies. Assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at current exchange rates, and the resulting
translation gains and losses are included as an adjustment to shareholders'
equity as a component of comprehensive income. Transaction gains and losses
that relate to U.S. dollar denominated intercompany short-term receivables
are recorded in the financial statements of the Company's foreign
subsidiaries and are reflected in income. Where related intercompany
balances have been designated as long-term, gains and losses are included
as an adjustment to shareholders' equity as a component of comprehensive
income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these
estimates.
Advertising Costs
The Company generally expenses advertising costs at the time the
advertisement is published, or in the case of direct mail, when mailed.
Advertising costs for the three months ended September 30, 2003 and 2002
were approximately $115,000 and $96,000 respectively.
9
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2) PROPERTY AND EQUIPMENT
As of the dates shown, property and equipment consisted of the
following (in thousands):
September 30, June 30,
2003 2003
----------- ----------
Computer equipment $ 5,856 $ 5,747
Furniture and fixtures 1,194 1,187
Leasehold improvements 898 838
----------- ----------
7,948 7,772
Less accumulated depreciation and amortization (6,591) (6,366)
----------- ----------
$ 1,357 $ 1,406
=========== ==========
3) OTHER ASSETS
Other assets are primarily comprised of goodwill. Other assets consist of
the following (in thousands):
September 30, June 30,
2003 2003
---------- ---------
Goodwill $ 2,181 $ 2,181
Note receivable 750 750
Other 62 62
---------- ---------
$ 2,993 $ 2,993
---------- ---------
The Company does not consider these assets to be impaired at either September
30, 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.
10
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4) 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 months
ended September 30, 2003 were as follows (in thousands):
Three months ended
September 30,
------------------
2003 2002
-------- ------
Net earnings (loss) available to common $ (521) $ 601
shareholders
Foreign currency translation adjustments (182) (20)
-------- ------
Total comprehensive income $ (703) $ 581
======== ======
5) NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Basic earnings (loss) per common share are computed by dividing net
earnings (loss) available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted earnings (loss) per
common share are computed in a manner consistent with that of basic earnings
(loss) per share while giving effect to all potentially dilutive common shares
that were outstanding during the period.
The following is a reconciliation of the numerators of diluted earnings
(loss) per share, (in thousands):
Three months ended
September 30,
--------------------
2003 2002
--------- --------
Net earnings (loss) - basic $ (521) $ 601
Dividend on convertible securities -- 38
--------- --------
Net earnings (loss) - diluted $ (521) $ 639
========= ========
The following is a reconciliation of the denominators of diluted
earnings per share, (in thousands):
Three months ended
September 30,
-------------------
2003 2002
------- ---------
Weighted average shares outstanding - basic 2,685 2,646
Conversion of preferred stock -- 500
"In the money" stock options, warrants and
contingent securities -- 121
------- ---------
Weighted average shares outstanding - diluted 2,685 3,267
======= =========
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 this would be antidilutive. For the three months ended
September 30, 2003 769,000 potentially dilutive common shares were excluded
because their impact would have been antidilutive.
11
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6) CAPITAL STOCK
Mandatorily Convertible Preferred Stock and Private Placement
In fiscal 1991, the Company authorized a new class of no par value
preferred stock consisting of 5,000,000 shares. The Board of Directors is
authorized to issue the preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions of such stock,
including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting any series or the designation of such
series, without further vote or action by the shareholders. All preferred
stock was issued with a mandatory conversion feature.
On June 29, 2001, the Company issued mandatorily convertible preferred
stock to a qualified investor in a private placement transaction. In
summary, the investor purchased 500,000 preferred shares at $4 per share
yielding $2,000,000 for the Company. This price represented a premium to
the market for the Company's common stock at the time of issuance. The
average closing share price of the Company's common stock for the 30
trading days prior to the private placement was approximately $2.22. The
preferred shares can be converted at $4.00 per share after June 29, 2002
but before June 29, 2006, on a one for one basis. The shares earn dividends
at the rate of 7.5%. In conjunction with this transaction, the Company
issued warrants to the broker who assisted in securing the investor. These
warrants were fairly valued at $60,000 on the date of issuance and the
expense has been recorded in the statement of operations as a component of
other expense (net) in the quarter ended June 30, 2001.
On April 27, 2001 the Company executed a reverse stock split on the
basis of 1 share for 10 shares.
On July 1, 2003 the company awarded a total of 25,000 restricted
shares to two of its officers. These shares have a ten year vesting period
and include certain accelerated vesting rights (as defined) which are
conditional upon a change of control of the Company, or the share price
closing at or above $20.00 per share.
7) RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", which clarifies
disclosure and recognition/measurement requirements related to certain
guarantees. The disclosure requirements are effective for financial
statements issued after December 15, 2002 and the recognition/measurement
requirements are effective on a prospective basis for guarantees issued or
modified after December 31, 2002. The application of the requirements of
FIN 45 did not have a significant 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. The Company adopted the disclosure provisions of SFAS
148 during fiscal 2003.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." This Interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
addresses consolidation by business enterprises of variable interest
entities which possess certain characteristics. The Interpretation requires
that if a business enterprise has a controlling financial interest in a
variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity must be included in the
consolidated financial statements with those of the business enterprise.
This Interpretation applied immediately to variable interest entities
created after January 31, 2003 and to variable interest entities in which
an enterprise obtains an interest after that date. The Company does not
have any ownership in any variable interest entities as of June 30, 2003.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities ("Statement 149"). This Statement amends Statement 133
for decisions made (1) as part of the Derivatives Implementation Group
process that effectively required amendments to Statement 133, (2) in
connection with other Board projects dealing with financial instruments,
and (3) in connection with implementation issues raised in relation to the
application of the definition of a derivative, in particular, the meaning
12
of an initial net investment that is smaller than would be required for
other types of contracts that would be expected to have a similar response
to changes in market factors, the meaning of underlying, and the
characteristics of a derivative that contains financing components. The
Company does not have any derivative instruments or hedging activities. The
application of Statement 149 did not have an impact on our financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("Statement 150"). This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many
of those instruments were previously classified as equity. Statement 150
requires that certain mandatorily redeemable financial instruments issued
in the form of shares are to be classified as liabilities rather than
equity. The Company has no outstanding financial instruments that fall into
the definitions covered by this Statement. The application of Statement 150
did not have a significant impact on our financial statements.
8) SEGMENT INFORMATION
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information'' established standards for the way that public business
enterprises report information about operating segments in their financial
statements. The standard defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. Based on these
standards the Company has determined that it operates in four geographical
segments: Northern Europe, Spain, the United Kingdom and North America.
The Company has no customers that represent ten percent or more of
annual revenues.
For management purposes, the results of the Asian operations are
included in the North American results since the costs associated with
managing the Asian marketplace are born by the North American entities
within the Group. Revenues in the Asian markets comprise less than 5% of
total revenues reported for the North American segment. Selected balance
sheet and income statement information pertaining to the various
significant geographic areas of operation are as follows:
As of and for the quarter ended September 30, 2003 (in thousands):
Net Income Depreciation Capital
Total Assets Revenue (Loss) and Amortization Expenditures
------------ -------- ---------- ---------------- ------------
Northern Europe........ $ 6,804 $ 993 $ 85 $ 21 $ 15
Spain.................. 6,088 1,293 (138) 80 70
United Kingdom......... 4,463 1,379 149 16 9
North America.......... 20,335 8,084 (579) 71 45
------------ -------- ---------- ---------------- ------------
Total.................. $ 37,690 $ 11,749 $ (483) $ 188 $ 139
============ ======== ========== ================ ============
As of and for the quarter ended September 30, 2002 (in thousands) :
Net Income Depreciation Capital
Total Assets Revenue (Loss) and Amortization Expenditures
------------ -------- ---------- ---------------- ------------
Northern Europe........ $ 2,133 $ 981 $ 33 $ 14 $ --
Spain.................. 4,908 1,249 121 76 48
United Kingdom......... 3,203 1,390 113 11 37
North America.......... 24,873 7,806 372 105 120
------------ -------- ---------- ---------------- ------------
Total.................. $ 35,117 $ 11,426 $ 639 $ 206 $ 205
============ ======== ========== ================ ============
9) PENDING MERGER
In early September 2003, the Company announced that it had signed a
definitive agreement whereby chinadotcom Software (CDC) would acquire Ross
Systems in a merger. Under the terms of the merger agreement, stockholders
of Ross Systems are to receive $5.00 in cash and a number of shares of CDC
stock based on the average value of CDC's shares for the 10 trading days
ending on and including the second trading day preceding the closing date.
For determination of the share conversion ratio, the maximum average value
is $10.50 per share and the minimum average value is $8.50 per share.
Completion of the merger is anticipated to occur by the end of the first
calendar quarter of 2004. Both companies are listed on NASDAQ.
Proposed merger transaction costs consisting of legal and professional
services fees of approximataly, $758,000 were incurred during the three
months ended September 30, 2003. These costs do not constitute normal
operating costs and have therefore been disclosed separately in the
Condensed Consolidated Statement of Operations.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Basis of Presentation
Our consolidated financial statements include the accounts of Ross and
our wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. Our fiscal year ends on
June 30. "Fiscal 2003," and "fiscal 2004" mean our fiscal years ended June
30 of each such year. The following discussion should be read in
conjunction with the Condensed Consolidated Financial Statements and the
related notes that appear elsewhere in this document. Unless otherwise
stated in this document, references to (1) "us," "our," "we" and similar
terms, (2) the "Company" or (3) "Ross" shall mean Ross Systems, Inc., a
Delaware corporation, and its subsidiaries.
Critical Accounting Policies
Revenue Recognition. We recognize revenues from licenses of computer
software "up-front" provided that a non-cancelable license agreement has
been signed, the software and related documentation have been shipped,
there are no material uncertainties regarding customer acceptance,
collection of the resulting receivable is deemed probable, and no
significant other vendor obligations exist. The revenue associated with any
license agreements containing cancellation or refund provisions is deferred
until such provisions lapse. Where we have future obligations, if such
obligations are insignificant, related costs are accrued immediately. If
the obligations are significant, the software product license revenues are
deferred. Future contractual obligations can include software
customization, requirements to provide additional products in the future
and porting products to new platforms. Contracts that require significant
software customization are accounted for on the percentage-of-completion
basis. Revenues related to significant obligations to provide future
products or to port existing products are deferred until the new products
or ports are completed.
Our revenue recognition policies are designed to comply with American
Institute of Certified Public Accountants Statement of Position ("SOP")
97-2, "Software Revenue Recognition," as amended by SOP 98-9, and with SEC
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." Revenues recognized from multiple-element software license
contracts are allocated to each element of the contracts based on the fair
values of the elements, such as licenses for software products,
maintenance, or professional services. The determination of fair value is
based on objective evidence that is specific to the Company. We limit our
assessment of objective evidence for each element to either the price
charged when the same element is sold separately, or the price established
by management having the relevant authority to do so, for an element not
yet sold separately. If evidence of fair value of all undelivered elements
exists but evidence does not exist for one or more delivered elements, then
revenue is recognized using the residual method. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining
portion of the arrangement fee is recognized as revenue.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance
revenues, including revenues bundled with original software product license
revenues, are deferred and recognized over the related contract period,
generally 12 months.
Computer Software Costs. We capitalize computer software product
development costs incurred in developing a product once technological
feasibility has been established and until the product is available for
general release to customers. Technological feasibility is established when
we either (1) complete a detail program design that encompasses product
function, feature and technical requirements and is ready for coding and
confirms that the product design is complete, that the necessary skills,
hardware and software technology are available to produce the product, that
the completeness of the detail program design is consistent with the
product design by documenting and tracing the detail program design to the
product specifications, that the detail program design has been reviewed
for high-risk development issues, and any related uncertainties have been
resolved through coding and testing or (2) complete a product design and
working model of the software product, and the completeness of the working
model and its consistency with the product design have been confirmed by
testing.
Capitalized software development costs generally relate to development
projects spanning several months. Resources are committed to these projects
on a consistent and long-term basis resulting in a generally consistent
impact on the financial results. We evaluate the extent to which the
capitalized amounts are realizable based on expected revenues from the
product over the remaining product life. Where future revenue streams are
not expected to cover remaining amounts to be amortized, we either
accelerate amortization or expense remaining capitalized amounts.
14
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Amortization of such costs is computed as the greater of (1) the ratio
of current revenues to expected revenues from the related product sales or
(2) a straight-line basis over the expected economic life of the product
(not to exceed five years). Software costs related to the development of
new products incurred prior to establishing technological feasibility or
after general release are expensed as incurred.
Reserves and Estimates. In the ordinary conduct of our business, we
must often use judgment and estimates regarding the recording of certain
reserves. For example, we use judgment in order to determine the amount of
our reserves for uncollectible accounts receivable. Should our estimates
prove to be incorrect, our reserves may be inadequate.
Foreign Currencies
The financial position and the results of operations of our foreign
subsidiaries are measured using local currencies as the functional
currencies. Assets and liabilities of these subsidiaries are translated
into US dollars at the exchange rate in effect at the end of the period.
Income and expense items are translated at the average exchange rate for
the period. The resulting translation adjustments are recorded in the
foreign currency translation adjustment account. The effects of changes in
foreign currency exchange rates have had minimal effect on our financial
results reported herein.
Variability of Quarterly Results
Our 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, our new product
introductions, and customer buying patterns. Because we typically ship
software products within a short period after orders are received, and
therefore maintain a relatively small backlog, any weakening in customer
demand can have an almost immediate adverse impact on revenues and
operating results. Moreover, a substantial portion of the revenue for each
quarter is attributable to a limited number of sales and therefore tends to
be realized in the latter part the period. Thus, even short delays in or
deferrals of sales near the end of a period can cause substantial
fluctuations in quarterly revenues and operating results. Finally, certain
agreements signed during a quarter may not meet our revenue recognition
criteria resulting in deferral of such revenue to future periods. Because
our operating expenses are based on anticipated revenue levels and a high
percentage of our expenses are relatively fixed, a small variation in the
timing of the recognition of specific revenues can cause significant
variations in the operating results from quarter to quarter.
Business Summary
General
The following description of our business is qualified in its entirety
by, and should be read in conjunction with the more detailed information
and financial data, including the financial statements and notes thereto,
appearing elsewhere in this Report.
Ross delivers innovative software solutions that help manufacturers
worldwide fulfill their business objectives through increased operational
efficiencies, improved profitability, strengthened customer relationships,
consistent quality and streamlined regulatory compliance. Focused on the
food and beverage, life sciences, chemicals, metals and natural products
industries and implemented by over 1,000 customer companies worldwide, our
family of Internet-architected solutions is a comprehensive, modular suite
that spans a customer's enterprise, from manufacturing, financials and
supply chain management to customer relationship management, performance
management and regulatory compliance.
Publicly traded on the NASDAQ under the symbol "ROSS" since 1991, our
global headquarters are based in the U.S. in Atlanta, Georgia, with sales
and support operations around the world.
Our internet address is www.rossinc.com. We make available free of
charge on or through our Internet website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act, in each case as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
Information provided on our website is not part of this quarterly
report on Form 10-Q.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
We license our products to customers through a direct sales force in
North America and Western Europe as well as independent distributors in
dozens of other markets worldwide. We also provide professional consulting
services for implementation, related custom application development and
education. We offer ongoing maintenance and support services for our
products via Internet and telephone help desks.
Merger Proposal
In early September 2003, we announced that we had entered into a
definitive agreement whereby chinadotcom Software (CDC) would acquire Ross
Systems in a merger. It is anticipated that the merger will be completed
early in December 2003, but in no event later than March 1, 2004. Both
companies are listed on NASDAQ. We have not yet determined to what extent
the proposed merger will affect our financial performance. However, we
believe that CDC's Asian operations offer greater opportunities for doing
business in that region, while at the same time we believe our operations
in North America and Europe will offer many new opportunities to CDC in our
markets. CDC is a licensed master distributor of our products in Greater
China and CDC and Ross believe the combination represents a unique
opportunity to rapidly scale the introduction of our manufacturing products
into Greater China. Both companies will be able to benefit from numerous
cross-selling opportunities as a result of the merger. In addition, we
believe we will have greater access to capital to pursue business
combinations with selected, strategic software and services companies. The
proposed merger is to be the subject of a shareholders' vote at our
forthcoming Annual Meeting.
Products
Ross offers the award-winning iRenaissance(TM) family of software
solutions which is an integrated suite of enterprise resource planning (ERP
II), financials, materials management, manufacturing and distribution,
supply chain management (SCM), advanced planning and scheduling, customer
relationship management (CRM), electronic commerce, business intelligence
and analytical applications.
iRenaissance applications are known for their deep and rich functional
fit to process industry requirements, as well as their short implementation
times and cost-effective returns on investment.
Technology
We leverage contemporary Internet technologies to enable significant
benefits for our customers. Many of our customers have benefited from
technology obsolescence protection as they have moved from older computing
technology to current technology by upgrading to new releases. Built on a
highly flexible technology platform, iRenaissance applications not only
cost-effectively support mid-size companies, but also scale effectively to
support large, global multi-lingual organizations with thousands of users
processing hundreds of thousands of transactions daily. Our 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 and data resides. End-user satisfaction is enhanced by
highly configurable and personalizable 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-based function profiles. The security facilities
further enable companies in their effort to achieve greater regulatory
greater compliance by providing detailed audit trails for every action
taken by every user.
Because our iRenaissance applications were developed with the GEMBASE
development environment, we believe that 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.
16
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Ongoing Development
To meet the increasingly sophisticated needs of our customers and
broaden our product offerings for targeted vertical markets, we continually
strive to enhance our existing product functionality. We survey our
customers through on-line, industry-specific discussion forums and polling
at our global user conferences, and incorporate many of their
recommendations into our products. We also conduct a variety of forms of
market research with industry analyst groups and targeted industry
associations to determine strategies for new features and entirely new
products for targeted vertical industries.
While maintaining focus on the requirements of targeted vertical
markets, we are expanding our potential geographic markets by developing
new product functionality to address the needs of additional prospective
customers in key international markets. These enhancements are related to
local languages and dialects, currency, accounting customs and procedures,
and regulatory requirements. As an example, through the partnership
established with CDC Software Corporation during the fourth quarter of
fiscal 2003, we are well advanced with preparations for releasing
additional local language versions of our software for the Chinese markets.
These enhancements enable the Company to leverage its iRenaissance ERP
products to capitalize on the growing and largely untapped process
manufacturing markets in China.
We are also committed to achieving technology advances by leveraging
new Internet-based capabilities enabled by XML and Web Services. During the
3rd quarter of fiscal 2003, we released the Internet Application Framework
(TM) which enables the iRenaissance ERP foundation with full Internet
deployment capabilities. Through the Internet Application Framework,
application users have full access to the iRenaissance ERP applications
from any computer with an Internet connection and the Microsoft Internet
Explorer browser. Because no iRenaissance ERP application software needs to
be deployed or maintained on user workstations, our customers have reported
significant savings resulting from the use of the Internet Application
Framework.
Third-Party Products
We resell complementary software products licensed from third parties,
including applications for custom reporting of information maintained by
our programs such as Business Objects for executive information, and FRx
for financial reporting and budgeting, as well as certain middle-ware
products. We resell other privately labeled software products licensed from
third parties including Prescient Systems (rebranded as iRenaissance SCM)
and Selligent (rebranded as iRenaissance CRM). Additionally, we have
entered into agreements which enable us to resell database products and
other products that are sublicensed to end users in conjunction with
certain of our open systems products. License revenues from the products
described in this paragraph constitute approximately 16% of total software
product license revenues in the first quarter of fiscal 2004.
Services
Our worldwide consulting services operation complements our enterprise
software sales organization by offering a broad selection of services to
plan, install and optimize each available software product. In addition we
offer customization services to develop unique custom features and
functions into our customers' business capabilities to help create
competitive advantages. These services fall into two broad categories:
Professional Services and Client Support. Income from these activities
consist of services and maintenance revenues which comprise approximately
30% and 45% of total revenues respectively.
Professional Services
Our Professional Services organization provides business application
experience, technical expertise and product knowledge to complement our
products and to provide solutions to clients' business requirements. The
major types of services provided include the following:
Application Consulting involves in-depth analysis of the client's
specific needs and the preparation of detailed plans that list step-by-step
actions and procedures necessary to achieve a timely and successful
implementation of our software products. These services are generally
offered on a time and expense reimbursement basis. Services are offered on
a worldwide basis and customization projects are often delivered locally
but developed in lower cost supply areas of the world.
17
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Technical Consulting involves evaluating and managing the client's
needs by supplying custom application systems, custom interfaces, data
conversions, and system conversions. Consultants participate in a wide
range of activities, including requirements definition, and software
design, development and implementation. We also provide advanced technology
services focused on networking, database administration and tuning. These
services are generally offered on a time and expense reimbursement basis.
We also provide remote systems management, and remote applications
management.
Education Services are offered to clients either at our education
facilities or at the client's location, as either standard or customized
classes.
Established relationships with third party consulting partners are
utilized in specific instances, to take advantage of specialized industry
expertise and to support our implementation demands.
Client Support
Our Client Support functions include web-based support, telephone
support, technical publications and product support guides, which are
provided under maintenance agreements. The annual maintenance fee for these
services is generally 20% of the price for the licensed software. The
standard maintenance agreement also entitles clients to certain new product
releases and product enhancements.
Marketing and Sales
We sell our products and services in the US and Western Europe
primarily through our direct sales force. In other areas of the world, we
sell our products through distributors. In support of our sales force and
distributors, we conduct comprehensive marketing programs which include
telemarketing, direct mailings, advertising, promotional material,
seminars, trade shows, public relations and on-going customer
communication.
We are based in Atlanta, Georgia, with a regional direct sales force
covering all major US business locations. We have subsidiaries in Belgium,
Canada, Germany; the Netherlands; Spain; United Kingdom as well as Hong
Kong.
We have distribution arrangements with distributors in the following
countries: Argentina, Australia, Brazil, Chile, China, Colombia, Czech
Republic, Denmark, Finland, Greece, Hong Kong, Hungary, Indonesia, Ireland,
Italy, Japan, Jordan, Latvia, Lebanon, Lithuania, Malaysia, Mexico,
Morocco, New Zealand, Norway, Pakistan, Peru, Poland, Portugal, Rumania,
Russia, Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa,
Sweden, Taiwan, Thailand, Ukraine, Uruguay and Venezuela. These
distributors pay us royalties on the sales of our products and maintenance
services.
Product Development and Acquisitions
To meet the increasingly sophisticated needs of its customers and
address potential new markets, we continually strive to enhance our
existing product functionality. We survey the needs of our customers
annually through ballots and direct discussions at our annual user
conferences, and incorporating many of their recommendations into our
products. We also conduct a variety of forms of market research with
industry analyst groups and targeted industries to determine strategies for
new features and functions. We are committed to achieving advances in the
use of computer systems technology and to expanding the breadth of our
product line.
Results of Operations
Revenues
Total revenues for the quarter ended September 30, 2003 of $11,749,000
increased 3% from $11,426,000 in the same quarter of fiscal 2003.
Software product license revenues were $2,961,000 during the quarter
ended September 30, 2003, a decrease of $772,000 or 21%, from the same
quarter in fiscal 2003. The decrease was uniformly spread across all the
markets we operate in. The majority of software license sales are usually
closed in the last month of the quarter. Early in September we announced
the proposed merger with chinadotcom. We believe that this announcement
caused several prospective customers to temporarily slow down their
decision making process while they included this new factor in their
evaluations. As a consequence, some sales in the pipeline were not closed
within the first quarter time frame.
18
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Consulting and other services revenues for the first quarter of fiscal
2004 increased 18% to $3,556,000 from $3,025,000 in the same quarter of
fiscal 2003. 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 on a delayed tracking basis according
to fluctuations in software product revenue. For the quarter ended
September 30, 2003, North American services revenues increased 31% at
$2,434,000 compared to $1,859,000 over the same quarter in the prior fiscal
year. This primarily reflects new services work arising from the growth in
software sales over the last fiscal year. International services revenues
increased by $200,000, or 22% over the same quarter in
the prior year, but the increase is due to the foreign exchange effect of
the stronger European currencies and the weaker US dollar in comparison to
the first quarter of fiscal 2003. In local currencies, international
services revenues are almost unchanged between the first quarters of fiscal
2003 and fiscal 2004.
Maintenance revenues increased by $309,000 or 6% in the first quarter
of fiscal 2004 versus the same quarter in the prior year. This is
attributable mainly to new maintenance contracts added during the prior
year. This is true for both North America and international maintenance
revenues. Because of the importance of maintenance revenues to the
stability and growth potential of any software company, this improving
trend is significant, and is indicative of the strengthening of our
customer installed base. Maintenance contracts sold by third party
distributors are included in software product license revenues because we
do not support the maintenance obligations of any of our distributors'
customers.
International revenues as a percentage of total revenues for the first
quarter of fiscal 2004 decreased to 37% from 38% for the same quarter in
fiscal 2003. International revenues marginally decreased by 1% over the
same quarter in the prior year. In local currencies, the decrease is
approximately 16%, but this is masked by the strengthening of the Pound and
the Euro against the US dollar. The decrease in first quarter revenues
internationally consists mainly of the lower software license sales as
mentioned above.
North American revenues comprised 63% of the first quarter 2004 total
revenues, up from 62% in the same quarter of the prior year. North American
revenues increased 4% over the same quarter of the previous fiscal year.
This increase was due to improving services and maintenance revenues
offset by declining software license revenues for the quarter.
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. Major third party products we sell include various database products
and other optional software including reporting and productivity tools.
Costs of software product licenses for the first quarter of fiscal 2004
decreased by 1% to $344,000 from $346,000 in the first quarter of fiscal
2003. As a percentage of software product license revenue, the costs of
software product licenses increased to 12% first quarter of fiscal 2004
compared to 9% in the same quarter of fiscal 2003. The increase in costs
for software product licenses for the quarter was primarily due to an
increase in the proportional mix of third party products in total software
sales sold in the first quarter of fiscal 2004 compared to the first
quarter of the prior fiscal year.
Costs of consulting 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. We
also use outside consultants to supplement our personnel resources in
order to meet peak customer consulting demands.
Costs of consulting and other services increased by 14% to $4,999,000
in the first quarter of fiscal 2004, as compared to $4,401,000 in the first
quarter of fiscal 2003. The increase in these costs for the quarter
reflects the higher levels of activity. We have improved utilization rates
19
ROSS SYSTEMS, INC. AND SUBSIDIARIES
and increased services headcount to meet increasing demand for services. In
addition, we have used third party subcontracted resources to supplement
our consulting capacity when required.
Sales and marketing expenses of $2,690,000 for the quarter ended
September 30, 2003 reflected an increase of 11% when compared to $2,422,000
in the first quarter of fiscal 2003. This increase is primarily due to the
increased headcount in our corporate marketing department. Certain key
positions which were open in the first quarter of fiscal 2003, are now
filled.
Product development (research and development) expenses of $ 2,125,000
in the first quarter of fiscal 2004 were up from $1,801,000 in the same
quarter of the prior year. The following table summarizes product
development expenditures (in thousands):
Three months ended
--------------------
September 30,
2003 2002
-------- ---------
Gross Expenditures for Product Development............. $ 1,715 $ 1,775
Less: Expenses capitalized............................. (841) (1,160)
Plus: Amortization of previously capitalized amounts... 1,251 1,186
-------- ---------
Total Product Development Expenses..................... $ 2,125 $ 1,801
-------- ---------
As a percentage of total revenues, product development expenses for
the three-month period ended September 30, 2003 increased to 18% from 16%
in the same period of the prior year. Product development expenditures
increased by 18% to $2,125,000 in the quarter ended September 30, 2003 from
$1,801,000 in the same quarter in the prior year. This increase was due
mainly to lower capitalization of software development costs in the fiscal
2004 quarter. During the three months ended September 30, 2003, certain new
projects were in the startup phase of establishing technological
feasibility. Being prior to technological feasibility, the cost of
man-hours on these projects was expensed and not capitalized. In future
periods we expect development of new products and enhancements to existing
products to continue at historical levels.
General and administrative expenses for the quarter ended September
30, 2003 decreased by 18%, to $1,118,000 from $1,361,000 in the same
quarter of the prior year. Due to lower legal costs, expenses were
significantly lower in the fiscal 2004 quarter and this factor, combined
with minor savings in several other expense categories resulted in the
decrease in general and administrative expenses.
In the quarter ended September 30, 2003, we had a provision for
doubtful accounts of $135,000 as compared to $272,000 recorded in the first
quarter of fiscal 2003. The lower provision is as a result of adequate bad
debt reserves and an improvement in the quality of accounts receivable. We
focus on seeking to fully satisfy all our customers and on keeping the
collections process efficient, and this has resulted in lower bad debt
experience. The first quarter 2004 and 2003 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.
Proposed Merger Transaction Costs
Pursuant to the proposed merger with chinadotcom, significant legal
and other professional costs amounting to $758,000 have been incurred in
the three months ended September 2003. We expect to incur additional legal
and professional fees during the second quarter, however it is expected
that these fees will not exceed a cumulative total of approximately
$1,000,000.
Other Income (Expense), Net
Other net income for the quarter ended September 30, 2003 was $15,000
compared to an expense of $94,000 in the same quarter of fiscal 2003. These
amounts primarily consisted of interest expense related to borrowings under
our existing line of credit facility, and the reduction
20
ROSS SYSTEMS, INC. AND SUBSIDIARIES
reflects the lower levels of our indebtedness. In addition, certain cash
transactions in the first quarter 2004, yielded minor currency gains that
offset the small amount of interest expense incurred.
Income Tax Expense
During the first quarter of fiscal 2004, we recorded an income tax
expense of $78,000 compared to $90,000 recorded during the same quarter in
fiscal 2003. The tax expense relates primarily to withholding taxes in
certain foreign jurisdictions where we had either no available net
operating loss carryfowards or had to pay treaty-based taxes.
Liquidity and Capital Resources
In the first three months of fiscal 2004, net cash used in operating
activities increased $2,703,000 compared to the increase of $3,033,000 in
net cash provided by operating activities for the same period of the prior
year. The decrease in cash provided by operating activities is mainly due
to the increase in cash used of $1,122,000 caused by the swing from a net
income of $639,000 in the first quarter of fiscal 2003, to a net loss of
$483,000 for the first quarter of fiscal 2004. In addition, there was an
aggregate increase of cash used of $1,290,000 in deferred revenues, accrued
expenses, accounts payable and income taxes payable. The net loss in the
first quarter of fiscal 2004 was adversely affected by merger transaction
costs of $758,000. Accounts payable and accrued expenses increased the use
of cash by an aggregate $817,000 reflecting faster payment of vendors and
accrued liabilities in fiscal 2004 when compared to the same quarter of
fiscal 2003.
In the first three months of fiscal 2004, we utilized $980,000 for
investing activities versus $1,349,000 over the same period of the prior
year, a decrease of $369,000. Investment in property and equipment was down
$66,000 to $139,000 in the first three months of fiscal 2004, from $205,000
in same period in the prior year. Investments in capitalized computer
software costs decreased by $319,000 in the first quarter of fiscal 2004 as
compared to the same period in the prior year. The lower investment in
capitalized software for the current quarter reflected the lower amount of
capitalizable costs incurred in the fiscal 2004 quarter.
Net cash flows provided by financing activities increased by
$2,486,000 for the three months ended September 30, 2003, versus the same
three month period of the prior fiscal year. Cash increased during the
three months ended September 30, 2003 by drawing an additional $1,711,000
on our lines of credit, a net $2,471,000 increase compared to the net
repayments of $760,000 in the same quarter of the prior year. Proceeds from
the issue of shares to employees under the Employee Stock Purchase Plan,
and the exercise of options by employees, amounted to $122,000 in the
quarter ended September 30, 2003, an increase of $15,000 over the same
quarter in the prior year.
At September 30, 2003 we had $7,935,000 of cash and cash equivalents.
We have a revolving credit facility with an asset-based lender. This
facility, with a maturity date of September 23, 2004, incorporates a
maximum credit line of $5,000,000, and an interest rate of prime plus 2%
(approximately 6.75% at September 30, 2003). Borrowings under the credit
facility are collateralized by substantially all assets of the Company. At
September 30, 2003, we had approximately $3,491,000 outstanding against the
$5,000,000 revolving credit facility, and based on the eligible accounts
receivable at September 30, 2003, our cash plus our remaining borrowing
capacity under the revolving credit facility totaled approximately
$9,411,000. This represents an increase in total availability of cash at
September 30, 2003 of $4,811,000 from September 30, 2002.
Risk Factors
Proposed merger: We have announced plans to enter into a merger as
discussed note 9 of the financial statements attached to this quarterly
report on Form 10-Q. On September 4, we announced our recommendation to our
shareholders that they vote in favor of a plan of merger between Ross and
the Software division of chinadotcom Corporation. In preparing for the
merger, we expect to incur significant additional time and expense and
potential customers may defer purchasing decisions until they understand
the form of and reasons for the merger. The combined effect of these
actions could have an adverse effect on our business model and our results
of financial operations if the merger is not consummated.
License revenues: Our software product license revenues can fluctuate
depending upon such factors as overall trends in the United States and
International economies, new product introductions, as well as customer
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
buying patterns. Because we typically ship software products within a short
period after orders are received, and we therefore maintain a relatively
small backlog, any weakening in customer demand could have an almost
immediate adverse impact on revenues and operating results. Moreover, a
substantial portion of the revenues for each quarter is attributable to a
limited number of sales, and tends to be realized in the latter part of the
quarter. Thus, even short delays or deferrals of sales near the end of a
quarter can cause substantial fluctuations in quarterly revenues and
operating results. Finally, certain agreements signed during a quarter may
not meet our revenue recognition criteria resulting in deferral of such
revenue to future periods. Because our operating expenses are based on
anticipated revenue levels and a high percentage of our expenses are
relatively fixed, a small variation in the timing of the recognition of
specific revenues can cause significant variation in operating results from
quarter to quarter.
Economic slowdown: Our business may be adversely impacted by the
worldwide economic slowdown and related uncertainties. Weak economic
conditions worldwide have contributed to the current technology industry
slow-down. This may impact our business resulting in reduced demand and
increased price competition, which may result in higher overhead costs, as
a percentage of revenues. Additionally, this uncertainty may make it
difficult for our customers to forecast future business activities. This
could create challenges to our ability to profitably grow our business. If
the economic or market conditions further deteriorate, this could have a
material adverse impact on the results of operations and cash flow.
Competition: We may face increased competition, and our financial
performance and future growth depend upon sustaining a leadership position
in our product functionality. Competitive challenges faced by Ross are
likely to arise from a number of factors, including: industry volatility
resulting from rapid development and maturation of technologies; industry
consolidation and increasing price competition in the face of worsening
economic conditions. Although there are fewer competitors in our target
markets than previously, failure to compete successfully against those
remaining could harm our business operating results and financial
condition.
Stock price: Our stock price, like that of other technology companies,
is subject to volatility because of factors such as announcement of new
products, and services, or technological innovations introduced by us or by
our competitors, quarterly variations in our operating results, and
speculation in the press or investment community. In addition our stock
price is affected by general economic and market conditions and may be
negatively affected by unfavorable global economic conditions. In addition,
the proposed merger has affected our stock price, and the final outcome of
that event may negatively affect the stock price in the future, should it
not be consummated.
Intellectual property: Our business may be damaged if it cannot
protect our intellectual property. We generally rely upon copyright,
trademark and trade secret laws and contract rights in the United States
and in other countries to establish and maintain proprietary rights in our
technology and products. However, there can be no assurance that any of our
proprietary rights will not be challenged, invalidated or circumvented. In
addition, the laws of certain countries do not protect proprietary rights
to the same extent as do the laws of the United States. Therefore, there
can be no assurance that we will be able to adequately protect our
proprietary technology against unauthorized third-party copying or use,
which could adversely affect our competitive position. Further, there can
be no assurance that we will be able to obtain licenses to any technology
that may be required to conduct our business or that, if obtainable, such
technology could be licensed at a reasonable cost.
Key Personnel: Our success depends upon retaining and recruiting
highly qualified employees and management personnel. However, difficulties
may be faced in attracting and retaining such employees. Although staff
turnover is historically low, and the labor market is soft, if our ability
to maintain a stable workforce is significantly handicapped, our ability to
compete may be adversely affected.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The 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 by, and the
trading price of our common stock could decline due to any of these risks.
You should also refer to the other information included in this quarterly
report on Form 10-Q and our financial statements and
the related notes included or incorporated by reference into our annual
report on Form 10-K which we have filed with the SEC.
Foreign Exchange: We have a world-wide presence and as such maintain
offices and derive revenues from sources overseas. For the first quarter of
fiscal 2004, international revenues as a percentage of total revenues were
approximately 37%. Our international business is subject to typical risks
of an international business, including, but not limited to: differing
economic conditions, changes in political climates, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, our future results could be materially adversely
impacted by changes in these or other factors. The effect of foreign
exchange rate fluctuations on our results in the first three months of
fiscal 2004 was not material. During the first quarter of fiscal 2004, our
European business units operated at almost break-even, yielding a combined
net earnings of approximately $95,000, Revenues and expenses were converted
using the same foreign exchange rate for the period, therefore because
revenues and expenses were almost equivalent in the fiscal 2004 quarter,
the effect of foreign exchange rate fluctuations on our results was not
material.
Interest Rates: Our exposure to interest rates relates primarily to
our cash equivalents and certain debt obligations. The Company invests in
financial instruments with original maturities of three months or less. Any
interest earned on these investments is recorded as interest income on our
statement of operations. Because of the short maturity of our investments,
a near-term change in interest rates would not materially affect our
financial position, results of operations, or cash flows. Certain of our
debt obligations include a variable rate of interest. We did not engage in
any derivative/hedging transactions in the first quarter of fiscal 2004.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
Item 4.Controls and Procedures
Part I
As of September 30, 2003, the Company carried out an evaluation, under
the supervision and with the participation of the Company's management,
including the Chief Executive Officer ("CEO") and the Chief Financial
Officer ("CFO") of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's CEO and CFO 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
disclosure controls or in other factors that could significantly affect
these disclosure controls subsequent to the completion of their evaluation.
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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.
2.1 Asset Sale Agreement between Registrant and Now Solutions LLC dated
March 5, 2001 (2)
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 (8)
4.1 Certificate of Designation of Rights, Preferences and Privileges of
Series B Preferred Stock of the Registrant (1)
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 (8)
10.2A Series A Convertible Preferred Stock Agreement dated 29 June, 2001
between Registrant and Benjamin W. Griffith III (6)
10.3 Employment Agreement, dated as of January 7, 1999, modified March
24,2003, between Mr. Patrick Tinley and the Registrant (4)
10.4 Employment Agreement, dated as of September 17, 1999, modified March
24, 2003, between Mr. Robert Webster and the Registrant (5) 10.5
Amendment to the Registration Statement on Form 8-A originally filed on
October 3, 2001 (9)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 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.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
(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-Q filed May 17, 1999.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-K filed September 28, 1999.
(6) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-K filed September 27, 2001.
(7) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A/A filed October 3, 2001.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 10-K/A filed October 2, 2002.
(9) Incorporated by reference to the exhibit filed with the Registrant's
Current Report on Form 8-A/A filed September 4, 2003.
(b) Reports on Form 8-K
o On September 5, 2003 Ross Systems filed a Current Report on form
8-K reporting that the Company had entered into an Agreement and
Plan of Merger with chinadotcom corporation.
o On September 10, 2003 Ross Systems filed an amendment to the
Current Report on Form 8-K filed September 5, 2003 including the
two exhibits 99.1 and 99.2 which had been inadvertently omitted
from the original filing.
o On October 14, 2003 Ross Systems filed a Current Report on Form
8-K reporting that the Company and chinadotcom had entered into
an amendment to the Agreement and Plan of Merger which removed
the obligations of the Parties to use their reasonable best
efforts to cause the Merger to qualify as a tax-free
reorganization.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ROSS SYSTEMS, INC.
Date: November 3, 2003 /s/ Verome M. Johnston
-------------------------------
Verome M. Johnston
Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer and
Duly Authorized Officer)
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