UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-12
Ross Systems, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-101349
(chinadotcom logo) (ross systems logo)
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Ross Systems, Inc., which will be held at Ross' executive offices located at Two
Concourse Parkway, Suite 800, Conference Room, Atlanta, Georgia on August 25,
2004, at 10:00 a.m. local time.
At the meeting, Ross will ask you to vote on a proposal to adopt and
approve a merger agreement that Ross has entered into with chinadotcom
corporation, and the related merger. In the merger, a wholly owned subsidiary of
chinadotcom will be merged with and into Ross. As a result, chinadotcom will
acquire Ross.
Pursuant to the merger agreement, if the merger is consummated, each share
of Ross common stock you hold will be converted into the right to receive, at
your election as described in this proxy statement/prospectus, either $17.00 in
cash, or $19.00 in cash and chinadotcom common shares. If you elect cash and
shares, you will receive $5.00 in cash and the number of chinadotcom common
shares equal to $14.00 divided by the average closing price of chinadotcom
common shares on the Nasdaq National Market for the 10 trading days ending on,
and including, the second trading day before the closing date. However, if this
average price of chinadotcom shares is below $8.50, chinadotcom can elect to
increase the amount of cash that you will receive and decrease the number of
chinadotcom shares. In this case, you would still receive $19.00 in a
combination of cash and shares, but would receive more than $5.00 in cash and
less than $14.00 in shares.
The receipt of the merger consideration will be taxable to Ross
stockholders.
Ross estimates that chinadotcom will issue a maximum of approximately 5.4
million chinadotcom common shares in the merger and reserve an additional
approximately 1.1 million chinadotcom common shares for future issuances in
connection with chinadotcom's assumption of Ross' outstanding options and
warrants.
chinadotcom's common shares are traded on the Nasdaq National Market under
the symbol "CHINA." chinadotcom has agreed to use its reasonable best efforts to
list the chinadotcom common shares issued in the merger on the Nasdaq National
Market. On September 3, 2003, the last trading day before the announcement of
the merger, the closing price of the chinadotcom common shares was $9.82. The
closing price of the chinadotcom shares on July 13, 2004 was $6.33.
The merger cannot be completed unless a majority of all shares of Ross
common stock and preferred stock outstanding and entitled to vote are voted in
favor of the proposal to approve and adopt the merger agreement and the merger.
After careful consideration, Ross' board of directors has unanimously
approved the merger agreement and the merger, and has determined that the merger
agreement is advisable and that the merger agreement and the merger are fair to
and in the best interests of Ross and its stockholders. The Ross board of
directors recommends that you vote FOR the proposal to approve and adopt the
merger agreement and the merger, and FOR the proposal relating to adjournment of
the special meeting, if necessary, to solicit additional proxies.
The obligations of chinadotcom and Ross to complete the merger are subject
to the satisfaction or waiver of several conditions. More information about
chinadotcom, Ross and the merger is contained in and incorporated by reference
into this proxy statement/prospectus, the accompanying annual report on Form
10-K/A and quarterly report on Form 10-Q of Ross.
ROSS ENCOURAGES YOU TO READ THIS ENTIRE PROXY STATEMENT/PROSPECTUS
CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS," BEGINNING ON PAGE 24.
Your vote is very important. Because the merger proposal requires the
affirmative vote of the holders of at least a majority of the outstanding shares
of Ross common and preferred stock, a failure to vote will have the same effect
as a vote against the merger proposal. Whether or not you expect to vote in
person at the special meeting, please complete, sign and date the enclosed proxy
card and return it in the enclosed envelope as soon as possible. You may also
grant your proxy by telephone or on the Internet if so indicated on the enclosed
proxy card. Giving your proxy now will not affect your right to vote in person
if you wish to attend the meeting and vote personally.
Sincerely,
J. Patrick Tinley
Chairman and CEO
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE CHINADOTCOM SECURITIES TO BE ISSUED
IN THE MERGER, OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT/PROSPECTUS IS DATED JULY 21, 2004, AND IS FIRST BEING
MAILED TO ROSS STOCKHOLDERS ON OR ABOUT JULY 21, 2004.
NOTICE CONCERNING INCORPORATED INFORMATION
This proxy statement/prospectus incorporates important business and
financial information about chinadotcom and Ross that is not included in or
delivered with this document. If you are a stockholder of Ross you can obtain
any of the documents incorporated by reference, including any amendments
thereto, from chinadotcom or Ross, as the case may be, or through the Securities
and Exchange Commission or its Web site. The address of that site is
http://www.sec.gov. Documents incorporated by reference, including any
amendments thereto, are available from the companies, without charge, excluding
all exhibits unless specifically incorporated by reference into the document.
Ross stockholders may obtain documents incorporated by reference in this
document, including any amendments thereto, by requesting them in writing or by
telephone from the appropriate company at the following addresses:
chinadotcom corporation Ross Systems, Inc.
34/F Citicorp Centre 2 Concourse Parkway
18 Whitfield Road Suite 800
Causeway Bay Atlanta, Georgia 30328
Hong Kong (770) 351-9600
(852) 2893-8200 Attention: Investor Relations
Attention: Investor Relations
If you would like to request documents, in order to ensure timely delivery
you must do so at least five business days before the date of the Ross special
meeting. This means you must request this information no later than August 18,
2004.
(ross systems logo)
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 25, 2004
To the Stockholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Ross
Systems, Inc., a Delaware corporation, will be held on Wednesday, August 25,
2004 at 10:00 a.m., local time, at Ross' executive offices located at Two
Concourse Parkway, Suite 800, Conference Room, Atlanta, Georgia 30328, for the
following purposes:
1. To vote on a proposal to adopt and approve a merger agreement, as
amended, that Ross has entered into with chinadotcom and the related
merger, more fully described in the accompanying proxy
statement/prospectus, as a result of which Ross will be acquired by
chinadotcom.
2. To vote on a proposal to authorize the adjournment of the special
meeting, if necessary, to solicit additional proxies.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The foregoing items of business are more fully described in the proxy
statement/prospectus accompanying this Notice.
Only stockholders of record at the close of business on July 13, 2004, are
entitled to notice of, and to vote at, the meeting. A list of stockholders will
be available for inspection by stockholders of record during business hours at
Ross' executive offices, Two Concourse Parkway, Suite 800, Atlanta, Georgia, for
10 days prior to the date of the meeting and will also be available at the
meeting.
FOR THE BOARD OF DIRECTORS
J. Patrick Tinley
Chairman of the Board
Atlanta, Georgia
July 21, 2004
TABLE OF CONTENTS
QUESTIONS & ANSWERS ABOUT THE MERGER PROPOSAL............... iii
SUMMARY..................................................... 1
The Companies............................................. 1
The Ross Special Meeting.................................. 2
Purposes of the Ross Special Meeting................... 2
Record Date; Voting; Quorum............................ 3
Required Vote.......................................... 3
Voting Agreements...................................... 3
The Merger and the Merger Agreement....................... 3
What Ross Stockholders Will Receive in the Merger...... 4
Risk Factors........................................... 4
Recommendation of the Ross Board of Directors.......... 4
Opinion of Financial Advisor........................... 4
Interests of Ross Directors and Officers in the
Merger................................................ 4
Conditions to Completion of the Merger................. 5
Prohibition on Ross Soliciting Other Offers............ 5
Termination of the Merger Agreement.................... 5
Termination Fee and Expenses........................... 6
Regulatory Approvals Required.......................... 6
Accounting Treatment................................... 6
Material U.S. Federal Income Tax Consequences.......... 6
Appraisal Rights....................................... 6
chinadotcom Common Shares Issued in the Merger Will Be
Listed on the Nasdaq National Market.................. 7
Market Price and Dividend Information..................... 7
Comparative Per Share Information......................... 7
Comparative Stock Prices and Dividends.................... 9
Ross Selected Historical Consolidated Financial Data...... 11
chinadotcom Selected Historical Consolidated Financial
Data................................................... 13
chinadotcom Unaudited Pro Forma Consolidated Financial
Data................................................... 16
Recent Significant Acquisitions and Partnerships by
chinadotcom............................................ 19
chinadotcom's Acquisition of Pivotal Corporation.......... 22
Proposed Initial Public Offering of chinadotcom's Mobile
Application Business................................... 23
RISK FACTORS................................................ 24
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS... 73
THE ROSS SPECIAL MEETING.................................... 74
PROPOSAL NO. 1 -- THE MERGER................................ 78
Background of the Merger.................................. 78
chinadotcom's Reasons for the Merger...................... 87
Ross' Reasons for the Merger.............................. 88
Recommendation of Ross' Board of Directors................ 90
Opinion of Financial Advisor to Ross' Board of
Directors.............................................. 90
Interests of Ross Directors and Officers in the Merger.... 99
Form of Merger............................................ 103
Effective Time of the Merger.............................. 103
Procedures for Exchange of Certificates................... 103
Listing of chinadotcom Common Shares...................... 104
Delisting and Deregistration of Ross Common Stock.................................................. 104
Regulatory Approvals Required for the Merger....................................................... 104
Accounting Treatment............................................................................... 104
Restrictions on Sales of chinadotcom Common Shares Received in the Merger.......................... 104
Certificate of Incorporation; Bylaws of Surviving Corporation...................................... 105
Appraisal Rights................................................................................... 105
THE MERGER AGREEMENT................................................................................. 106
AGREEMENTS RELATED TO THE MERGER..................................................................... 121
PROPOSAL NO. 2 -- POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING........................................ 123
THE COMPANIES........................................................................................ 124
DIRECTORS AND MANAGEMENT OF THE COMBINED COMPANY..................................................... 138
DESCRIPTION OF CHINADOTCOM SHARE CAPITAL............................................................. 139
COMPARISON OF RIGHTS OF CHINADOTCOM SHAREHOLDERS AND ROSS STOCKHOLDERS............................... 141
APPRAISAL RIGHTS..................................................................................... 151
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES........................................................ 154
LEGAL MATTERS........................................................................................ 159
EXPERTS.............................................................................................. 159
OTHER MATTERS........................................................................................ 160
WHERE YOU CAN FIND MORE INFORMATION.................................................................. 160
CHINADOTCOM UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA.......................................... 163
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS............ 186
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES COMBINED CONSOLIDATED FINANCIAL
STATEMENTS......................................................................................... 218
Annex A Merger Agreement and Amendments to the Merger Agreement
Annex B Form of Ross Common Stockholders Agreement
Annex C Ross Preferred Stockholder Agreement and Amendments to Ross Preferred Stockholder Agreement
Annex D Fairness Opinion Delivered to Ross
Annex E Delaware General Corporation Law, Section 262
Annex F Form of Ross Proxy Card
ii
QUESTIONS AND ANSWERS ABOUT THE MERGER PROPOSAL
Q: WHY ARE CHINADOTCOM AND ROSS PROPOSING TO MERGE?
A: chinadotcom and Ross believe that the merger will provide strategic and
financial benefits to the stockholders of both companies. The boards of
directors of both companies believe that the merger has the potential to
facilitate Ross' expansion into Asian and other markets where chinadotcom
has a presence and to provide Ross with economies of scale in its software
development process, as well as additional capital with which Ross may
expand its business. In addition, cost reductions and operating
efficiencies may be realized by Ross as a result of outsourcing certain
software development activities to other companies in the chinadotcom
group, which, if realized, would improve Ross' competitive position.
Q: WHAT WILL HAPPEN IN THE MERGER?
A: The businesses of chinadotcom and Ross will be combined. At the closing,
CDC Software Holdings, Inc., a newly formed, wholly owned subsidiary of
chinadotcom, will merge with and into Ross. Ross will survive the merger
and after the merger will be a wholly owned subsidiary of chinadotcom.
Q: WHAT WILL ROSS STOCKHOLDERS RECEIVE IN THE MERGER?
A: In the merger, for each share of Ross common stock you hold, you will
receive the right to receive, at your election as described in this proxy
statement/ prospectus, cash in the amount of $17.00, or a combination of
cash and chinadotcom common shares with a combined value of $19.00 on the
closing date of the merger. The number of chinadotcom common shares you
receive will be determined by dividing $14.00 by the average closing price
for chinadotcom common shares on the Nasdaq National Market during the ten
trading days ending on, and including, the second trading day before the
closing date of the merger and the amount of cash you will receive is
$5.00. However, if the average price of chinadotcom shares is below $8.50,
chinadotcom can elect to increase the amount of cash that you will receive
and decrease the number of chinadotcom shares. In this case, you would
still receive $19.00 in a combination of cash and shares, but would receive
more than $5.00 in cash and less than $14.00 in shares. Each Ross
stockholder who makes no election or who was not a holder on the record
date will be deemed to have elected to receive a combination of cash and
shares. In this proxy statement/prospectus, we refer to the fraction of a
share of chinadotcom common shares to be issued for each share of Ross
common stock, assuming an election to receive the stock consideration is
made for that share, as the exchange ratio.
Q: HOW DO I MAKE AN ELECTION TO RECEIVE EITHER CASH OR A COMBINATION OF CASH
AND CHINADOTCOM SHARES?
A: If your shares of Ross common stock are registered in your own name,
complete and sign the form of election which will be mailed to you
separately, and send it to Mellon Investment Services LLC, the exchange
agent for the merger, at one of its addresses indicated on the form of
election, together with the stock certificates representing the shares for
which you made an election, properly endorsed for transfer (or if those
shares are held in book-entry form, the documents specified on the form of
election), and indicate on the form whether you are electing to receive
cash or a combination of cash and chinadotcom shares. If the merger
agreement and merger is not approved, your stock certificates will be
returned to you.
If your shares of Ross common stock are held in "street name" by your
broker, bank or other nominee, you must follow the instructions your
broker, bank or other nominee provides.
iii
Q: IS THERE A DEADLINE FOR MAKING AN ELECTION?
A: Yes. Your form of election must be received by the exchange agent not later
than 5:00 p.m., New York City time, on the business day immediately before
the closing of the merger. We anticipate that the merger will close on or
about August 30, 2004. Assuming that the merger closes on that date, the
deadline for the exchange agent's receipt of your form of election will be
August 29, 2004. If you make no election you will be deemed to have elected
to receive cash and shares.
Q: IF THE MERGER IS COMPLETED, WHAT PERCENTAGE OF THE COMBINED COMPANY WILL
ROSS STOCKHOLDERS OWN?
A: If the merger is completed with each Ross stockholder electing to receive
for each share of Ross stock, a combination of cash and chinadotcom common
shares, and assuming a chinadotcom share price of $8.50, holders of Ross'
outstanding stock and options will own approximately 5% of the combined
company on a fully-converted basis, and the holders of chinadotcom's
outstanding shares and options will retain ownership of approximately 95%
of the combined company. The foregoing percentages are subject to change if
chinadotcom elects to adjust the exchange ratio, or not all Ross
stockholders elect to receive a combination of cash and shares in the
merger. chinadotcom may elect to adjust the exchange ratio if the ten-day
average closing price for chinadotcom common shares is less than $8.50. In
addition, chinadotcom is required to adjust the exchange ratio if the
number of chinadotcom common shares that would otherwise be issuable in the
merger would require approval of chinadotcom common shareholders.
In February 2004, chinadotcom acquired Pivotal Corporation, or Pivotal, for
total consideration of $58.0 million which included $35.9 million in cash,
1.85 million chinadotcom common shares with a value of $21.4 million based
on the trading price of chinadotcom the day the acquisition became
effective (the value for these shares was $20.7 million based on the
ten-day trading average used in the purchase price formula), transaction
costs of approximately $0.2 million, and assumption by chinadotcom of
Pivotal stock options valued at approximately $0.5 million. The issuance of
chinadotcom common shares resulted in approximately a 2% increase in the
number chinadotcom's common shares outstanding to approximately 104
million. For a more detailed discussion of the terms of chinadotcom's
acquisition of Pivotal, please see the section entitled "chinadotcom's
Acquisition of Pivotal Corporation" on page 22. For a more detailed
discussion of adjustments to the exchange ratio, please see the section
entitled "The Merger Agreement -- Merger Consideration" on page 106.
Q: WHAT IF I OWN ROSS STOCK OPTIONS?
A: Ross employee stock options with an exercise price greater than $19.00 that
are already vested can be exercised any time up until the closing, when
they will expire. However, if at the time of exercise Ross common stock is
trading at $19.00 or less, these options would be "out-of-the-money," and
would have no value.
Ross employee stock options, whether vested or unvested, with an exercise
price of $19.00 or less will be replaced with options to purchase
chinadotcom common shares. Each Ross stock option will be converted into an
option to acquire a number of chinadotcom common shares based on a
conversion ratio. For a more detailed discussion regarding the conversion
of Ross stock options into options to acquire chinadotcom common shares,
please see the section entitled "The Merger Agreement -- Treatment of Ross
Stock Options" on page 107.
Q: WHEN AND WHERE IS THE ROSS STOCKHOLDER MEETING?
A: The Ross special meeting will take place on Wednesday, August 25, 2004 at
10:00 a.m., local time, at Ross' executive offices located at Two Concourse
Parkway, Suite 800, Conference Room, Atlanta, Georgia 30328.
iv
Q: WHAT AM I BEING ASKED TO VOTE ON AT THE STOCKHOLDER MEETING?
A: You are being asked to:
- vote on a proposal to adopt and approve a merger agreement that Ross has
entered into with chinadotcom, and the related merger, pursuant to which
CDC Software Holdings, a wholly owned subsidiary of chinadotcom, will be
merged with and into Ross and, as a result of which, chinadotcom will
acquire Ross; and
- vote to authorize the adjournment of the special meeting, if necessary,
to solicit additional proxies.
The board of directors of Ross unanimously recommends that the Ross
stockholders vote:
- "FOR" the proposal to adopt and approve the merger agreement and the
merger; and
- "FOR" the proposal to authorize the adjournment of the meeting, if
necessary, to solicit additional proxies.
Q: WHAT VOTE OF ROSS STOCKHOLDERS IS REQUIRED TO APPROVE THE PROPOSALS AT THE
SPECIAL MEETING?
A: Holders of Ross' 7.5% Series A Convertible Preferred Stock vote together as
a single class with the Ross common stock and have one vote per share.
The affirmative vote of the holders of record of at least a majority of the
Ross common stock and preferred stock, voting together as a single class,
present and entitled to vote at the Ross special meeting is required to
authorize adjournment of the special meeting, if necessary, to solicit
additional proxies.
Adoption and approval of the merger agreement and the merger requires the
affirmative vote of the holders of a majority of the outstanding shares of
Ross common stock and preferred stock, voting together as a single class.
Q: WHAT DO I DO NOW?
A: Carefully read and consider the information contained in this proxy
statement/prospectus, including its annexes. In order for your shares to be
represented at the special meeting, (1) you can attend the meeting in
person, (2) you can, if so indicated on your proxy card, vote by telephone
or electronically through the Internet by following the instructions
included on your proxy card, or (3) you can indicate on the enclosed proxy
card how you would like to vote and return the proxy card in the
accompanying pre-addressed postage paid envelope. If you are a holder of
record and you give Ross a signed proxy without giving specific voting
instructions, your Ross shares will be voted in favor of the proposals.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Not necessarily. If you hold your shares in a stock brokerage account or if
your shares are held by a bank or nominee (i.e., in "street name"), the
record holder of your shares can vote your shares only if you provide
instructions on how to vote your shares. Please refer to the voting
instruction card used by your broker nominee to see if you may submit
voting instructions by telephone or the internet. You cannot vote shares
held in "street name" by returning a proxy card directly to Ross or by
voting in person at the special meeting.
Q: CAN I CHANGE MY VOTE EVEN AFTER RETURNING A PROXY CARD?
A: Yes. You can change your vote at any time before your proxy is voted at the
stockholder meeting. You can do this in one of three ways: (1) you can send
a signed notice of revocation; (2) you can grant a new, valid proxy; or (3)
if you are a holder of record, you can attend your stockholder meeting and
vote in person; however, your attendance alone will not revoke your proxy.
If you choose either of the first two methods, you must submit your notice
of revocation or your new proxy to the Ross corporate secretary before the
stockholder meeting.
v
If your shares are held in "street name" by your broker, you should contact
your broker to change your vote.
Q: WHAT WILL HAPPEN IF I DO NOT RETURN A PROXY CARD OR VOTE AT THE MEETING?
A: This will have the same effect as voting against the proposal to approve
and adopt the merger agreement and the merger, and will have no effect on
the other proposals.
Q: SHOULD I SEND IN MY ROSS STOCK CERTIFICATES NOW?
A: No. chinadotcom's exchange agent will send to Ross stockholders a letter of
transmittal explaining what you must do to exchange your Ross stock
certificates for the merger consideration payable to you.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: chinadotcom and Ross are working to complete the merger during the third
calendar quarter of 2004. Completion of the merger is subject to conditions
specified in the merger agreement, including regulatory approvals and
approval and adoption by the Ross stockholders of the merger agreement and
the merger. The merger will be completed as soon as practicable after
receipt of the necessary approvals. Neither chinadotcom nor Ross can
predict the exact timing of completion of the merger.
Q: AM I ENTITLED TO APPRAISAL RIGHTS IN CONNECTION WITH THE MERGER?
A: Yes. Under the Delaware General Corporation Law, holders of Ross common
stock who do not vote in favor of adopting and approving the merger
agreement and the merger will have the right to seek appraisal of the fair
value of their shares as determined by the Delaware Court of Chancery if
the merger is completed, but only if they submit a written demand for an
appraisal prior to the vote on the adoption of the merger agreement and the
merger and they comply with the Delaware law procedures summarized in this
proxy statement/prospectus in the section entitled "Appraisal Rights,"
beginning on page 151.
Q: WHAT ARE THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?
A: The merger will generally be taxable to Ross stockholders for U.S. federal
income tax purposes. U.S. holders will recognize taxable gain or loss equal
to the difference between the fair market value, as of the effective time
of the merger, of the chinadotcom shares received plus cash received, and
their tax basis in their Ross stock exchanged in the merger.
Because chinadotcom believes that it may be classified as a passive foreign
investment company, or PFIC, for 2004 and ownership of PFIC stock may
subject U.S. holders to certain adverse tax consequences, U.S. holders that
receive chinadotcom shares in the merger should consider (in consultation
with their tax advisors) the possibility of taking action that may mitigate
such consequences, including the possibility of making a qualified electing
fund, or QEF, election for the year in which the merger occurs.
Tax matters are complicated, and the federal income tax consequences
described above may not apply to some of Ross' stockholders. The tax
consequences of the proposed merger to you will depend on the facts of your
own situation. You should consult your own tax advisors for a full
understanding of the tax consequences of the merger to you. See the section
entitled "Material U.S. Federal Income Tax Consequences" on page 154 for a
discussion of federal income tax consequences of the merger.
vi
Q: WHO CAN ANSWER MY QUESTIONS?
A: Ross stockholders who have questions about the merger or desire additional
copies of this proxy statement/prospectus or additional proxy cards should
contact:
Robert B. Webster
Ross Systems, Inc.
Two Concourse Parkway,
Suite 800
Atlanta, Georgia 30328
Telephone: (770) 351-9600
Email: investor@rossinc.com
vii
SUMMARY
This summary highlights selected information contained in this proxy
statement/prospectus and may not contain all the information that is important
to you. To understand the merger fully and for a more complete description of
the legal terms of the merger, you should carefully read this entire proxy
statement/prospectus, including the attached annexes, and the other documents to
which Ross and chinadotcom have referred you. See the section entitled "Where
You Can Find More Information" on page 160. Page references have been included
parenthetically to direct you to a more complete description of the topics
presented in this summary. References to the merger agreement mean the merger
agreement, as amended by the amendments to the merger agreement described under
"The Merger Agreement -- Amendments" on page 118. Unless otherwise indicated,
all amounts are in U.S. dollars.
THE COMPANIES (SEE PAGE 124)
CHINADOTCOM CORPORATION
Principal executive offices
34/F Citicorp Centre
18 Whitfield Road
Causeway Bay
Hong Kong
Telephone: (852) 2893-8200
chinadotcom is a leading provider of enterprise software and solutions,
value-added mobile services and applications and marketing and advertising
services. It offers the following services for companies throughout Greater
China and Asia, North America, the United Kingdom and Europe:
- Software Products and Services, including implementation and development
of packaged software for use in enterprise resource planning (as defined
below) targeting mid-market manufacturers;
- Value-Added Mobile Services and Applications, including offering
value-added short messaging services to mobile phone subscribers in China
and providing mobile development and technology services in Korea for
leading telecom network operators, mobile handset manufacturers and
mobile application and content providers;
- Technology Services and Outsourcing, including offering economical,
high-quality software development services to chinadotcom's enterprise
software customer base utilizing programmers located principally in China
and India; and
- Marketing and Advertising Services, including developing targeted
advertising campaigns utilizing information gathered from chinadotcom's
proprietary databases.
chinadotcom's enterprise software business focuses on key industry groups
including manufacturing for export, finance and travel, and in key business
areas, including supply chain management, human resource and payroll
administration, and customer relationship management. chinadotcom aims to
leverage its expertise in its core business areas through alliances and
partnerships to help drive innovative client solutions. chinadotcom currently
has operations in more than 14 markets internationally, with over 1,400
employees.
In September 2003, chinadotcom acquired a 51% stake in Cayman First Tier,
the holding company of Industri-Matematik Corp., or IMI, an established
international provider of software to the supply chain management sector
principally servicing consumer packaged goods manufacturers and suppliers,
retail stores and wholesale distributors across Europe and the United States,
through a joint venture. IMI has developed software solutions for the grocery,
specialty goods, and pharmaceutical and over-the-counter drugs industries. In
the acquisition, chinadotcom provided a cash investment and loan facility to the
IMI entities which will primarily be used for further expansion in the supply
chain management software sector via organic growth and acquisitions.
1
In February 2004, chinadotcom acquired 100% of Pivotal, a leading
international customer relationship management company that provides a complete
set of highly flexible applications for use in customer relationship management
(as defined below) and implementation services for mid-sized enterprises, with
over 1,700 clients worldwide. For a detailed description the consideration paid
for the acquisition of Pivotal please see "chinadotcom's acquisition of Pivotal"
on page 22.
ROSS SYSTEMS, INC.
Principal executive offices
Two Concourse Parkway,
Suite 800, Atlanta, Georgia 30328
Telephone: (770) 351-9600
Ross Systems, Inc. is a software company that provides enterprise software
solutions to manufacturers. Ross focuses on the food and beverage, life
sciences, chemicals, metals and natural products industries. Ross' software has
been implemented by over 1,000 customer companies worldwide. Ross' software
addresses many aspects of a manufacturer's enterprise, from manufacturing,
financial statements and supply chain management to customer relationship
management, performance management and regulatory compliance.
GLOSSARY OF COMMONLY USED TECHNICAL TERMS:
Customer relationship management (CRM): the technique of establishing and
maintaining a long-term business relationship with your customers by integrating
information from the entire enterprise to provide detailed profiles of customers
which allows all the links in the chain to have the information necessary to
provide services. CRM software tools assist in customer/product sales history
and profitability analysis, campaign tracking and management, contact and call
center management, order status information, and returns and service tracking.
Enterprise resource planning (ERP): the technique of supporting and
automating the processes of an organization. ERP software, or enterprise
software, attempts to achieve company-wide integration of business and technical
information across multiple divisions and organizational boundaries, such as
finance, manufacturing, logistics, human resources and sales, utilizing common
databases and programs which can share data in real time across the multiple
business functions.
Software Solutions: software which provides solutions to complex business
problems and questions in planning, operating and measuring the various facets
of process of manufacturers business cycles, including forecasting, demand
planning, procurement, recipe and formula management, manufacturing scheduling,
inventory management, product distribution and financial accounting as well as
the reporting for both internal control and external reporting.
Supply chain management (SCM): the coordination of processes involved in
producing, shipping and distributing products to ensure that the correct amount
of product is in the correct locations at the right time and at the lowest
possible cost. SCM software helps to automate these processes.
THE ROSS SPECIAL MEETING (SEE PAGE 74)
Ross will hold a special meeting of its stockholders on August 25, 2004 at
10:00 a.m., local time. The special meeting will be held at Ross' executive
offices in Atlanta, Georgia located at Two Concourse Parkway, Suite 800,
Conference Room, Atlanta, Georgia 30328. The telephone number at that location
is (770) 351-9600.
PURPOSES OF THE ROSS SPECIAL MEETING (SEE PAGE 74)
The purposes of the Ross special meeting are to: (1) vote on the proposal
to adopt and approve the merger agreement and the merger between Ross and
chinadotcom pursuant to the merger agreement,
2
(2) authorize the adjournment of the special meeting, if necessary, to solicit
additional proxies, and (3) transact such other business as may properly come
before the meeting and any and all continuations and adjournments thereof.
RECORD DATE; VOTING; QUORUM (SEE PAGE 76)
Only Ross stockholders of record at the close of business on July 13, 2004,
the record date, are entitled to receive notice and vote at the special meeting.
Each Ross stockholder is entitled to one vote for each share held as of the
record date. The required quorum for the transaction of business at the special
meeting is a majority of the shares of common stock issued and outstanding on
the record date and entitled to vote at the special meeting, present in person
or represented by proxy.
REQUIRED VOTE (SEE PAGE 76)
The affirmative vote of the holders of record of at least a majority of the
Ross common stock and preferred stock, voting together as a single class,
present and entitled to vote at the Ross special meeting is required to
authorize adjournment of the special meeting, if necessary, to solicit
additional proxies.
Adoption and approval of the merger agreement and the merger requires the
affirmative vote of the holders of a majority of the outstanding shares of Ross
common stock and preferred stock, voting together as a single class.
VOTING AGREEMENTS (SEE PAGE 75)
Some of Ross' directors and executive officers, collectively representing
approximately 2.7% of the total number of outstanding shares of common stock of
Ross as of September 4, 2003, in their capacity as stockholders, entered into
separate stockholder agreements, each dated September 4, 2003, with chinadotcom.
These stockholders agreed, among other things, to:
- vote their Ross common stock in favor of the merger; and
- grant chinadotcom a proxy with respect to the voting of these shares
regarding the merger and related matters.
A form of these stockholder agreements is attached to this proxy
statement/prospectus as Annex B. See "The Ross Special Meeting -- Voting
Agreements". Although these stockholder agreements expired on March 31, 2004,
these directors and officers currently intend to vote their Ross common stock in
favor of the merger.
In addition, Benjamin W. Griffith, III, who beneficially owns common stock
and preferred stock representing, as of September 4, 2003, approximately 20.5%
of the total number of outstanding shares of common stock, on an as-converted
basis, of Ross, entered into a Preferred Stockholder Agreement, dated September
4, 2003, with chinadotcom and Ross. Mr. Griffith agreed, among other things, to:
- vote his Ross common stock and preferred stock in favor of the merger;
- grant chinadotcom a proxy with respect to the voting of these shares
regarding the merger and related matters; and
- immediately prior to the completion of the merger, surrender his
preferred stock for conversion into Ross common stock.
A copy of the preferred stockholder agreement, as amended, is attached to
this proxy statement/prospectus as Annex C.
THE MERGER AND THE MERGER AGREEMENT (SEE PAGES 78 AND 106)
chinadotcom has agreed to acquire Ross under the terms of a merger
agreement that is described in this proxy statement/prospectus. At the closing
of the merger, CDC Software Holdings, Inc., or CDC
3
Software Holdings, a newly formed, wholly owned subsidiary of chinadotcom will
merge with and into Ross. A copy of the merger agreement, as amended, is
attached as Annex A to this proxy statement/prospectus. Ross urges you to read
the merger agreement in its entirety because it is the principal legal document
governing the merger.
WHAT ROSS STOCKHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGE 106)
Please see the section entitled "Questions and Answers About the Merger
Proposal" beginning on page iii for a description of what Ross stockholders will
receive in the merger.
RISK FACTORS
The "Risk Factors" beginning on page 24 of this proxy statement/prospectus
should be considered carefully by the Ross stockholders in evaluating whether
vote to adopt and approve the merger agreement and the merger.
RECOMMENDATION OF THE ROSS BOARD OF DIRECTORS (SEE PAGE 90)
After careful consideration, the Ross board of directors unanimously
determined that the merger is advisable and is fair to and in the best interests
of Ross and its stockholders and unanimously approved the merger agreement. The
board of directors of Ross unanimously recommends that the Ross stockholders
vote:
- "FOR" the proposal to adopt and approve the merger agreement and the
merger; and
- "FOR" the proposal to authorize the adjournment of the meeting, if
necessary, to solicit additional proxies.
OPINION OF FINANCIAL ADVISOR (SEE PAGE 90)
Ross' financial advisor, Broadview International, LLC, has delivered a
written opinion to the Ross board of directors as to the fairness from a
financial point of view to Ross and Ross' stockholders of the consideration
proposed to be paid to Ross stockholders by chinadotcom in the merger and has
confirmed to the Ross board of directors its view that the amendments to the
merger agreement do not affect its opinion. A copy of the full text of this
opinion is attached to this document as Annex D. Ross encourages you to read the
opinion carefully in its entirety for a description of the procedures followed,
assumptions made, matters considered and limitations on the review undertaken by
Broadview.
Broadview provided its opinion for the information and assistance of the
Ross board in connection with its consideration of the merger and the merger
agreement, and such opinion is not a recommendation as to how any Ross
stockholder should vote with respect to the merger.
INTERESTS OF ROSS DIRECTORS AND OFFICERS IN THE MERGER (SEE PAGE 99)
When Ross stockholders consider the recommendation of the Ross board that
Ross stockholders vote in favor of the proposal to adopt and approve the merger
agreement and the merger, they should be aware that certain executive officers
of Ross and the members of Ross' board of directors have interests in the merger
that may be different from, or in addition to, the interests of the Ross
stockholders generally. These interests include (1) certain cash payments,
one-time special grants of chinadotcom common shares and one-time special grants
of chinadotcom restricted shares to certain Ross executive officers under the
transition and stock vesting agreements described in the section entitled
"Proposal No. 1 -- The Merger -- Interests of Ross Directors and Officers in the
Merger" beginning on page 99, (2) acceleration of certain options held by
certain Ross executive officers, and (3) the continuation of rights to
indemnification and the purchase of liability insurance for all Ross directors
and executive officers. In addition, certain Ross executive officers will enter
into new employment agreements with Ross, operating as a subsidiary of
chinadotcom, upon the completion of the merger. Ross' board of directors was
aware of and considered these potentially conflicting interests when the Ross
board approved the merger agreement.
4
CONDITIONS TO COMPLETION OF THE MERGER (SEE PAGE 112)
Several conditions must be satisfied or waived before chinadotcom and Ross
complete the merger, including those summarized below:
- the approval and adoption of the merger agreement by the affirmative vote
of the holders of a majority of the outstanding shares of Ross common
stock and preferred stock on the record date, voting as a single class;
- the absence of any law or regulation making the merger illegal or
prohibiting its consummation;
- the absence of any government litigation or investigation seeking to
prevent or adversely alter the merger;
- the receipt of United States antitrust approvals;
- the accuracy of each party's representations and warranties in the merger
agreement;
- the material compliance by each party with its covenants in the merger
agreement;
- the effectiveness of the registration statement containing this proxy
statement/prospectus; and
- the approval for listing on the Nasdaq National Market, subject to
official notice of issuance, of the chinadotcom common shares to be
issued to the Ross stockholders in the merger.
The following conditions also apply to chinadotcom's obligation to complete
the merger:
- the absence of a material adverse effect on Ross since the date of the
merger agreement; and
- the number of shares held by Ross stockholders perfecting appraisal
rights being less than 9% of the issued and outstanding shares of Ross
common stock.
PROHIBITION ON ROSS SOLICITING OTHER OFFERS (SEE PAGE 114)
The merger agreement contains detailed provisions that prohibit Ross and
its subsidiaries, and their officers and directors, from taking any action to
solicit or engage in discussions or participate in negotiations with any person
or entity with respect to an acquisition proposal, as defined in the merger
agreement, including a proposal relating to any direct or indirect acquisition
of (a) all or a substantial part of the assets of Ross and its subsidiaries, (b)
over 15% of any class of equity securities of Ross or its subsidiaries, (c) any
tender offer or exchange offer that would result in any person or entity
beneficially owning 15% or more of any class of equity securities of Ross or its
subsidiaries, or (d) any other merger or business combination involving Ross.
The merger agreement does not, however, prohibit Ross or its board of directors
from considering, and potentially recommending, an unsolicited bona fide written
acquisition proposal from a third party if specified conditions are met.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 116)
The merger agreement may be terminated and the merger abandoned at any time
prior to the completion of the merger, whether before or after approval of the
merger by the Ross stockholders:
- by mutual written consent of chinadotcom and Ross;
- by either chinadotcom or Ross if:
- the merger has not been completed on or before September 1, 2004, but
neither chinadotcom nor Ross may terminate the merger agreement if that
party's breach of a representation, warranty or covenant is the reason
that the merger has not been completed by that date;
- any governmental authority issues an order that has become final and
non-appealable and has the effect of making the completion of the merger
illegal, or otherwise prevents the completion of the merger; or
5
- Ross' stockholders do not approve and adopt the merger agreement at the
Ross special meeting;
- by chinadotcom if the board of directors of Ross has (1) withheld,
withdrawn or modified in a manner adverse to chinadotcom, its approval or
recommendation of the merger agreement and the merger, or (2) recommended
or approved any acquisition proposal from a third party; or
- by Ross upon two business days' notice to chinadotcom if, prior to the
approval and adoption of the merger agreement and the merger by the Ross
stockholders, (1) the Ross board determines in good faith in the exercise
of its fiduciary duties, that, in order to enter into a definitive
agreement with respect to a superior acquisition proposal from a third
party meeting certain requirements set forth in the merger agreement, the
termination of the merger agreement with chinadotcom is in the best
interests of the Ross stockholders, and (2) Ross has paid to chinadotcom
the termination fee and termination expenses required under the merger
agreement.
TERMINATION FEE AND EXPENSES (SEE PAGE 116)
If the merger is terminated under specified circumstances, Ross may be
required to pay to chinadotcom a termination fee of $1,350,000 and reimburse
chinadotcom for all expenses incurred by chinadotcom in connection with the
merger agreement and the merger, with these expenses not to exceed $750,000.
REGULATORY APPROVALS REQUIRED (SEE PAGE 104)
The merger is subject to review by the U.S. Department of Justice and the
U.S. Federal Trade Commission to determine whether the merger complies with
applicable antitrust laws. Under the provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, the merger may not be completed
until after each of chinadotcom and Ross has furnished certain information and
materials to the Antitrust Division of the U.S. Department of Justice and the
U.S. Federal Trade Commission and a required waiting period has expired or been
terminated. chinadotcom and Ross each filed the required notification and report
forms with the Antitrust Division of the U.S. Department of Justice and the U.S.
Federal Trade Commission on September 22, 2003. The waiting period expired on
October 27, 2003.
ACCOUNTING TREATMENT (SEE PAGE 104)
chinadotcom will account for the merger in its financial statements
prepared in accordance with generally accepted accounting principles in the
United States using the purchase method of accounting pursuant to Statement of
Financial Accounting Standards No. 141, "Business Combinations."
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 154)
The merger will generally be taxable to Ross stockholders for U.S. federal
income tax purposes. U.S. holders will recognize taxable gain or loss equal to
the difference between the fair market value, as of the effective time of the
merger, of the chinadotcom common shares received plus cash received, and their
tax basis in their Ross stock exchanged in the merger.
APPRAISAL RIGHTS (SEE PAGE 151)
Under the Delaware General Corporation Law, holders of Ross common stock
who do not vote in favor of adopting and approving the merger agreement and the
merger will have the right to seek appraisal of the fair value of their shares
as determined by the Delaware Court of Chancery if the merger is completed, but
only if they submit a written demand for an appraisal prior to the vote on the
adoption of the merger agreement and the merger and they comply with the
Delaware law.
6
CHINADOTCOM COMMON SHARES ISSUED IN THE MERGER WILL BE LISTED ON THE NASDAQ
NATIONAL MARKET (SEE PAGE 104)
If chinadotcom and Ross complete the merger, Ross stockholders will be able
to trade the chinadotcom common shares they receive in the merger on the Nasdaq
National Market, subject to restrictions on affiliates described in the section
entitled "Proposal No. 1 -- The Merger -- Restrictions on Sales of chinadotcom
Common Shares Received in the Merger" beginning on page 104 of this proxy
statement/prospectus. If the merger is completed, Ross common stock will no
longer be quoted on the Nasdaq National Market or any other market or exchange.
MARKET PRICE AND DIVIDEND INFORMATION
chinadotcom common shares are quoted on the Nasdaq National Market under
the symbol "CHINA." Shares of Ross common stock are quoted on the Nasdaq
National Market under the symbol "ROSS." For current share price information,
Ross stockholders are urged to consult publicly available sources for market
quotations. On September 3, 2003, the last trading day before the public
announcement of the signing of the merger agreement, the last quoted sale prices
of chinadotcom common shares and Ross common stock on the Nasdaq National Market
were $9.82 and $17.29, respectively. On July 13, 2004, the last quoted sale
prices of chinadotcom common shares and Ross common stock on the Nasdaq National
Market were $6.33 and $18.61, respectively. chinadotcom has never paid a cash
dividend on its common shares, and Ross has never paid a cash dividend on its
common stock. Future dividends declared and paid by chinadotcom, if any, will be
determined by chinadotcom's board of directors in light of circumstances
existing from time to time, including growth prospects, profitability, financial
condition, results of operations and other factors that chinadotcom's board of
directors deems relevant.
FINANCIAL INFORMATION PRESENTED IN ACCORDANCE WITH U.S. GAAP
In this proxy statement/prospectus, except as otherwise specified, the
financial information is presented according to generally accepted accounting
principles in the United States, referred to as "U.S. GAAP".
COMPARATIVE PER SHARE INFORMATION
The following tables show per share data regarding earnings, book value and
cash dividends for chinadotcom and Ross on a historical, pro forma combined and
pro forma equivalent basis. The pro forma book value and cash dividend
information was computed as if the merger with Ross had been completed on March
31, 2004. The pro forma earnings information was computed as if the merger with
Ross had been completed on January 1, 2003. The Ross pro forma equivalent
information shows how each share of Ross common stock would have participated in
chinadotcom's earnings, book value and cash dividends if the merger had been
completed at these dates. These amounts do not necessarily reflect future per
share levels of earnings, book value or cash dividends of chinadotcom.
The following unaudited comparative per share data is derived from the
historical consolidated financial statements of chinadotcom and the historical
consolidated financial statements of Ross. You should read the information below
in conjunction with the financial statements and accompanying notes of
chinadotcom, incorporated by reference into this proxy statement/prospectus, and
of Ross, set forth in the Annual Report on Form 10-K/A, and Quarterly Report on
Form 10-Q accompanying this proxy
7
statement/prospectus. You should also read the unaudited pro forma consolidated
financial statements and accompanying notes included in this proxy
statement/prospectus beginning on page 164.
THREE MONTHS
YEAR ENDED PERIOD ENDED
DECEMBER 31, 2003 MARCH 31, 2004
----------------- --------------
(UNAUDITED) (UNAUDITED)
Pro forma combined:(1)
Book value per share(2)................................. N/A $ 4.30
Cash dividends declared per share....................... -- --
Earnings/(loss) per share from continuing operations:
Basic................................................. $(0.01) $ 0.02
Diluted............................................... $(0.01) $ 0.02
chinadotcom:
Book value per share.................................... N/A $ 4.04
Cash dividends declared per share....................... -- --
Earnings/(loss) per share from continuing operations:
Basic................................................. $ 0.16 $ 0.04
Diluted............................................... $ 0.16 $ 0.04
Ross:
Book value per share.................................... N/A $ 5.23
Cash dividends declared per share....................... -- --
Earnings/(loss) per share from continuing operations:
Basic................................................. $ 0.42 $ 0.45
Diluted............................................... $ 0.32 $ 0.36
Equivalent pro forma combined:(3)
Book value per share.................................... N/A $ 7.08
Earnings/(loss) per share from continuing operations:
Basic................................................. $(0.02) $ 0.03
Diluted............................................... $(0.02) $ 0.03
---------------
(1) For a detailed discussion of what each Ross stockholder will receive in the
merger, please refer to "The Merger Agreement -- Merger Consideration" on
page 106.
(2) The book value per share is based on shareholders' equity over the pro-forma
number of chinadotcom shares of 109,383,208, comprised of:
- the number of chinadotcom common shares outstanding as of March 31, 2004;
plus,
- the number of chinadotcom common shares expected to be issued to Ross
shareholders, i.e. the number of Ross common shares outstanding as at
March 31, 2004 multiplied by the exchange ratio of 1.647, assuming the
average closing chinadotcom share price for the ten consecutive trading
days ending on, and including, the trading day that is two days prior to
the closing date of the merger is $8.50.
(3) The equivalent per share information is calculated by multiplying the
chinadotcom pro forma combined amounts by the exchange ratio of 1.647
chinadotcom common shares per Ross common share.
8
COMPARATIVE STOCK PRICES AND DIVIDENDS
chinadotcom common shares are quoted on the Nasdaq National Market under
the symbol "CHINA." Shares of Ross common stock are quoted on the Nasdaq
National Market under the symbol "ROSS." For current share price information,
Ross stockholders are urged to consult publicly available sources for market
quotations.
The following table sets forth the range of the reported high and low
closing per share sale prices of chinadotcom common shares and shares of Ross
common stock for the calendar quarters indicated.
SHARES OF
CHINADOTCOM COMMON ROSS COMMON
SHARES(1) STOCK(1)
------------------- -----------------
CALENDAR QUARTER HIGH LOW HIGH LOW
---------------- -------- -------- ------- -------
2001
First Quarter.................................. $ 7.63 $ 2.31 $ 7.50 $ 2.19
Second Quarter................................. $ 3.55 $ 2.06 $ 4.45 $ 1.88
Third Quarter.................................. $ 4.00 $ 1.87 $ 4.08 $ 2.94
Fourth Quarter................................. $ 3.00 $ 1.95 $ 6.31 $ 2.38
2002
First Quarter.................................. $ 3.28 $ 2.63 $ 11.56 $ 5.82
Second Quarter................................. $ 2.78 $ 2.16 $ 11.65 $ 7.80
Third Quarter.................................. $ 2.54 $ 1.86 $ 8.35 $ 6.05
Fourth Quarter................................. $ 3.07 $ 1.91 $ 9.90 $ 4.51
2003
First Quarter.................................. $ 3.58 $ 2.73 $ 14.95 $ 8.00
Second Quarter................................. $ 8.41 $ 3.21 $ 15.49 $ 11.10
April........................................ $ 5.24 $ 3.21 $ 13.75 $ 14.50
May.......................................... $ 5.42 $ 4.30 $ 15.49 $ 12.46
June......................................... $ 8.41 $ 4.95 $ 16.25 $ 13.04
Third Quarter.................................. $ 14.46 $ 8.67 $ 19.00 $ 15.00
July......................................... $ 14.46 $ 9.25 $ 16.25 $ 14.50
August....................................... $ 11.99 $ 8.67 $ 16.25 $ 14.93
September.................................... $ 10.13 $ 8.69 $ 19.00 $ 15.00
Fourth Quarter................................. $ 10.38 $ 7.43 $ 19.48 $ 17.30
October...................................... $ 10.38 $ 8.20 $ 19.48 $ 17.30
November..................................... $ 9.45 $ 8.26 $ 18.65 $ 17.85
December..................................... $ 8.67 $ 7.43 $ 18.47 $ 17.75
2004
First Quarter.................................. $ 12.65 $ 8.25 $ 18.75 $ 18.33
January...................................... $ 12.65 $ 9.05 $ 18.70 $ 18.33
February..................................... $ 11.90 $ 9.85 $ 18.74 $ 18.45
March........................................ $ 11.47 $ 8.25 $ 18.75 $ 18.57
Second Quarter
April........................................ $ 9.21 $ 6.73 $ 18.61 $ 18.16
May.......................................... $ 7.53 $ 6.20 $ 18.33 $ 18.10
June (through June 17)....................... $ 8.14 $ 7.44 $ 18.29 $ 18.16
---------------
(1) Source: Bloomberg
9
The table below presents the last quoted sale price of chinadotcom common shares
and Ross common stock, each as quoted on the Nasdaq National Market, presented
on two dates:
- September 3, 2003, the last trading day before the public announcement of
the signing of the merger agreement; and
- July 13, 2004, the latest practicable date before the date of this proxy
statement/prospectus.
The last column of this table shows the implied value of one share of Ross
common stock assuming the completion of the merger, which was calculated by
determining the merger consideration for one share of Ross common stock using
the closing price of chinadotcom common shares on each specified date to
determine the exchange ratio, instead of the actual chinadotcom common share
price that will be used to determine the exchange ratio. The cash consideration
of $5.00 per share of Ross common stock is included in the values presented in
the last column below. See "Proposal No. 1 -- The Merger -- The Merger
Agreement -- Merger Consideration" beginning on page 106.
IMPLIED VALUE OF
CHINADOTCOM ROSS ONE SHARE OF ROSS
COMMON SHARES COMMON STOCK COMMON STOCK
------------- ------------ -----------------
September 3, 2003........................ $ 9.82 $ 17.29 $ 19.00
July 13, 2004............................ $ 6.33 $ 18.61 $ 19.00
chinadotcom has never paid a cash dividend on its common shares. Future
dividends declared and paid by chinadotcom, if any, will be determined by
chinadotcom's board of directors in light of circumstances existing from time to
time, including growth prospects, profitability, financial condition, results of
operations and other factors that chinadotcom's board of directors deems
relevant.
Ross has never paid any cash dividends on its common stock and does not
expect to pay cash dividends in the foreseeable future. In the past Ross has
paid cash dividends on its preferred stock. Ross intends to retain future
earnings to finance the ongoing operations and growth of its business.
10
ROSS SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected statement of operations and balance
sheet data of Ross for the fiscal years ended and as of June 30, 1999, 2000,
2001, 2002, and 2003. Ross derived the selected financial data for the years
ended June 30 and as of June 30 from its audited financial statements and has
derived the selected financial data as of and for the nine months ended March
31, 2003 and 2004 from its unaudited quarterly financial statements. The
selected consolidated financial data should be read together with Ross'
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with Ross' consolidated financial statements, including the
related notes, included in Ross' Annual Report on Form 10-K/A for the fiscal
year ended June 30, 2003, and Quarterly Report on Form 10-Q for the three months
ended March 31, 2004, which accompany this proxy statement/prospectus.
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------------------------------ -----------------
1999 2000 2001 2002 2003 2003 2004
-------- ------- ------- ------- ------- ------- -------
(AUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Revenues:
Software product licenses.............. $ 32,207 $18,943 $ 9,607 $13,026 $14,589 $ 9,903 $11,594
Consulting and other services.......... 45,596 36,734 16,520 13,013 13,489 9,794 11,815
Maintenance............................ 28,326 27,722 24,678 20,014 20,022 15,323 15,538
-------- ------- ------- ------- ------- ------- -------
Total revenues(1)(2)................. 106,129 83,399 50,805 46,053 48,100 35,020 38,947
-------- ------- ------- ------- ------- ------- -------
Operating expenses:
Costs of software product
licenses(4).......................... 12,701 9,012 8,349 19,992 6,997 4,786 5,090
Costs of consulting, maintenance and
other services....................... 50,748 44,411 17,595 17,023 17,193 12,784 15,491
Selling, general and administrative
expenses............................. 42,200 32,842 21,277 15,298 16,591 12,324 12,246
Product development, net of capitalized
computer software costs and amortized
computer software costs.............. 3,153 3,128 4,127 3,057 2,528 1,893 2,417
Amortization of goodwill............... 1,263 1,004 691 -- -- -- --
Non-recurring costs (benefit)(5)....... -- 1,145 790 (650) -- -- 1,896
-------- ------- ------- ------- ------- ------- -------
Total operating expenses............. 110,065 91,542 52,829 54,720 43,309 31,787 37,140
-------- ------- ------- ------- ------- ------- -------
Operating profit (loss)(3)(4)........ (3,936) (8,143) (2,024) (8,667) 4,791 3,233 1,807
Other income (expense):
Proposed merger transaction costs...... -- -- -- -- -- -- (1,133)
Gain on sale of product line........... -- -- 2,372 -- -- -- --
Other financial income (expense),
net.................................. (1,156) (1,170) (1,181) (625) (180) (152) (144)
-------- ------- ------- ------- ------- ------- -------
Net income (loss) before income
taxes.............................. (5,092) (9,313) (833) (9,292) 4,611 3,081 530
Extraordinary expense, net of tax...... (213) -- -- -- -- -- --
Income tax expense..................... (321) (349) (9) (132) (405) (217) (105)
Net income (loss)........................ $ (5,626) $(9,662) $ (842) $(9,424) $ 4,206 $ 2,864 $ 425
Preferred stock dividend............... -- -- -- (150) (150) (113) (113)
-------- ------- ------- ------- ------- ------- -------
Net income (loss) available to common
shareholders....................... $ (5,626) $(9,662) $ (842) $(9,574) $ 4,056 $ 2,751 $ 312
======== ======= ======= ======= ======= ======= =======
Net income (loss) per common
share -- basic......................... $ (2.53) $ (4.15) $ (0.33) $ (3.65) $ 1.54 $ 1.05 $ 0.12
Net income (loss) per common
share -- diluted....................... $ (2.53) $ (4.15) $ (0.33) $ (3.65) $ 1.28 $ 0.87 $ 0.12
======== ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding -- basic................... 2,223 2,330 2,566 2,625 2,641 2,616 2,707
Weighted average shares
outstanding -- diluted................. 2,223 2,330 2,566 2,625 3,296 3,292 3,477
11
AS OF JUNE 30, AS OF MARCH 31,
------------------------------------------------ -----------------
1999 2000 2001 2002 2003 2003 2004
------- -------- ------- ------- ------- ------- -------
(AUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA
Working capital................ $(3,745) $(15,340) $(9,640) $(4,536) $ (943) $(2,094) $ 862
Total assets................... 83,185 64,295 50,462 37,618 40,211 38,633 41,341
Total long term debt and lease
obligations.................. 3,705 2,627 -- -- -- -- --
Total shareholders' equity..... 29,257 20,890 23,104 13,943 17,029 15,377 17,680
Book value per common share.... 12.77 8.78 7.55 4.46 5.14 4.66 5.23
---------------
(1) Revenues and operating costs have been increased in all years by the
reclassification of Reimbursable Expenses to comply with EITF 01-14.
(2) Results shown for fiscal years 2000 and 1999 include revenues and operating
costs relating to activities derived from the HR/Payroll product line which
was sold in February of 2000. Results for these two fiscal years are
therefore not directly comparable with the results of fiscal years 2001
through 2003.
(3) In accordance with the adoption of SFAS No. 142, Ross ceased amortization of
Goodwill beginning July 1, 2001.
(4) In accordance with SFAS No. 86, Ross recorded an impairment of Capitalized
Software Costs of $10,938,000 during the year ended June 30, 2002.
(5) On November 17, 2003, following protracted legal proceedings involving a
claim against Ross for more than $4,000,000, an arbitrator announced an
award of approximately $2,000,000 in favor of a Dutch systems integrator.
The claim was with respect to a distribution agreement which entitled Ross
to distribute the systems integrator's product. Ross paid the award before
the end of calendar 2003 by funding the payment out of operating cash flows
in the ordinary course of business. As a result, Ross recognized a charge of
approximately $1,896,000 during the quarter ended December 31, 2003 as
$104,000 was previously recorded in accordance with the contract in its
normal course.
12
CHINADOTCOM SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data and other financial
data for chinadotcom for each of the fiscal years ended December 31, 1999, 2000,
2001, 2002 and 2003 and the selected consolidated balance sheet data as of
December 31, 1999, 2000, 2001, 2002 and 2003 were derived from chinadotcom's
historical consolidated financial statements, which have been audited by Ernst &
Young, whose report for the fiscal years ended December 31, 2001, 2002 and 2003
has been incorporated by reference into this proxy statement/prospectus, after
adjustment for the restatement of discontinued operations and segment reporting.
Please refer to Note 3 of the audited financial statements incorporated by
reference into this proxy statement/prospectus through chinadotcom's Form 20-F/A
filed with the Commission on July 7, 2004.
The selected consolidated statement of operations data and other financial
data for chinadotcom for the three months period ended March 31, 2003 and 2004
and the selected consolidated balance sheet data as of March 31, 2003 and 2004
were derived from chinadotcom's unaudited consolidated financial statements,
which, in the opinion of chinadotcom's management, include all adjustments
necessary for a fair presentation in accordance with accounting principles
generally accepted in the United States.
The summary financial data set forth below should be read in conjunction
with chinadotcom's "Operating and Financial Review and Prospects," chinadotcom's
audited consolidated financial statements and the related notes, and
chinadotcom's unaudited condensed consolidated interim financial statements and
the related notes, each incorporated by reference into this proxy
statement/prospectus through chinadotcom's Form 20-F/A filed with the Commission
on July 7, 2004 and Form 6-K filed with the Commission on May 17, 2004.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- -------------------------
1999 2000 2001 2002 2003 2003 2004
---------- ---------- ---------- ----------- ----------- ----------- -----------
(AUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
INCOME STATEMENT DATA:(1)
REVENUES:
Software and consulting
services
Sale of IT products.......... -- -- 743 1,339 8,000 535 4,471
Consulting services.......... 7,914 45,791 15,900 14,166 42,699 6,139 22,416
Mobile services and
applications................. -- -- -- -- 16,876 -- 6,467
Advertising and marketing
activities................... 6,126 37,645 18,087 26,682 19,558 2,539 2,384
Other income................... 1,306 1,004 4,507 1,821 2,299 801 121
---------- ---------- ---------- ----------- ----------- ----------- -----------
15,346 84,440 39,237 44,008 89,432 10,014 35,859
Cost of revenues:
Software and consulting
services
Sale of IT products.......... -- -- (472) (668) (6,123) (235) (1,084)
Consulting services.......... (4,046) (28,972) (11,451) (6,255) (25,697) (3,818) (13,790)
Mobile services and
applications................. -- -- -- -- (2,247) -- (1,053)
Advertising and marketing
activities................... (3,905) (24,524) (11,625) (19,999) (12,966) (1,523) (981)
Other income................... (606) (1,123) (1,892) (845) (1,084) (321) (70)
---------- ---------- ---------- ----------- ----------- ----------- -----------
GROSS MARGIN..................... 6,789 29,821 13,797 16,241 41,315 4,117 18,881
Selling, general and
administrative expenses........ (26,557) (92,226) (73,297) (27,161) (34,325) (5,244) (14,364)
Depreciation and amortization
expenses....................... (6,079) (29,863) (19,180) (9,882) (7,182) (1,843) (2,315)
Impairment of goodwill and
intangible assets.............. -- (31,712) (21,908) -- -- -- --
---------- ---------- ---------- ----------- ----------- ----------- -----------
OPERATING INCOME/(LOSS).......... (25,847) (123,980) (100,588) (20,802) (192) (2,970) 2,202
Interest income.................. 3,826 29,750 26,689 23,713 13,440 3,949 2,797
Interest expense................. -- (851) (1,272) (2,463) (1,070) -- (392)
Gain/(loss) arising from share
issuance of a subsidiary....... -- 140,031 (55) -- -- -- --
13
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- -------------------------
1999 2000 2001 2002 2003 2003 2004
---------- ---------- ---------- ----------- ----------- ----------- -----------
(AUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Gain/(loss) on disposal of
available-for-sale
securities..................... 6,282 1,685 4,411 (163) 4,599 1,661 299
Gain/(loss) on disposal of
subsidiaries and cost
investments.................... -- 13,981 (1,915) (66) 469 295 53
Other non-operating gains........ -- -- -- 508 961 -- --
Other non-operating losses....... (42) (2,065) (922) (288) (153) (24) --
Impairment of cost investments
and available-for-sale
securities..................... -- (84,696) (12,260) (5,351) -- -- --
Share of income/(losses) in
equity investees(2)............ (65) (9,423) (2,592) 682 (115) -- 6
---------- ---------- ---------- ----------- ----------- ----------- -----------
Income/(loss) before income
taxes.......................... (15,846) (35,568) (88,504) (4,230) 17,939 2,911 4,965
Income tax benefit/(income
taxes)......................... -- (582) (186) (113) 689 33 (19)
---------- ---------- ---------- ----------- ----------- ----------- -----------
Income/(loss) before minority
interests...................... (15,846) (36,150) (88,690) (4,343) 18,628 2,944 4,946
Minority interests in
losses/(income) of consolidated
subsidiaries................... 12 546 3,162 248 (2,204) (571) (665)
---------- ---------- ---------- ----------- ----------- ----------- -----------
INCOME/(LOSS) FROM CONTINUING
OPERATIONS..................... (15,834) (35,604) (85,528) (4,095) 16,424 2,373 4,281
DISCONTINUED OPERATIONS
Loss from operations of
discontinued subsidiaries.... (2,883) (24,198) (38,857) (14,681) (3,027) (1,158) --
Gain on disposal/dissolution of
discontinued subsidiaries.... -- -- -- 545 2,127 95 53
---------- ---------- ---------- ----------- ----------- ----------- -----------
NET INCOME/(LOSS)................ (18,717) (59,802) (124,385) (18,231) 15,524 1,310 4,334
========== ========== ========== =========== =========== =========== ===========
Basic earnings/(loss)
per share...................... (0.26) (0.61) (1.21) (0.18) 0.15 0.01 0.04
Diluted earnings/(loss) per
share(3)....................... (0.26) (0.61) (1.21) (0.18) 0.15 0.01 0.04
Weighted average number of
shares:
Basic.......................... 71,879,704 98,091,541 102,589,760 102,269,735 100,532,594 100,282,718 102,611,756
Diluted........................ 71,879,704 98,091,541 102,589,760 102,269,735 103,199,421 100,282,718 106,788,279
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------- --------------------
1999 2000 2001 2002 2003 2003 2004
------- ------- ------- ------- ------- ------- ----------
(AUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents..................... 12,913 47,483 20,820 33,153 55,508 164,789 125,510
Restricted cash............................... -- 4,134 1,274 109 238 42 5,931
Available-for-sale debt securities(4)......... 111,612 242,324 346,980 320,056 282,145 196,224 127,819
Restricted debt securities.................... -- 148,622 134,960 151,123 31,109 105,838 104,564
Available-for-sale equity securities.......... 5,419 10,368 2,064 2,050 590 1,999 690
Bank loans(5)................................. -- 3,934 118,455 127,384 26,826 101,307 88,925
Working capital(6)............................ 124,209 450,391 359,412 340,476 270,451 334,233 230,218
Total assets.................................. 183,123 622,920 596,494 580,957 546,054 543,193 634,325
Total shareholders' equity.................... 163,822 512,024 389,861 377,700 390,446 367,703 420,262
BOOK VALUE PER COMMON SHARE................... 1.87 5.03 3.80 3.73 3.84 3.70 4.04
---------------
(1) In 2003, chinadotcom adopted new reporting segmentation, changing from the
previous segmentation of e-business solutions, advertising, and sales of IT
products, to the current segmentation of software and consulting services,
mobile services and applications and advertising and marketing activities.
In addition, chinadotcom discontinued the operations of certain subsidiaries
in the software and consulting services and the advertising and marketing
activities segments. In accordance with SFAS 144, Accounting for the
Impairment of Disposal of Long-Lived Assets, the operating results on the
discontinued operating units were retroactively reclassified as a loss from
operations of discontinued subsidiaries on the consolidated statements of
operations. As a result, the results of the continuing operations of 1999,
2000, 2001 and 2002 were reclassified to conform with the 2003 presentation.
(2) The term "equity investees" refers to chinadotcom's 20% to 50% owned
investments other than subsidiaries.
14
(3) The computation of diluted loss per share did not assume the conversion of
any issued stock options or warrants of chinadotcom because their inclusion
would have been antidilutive.
(4) Available-for-sale debt securities includes short-term and long-term debt
securities available-for-sale.
(5) Bank loans include short-term and long-term bank loans.
(6) Working capital represents current assets less current liabilities.
15
CHINADOTCOM UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The chinadotcom unaudited pro forma consolidated statement of operations
for the year ended December 31, 2003 gives effect to the acquisitions of IMI and
Pivotal and the proposed acquisition of Ross as if they had occurred on January
1, 2003. The unaudited pro forma consolidated statement of operations for the
year ended December 31, 2003 has been prepared by adding the consolidated
results of operations for chinadotcom for the year ended December 31, 2003, the
results of operations of Ross and Pivotal for the twelve months ended December
31, 2003 and the results of operations of IMI for the nine months ended July 31,
2003. Because IMI's fiscal year ends on April 30, the results of operations of
IMI for the nine months ended July 31, 2003 have been used in calculating the
pro forma consolidated statements of operations.
The unaudited pro forma consolidated statement of operations for the three
months ended March 31, 2004 gives effect to the acquisitions of IMI and Pivotal
and the proposed acquisition of Ross as if they had occurred on January 1, 2003.
The unaudited pro forma consolidated statement of operations for the period
ended March 31, 2004 has been prepared by adding the consolidated results of
operations for chinadotcom for the three months period ended March 31, 2004, the
results of operations of Pivotal for the two months period ended February 29,
2004 and the results of operations of Ross for the three months period ended
March 31, 2004. The unaudited pro forma consolidated balance sheet as of March
31, 2004 gives effect to the acquisition of Ross as if it had occurred on March
31, 2004. The financial positions of IMI and Pivotal as of March 31, 2004 had
been included in the consolidated financial position of chinadotcom as of March
31, 2004.
chinadotcom's unaudited pro forma consolidated financial data should be
read in conjunction with the unaudited pro forma consolidated financial
information and related notes thereto beginning on page 178, and the respective
consolidated financial statements and accompanying notes of chinadotcom, Ross,
Pivotal and IMI, including chinadotcom's audited consolidated financial
statements for the fiscal year ended December 31, 2003, and the related notes
thereto, which are incorporated by reference into this proxy
statement/prospectus through chinadotcom's Form 20-F/A filed with the Commission
on July 7, 2004 and chinadotcom's unaudited consolidated financial statements
for the three months ended March 31, 2004, which are incorporated by reference
into this proxy statement/prospectus through chinadotcom's Form 6-K filed with
the Commission on May 17, 2004.
chinadotcom's unaudited pro forma consolidated financial data has been
prepared to illustrate the effects of the acquisitions. chinadotcom's unaudited
pro forma consolidated financial data does not necessarily present chinadotcom's
financial position or results of operations as they would have been if the
companies involved had constituted one entity for the period presented and is
not necessarily indicative of future results of operations or the results that
might have occurred if the acquisitions had been consummated on the indicated
dates.
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 2003 MARCH 31, 2004
----------------- --------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF $, (IN THOUSANDS OF $,
EXCEPT SHARE AND EXCEPT SHARE AND
PER SHARE DATA) PER SHARE DATA)
PRO FORMA INCOME STATEMENT DATA(2)(3)
REVENUES:
Software and consulting services........................ 184,510 47,685
Mobile services and applications........................ 16,876 6,467
Advertising and marketing activities.................... 19,558 2,384
Other income............................................ 2,299 121
----------- -----------
223,243 56,657
16
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 2003 MARCH 31, 2004
----------------- --------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF $, (IN THOUSANDS OF $,
EXCEPT SHARE AND EXCEPT SHARE AND
PER SHARE DATA) PER SHARE DATA)
Cost of revenues:
Software and consulting services........................ (96,464) (25,094)
Mobile services and applications........................ (2,247) (1,053)
Advertising and marketing activities.................... (12,966) (981)
Other income............................................ (1,084) (70)
----------- -----------
Gross margin.............................................. 110,482 29,459
Selling, general and administrative expenses.............. (81,897) (21,319)
Depreciation and amortization expenses.................... (14,955) (4,797)
Research and development expenses......................... (21,220) (3,451)
Restructuring costs....................................... (4,854) --
Impairment of capitalized software costs.................. (1,200) --
Transaction-related costs................................. (1,406) --
Litigation settlement..................................... (1,896) --
----------- -----------
Operating loss............................................ (16,946) (108)
Interest income........................................... 13,681 2,800
Interest expense.......................................... (1,547) (434)
Gain on disposal of available-for-sale securities......... 4,324 299
Gain on disposal of subsidiaries and cost investments..... 469 53
Other non-operating gains................................. 949 --
Other non-operating losses................................ (2,163) (139)
Share of losses in equity investees....................... (115) 6
----------- -----------
Income/(loss) before income taxes......................... (1,348) 2,477
Income tax benefits....................................... 1,222 285
----------- -----------
Income/(loss) before minority interests................... (126) 2,762
Minority interests in losses of consolidated
subsidiaries............................................ (989) (665)
----------- -----------
Income/(loss) from continuing operations.................. (1,115) 2,097
----------- -----------
Earnings/(loss) per share from continuing operations(1)
Basic................................................ (0.01) 0.02
Diluted.............................................. (0.01) 0.02
Weighted average number of shares
Basic................................................ 107,780,082 108,012,815
Diluted.............................................. 110,967,306 112,668,162
---------------
(1) Pro forma earnings/(loss) per share
(2) Major assumptions of the pro forma calculations
(a) Each of the acquisitions of IMI, Pivotal and Ross was consummated as of
January 1, 2003;
(b) Each shareholder of Ross elects to receive a combination of cash and
shares as consideration in the Ross acquisition.
17
(3) No adjustment has been made for lost interest income on the cash funds used
to effect the acquisition of IMI, Pivotal and Ross. Such lost interest
income would have the effect of reducing income by $773,000 and $193,000 for
the year ended December 31, 2003 and for the three months' period ended
March 31, 2004, respectively.
AS OF MARCH 31,
2004
-------------------
(UNAUDITED)
(IN THOUSANDS OF $,
EXCEPT SHARE AND
PER SHARE DATA)
PRO FORMA BALANCE SHEET DATA(2)(3)
Cash and cash equivalents................................... 117,797
Restricted cash............................................. 5,931
Available-for-sale debt securities.......................... 127,819
Restricted debt securities.................................. 104,564
Available-for-sale equity securities........................ 690
Bank loans.................................................. 93,974
Working capital............................................. 210,768
Total assets................................................ 711,813
Total shareholders' equity.................................. 470,241
Book value per share(1)..................................... 4.30
---------------
(1) The book value per share is based on shareholders' equity over the pro forma
number of chinadotcom shares of 109,383,208, comprised of:
- the number of chinadotcom common shares outstanding as of March 31,
2004; plus,
- the number of chinadotcom common shares expected to be issued to Ross
shareholders, i.e. the number of Ross common shares outstanding as at
March 31, 2004 multiplied by the exchange ratio of 1.647, assuming the
average closing chinadotcom share price for the ten consecutive trading
days ending on, and including, the trading day that is two days prior to
the closing date of the merger is $8.50.
(2) Major assumptions of the pro forma calculations
(a) Each of the acquisitions of IMI, Pivotal and Ross were consummated as
of January 1, 2003;
(b) Each shareholder of Ross elects to receive a combination of cash and
shares as consideration in the Ross acquisition.
(3) No adjustment has been made for lost interest income on the cash funds used
to effect the acquisition of IMI, Pivotal and Ross. Such lost interest
income would have the effect of reducing income by $773,000 and $193,000 for
the year ended December 31, 2003 and for the three months' period ended
March 31, 2004, respectively.
18
RECENT SIGNIFICANT ACQUISITIONS AND PARTNERSHIPS BY CHINADOTCOM
The following table sets forth chinadotcom's recent significant
acquisitions and partnerships.
ACQUISITION OR PARTNER ACQUISITION, PAYMENT OR
COMPANY PARTNERSHIP DATE ACQUIRED OR PARTNER COMPANY'S ACTIVITIES
---------------------- ----------------------- --------------------------------------------
URLs from CIC During October 2001 and chinadotcom acquired from CIC the three
February 2002 URLs, www.china.com, www.hongkong.com and
www.taiwan.com, and the related intellectual
property rights for $16.8 million.
Layabo Pty. Limited March 2002 chinadotcom acquired Layabo Pty. Limited, an
(renamed Mezzo Australian database marketing business.
Business Databases Consideration was payable in four
Pty Limited) installments. Payments through the first
three installments amounted to $2.1 million,
with the fourth installment payable based
upon the 2004 earnings of the company.
OpusOne Technologies March 2002 and May 2003 chinadotcom acquired OpusOne Technologies
International Inc. International Inc., or OpusOne Technologies,
the parent of Platinum China Holdings, Inc.,
a developer and service provider of business
management software solutions for state
enterprises and multi-national corporations
in Greater China. The total consideration
payable will be based upon a set multiple of
average net earnings under US GAAP for the
three years from 2003 through 2005,
inclusive, and is payable in cash and
chinadotcom common shares in installments
during that period. The amount payable for
2003 has not yet been determined.
Praxa Limited February 2003 chinadotcom completed the acquisition of an
Australian information technology
professional services organization with a
21-year operating history. The acquisition
was completed for a purchase price of up to
A$11.0 million (approximately $6.4 million),
subject to clawback provisions based on
future performance.
Newpalm (China) April 2003 chinadotcom completed the acquisition of
Information Newpalm (China) Information Technology Co.,
Technology Co., Ltd. Ltd., or Newpalm, a short message service
mobile software platform developer and
application service provider in China,
through chinadotcom's 81% owned subsidiary,
hongkong.com Corporation. Consideration was
payable in installments. The first
installment of $14.0 million was paid in
2003 and the second installment of $41.0
million was paid in February 2004.
19
ACQUISITION OR PARTNER ACQUISITION, PAYMENT OR
COMPANY PARTNERSHIP DATE ACQUIRED OR PARTNER COMPANY'S ACTIVITIES
---------------------- ----------------------- --------------------------------------------
vMoksha Technologies May 2003 chinadotcom's wholly-owned subsidiary, CDC
Limited Outsourcing Holdings Ltd., entered into a
51% owned joint venture with vMoksha
Technologies Limited, an information
technology outsourcing company headquartered
in Bangalore, India. The joint venture aims
to provide a broad range of outsourcing
related services to major software vendors
and enterprises in the United States, Europe
and the Asia-Pacific region. Consideration
expended to establish this joint venture was
not material.
PK Information Systems August 2003 chinadotcom acquired PK Information Systems,
an established IT services business in
Australia which has specialized capabilities
in the areas of .Net based application
development and business intelligence
solutions, with clients mainly in the New
South Wales state government sector. In
connection with the acquisition, chinadotcom
made an initial payment valued at A$2.25
million and a second payment of A$0.26
million in March of 2004, with remaining
consideration, not to exceed an additional
A$1.74 million, to be paid in three
additional installments.
Industri-Matematik September 2003 chinadotcom acquired a 51% stake in the
International holding company of IMI, an international
Corp./Cayman First provider of software to the supply chain
Tier management sector principally across Europe
and the United States. The acquisition of
the controlling stake in IMI for $25.0
million was made through the formation of a
joint venture called Cayman First Tier
between CDC Software, a wholly-owned
subsidiary of chinadotcom, and Symphony
Technology Group, a venture capital fund. In
connection with the joint venture, CDC
Software agreed to provide up to an
aggregate of $25.0 million in revolving
credit facilities to Cayman First Tier.
Pivotal Corporation February 2004 chinadotcom acquired Pivotal, an
international customer relationship
management company that provides a complete
set of highly flexible customer relationship
management applications and implementation
services for mid-sized enterprises, with
over 1,700 clients worldwide. Consideration
paid amounted to $58.0 million which
included $35.9 million in cash, 1.85 million
chinadotcom common shares with a value of
$21.4 million based on the trading price of
chinadotcom the day the acquisition became
effective (the value for these shares was
$20.7 million based on the ten day trading
average used in the purchase price formula),
transaction costs of approximately $0.2
million, and assumption of Pivotal stock
options of approximately $0.5 million.
20
ACQUISITION OR PARTNER ACQUISITION, PAYMENT OR
COMPANY PARTNERSHIP DATE ACQUIRED OR PARTNER COMPANY'S ACTIVITIES
---------------------- ----------------------- --------------------------------------------
Go2Joy April 2004 In April 2004, chinadotcom acquired Go2Joy,
a leading mobile applications and services
provider in the PRC with established
partnerships with media companies in the
PRC. Go2Joy also offers a unique mobile
payment service through an exclusive
partnership with the official mobile payment
platform authorized by China Mobile to
handle third party collections of non-mobile
related services. In connection with the
acquisition, chinadotcom made an initial
payment of $9.6 million in April 2004, with
remaining consideration, not to exceed $50.4
million, to be paid in two installments in
early 2005 and 2006.
Beijing 17game Network Pending On February 12, 2004, chinadotcom, through
Technology Co., Ltd. its 81.3% owned subsidiary, hongkong.com,
entered into a secured convertible loan
agreement with Beijing 17game Network
Technology Co., Ltd., or 17game, a Beijing
based online games company. The convertible
loan from hongkong.com to 17game, of up to
$3.2 million can be drawn down by 17game in
two stages. The first draw-down of $1.2
million occurred upon closing the
transaction. The second draw-down of $2.0
million will occur upon satisfaction of
certain conditions for hongkong.com's
benefit. Upon the second draw-down, the loan
will be automatically converted into shares
of 17game, representing an ownership
interest of 28.6%. hongkong.com will then
have an option to acquire the remaining
interest based on an earn-out formula, with
total consideration not to exceed $50
million. Upon hongkong.com achieving
majority ownership, 17game will have an
option to put their then minority
shareholding to hongkong.com based on the
same earn-out formula.
Ross Systems, Inc. Pending chinadotcom and Ross have entered into a
merger agreement, the terms of which are
more fully described in the accompanying
proxy statement/ prospectus.
21
CHINADOTCOM'S ACQUISITION OF PIVOTAL CORPORATION
On December 1, 2003, chinadotcom announced that it had entered into a
definitive agreement to acquire Pivotal by way of either an all-cash or a
cash-and-stock transaction. chinadotcom completed the acquisition on February
25, 2004. Pivotal is a leading international customer relationship management
company headquartered in Vancouver, Canada, B.C., that provides a complete set
of highly flexible customer relationship management applications and
implementation services for mid-sized enterprises, with over 1,700 clients
worldwide. See "The Companies -- chinadotcom -- Software and Other Investment
Initiatives -- Pivotal Corporation" beginning on page 128.
STRUCTURE:
The transaction was structured as a plan of arrangement under the Company
Act (British Columbia) pursuant to which CDC Software, a wholly-owned subsidiary
of chinadotcom, acquired all issued and outstanding shares of Pivotal.
CONSIDERATION:
In February 2004, chinadotcom acquired Pivotal for total consideration of
$58.0 million which included $35.9 million in cash, 1.85 million chinadotcom
common shares with a value of $21.4 million based on the trading price of
chinadotcom the day the acquisition became effective (the value for these shares
was $20.7 million based on the ten day trading average used in the purchase
price formula), transaction costs of approximately $0.2 million, and assumption
of Pivotal stock options of approximately $0.5 million. The issuance of
chinadotcom common shares resulted in approximately a 2% increase in the number
of chinadotcom's common shares outstanding to approximately 104 million.
FINANCING AGREEMENT
Contemporaneously with the execution of the definitive agreement to acquire
Pivotal, CDC Software and Pivotal entered into a break fee financing agreement
pursuant to which Pivotal received a $2 million loan from CDC Software bearing
interest at the US prime rate, to be used by Pivotal to pay a $1.5 million break
fee to a prior potential acquiror of Pivotal and transaction costs related to
executing the definitive agreement with chinadotcom. The outstanding principal
balance of the loan and interest thereon will be repayable by Pivotal on
December 5, 2006. The financing agreement was secured by a security interest
ranking subordinate to Pivotal's existing credit facilities on:
- All of Pivotal's and its United States and Canadian subsidiaries' cash;
and
- All the issued and outstanding shares of capital stock of Pivotal's
United States and Canadian subsidiaries.
22
PROPOSED INITIAL PUBLIC OFFERING OF CHINADOTCOM'S MOBILE APPLICATIONS BUSINESS
chinadotcom announced that it has reorganized its mobile and portal unit as
a wholly-owned subsidiary, chinadotcom Mobile Interactive Corporation, or CDC
Mobile, and proposes to register an offering of CDC Mobile's American Depositary
Shares under the Securities Act of 1933, as amended. CDC Mobile provides mobile
services and applications in China, and also provides mobile technology
consulting and advertising and interactive media services in Asia and
internationally. The mobile services and applications are principally offered
utilizing short messaging services technology through Palmweb Inc., or Newpalm,
a company chinadotcom acquired in April 2003 through its 81.3% owned subsidiary,
hongkong.com. For the three months ended March 31, 2004, revenues from Newpalm
amounted to $6.5 million, representing approximately 18.0% of chinadotcom's
revenues and 69.7% of CDC Mobile's revenues.
Subject to market conditions and the receipt of all necessary approvals,
chinadotcom, which is currently the sole shareholder of CDC Mobile, intends to
offer approximately 21% of CDC Mobile to the public, assuming the over-allotment
option is not exercised (24%, assuming the over-allotment is exercised in full).
Approximately 30% of the shares offered to the public would consist of CDC
Mobile shares held by chinadotcom and the remaining 70% of the shares offered to
the public would consist of newly issued shares from CDC Mobile. In the event
the underwriters in the offering exercise their over-allotment option,
chinadotcom would cover the over-allotment with CDC Mobile shares held by
chinadotcom. After the offering, chinadotcom intends to retain its ownership
interest in CDC Mobile which is not sold to the public. chinadotcom does not
believe that the offering of a portion of CDC Mobile to the public will have a
material impact on chinadotcom's financial position, results of operations or
liquidity in future periods because chinadotcom intends to continue to
consolidate CDC Mobile into its financial results.
The purpose of the intended offering is to fund the operations of CDC
Mobile following its reorganization as a public company holding chinadotcom's
assets and business that provide mobile services and applications, advertising
and interactive media and Internet services. Although chinadotcom anticipates it
may commence the offering in the second half of 2004, subject to market
conditions and the receipt of all necessary approvals, no assurances can be
given that such offering will occur.
23
RISK FACTORS
By voting in favor of the merger, current Ross stockholders will be
choosing to invest in chinadotcom common shares.
An investment in chinadotcom common shares involves a high degree of risk.
In deciding whether to vote in favor of the merger, you should consider all of
the information included in this document and its annexes, all of the
information included in the accompanying documents and all of the information
that is included in the documents incorporated by reference. See "Where You Can
Find More Information" on page 160 of this proxy statement/prospectus.
In addition, you should pay particular attention to the following risks
relating to the merger and risks related to each of chinadotcom and the combined
company following the merger.
RISKS RELATING TO THE MERGER
ROSS STOCKHOLDERS WHO ELECT TO RECEIVE CASH AND SHARES IN THE MERGER MAY NOT
RECEIVE EXACTLY $14.00 IN VALUE OF CHINADOTCOM COMMON SHARES FOR EACH SHARE OF
ROSS COMMON STOCK, AND THE SHARES TO BE RECEIVED BY ROSS STOCKHOLDERS UPON
COMPLETION OF THE MERGER MAY DECREASE IN VALUE AFTER THE EXCHANGE RATIO IS
FIXED.
The exchange ratio is the number of chinadotcom common shares that will be
issued for each share of Ross common stock in the merger. The exact exchange
ratio for the merger will not be known until the second trading day before the
closing date. After the exchange ratio is fixed, the number of chinadotcom
common shares that Ross stockholders who elect to receive cash and shares in the
merger will be entitled to receive upon completion of the merger will not
change, even if the market price of chinadotcom common shares changes. In recent
years, the stock market has experienced extreme price and volume fluctuations.
These market fluctuations have adversely affected the market price of the common
stock of technology companies, including at times chinadotcom, and may continue
to do so in the future. The market price of chinadotcom common shares upon and
after completion of the merger could be lower than the market price on the date
the exchange ratio is fixed. You should obtain recent market quotations of
chinadotcom common shares.
SALES OF CHINADOTCOM AND ROSS SHARES COULD CAUSE A DECLINE IN THEIR MARKET
PRICES.
U.S. holders of Ross common stock may be disinclined to own shares of a
company that is classified as a passive foreign investment company, which
subjects U.S. investors to adverse tax rules. This could result in the sale of
Ross common stock before the closing of the merger which could adversely affect
the market prices for these securities. Based upon approximately 3.6 million
Ross shares outstanding, including preference shares, vested warrant and
options, as of January 14, 2004, assuming all of Ross' stockholders elect to
receive cash-and-shares and the average share price of chinadotcom's common
shares used to determine the exchange ratio is $8.50, approximately 4.5 million
common shares of chinadotcom will be issued as a result of the merger. The final
number of shares to be issued will depend upon the actual average share price
calculated under the terms of the merger agreement and will be subject to change
if chinadotcom elects to adjust the exchange ratio and is also dependent upon
how many holders of Ross common stock elect to receive $17.00 in cash per share
of Ross common stock in place of the combination of cash and chinadotcom common
shares. Sales of a significant number of chinadotcom's shares, which could
result if U.S. holders of Ross common stock are disinclined to own shares of a
company that is classified as a passive foreign investment company or sell
shares to generate funds to satisfy tax liabilities because the merger will
generally be taxable to Ross stockholders for U.S. federal income tax purposes,
could adversely affect the market prices for these securities, particularly if a
significant number of sales occur during a short period of time. For a more
detailed discussion of potential adverse tax consequences of the merger, please
see the section entitled "Material U.S. Federal Income Tax Consequences" on page
154.
24
OWNERSHIP OF CHINADOTCOM COMMON SHARES MAY SUBJECT U.S. INVESTORS TO ADVERSE
TAX CONSEQUENCES.
Based upon an analysis of its income and assets for the year 2003,
chinadotcom believes that it was a passive foreign investment company, or PFIC,
during 2003, and based upon an analysis of its projected income and assets for
the year 2004, chinadotcom believes that it may be a PFIC during 2004. PFIC
status depends upon the composition of income and assets and the market value of
assets from time to time, which may be especially volatile in a technology
related enterprise. chinadotcom has limited control over these variables.
Accordingly, there can be no assurance that chinadotcom will not be classified
as a PFIC for 2004 or any future tax year.
If chinadotcom is classified as a PFIC for any given year, unless a U.S.
holder makes a timely specific election, a special tax regime would apply to any
"excess distribution," which would be the amount of distributions you received
in any year in excess of 125% of the average annual distributions received by
you in the three preceding taxable years or your holding period, if shorter.
Under this regime, any excess distribution and any gain realized on the sale or
other disposition of the chinadotcom shares would be treated as ordinary income
and would be subject to tax as if the excess distribution or gain had been
realized ratably over your holding period for the chinadotcom shares. You will
generally be required to pay taxes on the amount allocated to a year at the
highest marginal tax rate and pay interest on the prior year's taxes. You may be
able to ameliorate the tax consequences somewhat by making a mark-to-market
election or QEF election, that is, an election to have chinadotcom treated as a
qualified electing fund for U.S. federal income tax purposes. A U.S. holder that
makes a timely QEF election would include its pro rata share of PFIC earnings
and capital gain in income each year, regardless of whether distributions are
actually made. Such a U.S. holder could thus have tax liability attributable to
PFIC earnings and gain without a corresponding receipt of cash. A U.S. holder
could instead make a mark-to-market election, under which marketable PFIC stock
would be treated as if it were sold and repurchased by the U.S. holder at the
close of each taxable year. The U.S. holder would recognize, as ordinary income,
any gain from the sale (including any deemed sale at the close of a taxable
year) or other disposition of the stock. Ordinary losses may be available in
connection with any such sale or other disposition to the extent of prior
ordinary income inclusions. You should consult your tax advisor on the
consequences of chinadotcom's classification as a PFIC.
For a more detailed description of the tax consequences of ownership of
chinadotcom shares, please see "Material U.S. Federal Income Tax Consequences"
beginning on page 154.
ROSS' EXECUTIVE OFFICERS AND DIRECTORS HAVE INTERESTS IN THE MERGER THAT ARE
DIFFERENT FROM YOUR INTERESTS AS A ROSS STOCKHOLDER.
The merger agreement was negotiated with chinadotcom by executive officers
of Ross. It has been approved by Ross' board of directors, which is recommending
that Ross stockholders vote in favor of the proposal to adopt and approve the
merger agreement and the merger. In considering these facts and the other
information contained in this document, you should be aware that Ross' executive
officers and directors may have economic interests in the merger in addition to
their interest in maximizing shareholder value which they share with you as a
holder of Ross stock. These interests include (1) in substitution for benefits
under prior employment agreements with Ross, cash payments, one-time special
grants of chinadotcom common shares and one-time special grants of chinadotcom
restricted shares to Ross executive officers under the Transition and Stock
Vesting Agreements described in the section entitled "Proposal No. 1 -- The
Merger -- Interests of Ross Directors and Officers in the Merger" beginning on
page 99, (2) acceleration of options held by Ross executive officers and (3) the
continuation of rights to indemnification and the purchase of liability
insurance for all Ross directors and executive officers. In addition, Ross
executive officers will enter into new employment agreements with Ross,
operating as a subsidiary of chinadotcom, upon the completion of the merger.
These interests are different from those of other Ross stockholders. These
interests will result in benefits to Ross directors and executive officers that
would not accrue were the merger not to be consummated. There is therefore a
risk that the directors and executive officers of Ross may have been more likely
to vote to approve (and recommend that stockholders vote to approve) the merger
agreement and the merger than if they did not have these
25
interests. Ross stockholders should consider whether these interests may have
influenced these directors and executive officers to support or recommend the
merger. For additional information about these interests, please see "Proposal
No. 1 -- The Merger -- Interests of Ross Directors and Officers in the Merger"
beginning on page 99.
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT EACH OF CHINADOTCOM'S
AND ROSS' FUTURE BUSINESSES AND OPERATIONS AND THE TRADING PRICE OF EACH
COMPANY'S STOCK.
Completion of the transaction is subject to the satisfaction or waiver of a
number of closing conditions, and there can be no assurances that those closing
conditions will be satisfied or waived. If the transaction is not completed for
any reason, chinadotcom and Ross may be subject to a number of negative
consequences, including the following:
- benefits that chinadotcom and Ross expect to realize from the
transaction, such as the enhanced financial and competitive position of
the combined company, would not be realized;
- the price of Ross shares may decline to the extent that the current
market price reflects a market assumption that the transaction will be
completed;
- market analysts' estimates of Ross' valuation may decline due to
uncertainty regarding Ross' stand-alone prospects;
- costs related to the transaction, such as legal, accounting and printing
fees, as well as a portion of the financial advisors fees, must be paid
even if the transaction is not completed;
- depending on the reason for termination of the merger agreement, Ross may
be required to pay chinadotcom a termination fee of up to $1,350,000 plus
an additional amount of up to $750,000 for chinadotcom's fees and
expenses; and
- the diversion of management's attention from the day-to-day business of
each of chinadotcom and Ross and the associated disruption to its
employees and its relationships with customers and suppliers during the
period that the transaction is pending may make it difficult for each
company to regain its financial and market position if the transaction
does not occur.
If either company's board of directors determines to seek another merger or
business combination, there can be no assurance that Ross will be able to find a
suitable partner or be able to negotiate terms similar to those provided for in
the merger agreement.
COMPLETION OF THE MERGER MAY BE MET WITH UNFAVORABLE REACTION FROM EITHER OR
BOTH OF ROSS' AND CHINADOTCOM'S PARTNERS, CUSTOMERS OR KEY EMPLOYEES.
While Ross and chinadotcom have not received any notice from any current or
prospective business partners, joint venture partners, service or equipment
suppliers and customers that in response to the announcement of the merger, they
have delayed or cancelled purchasing decisions or decisions relating to joint
ventures, contracts or other business alliances, there can be no assurance that
there will be no delay or cancellation by these parties in the future, any of
which could have a material adverse effect on the business of either or both
companies and the combined company following the merger. In addition, key
employees of both companies may feel that the merger poses uncertainties that
cause them to leave the company, which could also have a material adverse effect
on the business of either or both companies and the combined company following
the merger.
THE COMBINED COMPANY MAY NOT SUCCESSFULLY INTEGRATE THE OPERATIONS AND
TECHNOLOGY OF CHINADOTCOM AND ROSS IN A TIMELY MANNER, OR AT ALL, AND THE
COMBINED COMPANY MAY NOT REALIZE THE ANTICIPATED BENEFITS OF THE MERGER TO THE
EXTENT, OR IN THE TIMEFRAME, ANTICIPATED, WHICH COULD SIGNIFICANTLY HARM THE
COMBINED BUSINESS AND HAVE A MATERIAL ADVERSE EFFECT ON THE COMBINED COMPANY
AFTER THE MERGER.
Ross and chinadotcom entered into the merger agreement with the expectation
that the merger will result in benefits to the combined company. However, these
expected benefits may not be fully realized.
26
The integration of certain company operations after the merger may be difficult,
time consuming and costly, particularly in light of the technical and complex
nature of each company's products. After completion of the merger, the combined
company must successfully coordinate worldwide marketing and distribution of
multiple product lines, enhance certain product and service offerings where
appropriate, coordinate custom product development resources, communicate a
coordinated marketing message, and leverage company services and systems. It is
possible that these integration efforts will not be completed as efficiently as
planned or will distract management from the operations of the combined
company's business. The challenges involved in this integration include the
following:
- managing software development activities to define a product roadmap,
ensure timely release of innovative products to market, and to deliver
effective technology integration while coordinating software development
operations in a swift and efficient manner;
- demonstrating to existing and potential investors and customers that the
merger will not result in adverse changes in the value of their
investment or in customer service standards, quality or product
development focus;
- coordinating and integrating marketing efforts to effectively communicate
the capabilities of the combined company, cross selling related products
to each other's customers, and managing the sales forces to leverage
opportunity while minimizing channel conflict;
- maintaining employee morale and productivity, assimilating key employees
and managing an increased number of employees over large geographic
distances;
- creating and effectively implementing standards of excellence, controls,
procedures, policies and information systems; and
- retaining or recruiting key personnel.
The execution of these post-merger events will involve considerable risks
and may not be successful. These risks include:
- the potential disruption of the combined company's ongoing business and
distraction of its management;
- the potential strain on the combined company's financial and managerial
controls and reporting systems and procedures;
- unanticipated expenses and potential delays related to integration of the
operations, technology and other resources of the two companies;
- the inability to successfully manage the geographically diverse
organization;
- the failure to realize the anticipated synergies from the combination;
- greater than anticipated costs and expenses related to restructuring,
including employee severance or relocation costs and costs related to
vacating leased facilities; and
- potential unknown liabilities associated with the merger and the combined
operations.
IN THE EVENT THE MERGER IS APPROVED AND CONSUMMATED, ROSS STOCKHOLDERS WHO
ELECT TO RECEIVE A COMBINATION OF CASH AND SHARES IN THE MERGER WILL RECEIVE
COMMON SHARES OF CHINADOTCOM, WHICH IS A "FOREIGN PRIVATE ISSUER" AND HAS
DISCLOSURE OBLIGATIONS DIFFERENT FROM THOSE OF ROSS AND OTHER U.S. DOMESTIC
REPORTING COMPANIES.
chinadotcom is a foreign private issuer and, as a result, obtains relief
from certain of the requirements imposed upon U.S. domestic issuers by the
Securities and Exchange Commission, or the Commission. For example, chinadotcom
is not required to issue quarterly reports or proxy statements. chinadotcom is
allowed six months to issue annual reports instead of three, and chinadotcom is
not required to disclose executive compensation reports that are as detailed as
U.S. domestic issuers. chinadotcom's directors and
27
officers are not required to report equity holdings under Section 16 of the
Securities Act of 1933, as amended, or the Securities Act, although chinadotcom
does file reports under Sections 13 of the Securities Exchange Act of 1934, as
amended, or the Exchange Act, if and when applicable. In general, because
various of the disclosure obligations on chinadotcom as a foreign private issuer
are less stringent than those required of Ross, in the event the merger is
approved and consummated, Ross stockholders who receive shares of chinadotcom
should not expect to receive an equivalent amount of disclosure from chinadotcom
which they have received in the past from Ross as a U.S. domestic reporting
company.
THE REMAINING RISK FACTORS IN THIS SECTION ARE PROVIDED BY CHINADOTCOM.
RISKS RELATING TO CHINADOTCOM'S ACQUISITION OF PIVOTAL
SALES OF A SIGNIFICANT NUMBER OF CHINADOTCOM SHARES ISSUED IN SUCH ACQUISITION
COULD CAUSE A DECLINE IN THE MARKET PRICE OF CHINADOTCOM'S SHARES.
Similar to U.S. holders of Ross common stock, U.S. holders of Pivotal's
common shares may be disinclined to own shares of a company that is classified
as a passive foreign investment company, which subjects U.S. investors to
adverse tax consequences. This could result in the sale of some or all of the
1.85 million chinadotcom common shares received upon consummation of
chinadotcom's acquisition of Pivotal which represented an approximate 2%
increase in chinadotcom's common shares outstanding to approximately 104
million. Sales of a significant number of chinadotcom's shares, which could
result if U.S. holders of Pivotal's common shares are disinclined to own shares
of a company that is classified as a passive foreign investment company or sell
shares to generate funds to satisfy tax liabilities because the acquisition will
generally be taxable to Pivotal's shareholders for U.S. federal income tax
purposes, could adversely affect the market price for chinadotcom's common
shares, particularly if a significant number of sales occur during a short
period of time.
PIVOTAL HAS HAD A RECENT HISTORY OF NET LOSSES, AND THERE IS NO GUARANTEE THAT
CHINADOTCOM WILL REALIZE ANTICIPATED SYNERGIES BETWEEN PIVOTAL AND CHINADOTCOM
OR THAT THE COMBINED ENTITY WILL BE PROFITABLE.
Pivotal has a recent history of net losses. In particular, Pivotal incurred
net losses of $27.6 million in fiscal 2003, $95.9 million in fiscal 2002 and
$32.5 million in fiscal 2001. For the eight months ended February 29, 2004,
Pivotal incurred a net loss of $11.1 million. As at February 29, 2004 Pivotal
had an accumulated deficit of $183.0 million. While chinadotcom expects that the
combination of Pivotal and chinadotcom will result in synergies, which in turn
will result in improved financial performance at Pivotal, there is no guarantee
that Pivotal or the combined entity will be profitable in the future.
IF CHINADOTCOM IS UNABLE TO TAKE ADVANTAGE OF OPPORTUNITIES TO MARKET AND SELL
PIVOTAL'S PRODUCTS AND SERVICES TO ITS CUSTOMERS, DISTRIBUTION CHANNELS AND
BUSINESS PARTNERS IN ASIA, CHINADOTCOM MAY NOT REALIZE SOME OF THE EXPECTED
BENEFITS OF THE ACQUISITION OF PIVOTAL.
A significant anticipated benefit of the acquisition of Pivotal is
expanding Pivotal's business in the Asia Pacific region by leveraging
chinadotcom's local expertise and distribution channels. In particular,
chinadotcom believes Pivotal can cross-sell and market its customer relationship
management applications and implementation services (an area in which CDC
Software's existing product offerings have limited functionality), in growth
markets for such software in Asia where CDC Software has an established China
presence. In the event that chinadotcom cannot adapt the Pivotal products to the
needs of the local markets or chinadotcom's traditional customers and business
partners are not receptive to Pivotal's products and services, chinadotcom may
not realize some of the expected benefits of the acquisition, and both
businesses may be harmed.
28
RISKS RELATING TO CHINADOTCOM'S ACQUISITION OF 51% OF IMI
IF CHINADOTCOM IS UNABLE TO TAKE ADVANTAGE OF OPPORTUNITIES TO MARKET AND SELL
IMI'S PRODUCTS AND SERVICES TO ITS CUSTOMERS, DISTRIBUTION CHANNELS AND
BUSINESS PARTNERS IN ASIA, THE VALUE OF CHINADOTCOM'S INVESTMENT IN IMI WILL
BE SIGNIFICANTLY DIMINISHED.
In September 2003, chinadotcom acquired a 51% stake in Cayman First Tier,
the holding company of IMI, in exchange for $25 million in cash and up to an
aggregate of $25 million in revolving loan facilities provided to Cayman First
Tier. Symphony Technology Group, a Palo Alto, California based venture capital
company holds the remaining 49% in Cayman First Tier. Cayman First Tier's assets
consist of holding through intermediate holding companies, 100% of the shares of
IMI. IMI's assets include software solutions which it has developed for
retailers, wholesalers and consumer goods manufacturers, particularly in the
grocery, specialty goods, and pharmaceutical and over-the-counter drugs
industries.
A significant anticipated benefit of the IMI acquisition is expanding IMI's
business in the Asia Pacific region by leveraging chinadotcom's local expertise
and distribution channels. IMI expects to take advantage of chinadotcom's
existing customer bases and sales network in order to promote and sell IMI's
products and services to chinadotcom's traditional customers and business
partners because IMI's products and services target the supply chain management
needs of large enterprises, including customer fulfillment and warehouse
management, which is a market in which chinadotcom did not previously offer a
specialized enterprise software product. The companies believe IMI's software
will be attractive to many of chinadotcom's customers and partners in the
manufacturing, distribution, and retail sectors, and IMI can adapt its software
to integrate with the existing enterprise software products, primarily in the
areas of financials, manufacturing, distribution and payroll, which chinadotcom
may have previously sold to its customer base.
The products and services of IMI are highly technical, principally
servicing the supply chain management needs of large enterprises, a market in
which chinadotcom has limited experience, and the salespersons of chinadotcom
may not be successful in marketing IMI's products and services. In the event
that chinadotcom's traditional customers and business partners are not receptive
to IMI's products and services, chinadotcom may not realize some of the expected
benefits of its investment in IMI, and the value of its investment will be
significantly diminished. In addition, while the companies also believe any need
to adapt IMI's products to work with a customer's existing enterprise software
products can be accomplished in a more cost-effective and time efficient manner
utilizing chinadotcom's outsourced software development capabilities,
chinadotcom cannot assure you that it will be able to realize the benefits of
this anticipated synergy.
CHINADOTCOM HAS AN OBLIGATION TO PURCHASE THE SHARES OF CAYMAN FIRST TIER FROM
SYMPHONY UPON THE OCCURRENCE OF CERTAIN EVENTS WHICH MAY RESULT IN THE USE OF
A SIGNIFICANT AMOUNT OF CHINADOTCOM'S CASH OR ISSUANCE OF A SIGNIFICANT NUMBER
OF CHINADOTCOM'S SHARES WHICH COULD RESULT IN DILUTION TO HOLDERS OF
CHINADOTCOM'S SHARES.
Symphony, which holds the remaining 49% interest in Cayman First Tier, the
holding company of IMI, has an option to sell to chinadotcom all of Symphony's
49% interest in Cayman First Tier at any time during the twelve months following
the occurrence of unpermitted changes in the composition of Cayman First Tier's
executive committee, a decision of Cayman First Tier's executive committee being
overruled by the Cayman First Tier board, or modifications to the rights, powers
or responsibilities of Cayman First Tier's executive committee without the
approval of the directors appointed by Symphony.
chinadotcom's purchase price for Symphony's interest in Cayman First Tier
is based on the financial performance of Cayman First Tier, and is set at a
fixed multiple of Cayman First Tier's annual revenues. The multiple, while
subject to review, is selected based upon a formula using Cayman First Tier's
revenue growth and EBITDA as a percentage of revenue. The fixed multiple varies
from 0.25, in the event revenues for Cayman First Tier are decreasing by greater
than 10% per year and EBITDA as a percentage of revenues for Cayman First Tier
is less than 5%, to 6.0, in the event revenues for Cayman First Tier are
increasing by greater than 20% per year and EBITDA as a percentage of revenues
for Cayman First Tier
29
is greater than 20%. The form of payment of the purchase price will be
determined by the parties, and may consist of cash, chinadotcom common shares, a
combination of cash and chinadotcom common shares, or other form of payment.
IF CHINADOTCOM CANNOT OR CHOOSES NOT TO ENFORCE THE TERMS UNDER WHICH IT HAS
AGREED TO LOAN UP TO $25 MILLION TO CAYMAN FIRST TIER, IT MAY FACE ADDITIONAL
RISKS IN COLLECTING ANY AMOUNTS ADVANCED TO CAYMAN FIRST TIER.
In addition to a $25 million investment into Cayman First Tier, the holding
company parent of IMI, as consideration for chinadotcom's majority 51% stake in
Cayman First Tier, chinadotcom provided additional consideration in the form of
two loan facilities under which chinadotcom has agreed to loan up to an
aggregate of $25 million. The two loan facilities, one with Cayman First, as
borrower, and the second with Symphony Enterprise Solutions, S.ar.L., which is a
wholly-owned subsidiary of Cayman First Tier (and unrelated to Symphony
Technology Group, except through Symphony's 49% interest in Cayman First Tier),
as borrower, have substantially similar terms. Copies of the loan facilities
provided by chinadotcom, have been filed with the Commission under cover of its
Current Report on Form 6-K filed on September 15, 2003.
Proceeds of advances may be used for the following purposes:
- to acquire assets of, or equity interests in, companies that are in the
business of providing software for warehousing management, logistics and
distribution management, and supply chain execution;
- to provide working capital for any businesses so acquired;
- to make loans and capital contributions to subsidiaries; or
- to repay a then existing loan agreement among affiliates of IMI and
Foothill Capital Corporation.
If Cayman First Tier does not use the proceeds of any loan advance for one
of the approved purposes, it may not have sufficient funds to pursue
acquisitions, or to improve the business of the companies it acquires which may
delay or impair the ability to integrate these businesses with chinadotcom,
which could have a material adverse effect on chinadotcom's business, financial
condition and results of operations.
Under the loan facilities, each of the borrowers agrees that, upon the
request of chinadotcom, it will deliver to chinadotcom guaranties and security
agreements guaranteeing and/or securing payment of the borrower's obligations
under the loan facilities, which could include liens on the assets of the
borrower and the assets and securities of subsidiaries which are acquired.
chinadotcom cannot assure you that any guaranties or security it receives to
guarantee and/or secure payment of the borrowers' obligations under the loan
facilities will be adequate or sufficient to secure the full amount of the
borrowers' obligations in the event the borrowers are unable to make payment
under the loan facilities.
In addition, the lines of credit contain other covenants typical for such
facilities, including limitations on liens, limitations on debt and restrictions
on sale of assets. In addition, at any time when chinadotcom is no longer
entitled to appoint a majority of the board of directors of IMI, the borrower is
required to comply with financial covenants including maintaining minimum
tangible asset value, specified EBITDA and minimum consolidated cash levels.
chinadotcom cannot assure you that if it is no longer entitled to appoint a
majority of the board of directors of Cayman First Tier, and the borrower is
required to comply with the foregoing financial covenants, that such financial
covenants will be adequate or appropriate to protect its loan, or that the
borrower will be able to comply with the requirements of the financial
covenants.
As of May 31, 2004, $7 million had been drawn under the line of credit
between chinadotcom and Cayman First Tier, and no amounts had been drawn under
the line of credit between chinadotcom and Symphony Enterprise Solutions,
S.ar.L. (an entity unrelated to Symphony Technology Group, except through
Symphony's 49% interest in Cayman First Tier). Amounts drawn under the line of
credit between chinadotcom and Cayman First Tier had been used to repay amounts
understanding under a Loan and
30
Security Agreement, or Loan Agreement, among affiliates of IMI and Foothill
Capital Corporation, or Foothill, as lender, so that the Foothill Loan Agreement
could be terminated. In January 2003, prior to chinadotcom's acquisition of a
majority 51% stake in Cayman First Tier, affiliates of IMI had entered into the
Foothill Loan Agreement. The affiliates of IMI party to the Foothill Loan
Agreement as borrowers were IMI Global Holdings Ireland Limited, IMI Holdings
Ireland Limited, IMI North American Holdings Limited and Industri-Matematik,
Limited, each of which is currently a wholly-owned subsidiary of Cayman First
Tier. As of September 8, 2003, immediately prior to the chinadotcom's
acquisition of a 51% stake in Cayman First Tier, approximately $6.5 million was
outstanding under the Foothill Loan Agreement. The Foothill Loan Agreement
contained covenants typical for such facilities, including covenants not to
cause a change of control and create indebtedness with limited exceptions. The
consummation of chinadotcom's acquisition of a majority 51% stake in Cayman
First Tier conflicted with, and resulted in a default under, the Foothill Loan
Agreement. Prior to chinadotcom's consummation of the acquisition, Symphony and
chinadotcom discussed their proposed transaction with Foothill, and agreed with
Foothill that the Foothill Loan Agreement would be repaid reasonably soon after
chinadotcom's consummation of the acquisition, and the Foothill Loan Agreement
would be terminated. As a result, IMI did not seek to return to compliance with
the covenants under the Foothill Loan Agreement after chinadotcom's consummation
of the acquisition. On November 3, 2003, Cayman First Tier repaid all amounts
outstanding under the Foothill Loan Agreement, and the agreement was terminated.
As of May 31, 2004, Cayman First Tier was in compliance with its debt
covenants under the lines of credit provided by chinadotcom, although no
assurances can be given that Cayman First Tier will be in compliance with its
debt covenants under the lines of credit in future periods. The $7 million drawn
under the line of credit between chinadotcom and Cayman First Tier has been
secured by a first priority pledge by Symphony in favor of chinadotcom of all of
Symphony's right, title and interest in Symphony's 49% interest in Cayman First
Tier. As described in the following risk factor, Symphony's 49% interest in
Cayman First Tier is also used as security in connection with a $25 million
non-recourse loan from Cayman First Tier to Symphony. The security interest
granted in connection with the line of credit is senior to the security interest
to secure the non-recourse loan. Other than the $7 million drawn under the line
of credit to pay the Foothill Loan Agreement and the $25 million non-recourse
loan from Cayman First Tier to Symphony, Symphony's 49% interest in Cayman First
Tier is not used as security for any other debt or loan. In the event the value
of Symphony's 49% interest in the joint venture with chinadotcom in Cayman First
Tier declines, chinadotcom may be unable to recover the full amount owed to it
under the line of credit, which may have a material adverse effect on
chinadotcom's financial statements.
IF CAYMAN FIRST TIER IS UNABLE TO RECOVER THE FULL AMOUNT OWED TO IT UNDER A
NON-RECOURSE $25 MILLION LOAN TO SYMPHONY, IT MAY HAVE A MATERIAL ADVERSE
EFFECT ON CHINADOTCOM'S FINANCIAL STATEMENTS.
Promissory Note
On November 14, 2003, Cayman First Tier, the holding company of IMI, loaned
$25 million to Symphony in exchange for a non-recourse promissory note from
Symphony. Symphony would use the proceeds from the loan to pursue acquisitions
of enterprise resource planning software companies. Under the terms of the
promissory note, Symphony promised to re-pay the $25 million with interest
accruing at the rate of 3% per annum on November 14, 2007. Symphony's
obligations under the promissory note are secured by a pledge from Symphony in
favor of Cayman First Tier of all of Symphony's right, title and interest in
Symphony's 49% interest in Cayman First Tier. The security interest is
subordinate to the security interest Symphony granted in its 49% interest in
Cayman First Tier to secure amounts outstanding under the line of credit from
chinadotcom to Cayman First Tier. Any inability by Cayman First Tier to recover
the full amount owed to it by Symphony under the promissory note may have a
material adverse effect on chinadotcom's financial statements.
31
Joint Venture Agreement
In connection with the making of the $25 million loan from Cayman First
Tier to Symphony and the $7 million loan from chinadotcom to Cayman First Tier,
on November 14, 2003, Symphony agreed to waive its right to receive, and granted
to chinadotcom, Symphony's pro rata portion of the profits of Cayman First Tier
that are available to be distributed by way of dividend to Symphony during the
two year period between September 30, 2003 and September 30, 2005, up to a
maximum of $10 million per year. If the total profits of Cayman First Tier
during the two year period, however, are less than $20 million, Symphony agreed
that the term of its waiver, and grant to chinadotcom, is to be extended until
the earlier of March 31, 2006 or such time as the total profits of Cayman First
Tier waived by Symphony equal $20 million.
Symphony has also agreed that its pro rata portion of the actual aggregate
profits of Cayman First Tier that are available to be distributed by way of
dividend to Symphony during the two year period between September 30, 2003 and
September 30, 2005, in excess of $10 million per year is to used to set-off any
amounts of accrued and unpaid interest and outstanding principal under the $25
million loan from Cayman First Tier to Symphony, and evidenced by a promissory
note.
chinadotcom cannot give you assurances as to the amount of profits of
Cayman First Tier, if any, that will be available to be distributed by way of
dividend to it instead of Symphony as a result of Symphony's waiver. Cayman
First Tier's profits that will be available to be distributed by way of dividend
will depend upon the financial performance of Cayman First Tier which is subject
to risks and uncertainties, including the risks and uncertainties set forth
under "Risks Relating to chinadotcom's Acquisition of 51% of IMI" and "Risks
Relating to chinadotcom's Overall Business."
Contingent Option Agreement
In connection with the making of the $25 million loan from Cayman First
Tier to Symphony and the $7 million loan from chinadotcom to Cayman First Tier,
on November 14, 2003, Symphony agreed to grant to Cayman First Tier an option to
purchase from Symphony that amount of securities of the company Symphony
acquired with the proceeds of its $25 million loan to Symphony equal to 5% of
the amount of securities acquired by Symphony in such company. In December 2003,
Symphony used proceeds from the $25 million loan from Cayman First Tier to
acquire a 27.4% interest in Intentia International AB, or Intentia, a public
company traded on the Stockholm Stock Exchange which supplies collaboration
solutions to more than 3,500 customers in the manufacturing, maintenance and
distribution industries in approximately 40 countries. In connection with
Symphony's transaction with Intentia, Symphony invested an initial SEK 256
million in Intentia. Symphony acquired 38.8 million shares at a price of SEK
6.60 per share, and 23 million warrants exercisable over four years into shares
with a strike price of SEK 10.00 per share. The investment gave Symphony an
initial 27.4% of Intentia's shares, and a potential to hold 37.2%. The directed
shares and warrants issued were approved by an extraordinary general meeting of
Intentia's shareholders held on February 6, 2004. Neither chinadotcom nor Cayman
First Tier was a party to any of the agreements between Symphony and Intentia,
and neither chinadotcom nor Cayman First Tier currently hold any interest in
Intentia.
Under the Contingent Option Agreement between Cayman First Tier and
Symphony, the purchase price for the securities to be paid by Cayman First Tier
if it exercises this option was set at 175% of the price Symphony paid for the
acquired securities.
Cayman First Tier, with the consent of Symphony, has assigned the option to
chinadotcom. The value of the option granted by Symphony is inherently
speculative and cannot be determined at the current time. In addition, no
assurances can be given that Intentia will be sufficiently successful such that
chinadotcom would believe it to be in its interest to exercise the option, or
that chinadotcom will have sufficient capital and resources to pay the purchase
price of the securities granted under the option, even if it desired to exercise
the option.
32
IMI HAS HAD A RECENT HISTORY OF NET LOSSES, AND THERE IS NO GUARANTEE THAT IMI
WILL CONTINUE TO BE PROFITABLE IN THE FUTURE.
IMI has a recent history of net losses. In particular, IMI incurred net
losses of $12.4 million in fiscal 2003, $6.6 million in fiscal 2002, $35.3
million in fiscal 2001 and $22.8 million in fiscal 2000. There is no assurance
that IMI will achieve profitability. chinadotcom is in the process of
integrating IMI into chinadotcom's operations in an effort to improve its
operating results. Some of its integration activities have included the
following:
- Back office integration, including a consolidation of the general and
administrative functions of IMI which may lead to staff reductions and
consolidation of offices in the United Kingdom and the Netherlands to
reduce the need for office space;
- Financial integration, including the repayment and termination of a loan
facility with an independent third party lender, and replacement of it
with debt drawn on two revolving credit facilities made available to IMI
from chinadotcom in order to reduce cost of capital and loan fees. In
order to minimize liabilities, other than the than these two revolving
credit facilities provided by chinadotcom, there are no other existing
credit facilities of Cayman First Tier; and
- Business integration, including the appointment of Patrick Tinley, who
also acts as chief executive officer of Ross, as the chief executive
officer of Cayman First Tier.
chinadotcom, however, cannot assure you that such integration activities
will be sufficient to enable IMI to sustain profitability.
CONTRACTUAL RIGHTS PROVIDED TO SYMPHONY MAY LIMIT THE ABILITY OF CHINADOTCOM
TO INTEGRATE CAYMAN FIRST TIER QUICKLY IN THE EVENT OF DISAGREEMENT WITH THE
MINORITY SHAREHOLDER WHICH MAY ADVERSELY AFFECT THE OPERATIONS AND FINANCIAL
CONDITION OF CHINADOTCOM.
With respect to Cayman First Tier, a non-wholly owned subsidiary of
chinadotcom, Symphony, as the minority shareholder, has contractual rights which
may limit the ability of chinadotcom to integrate Cayman First Tier quickly in
the event of disagreement with Symphony. chinadotcom and Symphony have
established an executive committee for Cayman First Tier and adopted an
executive committee charter which may be amended or repealed by a majority of
the Cayman First Tier board at any time. The executive committee consists of
four members of the Cayman First Tier board, with two members elected by each of
chinadotcom and Symphony. The executive committee charter delegates some of the
responsibilities regarding personnel, compensation and expenditures to the
executive committee. As a result, chinadotcom must work with Symphony to build
consensus as to how to proceed with decisions which affect integration. In the
event chinadotcom cannot reach consensus with Symphony at the executive
committee, chinadotcom, which holds a majority of the seats of the Cayman First
Tier board, retains the authority to amend or repeal the delegation of the
responsibilities to the executive committee. The contractual rights, as a
result, may limit the ability of chinadotcom to integrate Cayman First Tier
quickly in the event of disagreement with the minority shareholder which may
adversely affect the operations and financial condition of chinadotcom. See "The
Companies -- Integration of Recently Acquired and Proposed to be Acquired
Companies -- Industri-Matematik International Corp." beginning on page 129.
Additionally, in the event the parties do not comply with the terms of the
voting agreement with respect to the election of directors, the parties may need
to litigate the issues which could be costly and time consuming, and would
distract chinadotcom from integrating Cayman First Tier into its operations. In
addition, any disagreements between the parties with respect to the voting
agreement or any of the other material agreements which form part of the joint
venture, even if resolved, could strain or have an adverse effect upon the
relationship between Symphony and chinadotcom which could, in turn, affect the
ability of the parties to work together in the joint venture, and could have a
material adverse effect on Cayman First Tier.
33
Because each of chinadotcom and Symphony have an equal number of seats on
the executive committee, in the event of a disagreement between the
representatives of chinadotcom and Symphony on the executive committee with
respect to a decision which has been delegated initially to the executive
committee, the parties will need to meet to discuss the issues, which will take
time to resolve and could affect the ability of Cayman First Tier to take quick
action in a rapidly evolving marketplace. If Cayman First Tier cannot take
timely action, Cayman First Tier may fail to take advantage of new business
opportunities or face increased risks with existing customers, which could have
a material adverse effect on Cayman First Tier's business and results of
operations, which, in turn, could have a material adverse effect on
chinadotcom's business and results of operations. While chinadotcom, which holds
a majority of the seats of the Cayman First Tier board, retains the authority to
amend or repeal the delegation of the foregoing responsibilities to the
executive committee, in the event a majority of the entire Cayman First Tier
board amends or repeals the executive committee charter without the approval of
the directors elected by Symphony, Symphony may have the right to exercise an
option to sell to chinadotcom all of Symphony's 49% minority interest in Cayman
First Tier at any time during the twelve months following the occurrence of such
events. If Symphony exercises its option, it may result in the use of a
significant amount of chinadotcom's cash or issuance of a significant number of
chinadotcom's shares.
RISKS RELATING TO CHINADOTCOM'S OVERALL BUSINESS
BECAUSE CHINADOTCOM HAS A LIMITED OPERATING HISTORY AND ITS BUSINESS MODEL AND
STRATEGY ARE EVOLVING, IT LACKS EXPERIENCE IN ITS NEW MARKETS AND CANNOT
PROVIDE ASSURANCES IT WILL BE SUCCESSFUL IN MEETING THE NEEDS OF CUSTOMERS IN
THESE MARKETS.
chinadotcom has a limited operating history beginning in June 1997 as a
pan-Asian integrated Internet company with its business model centered around
its e-business consulting services and advertising businesses, including
e-marketing services, portal services and other media. chinadotcom's business
model has evolved to focus on providing enterprise software and related support
services, outsourced software development and support services, advertising,
short messaging services for mobile devices and portal services.
With this new focus, chinadotcom's goal is to be a leading integrated
enterprise solutions company offering technology, marketing and media services
for companies and end users throughout Greater China (comprised of Taiwan, Hong
Kong and the PRC) and the Asia-Pacific region, the United States and the United
Kingdom.
You will not be able to evaluate chinadotcom's prospects solely by
reviewing its past businesses, but should consider chinadotcom's prospects in
light of the changes in its business focus. Each of chinadotcom's targeted
markets is rapidly changing, and chinadotcom cannot assure you that it can
successfully address the challenges in its new lines of business or adapt its
business model and strategy to meet the needs of customers in these markets. If
chinadotcom fails to modify its business model or strategy to adapt to these
markets, its business could suffer.
CHINADOTCOM HAS UNTIL RECENTLY A HISTORY OF LOSSES AND CANNOT PROVIDE ANY
ASSURANCES THAT IT CAN ACHIEVE OR SUSTAIN PROFITABILITY.
Since chinadotcom's corporate organization in June 1997, it has incurred
net losses in each of its last four fiscal years until fiscal 2003, in which
chinadotcom recorded a net gain. chinadotcom generated net income and incurred
net loss in the last five fiscal years as follows:
1999 2000 2001 2002 2003
------- ------- -------- ------- ------
(IN THOUSANDS OF U.S. DOLLARS)
Net income/(loss).................... (18,717) (59,802) (124,385) (18,231) 15,524
While chinadotcom has recorded net profits in the fourth quarter of 2002,
fiscal 2003 and the first quarter of 2004, it has continued to post losses from
operations during these periods (except for the first quarter of 2004).
chinadotcom's operating losses may increase in the future, and it may never
achieve
34
operating profitability or sustain net profitability. chinadotcom may continue
to incur operating losses and post net losses in the future due to:
- additional acquisition activities related to the growth and development
of its enterprise software, outsourced software development, short
messaging services for mobile devices and portal businesses and services;
- a high level of planned operating expenditures;
- increased sales and marketing costs;
- increased investment activities;
- further decreases in the value of its prior investments, including prior
Internet-related acquisitions and its publicly traded, unlisted and other
marketable securities;
- greater levels of product development;
- even greater competition; and
- its general business and growth objectives.
In addition, while chinadotcom has experienced sequential increases in
revenues in 2003, it cannot be certain that revenue growth will continue in the
future. chinadotcom may see a reversal of the recent growth in quarterly
revenues due to:
- a slowdown in the Asian, U.S. and other economic markets;
- the ongoing low level of expenditures in the software, Internet and media
markets;
- the potential or actual loss of key clients and key personnel, including
those from its software development and outsourcing, mobile service and
e-marketing services businesses;
- its inability to identify or acquire suitable target companies to
implement its business model and strategy and grow its business;
- its decision to exit the low-margin online network advertising business
in South Korea, which will cause revenues from its advertising and
e-marketing businesses to decline;
- its disposal of certain subsidiaries and investments;
- its decision to discontinue certain products and services; and
- the recent adverse effect on general economic conditions in Asia as a
result of concerns about the severe acute respiratory syndrome or SARS
and the avian influenza virus.
These factors could also adversely affect chinadotcom's ability to sustain
profitability. chinadotcom cannot assure you that it will generate sufficient
revenue to sustain profitability. chinadotcom cannot assure you that it can
sustain or increase profitability on a quarterly or annual basis in the future.
If revenue does not meet its expectations, or if operating expenses exceed what
it anticipates or cannot be reduced accordingly, chinadotcom's business, results
of operations and financial condition will be materially and adversely affected.
CHINADOTCOM'S STRATEGY OF EXPANSION THROUGH ACQUISITIONS OR INVESTMENTS,
INCLUDING THE PROPOSED ACQUISITION OF ROSS, AND THE RECENT ACQUISITIONS OF
PIVOTAL AND IMI, HAS BEEN AND WILL CONTINUE TO BE COSTLY AND MAY NOT BE
EFFECTIVE, AND IT MAY REALIZE LOSSES ON ITS INVESTMENTS.
As a key component of its business and growth strategy, chinadotcom has
acquired and invested in, and intends to continue to acquire and invest in,
companies and assets, particularly relating to its strategy in enterprise
software, outsourced software development and mobile services. Recent
significant acquisitions were IMI and Pivotal, and Ross is a significant
proposed acquisition. chinadotcom's acquisitions and investments have resulted
in, and will continue to result in, the use of significant amounts
35
of cash, dilutive issuances of its common shares and amortization expenses
related to certain intangible assets, each of which could materially and
adversely affect its business, results of operations and financial condition.
DURING 2003, CHINADOTCOM WAS DEPENDENT UPON ITS ACQUISITIONS FOR ITS INCREASE
IN REVENUES, AND CHINADOTCOM CANNOT ASSURE YOU THAT IT WILL BE SUCCESSFUL IN
INCREASING ITS REVENUES THROUGH ORGANIC GROWTH OF ITS BUSINESSES.
During 2003, chinadotcom acquired several businesses material to its 2003
results for which it commenced consolidation at an interim period during the
year:
- In February 2003, chinadotcom acquired Praxa Limited, or Praxa, a leading
Australian information technology outsourcing and professional services
organization. chinadotcom commenced consolidating the results of Praxa in
February 2003, and Praxa contributed $22.3 million of revenues during
2003, representing approximately 24.9% of chinadotcom's revenues.
- In April 2003, chinadotcom completed the acquisition of Newpalm, a
leading SMS provider based in Beijing, China to deliver value added
mobile services and products in China. chinadotcom commenced
consolidating the results of Newpalm in April 2003, and Newpalm
contributed $16.9 million of revenues during 2003, representing
approximately 18.9% of chinadotcom's revenues.
- In September 2003, chinadotcom completed the acquisition of a 51% stake
in IMI, an international provider of software to the supply chain
management sector principally across Europe and the United States.
chinadotcom commenced consolidating the results of IMI in September 2003,
and IMI contributed $11.2 million of revenues during 2003, representing
approximately 12.5% of chinadotcom's revenues.
The acquisitions of Praxa, Newpalm and IMI contributed a total of
approximately $50.4 million of revenues during 2003, representing approximately
56.4% of chinadotcom's total revenues. Between 2002 and 2003, chinadotcom's
revenues increased by $45.4 million from $44.0 million in 2002 to $89.4 million
in 2003. Excluding the impact of these acquired businesses, total revenues would
have decreased by $5.0 million during 2003 as compared to 2002. As a result,
during 2003, chinadotcom was dependent upon its acquisitions for its increase in
revenues.
While chinadotcom will seek to grow its businesses, including the
businesses it has acquired, organically in the future, chinadotcom cannot assure
you that it will be successful in increasing revenues through organic growth.
chinadotcom's ability to achieve organic growth in its businesses is subject to
numerous risks and uncertainties, including the following:
- chinadotcom may face difficulties in integrating, assimilating and
managing the operations, technologies, intellectual property, products
and personnel of its acquired businesses individually and cumulatively;
- chinadotcom may be required to make additional new investments, increase
sales and marketing efforts, provide additional training, and develop new
products in order to generate organic growth, none of which may
ultimately prove successful in generating such growth;
- chinadotcom may not be successful in introducing products and services it
acquires to new markets. For example, one of chinadotcom's strategies in
its software and consulting services business is to target the emerging
market in Greater China for applications software. However, although
chinadotcom recently acquired Pivotal in February 2004, an international
customer relationship management, or CRM, company with over 1,700
customers worldwide, Pivotal does not have a single installation of its
products in mainland China; and
- While with the completion of chinadotcom's recent acquisition of Pivotal,
it has added an additional 1,700 customers to its customer base which
totals approximately 2,200 worldwide, and while its pending acquisition
of Ross Systems, Inc. would add an additional 1,000 customers,
chinadotcom
36
may not be successful in its strategy of leveraging upon cross-selling
opportunities with respect to its expanded customer base.
chinadotcom's inability to achieve organic growth in its businesses will
have a material adverse effect on its business, results of operations and
financial condition.
CHINADOTCOM'S ACQUISITIONS MAY DIVERT MANAGEMENT'S ATTENTION, AND WILL REQUIRE
CONTROLS, PROCEDURES AND POLICIES THAT MAY INCREASE THE COSTS OF ITS
ACQUISITIONS AND REDUCE EMPLOYEE MORALE.
Executing on chinadotcom's acquisitions may divert management's attention
from its operations both during the period of negotiation through closing and
thereafter to integrate acquired businesses. In addition, to realize the
benefits of its acquisitions, chinadotcom needs to implement operational,
managerial and financial controls, procedures and policies within businesses it
acquires, which may divert management's attention further, increase transaction
costs, and reduce employee morale. As a result, chinadotcom's acquisitions
involve significant risks, including:
- incurring transaction costs that may outweigh the benefits of the
acquisitions;
- financing for future acquisitions may not be available to chinadotcom on
favorable terms or at all;
- adequately managing the currency, interest rate and equity price
fluctuations relating to chinadotcom's acquisitions and investments;
- retaining key employees and managing employee morale;
- facing potential claims filed by terminated employees and contractors;
and
- adapting to local market conditions and business practices.
Any one of these challenges could strain chinadotcom's management
resources.
CHINADOTCOM HAS BEEN EXPANDING ITS BUSINESS THROUGH ACQUISITIONS AND MAY LOSE
ITS ENTIRE INVESTMENT IF IT DOES NOT SUCCESSFULLY INTEGRATE THE BUSINESSES IT
ACQUIRES.
chinadotcom has been expanding its operations rapidly, both in size and
scope, through acquisitions, and needs to integrate, manage and protect its
interests in its acquired businesses. Its failure to do so could have a material
adverse effect on its business, results of operations and financial condition
particularly with respect to the proposed acquisition of Ross and the recent
acquisitions of IMI and Pivotal. chinadotcom may experience difficulties in
integrating, assimilating and managing the operations, technologies,
intellectual property, products and personnel of its acquired businesses
individually and cumulatively, and may need to reorganize or restructure its
operations to achieve its operating goals. This may include creating or
retaining separate units or entities within each of chinadotcom's operating
segments. chinadotcom's failure to integrate and manage its acquired businesses
successfully could delay the contribution to profit that it anticipates from
these acquisitions, and could have a material adverse effect on its business,
results of operations and financial condition.
CHINADOTCOM'S CONTINUED INTERNATIONAL ACQUISITIONS AND INVESTMENTS MAY EXPOSE
CHINADOTCOM TO ADDITIONAL REGULATORY AND POLITICAL RISKS, AND COULD NEGATIVELY
IMPACT ITS BUSINESS PROSPECTS.
The expansion throughout Asia and into other international markets could
harm chinadotcom's business because it will be exposed to:
- adverse changes in regulatory requirements, including export restrictions
or controls;
- potentially adverse tax and regulatory consequences;
- differences in accounting practices;
- different cultures which may be relatively less accepting of its
business;
- difficulties in staffing and managing operations;
37
- greater legal uncertainty;
- tariffs and other trade barriers;
- changes in the general economic and investment climate affecting
valuations and perception of the its business sectors;
- political instability and fluctuations in currency exchange rates; and
- different seasonal trends in business activities,
any one of which could have a material adverse effect on the success of its
business and future growth.
DECREASE IN THE VALUE OF CHINADOTCOM'S INVESTMENTS MAY LEAD TO IMPAIRMENT OF
ITS GOODWILL AND OTHER INTANGIBLE ASSETS LEADING TO A MATERIAL ADVERSE IMPACT
ON CHINADOTCOM'S FINANCIAL CONDITION.
As economic, market and other conditions continue to fluctuate, chinadotcom
has recorded in the past and may record in the future impairment losses for the
decrease in value of its investments and has incurred in the past and may record
in the future unrealized losses in the fair value of its marketable securities.
For the fiscal years ended December 31, 2001 and 2002, chinadotcom recognized an
impairment loss in an aggregate amount of $8.1 million and $0.3 million,
respectively, for the decrease in fair value of its less than 20% owned unlisted
equity investments, and incurred an unrealized aggregate loss of $4.2 million
and $5.1 million, respectively, for the decrease in fair value of its marketable
securities. For fiscal 2003, chinadotcom recorded no impairment loss. On January
1, 2002, chinadotcom began to apply SFAS 142, which requires that intangible
assets with indefinite useful lives must be reviewed annually for impairment, or
more frequently if indications of impairment arise. chinadotcom performed the
transitional impairment test for goodwill on June 30, 2002, and the annual
impairment test on December 31, 2002 and 2003, and no impairment charge was
recorded during 2002 or 2003. chinadotcom cannot give you assurances that it
will not have to record impairment of its goodwill and intangible assets in the
future. A decrease in the value of chinadotcom's investments may lead to
impairment of its goodwill and other intangible assets and have a material
adverse impact on chinadotcom's financial condition.
CHINADOTCOM HAS SIGNIFICANT FIXED OPERATING EXPENSES, WHICH MAY BE DIFFICULT
TO ADJUST IN RESPONSE TO UNANTICIPATED FLUCTUATIONS IN REVENUES AND THEREFORE
COULD HAVE A MATERIAL ADVERSE EFFECT ON OPERATIONS.
A significant part of chinadotcom's operating expenses, particularly
personnel, rent, depreciation and amortization, are fixed in advance of any
particular quarter. As a result, an unanticipated decrease in the number or
average size of, or an unanticipated delay in the scheduling for, its
engagements may cause significant variations in operating results in any
particular quarter and could have a material adverse effect on operations for
that quarter.
In addition, an unanticipated termination or decrease in size or scope of a
major engagement, or the completion of several major client engagements in any
given quarter could require chinadotcom to maintain underutilized employees and
could have a material adverse effect on its business, results of operations and
financial condition.
FROM 2001 TO 2003, CHINADOTCOM'S ACCOUNTS RECEIVABLE BALANCES REMAINED
OUTSTANDING LONGER THAN WOULD BE EXPECTED IF ITS CREDIT POLICIES WERE
CONSISTENTLY ENFORCED. WHILE CHINADOTCOM HAS RECENTLY IMPROVED THE COLLECTIONS
PROCESS FOR ACCOUNTS RECEIVABLE, ITS FINANCIAL CONDITION AND RESULTS OF
OPERATIONS WOULD BE ADVERSELY IMPACTED IF ITS JUDGMENTS REGARDING THE
COLLECTIBILITY OF ACCOUNTS RECEIVABLE PROVED TO BE INCORRECT.
Generally, chinadotcom offers customers in each of its business segments
the following credit terms:
- For sales of IT products, "30 to 60 days credit from date of delivery of
software" or "cash on delivery";
38
- For sales of consulting services, "30 to 60 days credit after completion
of milestones set forth in the agreement";
- For sales in the mobile services and applications segment (a business
segment introduced in 2003), "90 days credit from the date of the
issuance of invoices which usually takes place one month following the
month of actual sales"; and
- For sales in the advertising and marketing activities segment, "cash on
delivery", "14 days after completion of campaign" or "30 days credit".
In the software and consulting services segment, during 2001 and 2002,
34.3% and 40.6% of accounts receivables were outstanding greater than 60 days,
respectively, aggregating $4.7 million and $2.8 million, respectively. Days
sales outstanding in this segment were 301 and 162 days, respectively, during
2001 and 2002. During 2003, accounts receivables outstanding greater than 60
days declined to 9.3% of accounts receivable and aggregated $1.0 million. Days
sales outstanding was reduced to 78 days during 2003.
In the advertising and marketing activities segment, during 2001 and 2002,
50.5% and 52.8% of accounts receivables were outstanding greater than 30 days,
respectively, aggregating $5.6 million and $5.7 million, respectively. Days
sales outstanding in this segment were 224 and 148 days, respectively, during
2001 and 2002. During 2003, accounts receivables outstanding greater than 30
days declined to 43.8% of accounts receivable and aggregated only $0.7 million.
Days sales outstanding was reduced to 30 days during 2003.
In the mobile services and applications segment (a business segment
introduced in 2003), during 2003, 20.3% of accounts receivables were outstanding
greater than 90 days aggregating $1.3 million. Days sales outstanding in this
segment were 138 days during 2003.
As a result, during 2001 and 2002, chinadotcom's accounts receivables
balances were outstanding longer than would be expected if its stated credit
policies were consistently enforced. chinadotcom attributes the inconsistency to
several factors, including the following:
- The general economic downturn commencing in 2000 and continuing through
2002 which impacted in particular the internet industry and internet
companies, and caused many of such companies who were its customers to
experience cashflow problems and delay payments to suppliers;
- Turnover in a client's organization whereby the new persons-in-charge did
not acknowledge the original project contracts signed with it or accept
the work authorized by their predecessors;
- A change of control in the customer's organization during the project
period whereby all payments were withheld and time of payment became
uncertain;
- Miscommunication within a client's organization, such as between the user
department and the finance department, which resulted in partial or
non-payment;
- A common business practice in China where customers delay payments beyond
their due dates; and
- A common business practice in China where if a company is perceived to be
"failing" or discontinuing its businesses, then debtors to the company
would not settle their outstanding payments, irrespective of any
contractual obligations because of a view by the debtor that the company
would not have the resources or capacity to be able to collect or
effectively enforce collection.
Improvements during 2003 in the aggregate accounts receivable balances
overdue, accounts receivables balances overdue as a percentage of aggregate
accounts receivables, and days sales outstanding was attributable to several
factors, including the following:
- Acquisition of businesses, such as IMI, that have shorter and
better-managed credit terms; and
- Improvements in chinadotcom's collection processes.
39
chinadotcom has concluded, despite such inconsistencies, that the recorded
accounts receivable balances are collectible based on its credit procedures,
including assessing customers' credit risk, establishing credit limits,
performing credit checks when warranted, and signing contracts with all
customers to establish a legal obligation to pay. In addition, chinadotcom
complies with the revenue recognition criteria relating to collectibility
included for mobile applications and advertising and marketing activities in SAB
101, for sale of IT products in SOP 91-2 paragraph 8, and for consulting
services in SOP 81-1 paragraph 23.
While chinadotcom has improved the collectibility of its accounts
receivable and believe that its cash and cash equivalents balance of $125.5
million as of March 31, 2004 should allow it to continue operations despite any
continued delays in collecting accounts receivable, chinadotcom's financial
condition and results of operations would be adversely affected in the event
that its judgments regarding the collectibility of its accounts receivable prove
to be incorrect.
BECAUSE CHINADOTCOM RELIES ON LOCAL MANAGEMENT FOR MANY OF ITS LOCALIZED
ENTERPRISE SOFTWARE, OUTSOURCED SOFTWARE DEVELOPMENT AND VALUE ADDED MOBILE
SERVICES BUSINESSES, ITS BUSINESS MAY BE ADVERSELY AFFECTED IF IT CANNOT
EFFECTIVELY MANAGE LOCAL OFFICERS OR PREVENT THEM FROM ACTING OR FAILING TO
ACT AT ITS DIRECTION.
In connection with its strategy to develop its enterprise software
business, outsourced software development and service business, and mobile and
portal businesses, chinadotcom may have and may continue to acquire interests in
companies in local markets where chinadotcom has limited experience with
operating assets and businesses in such jurisdictions, including enterprise
software companies in the United States, Canada and Europe, outsourced software
developers in the People's Republic of China, or PRC, and India, and developers
of add-on services for mobile devices in Hong Kong and the PRC. As a result, it
may be necessary for chinadotcom to rely on its local management with limited
oversight. If chinadotcom cannot effectively manage its local officers and
management, or prevent them from acting or failing to act at its direction,
these problems could have a material adverse effect on its business, financial
condition, results of operations and share price.
BECAUSE SOME OF CHINADOTCOM'S DIRECTORS AND OFFICERS ACT IN SIMILAR CAPACITIES
FOR CIC OR XINHUA NEWS AGENCY, OR XINHUA, THEY MAY NOT BE ABLE TO DEVOTE
SUFFICIENT ATTENTION TO CHINADOTCOM OR MAY FACE CONFLICTS OF INTEREST WITH
CHINADOTCOM.
One of chinadotcom's seven directors also serves as a director for CIC.
chinadotcom's Vice Chairman also serves as an officer for CIC and beneficially
owns a significant percentage of the equity of both chinadotcom and CIC.
Affiliated companies of Xinhua, a significant shareholder, also own a
significant percentage of CIC. Among chinadotcom's directors, one is an
executive officer of Xinhua. Because these individuals are or will be required
to devote attention to CIC or Xinhua, they may be unable to devote a sufficient
amount of attention to chinadotcom. Furthermore, additional conflicts of
interest may arise to the extent that future changes in chinadotcom's business
model and strategy cause it to compete with CIC, Xinhua and their respective
affiliates in similar industries and markets in Greater China and elsewhere in
Asia. In June 1999, chinadotcom entered into an agreement with CIC that limits
the ability of those of its directors or officers who are also CIC directors or
officers to take advantage of corporate opportunities presented to them as
directors or officers of chinadotcom. There is no assurance that this agreement
can be enforced effectively if it is violated against chinadotcom's interest.
CHINADOTCOM'S SHAREHOLDERS MAY INCLUDE SOME OF ITS SUPPLIERS, CUSTOMERS AND
DEBTORS, THE INTERESTS OF WHICH MAY BE IN CONFLICT WITH CHINADOTCOM'S, AND
WHOSE ACTIONS MAY AFFECT CHINADOTCOM'S BUSINESS NEGATIVELY.
chinadotcom's shares are held by institutional investors, strategic
shareholders, suppliers, customers, investees, guarantors and debtors, The
deterioration of its relationships with any of these shareholders could cause
them to dispose of their chinadotcom shares and could negatively affect
chinadotcom's financial condition, business prospects and share price.
40
In addition, there can be no assurance that despite non-compete and
confidentiality arrangements and other fiduciary obligations that may apply,
chinadotcom's shareholders or directors have not used or will not use
information obtained as a result of association with chinadotcom to compete
against it, directly or indirectly. If such information is used to compete
against chinadotcom, its business, financial or other condition, results of
operations and share price could be materially and adversely affected.
CHINADOTCOM IS SUBJECT TO RISKS RELATED TO ITS PURCHASE OF URLS FROM CIC,
WHICH COULD MATERIALLY AND ADVERSELY IMPACT ITS BUSINESS STRATEGY AND VALUE OF
THESE ASSETS IN THE EVENT THE VALUE PAID FOR THE URLS WAS NOT REASONABLE,
THIRD PARTIES BRING CLAIMS FOR INTELLECTUAL PROPERTY INFRINGEMENT, THIRD PARTY
CREDITORS OF CIC BRING CLAIMS OF UNFAIR PREFERENCE IN THE EVENT CIC IS
LIQUIDATED, OR CHINADOTCOM IS REQUIRED TO RECORD AN IMPAIRMENT ON THE VALUE OF
THE URLS.
In February 2002, chinadotcom completed the payment related to the purchase
of three Uniform Resource Locators, or URLs, www.china.com, www.hongkong.com and
www.taiwan.com, and related intellectual property rights for $16.8 million, from
CIC pursuant to an agreement reached with CIC in October 2001.
While chinadotcom believes that the URLs are of material importance to its
business strategy and operations, chinadotcom's acquisition of the URLs involves
significant risks, including:
- While it relied upon valuations as determined by internationally
recognized third party valuation concerns, as well as commercial
negotiations with CIC, chinadotcom cannot guarantee that the purchase
price it paid for the URLs is fair, reasonable or market value or that
such fair, reasonable and market value price is readily or objectively
determinable.
- Under existing intellectual property laws in various countries (such as
the United States and Hong Kong), a mark that has location significance
or geographical significance such as the URLs cannot be registered as a
trademark. As a result, the purchase of the URLs may not be an effective
means to resolve chinadotcom's trademark ownership concerns, and it may
continue to be vulnerable to intellectual property ownership and use
risks, such as challenges by third parties of infringement.
- chinadotcom believes that the URLs will serve an important business
purpose for a period of 20 years, and as such chinadotcom has chosen to
amortize them on a straight-line basis over a period of 20 years.
However, given the unique nature of the URLs and its short operating
history, it cannot be assured that this time period will accurately
correlate with the actual useful life of the URLs.
- chinadotcom cannot provide any assurances that it will not have to record
impairment of the value of the URLs to comply with US GAAP.
Any of these risks could materially and adversely affect our reputation,
our mobile services and advertising businesses and business prospects.
RISKS RELATING TO TREASURY MANAGEMENT
IN AN ATTEMPT TO INCREASE ITS TREASURY YIELD, CHINADOTCOM HAS INVESTED IN DEBT
SECURITIES WHICH EXPOSE IT TO INTEREST RATE AND CREDIT RISKS WHICH COULD CAUSE
IT TO LOSE ITS INTEREST PAYMENTS OR INVESTED PRINCIPAL.
In order to increase the yield from its invested cash pending its use in
the conduct of its business, chinadotcom has increased its leverage and invested
in debt securities that expose it to market risks such as credit default and
interest rate risk.
chinadotcom manages its interest rate risk by maintaining a portfolio of
trading and held-to-maturity investments which it believes to have high credit
quality and relatively short average maturities. These instruments may include,
but are not limited to, money-market instruments, bank time deposits, and
variable rate and fixed rate obligations of corporations, government, and
government sponsored enterprises such as the Federal National Mortgage
Association, or Fannie Mae, in accordance with an investment
41
policy approved by its Board of Directors. These instruments are denominated in
U.S. dollars. The fair market value of chinadotcom's debt security investments,
as of March 31, 2004, was $232.4 million.
chinadotcom also holds cash balances in accounts with commercial banks in
the United States and foreign countries. These cash balances represent operating
balances only and are invested in short-term time deposits of the local bank.
Many of chinadotcom's investments carry interest rate risk. When interest
rates fall, the income from chinadotcom's investments in variable-rate
securities declines. When interest rates rise, the fair market value of its
investments in fixed-rate securities declines. Due in part to these factors,
chinadotcom's future investment income may fall short of expectations or it may
suffer losses in principal if forced to sell securities, which have declined in
market value due to changes in interest rates. chinadotcom attempts to mitigate
risk by holding fixed-rate securities to maturity, but, if its liquidity needs
force chinadotcom to sell fixed-rate securities prior to maturity, it may
experience a loss of principal.
chinadotcom is also exposed to the risk of default by the issuers of its
debt securities. chinadotcom attempts to mitigate credit default risk by
purchasing only investment grade securities as categorized by Moody's Investor
Service and Standard and Poor's. The following chart breaks down chinadotcom's
debt securities portfolio into four primary risk categories based on the
Standard and Poor's credit ratings as of March 31, 2004.
RATING (STANDARD & POOR'S) AAA AA A BBB TOTAL
-------------------------- ----- --- --- ---- -----
Amounts of debt securities outstanding as of March 31, 2004
(in US$ millions)
Moody's Investors Service................................... 222.7 0.0 0.0 9.7 232.4
Standard & Poor's........................................... 222.7 0.0 0.0 9.7 232.4
As of March 31, 2004, chinadotcom's entire treasury portfolio of $232.4
million, was effectively reflected in its consolidated financial statements at
current market prices. At the end of each quarter, if the end of quarter price
is below the original investment cost, the difference is charged to "accumulated
other comprehensive income" under the shareholders' equity section of
chinadotcom's consolidated balance sheet. If the fair market value of any of its
debt investments remains below its investment cost and is considered "other than
temporary," this decline would then be reflected as an expense under "impairment
of cost investments and available-for-sale securities" in its consolidated
income statement. Any such adjustment could have a material adverse effect on
chinadotcom's business, financial condition, results of operations and share
price.
In addition, sharp price movements or volatility shocks may reduce the
liquidity of chinadotcom's treasury portfolio and in some circumstances its debt
instruments may have no tradeable market. This could prevent chinadotcom from
altering or closing its security positions without incurring substantial losses.
Certain of chinadotcom's investments would be subject to the additional risks of
trading in foreign debt securities, which may not be regulated as rigorously as
similar investments in the United States. Any losses from chinadotcom's
investments in treasury instrument could have a material adverse effect on its
business, financial condition, results of operations and share price.
CHINADOTCOM'S ENTRY INTO REPURCHASE FACILITIES WITH FORTIS BANK AND DBS BANK
EXPOSES IT TO INTEREST RATE, MARKET AND CREDIT RISKS WHEN IT BORROWS FUNDS
FROM THESE FACILITIES TO MAKE OTHER INVESTMENTS.
chinadotcom has entered into repurchase facilities with Fortis Bank nv-sa
an AA- rated bank (as rated by Standard & Poor's) and DBS Bank, an A+ rated bank
(as rated by Standard & Poor's). The Fortis Bank facility allows chinadotcom to
draw up to $250.0 million for a one-year term. The DBS Bank facility allows
chinadotcom to draw up to $150.0 million for a three year term. Each drawdown
will be agreed upon with the corresponding bank before execution. Both
facilities were established to provide chinadotcom with a source of capital to
give it the flexibility to finance working capital requirements and
acquisitions, as well as its treasury management program, without having to
liquidate its investment portfolio on short notice.
42
Under the repurchase facilities, a drawdown requires chinadotcom to sell
debt securities from its portfolio to the bank at an agreed to price, and the
bank agrees to sell back to chinadotcom the same securities at the same purchase
price at a later date. In effect, the bank retains title to chinadotcom's
securities as collateral during the life of the drawdown; however, the bank has
agreed to pay chinadotcom any income associated with the debt securities sold.
In return, chinadotcom has agreed to pay interest to the bank at a base-rate of
Libor plus a fixed 0.20% or 0.35%. This base rate is set on every 3 month, 6
month or 1 year anniversary of the execution of the draw down, as chinadotcom
and the bank may mutually agree.
Use of the repurchase facilities with Fortis Bank and DBS Bank creates the
following three primary risks:
- The risk associated with increased leverage which includes chinadotcom's
obligation to pay back the borrowed funds in a timely manner which may
require chinadotcom to liquidate a portion of its treasury portfolio at a
loss to repay the borrowing.
- By setting aside debt securities as collateral under either repurchase
facility, chinadotcom incurs the risk that if the banks themselves were
to undergo an insolvency event, it could lose all or part of its debt
securities set aside at such time with the bank.
- The interest that chinadotcom pays under the repurchase facilities is
dependent upon Libor, and therefore, chinadotcom's future interest
expenses with respect to any amounts drawn under the repurchase
facilities may exceed chinadotcom's expectations due to changes in
interest rates. For example, if Libor rises extremely rapidly over the
next few years, chinadotcom's interest expenses will rise commensurately.
Further, because chinadotcom has purchased, as of March 31, 2004, under the
repurchase facilities approximately $10.1 million of debt securities with
drawdowns under its repurchase facilities, it is subject to risk associated with
investment leverage. Since the base rate (Libor) of chinadotcom's drawdowns are
reset periodically, in rising interest rate environments, chinadotcom runs the
risk that its borrowing rate might exceed any interest income that it receives
from the debt securities purchased with the proceeds of draw downs from the
repurchase facilities. Any such negative interest rate differential, or
"negative carry", could have a lead to material adverse effect on chinadotcom's
financial results.
CHINADOTCOM RELIES UPON ITS INTERNAL CONTROL SYSTEMS TO MANAGE ITS TREASURY
OPERATIONS, AND ITS TREASURY PORTFOLIO AND RETURNS ON ITS TREASURY PORTFOLIO
MAY BE ADVERSELY AFFECTED IF IT INCURS GREATER RISK THAN OTHERWISE APPROPRIATE
OR DOWNGRADES OCCUR IN ITS PORTFOLIO.
Any failure by chinadotcom to maintain adequate treasury management control
systems, it could have a material adverse effect on its business, results of
operations and financial condition. While it continually assesses and improves
its treasury management systems and policies, there is no assurance that its
system of controls and policies will effectively prevent the incurrence of
greater risk than is otherwise appropriate. Downgrades in its portfolio of
investment grade debt securities may have a material adverse effect on
chinadotcom's business, results of operations and financial condition. It may
decide to outsource all or a portion of the investment management of its
portfolio of debt securities to third party professional bond portfolio
managers.
CHINADOTCOM GENERALLY HAS NOT OUTSOURCED MANAGEMENT OF ITS DEBT INVESTMENT
PORTFOLIO TO PROFESSIONAL PORTFOLIO MANAGERS. A PROFESSIONAL PORTFOLIO MANAGER
MAY BE ABLE TO GENERATE A HIGHER RETURN ON CHINADOTCOM'S DEBT INVESTMENTS THAN
ITS INTERNAL TREASURY STAFF.
chinadotcom generally has not outsourced a significant portion of its debt
investment portfolio to professional portfolio managers. Professional managers
may have broader experience and might enjoy greater resources than those
available to chinadotcom's internal treasury personnel. These factors might
chinadotcom may have achieved a higher return on investments if chinadotcom had
outsourced management of its debt investment portfolio. As at March 31, 2004
chinadotcom's portfolio of securities
43
managed by a third party professional manager includes only $9.7 million
invested with the Centauri Fund (currently rated BBB by Standard & Poor's and
Baa2 by Moody's Investors Service) which is a bond fund. Accordingly,
chinadotcom is exposed to external management risk for this investment, and
chinadotcom relies on the professional skills of the fund manager to deliver its
target interest income. The investment in the Centauri Fund is highly illiquid
and could be difficult to realize prior to first available redemption in 2006.
RISKS RELATING TO CHINADOTCOM'S SOFTWARE AND CONSULTING SERVICES BUSINESS
AS CHINADOTCOM PURSUES ITS STRATEGY OF DEVELOPING ITS ENTERPRISE SOFTWARE
BUSINESS, IT IS EXPOSED TO A VARIETY OF RISKS IN THIS MARKET THAT MAY AFFECT
ITS ABILITY TO GENERATE REVENUES FROM THE SALE OF ENTERPRISE APPLICATION
SOFTWARE AND RELATED SUPPORT SERVICES.
As chinadotcom pursues its strategy of developing its enterprise software
business, it anticipates that it will generate additional revenues in the future
from the sale of various enterprise software application packages and related
services. Accordingly, any event that adversely affects fees derived from the
sale of such systems would have a material adverse affect on its business,
results of operations and performance. For example, the market for enterprise
software application products was negatively impacted in 1999 and the first half
of 2000 by Year 2000 concerns. Similarly, in 2001 and continuing through the
fourth quarter of 2002, the market for enterprise software application products
continued to be negatively impacted by challenging economic conditions in the
United States. Other such events may include:
- competition from other products;
- flaws in its products;
- incompatibility with third party hardware or software products;
- negative publicity or valuation of its products and services; and
- obsolescence of the hardware platforms or software environments on which
its systems run.
THE MARKET FOR ENTERPRISE SOFTWARE APPLICATION PRODUCTS AND SERVICES IS HIGHLY
COMPETITIVE. CHINADOTCOM HAS ENTERED THIS MARKET RECENTLY, AND IF CHINADOTCOM
FAILS TO COMPETE EFFECTIVELY, ITS FAILURE COULD HAVE A MATERIAL ADVERSE EFFECT
ON ITS BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The business information systems industry in general and the enterprise
software industry in particular are very competitive and subject to rapid
technological change. Many of chinadotcom's current and potential competitors
have longer operating histories, significantly greater financial, technical and
marketing resources, greater name recognition, larger technical staffs and a
larger installed customer base than chinadotcom. A number of companies offer
products that are similar to its products and that target the same markets. In
addition, many of these competitors may be able to respond more quickly to new
or emerging technologies and changes in customer requirements, and to devote
greater resources to the development, promotion and sale of their products than
chinadotcom. Furthermore, because there are relatively low barriers to entry in
the software industry, chinadotcom expects additional competition from other
established and emerging companies. Such competitors may develop products and
services that compete with chinadotcom's or may acquire companies, businesses
and product lines that compete with chinadotcom. It is also possible that
competitors may create alliances and rapidly acquire significant market share.
Accordingly, chinadotcom cannot assure you that its current or potential
competitors will not develop or acquire products or services comparable or
superior to those that it develops, combine or merge to form significant
competitors or adapt more quickly than chinadotcom to new technologies, evolving
industry trends and changing customer requirements. Competition could cause
price reductions, reduced margins or loss of market share, any of which could
materially and adversely affect its strategy in this market, and affect its
business, operating results and financial condition.
chinadotcom is focused on building chinadotcom's intellectual property
asset base, establishing partnerships with software vendors and broadening the
overall software product offerings in the areas of
44
enterprise solutions and integration. chinadotcom is pursuing this strategy
through acquisitions, strategic partnerships, joint ventures, consolidation of
software assets and restructurings, or combinations of the foregoing approaches.
chinadotcom cannot assure you that it will be able to successfully implement
this strategy or that the strategy will prove successful.
THE OVERALL MARKET FOR CHINADOTCOM'S CONSULTING SERVICES BUSINESS REMAINED
RELATIVELY WEAK DURING FIRST HALF OF 2003, AND DEMAND MAY REMAIN WEAK FOR SOME
TIME BECAUSE OF THE CURRENT ECONOMIC CLIMATE, WHICH COULD LEAD TO
CANCELLATIONS OR DELAYS IN BUSINESS AND TECHNOLOGY CONSULTING INITIATIVES
ADVERSELY AFFECTING CHINADOTCOM'S BUSINESS AND GROWTH PROSPECTS.
The market for consulting services has changed rapidly over the last
several years. Since the second half of 2000, many companies have experienced
financial difficulties or uncertainty, and canceled or delayed spending on
technology initiatives as a result. These companies typically are not
demonstrating the same urgency regarding technology initiatives that existed
during the economic expansion that stalled in 2000. If large companies continue
to cancel or delay their business and technology consulting initiatives because
of the current economic climate, or for other reasons, chinadotcom's business,
results of operations and financial condition and results of operations may be
materially and adversely affected.
A SUBSTANTIAL AMOUNT OF CHINADOTCOM'S CONSULTING REVENUES ARE BILLED ON A
FIXED PRICE BASIS WHICH MAY BE SUBJECT TO COST OVERRUNS IF IT DOES NOT
ACCURATELY ESTIMATE THE COSTS OF THESE ENGAGEMENTS OR IF CLIENTS CHANGE THE
SCOPE OF A PROJECT.
A substantial percentage of chinadotcom's consulting engagements are
individual, non-recurring, short-term projects billed on a fixed price basis as
distinguished from a method of billing on a time and materials basis. At times
this requires chinadotcom to commit unanticipated additional resources to
complete consulting engagements, which may result, and has in the past resulted,
in losses on certain engagements. chinadotcom's failure to obtain new consulting
business in any given quarter or estimate accurately the resources and time
required for a consulting engagement, to manage client expectations effectively
regarding the scope of the services to be delivered for the estimated fees or to
complete fixed price engagements within budget, on time and to clients'
satisfaction (particularly if a client changes the scope of the project) could
expose chinadotcom to risks associated with cost overruns and penalties, any of
which could have a material adverse effect on its business, results of
operations and financial condition.
CHINADOTCOM'S CLIENTS COULD UNEXPECTEDLY TERMINATE THEIR CONTRACTS FOR ITS
SERVICES WHICH COULD RESULT IN A LOSS OF EXPECTED REVENUES AND ADDITIONAL
EXPENSES FOR REDEPLOYMENT OF STAFF AND RESOURCES.
The standard terms for chinadotcom's consulting services contract include a
down payment of 30% of the fee at the commencement of the contract with the
balance of the payments subject to the achievement of specific milestones and
deliverables. chinadotcom generally does not require collateral for accounts
receivable. The final payment is due upon the completion of successful user
acceptance testing. However, most of chinadotcom's consulting services contracts
can be cancelled by the client with limited advance notice and without
significant penalty. Termination by any client of a contract for its services
could result in a loss of expected revenues and additional expenses for
redeployment of staff and resources that were allocated to the terminated
engagement. chinadotcom could be required to maintain underutilized employees
who were assigned to the terminated contract. The unexpected cancellation or
significant reduction in the scope of any of its large projects could have a
material adverse effect on its business, results of operations and financial
condition.
THE SERVICE CONTRACTS CHINADOTCOM SIGNS WITH ITS CUSTOMERS MAY EXPOSE IT TO
POTENTIAL LITIGATION AND LIABILITIES.
chinadotcom's consulting services and advertising businesses involve
services agreements with customers, some of which do not have disclaimers or
limitations on liability for special, consequential and incidental damages, or
do not have caps or have relatively high caps on the amounts its customers can
recover for damages. chinadotcom does not carry professional indemnity or other
insurance covering its
45
exposure to any claims or breaches under the customer contracts. While there are
no current claims or litigation in connection with the service contracts, there
can be no assurance that future claims will not arise. Any claim under customer
contracts could subject chinadotcom to litigation and give rise to substantial
liability for damages, including special, consequential or incidental, that in
turn could materially and adversely affect its business and financial condition.
FAILURE BY ITS THIRD PARTY SUPPLIERS TO PROVIDE CHINADOTCOM WITH SOFTWARE AND
HARDWARE COMPONENTS WILL AFFECT ITS ABILITY TO OPERATE ITS BUSINESS.
chinadotcom depends on third party suppliers of software and hardware
components. For its various business units, it relies on components that are
sourced from key suppliers, including Best Software, Inc., Cisco Systems, Inc.,
International Business Machines Corporation, LSI Logic Corporation, Microsoft
Corporation, Network Appliance, Inc., Oracle Corporation, Siebel Systems Inc.,
Sun Microsystems Corporation and Vignette Corporation. Any failure or delay on
the part of its suppliers may prevent chinadotcom from receiving the components,
products and support it needs to conduct its operations. chinadotcom's inability
to develop alternative sources for the software and hardware it needs to operate
its business may materially and adversely affect its operating efficiency and
results of operations.
TIMING DIFFERENCES BETWEEN WHEN CHINADOTCOM IS OBLIGATED TO PAY ITS VENDORS
FOR THE PURCHASE OF SOFTWARE PRODUCTS FROM THEM AND THE TIME CHINADOTCOM IS
PAID BY ITS CUSTOMERS FOR THE SOFTWARE PRODUCTS IT RESELLS TO THEM EXPOSES
CHINADOTCOM TO CREDIT RISKS, WHICH MAY ADVERSELY AFFECT ITS BUSINESS AND
RESULTS OF OPERATIONS.
In connection with its sale of software products and enterprise software,
chinadotcom may purchase such products from vendors and then resell to
customers. Typically, the payment terms for the third party software are 60 days
from the date of invoice, but in some cases payment may be required upon
delivery. If the customers do not pay the full amount invoiced by chinadotcom,
which may occur if a customer files for bankruptcy among other circumstances,
chinadotcom may not collect sufficient funds from customers to cover the
original cost of the third party software that it has already purchased. In
addition, if chinadotcom cannot collect funds from its customers in a timely
manner, which may occur if a customer is experiencing cashflow issues among
other circumstances, it may not generate sufficient cashflows to cover the
original purchase price of third-party products. These credit risks may
adversely affect chinadotcom's business and results of operations.
CHINADOTCOM'S FAILURE TO SUCCESSFULLY INTRODUCE, MARKET AND SELL NEW PRODUCTS
AND TECHNOLOGIES, ENHANCE AND IMPROVE EXISTING PRODUCTS IN A TIMELY MANNER,
AND PROPERLY POSITION OR PRICE CHINADOTCOM'S PRODUCTS, AS WELL AS UNDETECTED
ERRORS OR DELAYS IN NEW PRODUCTS OR NEW VERSIONS OF A PRODUCT OR THE FAILURE
OF ANTICIPATED MARKET GROWTH COULD INDIVIDUALLY AND/OR COLLECTIVELY HAVE A
MATERIAL ADVERSE EFFECT ON ITS BUSINESS, RESULTS OF OPERATIONS OR FINANCIAL
POSITION.
chinadotcom's IT and enterprise software products compete in a market
characterized by rapid technological advances in hardware and software
development, evolving standards in computer hardware and software technology and
frequent new product introductions and enhancements. chinadotcom continually
seeks to expand and refresh its product offerings to include newer features or
products, and enter into agreements allowing integration of third-party
technology into its products. The introduction of new products or updated
versions of continuing products has inherent risks, including, but not limited
to:
- product quality, including the possibility of software defects, which
could result in claims against chinadotcom or the inability to sell its
software products;
- the fit of the new products and features with the customer's needs, which
could result the customer seeking the product elsewhere;
- the successful adaptation of third-party technology into chinadotcom's
products, which may result in the failure of chinadotcom's product to
perform at its maximum potential;
46
- educating chinadotcom's sales, marketing and consulting personnel to work
with the new products and features, which may place a strain of
chinadotcom resources;
- competition from earlier and more established entrants that may have more
significant resources than chinadotcom;
- market acceptance of initial product releases;
- marketing effectiveness; and
- the accuracy of assumptions about the nature of customer demand, whereas
actual demand could be limited or non-existent.
Additionally, as newer products are deployed, chinadotcom's service and
maintenance organizations, along with its partners, will have to rapidly
increase their ability to install and service these products, and chinadotcom
must rapidly improve its products' ease-of-implementation and ease-of-use. The
failure to successfully increase these capacities and make these improvements
could result in significantly lower customer satisfaction, which could lead to
lower license revenue.
FAILURE TO UPGRADE OLDER PRODUCTS WILL ADVERSELY AFFECT CHINADOTCOM'S SOFTWARE
REVENUE.
As chinadotcom or its competition introduces newer products, the market's
demand for chinadotcom's older products declines. Declining demand reduces
revenue from additional licenses and reduces maintenance revenue from past
purchasers of chinadotcom's software. chinadotcom must continually upgrade its
older products in order for its customers to continue to see value in its
maintenance services. If chinadotcom is unable to provide continued improvements
in functionality, or, alternatively, move customers with chinadotcom's older
products to its newer products, declining maintenance and new license revenue
from older products could have a material adverse effect on chinadotcom's
enterprise software business.
IF CHINADOTCOM IS UNABLE TO DEVELOP NEW AND ENHANCED PRODUCTS THAT ACHIEVE
WIDESPREAD MARKET ACCEPTANCE, IT MAY BE UNABLE TO RECOUP PRODUCT DEVELOPMENT
COSTS, AND ITS EARNINGS AND REVENUE MAY DECLINE.
chinadotcom's future success depends on its ability to address the rapidly
changing needs of customers by developing and introducing new products, product
updates and services on a timely basis. chinadotcom must also extend the
operation of its products to new platforms and keep pace with technological
developments and emerging industry standards. chinadotcom commits substantial
resources to developing new software products and services. If the markets for
these new products do not develop as anticipated, or demand for chinadotcom's
products and services in these markets does not materialize or occurs more
slowly than chinadotcom expects, it will have expended substantial resources and
capital without realizing sufficient revenue, and its enterprise software
business and operating results could be adversely affected.
CHINADOTCOM'S ENTERPRISE SOFTWARE REVENUES AND OPERATING RESULTS FLUCTUATE
SIGNIFICANTLY FROM QUARTER TO QUARTER WHICH MAY CAUSE VOLATILITY IN
CHINADOTCOM'S SHARE PRICE.
Many factors have caused and may in the future cause chinadotcom's
enterprise software revenue and operating results to fluctuate significantly.
Some of these factors are:
- the timing of significant orders, delivery and implementation of their
products;
- the gain or loss of any significant customer;
- the number, timing and significance of new product announcements and
releases by chinadotcom or its competitors;
- chinadotcom's ability to acquire or develop (independently or through
strategic relationships with third parties), introduce and market new and
enhanced versions of its products on a timely basis;
47
- possible delays in the shipment of new products and purchasing delays of
current products as its customers anticipate new product releases;
- order cancellations and shipment rescheduling or delays;
- patterns of capital spending and changes in budgeting cycles by its
customers;
- market acceptance of new and enhanced versions of chinadotcom's products;
- changes in the pricing and the mix of products and services chinadotcom
sells;
- seasonal variations in chinadotcom's sales cycle;
- the level of product and price competition;
- changes in operating expenses;
- exchange rate fluctuations;
- the timing of any acquisitions and related costs; and
- changes in personnel and related costs.
In addition, chinadotcom expects that a substantial portion of its
enterprise software revenues will continue to be derived from renewals of
maintenance contracts from customers of its software applications. These
maintenance contracts typically expire on an annual basis, and the timing of
cash collections of related revenues varies from quarter to quarter. In
addition, chinadotcom's new license revenue and results of operations may
fluctuate significantly on a quarterly and annual basis in the future, as a
result of a number of factors, many of which are outside of its control. A sale
of a new license generally requires a customer to make a purchase decision that
involves a significant commitment of capital. As a result, the sales cycle
associated with the new license revenue will vary substantially and will be
subject to a number of factors, including customers' budgetary constraints,
timing of budget cycles and concerns about the pricing or introduction of new
products by chinadotcom or its competitors.
RISKS RELATING TO CHINADOTCOM'S ADVERTISING AND MARKETING BUSINESS
CHINADOTCOM IS SEEKING TO RE-ORIENT ITS ADVERTISING STRATEGY, AND HAS
SIGNIFICANTLY REDUCED OPERATIONS IN ONLINE ADVERTISING AND E-MARKETING
SERVICES, AND CANNOT ASSURE YOU THAT IT WILL BE SUCCESSFUL IN GENERATING
REVENUES OR MARGINS FROM ITS REORIENTED ADVERTISING STRATEGY SUFFICIENT TO
REPLACE REVENUES AND MARGINS FROM ITS REDUCED ONLINE ADVERTISING AND
E-MARKETING SERVICES BUSINESSES.
chinadotcom is seeking to re-orient its advertising strategy away from
online advertising and e-marketing services with low margins performed for a
fixed fee which relies upon short-term advertising campaigns dependent upon high
volume to higher margin database marketing related services used to develop
targeted campaigns for clients. In chinadotcom's experience, margins from online
advertising and e-marketing services range from 20% to 30% versus margins in
database marketing related services which range from 50% to 70%. chinadotcom
cannot assure you that it will be successful in generating sufficient revenues
or margins from its database marketing related services to replace revenues and
margins from its reduced online advertising and e-marketing services business.
CHINADOTCOM'S STRATEGY TO TARGET HIGHER MARGIN DATABASE MARKETING RELATED
SERVICES THROUGH ITS SUBSIDIARY MEZZO BUSINESS DATABASES PTY LIMITED, OR MEZZO
BUSINESS, WHICH GENERATED ONLY A VERY SMALL PORTION OF ADVERTISING REVENUES IN
2003, IS SUBJECT TO NUMEROUS RISKS, AND MAY NOT BE SUCCESSFUL, WHICH COULD
LIMIT THE AMOUNT OF ADVERTISING REVENUES CHINADOTCOM CAN GENERATE.
chinadotcom's re-oriented advertising strategy is to target higher margin
database marketing related services utilizing data mining techniques. Data
mining involves the process of analyzing significant amounts of data retained in
a database to uncover underlying patterns that may indicate trends or
relationships, and has become a more important part of customer relationship
management as a method to better understand customer behavior and preferences.
The uncovered relationship can then be utilized by a
48
client to develop a targeted customer campaign. Database marketing related
services generated only a very small portion of chinadotcom's advertising
revenues in 2003, and is subject to numerous risks, including the following:
- chinadotcom may not be able to successfully market services in this
business segment outside of Australia where most of the businesses
providing these services are currently located;
- chinadotcom may not be able to attract larger clients with
correspondingly larger marketing budgets due to the limited size and
scope of its currently operational base in Australia;
- chinadotcom may not be able to compete against other companies in this
business segment which may have or develop better quality data sets and
related products and services than chinadotcom's;
- chinadotcom may not be able to successfully migrate, if necessary, its
current data sets, products and services to other technology formats in
the future;
- chinadotcom may not be able to effectively manage Mezzo Business if the
founder and current general manager leave the business at the conclusion
of the earn-out period on June 30, 2004; and
- chinadotcom may suffer reductions in revenues and profits in the future
as a result of any changes in privacy related legislation that could
reduce the distribution potential of its databases.
CHINADOTCOM'S RE-ORIENTED ADVERTISING STRATEGY DEPENDS UPON MEZZO'S ABILITY TO
MAINTAIN UP-TO-DATE DATA SETS. IF MEZZO FAILS TO MAINTAIN ITS DATA SETS, ITS
SERVICES WILL BE LESS ATTRACTIVE TO CUSTOMERS AND CHINADOTCOM'S PROSPECTS
RELATING TO ITS ADVERTISING BUSINESS WILL BE ADVERSELY AFFECTED.
chinadotcom's re-oriented advertising strategy depends upon Mezzo's ability
to maintain up-to-date data sets. If Mezzo fails to maintain its data sets, its
services will be less attractive to customers. The ability of Mezzo to maintain
its data sets can be affected by governmental actions in Australia, as well as
actions by third parties to protect their proprietary rights, although Mezzo is
not aware of any current prohibitions applicable to it which would prohibit its
ability to maintain its databases. For example:
- The Australian government has moved to restrict the use of publicly
available telephone data in the Integrated Public Number Database for
both consumers and business. While Mezzo believes that such governmental
action will not impact Mezzo's results of operations because such data
has not historically been used as a data source, restrictions on the use
of such data eliminates a potentially cost effective manner to increase
the accuracy of telephone contact data in Mezzo's datasets; and
- A number of other database marketing organizations in Australia which
compete with Mezzo rely on digitized versions of the Yellow Pages
business telephone directory to generate and maintain their databases.
Telstra, which owns the copyright to the Australian Yellow Pages, has
recently moved to restrict the publishing and sale of Yellow Pages data
by taking legal action against the major publisher of that material in
Australia. Mezzo does not believe that actions by Telstra will impact
Mezzo's business because Mezzo does not rely on Yellow Pages material to
produce its datasets.
PRIVACY CONCERNS MAY LIMIT OR PREVENT CHINADOTCOM FROM SELLING DEMOGRAPHICALLY
TARGETED ONLINE ADVERTISING IN THE FUTURE.
To the extent that chinadotcom collects data derived from user activity on
its online advertising network, it cannot be certain that any trade secret,
copyright or other protection will be available for this data or that third
parties will not assert their rights to the data. chinadotcom must also keep
information regarding Web publishers confidential under its contracts with Web
publishers. In addition, various
49
technologies seeking to protect privacy, including the following, have affected
or may affect its advertising business:
- any limitation on its ability to use cookies, which are bits of
information keyed to a specific server, file pathway or directory
location that are stored on a user's hard drive and passed to a Web
site's server through the user's browser software, could impair its
future targeting capabilities; and
- web-browsing software with enhanced privacy preference settings, allowing
users to define settings to reject third party cookies automatically, may
lower the total pool of users from whom any cookie-based third party ad
serving solutions can collect and target ad delivery based on demographic
data or data mining techniques.
In Hong Kong, a company will contravene the Personal Data Ordinance,
privacy legislation in force in Hong Kong, if it collects information on its
users, analyzes the information for a profile of the user's interests and sells
or transmits the profiles to third parties for direct marketing purposes without
the user's consent. As part of its future advertisement delivery system,
chinadotcom will be integrating information including a user's online response
rate to advertisements, name, address, age or e-mail address with third party
databases to generate a comprehensive demographic profile of the Internet user.
The transfer of this information, which provides an individual's profile, may
contravene the Personal Data Ordinance unless the individual expressly consents
to the use of this information. chinadotcom's future inability to obtain
demographic profiles from Internet users that do not consent to this use or any
contravention of relevant privacy legislation in its data collection or use or
storage may have a material and adverse effect on its business.
RISKS RELATING TO CHINADOTCOM'S MOBILE SERVICES AND APPLICATIONS AND PORTAL
BUSINESSES
CHINADOTCOM DEPENDS ON THE TWO MOBILE NETWORK OPERATORS IN CHINA FOR DELIVERY
OF ITS MOBILE SERVICES AND APPLICATIONS, AND THE TERMINATION OR ALTERATION OF
ITS VARIOUS CONTRACTS WITH EITHER OF THEM OR THEIR PROVINCIAL OR LOCAL
AFFILIATES COULD MATERIALLY AND ADVERSELY IMPACT CHINADOTCOM'S BUSINESS.
chinadotcom offers its mobile services and applications to consumers
through the two mobile network operators in China, China Mobile and China
Unicom, which service nearly all of China's approximately 282.3 million mobile
subscribers, as estimated by China's Ministry of Information Industry. Such
dominant market position limits chinadotcom's negotiating leverage with these
network operators. If chinadotcom's various contracts with either network
operator are terminated or adversely altered, it may be impossible to find
appropriate replacement operators with the requisite licenses and permits,
infrastructure and customer base to offer its services, and chinadotcom's
business would be significantly impaired. For the three months ended March 31,
2004, chinadotcom derived approximately 18.0% of its total revenues from sales
made through the network operators and are, therefore, particularly dependent on
them.
Delivery of chinadotcom's mobile services and applications is governed by
contracts between it and the national, provincial or local affiliates of China
Mobile and China Unicom. Each of these contracts is nonexclusive and has a
limited term (generally one or two years). chinadotcom usually renews these
contracts or enters into new ones when the prior contracts expire, but on
occasion the renewal or new contract can be delayed by periods of one month or
more. The terms of these contracts vary, but the network operators are generally
entitled to terminate them in advance for a variety of reasons or, in some
cases, for no reason in their discretion. For example, several of chinadotcom's
contracts with the network operators can be terminated if:
- it fails to achieve performance standards established by the applicable
network operator from time to time;
- it breaches its obligations under the contracts, which include, in many
cases, the obligation not to deliver content that violates the network
operator's policies and applicable law;
- the network operator receives high levels of customer complaints about
its mobile applications or services; or
50
- the network operator sends it written notice that it wishes to terminate
the contract at the end of the applicable notice period.
chinadotcom may also be compelled to alter its arrangements with these
mobile network operators in ways which materially and adversely affect its
business. China Mobile and China Unicom have unilaterally changed their policies
as applied to third party service providers from time to time in the past, and
may do so again in the future. For example, China Mobile banned all cooperative
arrangements known as "SMS Website Unions" in July 2003, effectively precluding
large service providers from aggregating unregistered websites and utilizing
China Mobile's billing platform to gather fees for these services. In August
2003, China Mobile further banned service providers from using its network to
charge customers for services which were deemed by it to be not purely wireless
services. Although chinadotcom was not engaged in these activities and,
therefore, these particular policy changes did not impact its business,
chinadotcom may not be able to respond adequately to negative developments in
its contractual relationships with China Mobile and China Unicom that may result
in the future from unforeseen unilateral policy changes.
CHINADOTCOM'S BUSINESS COULD BE ADVERSELY AFFECTED IF CHINA MOBILE OR CHINA
UNICOM OR BOTH BEGIN PROVIDING THEIR OWN MOBILE APPLICATIONS AND SERVICES.
chinadotcom's mobile business may be adversely affected if China Mobile or
China Unicom or both decide to terminate chinadotcom's existing revenue-sharing
relationship and begin providing their own mobile services and applications to
subscribers. In that case, chinadotcom would not only face enhanced competition,
but could be partially or fully denied access to their networks.
IF CHINA MOBILE OR CHINA UNICOM BLOCKS CHINADOTCOM'S ACCESS TO THEIR MOBILE
NETWORKS OR THEIR BILLING AND COLLECTION SYSTEMS, CHINADOTCOM'S MOBILE
BUSINESS COULD BE DISCONTINUED.
chinadotcom relies exclusively on China Mobile and China Unicom, and their
respective provincial and local affiliates, for access to chinadotcom's
subscribers over their mobile networks and for revenues collected through their
billing and collection systems. Currently, there are no other mobile network
operators in China. If China Mobile, China Unicom or any of their affiliates
blocks chinadotcom's access to their mobile networks or limits its services,
chinadotcom may be unable to find a reliable and cost-effective replacement in a
timely manner upon acceptable terms, if at all. If one or more of these events
occurs, chinadotcom's mobile services and applications business would not be
viable and chinadotcom may need to discontinue such business.
IF CHINA MOBILE OR CHINA UNICOM FAILS TO BILL THEIR CUSTOMERS OR TO PROVIDE
BILLING CONFIRMATIONS FOR CHINADOTCOM'S MOBILE SERVICES AND APPLICATIONS,
CHINADOTCOM'S MOBILE SERVICES AND APPLICATIONS REVENUES COULD BE SIGNIFICANTLY
REDUCED.
chinadotcom depends upon China Mobile and China Unicom to maintain accurate
records of the fees paid by users and their willingness to pay chinadotcom.
Specifically, the network operators provide chinadotcom with monthly statements
that do not provide itemized information indicating for which mobile services
and applications the network operator has collected fees. As a result, monthly
statements that chinadotcom receives from the network operators cannot be
reconciled to chinadotcom's internal records on a segmented basis. In addition,
access to the network operators' internal billing and collection records is
subject to the discretion of such operators; chinadotcom has only limited means
to verify the information provided to it independently. chinadotcom's mobile
services and applications revenues could be significantly reduced if these
network operators miscalculate the revenues generated from chinadotcom's mobile
services and applications and chinadotcom's portion of those revenues.
CHINADOTCOM'S MOBILE SERVICES AND APPLICATIONS REVENUES ARE AFFECTED BY
BILLING AND TRANSMISSION FAILURES WHICH ARE OFTEN BEYOND ITS CONTROL.
chinadotcom does not collect fees for delivery of its mobile services and
applications from China Mobile and China Unicom in a number of instances,
including if:
51
- the delivery of chinadotcom's mobile services and applications to a
subscriber is prevented because his or her mobile phone is turned off for
an extended period of time, the customer's prepaid phone card has no
value or the subscriber has ceased to be a customer of the applicable
network operator;
- China Mobile or China Unicom experiences technical problems with its
network which prevent the delivery of chinadotcom's mobile services and
applications to the subscriber;
- chinadotcom experiences technical problems with its technology platform
that prevents delivery of its mobile services and applications; or
- the subscriber refuses to pay for chinadotcom's mobile services and
applications due to quality or other problems.
These situations are known in the mobile services and applications industry
as billing and transmission failures. chinadotcom does not expect to recover
revenues that are lost due to billing and transmission failures. The failure
rate can vary among network operators, and by province, and also have fluctuated
significantly in the past. For example, for the year ended December 31, 2003,
the average monthly transmission failure rate ranged from 10% to 30%.
chinadotcom does not have any agreements with the mobile operators that provide
that if such differences are greater than a fixed percentage, chinadotcom has
the right to adjust the differences. The mobile operators have absolute
discretion in the adjustment of any difference. Any significant billing and
transmission failures therefore will significantly lower chinadotcom's recorded
revenues.
BECAUSE CHINA MOBILE AND CHINA UNICOM DO NOT PROVIDE INFORMATION SHOWING
REVENUES AND TRANSMISSION INFORMATION ON A SERVICE-BY-SERVICE BASIS,
CHINADOTCOM CAN ONLY ESTIMATE ITS ACTUAL REVENUES BY SERVICE TYPE.
China Mobile's and China Unicom's monthly statements to service providers
regarding mobile services and applications delivered through their networks
currently do not contain revenues and billing and transmission failure
information on a service-by-service basis. Although chinadotcom maintains its
own records reporting the mobile services and applications provided, it can only
estimate the actual revenues by service type because it is unable to confirm
which services were transmitted but resulted in billing and transmission
failures. As a result, chinadotcom is unable to calculate and monitor
service-by-service revenues, margins and other financial information, such as
average revenue per user by service and total revenues per user by service, with
precision to allow it to accurately determine which of its mobile services and
applications are or may be profitable.
CHINA MOBILE AND CHINA UNICOM MAY IMPOSE HIGHER SERVICE OR NETWORK FEES IF IT
IS UNABLE TO SATISFY CUSTOMER USAGE AND OTHER PERFORMANCE CRITERIA, THEREBY
REDUCING CHINADOTCOM'S MOBILE SERVICES AND APPLICATIONS REVENUES.
Fees for chinadotcom's mobile services and applications are charged on a
monthly subscription or per use basis. Based on chinadotcom's contractual
arrangements, it relies upon China Mobile and China Unicom for both billing of,
and collection from, subscribers of fees for chinadotcom's mobile services and
applications.
China Mobile and China Unicom generally charge chinadotcom service fees of
15% and 12% of the revenues generated by chinadotcom's mobile services and
applications, respectively. To the extent that the number of messages sent by
chinadotcom over China Mobile's network exceeds the number of messages
chinadotcom's subscribers send to chinadotcom, chinadotcom must pay per message
channel fees, which decrease in several provinces as the volume of customer
usage of chinadotcom's mobile services and applications increases. The number of
messages sent will exceed those sent by chinadotcom's subscribers, for example,
if the subscriber sends a single message to order a game but chinadotcom must
send that subscriber several messages to confirm his or her order and deliver
the game itself. Any increase in China Mobile's or China Unicom's network fees
and service charges could reduce chinadotcom's gross margins.
52
CHINA MOBILE AND CHINA UNICOM MAY NOT AUTHORIZE CHINADOTCOM'S MOBILE SERVICES
AND APPLICATIONS TO BE OFFERED ON THEIR NETWORKS IF CHINADOTCOM FAILS TO
ACHIEVE MINIMUM CUSTOMER USAGE, REVENUES AND OTHER CRITERIA, THEREBY ADVERSELY
AFFECTING CHINADOTCOM'S REVENUES.
chinadotcom's business could be adversely affected if chinadotcom fails to
achieve minimum customer usage, revenues and other criteria imposed or revised
by China Mobile and China Unicom at their discretion from time to time. China
Mobile and China Unicom, through their provincial and local offices, have
historically preferred to work only with a small group of the best-performing
mobile services and applications providers, based upon the uniqueness of the
service offered by each provider, total number of subscribers, usage and
revenues generated in the applicable province or municipality, the rate of
customer complaints, and marketing expenditures in the applicable province or
municipality.
For example, China Mobile has recently been increasing its promotion of STK
cards, which are semiconductor chips for mobile phones that have the services of
various third-party service providers preselected by the network operators'
provincial or municipal offices embedded on the chip. Generally, the services of
a limited number of service providers are embedded on the STK card, with the
selection based on the quantitative criteria referenced above. While several of
chinadotcom's mobile services and applications have been selected by ten of the
provincial and municipal China Mobile offices (out of a total of 31 that offer
STK cards) for inclusion on their STK cards, the remaining provinces and
municipalities have either not launched STK cards or have not selected
chinadotcom for inclusion on their STK cards.
In the future, chinadotcom may fail to meet the then-current performance
criteria that network operators in these or other provinces or municipalities
set from time to time. In any such case, chinadotcom's mobile services and
applications could be excluded from those cards or from their entire networks at
a national, provincial or municipal level, or chinadotcom could be precluded
from introducing new services, which would adversely affect chinadotcom's
revenues and growth prospects.
CHINADOTCOM'S MOBILE SERVICES AND APPLICATIONS AND THEIR PRICING ARE SUBJECT
TO APPROVAL BY CHINA MOBILE AND CHINA UNICOM, AND IF REQUESTED APPROVALS ARE
NOT GRANTED IN A TIMELY MANNER, CHINADOTCOM'S MOBILE SERVICES AND APPLICATIONS
BUSINESS COULD BE ADVERSELY AFFECTED.
chinadotcom must obtain approval from China Mobile and China Unicom with
respect to each mobile service or application that chinadotcom proposes to offer
to their subscribers and the pricing for such mobile service or application. In
addition, any changes in chinadotcom's existing mobile services and applications
as well as the pricing of such services and applications must be approved in
advance by these network operators. No assurance can be given that such
approvals will be granted in a timely manner or at all. Moreover, under some of
chinadotcom's contracts with the network operators, chinadotcom cannot change
prices more than once every six months or charge prices outside a fixed range.
Failure to obtain, or a delay in, obtaining such approvals could place
chinadotcom at a competitive disadvantage in the market and adversely affect
chinadotcom's business.
CHINADOTCOM RELIES HEAVILY ON CERTAIN REGIONS IN CHINA FOR A SIGNIFICANT SHARE
OF ITS MOBILE SERVICES AND APPLICATIONS REVENUES. AN ECONOMIC DOWNTURN OR ANY
LOSS OF CONTRACTS WITH MOBILE OPERATORS IN THESE PROVINCES COULD HAVE A
MATERIAL ADVERSE EFFECT ON CHINADOTCOM'S RESULTS OF OPERATIONS.
A significant portion of chinadotcom's revenues from mobile services and
applications are derived from Shanghai and the provinces of Shandong, Jiangsu,
Guangdong and Zhejiang in China. Customers in these regions accounted for 55.8%
of chinadotcom's total mobile services and applications revenues for the year
ended December 31, 2003. As such, chinadotcom's results of operations are
susceptible to changes in the economies of these regions. An economic downturn
in any one of these regions, or chinadotcom's failure to renew contracts with
either China Mobile or China Unicom in any one of these regions, could reduce
chinadotcom's mobile services and applications revenues.
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IF OTHER NEW MOBILE OPERATORS GAIN A SIGNIFICANT SHARE OF THE MOBILE MARKET IN
CHINA, CHINADOTCOM WILL NEED TO ESTABLISH NEW ARRANGEMENTS WITH THOSE MOBILE
OPERATORS AND IF CHINADOTCOM FAILS TO DO SO, ITS MOBILE SERVICES AND
APPLICATIONS BUSINESS MAY SUFFER.
The success of chinadotcom's mobile data business depends on chinadotcom's
relationship with China's mobile operators. Currently, China Mobile and China
Unicom are the only companies permitted to provide mobile services in China. If
the PRC government further opens the mobile market in China to allow greater
competition, chinadotcom may need to establish new arrangements with new market
entrants in order to continue to provide chinadotcom's mobile services.
chinadotcom may not succeed in establishing such new arrangements, and
chinadotcom's failure to do so may limit access to chinadotcom's mobile
services, thereby causing business to suffer.
IF CHINADOTCOM FAILS TO KEEP PACE WITH CHANGES IN MOBILE TECHNOLOGY, ITS
COMPETITIVE POSITION AND ABILITY TO GENERATE REVENUES COULD BE ADVERSELY
AFFECTED.
chinadotcom's current value-added mobile services focus on short message
services, but mobile technology is changing rapidly to support multi-media
messaging services, mobile e-commerce, music and image downloads, and other
complex services. chinadotcom is developing new mobile related products and
services, and the success of chinadotcom's new products and services is subject
to risks and uncertainties. For example, technical, operational or distribution
problems could delay or prevent the introduction of chinadotcom's new products
or services. chinadotcom can provide no assurance that its new products and
services will achieve widespread market acceptance or generate meaningful
revenue. If chinadotcom fails to introduce new products and services that offer
the latest mobile technology, its competitive position and its ability to
generate new revenues could be compromised.
CHINADOTCOM'S PORTAL BUSINESS DEPENDS SUBSTANTIALLY ON THIRD PARTY CONTENT
PROVIDERS AND MAY BE ADVERSELY AFFECTED IF CHINADOTCOM IS UNABLE TO MAINTAIN
EXISTING ARRANGEMENTS WITH THESE CONTENT PROVIDERS.
chinadotcom relies on third parties to create traffic and provide content
for its portal network to make it more attractive to advertisers and consumers.
chinadotcom's content providers include Xinhua, a major shareholder of
chinadotcom, as well as commercial content providers and chinadotcom's
registered community members. If Xinhua or these third parties fail to provide
chinadotcom with high-quality content, chinadotcom's portal network could lose
viewers, subscribers and advertisers and revenues from these sources would
decrease. chinadotcom's existing relationships with Xinhua and other commercial
content providers are not exclusive and may not result in sustained business
partnerships or successful service offerings or sustained traffic on
chinadotcom's portal network or future revenues.
CHINADOTCOM'S MOBILE AND PORTAL BUSINESS COULD BE MATERIALLY ADVERSELY
AFFECTED IF THE CURRENT OWNERSHIP STRUCTURE OF ITS CHINESE COMPANIES THAT HOLD
THE ICP LICENSES IS CHALLENGED BY THE PRC AUTHORITIES.
The PRC government has imposed foreign ownership restrictions and
prohibitions on Internet content and telecommunications operations. PRC laws and
regulations require all Internet portal and mobile portal operators to obtain an
Internet content provider, or ICP, license before they may operate the portals
in China. Under current PRC regulations, ICP license holders must be PRC
nationals or domestic PRC companies. As a result, chinadotcom cannot be the
legal owner of such ICP licenses, which are necessary to operate chinadotcom's
mobile and portal businesses in China. Currently, Newpalm's ICP licenses are
held by two PRC companies, Beijing New Palm Technology Co., Ltd. and Beijing
Wisecom Technology Co., Ltd. However, the two PRC individuals that own 100% of
the shares of these companies have entered into trust deed arrangements with
chinadotcom's indirect subsidiary, hongkong.com Limited. Under these
arrangements, the two PRC individuals are trustees or nominees of hongkong.com
Limited and may only act at its direction. Similar deed of trust arrangements
have been entered into between certain PRC individuals and chinadotcom's
indirect subsidiary, chinadotcom Portals Limited, in connection with the ICP
license for the www.china.com portal.
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Due to the uncertainties relating to the interpretation and application of
telecommunications and Internet legislation in China, the PRC authorities could,
at any time, assert that any part of chinadotcom's existing or future business,
or the ownership of the PRC companies and their ICP licenses through the trust
deed arrangements, violate PRC laws or regulations. If chinadotcom is found to
be in violation of any PRC law or regulation, the relevant authorities would
have broad discretion in imposing penalties, which could include one or more of
the following:
- levying of fines;
- compulsory disgorgement of income for both current and past periods;
- revocation of chinadotcom's ICP or business license;
- closure or suspension of chinadotcom's China operations; and
- compulsory restructuring of chinadotcom's China operations or licensing
arrangements.
Any of these actions may disrupt chinadotcom's services in China, may harm
chinadotcom's reputation and could have a material adverse effect on
chinadotcom's portal and mobile operations in China. In particular, if any of
these ICP licenses are revoked or terminated, Internet content and mobile
operations in China that are dependent on such licenses will be discontinued,
which will have a material adverse effect on chinadotcom's results of operation
and financial condition.
CHINADOTCOM'S BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED IF CHINADOTCOM
CANNOT PROVIDE EFFECTIVE OPERATIONAL CONTROL OF ITS MOBILE AND PORTAL BUSINESS
DUE TO THE CURRENT OWNERSHIP STRUCTURE OF ITS CHINESE COMPANIES.
chinadotcom relies upon certain PRC individuals as the legal owners of the
PRC companies that hold the ICP licenses, which are necessary to operate
chinadotcom's Internet and mobile businesses in China. Although chinadotcom's
indirect subsidiaries are the beneficial owners of these PRC companies and such
PRC individuals may be directors or employees, the rights provided in these
trust arrangements are contractual in nature and do not guarantee the necessary
operational control. If chinadotcom's trustees fail to perform their
obligations, the contractual remedies available in jurisdictions outside China
may not provide chinadotcom with effective control over these PRC companies due
to the uncertainty of enforcing foreign judgments or arbitral awards in China.
The loss of effective control over chinadotcom's China operations and licensing
would significantly harm chinadotcom's portal and mobile businesses in China.
CHINA MOBILE AND CHINA UNICOM HAVE IMPOSED PENALTIES ON CHINADOTCOM FOR
TECHNICAL BREACHES AND IRREGULARITIES IN THE PROVISION OF SERVICES TO USERS.
IF PENALTIES ARE IMPOSED IN THE FUTURE, CHINADOTCOM'S BUSINESS AND FINANCIAL
RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.
In the first quarter of 2004, China Mobile and China Unicom imposed
penalties, in the form of fines, on chinadotcom for certain technical breaches
and irregularities in chinadotcom's provision of services to certain of their
mobile users. While chinadotcom has taken steps to prevent a reoccurrence of
these technical breaches and irregularities, there can be no assurance that
additional technical breaches and irregularities will not occur resulting in
further penalties and/or fines imposed by China Mobile and China Unicom. Such
penalties and/or fines could have a material adverse effect on chinadotcom's
operations and financial results.
IF CHINADOTCOM IS HELD LIABLE FOR CLAIMS BASED ON INFORMATION ORIGINATING FROM
ITS PORTAL NETWORK OR COMMUNICATED THROUGH ITS SMS PRODUCTS, CHINADOTCOM MAY
INCUR SIGNIFICANT COSTS CONTESTING SUCH CLAIMS OR PAYING DAMAGES.
chinadotcom may face liability for defamation, negligence, copyright,
patent or trademark infringement and other claims based on the nature and
content of information originating from chinadotcom's portal network or
communicated through chinadotcom's SMS products. Such information could include
content and material posted by registered community members on message boards,
online communities,
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voting systems, e-mail or chat rooms. By providing technology for hypertext
links to third-party websites, chinadotcom may be held liable for copyright or
trademark violations by those third-party sites. Third parties could assert
claims against chinadotcom for losses incurred in reliance on erroneous
information distributed by chinadotcom. Users of chinadotcom's web-based e-mail
or SMS could seek damages for:
- unsolicited e-mail or SMS messages;
- lost or misplaced messages;
- illegal or fraudulent use of e-mail or SMS messages; or
- interruptions or delays in service.
chinadotcom does not carry liability insurance to cover potential claims of
this type. chinadotcom may incur significant costs in investigating and
contesting these claims. Any judgment, fine, damage awards or liability imposed
could significantly increase chinadotcom's costs. Moreover, chinadotcom's
reputation may suffer as a result of these claims, which could reduce traffic on
chinadotcom's portal network or reduce chinadotcom's revenues.
IF THE PRC GOVERNMENT CONSIDERS CHINADOTCOM'S EXISTING LICENSING STRUCTURES TO
BE INSUFFICIENT IN MEETING COMPLIANCE REQUIREMENTS WITH APPLICABLE LICENSING
RESTRICTIONS, OR IF CHINADOTCOM FAILS TO COMPLY WITH CHANGES TO THESE
REQUIREMENTS OR RESTRICTIONS, ITS PORTAL AND MOBILE APPLICATIONS BUSINESSES
COULD BE MATERIALLY ADVERSELY AFFECTED.
The PRC government regulates access to the Internet by imposing strict
licensing requirements on Internet service providers, or ISPs. Generally, the
provision of different types of infrastructure telecommunication services and
value-added telecommunication services is subject to different licensing regimes
in the PRC. In April 2003, a new regulation was promulgated by the Ministry of
Information Industry, or the MII, in connection with the categorization of each
kind of telecommunication business.
While chinadotcom believes that its current operation complies with all
existing PRC laws, rules and regulations, there are substantial uncertainties
regarding the interpretation of current Internet laws and regulations. It is
possible the PRC government may take a view contrary to chinadotcom's because
there are no well established precedents or clear judicial interpretations to
support chinadotcom's interpretations and views of the laws, rules and
regulations. Issues, risks and uncertainties relating to PRC government
regulation of China's Internet sector include:
- recently enacted regulations applying to Internet-related services and
telecom-related activities. While many aspects of these regulations
remain unclear, they purport to limit and require licensing of various
aspects of the provision of Internet information services. If these
regulations are interpreted to preclude chinadotcom's current ownership
structure or business model, its portal and mobile applications
businesses could be severely impaired; and
- the activities of Internet content providers, or ICPs, are subject to
regulation by various PRC government authorities depending on the
specific activities conducted by the ICP as stated by the MII. Various
government authorities have enacted several new laws and regulations that
govern these activities. The areas of regulation currently contemplated
include:
- online advertising;
- online news reporting;
- online publishing;
- online securities trading;
- online gaming;
- online broadcasting;
- bulletin board service; and
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- the provision of industry-specific information (e.g., pharmaceutical
products) over the Internet, etc.
Other aspects of chinadotcom's online operations may be subject to
regulation in the future.
In addition to the regulations promulgated by the PRC national government,
some local governments, such as the Beijing local government, have also
promulgated local rules applicable to Internet companies operating within their
respective jurisdictions. These local rules may also create additional barriers
in relation to the operation of chinadotcom's business.
IF CHINADOTCOM FAILS TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH CONTENT
PROVIDERS AND MOBILE NETWORK OPERATORS, IT MAY NOT ATTRACT OR RETAIN USERS.
chinadotcom relies on a number of third party relationships to attract
traffic and provide content to make its portals more attractive to advertisers
and consumers. Most of these arrangements are not exclusive and are short-term
or may be terminated at the convenience of the other party. chinadotcom cannot
assure you that its existing relationships will result in sustained business
partnerships, successful service offerings, significant traffic or significant
revenues. In addition, much of the third party content provided to chinadotcom's
portal is also available from other sources or may be provided to other
companies. If chinadotcom's competitors present the same or similar content in a
superior manner, it would adversely affect chinadotcom's visitor traffic.
THE DIVIDENDS AND OTHER DISTRIBUTIONS ON EQUITY CHINADOTCOM MAY RECEIVE FROM
ITS SUBSIDIARIES OR OTHER PAYMENTS CHINADOTCOM MAY RECEIVE FROM BEIJING
NEWPALM OR BEIJING WISECOM ARE SUBJECT TO RESTRICTIONS UNDER PRC LAW OR
AGREEMENTS THAT THESE ENTITIES MAY ENTER INTO WITH THIRD PARTIES.
chinadotcom is a holding company. chinadotcom's subsidiaries hongkong.com
Corporation, hongkong.com Limited and Newpalm, entered into contractual
arrangements with Beijing Newpalm Technology Co., Ltd. and Beijing Wisecom
Technology Co., Ltd. chinadotcom conducts its mobile services and applications
business activities and receives substantially all of its revenues from this
business in the form of service fees through Beijing Newpalm and Beijing
Wisecom. chinadotcom relies on dividends and other distributions on equity paid
by its subsidiaries and service fees from Beijing Newpalm and Beijing Wisecom
for its cash requirements in excess of any cash raised from investors and
retained by it. If any of chinadotcom's subsidiaries incurs debt in the future,
the instruments governing the debt may restrict their ability to pay dividends
or make other distributions to chinadotcom. In addition, PRC law requires that
payment of dividends by chinadotcom's subsidiaries that are incorporated in
China can only be made out of their net income, if any, determined in accordance
with PRC accounting standards and regulations. Under PRC law, those subsidiaries
are also required to set aside a portion, up to 10% of their after-tax net
income each year to fund reserve funds, and these reserves are not distributable
as dividends. Any limitation on the payment of dividends by chinadotcom's PRC
subsidiaries could have a material adverse effect on its ability to grow, fund
investments, make acquisitions, pay dividends, and otherwise operate its mobile
services and applications business.
RISKS RELATING TO CHINADOTCOM'S NETWORK, INTELLECTUAL PROPERTY AND PERSONNEL
CHINADOTCOM'S COMPUTER NETWORK IS VULNERABLE TO HACKING, VIRUSES, SPAMMING AND
OTHER DISRUPTIONS WHICH MAY CAUSE IT TO LOSE KEY CLIENTS, EXPOSE IT TO
LIABILITY FOR ITS CLIENTS' LOSSES OR PREVENT IT FROM SECURING FUTURE BUSINESS.
Inappropriate use of chinadotcom's Internet services or errors or omissions
in processing instructions or data available in its computer system or databases
could jeopardize the security of confidential information stored in its computer
system, which may cause chinadotcom to lose key clients, expose chinadotcom to
liability for its clients' losses and prevent it from securing future business,
any of which could have a material adverse effect on its business, financial
condition, results of operations and share price.
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Inappropriate use of the Internet includes attempting to gain unauthorized
access to information or systems, commonly known as cracking or hacking, and
repeated transmission of unsolicited e-mail messages, commonly known as e-mail
bombing or spamming. chinadotcom's current policies, procedures and
configurations for managing its systems, including its computer servers, may not
be adequate to protect its facilities and the integrity of its user and customer
information. Although chinadotcom implements security measures to protect its
facilities and the integrity of its user and customer information, such measures
could be ineffective or circumvented.
Spam
As is typical for many businesses offering online based products and
services such as emails, chinadotcom experiences spam attacks on a regular
basis. chinadotcom's systems use filters which identify common words and
sentence structures typically used in spamming to block spam attacks.
chinadotcom's network administrators constantly review spam activities as a part
of system maintenance, and also consult with outside authorities to learn about
the latest techniques spammers use to attack systems which is often used to
update chinadotcom's filters. In addition, the email products chinadotcom offers
have their own filtering capabilities which allow users to further refine the
emails which should be blocked. chinadotcom encourages users to notify
chinadotcom of any suspect email activity, and chinadotcom will terminate user
accounts which are detected as engaging in spamming activities. However,
chinadotcom's systems continue to experience spam attacks regularly, and there
is no assurance that the spam attacks will not become more frequent and
materially disrupt its operations.
Viruses
While chinadotcom's computer systems have occasionally experienced problems
as a result of viruses, chinadotcom has not experienced extended system outages
as a result of viruses. To protect chinadotcom's systems from viruses,
chinadotcom has installed on its networks commercially available antivirus
software produced for enterprise networks. chinadotcom updates on a daily basis
its library of viruses to be scanned for, and performs anti-virus updating
activities upon computers when they log on to the chinadotcom network. In
addition, upon receipt of specific information that a new virus is causing
difficulties across the computer networks of a number of other companies,
chinadotcom's system administrators will send out virus alerts to its users to
inform them about the virus activities, including, when applicable, advice not
to open emails with specified tag lines or headers. Nonetheless, chinadotcom's
efforts to protect its systems from viruses may not be adequate and there is no
assurance that chinadotcom will not experience extended system outages due to
viruses in the future.
Hacking
chinadotcom's computer networks have been the target of sporadic hacking
activities over the years, although most hacking activities have been targeted
against the gateways chinadotcom's computer systems use to access the Internet
which are operated by third parties, rather than directly against chinadotcom's
systems. chinadotcom has set up firewalls using commercially available software
to shield its systems from hacker attacks. In addition, chinadotcom uses
commercially available software which monitors traffic across the chinadotcom
network looking for abnormal activities and traffic which may signal a hacker
attack, and also uses restricted access lists to restrict unauthorized traffic
on its routers to limit hacker attacks. However, chinadotcom may continue to be
the target of hacking activities, and there is no guarantee that the firewalls
and software that chinadotcom has implemented will adequately protect its
systems from such hacking activities.
Alleviating problems caused by computer viruses or other inappropriate uses
or security breaches may require interruptions, delays or cessation in its
services, in addition to the outages that occur in its systems from time to time
for various reasons, including power interruptions, errors in instructions,
equipment inadequacy, capacity and other technical problems. chinadotcom does
not carry errors and omissions or other insurance covering losses or liabilities
caused by computer viruses, security breaches or spamming attacks. Compromises
or breaches in the security or integrity of chinadotcom's facilities or customer
or
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user information, or inappropriate use of its Internet services, could subject
it to litigation and could adversely affect chinadotcom's customer base,
business, share price, results of operation and financial condition.
CHINADOTCOM RELIES ON SOFTWARE AND HARDWARE SYSTEMS THAT ARE SUSCEPTIBLE TO
FAILURE, AND IN THE EVENT OF SERVICE OPERATIONS OR OTHER RELATED PROBLEMS,
CHINADOTCOM'S OPERATING EFFICIENCY AND RESULTS OF OPERATIONS MAY BE ADVERSELY
AFFECTED.
Any system failure or inadequacy that interrupts chinadotcom's services or
increases the response time of its services could reduce user satisfaction,
future traffic and its attractiveness to advertisers and consumers. There can be
no assurance that chinadotcom's technologies, services and products will not
experience interruptions or other related problems, which could affect its
operating efficiency and results of operations.
In addition, as chinadotcom's Web pages and traffic increases, there can be
no assurance that it will be able to scale its systems proportionately. There
also can be no assurance that its ad serving capabilities will be adequate for
its business needs or properly track the number of impressions on its
advertising affiliates. chinadotcom also depends on Web browsers, ISPs and other
Web site operators in Greater China and elsewhere that have experienced
significant system failures and electrical outages in the past. chinadotcom's
users have experienced difficulties due to system failures that were unrelated
to its systems and services.
chinadotcom has limited backup systems and redundancy, and chinadotcom has
experienced system failures and electrical outages that have disrupted its
operations. chinadotcom does not have a disaster recovery plan in the event of
damage from fire, natural disasters, power loss, telecommunications failures,
break-ins and similar events. chinadotcom may experience a complete system
shut-down if any of these events were to occur. To improve performance and to
prevent disruption of its services, it may have to make substantial investments
to deploy additional servers or one or more copies of its Web sites to mirror
its online resources. Because chinadotcom carries property insurance with low
coverage limits, its coverage may not be adequate to compensate it for its
losses. If chinadotcom does not increase its capacity and its redundancy, these
constraints could have a material adverse effect on its business, results of
operations and financial condition.
CHINADOTCOM MAY BE UNABLE TO PROTECT OR ENFORCE ITS OWN INTELLECTUAL PROPERTY
RIGHTS ADEQUATELY AND MAY BE INVOLVED IN FUTURE LITIGATION OVER ITS USE OF
TECHNOLOGY RIGHTS.
As chinadotcom increasingly develops or acquires intellectual property,
including:
- the purchase of the URLs;
- the recent purchase of OpusOne Technologies which has developed several
proprietary enterprise software related applications for use in human
resources, payroll administration, attendance tracking and financial
accounting;
- the recent purchase of IMI, which provides supply chain management
solutions for complex retail, wholesale, consumer goods, and distribution
operations;
- the recent purchase of Pivotal, which provides a complete set of highly
flexible CRM applications; and
- the recent purchase of Executive Suite, a business intelligence and
analytics software product.
chinadotcom regards the protection of its trademarks, service marks, copyrights,
patents, domain names, trade dress and trade secrets as important to its
success. chinadotcom protects its intellectual property rights by relying on a
combination of trademark, service mark, copyright, patent, trade dress and trade
secret laws and through the domain name dispute resolution system. chinadotcom
also relies on contractual restrictions to protect its proprietary rights in
products, services and methodologies.
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chinadotcom enters into confidentiality agreements and assignments of
intellectual property with its employees, consultants, resellers and sub-agents,
and controls access to and distribution of its documentation, source code and
other licensed information. In spite of these precautions, it may be possible
for such persons to breach such precautions or controls or a third party to copy
or otherwise obtain and use chinadotcom's licensed services or technology
without authorization, or to develop and apply similar technology independently.
In addition, effective copyright, trademark, service mark and trade secret
protection is very expensive to maintain, and may be unavailable or limited. The
global nature of the markets in which chinadotcom operates also makes it
practically impossible to control the ultimate destination of its goods and
products. Protection may not be available in every country in which
chinadotcom's intellectual property and technology is used. Furthermore,
chinadotcom must also protect its trademarks, patents and domain names in an
increasing number of jurisdictions, a process that is expensive and may not be
successful in every location. Policing the unauthorized use of its licensed
technology is difficult as are the steps necessary to prevent the
misappropriation or infringement of its licensed technology. In addition,
further litigation may be necessary to enforce chinadotcom's intellectual
property rights, to protect its trade secrets or to determine the validity and
scope of the proprietary rights of others, which could result in substantial
cost to chinadotcom, divert its resources and have a material adverse effect on
its business, results of operations and financial condition.
chinadotcom currently owns, licenses, resells and distributes via
sub-agents intellectual property and technology from third parties. As
chinadotcom continues to develop intellectual property and introduce new
products and services that require new technology, it anticipates that it may
need to obtain licenses for additional third party technology. chinadotcom
cannot provide assurance that these existing and additional technology licenses
will be or will continue to be available to it on commercially reasonable terms,
if at all. In addition, it is possible that in the course of using new
technology, chinadotcom or its sub-agents may inadvertently breach the
technology rights of third parties and face liability for its breach.
chinadotcom's inability to obtain these technology licenses or avoid breaching
third party technology rights could require it to obtain substitute technologies
of lower quality or performance standards or at greater cost which could delay
or compromise its introduction of new products and services, and could
materially and adversely affect its business and financial condition.
CHINADOTCOM IS SUBJECT TO POSSIBLE INFRINGEMENT CLAIMS, WHICH COULD BE TIME
CONSUMING AND COSTLY TO DEFEND, DIVERT MANAGEMENT'S ATTENTION AND RESOURCES OR
CAUSE PRODUCT SHIPMENT DELAYS.
chinadotcom expects that software product developers will increasingly be
subject to infringement claims as the number of products and competitors in its
various industry segments grow and the functionality of products in different
industry segments overlaps. Any such claims, with or without merit, could be
time consuming and costly to defend, divert management's attention and
resources, cause product shipment delays or require chinadotcom to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to chinadotcom, if at all,
and may require the payment of substantial amounts of money. In the event of a
successful product infringement claim against chinadotcom or its failure or
inability to license the infringed or similar technology, chinadotcom's
business, operating results and financial condition could be materially
adversely affected.
CHINADOTCOM IS EXPOSED TO PRODUCT LIABILITY CLAIMS, WHICH COULD BE TIME
CONSUMING AND COSTLY TO DEFEND, DIVERT MANAGEMENT'S ATTENTION AND COULD HAVE A
MATERIAL ADVERSE EFFECT ON ITS BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION.
chinadotcom's enterprise software license agreements with its customers
typically contain provisions designed to limit its exposure to potential product
liability claims. Any such claims, with or without merit, could be time
consuming and costly to defend and divert management's attention and resources.
Some of chinadotcom's subsidiaries carry insurance to protect against such
claims. It is possible, however, that the limitation of liability provisions
contained in chinadotcom's license agreements may not be effective as a result
of U.S. or foreign laws or ordinances enacted in the future or because of
judicial decisions, and that
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liability insurance may not be available, or that coverage for specific claims
may be denied. Although it has not experienced any material product liability
claims to date, the sale and support of products by chinadotcom may entail the
risk of such claims. A successful product liability claim brought against
chinadotcom could have a material adverse effect upon its business, operating
results and financial condition.
DEFECTS IN CHINADOTCOM'S ENTERPRISE SOFTWARE PRODUCTS COULD INCREASE ITS COSTS,
ADVERSELY AFFECT ITS REPUTATION, DIMINISH DEMAND FOR ITS PRODUCTS AND HURT ITS
OPERATING RESULTS.
As a result of their complexity, chinadotcom's enterprise software products
may contain undetected errors or viruses. Errors in new products or product
enhancements might not be detected until after initiating commercial shipments,
which could result in additional costs, delays, possible damage to chinadotcom's
reputation and could cause diminished demand for its products. This could lead
to customer dissatisfaction and reduce the opportunity to renew maintenance or
sell new licenses.
CHINADOTCOM RELIES ON KEY PERSONNEL. IN THE EVENT CHINADOTCOM LOSES THE
SERVICES OF KEY EMPLOYEES, IT MAY BE COSTLY AND TIME CONSUMING FOR CHINADOTCOM
TO LOCATE OTHER PERSONNEL WITH THE REQUIRED SKILLS AND EXPERIENCE.
chinadotcom's success depends on the continued efforts of its board
members, its senior management and its technical, marketing and sales personnel.
These persons may terminate their association or employment with chinadotcom, or
they may be terminated by it, at any time. chinadotcom does not maintain life
insurance policies for its key personnel. chinadotcom's loss of the services of
key members of senior management or experienced personnel in its key revenue
producing businesses, or its inability to attract or retain additional qualified
board members, senior managers or personnel in a timely manner, or health,
family or other personal problems of key personnel could have a material adverse
effect on its business, financial condition, results of operations and share
price.
chinadotcom's success, including with respect to IMI's operations, also
depends on its ability to attract and retain additional highly qualified
management, technical, marketing and sales personnel although there are no
special personnel specific to IMI upon which chinadotcom depends. The process of
hiring employees with the combination of skills and attributes required to
implement its business strategy can be extremely competitive and time-consuming.
chinadotcom competes with more established companies with greater resources that
offer more attractive compensation or employment conditions for a limited number
of qualified individuals. As a result, chinadotcom may be unable to retain or
integrate existing personnel or identify and hire additional qualified
personnel. Furthermore, chinadotcom's success depends upon its ability to retain
or replace the members, particularly the independent members, of its board of
directors.
CHINADOTCOM HAS RELIED ON STOCK OPTIONS TO COMPENSATE ITS EMPLOYEES. IN THE
EVENT EMPLOYEES DO NOT CONSIDER THEIR OPTIONS AS VALUABLE COMPENSATION,
CHINADOTCOM MAY NEED TO PROVIDE ADDITIONAL COMPENSATION AT ADDITIONAL EXPENSE.
chinadotcom has granted stock options to many of its employees in lieu of
additional salary. Some of chinadotcom's employees may not consider their
options to be valuable compensation, and chinadotcom may need to provide
additional compensation, in the form of additional salary, bonuses or equity, in
an effort to retain those existing employees. Its inability to retain its
employees, particularly its senior officers, and key sales, technical, marketing
and other service personnel in its key revenue producing businesses could have a
material adverse effect on its business, financial conditions, results of
operations and share price.
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RISKS RELATING TO CHINADOTCOM'S COMMON SHARES
CHINADOTCOM'S SHARE PRICE COULD BE ADVERSELY AFFECTED IF ITS MAJOR STRATEGIC
SHAREHOLDERS MATERIALLY CHANGE THEIR HOLDINGS IN ITS SHARES, PARTICULARLY IF
THE SHAREHOLDINGS ARE NOT DISPOSED OF IN AN ORDERLY MANNER.
As of April 30, 2004, Xinhua, through a wholly owned subsidiary, owned
7,362,734 of chinadotcom's common shares, or approximately 7.1% of its total
outstanding share capital. As of April 30, 2004, Asia Pacific Online Limited, or
APOL, owned 11,835,686 of chinadotcom's common shares or approximately 11.4% of
chinadotcom's total outstanding share capital which includes shares to be
acquired within 60 days. APOL is owned by the spouse of Mr. Peter Yip,
chinadotcom's chief executive officer, and by a trust established for the
benefit of Mr. Yip's children. There is no guarantee that Xinhua or APOL will
continue to hold chinadotcom's shares going forward for any length of time. If
either Xinhua or APOL disposes of, or if investors expect either Xinhua or APOL
to dispose of, a substantial portion of its holdings in chinadotcom at any time,
it could adversely affect chinadotcom's share price.
A SMALL GROUP OF CHINADOTCOM'S EXISTING SHAREHOLDERS CONTROL A SIGNIFICANT
PERCENTAGE OF ITS COMMON SHARES, AND THEIR INTERESTS MAY DIFFER FROM OTHER
SHAREHOLDERS.
APOL has beneficial ownership of approximately 11.4% of chinadotcom's
common shares. In addition, based solely upon information derived from publicly
available information as of April 30, 2004, each of Xinhua, Capital Group
International, Inc. and Jayhawk Capital Management, L.L.C. have beneficial
ownership of approximately 7.1%, 3.9% and 1.8% of chinadotcom's common shares,
respectively.
Accordingly, these shareholders, particularly if they act together, will
have significant influence in determining the outcome of any corporate
transaction or other matter submitted to shareholders for approval, including:
- mergers, consolidations and other business combinations which under the
law of the Cayman Islands requires the approval of at least 75% of the
shares voting at the meeting;
- election of directors which under the law of the Cayman Islands requires
the approval of a simple majority of the shares voting at the meeting;
- removal of directors which under the law of the Cayman Islands requires
the approval of at least 66 2/3% of the shares voting at the meeting; and
- amendments to chinadotcom's memorandum and articles of association which
under the laws of the Cayman Islands requires the approval of at least
66 2/3% of the shares voting at the meeting.
As a result, these shareholders, if they act together, may be able to
effectively prevent a merger, consolidation or other business combination, elect
or not elect directors, prevent removal of a director and prevent amendments to
chinadotcom's memorandum and articles of association.
CHINADOTCOM'S SHARE PRICE HAS BEEN, AND MAY CONTINUE TO BE, EXTREMELY VOLATILE
WHICH MAY NOT BE ATTRACTIVE TO INVESTORS.
The trading price of chinadotcom's common shares has been, and is likely to
continue to be, extremely volatile. During the period from July 12, 1999, the
date chinadotcom completed its initial public offering, to December 30, 2002,
the closing price of chinadotcom's shares ranged from $1.86 to $73.4375,
adjusted for its two stock splits. From January 1, 2003 to May 31, 2004, the
closing price of chinadotcom's shares ranged from a low of $2.73 per share on
March 11, 2003, to a high of $14.46 per share on July 14, 2003. There is no
assurance that its share price will not fall below its historic or yearly low.
The trading price of chinadotcom's common shares is subject to significant
volatility in response to, among other factors:
- investor perceptions of its business, the market performance of its peer
companies in the Greater China portal business and enterprise software
businesses in general;
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- chinadotcom's significant acquisitions, partnerships, joint ventures or
capital commitments;
- trends and developments in all the markets in which chinadotcom competes;
- variations in its operating results;
- its new product or service offerings;
- changes in its financial estimates by financial or industry analysts;
- technological innovations;
- litigation;
- changes in pricing made by chinadotcom, its competitors or providers of
alternative services;
- the depth and liquidity of the market for its shares; and
- general economic and other factors.
In addition, the market price of shares of chinadotcom's common shares may
decline as a result of chinadotcom's acquisition of IMI and Pivotal for a number
of reasons, including if:
- IMI, Pivotal and chinadotcom do not achieve the perceived benefits of the
acquisitions as rapidly or to the extent anticipated by financial or
industry analysts;
- the effect of the acquisitions on IMI's, Pivotal's and chinadotcom's
financial results is not consistent with the expectations of financial or
industry analysts; and
- significant shareholders of chinadotcom following the acquisitions decide
to dispose of their shares because the results of the acquisitions are
not consistent with their expectations.
The trading price of chinadotcom's common shares has experienced extreme
price and volume fluctuations. These fluctuations often have been unrelated or
disproportionate to chinadotcom's operating performance. Broad market, political
and industry factors may also decrease the price of its common shares,
regardless of its operating performance. Securities class-action litigation and
regulatory investigations often have been instituted against companies following
steep declines in the market price of their securities.
CHINADOTCOM IS CURRENTLY THE SUBJECT OF A CLASS ACTION LAWSUIT WITH RESPECT TO
ITS INITIAL PUBLIC OFFERING ALLOCATIONS WHICH, IF FINALLY JUDICIALLY
DETERMINED ADVERSELY AGAINST IT, COULD CAUSE CHINADOTCOM TO BE LIABLE FOR
SIGNIFICANT JUDGMENT AWARDS.
A class action lawsuit was filed in the United States District Court,
Southern District of New York on behalf of purchasers of chinadotcom's
securities between July 12, 1999 (the date of chinadotcom's initial public
offering, or IPO) and December 6, 2000, inclusive. The complaint charges
chinadotcom and the underwriters in its IPO with violations of Sections 11,
12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The
complaint alleges that the prospectus used in chinadotcom's IPO was materially
false and misleading because it failed to disclose, among other things, that (i)
the underwriters had solicited and received excessive and undisclosed
commissions from some investors, in exchange for which the underwriters
allocated to those investors material portions of the restricted numbers of
chinadotcom's shares issued in connection with the IPO; and (ii) the
underwriters had entered into agreements with customers whereby the underwriters
agreed to allocate chinadotcom's shares to those customers, in exchange for
which the customers agreed to purchase additional shares in the aftermarket at
pre-determined prices. On June 26, 2003, the plaintiffs in the consolidated
initial public offering class action lawsuits currently pending against
chinadotcom and over 300 other issuers who went public between 1998 and 2000,
announced a proposed settlement with chinadotcom and the other issuer
defendants. The proposed settlement provides that the insurers of all settling
issuers will guarantee that the plaintiffs recover $1 billion from non-settling
defendants, including the investment banks that acted as underwriters in those
offerings. In the event that
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the plaintiffs do not recover $1 billion, the insurers for the settling issuers
will make up the difference. Under the proposed settlement, the maximum amount
that could be charged to chinadotcom's insurance policy in the event that the
plaintiffs recovered nothing from the investment banks would be approximately
$3.9 million. chinadotcom believes that it has sufficient insurance coverage to
cover the maximum amount that it may be responsible for under the proposed
settlement. The independent members of chinadotcom's board of directors approved
the proposed settlement at a meeting held in June 2003. It is possible, however,
that the parties may not reach agreement on the final settlement documents or
that the federal District Court may not approve the settlement in whole or in
part, in which event litigation could continue, and chinadotcom could be liable
for significant judgment awards against it if a final judgment is rendered
adversely against it. No provision has been made for any expenses that might
arise as a result of the class action lawsuits.
There can also be no assurance that chinadotcom will not be subjected to
additional litigation of a similar form or type in the future. These class
action lawsuits and any future litigation or investigations, if initiated
against it, could result in substantial costs and a diversion of its
management's attention and resources and could have a material adverse affect on
its business, results of operations, financial condition and share price.
CHINADOTCOM MAY INCUR SIGNIFICANT COSTS TO AVOID BEING CONSIDERED AN
INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940.
chinadotcom may incur significant costs and management time to avoid
investment company status under the Investment Company Act of 1940. Based upon
an analysis of its assets as of December 31, 2003 and income for the year 2003
and the manner in which it intends to operate its business, chinadotcom does not
believe it will be considered an investment company. The determination of
whether chinadotcom will be an investment company will be based primarily upon
the composition and value of its assets, which are subject to change,
particularly when market conditions are volatile. As a result, it could
inadvertently become an investment company in the future. It is not feasible for
chinadotcom to be regulated as an investment company because application of
Investment Company Act regulations are inconsistent with its strategy of
actively managing, operating and promoting collaboration among its businesses
and network of strategic partners.
SUBSTANTIAL AMOUNTS OF CHINADOTCOM'S COMMON SHARES ARE ELIGIBLE FOR FUTURE
SALE, WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF ITS SHARES.
Sales of substantial amounts of chinadotcom's common shares in the public
market could adversely affect the market price for its shares. As of May 31,
2004, chinadotcom had 104,213,375 common shares issued and outstanding,
substantially all of which may be sold pursuant to an effective registration
statement under the Securities Act or an applicable exemption from registration
thereunder, including Rule 144, which permits resales of securities subject to
limitations depending on the holding period of such securities.
In addition, as chinadotcom continues to issue and register shares to
fulfill its contractual and acquisition-related obligations, and as its
employees and other grantees have been or are granted additional options and
warrants to purchase its shares, additional shares will be available-for-sale in
the public market. chinadotcom has also granted options to certain of its
shareholders, directors and officers to purchase its shares, the vesting of
which options may be accelerated upon a change-of-control event occurring. As a
result, additional shares may be available-for-sale in the public market. The
availability or perceived availability of additional shares could have a
dilutive and negative impact on the market price of chinadotcom's shares.
In the future, chinadotcom may issue additional shares, or warrants to
purchase its shares, in connection with acquisitions and its efforts to expand
its business. Shareholders could face further dilution from its future share
issuances.
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ANTI-TAKEOVER PROVISIONS IN CHINADOTCOM'S CHARTER DOCUMENTS MAY ADVERSELY
AFFECT THE RIGHTS OF HOLDERS OF ITS COMMON SHARES.
chinadotcom's memorandum and articles of association include provisions
that could limit the ability of others to acquire control of chinadotcom, modify
its structure or cause it to engage in change-of-control transactions. These
provisions could have the effect of depriving shareholders of an opportunity to
sell their shares at a premium over prevailing market prices by discouraging
third parties from seeking to obtain control of chinadotcom in a tender offer or
similar transaction.
For example, chinadotcom's board of directors is divided into three
classes, each having a term of three years, with the term of one class expiring
each year. This provision would delay the replacement of a majority of its
directors and would make changes to the board of directors more difficult than
if such provision was not in place. In addition, its board of directors has the
authority, without further action by its shareholders, to issue up to 5,000,000
preferred shares in one or more series and to fix their designations, powers,
preferences, privileges, and relative participating, optional or special rights
and the qualifications, limitations or restrictions, including dividend rights,
conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights associated with
its common shares. Preferred shares could be issued quickly with terms
calculated to delay or prevent a change in control of chinadotcom or make
removal of management more difficult. If chinadotcom's board of directors issues
preferred shares, the price of its common shares may fall and the voting and
other rights of the holders of its common shares may be adversely affected.
CHINADOTCOM'S SHAREHOLDERS MAY FACE DIFFICULTIES IN PROTECTING THEIR INTERESTS
BECAUSE CHINADOTCOM IS INCORPORATED UNDER CAYMAN ISLANDS LAW.
chinadotcom's corporate affairs are governed by its memorandum and articles
of association, by the Companies Law and the common law of the Cayman Islands.
The rights of shareholders to take action against its directors, actions by
minority shareholders and the fiduciary responsibilities of its directors under
Cayman Islands law are to a large extent governed by the common law of the
Cayman Islands. The common law in the Cayman Islands is derived in part from
comparatively limited judicial precedent in the Cayman Islands and from English
common law, the decisions of whose courts are of persuasive authority but are
not binding on a court in the Cayman Islands. Cayman Islands law in this area
may conflict with jurisdictions in the United States. As a result, its public
shareholders, may face more difficulties in protecting their interests in the
face of actions against the management, directors or its controlling
shareholders than would shareholders of a corporation incorporated in a
jurisdiction in the United States. For instance, a class action lawsuit may not
be available to chinadotcom's shareholders as a vehicle for litigating
securities matters against chinadotcom in the Cayman Islands. In addition,
shareholder derivative actions may generally not be brought by a minority
shareholder in the Cayman Islands.
IF YOU ARE NOT A REGISTERED SHAREHOLDER AND DO NOT HOLD GREATER THAN 10,000
SHARES, YOU MAY NOT RECEIVE CHINADOTCOM'S PROXY MATERIALS OR OTHER CORPORATE
COMMUNICATIONS.
chinadotcom is a Cayman Islands company and as such, it only needs to
distribute its proxy materials to its registered shareholders. chinadotcom's
proxy materials are delivered to all of its registered shareholders. chinadotcom
offers electronic delivery of proxy materials to its registered shareholders,
and mails proxy materials to each registered owner who has not opted to receive
materials electronically. You are a registered shareholder if you have an
account with its transfer agent, The Bank of New York, and if you hold a stock
certificate evidencing your ownership of its common shares. In an effort to
maintain cost effectiveness, chinadotcom has, and will continue to, mail the
proxy materials to those beneficial shareholders who hold greater than 10,000 of
its shares. You are a beneficial shareholder if a brokerage firm, bank trustee
or other agent holds your common shares. However, your name would not appear
anywhere on chinadotcom's records, but rather the name of the broker, bank or
other nominee appears on its records as retained by its transfer agent, The Bank
of New York. Although chinadotcom only needs to distribute its proxy materials
to registered shareholders under Cayman Islands law, chinadotcom also
distributes proxy materials to beneficial shareholders who hold greater than
10,000 of its shares. If you are
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not a registered shareholder and do not hold greater than 10,000 of its shares,
you may not receive chinadotcom's proxy materials or other corporate
communications. Therefore, if you are a beneficial shareholder and want to
ensure that you do receive proxy materials, you are urged to become a registered
owner. If you have questions on how to do so, chinadotcom encourages you to
contact your broker or bank to find out how to do so, and you may also contact
chinadotcom.
THERE IS UNCERTAINTY AS TO CHINADOTCOM'S SHAREHOLDERS' ABILITY TO ENFORCE
CIVIL LIABILITIES IN AUSTRALIA, THE CAYMAN ISLANDS, HONG KONG, SOUTH KOREA,
THE PRC AND SINGAPORE.
chinadotcom is a Cayman Islands company and a substantial majority of its
assets are located outside the United States. A substantial portion of its
current operations is conducted in Australia, Hong Kong, South Korea, the PRC
and Singapore. In addition, a majority of its directors and officers are
nationals and/or residents of countries other than the United States. All or a
substantial portion of the assets of these persons are located outside the
United States. As a result, it may be difficult for you to effect service of
process within the United States upon these persons. In addition, there is
uncertainty as to whether the courts of Australia, the Cayman Islands, Hong
Kong, South Korea, the PRC, Singapore and other jurisdictions would recognize or
enforce judgments of United States courts obtained against chinadotcom or such
persons predicated upon the civil liability provisions of the securities laws of
the United States or any state thereof, or be competent to hear original actions
brought in Australia, the Cayman Islands, Hong Kong, South Korea, the PRC,
Singapore or other jurisdictions against chinadotcom or such persons predicated
upon the securities laws of the United States or any of its states.
RISKS RELATING TO THE GREATER CHINA AND ASIAN SOFTWARE, CONSULTING, MOBILE
APPLICATIONS AND ADVERTISING INDUSTRIES
THE INDUSTRIES IN WHICH CHINADOTCOM OPERATE ARE INTENSELY COMPETITIVE AND
VOLATILE WHICH COULD CAUSE CHINADOTCOM TO EXPERIENCE LOWER VALUATIONS, GREATER
DIFFICULTY IN OBTAINING FUNDING, REDUCED LIQUIDITY, RISKS OF CONSOLIDATION AND
LITIGATION.
The Greater China and Asian technology and internet markets, encompassing
software, e-Business consulting services, mobile applications, internet portal
and marketing, are characterized by intense competition. These markets in North
America, Asia and elsewhere have experienced marked downturns resulting in,
among other things, lower valuations, greater difficulty in obtaining funding,
increased consolidation, reduced liquidity, litigation and other structural
problems in these markets. As a result, chinadotcom's competitors may be able to
better position themselves to compete in its markets as they further
consolidate, deteriorate, change or mature.
In addition, many of chinadotcom's existing competitors, as well as a
number of potential new competitors, have longer operating histories in each of
its target markets, greater name recognition, larger customer bases and greater
financial, technical and marketing resources when compared to chinadotcom. Any
of its present or future competitors may provide products and services that
provide significant performance, price, creative or other advantages over those
offered by chinadotcom. chinadotcom can provide no assurance that it will be
able to compete successfully against its current or future competitors,
particularly as markets continue to consolidate, deteriorate, change or mature.
Software Competition. chinadotcom's competition in the market for a broad
range of sophisticated business applications, including procurement,
collaborative planning, financial, manufacturing, distribution, supply chain
management, customer relationship management and human resource management is
varied and includes a combination of international and local software providers.
chinadotcom's major competitors include:
- enterprise solutions software companies targeting mid-market companies,
including Exact Corporation, Microsoft Corporation, Scala Business
Solutions NV, Systems Union Group Inc. and local providers such as
FlexSystem Holdings Ltd., Kingdee International Software Group Company
Limited and UFSoft;
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- human resources and payroll solution providers, including PeopleSoft,
Inc, SAP AG and various local providers in Greater China including
Cityray Technology (China) Ltd. and UFSoft;
- process manufacturing enterprise resource planning providers, including
Peoplesoft and QAD, Inc.;
- large information technology consulting and outsourcing service
providers, including Accenture Ltd., Cambridge Technology Partners Inc.,
Electronic Data Systems Corporation, Wipro Ltd and Infosys Technologies;
- customer relationship management providers, including Onyx, Sales Logics,
Salesforce.com and Siebel Systems, Inc.;
- various providers of internet portal and web content applications;
providers of business intelligence solutions, including Business Objects
SA, Cognos, Inc. and Hyperion, Inc.; and
- providers of supply chain management solutions, including Aspen
Technologies, i2 Technologies, Inc., Manhattan Associates, Manugistics
Group, Inc. and MAPICS, Inc.
Many of these companies are well funded with long operating histories of
profitable performance. They possess a number of tangible strengths and
advantages, including high quality client lists and high numbers of highly
qualified staff, complemented by extensive operating infrastructures. The
principal competitive factors in the market for enterprise software application
software include product reputation, product functionality, performance, quality
of customer support, size of installed base, financial stability, hardware and
software platforms supported, price and timeliness of installation.
Software and Consulting Services Competition. chinadotcom's competition
for strategic expertise, online marketing, technical solution delivery, and
general business consultancy problem solving skills include:
- computer hardware and service vendors including International Business
Machines and Hewlett-Packard Company;
- Internet integrators and Web site design and development companies
including Sapient Corporation, Digitas, Inc., Delirium Cybertouch
Corporation and Dimension Data Holdings Limited;
- large information technology consulting service providers including
Accenture Ltd., Cambridge Technology Partners Inc. and Electronic Data
Systems Corporation; and
- local service providers in an individual market.
Many of these companies are well funded with long operating histories of
profitable performance. They possess a number of tangible strengths and
advantages including extensive client lists and large numbers of skilled staff,
complemented by well-established operating infrastructures. In addition to this,
market conditions are currently extremely challenging. chinadotcom's revenue
streams have been volatile and despite the extended market downturn, the
competitive threat has still not evaporated and it remains challenging in most
markets. This has resulted in continued price pressure and an intensive level of
competition in these markets.
Advertising and Marketing Competition. With respect to chinadotcom's
strategy of moving towards higher margin database marketing related services,
chinadotcom anticipates that it will compete with companies that have developed
high quality data sets and related products and services, such as Axciom and The
Dun & Bradstreet Corporation. With respect to its online advertising strategy,
chinadotcom competes with a variety of Internet advertising networks, including
BMC Software, Inc., and DoubleClick, Inc. for the sale of advertisements to its
network of advertising affiliates.
In its overall advertising business, chinadotcom also competes with content
aggregators, companies engaged in advertising sales networks, advertising
agencies and traditional advertising media including print, radio and
television.
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Portal Competition. chinadotcom's competition for user traffic, ease of
use and functionality include Chinese and/or English language based Web search
and retrieval companies, including AltaVista Co., Apple Daily, ChinaByte,
FindWhat.com, Google, Inc., HotBot, HotWired Ventures, Lycos, Inc., Mingpao.com,
MSN, Netease.com, Inc., Netvigator.com, Overture Services, Inc., Shanghai
Online, Sina Corporation, Sohu.com, Inc., Tom Online Inc. and Yahoo!, Inc.
chinadotcom may also encounter increased competition from ISPs, Web site
operators and providers of Web browser software, including Microsoft
Corporation, or Netscape Communications Corporation that incorporate search and
retrieval features in their products. Its competitors may develop Web search,
retrieval services, freemail and community services that are equal or superior
to those chinadotcom offers its users and may achieve greater market acceptance
than its offerings in the area of performance, ease of use and functionality.
Mobile Applications and Services Competition. chinadotcom is not the only
company providing value-added short message services and generating subscription
revenues in China. chinadotcom anticipates that it will face increasing
competition for subscribers, mobile applications and content from companies such
as: (1) Sina Corporation; (2) Sohu.com Inc.; (3) NetEase.com Inc.; (4) Tom
Online Inc.; (5) Tencent.com Technology Limited; (6) Linktone Ltd.; and (7)
Mtone Wireless Corporation, as well as a number of smaller companies that serve
China's short message service market. chinadotcom expects competitors are also
seeking to develop or have already developed mobile applications that are more
sophisticated than short message services. Many of chinadotcom's current
competitors have more experience and longer operating histories in its target
markets, as well as greater name recognition, larger customer bases and greater
financial, technical and marketing resources. chinadotcom may not be able to
compete successfully against its competitors. In addition, mobile operators,
including China Mobile or China Unicom, may seek to develop and launch services
that compete with chinadotcom's own services. Moreover, these competitors may be
more successful in developing and implementing higher-margin value-added mobile
services. chinadotcom's failure to remain competitive may cause it to lose its
market share in the mobile services and applications business and chinadotcom's
profitability may suffer.
Outsourced Software Development and Support Services Competition. In
February 2003, chinadotcom acquired Praxa Limited, or Praxa, which is seeking to
develop a China and India-based outsourcing platform that can offer clients
outsourced software application development and support services. As
chinadotcom's business evolves to place greater emphasis on outsourced software
development and support services, it will face competition from many of the
large Asia Pacific-based outsourcing firms such as Infosys Technologies Ltd and
Wipro Ltd. While these competitors have traditionally focused on servicing the
U.S. markets, due to lower demand in the United States they have entered the
English-speaking markets in Asia (such as Australia, Singapore and Hong Kong)
where chinadotcom is developing its business.
Merger and Acquisition Competition. The significant slowdown in capital
markets activity over the past three years has resulted in an increased trend of
mergers and acquisitions as a means for companies to expand and realize value.
Across the Asia-Pacific region, many of chinadotcom's competitors have greater
financial and other resources and brand name recognition when compared to
chinadotcom. These competitors may limit chinadotcom's ability to effect
strategic acquisitions or combinations, particularly as its markets consolidate
further through local and regional mergers and acquisitions. If chinadotcom
cannot merge or combine with or acquire strategically significant companies on
reasonable terms, its ability to compete in its markets may be compromised.
CHINADOTCOM'S GROWTH WITHIN THE BROAD PRC INTERNET MARKET DEPENDS ON THE
AVAILABILITY OF AN ADEQUATE TELECOMMUNICATIONS INFRASTRUCTURE IN THE PRC. IN
THE EVENT OF ANY DISRUPTION OR FAILURE, CHINADOTCOM MAY HAVE NO MEANS OF
ACCESSING ALTERNATIVE NETWORKS OR SERVICES WHICH WOULD ADVERSELY AFFECT
CHINADOTCOM'S BUSINESS.
Unlike Taiwan and Hong Kong, where the telecommunications infrastructure is
comparable to U.S. standards and where private companies compete as ISPs, the
telecommunications infrastructure in the
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PRC is not as well developed. In addition, access to the Internet in the PRC is
accomplished primarily by means of the government's backbone of separate
national interconnecting networks that connect with the international gateway to
the Internet. This gateway is owned and operated by the PRC government and is
the only means for the domestic PRC Internet network to connect to the
international Internet network. Although private sector ISPs exist in the PRC,
almost all access to the Internet is accomplished through ChinaNet, the PRC's
primary commercial network, which is owned and operated by the PRC government.
chinadotcom relies on this backbone and China Telecom to provide data
communications capacity primarily through local telecommunications lines. As a
result, chinadotcom will continue to depend on the PRC government to establish
and maintain a reliable Internet infrastructure to reach a broader base of
Internet users in the PRC. chinadotcom will have no means of accessing
alternative networks and services in the PRC, on a timely basis or at all, in
the event of any disruption or failure. There can be no assurance that the
Internet infrastructure in Greater China will support the demands associated
with continued growth. If the necessary infrastructure standards or protocols or
complementary products, services or facilities are not developed by the PRC
government, chinadotcom's business could be materially and adversely affected.
POLITICAL, ECONOMIC AND REGULATORY RISKS
INCREASED SINO-U.S. POLITICAL TENSION MAY MAKE CHINADOTCOM LESS ATTRACTIVE TO
INVESTORS AND CLIENTS AND ITS WEB SITES MORE VULNERABLE TO HACKING AND OTHER
DISRUPTIONS.
The relationship between the United States and the PRC is subject to sudden
fluctuation and periodic tension. For example, relations may be compromised if
the U.S. becomes a more vocal advocate of Taiwan or proceeds to sell certain
military weapons and technology to Taiwan. Any weakening of relations between
the U.S. and the PRC could have a material adverse effect on chinadotcom's
business and could attract hacking or result in other disruptions to its Web
sites. Anti-U.S. or anti-PRC sentiment could make chinadotcom and its shares
less attractive since chinadotcom is listed in the United States. In addition,
changes in political conditions in the PRC and changes in the state of Sino-U.S.
relations are difficult to predict and could adversely affect chinadotcom's
operations or cause the Greater China market to become less attractive to
investors and clients because of its relationship with Xinhua and because it
operates in the PRC.
THE ECONOMIC CLIMATE IN ASIA IS VOLATILE AND VULNERABLE WHICH HAS AFFECTED,
AND MAY CONTINUE TO AFFECT, CHINADOTCOM'S BUSINESS THROUGH DECLINING SPENDING
LEVELS BY CUSTOMERS, DEFERRED OR UNCOLLECTIBLE ACCOUNTS RECEIVABLE, AND
RESTRICTED ABILITY TO ACCESS LINES OF CREDIT.
Over the last decade, many countries in Asia experienced significant
economic downturns and related difficulties. As a result of the decline in the
value of the region's currencies, many Asian governments and companies had
difficulties servicing foreign currency-denominated debt and many corporate
borrowers defaulted on their payments. As the economic crisis spread across the
region, governments raised interest rates to defend their weakening currencies,
which adversely impacted domestic growth rates. In addition, liquidity was
substantially reduced as foreign investors curtailed investments in the region
and domestic banks restricted additional lending activity. The currency
fluctuations, as well as higher interest rates and other factors, have
materially and adversely affected the economies of a number of countries in
Asia, many of which are still recovering or have yet to recover.
Economic developments in countries outside Asia could also materially and
adversely affect the Asian markets and chinadotcom's business, results of
operations and financial condition. For example, the recent volatility of the
U.S. stock market and the interest rate environment, the downturn in the
high-tech sector and the slowdown of the U.S. economy have had a negative impact
on Asian markets. A further reduction in exports and a further decrease in
direct foreign investment could reduce demand for chinadotcom's services,
especially in those countries heavily dependent on technology export sales from
where it derives significant revenue.
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The economic crisis and its effect on the Asian economies has had and may
continue to have an adverse impact on chinadotcom's business in the following
respects:
- spending by companies in Asia for e-enterprise software products may
continue to decline;
- spending levels by both Asian and international companies for advertising
in the Asian markets may continue to decline;
- payments on its accounts receivable may be deferred and may become more
difficult to collect or uncollectable; and
- its ability to access lines of credit or other financing may be
restricted.
ANY RECURRENCE OF SEVERE ACUTE RESPIRATORY SYNDROME, OR SARS, OR ANOTHER
WIDESPREAD PUBLIC HEALTH PROBLEM, COULD ADVERSELY AFFECT CHINADOTCOM'S
BUSINESS AND RESULTS OF OPERATIONS.
A renewed outbreak of SARS or another widespread public health problem in
China could have a negative effect on chinadotcom's China operations.
chinadotcom's China operations may be impacted by a number of health-related
factors, including the following:
- quarantines or closures of some of its offices which would severely
disrupt its operations,
- the sickness or death of key officers and employees, and
- a general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public
health problems could adversely affect chinadotcom's business and results of
operations.
THERE ARE ECONOMIC RISKS ASSOCIATED WITH DOING BUSINESS IN THE COUNTRIES IN
WHICH CHINADOTCOM PRIMARILY OPERATES WHICH COULD ADVERSELY AFFECT
CHINADOTCOM'S BUSINESS.
- PRC. A significant part of chinadotcom's current revenues are, and a
significant part of its future revenues are expected to be, derived from
the PRC market. The PRC economy differs from the economies of most
developed countries in many respects, including:
- amount of government involvement in the economy;
- level of development;
- growth rate;
- control of foreign exchange; and
- methods of allocation resources.
While the PRC economy has experienced significant growth in the past twenty
years, growth has been uneven, both geographically and among various sectors of
the economy. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may also have a negative effect on
chinadotcom. For example, chinadotcom's financial condition and results of
operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to it.
The PRC economy has been transitioning from a planned economy to a more
market-oriented economy. Although in recent years, the PRC government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of productive assets in China is still owned by the PRC
government. In addition, the PRC government continues to play a significant role
in regulating industry development by imposing industrial policies. It also
exercises significant control over PRC economic growth through the allocation of
resources, controlling payment of
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foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies.
- Hong Kong. A significant part of chinadotcom's facilities and operations
are currently located in Hong Kong. Hong Kong is a Special Administrative
Region of the PRC with its own government and legislature. Although Hong
Kong enjoys a high degree of autonomy from the PRC under the principle of
"one country, two systems", chinadotcom can give no assurance that Hong
Kong will continue to enjoy autonomy from the PRC.
PRC REGULATION OF CONTENT DISTRIBUTED ON THE INTERNET MAY ADVERSELY AFFECT
CHINADOTCOM'S BUSINESS.
The PRC has enacted regulations governing Internet access and the
distribution of news and other information. The MII has published implementing
regulations that subject online information providers to potential liability for
content included on their portals and the actions of subscribers and others
using their systems, including liability for violation of the PRC laws
prohibiting the distribution of content deemed to be socially destabilizing.
Because many PRC laws, regulations and legal requirements with regard to the
Internet are relatively new and untested, their interpretation and enforcement
of what is deemed to be socially destabilizing by PRC authorities may involve
significant uncertainty.
Under the PRC's regulations on telecommunications and Internet information
services, Internet information service providers are prohibited from producing,
duplicating, releasing or distributing any information which falls within one or
more of the nine stipulated categories of "undesirable content." These
categories cover any information which:
- contravenes the basic principles enshrined in the PRC Constitution;
- endangers the security or unity of the State;
- undermines the State's religious policies;
- undermines public order or social stability; or
- contains obscene, pornographic, violent or other illegal content or
information otherwise prohibited by law.
In addition, the PRC legal system is a civil law system based on written
statutes. Unlike common law systems, it is a system in which decided legal cases
have little precedential value. As a result, it is difficult to determine the
type of content that may result in liability. chinadotcom cannot predict the
effect of further developments in the PRC legal system, particularly with regard
to the Internet and the dissemination of news content, including the creation of
new laws, changes to existing laws or the interpretation or enforcement thereof,
or the pre-emption of local rules and regulations by national laws.
Violations or perceived violations of PRC laws arising from information
displayed, retrieved from or linked to chinadotcom's portals could result in
significant penalties, including a temporary or permanent cessation of
chinadotcom's business in the PRC. PRC government agencies have announced
restrictions on the transmission of state secrets through the Internet. State
secrets have been broadly interpreted by PRC governmental authorities in the
past. chinadotcom may be liable under these pronouncements for content and
materials posted or transmitted by users on its message boards, virtual
communities, chat rooms or e-mails. If the PRC government were to take any
action to limit or eliminate the distribution of information through
chinadotcom's portal network or to limit or regulate any current or future
applications available to users on its portal network, this action could have a
material adverse effect on its business, financial condition and results of
operations.
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A CHANGE IN CURRENCY EXCHANGE RATES COULD INCREASE CHINADOTCOM'S COSTS
RELATIVE TO ITS REVENUES THEREBY POTENTIALLY ADVERSELY AFFECTING CHINADOTCOM'S
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND INCREASING MARKET RISK.
Substantially all of chinadotcom's revenues, expenses and liabilities are
denominated in renminbi, Hong Kong dollars, South Korean won, U.S. dollars,
Euros, Canadian dollars, Swedish kronas and Australian dollars. chinadotcom also
generates revenues, expenses and liabilities in other currencies such as
Singapore dollars, British pounds and New Taiwan dollars. However, chinadotcom's
quarterly and annual financial results are reported in U.S. dollars. In the
future, chinadotcom may also conduct business in additional foreign countries
and generate revenues, expenses and liabilities in other foreign currencies. As
a result, chinadotcom is subject to the effects of exchange rate fluctuations
with respect to any of these currencies and the related interest rate
fluctuations. chinadotcom has not entered into agreements or purchase
instruments to hedge its exchange rate risks although it may do so in the
future.
RESTRICTIONS ON CURRENCY EXCHANGE IN THE PRC MAY LIMIT CHINADOTCOM'S ABILITY
TO UTILIZE ITS REVENUES EFFECTIVELY TO FUND BUSINESS ACTIVITIES OUTSIDE OF THE
PRC WHICH COULD RESULT IN INCREASED COSTS FOR CAPITAL.
Although PRC government policies were introduced in 1996 to allow greater
convertibility of the renminbi, significant restrictions still remain.
chinadotcom can provide no assurance that the PRC regulatory authorities will
not impose greater restrictions on the convertibility of the renminbi. Because a
significant amount of chinadotcom's future revenues may be in the form of
renminbi, any future restrictions on currency exchanges may limit its ability to
utilize revenue generated in renminbi to fund its business activities outside
the PRC.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus and the documents accompanying and
incorporated by reference in this proxy statement/prospectus contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the financial condition, results
of operations, business strategies, operating efficiencies or synergies,
competitive positions, growth opportunities, plans and objectives of management
of each of chinadotcom and Ross, the merger with Ross, the acquisition of
Pivotal, and markets for chinadotcom common shares and other matters. Statements
in this proxy statement/prospectus and the accompanying documents, as well as
those incorporated by reference, that are not historical facts are hereby
identified as "forward-looking statements" for the purpose of the safe harbor
provided by Section 21E of the Exchange Act and Section 27A of the Securities
Act. These forward-looking statements, including, without limitation, those
relating to the future business prospects, revenues and income, in each case
relating to chinadotcom and Ross, wherever they occur in this proxy
statement/prospectus, the accompanying documents or the documents incorporated
by reference herein, are necessarily estimates reflecting the best judgment of
the respective management of chinadotcom and Ross and involve a number of risks
and uncertainties that could cause actual results to differ materially from
those suggested by the forward-looking statements. These forward-looking
statements should, therefore, be considered in light of various important
factors, including those set forth in, accompanying, and incorporated by
reference into this proxy statement/prospectus.
Words such as "estimate," "project," "plan," "intend," "expect,"
"anticipate," "believe," "would," "should," "could" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are found at various places throughout this proxy
statement/prospectus, including in the section entitled "Risk Factors," and the
documents accompanying this proxy statement/prospectus and incorporated by
reference herein. You are cautioned not to place undue reliance on any
forward-looking statements, which speak only as of the date of this proxy
statement/prospectus, or in the case of accompanying documents or documents
incorporated by reference, as of the date of those documents. Neither
chinadotcom nor Ross undertakes any obligation to publicly update or release any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this proxy statement/prospectus or to reflect the occurrence
of unanticipated events, except as required by law.
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THE ROSS SPECIAL MEETING
GENERAL
The enclosed proxy is solicited on behalf of the board of directors of Ross
for use at the special meeting of stockholders to be held on August 25, 2004 at
10:00 a.m., local time, or at any and all continuation(s) and adjournment(s)
thereof, for the purposes set forth herein and in the accompanying notice of
special meeting of stockholders. The special meeting will be held at Ross'
executive offices in Atlanta, Georgia located at Two Concourse Parkway, Suite
800, Conference Room, Atlanta, Georgia 30328. The telephone number at that
location is (770) 351-9600.
These proxy solicitation materials were mailed on or about July 21, 2004 to
all Ross stockholders entitled to vote at the special meeting.
PURPOSES OF THE SPECIAL MEETING
The purposes of the special meeting are to: (1) approve the merger between
Ross and chinadotcom pursuant to the Agreement and Plan of Merger among
chinadotcom, CDC Software Holdings, Inc. and Ross dated as of September 4, 2003,
as amended, (2) authorize the adjournment of the special meeting, if necessary,
to solicit additional proxies, and (3) transact such other business as may
properly come before the meeting and any and all continuations and adjournments
thereof.
RECORD DATE, VOTING SECURITIES AND SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND
MANAGEMENT
Only stockholders of record at the close of business on July 13, 2004 (the
"Record Date") are entitled to receive notice and vote at the special meeting.
At the Record Date, 2,892,374 shares of Ross common stock were issued and
outstanding and held of record by 458 registered stockholders. At the Record
Date, 500,000 shares of Ross 7.5% Series A Convertible Preferred Stock were
issued and outstanding. The closing price of Ross common stock on the Record
Date, as reported by the NASDAQ National Market, was $18.61 per share.
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The following table sets forth the beneficial ownership of Ross common
stock as of June 4, 2004 by (a) each director, (b) each of the executive
officers identified in the Summary Compensation Table, (c) all directors and
executive officers as a group and (d) each person known by Ross to beneficially
own more than 5% of any class of Ross' voting securities. Under the rules of the
Securities and Exchange Commission, or Commission, beneficial ownership includes
any shares as to which the individual has sole or shared voting power or
investment power and also any shares which the individual has the right to
acquire within 60 days of June 4, 2004 through the exercise of any stock option.
COMMON STOCK SERIES A PREFERRED STOCK
----------------------------------- ------------------------
NUMBER OF NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
NAME SHARES(1) OPTIONS(2) OF CLASS SHARES(3) OF CLASS
---- --------- ---------- ---------- ---------- -----------
Alvin Johns..................... 52,159 9,851 2.2% -- --
Robert B. Webster**............. 68,777 122,300 6.6% -- --
J. Patrick Tinley**............. 31,041 216,215 8.6% -- --
Oscar Pierre Prats.............. 3,625 3,800 * -- --
Gary Nowacki.................... 22 5,000 * -- --
Eric W. Musser.................. -- 23,850 * -- --
Verome M. Johnston.............. 4,120 18,000 * -- --
Bruce J. Ryan................... -- 8,800 * -- --
Frank M. Dickerson.............. -- 18,000 * -- --
J. William Goodhew, III......... -- 8,800 * -- --
Rick Marquardt.................. 123 12,500 * -- --
Richard Thomas.................. 1,448 3,750 * -- --
All officers and directors as a
group (12 persons)............ 161,315 450,866 15.6% -- --
Benjamin W. Griffith III........ 152,500 -- 19.3% 500,000 100%
---------------
* Less than 1%.
** Number of options exercisable within 60 days includes accelerated vesting of
certain options due to a change of control pursuant to the proposed merger.
(1) The table is based upon information supplied by executive officers,
directors and principal stockholders. Unless otherwise indicated, each of
the stockholders named in the table has sole voting investment and/or
dispositive power with respect to all shares of common stock shown as
beneficially owned, subject to community property laws where applicable and
to the information contained in the footnotes to this table.
(2) These are options which are exercisable for common stock within 60 days of
June 4, 2004.
(3) These are Series A Convertible Preference Shares with Common Stock voting
rights equal to the number of preference shares held on the day of voting.
These shares may be converted after June 29, 2002 at the rate of one
preference share for one common stock share. These shares must be converted
by June 29, 2006.
VOTING AGREEMENTS
Robert B. Webster, J. Patrick Tinley and Verome M. Johnston, who
collectively held approximately 2.7% of the total number of outstanding shares
of common stock of Ross as of September 4, 2003, in their capacity as
stockholders, entered into separate stockholder agreements, each dated September
4, 2003, with chinadotcom. Under the stockholder agreements, these stockholders
agreed, among other things, to vote their Ross common stock in favor of the
merger. As an additional assurance to chinadotcom that these shares will be
voted in favor of the merger, in the stockholder agreements these stockholders
granted chinadotcom a proxy to vote these shares in favor of the merger and
related transactions. It is not intended that the shares subject to the
stockholder agreements will be voted more than once. For example, a vote in
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favor of the merger and related transactions by chinadotcom pursuant to a proxy
will satisfy the requirement that the corresponding stockholder vote in favor of
the merger. Although these stockholder agreements expired on March 1, 2004,
Messrs. Tinley, Webster and Johnston currently intend to vote their Ross common
stock in favor of the adoption and approval of the merger agreement and the
merger. For a more detailed description of the stockholder agreements, see
"Agreements Related to the Merger" beginning on page 121.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Corporate Secretary of
Ross a written notice of revocation or a duly executed proxy bearing a later
date, or by attending the meeting and voting in person.
VOTING; QUORUM; ABSTENTIONS AND BROKER NON-VOTES
Each stockholder is entitled to one vote for each share held as of the
Record Date.
The required quorum for the transaction of business at the special meeting
is a majority of the shares of common stock issued and outstanding on the Record
Date and entitled to vote at the special meeting, present in person or
represented by proxy. Shares that are voted "FOR," "AGAINST" or "ABSTAIN" from a
matter are treated as being present at the special meeting for purposes of
establishing a quorum at the special meeting, but an abstention is not deemed a
vote cast. In accordance with Delaware law, broker non-votes, discussed below,
will be counted for purposes of determining the presence of a quorum for the
transaction of business.
If a quorum is not present or represented, then either the chairman of the
special meeting or the stockholders entitled to vote at the special meeting,
present in person or represented by proxy, will have the power to adjourn the
special meeting from time to time, without notice other than an announcement at
the special meeting, until a quorum is present. At any adjourned special meeting
at which a quorum is present, any business may be transacted that might have
been transacted at the special meeting as originally notified. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned special meeting, a notice of the
adjourned meeting shall be given to each stockholder of record entitled to vote
at the adjourned special meeting.
If your shares are held through a nominee (such as a bank or broker), your
nominee, under certain circumstances, may vote your shares. Nominees have
authority to vote shares for which their customers do not provide voting
instructions on certain "routine" matters. However, a "broker non-vote" occurs
when a nominee does not have discretionary voting authority for shares held on
behalf of a beneficial owner and does not receive voting instructions from the
beneficial owner by ten days before the special meeting.
The proposal to adjourn the special meeting, if necessary, to solicit
additional proxies (proposal two) require the affirmative vote of a majority of
the votes duly cast and are also routine matters. As a result, abstentions and
broker non-votes are not included in the tabulation of the voting results on the
authorization to adjourn the special meeting, if necessary, to solicit
additional proxies and, therefore, do not have the effect of votes in
opposition.
If a nominee cannot vote on a particular matter because it is not routine,
there is a broker non-vote on that matter. Proposal one (approval of the merger
agreement and merger) is not a routine matter. If you do not provide
instructions to your broker as to how to vote on proposal one, your broker will
not be able to vote on proposal one. Because proposal one requires the
affirmative vote of a majority of the outstanding shares of Ross stock, an
abstention or a broker non-vote will have the effect of a vote AGAINST the
proposal.
ROSS ENCOURAGES YOU TO PROVIDE INSTRUCTIONS TO YOUR BROKERAGE FIRM BY
VOTING YOUR PROXY. THIS ENSURES YOUR SHARES WILL BE VOTED AT THE MEETING.
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PROXIES IN THE ACCOMPANYING FORM THAT ARE PROPERLY EXECUTED AND RETURNED
WILL BE VOTED AT THE SPECIAL MEETING IN ACCORDANCE WITH THE INSTRUCTIONS ON THE
PROXY. IF YOU ARE A RECORD HOLDER AND YOU RETURN A PROPERLY EXECUTED PROXY TO
ROSS ON WHICH THERE ARE NO INSTRUCTIONS INDICATED ABOUT A SPECIFIED PROPOSAL,
YOUR SHARES WILL BE VOTED AS FOLLOWS:
- FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND MERGER;
AND
- FOR THE PROPOSAL TO AUTHORIZE THE ADJOURNMENT OF THE SPECIAL MEETING, IF
NECESSARY, TO SOLICIT ADDITIONAL PROXIES.
No business other than that set forth in the accompanying notice of special
meeting of stockholders is expected to come before the special meeting. Should
any other matter requiring a vote of stockholders properly arise, the persons
named in the proxy will vote the shares they represent as the board of directors
may recommend. The persons named in the proxy may also, at their discretion,
vote the proxy to adjourn the special meeting from time to time as allowed under
Delaware law.
SOLICITATION
The cost of soliciting proxies will be borne by Ross. Ross has retained
Georgeson Shareholder to solicit proxies, for a fee of $8,000. In addition, Ross
may reimburse brokerage firms and other persons representing beneficial owners
of shares for their expenses in forwarding solicitation material to such
beneficial owners. Proxies may also be solicited by certain of Ross' directors,
officers and regular employees, without additional compensation, personally or
by telephone, facsimile or telegram.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR 2005 ANNUAL MEETING
Due to the proposed merger, Ross does not currently expect to hold a 2005
annual meeting of stockholders. If the merger is not completed and an annual
meeting is held, to be eligible for inclusion in Ross' proxy statement and form
of proxy relating to that meeting, proposals of stockholders intended to be
presented at the meeting must be received by Ross within a reasonable amount of
time after Ross announces the date of the meeting and before Ross mails its
proxy statement to stockholders in connection with the meeting.
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PROPOSAL NO. 1
THE MERGER
Proposal No. 1 is a proposal to adopt and approve the merger agreement that
Ross has entered into with chinadotcom, and the related merger. In the merger,
chinadotcom's wholly owned merger subsidiary, CDC Software Holdings, will be
merged with and into Ross. Ross will be the surviving corporation, and, as a
result of the merger, chinadotcom will acquire Ross.
The discussion in this proxy statement/prospectus of the merger and the
principal terms of each of:
- the Agreement and Plan of Merger, dated as of September 4, 2003, by and
among chinadotcom, CDC Software Holdings and Ross, as amended by the
amendments among the parties dated as of October 3, 2003, January 7,
2004, April 29, 2004 and May 12, 2004;
- the Stockholder Agreements, dated as of September 4, 2003, between
chinadotcom and certain Ross stockholders; and
- the Preferred Stockholder Agreement, dated as of September 4, 2003,
between chinadotcom, Ross and Benjamin W. Griffith, III as amended.
is a summary of the material terms of these agreements and is qualified in its
entirety by reference to the merger agreement, the stockholder agreements and
the preferred stockholder agreement, copies or forms of which are attached to
this proxy statement/prospectus as Annex A, Annex B and Annex C, respectively,
and are incorporated herein by reference.
BACKGROUND OF THE MERGER
chinadotcom and Ross independently have each regularly evaluated different
strategies to improve their respective competitive positions and enhance
stockholder value, including opportunities for acquisitions, possible
partnerships or alliances and other similar transactions.
Ross in the past has considered acquisitions of other software companies
that sell software that is complementary to Ross' ERP software to enable Ross to
compete more effectively in the ERP market against larger firms such as SAP AG,
Oracle Corporation and J.D. Edwards, now a division of Peoplesoft. These firms,
due to their larger sizes, offer a more complete range of integrated products to
their respective manufacturing customers than Ross is able to offer on a
stand-alone basis. Because the financial resources required to implement an
active acquisition strategy have not been available to Ross as a small public
company, Ross has instead pursued a strategy involving the formation of separate
marketing and development partnerships with other firms in an attempt to offer a
more competitive range of products. These partnerships are often limited in
duration, however, and Ross has determined that the merger will help to improve
Ross' competitive position on a more permanent basis. As a result of the merger,
Ross will be able to offer its products on an integrated basis with those of the
wider chinadotcom group, thereby enabling Ross to compete more effectively with
other large firms.
During the fall of 2002, as part of its overall software initiative,
chinadotcom identified several classes of applications for which chinadotcom
believed there was substantial demand among its customers and within the overall
scope of the growth in China's manufacturing for export industry after China's
accession into the World Trade Organization. chinadotcom considered a number of
U.S. and European-based companies offering these applications as possible
acquisition candidates. chinadotcom identified and contacted a number of ERP and
SCM software companies, including Ross, in connection with a potential strategic
alliance or other cooperative arrangement.
On October 9, 2002, Jon Winslow, former Chief Operating Officer of Ion
Global, the e-Business consulting services arm of chinadotcom, sent an email to
J. Patrick Tinley, Chairman and Chief Executive Officer of Ross, in which Mr.
Winslow expressed an interest in initiating discussions regarding potential
business opportunities, including a possible strategic investment and/or an
operational relationship between chinadotcom and Ross. In a follow-up call made
by Mr. Winslow on November 4, 2002, Messrs. Winslow
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and Tinley agreed to begin discussions with respect to a potential investment or
other arrangement between Ross and chinadotcom.
On November 21, 2002, chinadotcom and Ross executed a confidentiality
agreement imposing mutual confidentiality obligations on both parties in
connection with the evaluation of, and discussions related to, product
distribution and development outsourcing in Greater China and a possible
investment by chinadotcom in Ross.
Also on November 21, 2002, Mr. Tinley met with Peter Yip, Chief Executive
Officer and a board member of chinadotcom, at the chinadotcom offices in San
Francisco, California to discuss a possible product distribution and development
outsourcing arrangement and a possible investment by chinadotcom in Ross.
On December 23, 2002, chinadotcom delivered a term sheet to Ross that
included, among other things, a proposal for Ross to issue warrants to
chinadotcom to purchase Ross common stock. After some further discussion between
Ross and chinadotcom, Mr. Tinley proposed to chinadotcom that, rather than focus
on a possible investment by chinadotcom in Ross, the companies should focus on
continuing to pursue discussions with chinadotcom regarding a possible product
distribution and development outsourcing arrangement.
On December 27, 2002, representatives of CDC Software initiated discussions
with representatives of Ross in connection with a potential product distribution
and development outsourcing arrangement between Ross and CDC Software whereby
CDC Software would become a master distributor of Ross software in the Asia
Pacific region. During the period between December 27, 2002 and January 27,
2003, the parties continued to discuss various terms as well as strategic
advantages to both parties in developing a product distribution and development
outsourcing arrangement.
Between February 25 and February 28, 2003, several meetings were held in
Hong Kong between the respective representatives of Ross and CDC Software
regarding possible terms for a product distribution and development outsourcing
arrangement. Mr. Tinley also met with Mr. Yip and Mr. Daniel Widdicombe, Chief
Financial Officer of chinadotcom, to discuss a possible product distribution and
development outsourcing arrangement and, in addition, began discussing a
potential business combination involving chinadotcom and Ross.
On March 11, 2003, Mr. Yip and Steve Collins, Managing Director of CDC
Software, made a detailed presentation to the board of directors of chinadotcom
that included the rationale for a possible acquisition of Ross, an overview of
Ross' business, products and financial information, and potential synergies
between the companies. The chinadotcom board of directors expressed interest and
authorized chinadotcom management to continue to engage Ross in discussions
related to a potential acquisition.
Discussions between Ross and chinadotcom regarding a possible master
distributor agreement setting forth the terms for a possible product
distribution and development outsourcing arrangement continued into May 2003.
From March 24 through March 28, 2003, representatives of chinadotcom
conducted a due diligence review with respect to certain financial, legal and
operational information regarding Ross at an off-site location near Ross'
headquarters in Atlanta. On March 25 and 26, 2003, Mr. Yip met with members of
Ross' senior management, including Mr. Tinley, as well as Bob Webster, Ross'
Executive Vice President of Operations, Eric Musser, Ross' Chief Technology
Officer and Vice President of Product Development and Support, Rick Marquardt,
Ross' Senior Vice President of Worldwide Sales and Marketing, and Verome
Johnston, Ross' Chief Financial Officer. These meetings focused on Ross'
products and their functionalities, management capabilities, and the strategic
direction for a combined entity if a merger between chinadotcom and Ross were to
take place.
On April 8, 2003, Ross engaged King & Spalding LLP to serve as its legal
advisor in connection with the proposed combination.
79
In early April 2003, Messrs. Tinley and Webster conducted interviews with
three nationally known investment banking firms in order to begin the process of
selecting a financial advisor to Ross. Each investment banking firm interviewed
was asked to sign a confidentiality agreement and prepare a proposal with
respect to its financial advisory services. On April 9, 2003, Ross selected
Broadview International, LLC as its financial advisor. Broadview was selected
based principally on its overall institutional strength, its expertise and
experience with respect to transactions in the technology industry, and the
individual experience of each of the members of the Broadview team.
On April 11, 2003, the board of directors of chinadotcom met to outline a
preliminary set of proposed terms for a potential business combination with Ross
and a preliminary timeline for the completion of the merger process. The
chinadotcom board of directors authorized management to continue discussions
with Ross with respect to the proposed merger.
Ross and chinadotcom executed a second confidentiality agreement on April
16, 2003 in order to facilitate further exchange of information in connection
with a possible merger transaction. The April 16 confidentiality agreement
contained an agreement by Ross that it would negotiate an acquisition
transaction exclusively with chinadotcom until the earlier of May 31, 2003 or
the termination of good faith discussions between Ross and chinadotcom
concerning the proposed transaction. In addition, chinadotcom agreed that, until
April 16, 2004, it would not take certain actions with respect to Ross, such as
the solicitation of proxies with respect to, or acquisitions of, Ross
securities.
On April 22, 2003, Steven Chan, General Counsel and Company Secretary of
chinadotcom, delivered a memorandum to Ross proposing various terms for the
transaction including the possibility of using chinadotcom shares as a portion
of the consideration. Mr. Chan also raised due diligence questions to be
resolved by Ross in advance of the next chinadotcom board meeting. Mr. Chan
requested further information and feedback from Ross for purposes of summarizing
for chinadotcom's board the potential value of an acquisition of Ross and
identifying terms that would be satisfactory to Ross as a basis for further
discussion.
The certain proposed terms and due diligence issues of concern of
chinadotcom were as follows:
- the desire to conduct due diligence with any key shareholders that may
add value to its understanding of Ross;
- the request to have key management of Ross replace their employment
agreements with ones more consistent with chinadotcom's standard
employment agreement, including provisions related to restrictive
covenants, change of control and termination;
- the request to consider changes to its cash offer amount to include
performance-based adjustments, as well as the use of chinadotcom shares
as a portion of the consideration;
- the request to consider a different transaction structure such as a
tender offer together with convening a Ross shareholders meeting; and
- additional due diligence requests as related to Ross's business.
Ross provided an outline response to Mr. Chan's request on April 24, 2003.
On April 24, 2003, Mr. Widdicombe provided a detailed update on the due
diligence efforts and progress of the proposed transaction to the board of
directors of chinadotcom. Mr. Chan also summarized for the board of directors
some of the key legal issues related to the transaction. At that time, the
chinadotcom board of directors authorized the management of chinadotcom to
continue to negotiate with Ross and to sign a non-binding letter of intent
within the scope substantially similar to the terms and conditions as presented
to the board of directors.
In early May 2003, chinadotcom engaged Milbank, Tweed, Hadley & McCloy LLP
to serve as its legal advisor in connection with the proposed transaction.
80
On May 6, 2003, at a regularly scheduled meeting, Messrs. Tinley and
Webster updated the other members of Ross' board of directors on the status of
discussions with chinadotcom and the proposed strategy and timeline for further
discussions. At that time, the Ross board of directors approved continued
discussions with chinadotcom.
On May 8, 2003, chinadotcom delivered to Ross an initial draft of a merger
agreement which contemplated a cash tender offer followed by a cash merger. The
draft agreement included an indemnification arrangement pursuant to which a
portion of the merger consideration would be held in escrow for a certain period
of time to cover losses arising out of any breaches by Ross of representations
and warranties contained in the draft agreement, a break-up fee to be paid by
Ross in connection with a termination of the merger agreement in certain
circumstances and several conditions to chinadotcom's obligation to complete the
tender offer, such as the absence of Ross indebtedness and the maintenance by
Ross of cash levels in excess of certain amounts.
On May 9, 2003, Messrs. Tinley and Webster met with Messrs. Yip and Chan at
the Intercontinental Hotel in New York City to discuss the structure and terms
of a proposed acquisition. The parties also discussed current Ross employment
commitments and general business concerns related to stockholder expectations,
as well as the process required to finalize a business proposal. Mr. Yip
presented his vision of the strategic initiative to expand chinadotcom's
ownership of manufacturing software intellectual property. Mr. Yip also
emphasized the need for a highly competent and committed management team with
experience in the software marketing and development sector, since chinadotcom
is an early stage entrant into that market segment and has only a small North
American operational presence. Mr. Tinley expressed confidence in the Ross
management team members and confirmed the interest of Ross' management team in
becoming the platform for further acquisitions to help chinadotcom achieve its
vision. Mr. Tinley explained that the executive group at Ross would need to be
motivated following the merger and suggested that to retain the nine members of
the Ross operating committee, fair compensation and competitive incentive
programs would be required. Mr. Tinley pointed out that in general most members
of the Ross executive group had small equity investments in Ross. chinadotcom
acknowledged that it was aware of these needs and indicated that it would
propose fair compensation and incentive programs to encourage retention of the
management group.
Mr. Tinley outlined the current change of control provisions contained in
the offer letter or employment agreements between Ross and each of the
executives of Ross. These provisions provided for severance payments in the
event of termination of the executive following the merger that varied from
three months to one year for most executives. In addition, Mr. Tinley agreed to
supply Mr. Chan with the agreements currently in place for each executive,
including Mr. Webster and himself. The agreements with Messrs. Webster and
Tinley included change of control provisions providing for severance payments
and acceleration of stock options in the event of a change of control.
In a press release dated May 12, 2003, Ross and CDC Software announced that
they had signed a Master Distributor Agreement pursuant to which CDC Software
agreed to serve as master distributor of Ross' iRenaissance ERP software in
Greater China, including China, Taiwan, Hong Kong and the territories of ASEAN,
Korea, and Australia/New Zealand. The Master Distributor Agreement between CDC
Software and Ross was executed independently of the ongoing discussions between
chinadotcom and Ross relating to the proposed merger and was not intended by the
parties to be affected by any decision on the part of chinadotcom and/or Ross as
to whether or not to proceed with the possible merger transaction under
discussion.
On May 17, 2003, Raymond Ch'ien, chinadotcom's Executive Chairman, and Mr.
Chan met with Messrs. Tinley, Webster, Musser and Marquardt, as well as with J.
William Goodhew, an independent director of Ross, at Ross' headquarters in
Atlanta to discuss the current status of negotiations as well as business
objectives.
Between May 18 and May 26, 2003, chinadotcom management polled various
members of the board of directors of chinadotcom as to their viewpoints on the
terms and conditions of the potential merger with Ross. As a result, on May 27,
2003, Mr. Chan notified Ross that the chinadotcom board of directors was
81
not prepared at that time to authorize chinadotcom management to proceed with
merger discussions, primarily in light of differing views between chinadotcom
and Ross with respect to the nature and amount of the proposed merger
consideration.
On May 30, 2003, Mr. Tinley informed the Ross board of directors of
chinadotcom's position with respect to merger discussions. The members of the
Ross board expressed confidence that Ross' management team would continue to
make strong progress in building the value of the business and that there was no
need to consider a sale of Ross on terms any less favorable than those
previously discussed with chinadotcom.
On June 19, 2003, Mr. Yip called Mr. Tinley to inform him of a renewed
interest on the part of chinadotcom to pursue a transaction with Ross. Mr. Yip
requested updated presentation materials from Ross that he could incorporate
into a presentation to be given to the chinadotcom board of directors,
concentrating on the potential value and synergies that could be possible
through a merger transaction between chinadotcom and Ross. Mr. Tinley prepared
presentation materials and delivered them to Mr. Yip, and Mr. Webster briefed
Mr. Widdicombe with respect to details supporting the synergies specified in the
presentation.
Between June 27 and 29, 2003, the board of directors of chinadotcom
attended an off-site retreat in Sydney, Australia. The proposed merger with Ross
was one of the agenda items discussed by the chinadotcom board members. The
chinadotcom board members were updated on, among other things, the status of the
proposed merger with Ross, the estimated cost synergies and proposed integration
roadmap between the two companies, and the next steps for the proposed merger.
Mr. Chan provided the chinadotcom board members with a summary of the merger
process thus far and informed them that, if the parties entered into a
definitive agreement with respect to the proposed merger, the parties would be
required to file certain transaction and disclosure documents with the
Commission.
In a memorandum dated July 2, 2003 from Mr. Chan to Messrs. Tinley and
Webster, chinadotcom outlined a revised proposal to acquire Ross. The revised
proposal contemplated a stock-for-stock transaction in which Ross stockholders
would receive chinadotcom stock. In response to chinadotcom's revised proposal,
Mr. Tinley agreed to meet with Mr. Yip in person to negotiate further the terms
of a potential agreement.
On July 9, 2003, Mr. Tinley met with Messrs. Yip and Chan in the London
office of King & Spalding LLP. The parties engaged in further discussions
regarding the terms of a proposed acquisition and the consideration that would
be payable to stockholders of Ross in connection with the transaction. During
the meeting, Messrs. Tinley, Yip and Chan discussed the possibilities that, in a
merger transaction between chinadotcom and Ross, (1) Ross common stock would be
valued at $19.25 per share, of which Ross stockholders would receive up to $5.00
in cash and the balance of the consideration in chinadotcom stock; and (2) Ross
would have a unilateral right to terminate the transaction agreement if
chinadotcom shares were trading outside of a collared range immediately prior to
the effective time of the merger. The parties further discussed the possibility
that the exchange ratio used to determine the number of shares of chinadotcom
stock to be received by Ross stockholders in the merger would be determined
based on the 30-day average trading price for chinadotcom stock prior to the
effective time of the merger. At the July 9 meeting, the parties also discussed
other proposed terms, including conditions to the parties' respective
obligations to complete the merger and a possible break-up fee to be paid by
Ross in the event of a termination of the merger agreement in certain
circumstances.
At the July 9 meeting, the parties also discussed the extent to which it
would be appropriate for chinadotcom to seek and obtain stockholder agreements
from directors and other significant stockholders of Ross committing such
stockholders to vote to approve the merger, and chinadotcom sought an agreement
from Ross that Ross would negotiate an acquisition transaction exclusively with
chinadotcom for a specified period of time. Mr. Tinley also emphasized Ross'
desire to limit the closing conditions and to eliminate the indemnification
arrangement that chinadotcom had proposed in the parties' prior discussions.
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On July 22, 2003, Messrs. Webster and Widdicombe continued to discuss by
conference call various terms relating to the proposed acquisition, including a
proposal whereby (1) the average price of chinadotcom stock would have a floor
of $8.50 for purposes of determining the exchange ratio used to calculate the
number of chinadotcom shares received by Ross stockholders in the merger, and
Ross would have a right to terminate the transaction agreement if chinadotcom
stock was trading at an average price below $8.50 immediately prior to the
effective time of the merger, unless chinadotcom agreed to calculate the
exchange ratio based on the actual average trading price of chinadotcom stock,
and (2) Ross common stock would be valued at $19.00 per share, instead of $19.25
per share, provided that no portion of the merger consideration would be held
back or placed in escrow in connection with any indemnification arrangement.
On July 30, 2003, Mr. Tinley updated the other members of the Ross board of
directors regarding the status of negotiations with chinadotcom.
On July 31, 2003, chinadotcom delivered to Ross a revised draft of a merger
agreement contemplating an acquisition by chinadotcom of Ross in a
stock-for-stock transaction and containing terms reflecting the discussions
between the parties held on July 9 and July 22. Later the same day, Ross and
chinadotcom signed an agreement whereby Ross agreed that it would negotiate an
acquisition transaction exclusively with chinadotcom until August 31, 2003 or,
if earlier, the termination of good faith discussions between chinadotcom and
Ross concerning the merger transaction.
During the week of August 4, 2003, King & Spalding LLP delivered comments
on the draft merger agreement and the form of stockholders' agreement to
chinadotcom and had discussions by telephone with representatives of
chinadotcom. Among the issues discussed were the circumstances under which a
break-up fee would be payable by Ross to chinadotcom in connection with a
termination of the merger agreement and the scope and substance of the
conditions to the parties' respective obligations to complete the merger.
On August 8, 2003, the chinadotcom board of directors met to review and
discuss the then-current terms, timeline and filing process with respect to the
proposed merger transaction. Mr. Chan briefed the board of directors on the
proposed terms and conditions of the transaction, including chinadotcom's
material undertakings with respect to representations, warranties and covenants,
as well as Commission requirements. He also reviewed with the board members
their roles and obligations in evaluating possible business combination
transactions and the recommended procedures to be followed in order to satisfy
their fiduciary duties as members of the board. The chinadotcom board of
directors gave its unanimous approval of the proposed merger and delegated to
management the authority to negotiate the final terms and conditions and execute
the transaction documents pursuant to the guidelines established by the board of
directors.
On August 13, 2003, at a special meeting of Ross' board of directors,
members of the Ross board discussed the ongoing negotiations with chinadotcom,
the terms of the then-current draft merger agreement and stockholder agreements
and the potential economic effect of the proposed transaction on Ross
stockholders. At the August 13 meeting, the Ross board of directors authorized
the formal engagement of Broadview as Ross' financial advisor in connection with
the proposed transaction. Representatives of Broadview participated by telephone
in the board's discussions on financial matters related to the proposed
transaction. King & Spalding LLP reviewed with the board members their role and
obligations in evaluating possible business combination transactions and the
recommended procedures to be followed in order to satisfy their fiduciary duties
as members of the board.
On August 14, 2003, Mr. Widdicombe provided the chinadotcom board of
directors with an update as to the progress of the merger negotiations with Ross
and answered questions related to the proposed merger and underlying transaction
documents. Thereafter, through September 4, 2003, chinadotcom management,
particularly Mr. Yip, updated various chinadotcom board members as to the status
of the proposed merger with Ross.
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On August 18, 2003, Mr. Webster notified counsel to the holder of the Ross
preferred stock (after execution by such counsel of a confidentiality agreement)
of the proposed transaction and the possibility that the holder of the preferred
stock would be requested to sign an agreement committing such holder to vote to
approve the merger.
On August 19, 2003, Mr. Tinley notified Mr. Yip that, based on the advice
of Ross' financial advisors, the 30-trading day period that the parties had
discussed as a basis on which to determine the chinadotcom average price for
purposes of calculating the exchange ratio was too long in light of the risk of
a sharp downward trend in chinadotcom's stock price shortly prior to the
effective time of the merger. Mr. Tinley instead proposed that chinadotcom's
price be based on a 10-day average.
On August 20, 2003, Ross' accountants completed their diligence review of
the work papers of chinadotcom's accountants and certain other legal matters
conducted in the offices of chinadotcom's accountants in Hong Kong. The due
diligence report of Ross' accountants was distributed to the members of the Ross
board of directors for their review and consideration.
Also on August 20, 2003, a special meeting of the Ross board of directors
was held. At that meeting, Mr. Tinley described the then current state of
negotiations with chinadotcom. Representatives of King & Spalding LLP and
Broadview summarized the basic terms of the then-current draft merger agreement
and stockholders agreements. Representatives of Broadview made a detailed
presentation of their financial analysis with respect to chinadotcom and Ross.
The Ross board of directors discussed the Broadview presentation and asked
questions about the assumptions, analysis and factors contained in the
presentation. The Ross board of directors unanimously authorized Messrs. Tinley
and Webster to continue negotiations and report back to the board as
appropriate.
Also on August 20, 2003, Mr. Yip responded favorably to Mr. Tinley's
proposal of August 19 regarding the use of an average 10-day trading price for
chinadotcom stock for purposes of determining the number of shares of
chinadotcom stock to be issued to Ross stockholders in the merger. Further, Mr.
Yip proposed that the exchange ratio be determined based on that 10-day average,
so long as chinadotcom stock remained in a trading range between $8.50 and
$10.50. As a result, pursuant to Mr. Yip's proposal, the per share merger
consideration would consist of $5.00 in cash and a fixed value of $14.00 of
chinadotcom stock if chinadotcom stock remained in a trading range (based on a
10-day average) of $8.50 to $10.50 per share. Ross would retain its termination
right if the 10-day trading average of chinadotcom stock dropped below $8.50,
unless chinadotcom agreed to calculate the exchange ratio based on the actual
average 10-day trading price of chinadotcom stock. Alternatively, the exchange
ratio would be fixed based on a chinadotcom price per share of $10.50 if the
10-day trading average of chinadotcom stock was trading above that range.
On August 25, 2003, the Ross board of directors convened a meeting by
telephone with Broadview and King & Spalding LLP. King & Spalding LLP reviewed
again with the members of the Ross board their duties when considering possible
business combination transactions. King & Spalding LLP also reviewed with the
Ross board the then-current terms of the draft merger agreement, including the
structure of the transaction, the scope of Ross' representations and warranties
and the scope of the conditions to the parties' respective obligations to
complete the transaction. Specifically, King & Spalding LLP reviewed certain
provisions contained in the draft merger agreement that were favorable to Ross,
including a "fiduciary out" that would allow the Ross board of directors to
engage in discussions or provide information to third parties, or to withdraw or
modify its recommendation that the Ross stockholders approve the merger, in the
event of a higher competing offer meeting certain criteria. King & Spalding LLP
also reviewed the circumstances under which Ross would be obligated, upon a
termination of the merger agreement, to pay a break-up fee to chinadotcom,
including a termination by Ross based on the good faith determination by the
Ross board, in the exercise of its fiduciary duties, that such termination is in
the best interests of the Ross stockholders and necessary in order to enter into
an agreement with respect to a superior acquisition proposal and a termination
by chinadotcom based on the withdrawal or modification by the Ross board of
directors of its approval or recommendation of the merger agreement or
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the merger, followed by the entry into or completion by Ross of another
acquisition proposal within 12 months after such termination.
At the August 25 meeting, Broadview summarized the revised financial terms
of the then-current draft merger agreement and reviewed its updated analysis and
conclusions. Broadview provided the Ross board of directors with an oral opinion
that the merger consideration was fair, from a financial point of view, to the
holders of Ross common stock. The Ross board of directors unanimously authorized
Messrs. Tinley and Webster to continue to work toward finalizing the definitive
agreements in connection with the proposed transaction.
During the period from August 25 to September 3, 2003, Ross completed its
due diligence review with respect to certain financial, legal and operational
information regarding chinadotcom, chinadotcom completed its due diligence
review with respect to certain financial, legal and operating information
regarding Ross and chinadotcom and Ross finalized the merger agreement and the
other agreements related to the merger.
On September 3, 2003, the Ross board of directors convened by telephone to
review the terms of the final drafts of transaction documents related to the
merger.
On September 4, 2003, pursuant to the chinadotcom board's direction with
respect to its approval of the merger on August 8, 2003, Mr. Widdicombe
circulated final drafts of the transaction documents to the chinadotcom board.
On September 4, 2003, before the open of trading on the Nasdaq National
Market, the Ross board unanimously approved and declared advisable the merger
and the merger agreement and resolved to recommend that Ross' stockholders
approve the merger in accordance with the provisions of the merger agreement.
Broadview confirmed in writing its oral opinion that, as of September 4, 2003,
the merger consideration was fair, from a financial point of view, to the
holders of Ross common stock.
Also on September 4, before the open of trading on the Nasdaq National
Market, Ross and chinadotcom executed the merger agreement, the stockholder
agreements and the preferred stockholder agreement and issued a press release
announcing their entry into the agreements relating to the merger.
The merger agreement as signed contemplated that the parties would explore
whether the transaction could be effected as a tax-free organization. Between
September 4, 2003 and October 2, 2003, the parties and their counsel examined
this issue, but concluded that given the complexities associated with attempting
to effect the transactions as a tax-free reorganization, as well as certain
potential adverse consequences associated with effecting the transaction on that
basis, it was in the best interests of Ross and its stockholders to effect the
transaction as a taxable transaction.
Accordingly, on October 3, 2003, chinadotcom, CDC Software Holdings and
Ross executed an amendment to the merger agreement removing the obligations of
the parties to use their reasonable best efforts to cause the merger to qualify
as a tax-free reorganization and removing chinadotcom's obligation to cause its
outside counsel to deliver an opinion to Ross and its stockholders relating to a
tax-free reorganization.
On November 18, 2003, chinadotcom announced that it would make a
conditional proposal to acquire Pivotal. During the following two weeks,
chinadotcom engaged Pivotal and members of its special committee in discussions
relating to its conditional proposal, and on December 1, 2003, chinadotcom
submitted a definitive offer to acquire Pivotal. Pivotal accepted chinadotcom's
definitive offer on December 8, 2003.
Based on Ross' concerns that the proposed acquisition of Pivotal would have
the effect of delaying the mailing of the proxy statement such that the closing
of the merger would be delayed past January 15, 2004, chinadotcom and Ross
entered into discussions to amend the merger agreement to extend the date after
which either party could terminate the merger agreement and reduce uncertainty
as to the completion of the transaction. From November 26, 2003 until January 7,
2004, chinadotcom and Ross
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discussed the terms and conditions of a second amendment to the merger agreement
and proposed, among other things, to:
- remove the floor of $8.50 and the ceiling of $10.50 applicable to the
average price of chinadotcom common shares used to calculate the number
of chinadotcom common shares to be received by Ross stockholders
receiving cash-and-shares in the merger;
- provide Ross stockholders with an option to receive at the closing of the
merger, for each share of Ross common stock held, $17.00 in cash rather
than $19.00 in cash-and-shares;
- provide for an adjustment to the exchange ratio such that if the average
price of chinadotcom common shares is less than $8.50 and chinadotcom
elects to adjust the exchange ratio, then Ross stockholders electing to
receive cash-and-shares in the merger would receive, for each share of
Ross common stock held, (1) $5.00 in cash, (2) a number of chinadotcom
common shares determined by dividing $14.00 by a number determined by
chinadotcom that is between the ten day average closing price and $8.50,
this quotient being referred to as the adjusted exchange ratio, and (3)
additional cash in an amount equal to the average price multiplied by the
difference between the original exchange ratio minus the adjusted
exchange ratio;
- eliminate provisions permitting Ross to terminate the merger agreement if
the average price of chinadotcom common shares was below $8.50 per share,
unless chinadotcom agreed to calculate the exchange ratio based on the
actual average closing price of chinadotcom common shares for the 10
trading days ending on, and including, the second trading day before the
closing date of the merger;
- extend the date after which either chinadotcom or Ross could terminate
the merger from March 1, 2004 to July 1, 2004; and
- increase the commitment of the parties to cooperate in the operation of
the two companies prior to closing.
In considering these proposed terms of the second amendment, Ross consulted
with Broadview as to the effect of the proposed changes on the merger
consideration to be received by Ross stockholders. Broadview advised Ross that
the changes did not affect its original fairness opinion because the elimination
of the $8.50 floor on the average price of chinadotcom shares was an improvement
and because Broadview in its original opinion did not ascribe material value to
the upside that Ross stockholders would receive if chinadotcom shares had a
market value above $10.50.
Between November 26, 2003 and January 7, 2003, the Ross board was updated
regularly on the discussions concerning the proposed second amendment. On
January 7, 2004, the Ross board approved and declared advisable the second
amendment on the proposed terms described above, and chinadotcom, and CDC
Software Holdings and Ross executed a second amendment to the merger agreement
incorporating these proposed terms.
On April 29, 2004, chinadotcom and Ross entered into a third amendment to
the merger agreement pursuant to which the parties agreed that the deadline for
Ross stockholders to elect to receive either cash or a combination of cash and
chinadotcom shares in connection with the merger would be the business day
immediately before the closing of the merger. Prior to the amendment, such
deadline was the tenth day following the closing of the merger. chinadotcom and
Ross agreed that the amendment would facilitate the final determination of the
exact amount of the merger consideration for Ross stockholders electing to
receive cash and shares, allow chinadotcom to more efficiently deliver the
merger consideration to Ross stockholders, and allow Ross stockholders to
receive the merger consideration in a more timely manner.
On May 12, 2004, chinadotcom and Ross entered into a fourth amendment to
the merger agreement in order to extend the date after which either chinadotcom
or Ross could terminate the merger from July 1, 2004 to September 1, 2004.
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CHINADOTCOM'S REASONS FOR THE MERGER
On August 8, 2003, chinadotcom's board of directors approved the principal
terms and conditions of the merger agreement, the issuance of chinadotcom common
shares and cash as consideration in the merger, and the other transactions
contemplated by the merger agreement.
chinadotcom's board of directors believes that the acquisition of Ross,
together with the acquisition of a 51% interest in IMI in early September 2003
and the acquisition of Pivotal completed on February 25, 2004, represent
significant steps to becoming a leading China-based software company with global
presence and will allow chinadotcom to combine the vertical strengths of Ross in
process manufacturing, IMI in supply chain management and Pivotal in customer
relationship management. chinadotcom's board of directors approved the
acquisition of Ross as part of chinadotcom's strategy to move up the value curve
in the software services and product areas, as the merger increases
chinadotcom's intellectual property asset base. Through the merger, chinadotcom
is continuing its drive to establish partnerships with software vendors, as well
as broaden its overall software product offering in the areas of enterprise
solutions and integration. The merger will also help to diversify chinadotcom's
business risk through bringing in a sizable recurring revenue base with over
1,000 active customers globally, increase the range of quality proprietary
manufacturing focused software products with strong potential for Greater China,
and increase its future revenue streams and profitability through cross selling
and cost reduction via synergies.
chinadotcom and its board of directors believe that the acquisition of Ross
represents an attractive and earnings-accretive transaction. chinadotcom's board
of directors believes the Ross management team will bring in-depth industry
expertise to chinadotcom's wholly owned software unit, CDC Software, especially
for the U.S. and European markets. CDC Software and Ross already have entered
into a master distribution agreement for Greater China and the Asia-Pacific
region, and the merger will further strengthen that relationship and help
realize greater potential between Ross and chinadotcom.
chinadotcom's board of directors believes that the merger will:
- allow chinadotcom to satisfy the increasing demand for process
manufacturing software that meets global standards, as China is becoming
an increasingly important manufacturing base for multinationals and
domestic exporters since its accession into the World Trade Organization;
- provide meaningful and realistic business synergies to be developed
within CDC Software by cross training the enlarged global consulting
network formed by the combination of Ross, IMI, Pivotal and CDC
Outsourcing in chinadotcom's combined portfolio of products and software
suites;
- allow chinadotcom to take advantage of the global trend of companies
looking to outsource to China by positioning chinadotcom's own
CMM-certified China-based software development center's capabilities as
an outsourcing conduit for economical and high quality software
development for the enlarged customer base of chinadotcom's acquired
companies to realize additional cost savings;
- allow chinadotcom to provide complementary software product offerings in
the process manufacturing and supply chain management sectors, as well as
broaden chinadotcom's overall software product offerings in the United
States, Europe and the Asia-Pacific region;
- lead to the development of new sales growth for chinadotcom throughout
mainland China and the Asia-Pacific region by offering Ross' core
products in those markets, and increase Asian sales as a percentage of
Ross' total sales mix;
- complement chinadotcom's geographic coverage and strengthen chinadotcom's
sales and distribution network globally, given chinadotcom's existing
profile in the Asia-Pacific region and mainland China, and Ross'
traditional base in the United States and presence in Europe; and
- help to increase chinadotcom's overall gross and operating margins and
strengthen the percentage of recurrent revenues.
chinadotcom believes that the merger is a key step in the execution of its
strategic plan. It seeks, through selective acquisitions and investments, to
extend the breadth of its enterprise applications suite to
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provide more complete solutions demanded by the company's enterprise software
customers. chinadotcom believes that its overall product offering and market
position are enhanced by owning, rather than licensing or only distributing,
enterprise software products targeted at mid-market manufacturers. chinadotcom
believes the products and know-how it will acquire as a result of the merger
will lead to the joint development of products between Ross, IMI, Pivotal and
CDC Software, and through CDC Outsourcing, provide outsourced solutions beyond
the scope of just these companies' core products which will deliver accretive
benefits for chinadotcom. chinadotcom expects to significantly reduce or
eliminate expenses associated with Ross operating independently as a public
company, including legal, accounting, investor relations and insurance expense.
The foregoing discussion of the information and factors considered by the
chinadotcom board of directors is not intended to be exhaustive, but includes
the material factors considered by the chinadotcom board. In view of the
complexity and wide variety of factors considered by the chinadotcom board of
directors, it did not find it practical to quantify, rank or otherwise assign
relative or specific weights to the factors considered. In addition, the
chinadotcom board did not reach any specific conclusion with respect to each of
the factors considered, or any aspect of any particular factor. Instead, the
chinadotcom board of directors conducted an overall analysis of the factors
described above, including discussions with chinadotcom's management and legal
advisors.
ROSS' REASONS FOR THE MERGER
Ross' board of directors has determined that the merger agreement and the
merger are fair to and in the best interest of Ross and the Ross stockholders
and has unanimously approved and declared advisable the merger agreement and the
merger. Ross' board unanimously recommends that the Ross stockholders vote "FOR"
the proposal to adopt and approve the merger agreement and the merger at the
special meeting.
Ross in the past has considered acquisitions of other software companies
that sell software that is complementary to Ross' ERP software to enable Ross to
compete more effectively in the ERP market against larger firms such as SAP AG,
Oracle Corporation and J.D. Edwards, now a division of Peoplesoft. These firms,
due to their larger sizes, offer a more complete range of integrated products to
their respective manufacturing customers than Ross is able to offer on a
stand-alone basis. Because the financial resources required to implement an
active acquisition strategy have not been available to Ross as a small public
company, Ross has instead pursued a strategy involving the formation of separate
marketing and development partnerships with other firms in an attempt to offer a
more competitive range of products. These partnerships are often limited in
duration, however, and Ross has determined that the merger will help to improve
Ross' competitive position on a more permanent basis. As a result of the merger,
Ross will be able to offer its products on an integrated basis with those of the
wider chinadotcom group, thereby enabling Ross to compete more effectively with
other large firms.
Ross' board of directors consulted with senior management and Ross'
financial and legal advisors and considered a number of factors in reaching its
decision to approve and declare advisable the merger agreement and the
amendments to the merger agreement and the merger and recommend that Ross
stockholders vote "FOR" the adoption and approval of the merger agreement and
merger. Among the factors considered by the Ross board in its deliberations were
the following:
- the potential for the merger to facilitate Ross' expansion into Asian and
other markets where chinadotcom has a presence and to provide Ross with
economies of scale in its software development process;
- cost reductions and operating efficiencies that may be realized by Ross
as a result of outsourcing certain software development activities to
other companies in the chinadotcom group, which, if realized, would
improve Ross' competitive position;
- chinadotcom's anticipation that it will operate Ross as a separate entity
within the chinadotcom group and provide Ross with access to additional
capital;
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- current industry, economic and market conditions, including the potential
for further consolidation within Ross' industry;
- historical market prices and trading information with respect to
chinadotcom common shares and Ross common stock;
- the merger consideration, which represented an approximate 9.9% premium
over the closing price per share of Ross' common stock on September 3,
2003, the last trading day before the public announcement of the signing
of the merger agreement, and an approximate 18.4% premium over the
closing price per share of Ross' common stock on August 1, 2003, which is
the date 20 trading days before the public announcement;
- the likelihood of an alternative transaction and Ross' prospects if it
were to continue as an independent company;
- the financial presentation by Broadview, including its opinion as to the
fairness from a financial point of view of the merger consideration to be
received by the Ross stockholders, as described more fully below under
the heading "Opinion of Financial Advisor to Ross' Board of Directors"
beginning on page 90;
- the terms and conditions of the merger agreement, including the closing
conditions, and the terms and conditions of the preferred stockholder
agreement and the stockholder agreements;
- the ability of the Ross board to enter into discussions with another
party in response to an unsolicited superior offer if the Ross board
believes in good faith, after consultation with its legal counsel, that
not doing so would not be in the best interests of Ross' stockholders;
and
- the expectation that the merger could be completed in a reasonable
timeframe.
Ross' board also identified and considered a number of potentially negative
factors in its deliberations concerning the merger, including:
- the risks that the potential benefits sought in the merger might not be
fully realized;
- the possibility that the merger might not be completed and the potential
adverse effects of the public announcement of the merger on Ross' ability
to attract and retain key employees, including management, sales,
marketing, software developers and technical personnel;
- the U.S. federal income tax consequences of the merger to Ross
stockholders;
- the potential disruption of Ross' business that might result from
employee and customer uncertainty and lack of focus following the public
announcement of the merger;
- the risk that, despite the efforts of chinadotcom and Ross, key
employees, including management, sales, marketing and technical
personnel, might not remain employees of Ross following the completing of
the merger;
- the requirement that Ross pay chinadotcom a break-up fee of $1,350,000,
and reimburse chinadotcom up to a maximum of $750,000 for chinadotcom's
fees and expenses in connection with the merger, if the merger is
terminated under specified circumstances;
- the restrictions on Ross imposed by the merger agreement and the
potential business opportunities that might be foregone due to these
restrictions or the pendency of the merger generally; and
- the fact that some officers and directors of Ross may have interests in
the merger that are different from, or in addition to the interests of
Ross stockholders generally, including the matters described under the
heading "Interests of Ross Directors and Officers in the Merger"
beginning on page 99.
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In addition, the Ross board considered a number of negative factors related
to the risks of holding chinadotcom shares. Many of these risks are identified
under the heading "Risk Factors" beginning on page 24. In particular, the Ross
board considered risks related to:
- the fact that due to chinadotcom's status as a "passive foreign
investment company," ownership of chinadotcom common shares may subject
U.S. investors to adverse tax rules, potentially causing an
administrative burden to Ross stockholders and a negative impact on the
value received by Ross stockholders in the merger;
- chinadotcom's limited operating history and evolution from an internet
company to a software company;
- chinadotcom's history of losses and the risk that it might not achieve or
sustain profitability;
- chinadotcom's intention to continue to expand through acquisitions and
investments, and the possibility that chinadotcom may not be able to
integrate the operations of Ross and other acquired companies into its
own operations or manage the operations of these acquired companies;
- the potential for chinadotcom's share price to be adversely affected if
its major strategic shareholders change their holdings in its shares;
- the historical volatility of chinadotcom's share price and the potential
that chinadotcom's share price may continue to be extremely volatile,
resulting in a degree of uncertainty as to the value that Ross
stockholders will receive in the merger; and
- litigation currently pending or threatened against chinadotcom, including
the class action lawsuits relating to chinadotcom's IPO allocations.
The Ross board considered these risks in light of the chinadotcom common
shares that each Ross stockholder will receive under the merger agreement. In
the view of the Ross board, these risks were not sufficient, either individually
or in the aggregate, to outweigh the advantages of the merger.
The above discussion is not intended to be exhaustive of all factors
considered by the Ross board of directors, but does set forth material positive
and negative factors considered by the Ross board. On September 4, 2003, the
Ross board unanimously approved and declared advisable the merger agreement and
the merger and recommended the adoption and approval of the merger agreement and
the merger in light of the various factors described above and other factors
that each such member of the Ross board of directors felt were appropriate. In
view of the wide variety of factors considered by the Ross board in connection
with its evaluation of the merger and the complexity of these matters, the Ross
board did not consider it practical, and did not attempt, to quantify, rank or
otherwise assign relative weights to the specific factors it considered in
reaching its decision.
RECOMMENDATION OF ROSS' BOARD OF DIRECTORS
After careful consideration, Ross' board of directors, on September 4,
2003, unanimously approved and declared advisable the merger agreement and the
merger. The board of directors of Ross unanimously recommends that the Ross
stockholders vote "FOR" the proposal to adopt and approve the merger agreement
and the merger at the Ross special meeting.
OPINION OF FINANCIAL ADVISOR TO ROSS' BOARD OF DIRECTORS
Pursuant to a letter agreement dated as of August 14, 2003 and executed on
August 14, 2003, Broadview was engaged to provide a fairness opinion to the
board of directors of Ross. Broadview focuses on providing merger and
acquisition advisory services to information technology, communications,
healthcare technology and media companies. In this capacity, Broadview is
continually engaged in valuing these businesses and maintains an extensive
database of information technology, communications, healthcare technology and
media mergers and acquisitions for comparative purposes. Broadview presented an
oral opinion to the Ross board on August 25, 2003, that as of such date, based
upon and subject to the
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various factors and assumptions described in the Broadview opinion, the per
share merger consideration to be received by holders of Ross common stock
(including stockholders holding Ross common stock as a result of the conversion
of Ross preferred stock) under the then-current draft of the definitive merger
agreement was fair, from a financial point of view, to such holders. On
September 4, 2003, Broadview delivered a written opinion, based upon its review
of the final draft of the definitive merger agreement, confirming, as of
September 4, 2003, their opinion that the merger consideration to be received by
holders of Ross common stock was fair, from a financial point of view to such
holders. Other than the retention of Broadview in connection with the delivery
of the fairness opinion, there is no material relationship between Ross and
Broadview, and there has been no material relationship between these parties at
any time during the two years prior to the date of this proxy
statement/prospectus.
In considering these proposed terms of the second amendment to the merger
agreement, Ross consulted with Broadview as to the effect of the proposed
changes to the merger consideration to be received by Ross stockholders.
Broadview advised Ross that these changes did not affect the fairness opinion
Broadview delivered to Ross on September 4, 2003 because the elimination of the
$8.50 floor on the average price of chinadotcom shares was an improvement and
because, in rendering the September 4, 2003 fairness opinion, Broadview did not
ascribe material value to the upside that Ross stockholders would receive if
chinadotcom shares had a market value above $10.50.
Broadview's September 4, 2003 fairness opinion, which describes the
assumptions made, matters considered and limitations on the review undertaken by
Broadview, is attached as Annex D to this proxy statement/prospectus. Ross
stockholders are urged to, and should, read the Broadview opinion carefully and
in its entirety. The Broadview opinion is directed to the board of directors of
Ross and addresses only the fairness of the merger consideration from a
financial point of view to holders of Ross common stock as of the date of the
opinion. The Broadview opinion does not address any other aspect of the merger
consideration and does not constitute a recommendation to any Ross stockholder
as to how to vote at the Ross special meeting. The summary of the Broadview
opinion set forth in this proxy statement/prospectus, although materially
complete, is qualified in its entirety by reference to the full text of such
opinion.
In rendering its opinion, Broadview, among other things:
- reviewed the terms of the draft definitive merger agreement furnished to
Broadview by legal counsel to Ross on September 4, 2003;
- reviewed certain publicly available financial statements and other
information with respect to Ross;
- reviewed certain internal financial and operating information, including
certain projections for Ross prepared and provided to Broadview by Ross
management;
- participated in discussions with Ross' management concerning the
operations, business strategy, current financial performance and
prospects for Ross;
- discussed with Ross' management its view of the strategic rationale for
the merger consideration;
- reviewed recent reported closing prices and trading activity for Ross
common stock;
- compared certain aspects of the financial performance of Ross with other
comparable public companies;
- analyzed available information, both public and private, concerning other
comparable mergers and acquisitions;
- reviewed recent equity research analyst reports covering Ross;
- reviewed certain publicly available financial statements and other
information with respect to chinadotcom;
- reviewed certain internal financial and operating information, including
certain projections for chinadotcom prepared and provided to Broadview by
chinadotcom's management;
91
- reviewed recent reported closing prices and trading activity for
chinadotcom's common shares;
- participated in discussions with chinadotcom's management concerning the
operations, business strategy, current financial performance and
prospects for chinadotcom;
- discussed with chinadotcom's management its view of the strategic
rationale for the merger consideration;
- compared certain aspects of the financial performance of chinadotcom with
other comparable public companies;
- analyzed the anticipated effect of the merger on the future financial
performance of the consolidated entity;
- reviewed recent equity research analyst reports covering chinadotcom; and
- conducted other financial studies, analyses and investigations as
Broadview deemed appropriate for purposes of its opinion.
In rendering its opinion, Broadview relied, without independent
verification, on the accuracy and completeness of all the financial and other
information, including without limitation the representations and warranties
contained in the definitive merger agreement, that was publicly available or
furnished to Broadview by Ross, chinadotcom or their respective advisors. With
respect to the financial projections examined by Broadview, Broadview assumed
that they were reasonably prepared and reflected the best available estimates
and good faith judgments of the management of Ross and chinadotcom as to the
future performance of Ross and chinadotcom, respectively. Broadview's opinion
does not address the financial impact of any of the potential acquisitions that
chinadotcom has confidentially disclosed to Broadview that it is considering.
Broadview did not make or take into account any independent appraisal of any of
Ross' or chinadotcom's assets. In addition, Broadview expressed no opinion as to
the price at which chinadotcom common shares will trade at any time or as to the
tax consequences of the merger to Ross or any of its stockholders.
Broadview did not make or obtain any independent appraisal or valuation of
any of the assets of Ross or any its subsidiaries. Broadview's fairness opinion
is necessarily based upon market, economic, financial and other conditions as
they existed and could have been evaluated as of the date of the opinion, and
any change in such conditions would require a reevaluation of the opinion.
The following is a brief summary of some of the sources of information and
valuation methodologies employed by Broadview in rendering its opinion. These
analyses were presented to the board of directors of Ross at its meeting on
August 25, 2003, with updated documentation delivered to the Ross board on
September 4, 2003. This summary includes the financial analysis used by
Broadview and deemed by Broadview to be material, but does not purport to be a
complete description of analysis performed by Broadview in arriving at its
opinion. Broadview did not explicitly assign any relative weights to the various
factors of analysis considered. This summary of financial analysis includes
information presented in tabular format. In order to fully understand the
financial analysis used by Broadview, the tables must be read together with the
text of each summary. The tables alone do not constitute a complete description
of the financial analysis.
ROSS STOCK PERFORMANCE ANALYSIS
Broadview compared the recent stock performance of Ross with that of the
NASDAQ Composite and Ross Comparable Index. The Ross Comparable Index is
comprised of public companies that Broadview deemed comparable to Ross.
Broadview selected profitable companies competing in the North American middle
market ERP software industry with trailing twelve month, or TTM, revenue between
$40 million and $500 million. The Ross Comparable Index consists of the
following companies: Epicor Software Corporation, MAPICS, Inc., QAD, Inc.,
American Software, Inc. and GEAC Computer Corporation Ltd.
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PUBLIC COMPANY COMPARABLES ANALYSIS
Broadview considered ratios of share price and market capitalization,
adjusted for cash and debt when necessary, to selected historical operating
results in order to derive multiples placed on a company in a particular market
segment. In order to perform this analysis, Broadview compared financial
information of Ross with publicly available information for the public companies
comprising the Ross Comparable Index. For this analysis, as well as other
aspects of Broadview's financial analysis, Broadview examined publicly available
information.
The following table presents, as of September 3, 2003, the median multiples
and the range of multiples for the Ross Comparable Index of total market
capitalization, or TMC (which is defined as equity market capitalization plus
total debt minus cash and cash equivalents), divided by selected operating
metrics:
MEDIAN
MULTIPLE RANGE OF MULTIPLES
-------- ------------------
TTM TMC/R.................................................. 1.27x 0.53x - 2.79x
LQA TMC/R.................................................. 1.24x 0.55x - 2.70x
Projected 12/31/03 TMC/R................................... 1.22x 0.54x - 2.60x
Projected 12/31/04 TMC/R................................... 1.08x 0.50x - 2.30x
TTM TMC/EBIT............................................... 17.63x 3.11x - 50.04x
Projected 12/31/03 TMC/EBIT................................ 11.65x 3.49x - 18.97x
Projected 12/31/04 TMC/EBIT................................ 12.42x 3.39x - 12.52x
TTM P/E.................................................... 22.52x 6.11x - 54.36x
Projected 12/31/03 P/E..................................... 25.23x 7.21x - 43.33x
Projected 12/31/04 P/E..................................... 19.53x 7.50x - 22.75x
These comparables imply the following medians and ranges for per share
value:
MEDIAN IMPLIED
VALUE RANGE OF IMPLIED VALUES
-------------- -----------------------
TTM TMC/R.......................................... $19.91 $ 9.37 - $41.68
LQA TMC/R.......................................... $20.77 $10.23 - $43.25
Projected 12/31/03 TMC/R........................... $20.13 $ 9.82 - $41.02
Projected 12/31/04 TMC/R........................... $20.37 $10.31 - $41.32
TTM TMC/EBIT....................................... $26.89 $ 6.18 - $73.16
Projected 12/31/03 TMC/EBIT........................ $17.00 $ 6.31 - $26.59
Projected 12/31/04 TMC/EBIT........................ $22.70 $ 7.46 - $22.88
TTM P/E............................................ $27.71 $ 7.52 - $66.90
Projected 12/31/03 P/E............................. $27.50 $ 6.66 - $47.23
Projected 12/31/04 P/E............................. $28.78 $11.05 - $33.52
No company utilized in the public company comparables analysis as a
comparison to Ross is identical to Ross. In evaluating the comparables,
Broadview made numerous assumptions with respect to the North American middle
market ERP software industry performance and general economic conditions, many
of which are beyond the control of Ross. Mathematical analysis, such as
determining the median, average or range, is not in itself a meaningful method
of using comparable company data.
TRANSACTION COMPARABLES ANALYSIS
Broadview considered ratios of equity purchase price, adjusted for the
seller's cash and debt when appropriate, to selected historical operating
results in order to indicate multiples strategic and financial acquirers have
been willing to pay for companies in a particular market segment. A group of
companies involved in recent transactions are comparable to Ross based on market
focus, business model and size.
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Broadview reviewed ten comparable merger and acquisition transactions announced
from January 1, 2002 through September 3, 2003 involving sellers in the middle
market ERP software industry with TTM revenue between $10 million and $300
million, from a financial point of view. For this analysis, as well as other
aspects of Broadview's financial analysis, Broadview examined publicly available
information, as well as information from Broadview's proprietary database of
published and confidential merger and acquisition transactions in the
information technology, communication, healthcare technology and media
industries. These transactions consisted of the acquisitions of:
(1) Eclipse, Inc. by Intuit, Inc.;
(2) Timberline Software Corporation by The Sage Group plc (Best Software);
(3) Infinium Software, Inc. by SSA Global Technologies, Inc.;
(4) Prophet 21, Inc. by Thoma Cressey Equity Partners, Inc. & LLR
Partners, Inc.;
(5) ROI Systems, Inc. by Epicor Software Corporation;
(6) Deltek Systems, Inc. by deLaski Family (Management Buyout);
(7) Kewill Systems plc, (ERP Division) by Exact Holding N.V.;
(8) Frontstep, Inc. by MAPICS, Inc.;
(9) Invensys plc (Baan Company N.V.) by SSA Global Technologies, Inc.; and
(10) Made2Manage Systems, Inc. by Battery Ventures Holding Corporation.
The following table presents, as of September 3, 2003, the median multiple
and the range of multiples of adjusted price (defined as equity price plus total
debt minus cash and cash equivalents) divided by the seller's revenue and
seller's earnings before interest and taxes, or EBIT in the last reported twelve
months prior to acquisition for the transactions listed above:
These comparables exhibit the following median and range for the applicable
multiple:
MEDIAN MULTIPLE RANGE OF MULTIPLES
--------------- ------------------
P/R................................................... 0.88x 0.46x - 1.89x
P/EBIT................................................ 9.46x 6.14x - 27.96x
The following table presents, as of September 3, 2003, the median implied
value and the range of implied values of Ross, calculated by multiplying the
multiples shown above by the appropriate Ross operating metric for the twelve
months ended June 30, 2003. These comparables imply the following median and
range for per share value:
MEDIAN IMPLIED VALUE RANGE OF IMPLIED VALUES
-------------------- -----------------------
P/R........................................... $14.30 $ 8.35 - $28.77
P/EBIT........................................ $15.24 $10.50 - $41.64
No transaction utilized as a comparable in the transaction comparables
analysis is identical to the merger. In evaluating the comparables, Broadview
made numerous assumptions with respect to the middle market ERP software
industry's performance and general economic conditions, many of which are beyond
the control of Ross or chinadotcom. Mathematical analysis, such as determining
the average, median or range, is not in itself a meaningful method of using
comparable transaction data.
TRANSACTION PREMIUMS PAID ANALYSIS
Broadview considered the premiums paid above a seller's share price in
order to determine the additional value that strategic and financial acquirers,
when compared to public stockholders, are willing to pay for companies in a
particular market segment. In order to perform this analysis, Broadview reviewed
a number of transactions involving publicly-held software companies. Broadview
selected these transactions
94
from its proprietary database by choosing transactions since January 1, 2001
with an equity purchase price between $10 million and $100 million. These
transactions consisted of the acquisitions of:
(1) Credit Management Solutions, Inc. by The First American Corporation;
(2) Wasatch Interactive Learning Corporation by PLATO Learning, Inc.;
(3) Starbase Corporation by Borland Software Corporation;
(4) INTERLINQ Software Corporation by John H. Harland Company (Harland
Financial Solutions, Inc.);
(5) eshare communications, Inc. by divine, Inc.;
(6) Liquent, Inc. by Information Holdings, Inc.;
(7) NetGenesis Corporation by SPSS, Inc.;
(8) Eprise Corporation by divine, Inc.;
(9) NetSpeak Corporation by Adir Technologies, Inc.;
(10) Applied Terravision Systems, Inc. by COGNICASE, Inc.;
(11) Landmark Systems Corporation by Allen Systems Group, Inc.;
(12) Crosskeys Systems Corporation by Orchestream Holdings PLC;
(13) Exigent International, Inc. by Harris Corporation;
(14) Fourth Shift Corporation by AremisSoft Corporation;
(15) Extensity, Inc. by GEAC Computer Corporation, Ltd.;
(16) SignalSoft Corporation by Openwave Systems, Inc.;
(17) Ecometry Corporation by SG Merger Corporation;
(18) Micrografx, Inc. by Corel Corporation;
(19) Ezenet Corporation by COGNICASE Inc.;
(20) Prophet 21, Inc. by Thoma Cressey Equity Partners, Inc. and LLR
Partners, Inc.;
(21) Centrinity, Inc. by Open Text Corporation;
(22) T/R Systems, Inc. by Electronics For Imaging, Inc.;
(23) Mediaplex, Inc. by ValueClick, Inc.;
(24) eXcelon Corporation by Progress Software Corporation;
(25) AvantGo, Inc. by Sybase, Inc.;
(26) Infinium Software, Inc. by SSA Global Technologies, Inc.;
(27) SoftQuad Software, Ltd. by Corel Corporation;
(28) Vicinity Corporation by Microsoft Corporation;
(29) TCSI Corporation by Rocket Software, Inc.;
(30) EXE Technologies, Inc. by SSA Global Technologies, Inc.;
(31) InfoInterActive, Inc. by AOL Time Warner, Inc.;
(32) Deltek Systems, Inc. by deLaski Family (Management Buyout);
(33) MessageMedia, Inc. by DoubleClick, Inc.;
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(34) Comshare, Incorporated by GEAC Computer Corporation Ltd.;
(35) Made2Manage Systems, Inc. by Battery Ventures Holding Corporation;
(36) Eagle Point Software Corporation by JB Acquisitions, LLC;
(37) Corel Corporation by Vector Capital Corporation;
(38) Alysis Technologies, Inc. by Pitney Bowes, Inc.;
(39) Elevon, Inc. by SSA Global Technologies, Inc.;
(40) Valicert, Inc. by Tumbleweed Communications Corporation;
(41) Virage, Inc. by Autonomy Corporation plc;
(42) Triple G Systems Group, Inc. by General Electric Company (GE Medical
Systems Information Technologies);
(43) Momentum Business Applications, Inc. by PeopleSoft, Inc.;
(44) Prime Response, Inc. by Chordiant Software, Inc.;
(45) Dynamic Healthcare Technologies, Inc. by Cerner Corporation;
(46) Open Market, Inc. by divine, Inc.;
(47) FrontStep, Inc. by MAPICS, Inc.;
(48) Delano Technology Corporation by divine, inc.;
(49) MGI Software Corporation by Roxio, Inc.;
(50) CUseeMe Networks, Inc. by First Virtual Communications, Inc.; and
(51) MedPlus, Inc. by Quest Diagnostics, Inc.
The following table presents, as of September 3, 2003, the median premium
and the range of premiums for these transactions, calculated by dividing:
(1) the offer price per share minus the closing share price of the
seller's common stock twenty trading days or one trading day prior to the
public announcement of the transaction, by
(2) the closing share price of the seller's common stock twenty
trading days or one trading day prior to the public announcement of the
transaction:
MEDIAN PREMIUM RANGE OF PREMIUMS
-------------- -----------------
Premium Paid to Seller's Stock Price 1 Trading Day
Prior to Announcement............................ 41.0% (7.5)% - 243.7%
Premium Paid to Seller's Stock Price 20 Trading
Days Prior to Announcement....................... 51.2% (38.5)% - 433.2%
The following table presents the median implied value and the range of
implied values of Ross' stock, calculated by using the premiums shown above and
Ross' share price twenty trading days and one trading day prior to September 3,
2003:
MEDIAN IMPLIED VALUE RANGE OF IMPLIED VALUES
-------------------- -----------------------
Premium Paid to Seller's Stock Price 1 Trading
Day Prior to Announcement................... $24.37 $15.99 - $59.43
Premium Paid to Seller's Stock Price 20
Trading Days Prior to Announcement.......... $24.27 $ 9.88 - $85.59
No transaction utilized as a comparable in the transaction premiums paid
analysis is identical to the merger. In evaluating the comparables, Broadview
made numerous assumptions with respect to the
96
software industry's performance and general economic conditions, many of which
are beyond the control of Ross or chinadotcom. Mathematical analysis, such as
determining the average, median or range is not in itself a meaningful method of
using comparable transaction data.
DISCOUNTED CASH FLOW VALUATION ANALYSIS
Broadview examined the value of Ross based on projected free cash flow
estimates, derived from discussions with management, on a standalone basis. The
free cash flow estimates were generated by applying financial projections from
June 30, 2004 through June 30, 2007. A range of terminal values at June 30, 2007
was determined by ascribing terminal growth rates, which ranged from 2.0% to
4.0%, to the annual free cash flow for the twelve months ending June 30, 2007.
Broadview calculated a discount rate of 16.09% based on the Capital Asset
Pricing Model, or CAPM, using the calculated median capital-structure adjusted
beta for the public company comparables, adjusting by a market risk premium of
7.8% and then adding a small company premium of 3.5%.
Based on a range of terminal growth rates, Broadview calculated values
ranging from $18.41 to $20.36 per share with a median implied equity value of
$19.31 per share, calculated using a discount rate of 16.09% and a terminal
growth rate of 3.0%.
RELATIVE SHARE PRICE ANALYSIS
Broadview considered the relative value that public equity markets have
placed on chinadotcom and Ross common stock from September 3, 2002 through
September 3, 2003. For comparative purposes, the implied historical relative
share price was examined in contrast with an exchange ratio derived from a
$19.00 stock transaction. Based on this analysis the historical relative share
price has ranged from 1.093 to 4.762 with an average of 2.971.
Broadview also measured the number of chinadotcom common shares that could
be exchanged for $14 from September 3, 2002 through September 3, 2003. Based on
this analysis this figure has ranged from 0.968 shares to 7.330 shares with an
average of 4.081 shares.
RELATIVE CONTRIBUTION ANALYSIS
Broadview examined the relative contribution of Ross to chinadotcom for a
number of historical and projected operating metrics. In this analysis,
projected figures for chinadotcom and Ross are derived from respective
managements' estimates.
The following reflects the relative contribution of chinadotcom and Ross,
respectively.
CHINADOTCOM ROSS
----------- -----
TTM Revenue................................................. 56.5% 43.5%
TTM EBIT.................................................... NM 100.0%
TTM Net Income.............................................. 21.3% 78.7%
Projected 12/31/03 Revenue.................................. 63.2% 36.8%
Projected 12/31/03 EBIT..................................... 51.9% 48.1%
Projected 12/31/03 Net Income............................... 79.8% 20.2%
Projected 12/31/04 Revenue.................................. 73.0% 27.0%
Projected 12/31/04 EBIT..................................... 89.3% 10.7%
Projected 12/31/04 Net Income............................... 90.2% 9.8%
CHINADOTCOM STOCK PERFORMANCE ANALYSIS AND CHINADOTCOM PUBLIC COMPANY
COMPARABLES ANALYSIS
Broadview compared the recent stock performance of chinadotcom with that of
the NASDAQ Composite and chinadotcom Comparable Indices. The chinadotcom
Comparable Indices are comprised of public companies that Broadview deemed
comparable to chinadotcom. Broadview selected companies
97
competing in the China-focused portal industry, consumer wireless services
industry and government-focused services industry with less than $350 million in
revenue and companies competing in the North American ERP software industry with
revenues between $40 million and $500 million and positive net income. The
China-focused portal comparable index consists of the following companies:
NetEase.com, Inc., Sohu.com Inc. and SINA Corporation. The consumer wireless
services comparable index consists of the following companies: InfoSpace, Inc.,
Metro One Telecommunications, Inc., and 724 Solutions Inc. The government
focused services comparables index consists of the following companies: PEC
Solutions, Inc., MTC Technologies, Inc, Tier Technologies, Inc., Dynamics
Research Corporation and Dyntek, Inc. The profitable North American ERP software
comparable index consists of the following companies: Epicor Software
Corporation, MAPICS, Inc., QAD, Inc., Ross, American Software, Inc. and GEAC
Computer Corporation Ltd.
Broadview considered ratios of share price and market capitalization,
adjusted for cash and debt when necessary, to selected historical operating
results in order to derive multiples placed on a company in a particular market
segment. In order to perform this analysis, Broadview compared financial
information of chinadotcom with publicly available information for public
companies comprising the chinadotcom Comparable Indices. For this analysis, as
well as other aspects of Broadview's financial analysis, Broadview examined
publicly available information.
PRO FORMA COMBINATION ANALYSES
Broadview calculated the EPS accretion or dilution of the pro forma
combined entity taking into consideration various financial effects, which will
result from a consummation of the merger. This analysis relies upon certain
financial and operating assumptions provided by chinadotcom's and Ross'
management. Broadview examined a purchase scenario under the assumption that no
opportunities for cost savings or revenue enhancements exist. Based on this
scenario, the pro forma purchase model indicates earnings per share accretion of
$0.01 for the fiscal year ending December 31, 2003 and accretion of $0.02 for
the fiscal year ending December 31, 2004.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its opinion, Broadview considered the results of the various aspects of its
analysis as a whole and did not attribute any particular weight to any
particular aspect of its analysis or factor considered by it. Furthermore,
Broadview believes that selecting any portion of its analysis, without
considering all of the various aspects of its analysis, would create an
incomplete view of the process underlying its opinion.
In performing its analysis, Broadview made numerous assumptions with
respect to industry performance and general business and economic conditions and
other matters, many of which are beyond the control of Ross or chinadotcom. The
analysis performed by Broadview is not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
suggested by such analysis. The consideration to be received by Ross
stockholders pursuant to the definitive merger agreement and other terms of the
definitive merger agreement were determined through arm's length negotiations
between Ross and chinadotcom, and were approved by the board of directors of
Ross. Broadview did not recommend any specific consideration to the board of
directors or suggest that any specific consideration constituted the only
appropriate consideration for the merger consideration. In addition, Broadview's
opinion and presentation to Ross' board of directors was one of many factors
taken into consideration by the Ross board in making its decision to approve the
merger transaction. Consequently, the Broadview analysis as described above
should not be viewed as determinative of the opinion of the Ross board with
respect to the value of Ross or of whether the Ross board would have been
willing to agree to a different merger consideration.
FEES
Pursuant to a letter agreement between Ross and Broadview, Ross paid a
$100,000 engagement fee to Broadview at the time the parties entered into the
letter agreement and an additional $150,000 upon
98
delivery of the fairness opinion. In addition, Ross has agreed to reimburse
Broadview for its reasonable expenses, including fees and expenses of its
counsel, up to a maximum of $12,000, and to indemnify Broadview and its
affiliates against certain liabilities and expenses related to their engagement,
including liabilities under the federal securities laws. The terms of the fee
arrangement with Broadview, which Ross and Broadview believe are customary in
transactions of this nature, were negotiated at arm's length between the Ross
board and Broadview, and the Ross board was aware of the nature of the fee
arrangement.
INTERESTS OF ROSS DIRECTORS AND OFFICERS IN THE MERGER
Certain officers and directors of Ross may have interests in the merger
that are different from, or in addition to, the interests of Ross stockholders
generally.
As described in detail below, there are substantial financial interests to
be conveyed to certain executive officers of Ross in connection with the merger.
For example, Ross stock options and restricted stock held by Messrs. Tinley and
Webster will vest as a result of the merger, and Messrs. Tinley and Webster have
entered into Transition and Stock Vesting Agreements among Ross, chinadotcom and
CDC Software Holdings, certain terms of which are described below under the
heading "-- Transition and Stock Vesting Agreements".
UNEXERCISABLE IN-THE-
MONEY OPTIONS TO BE
ACCELERATED UPON THE
MERGER
----------------------
NUMBER VALUE OF
OF VESTED EXERCISABLE IN-THE-MONEY OPTIONS
SHARES OF VALUE OF OPTIONS(1) UPON
ROSS ROSS ------------------------ COMPLETION
RESTRICTED RESTRICTED NUMBER OF VALUE OF NUMBER OF OF THE
NAME STOCK STOCK(2) SHARES OPTIONS(3) SHARES MERGER(4)
---- ---------- ---------- ---------- ----------- --------- ----------
J. Patrick Tinley............ 18,000 $342,000 37,100 $458,876 148,650 $1,322,363
Robert B. Webster............ 4,500 $ 85,500 6,250 $ 76,650 111,550 $ 970,836
---------------
(1) Options which are exercisable for common stock within 30 days of June 4,
2004.
(2) Values are calculated by multiplying the number of shares of vested
restricted stock held by each executive by $19.00, the value of one share of
Ross common stock at the effective time of the merger.
(3) Per option values are calculated by subtracting the exercise price of the
stock option from $19.00, the value of one share of Ross common stock at the
effective time of the merger.
(4) Per option values are calculated by subtracting the exercise price of the
stock option $19.00, the value of one share of Ross common stock at the
effective time of the merger. Messrs. Tinley and Webster have agreed to
terminate all outstanding options as of the effective time of the merger as
described below under the heading "-- Transition and Stock Vesting
Agreements".
Additionally, the in-the-money Ross stock options held by all executive
officers of Ross other than Messrs. Tinley and Webster will become chinadotcom
stock options in the merger.
NUMBER OF SHARES
COVERED BY
CHINADOTCOM OPTIONS
TO BE RECEIVED
ASSUMING EXCHANGE
NUMBER OF SHARES RATIO BASED ON VALUE OF
COVERED BY ROSS CHINADOTCOM SHARE CHINADOTCOM
NAME OPTIONS(1) PRICE OF $8.5 OPTIONS(2)
---- ---------------- ------------------- -----------
Alvin Johns..................................... 5,351 11,961 $ 60,658
Oscar Pierre Prats.............................. -- -- --
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NUMBER OF SHARES
COVERED BY
CHINADOTCOM OPTIONS
TO BE RECEIVED
ASSUMING EXCHANGE
NUMBER OF SHARES RATIO BASED ON VALUE OF
COVERED BY ROSS CHINADOTCOM SHARE CHINADOTCOM
NAME OPTIONS(1) PRICE OF $8.5 OPTIONS(2)
---- ---------------- ------------------- -----------
Gary Nowacki.................................... -- -- $ --
Eric W. Musser.................................. 12,450 27,829 $ 165,769
Verome M. Johnston.............................. 11,500 25,706 $ 144,635
Bruce J. Ryan................................... 8,400 18,776 $ 83,860
Frank M. Dickerson.............................. 18,000 40,235 $ 232,760
J. William Goodhew, III......................... 8,400 18,776 $ 83,860
Rick Marquardt.................................. 7,500 16,765 $ 101,250
Richard Thomas.................................. 2,125 4,750 $ 33,023
All officers and directors as a group (12
persons)...................................... 385,226 861,093 $3,803,881
---------------
(1) In-the-money options which are exercisable for common stock within 30 days
of June 4, 2004.
(2) Values are calculated by subtracting the exercise price of the chinadotcom
option from the value of the chinadotcom common shares covered by the
chinadotcom option that would be received upon conversion of the Ross
option. The value of the chinadotcom common shares is determined in the same
manner as the value of one chinadotcom common share in calculating the
merger consideration. See the heading entitled "The Merger
Agreement -- Merger Consideration." As described under the heading entitled
"The Merger Agreement -- Treatment of Ross Stock Options" beginning on page
107, the conversion ratio depends on the value of chinadotcom common shares.
It is expected that Messrs. Tinley and Webster will enter into new
employment agreements with Ross that will become effective when the merger is
completed, under which they will continue to have senior management positions
with Ross, operating as a chinadotcom subsidiary. Certain terms of these
employment agreements are summarized below under the heading "New Executive
Employment Agreements".
The merger will result in the accelerated vesting of unvested employee
stock options with an exercise price greater than $19.00, with these options
becoming exercisable at the time of closing of the merger, immediately after
which they will expire. Ross employee stock options with an exercise price
greater than $19.00 that are already vested can be exercised any time up until
the closing, when they will expire. However, if at the time of exercise Ross
common stock is trading at $19.00 or less, these options would be "out of the
money," would have no value, and presumably would not be exercised. In-the-money
stock options will not be subject to accelerated vesting except for those held
by Messrs. Tinley and Webster. In the merger, in-the-money Ross stock options,
other than those held by Messrs. Tinley and Webster, will be replaced with
options to acquire chinadotcom common shares.
Following the merger, chinadotcom has agreed that the surviving corporation
will continue to honor all indemnification agreements between Ross and its
directors and officers, and, subject to specified cost restrictions, maintain
directors' and officers' insurance for a five-year period following completion
of the merger. This directors' and officers' insurance will cover the directors
and officers of Ross with respect to events occurring before completion of the
merger. The provisions of the merger agreement describing indemnification and
insurance of Ross directors and officers are described below under the heading
"The Merger Agreement -- Indemnification; Directors' and Officers' Insurance"
beginning on page 115.
100
Executive officers and directors of Ross hold shares of Ross common stock
and stock options to acquire shares of Ross common stock. Such interests are
described under the heading "The Ross Special Meeting -- Record Date, Voting
Securities and Share Ownership of Principal Stockholders and Management"
beginning on page 74.
NUMBER OF SHARES OF COMMON STOCK VALUE OF COMMON STOCK AND OPTIONS
----------------------------------- ------------------------------------
NUMBER OF NUMBER OF PERCENTAGE VALUE OF VALUE OF AGGREGATE
NAME SHARES(1) OPTIONS(2) OF CLASS SHARES(3) OPTIONS(4) VALUE
---- --------- ---------- ---------- ---------- ---------- ----------
Alvin Johns.............. 52,159 5,351 2.2% $ 991,021 $ 60,658 $1,051,679
Robert B. Webster**...... 68,777 117,800 7.5% 1,306,763 1,012,936 2,319,699
J. Patrick Tinley**...... 31,041 185,750 8.7% 589,779 1,781,240 2,371,019
Oscar Pierre Prats....... 3,625 -- * 68,875 -- 68,875
Gary Nowacki............. 22 -- * 418 -- 418
Eric W. Musser........... -- 12,450 * -- 165,769 165,769
Verome M. Johnston....... 4,120 11,500 * 78,280 144,635 222,915
Bruce J. Ryan............ -- 8,400 * -- 83,860 83,860
Frank M. Dickerson....... -- 18,000 * -- 232,760 232,760
J. William Goodhew,
III.................... -- 8,400 * -- 83,860 83,860
Rick Marquardt........... 123 7,500 * 2,337 101,250 103,587
Richard Thomas........... 1,448 2,125 * 27,512 33,023 60,535
All officers and
directors as a group
(12 persons)........... 161,315 377,276 16.8% $3,064,985 $3,699,991 $6,764,976
---------------
* Less than 1%.
** Number of options exercisable within 30 days of June 4, 2004 includes
accelerated vesting of options due to a change of control pursuant to the
proposed merger.
(1) The table is based upon information supplied by executive officers,
directors and principal stockholders. Unless otherwise indicated, each of
the stockholders named in the table has sole voting investment and/or
dispositive power with respect to all shares of common stock shown as
beneficially owned, subject to community property laws where applicable and
to the information contained in the footnotes to this table.
(2) In-the-money options which are exercisable for common stock within 30 days
of June 4, 2004.
(3) Values are calculated by multiplying the number of shares of common stock
held by each officer or director by $19.00, the value of one share of Ross
common stock at the effective time of the merger.
(4) At the effective time of the merger, Ross stock options will be converted
into chinadotcom stock options. Values are calculated by subtracting the
exercise price of the chinadotcom option from the value of the chinadotcom
common shares covered by the chinadotcom option that would be received upon
conversion of the Ross option. As described under the heading entitled "The
Merger Agreement -- Treatment of Ross Stock Options" beginning on page 107,
the conversion ratio depends on the value of chinadotcom common shares,
giving the chinadotcom options the same value regardless of the chinadotcom
average price.
Messrs. Tinley, Webster and Johnston have entered into stockholder
agreements with chinadotcom whereby such executives agreed, among other things,
to vote the Ross common stock owned by them in favor of the merger and to grant
chinadotcom a proxy with respect to the voting of their shares of Ross common
stock in connection with the merger and certain related matters, subject to
certain terms and conditions. Although these stockholder agreements expired on
March 1, 2004, Messrs. Tinley, Webster and Johnston currently intend to vote
their Ross common stock in favor of the merger. The material terms of these
stockholder agreements are described under the heading "Agreements Related to
the Merger -- Stockholder Agreements" beginning on page 121.
101
Ross' board of directors was aware of these interests and considered them,
among other matters, in approving the merger agreement and the transactions
contemplated by the merger agreement.
TRANSITION AND STOCK VESTING AGREEMENTS
Messrs. Tinley and Webster each have entered into a Transition and Stock
Vesting Agreement with Ross, chinadotcom and CDC Software Holdings. Under the
terms of these agreements, all unvested stock options with an exercise price of
$19.00 or less held by these executives will accelerate at the effective time of
the merger, and each executive will terminate such stock options and enter into
a new employment agreement with Ross, operating as a subsidiary of chinadotcom,
upon the completion of the merger. In return, chinadotcom will make a one-time
special grant of chinadotcom common shares and a one-time special grant of
chinadotcom restricted shares (vesting in equal annual installments over a
three-year period) to Mr. Tinley and to Mr. Webster, each such grant having the
value, as of September 4, 2003, set forth in the table below, assuming either
the continued employment of such executive for the restricted share vesting
period or the acceleration of the vesting of such restricted shares. In
addition, upon termination of either executive's employment by Ross, operating
as a subsidiary of chinadotcom, without "cause" or due to the death or
disability of such executive, or in the event of a change of control of
chinadotcom, vesting of such executive's chinadotcom restricted shares will
accelerate.
Upon completion of the merger, the employment of Messrs. Tinley and Webster
under their respective existing employment agreements will be deemed to have
been terminated due to a "change of control," entitling such executives to the
cash payments set forth in the table below.
ROSS CHANGE
OF CONTROL CHINADOTCOM AGGREGATE
VESTED CHINADOTCOM ONE-TIME CASH AND
RESTRICTED ONE-TIME RESTRICTED CASH STOCK
NAME ROSS POSITION STOCK GRANT STOCK GRANT STOCK GRANT PAYMENT AWARDS(1)
---- ---------------- ----------- ----------- ----------- ---------- ----------
J. Patrick Tinley..... Chairman & Chief $342,000 $875,859 $875,859 $1,417,500 $3,511,218
Executive
Officer
Robert B. Webster..... Executive Vice $ 85,500 $511,443 $511,443 $ 630,000 $1,738,386
President
---------------
(1) Reflects aggregate value of cash and stock awards for each executive's
agreement to terminate all stock options held by such executive and enter
into a new employment agreement with Ross, operating as a subsidiary of
chinadotcom. The number of shares of restricted stock and stock to be
received by Messrs. Tinley and Webster will be determined at the effective
time of the merger based on the values indicated in the table.
NEW EXECUTIVE EMPLOYMENT AGREEMENTS
It is expected that Messrs. Tinley and Webster will enter into new
employment agreements with Ross, operating as a subsidiary of chinadotcom,
following completion of the merger. These employment agreements will begin upon
completion of the merger and will be terminable by either party upon three
months' notice. Under the new employment agreements, each executive will
generally serve in the same position with Ross, operating as a subsidiary of
chinadotcom, that such executive held with Ross as of the date of the merger
agreement. Each executive will be eligible to participate in the various
retirement, welfare and fringe benefit plans, programs and arrangements of
chinadotcom available to similarly situated senior executives of companies in
the chinadotcom group, in accordance with the terms of such plans, programs and
arrangements.
102
After the completion of the merger, each of Mr. Tinley's and Mr. Webster's
new employment agreement with Ross, operating as a subsidiary of chinadotcom,
will entitle such executive to receive the following annual salary and be
eligible to receive the following annual performance bonus:
POSITION WITH ROSS ANNUAL
(AS A CHINADOTCOM SUBSIDIARY) ANNUAL PERFORMANCE
NAME AFTER THE MERGER SALARY BONUS
---- ---------------------------------- -------- -----------
J. Patrick Tinley........... Chairman & Chief Executive Officer $236,250 $236,250
Robert B. Webster........... Executive Vice President $157,500 $157,500
If an executive's employment agreement is terminated, Ross, operating as a
subsidiary of chinadotcom, will pay to such executive salary, accrued bonus and
benefits (and reimburse such executive's proper expenses) until the executive's
last day of employment. Ross, operating as a subsidiary of chinadotcom, will pay
an executive such executive's salary and accrued bonus during the three-month
notice period for termination and may require the executive to leave Ross'
offices prior to the date of termination.
The new employment agreements also provide that, during their term and
during the one-year period following the termination of an executive's
employment, the executive may not become associated with competitive entities
that are actively engaged in Ross' business, operating as a subsidiary of
chinadotcom, solicit the business of any company that was a customer or client
of Ross or its affiliates during the twelve-month period prior to the
executive's termination date, or solicit any person that was a management or
sales employee of Ross or its affiliates during the twelve-month period prior to
the executive's termination date. The new employment agreements also contain
provisions requiring the executives to maintain the confidentiality of certain
proprietary information of chinadotcom and other companies in the chinadotcom
group.
Upon completion of the merger, these new employment agreements, and the
Transition and Stock Vesting Agreements, will supersede each of Mr. Tinley's and
Mr. Webster's existing employment agreement with Ross. Other Ross executives may
enter into employment agreements with Ross upon the completion of the merger.
FORM OF MERGER
Subject to the terms and conditions of the merger agreement and in
accordance with Delaware law, upon completion of the merger, CDC Software
Holdings, a wholly owned subsidiary of chinadotcom formed for the purposes of
the merger, will be merged with and into Ross. Ross, operating as a subsidiary
of chinadotcom, will survive the merger as a wholly owned subsidiary of
chinadotcom.
EFFECTIVE TIME OF THE MERGER
The merger will become effective upon the filing of the certificate of
merger with the Secretary of State of Delaware or such later time as agreed upon
by chinadotcom and Ross and as specified in the certificate of merger. The
filing of the certificate of merger will occur as soon as practicable after
satisfaction or waiver of the conditions to completion of the merger described
in the merger agreement.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
Chinadotcom's exchange agent will mail to Ross stockholders a letter of
transmittal and instructions to be used in surrendering certificates that
represent shares of Ross common stock. When a Ross stockholder delivers these
certificates to the exchange agent together with a properly executed letter of
transmittal and any other required documents, the Ross stockholder will receive
chinadotcom common share certificates representing the whole number of
chinadotcom common shares to which the stockholder is entitled under the merger
agreement and a check (1) for cash that the stockholder is entitled to receive
for his shares under the merger agreement and (2) for cash in lieu of any
fractional chinadotcom common shares.
103
LISTING OF CHINADOTCOM COMMON SHARES
It is a condition to the completion of the merger that the chinadotcom
common shares to be issued in the merger be approved for quotation on the Nasdaq
National Market, subject to official notice of issuance.
DELISTING AND DEREGISTRATION OF ROSS COMMON STOCK
If the merger is completed, Ross common stock will be delisted from the
Nasdaq National Market and will be deregistered under the Exchange Act.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
The merger is subject to review by the U.S. Department of Justice and the
U.S. Federal Trade Commission to determine whether the merger complies with
applicable antitrust laws. Under the provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, the merger may not be completed until after
each of chinadotcom and Ross have furnished certain information and materials to
the Antitrust Division of the Department of Justice and the Federal Trade
Commission and a required waiting period has expired or been terminated.
chinadotcom and Ross each filed the required notification and report forms with
the Antitrust Division and the Federal Trade Commission on September 22, 2003.
The waiting period expired on October 27, 2003.
ACCOUNTING TREATMENT
chinadotcom will account for the merger in its financial statements
prepared in accordance with U.S. GAAP using the purchase method of accounting
pursuant to Statement of Financial Accounting Standards No. 141, "Business
Combinations." Under the purchase method of accounting, chinadotcom will record
the market value of its treasury stock bought back and new common stock issued
in connection with the merger, the amount of cash paid, the fair value of the
options to purchase chinadotcom common shares and the amount of direct
transaction costs for the acquisitions. chinadotcom will allocate the cost to
the individual assets acquired and liabilities assumed, including various
identifiable intangible assets (such as acquired technology and customer
contracts), based on their respective fair values at the date of the completion
of the mergers. Any excess of the purchase price over those fair values will be
accounted for as goodwill. chinadotcom's results of operations for the fiscal
year 2004 will include the results of operations of Ross and Pivotal from the
date of the closing of the respective transactions.
Intangible assets with finite useful lives generally will be amortized over
a specific period, resulting in an estimated accounting charge attributable to
these items. In accordance with the Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets," intangible assets with
indefinite useful lives, including goodwill resulting from a business
combination completed subsequent to June 30, 2001, will not be amortized but
will be subject to at least annual assessment for impairment based on a fair
value test.
A final determination of the required purchase accounting adjustments and
the fair value of the assets and liabilities of Ross and Pivotal has not been
made. Accordingly, the purchase accounting adjustments reflected in the
unaudited pro forma condensed combined financial information and the comparative
pro forma per share financial information appearing elsewhere in this document
are preliminary and subject to change.
RESTRICTIONS ON SALES OF CHINADOTCOM COMMON SHARES RECEIVED IN THE MERGER
The chinadotcom common shares to be issued in the merger to Ross
stockholders generally will be freely transferable, except for chinadotcom
common shares issued to any person who is deemed to be an "affiliate" of Ross
under the Securities Act as of the date of the Ross special meeting. Persons who
may be deemed to be "affiliates" of Ross prior to the merger include individuals
or entities that control, are controlled by, or are under common control with
Ross prior to the merger, and may include officers and
104
directors, as well as significant stockholders of Ross prior to the merger.
Affiliates of Ross prior to the merger may not sell any of the chinadotcom
common shares received by them in connection with the merger except pursuant to:
- an effective registration statement under the Securities Act covering
resale of those shares;
- an exemption under paragraph (d) of Rule 145 under the Securities Act; or
- any other applicable exemption under the Securities Act.
chinadotcom's registration statement on Form F-4, of which this proxy
statement/prospectus forms a part, does not cover the resale of chinadotcom
common shares to be received by affiliates of Ross in the merger.
CERTIFICATE OF INCORPORATION; BYLAWS OF SURVIVING CORPORATION
In the merger, the certificate of incorporation of CDC Software Holdings, a
Delaware corporation, will be the certificate of incorporation of the surviving
corporation, except as amended in accordance with an agreement between the
parties to the merger. The bylaws of CDC Software Holdings as of the effective
time will serve as the bylaws of the surviving corporation.
APPRAISAL RIGHTS
Under Delaware law, holders of Ross common stock are entitled to appraisal
rights in connection with the merger. See the section entitled "Appraisal
Rights" on page 151.
105
THE MERGER AGREEMENT
The following summarizes the material provisions of the merger agreement
and is qualified in its entirety by reference to the complete text of the merger
agreement. The merger agreement included in this proxy statement/prospectus as
Annex A contains the complete terms of the agreement. Ross stockholders should
read it carefully and in its entirety.
CLOSING; EFFECTIVE TIME OF THE MERGER
The completion of the merger will occur as promptly as practicable after
the satisfaction or waiver of the conditions to the completion of the merger set
forth in the merger agreement. If the merger agreement and the merger are
adopted and approved at the special meeting of the Ross stockholders,
chinadotcom and Ross currently expect to complete the merger promptly following
receipt of stockholder approval.
As soon as practicable after all conditions to the completion of the merger
are satisfied or waived, chinadotcom and Ross will execute and file a
certificate of merger with the Secretary of State of the State of Delaware
relating to the merger.
MERGER CONSIDERATION
In the merger, Ross stockholders can elect to receive, for each share of
Ross common stock, either:
- $17.00 in cash, or
- $19.00 in cash and shares, $5.00 of which will be paid in cash, and the
remainder of which to be paid in chinadotcom common shares.
Ross stockholders may make the election to receive either cash or a
combination of cash and chinadotcom shares in the merger by completing the form
of election to be delivered to each Ross stockholder. The form of election must
be completed in accordance with the instructions in the form. Any Ross
stockholder that does not make an election by the business day immediately
before the closing of the merger will be deemed to have elected to receive a
combination of cash and chinadotcom shares in the merger.
Each Ross stockholder that elects to receive cash and shares will receive a
number of chinadotcom common shares equal to an exchange ratio, the numerator of
which is $14.00, and the denominator of which is the average closing price of
chinadotcom common shares for the ten trading days ending on, and including, the
second trading day before the closing date of the merger. However, in the event
the ten-day average closing price of chinadotcom common shares is less than
$8.50, chinadotcom may elect to adjust the exchange ratio to increase the amount
of cash paid and reduce the number of chinadotcom common shares otherwise
issuable upon conversion of Ross common stock based on the exchange ratio. If
chinadotcom elects to adjust the exchange ratio, a Ross stockholder that elects
to receive cash and shares will receive, for each share of Ross common stock:
- $5.00 in cash,
- a number of chinadotcom common shares equal to the adjusted exchange
ratio, the numerator of which is $14.00, and the denominator of which is
a number to be determined by chinadotcom, between the ten-day average
price and $8.50, this fraction being referred to as the adjusted exchange
ratio, and
- cash in an amount equal to the product of (a) the ten-day trading average
closing price of chinadotcom common shares on Nasdaq, multiplied by (b)
the excess of the exchange ratio over the adjusted exchange ratio.
In addition, even if the ten-day average closing price of chinadotcom
common shares is $8.50 or more, chinadotcom is required to elect to adjust the
exchange ratio as set forth above if the number of shares issuable in the merger
would require approval by the shareholders of chinadotcom under Nasdaq rules or
other applicable laws.
106
If chinadotcom elects to adjust the exchange ratio, chinadotcom is required
to deliver notice to Ross prior to the closing date of (1) the adjusted exchange
ratio, and (2) the aggregate amount of cash chinadotcom will issue for each
share of Ross common stock as a result of the adjusted exchange ratio.
Any election by chinadotcom to adjust the exchange ratio will be made by
the board of directors of chinadotcom. Ross stockholders will not have an
opportunity to vote to approve this decision.
Holders of Ross common stock will not receive certificates representing a
fraction of a chinadotcom common share. Instead, each holder of Ross common
stock otherwise entitled to a fractional share interest in a chinadotcom common
share will be paid an amount in cash, without interest, calculated by
multiplying (1) the fractional share interest to which such holder would
otherwise be entitled by (2) the average closing price of chinadotcom common
shares on the Nasdaq National Market for the ten consecutive trading days ending
on, and including, the trading day that is two trading days prior to the closing
date.
Upon conversion of the outstanding shares of Ross common stock into the
right to receive the merger consideration, the Ross common stock will be
cancelled and retired and will cease to exist.
SURRENDER OF ROSS STOCK CERTIFICATES
chinadotcom has appointed Mellon Investor Services LLC to act as paying
agent for the purpose of paying the merger consideration. chinadotcom will make
available to the paying agent, on or before the effective time of the merger,
the cash and share certificates for chinadotcom common shares required for that
purpose.
chinadotcom will cause the paying agent to send to each holder of Ross
common stock a letter of transmittal for use in the exchange and instructions
explaining how to surrender certificates to the paying agent. Holders of Ross
common stock whose shares are converted into the right to receive the merger
consideration and who surrender their certificates to the paying agent, together
with a properly completed and signed letter of transmittal, will receive the
merger consideration with respect to such shares.
Holders of unexchanged shares of Ross common stock will not be entitled to
receive any dividends or other distributions, or cash payment in lieu of
fractional shares payable by chinadotcom on the chinadotcom common shares until
surrender of their Ross common stock. Upon surrender, those holders will receive
accumulated dividends and distributions, without interest, payable on
chinadotcom common shares after and in respect of a record date following the
completion of the merger, together with cash instead of fractional shares.
TREATMENT OF ROSS STOCK OPTIONS
At the effective time of the merger, chinadotcom will substitute, for each
stock option outstanding under Ross' 1988 Stock Option Plan and 1998 Stock
Option Plan with an exercise price of $19.00 per share or less (other than stock
options granted to Messrs. Tinley and Webster, the treatment of which is
described under the heading "Interests of Ross' Directors and Officers in the
Merger -- Transition and Stock Vesting Agreements" beginning on page 102), stock
options to purchase chinadotcom common shares. Each substituted Ross stock
option, whether vested or unvested, will be converted into an option to acquire
a number of chinadotcom common shares equal to the product of (a) the number of
shares of Ross common stock subject to the substituted Ross stock option,
multiplied by (b) the "conversion ratio," as defined below, at an exercise price
per chinadotcom common share calculated using the formula described below. Ross
stock options that are subject to a vesting schedule at the effective time of
the merger will be substituted with chinadotcom stock options subject to the
same vesting schedule. Options to acquire chinadotcom common shares will be
issued on the same terms and conditions as were applicable under Ross' 1988
Stock Option Plan and 1998 Stock Option Plan.
107
Conversion Ratio. For purposes of the above paragraph, the "conversion
ratio" is the sum of:
- if chinadotcom does not elect to adjust the exchange ratio to determine
the merger consideration:
- $14.00 divided by the average closing price of chinadotcom common shares
for the 10 trading days ending on, and including, the second trading day
before the closing date of the merger; and
- $5.00 divided by the closing sales price of chinadotcom common shares on
Nasdaq for the last trading day prior to the closing date of the merger;
or
- if chinadotcom elects to adjust the exchange ratio to determine the
merger consideration:
- the adjusted exchange ratio, which is a fraction, (a) the numerator of
which is $14.00, and (b) the denominator of which is a number, not less
than the ten-day average price or more than $8.50, to be determined by
chinadotcom, and
- the quotient obtained by dividing the total cash amount to be paid per
share of Ross common stock based on the adjusted exchange ratio by the
closing price of each chinadotcom common share on the Nasdaq National
Market for the last trading date before the closing date of the merger.
Exercise Price. Under the new options to be issued, the exercise price per
chinadotcom common share will equal:
- the exercise price of the Ross stock option, divided by
- the conversion ratio described above.
Possible Exception For Incentive Stock Options. For Ross incentive stock
options, the exercise price and the number of shares subject to each option may
be adjusted in order to comply with applicable tax law requirements under
section 424(a) of the Internal Revenue Code.
All options to purchase chinadotcom common shares will be issued contingent
upon the closing of the merger and will include an acknowledgement by the
optionee that the stock options are being substituted for the relevant Ross
options.
You should not send your Ross stock option certificates to Ross to be
exchanged. After the merger, chinadotcom will send you instructions explaining
what you must do to exchange your Ross stock options for chinadotcom options.
ROSS' EMPLOYEE STOCK PURCHASE PLAN
On the last day of the payroll period immediately preceding the effective
time of the merger, or, if earlier, on December 31, 2003, all purchase periods
under Ross' 1991 Employee Stock Purchase Plan will terminate, and no new
purchase rights will be issued under such plan. Each outstanding right to
purchase Ross common stock under Ross' 1991 Employee Stock Purchase Plan will
automatically be exercised on the date that the purchase periods terminate,
unless such right is withdrawn by the plan participant prior to that date. All
shares acquired by plan participants through the exercise of purchase rights
will be converted to the right to receive the merger consideration at the
effective time of the merger, as described under the heading "-- Merger
Consideration" above.
TREATMENT OF ROSS WARRANT
In conjunction with Ross' private placement of preferred stock to Benjamin
W. Griffith, III in June 2001, Ross issued to the broker who assisted in the
transaction a warrant to purchase up to 47,244 shares of Ross common stock,
subject to a vesting schedule. Upon the exercise of the Ross warrant, the
warrant holder will have the right to receive the merger consideration for each
share of Ross common stock issuable upon exercise of the Ross warrant. Ross has
agreed to use its reasonable best efforts to cause the Ross warrant to be either
vested and exercised or redeemed prior to the closing of the merger.
108
REPRESENTATIONS AND WARRANTIES OF ROSS AND CHINADOTCOM
The merger agreement contains customary representations and warranties by
each of Ross and chinadotcom relating to, among other things:
- due organization and good standing;
- capital structure;
- authority to enter into the merger agreement and consummate the merger;
- enforceability of the merger agreement;
- no breach of organizational documents or material contracts as a result
of the merger agreement or the consummation of the merger;
- required governmental consents;
- required stockholder approvals, if any;
- compliance with laws;
- compliance with the Commission's reporting requirements and accuracy of
documents filed with the Commission;
- accuracy of information to be provided in this proxy
statement/prospectus;
- no material undisclosed liabilities;
- outstanding and pending material litigation; and
- brokers' or finders' fees.
In addition to the representations and warranties made by both Ross and
chinadotcom, the merger agreement contains further representations and
warranties made by Ross relating to, among other things:
- Ross subsidiaries;
- absence of certain changes and events since March 31, 2003;
- appropriate funding of employee benefit plans and compliance with
applicable regulations;
- labor and employee matters;
- real property and leases;
- ownership and infringement of intellectual property;
- tax matters;
- environmental matters;
- material contracts and debt instruments and absence of defaults under
such agreements;
- customers and performance of services;
- insurance;
- related party transactions;
- exemption from anti-takeover statutes;
- actions to ensure that the Ross Rights Agreement is not applicable to the
merger and related transactions;
- absence of unlawful payments or illegal gifts to foreign or domestic
government officials;
- receipt of opinion of financial advisor;
109
- no outstanding borrowings under credit facility; and
- accounts receivable.
The merger agreement contains additional representations and warranties
made by chinadotcom relating to:
- chinadotcom's ownership of CDC Software Holdings;
- the absence of any business activities by CDC Software Holdings;
- the ability to finance the transactions related to the merger; and
- the due authorization and valid issuance of the chinadotcom common shares
to be issued in connection with the merger.
CONDUCT OF ROSS' BUSINESS PRIOR TO THE MERGER
Until the earlier of the termination of the merger agreement or the
completion of the merger, Ross has agreed that, unless otherwise permitted by
obtaining chinadotcom's prior written consent, it will, and will cause its
subsidiaries to, among other things:
- conduct its business and the business of its subsidiaries only in the
ordinary course of business and in a manner that is consistent with past
practice; and
- use reasonable best efforts to preserve substantially intact the business
organization of Ross and its subsidiaries, to keep available the services
of the officers, employees and consultants of Ross and its subsidiaries,
and to preserve Ross' relationships with its customers, suppliers and
others with whom Ross or its subsidiaries do business.
In addition, Ross has agreed that, pending the effective time of the merger
or, if earlier, the termination of the merger agreement, without chinadotcom's
prior written consent, it will not, and will not permit its subsidiaries to,
among other things:
- amend its organizational documents;
- authorize, issue, sell or commit to authorize, issue or sell any
securities of Ross or its subsidiaries, or securities convertible into,
or exchangeable for, such securities, except in specified instances;
- pledge or encumber any shares of the capital stock of Ross or its
subsidiaries;
- sell, pledge or encumber any assets of Ross or its subsidiaries, other
than in the ordinary course of business and in a manner consistent with
past practices;
- declare, set aside or pay any dividend or make any other distribution or
payment with respect to the Ross capital stock, other than dividends
payable with respect to Ross preferred stock;
- re-classify, split or combine any shares of Ross capital stock;
- acquire any corporation or other business organization, or any division
or material amount of assets of such a business organization, or enter
into any agreement, commitment or arrangement to make such an
acquisition;
- incur or assume any indebtedness or issue any debt securities, except for
borrowings in the ordinary course of business under its existing line of
credit and for specified purposes;
- assume, guarantee, endorse or otherwise become responsible for the
obligations of another person;
- make any loans or advances to any other person;
- grant any security interest in any of its assets;
- enter into any contract or agreement other than in the ordinary course of
business and consistent with past practice;
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- authorize, or enter into any commitment for, any capital expenditure in
excess of $25,000 or any capital expenditures which are, in the
aggregate, in excess of $150,000;
- invest in any entity, other than a wholly owned subsidiary;
- revalue any of its assets, or except as required by GAAP, change any
accounting method it uses;
- pay, discharge or satisfy any claim, liability or obligation (whether
absolute, accrued, asserted or unasserted, contingent or otherwise),
except in specified instances;
- pay or delay the payment of accounts payable or accelerate the collection
of accounts receivable, other than in the ordinary course of business and
consistent with past practice;
- amend, modify or consent to the termination of any material contract or
any rights thereunder, other than in the ordinary course of business and
consistent with past practice;
- amend or modify any of the employment agreements entered into between
Ross and certain officers of Ross;
- amend or waive any of Ross' rights under, or accelerate the vesting of
options under, Ross' 1988 Stock Option Plan or 1998 Stock Option Plan or
any stock option agreement or restricted stock purchase agreement, or
otherwise modify any of the terms of any outstanding option, warrant or
other security of Ross, except in specified circumstances;
- establish, adopt or materially amend any employee benefit plan, except as
required to comply with applicable law;
- pay, commit to pay or accelerate the payment of any bonus or make, commit
to make or accelerate any profit-sharing or similar payment to, or
increase or commit to increase the amount of the wages, salary,
commissions, fringe benefits, severance, insurance or other compensation
or remuneration payable to, any of Ross' directors, officers, employees
or consultants, except in specified instances, including raises in the
normal annual compensation review process;
- enter into or materially amend any employment, consulting, severance or
similar agreement with any individual, other than consulting agreements
in specified instances;
- hire any employee with an annual base salary in excess of $110,000, or
with total potential annual compensation in excess of $200,000;
- acquire, lease or license any right or other asset from any other Person,
or sell, lease or license, any right or other asset, including any
intellectual property, to any other person, or waive any material right,
except in specified instances;
- dispose of any rights to the use of any intellectual property owned by
Ross or permit any of such rights to lapse;
- dispose of, or disclose to any person other than representatives of
chinadotcom, any trade secret, formula, process, know-how or other
intellectual property owned by Ross not previously a matter of public
knowledge;
- change any personnel policy of Ross or any of its subsidiaries;
- make any change in any of its methods of accounting or accounting
practices or policies, except as required by any changes in generally
accepted accounting principles or as otherwise required by law;
- commence or settle any claim or other legal proceeding;
- permit, without notice to chinadotcom, any material insurance policy of
Ross or any of its subsidiaries to be cancelled or terminated;
- enter into any agreement, understanding or commitment that restrains the
ability of Ross or any of its subsidiaries to compete with or conduct any
business or line of business;
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- enter into any agreement for the acquisition, distribution or licensing
of any material intellectual property, other than license or distribution
agreements entered into in the ordinary course of business and consistent
with past practice;
- enter into related party transactions or transactions with subsidiaries,
other than arms length transactions;
- take any action that would, or that would reasonably be expected to,
result in any of the conditions to the completion of the merger not being
satisfied or any material delay in the satisfaction of any such
conditions; or
- take any action that would have the effect of increasing the tax
liability or reducing any tax asset of Ross or any of its subsidiaries.
CONDUCT OF CHINADOTCOM'S BUSINESS PRIOR TO THE MERGER
Until the completion of the merger, in accordance with the terms of the
merger agreement, chinadotcom has agreed that, unless permitted by obtaining
Ross' prior written consent, and except in specified instances, it will not, and
will not cause its subsidiaries to, among other things:
- amend its organizational documents; or
- subject to the terms of the merger agreement, enter into any negotiation
or contract with respect to any transaction, other than the merger or the
acquisition of Pivotal, that would, to chinadotcom's knowledge acting
reasonably, materially delay or adversely affect the ability of Ross and
chinadotcom to obtain any governmental approvals required to complete the
merger or delay the completion of the merger past September 1, 2004.
CONDITIONS TO COMPLETION OF THE MERGER
CONDITIONS TO EACH PARTY'S OBLIGATION TO COMPLETE THE MERGER
Each party's obligation to complete the merger is subject to the
satisfaction of the following conditions prior to the effective time of the
merger:
- the approval and adoption of the merger agreement by the affirmative vote
of the holders of a majority of the outstanding shares of Ross common
stock and preferred stock as of the record date, voting as single class;
- the absence of any law or regulation making the merger illegal or
prohibiting its consummation;
- the absence of any litigation, proceeding or investigation by any
governmental authority seeking to prevent or adversely alter the
transactions contemplated by the merger agreement;
- the expiration or termination of any waiting period applicable to the
merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976;
- the effectiveness of, and the absence of any stop order or proceeding
seeking a stop order with respect to, the registration statement on Form
F-4 of which this proxy statement/prospectus forms a part; and
- the approval for listing on the Nasdaq National Market, subject to
official notice of issuance, of the chinadotcom common shares to be
issued to the Ross stockholders in the merger.
CONDITIONS TO CHINADOTCOM'S OBLIGATION TO COMPLETE THE MERGER
chinadotcom's obligation to complete the merger is subject to the
satisfaction of the following conditions prior to the effective time of the
merger:
- the representations and warranties of Ross set forth in the merger
agreement being true and correct (without giving effect to any limitation
as to materiality or material adverse effect on Ross included
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therein) as of the effective time of the merger as though made at the
effective time (except to the extent such representations and warranties
relate to an earlier date, then as of such earlier date), except where
the failure of such representations and warranties to be so true and
correct (without giving effect to any limitation as to materiality or
material adverse effect on Ross included therein) would not, individually
or in the aggregate, have a material adverse effect on Ross;
- Ross having performed or complied with in all material respects all
agreements and covenants required to be performed or complied with by
Ross under the merger agreement at or prior to the effective time of the
merger;
- the absence of a "material adverse effect," as defined below, with
respect to Ross since the date of the merger agreement; and
- the number of shares held by Ross stockholders that did not vote in favor
of the merger and properly demanded in writing appraisal for such shares
under Delaware law (and that have not withdrawn or lost the right to such
appraisal) being less than 9% of the issued and outstanding shares of
Ross common stock.
CONDITIONS TO ROSS' OBLIGATION TO COMPLETE THE MERGER
Ross' obligation to complete the merger is subject to the satisfaction of
the following conditions prior to the effective time of the merger:
- the representations and warranties of chinadotcom set forth in the merger
agreement that are qualified as to materiality being true and correct,
and the representations and warranties of chinadotcom set forth in the
merger agreement that are not so qualified being true and correct in all
material respects, in each case, as of the effective time of the merger
as though made at the effective time, except to the extent such
representations and warranties relate to an earlier date, then as of such
earlier date;
- chinadotcom having performed or complied with in all material respects
all agreements and covenants required to be performed or complied with by
chinadotcom under the merger agreement at or prior to the effective time
of the merger; and
- the absence of a material adverse effect with respect to chinadotcom
since the date of the merger agreement.
The merger agreement provides that a "material adverse effect" means, when
used in reference to Ross or chinadotcom, any change, event, circumstance,
development or effect on Ross and its subsidiaries or the chinadotcom group of
companies, as applicable, that is or is reasonably likely to be materially
adverse to the business, assets, properties, financial condition or results of
operations of Ross and its subsidiaries or the chinadotcom group of companies,
as applicable, taken as a whole. There will be no material adverse effect,
however, in the event that the change, event, circumstance, development or
effect in question resulted from:
- a change in general economic or financial market conditions, except to
the extent such change, event, circumstance, development or effect
disproportionately affects either Ross or chinadotcom, as applicable,
relative to the technology industry as a whole;
- any acts of terrorism or war, except to the extent such change, event,
circumstance, development or effect disproportionately affects either
Ross or chinadotcom, as applicable, relative to the technology industry
as a whole;
- a change in industry conditions in the industries in which Ross and
chinadotcom, respectively, operate, except to the extent such change,
event, circumstance, development or effect disproportionately affects
either Ross or chinadotcom, as applicable, relative the technology
industry as a whole;
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- the announcement, pendency or consummation of the merger agreement,
provided that Ross or chinadotcom, as applicable, shall have used
reasonable best efforts to ameliorate or prevent such adverse change,
event, circumstance, development or effect; or
- compliance with the terms of, or the taking of any action required by,
the merger agreement, provided that Ross or chinadotcom, as applicable,
shall have used reasonable best efforts to ameliorate or prevent such
adverse change, event, circumstance, development or effect.
NO SOLICITATION OF ACQUISITION PROPOSALS BY ROSS
The merger agreement contains detailed provisions prohibiting Ross from
seeking an alternative transaction. Under these "no solicitation" provisions,
Ross agreed that neither it nor any of its subsidiaries will, directly or
indirectly through any officer, director, employee, representative, agent
(collectively, "Ross' representatives") or otherwise:
- solicit, initiate or take any action intended to encourage the submission
of any "acquisition proposal," as defined below; or
- participate in any discussions or negotiations regarding, or furnish to
any Person any non-public information with respect to, an acquisition
proposal.
Further, Ross agreed that neither its board of directors nor any committee of
its board will:
- withhold, withdraw, amend, change, or modify in a manner adverse to
chinadotcom the approval or recommendation by the board of directors of
the merger and the merger agreement; or
- approve or recommend or enter into any agreement with respect to an
acquisition proposal.
In addition, Ross has agreed to:
- immediately cease and terminate any existing discussions or negotiations
with any persons conducted before execution of the merger agreement with
respect to any acquisition proposal, and instruct each Ross
representative to comply with this obligation;
- promptly notify chinadotcom of the existence of any proposal received by
Ross regarding, or any discussion or negotiation relating to, any
acquisition proposal;
- promptly communicate to chinadotcom the material terms of any proposal,
discussion or negotiation regarding any acquisition proposal (and provide
copies of any written materials received by Ross or Ross' representatives
describing such acquisition proposal) and the identity of the party
making such proposal or engaging in such discussion or negotiation;
- promptly provide to chinadotcom any non-public information concerning
Ross provided to any other person in connection with any acquisition
proposal, if such information was not previously provided to chinadotcom;
and
- keep chinadotcom reasonably informed on a prompt basis of the status and
details of any acquisition proposal, any amendments or proposed
amendments to the material terms of any acquisition proposal and the
status of any discussions or negotiations relating to any acquisition
proposal.
Under certain circumstances, however, Ross may furnish information to, or
engage in discussions or negotiations with, any person that makes an unsolicited
bona fide acquisition proposal to Ross and, prior to the approval by the Ross
stockholders of the merger, the Ross board of directors may withhold, withdraw
or modify its approval or recommendation of the merger, provided that:
- the board of directors of Ross determines in good faith (after
consultation with its advisors) that the acquisition proposal is a
"superior proposal," as defined below;
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- the board of directors of Ross determines in good faith (after
consultation with outside legal counsel), in the exercise of its
fiduciary duties, that to do otherwise would not be in the best interests
of the Ross stockholders; and
- Ross enters into a confidentiality agreement with that person, the terms
of which are no more favorable to the person or entity making the
alternative acquisition proposal as the terms of the confidentiality
agreement entered into with chinadotcom.
Even in such a case, Ross is required to notify chinadotcom of the
existence of the superior proposal and the identity of the party making the
proposal and keep chinadotcom reasonably informed of the status and details of
the proposal, including any changes in its material terms.
For purposes of the merger agreement, "acquisition proposal" means:
- any proposal or offer from any person other than chinadotcom or CDC
Software Holdings relating to any direct or indirect acquisition of (a)
all or a substantial part of the assets of Ross and its consolidated
subsidiaries, taken as a whole, or (b) over 15% of any class of equity
securities of Ross or of any of its material consolidated subsidiaries;
- any tender offer or exchange offer, that, if consummated, would result in
any person obtaining beneficial ownership of 15% or more of any class of
equity securities of Ross or any of its consolidated subsidiaries; or
- any proposal or offer from any person other than chinadotcom or CDC
Software Holdings regarding any merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar
transaction involving Ross or any of its consolidated subsidiaries.
For purposes of the merger agreement, "superior proposal" means an
unsolicited acquisition proposal that:
- relates to more than 50% of the outstanding shares of Ross common stock
or all or substantially all of the assets of Ross and its subsidiaries
taken as a whole;
- is made by a person that the board of directors of Ross has reasonably
concluded in good faith will have adequate sources of financing to
consummate such proposal; and
- is on terms that the board of directors of Ross determines in its good
faith judgment (after receiving the advice of a financial advisor and
taking into account all legal and regulatory matters, break-up fees,
expense reimbursement provisions and conditions to consummation) are more
favorable to the Ross stockholders than the merger agreement, taken as a
whole.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
Under the merger agreement, chinadotcom has agreed to cause the surviving
corporation to provide in its by-laws for the indemnification of directors and
officers of Ross, on terms no less favorable to such directors and officers than
the terms with respect to indemnification set forth in the Ross organizational
documents. In addition, with respect to indemnification agreements between Ross
and certain of its officers and each of its directors, chinadotcom has agreed to
cause the surviving corporation to honor each indemnification agreement that is
in effect prior to the effective time of the merger and, as a result,
chinadotcom will be bound by the obligations of Ross to indemnify these
directors and officers for liabilities and expenses arising out of claims or
proceedings against these directors and officers by reason of their status as
directors and/or officers of Ross. chinadotcom has further agreed to purchase a
directors' and officers' liability insurance policy in form and substance
reasonably satisfactory to Ross to provide coverage with respect to matters
occurring prior to the effective time of the merger. Such insurance policy will
have a term of five years and contain terms not materially more favorable to
directors and officers than the terms of Ross' directors' and officers'
liability insurance policy and will be subject to a price restriction of $1
million.
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TERMINATION OF THE MERGER AGREEMENT
RIGHT TO TERMINATE
The merger agreement may be terminated and the merger abandoned at any time
prior to the effective time, whether before or after approval of the merger by
the Ross stockholders:
- by mutual written consent of chinadotcom and Ross;
- by either chinadotcom or Ross if:
- the merger has not been completed on or before September 1, 2004, but
neither chinadotcom nor Ross may terminate the merger agreement if such
party's breach of a representation, warranty or covenant is the reason
that the merger has not been completed by such date;
- any governmental authority issues an order, injunction, decree or ruling
(whether temporary, preliminary or permanent) that has become final and
non-appealable and has the effect of making the completion of the merger
illegal, or otherwise prevents the completion of the merger; or
- Ross' stockholders do not approve and adopt the merger agreement at the
Ross special meeting;
- by chinadotcom if the board of directors of Ross has (1) withheld,
withdrawn or modified in a manner adverse to chinadotcom, its approval or
recommendation of the merger agreement and the merger, or (2) recommended
or approved any acquisition proposal (as defined under the heading "-- No
Solicitation of Acquisition Proposals by Ross," above); or
- by Ross upon two business days' notice to chinadotcom if, prior to the
approval and adoption of the merger agreement and the merger by the Ross
stockholders, the Ross board determines in good faith (after consultation
with its advisors) in the exercise of its fiduciary duties, that, in
order to enter into a definitive agreement with respect to a superior
proposal (as defined under the heading "-- No Solicitation of Acquisition
Proposals by Ross," beginning on page 114), such termination is in the
best interests of the Ross stockholders; provided that such termination
will not be effective until Ross has paid to chinadotcom the termination
fee and termination expenses (as described below under the heading
"Termination Fee and Expenses").
EFFECT OF TERMINATION
If the merger agreement is terminated as described above, the merger
agreement will become void and have no effect, except for provisions in the
merger agreement regarding payment of termination fee and expenses. In addition,
if the merger agreement is so terminated, there will be no liability on the part
of chinadotcom or Ross (other than any applicable liability to pay the
termination fee and expenses), except to the extent that the termination results
from a breach by any party of any of its representations, warranties, covenants
or agreements contained in the merger agreement prior to the date of
termination. The confidentiality agreement, dated November 21, 2002, between
Ross and a subsidiary of chinadotcom will continue in effect notwithstanding any
termination of the merger agreement.
TERMINATION FEE AND EXPENSES
Ross will reimburse chinadotcom for all expenses, up to a limit of
$750,000, incurred by chinadotcom in connection with the merger agreement and
the merger if:
- the merger agreement is terminated by chinadotcom because:
- the board of directors of Ross or any committee thereof has withheld,
withdrawn or modified, in a manner adverse to chinadotcom, its approval
or recommendation of the merger agreement or the merger; or
- the board of directors of Ross has recommended or approved any
acquisition proposal; or
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- the following three events have occurred:
- any person or entity has commenced, publicly proposed or communicated to
Ross an acquisition proposal that is publicly disclosed;
- the merger agreement and the merger have not been approved and adopted
at the Ross stockholders' meeting; and
- the merger agreement has been terminated by chinadotcom or Ross because
of the failure of Ross' stockholders to approve and adopt the merger
agreement at the Ross stockholders' meeting.
Ross will pay to chinadotcom a termination fee of $1,350,000 and, unless already
paid, reimburse chinadotcom for all expenses, up to a limit of $750,000,
incurred by chinadotcom in connection with the merger agreement and the merger
if:
- the merger agreement is terminated by chinadotcom because:
- the board of directors of Ross or any committee thereof has withheld,
withdrawn or modified, in a manner adverse to chinadotcom, its approval
or recommendation of the merger agreement or the merger, or
- the board of directors of Ross has recommended or approved any
acquisition proposal; and
- Ross enters into, or submits to the Ross stockholders for approval, an
agreement with respect to, an acquisition proposal, or an acquisition
proposal is consummated, in each case within 12 months after such
termination of the merger agreement.
Ross is also obligated to pay to chinadotcom the $1,350,000 termination fee and
to reimburse chinadotcom for all expenses, up to a limit of $750,000, incurred
by chinadotcom in connection with the merger agreement and the merger, if the
merger agreement has been terminated by Ross because:
- prior to the Ross stockholders' meeting, the Ross board of directors has
determined in good faith, after consultation with its advisors, and in
the exercise of its fiduciary duties that, in order to enter into a
definitive agreement with respect to a superior proposal, such
termination is in the best interests of the Ross stockholders; and
- Ross has given two business days' prior written notice to chinadotcom,
setting forth in reasonable detail the identity of the person or entity
making, and the final terms and conditions of, the superior proposal and
has duly considered any proposals that chinadotcom may have made during
such two business day period.
AMENDMENT OF THE MERGER AGREEMENT; WAIVER
The merger agreement may be amended by the parties in writing by action of
the chinadotcom board of directors, the CDC Software Holdings board of directors
and the Ross board of directors at any time before or after the Ross
stockholders adopt and approve the merger agreement and the merger, but after
such adoption and approval, no amendment may be made that would reduce the
amount or change the type of the merger consideration into which shares of Ross
common stock will be converted upon the consummation of the merger.
At any time before the completion of the merger, any party to the merger
agreement may, in writing:
- extend the time for the performance of any of the obligations or other
acts of any other party;
- waive any inaccuracies in the representations and warranties of the other
party contained in the merger agreement or in any document delivered
under the merger agreement; or
- waive compliance with any of the agreements of any other party or any
condition to its own obligations contained in the merger agreement.
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By law, neither chinadotcom, CDC Software Holdings nor Ross can waive:
- the requirement that the Ross stockholders approve the merger; or
- any court order or law preventing the completion of the merger.
Whether any of the other conditions would be waived would depend on the
facts and circumstances as determined by the reasonable business judgment of the
chinadotcom board of directors, CDC Software Holdings' board of directors or the
board of directors of Ross. If chinadotcom, CDC Software Holdings or Ross waived
compliance with one or more of the other conditions and the condition was deemed
material to a vote of the Ross stockholders, Ross would have to resolicit
stockholder approval before closing the merger. Ross does not intend to notify
its stockholders of any waiver that, in the judgment of Ross' board of
directors, does not require resolicitation of shareholder or stockholder
approval. Any material change to the terms of the merger may require circulation
of an amended prospectus or a prospectus supplement.
AMENDMENTS
Amendment No. 1
The merger agreement as signed contemplated that the parties would explore
whether the transaction could be effected as a tax-free organization. Between
September 4, 2003 and October 2, 2003, the parties and their counsel examined
this issue, but concluded that given the complexities associated with attempting
to effect the transactions as a tax-free reorganization, as well as certain
potential adverse consequences associated with effecting the transaction on that
basis, it was in the best interests of Ross and its stockholders to effect the
transaction as a taxable transaction.
Accordingly, on October 3, 2003, chinadotcom, CDC Software Holdings and
Ross executed an amendment to the merger agreement removing the obligations of
the parties to use their reasonable best efforts to cause the merger to qualify
as a tax-free reorganization and removing chinadotcom's obligation to cause its
outside counsel to deliver an opinion to Ross and its stockholders relating to a
tax-free reorganization.
Amendment No. 2
On November 18, 2003, chinadotcom announced that it would make a
conditional proposal to acquire Pivotal. During the following two weeks,
chinadotcom engaged Pivotal and members of its special committee in discussions
relating to its conditional proposal, and on December 1, 2003, chinadotcom
submitted a definitive offer to acquire Pivotal. Pivotal accepted chinadotcom's
definitive offer on December 8, 2003.
Based on Ross' concerns that the proposed acquisition of Pivotal and
chinadotcom's concerns that the SEC review process irrespective of the proposed
acquisition of Pivotal would each have the effect of delaying the mailing of the
proxy statement such that the closing of the merger would be delayed past
January 15, 2004, chinadotcom and Ross entered into discussions to amend the
merger agreement to extend the date after which either party could terminate the
merger agreement and reduce uncertainty as to the completion of the transaction.
From November 26, 2003 until January 7, 2004, chinadotcom and Ross discussed the
terms and conditions of a second amendment to the merger agreement and proposed,
among other things, to:
- remove the floor of $8.50 and the ceiling of $10.50 applicable to the
average price of chinadotcom common shares used to calculate the number
of chinadotcom common shares to be received by Ross stockholders
receiving cash-and-shares in the merger;
- provide Ross stockholders with an option to receive at the closing of the
merger, for each share of Ross common stock held, $17.00 in cash rather
than $19.00 in cash-and-shares;
- provide for an adjustment to the exchange ratio that if the average price
of chinadotcom common shares is less than $8.50 chinadotcom can elect to
adjust the exchange ratio, such that Ross
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stockholders electing to receive cash-and-shares in the merger would
receive, for each share of Ross common stock held, (1) $5.00 in cash, (2)
a number of chinadotcom common shares determined by dividing $14.00 by a
number determined by chinadotcom that is between the average price and
$8.50, this quotient being referred to as the adjusted exchange ratio,
and (3) additional cash in an amount equal to the average price
multiplied by the difference between the original exchange ratio minus
the adjusted exchange ratio;
- eliminate provisions permitting Ross to terminate the merger agreement if
the average price of chinadotcom common shares was below $8.50 per share,
unless chinadotcom agreed to calculate the exchange ratio based on the
actual average closing price of chinadotcom common shares for the 10
trading days ending on, and including, the second trading day before the
closing date of the merger;
- extend the date after which either chinadotcom or Ross could terminate
the merger from March 1, 2004 to July 1, 2004; and
- increase the commitment of the parties to cooperate in the operation of
the two companies prior to closing.
In considering these proposed terms of the second amendment, Ross consulted
with Broadview as to the effect of the proposed changes on the merger
consideration to be received by Ross stockholders. Broadview advised Ross that
the changes did not affect its original fairness opinion because the elimination
of the $8.50 floor on the average price of chinadotcom shares was an improvement
and because Broadview in its original opinion did not ascribe material value to
the upside that Ross stockholders would receive if chinadotcom shares had a
market value above $10.50.
Between November 26, 2003 and January 7, 2004, each of the Ross and the
chinadotcom board was updated regularly on the discussions concerning the
proposed second amendment. On January 7, 2004, the Ross board approved and
declared advisable the second amendment on the proposed terms described above,
and chinadotcom, and CDC Software Holdings and Ross executed a second amendment
to the merger agreement incorporating these proposed terms. On December 1, 2003,
the chinadotcom board approved the terms and conditions that were proposed to be
set forth in the second amendment and authorized management as well as Thomas
Britt, chairman of its audit committee to negotiate and conclude an agreement
subject to regular updates that were provided to the board for comment and final
approval.
In addition to the proposed terms described above, the second amendment to
the merger agreement changed the structure of the merger under certain
circumstances to ensure that the merger is effected as a taxable transaction.
If, immediately prior to the effective time of the merger, the aggregate value
of chinadotcom common shares to be issued in the merger would comprise 80% or
more of the aggregate value of the consideration (and any cash in lieu of
fractional shares) to be issued and paid to Ross stockholders in the merger,
chinadotcom would be required to transfer or contribute all of the outstanding
shares of CDC Software Holdings, Inc. to another direct, wholly owned subsidiary
of chinadotcom, so that, immediately prior to the effective time of the merger,
CDC Software Holdings, Inc. would be an indirect wholly owned subsidiary of
chinadotcom.
Amendment No. 3
On April 29, 2004, chinadotcom and Ross entered into a third amendment to
the merger agreement pursuant to which the parties agreed that the deadline for
Ross stockholders to elect to receive either cash or a combination of cash and
chinadotcom shares in connection with the merger would be the business day
immediately before the closing of the merger. Prior to the amendment, such
deadline was the tenth day following the closing of the merger. chinadotcom and
Ross agreed that the amendment would facilitate the final determination of the
exact amount of the merger consideration for Ross stockholders electing to
receive cash and shares, allow chinadotcom to more efficiently deliver the
merger consideration to Ross stockholders, and allow Ross stockholders to
receive the merger consideration in a more timely manner.
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Amendment No. 4
On May 12, 2004, chinadotcom and Ross entered into a fourth amendment to
the merger agreement in order to extend the date after which either chinadotcom
or Ross could terminate the merger from July 1, 2004 to September 1, 2004.
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AGREEMENTS RELATED TO THE MERGER
STOCKHOLDER AGREEMENTS
Messrs. Tinley, Webster and Johnston have entered into stockholder
agreements with chinadotcom agreeing to vote all shares of Ross common stock
beneficially owned by each of them, or that they otherwise have the power to
vote:
- in favor of adoption and approval of the merger agreement and the merger
and any other matter necessary for consummation of the transactions
contemplated by the merger agreement; and
- against any proposal for any recapitalization, reorganization,
liquidation, merger, sale of assets or other business combination between
Ross and any person (other than the merger).
As additional assurance to chinadotcom that these shares will be voted in
favor of the merger, each of these stockholders has granted chinadotcom a proxy
to vote shares of Ross common stock owned by them at the special meeting of Ross
stockholders in the manner described above. It is not intended that the shares
subject to the stockholder agreements be voted more than once. For example, a
vote in favor of the merger and related transactions by chinadotcom under a
proxy will satisfy the requirement that the corresponding stockholder vote in
favor of the merger.
Although these stockholder agreements expired on March 1, 2004, Messrs.
Tinley, Webster and Johnston currently intend to vote their Ross common stock in
favor of the adoption and approval of the merger agreement and the merger.
PREFERRED STOCKHOLDER AGREEMENT
Benjamin W. Griffith, III has entered into a preferred stockholder
agreement with chinadotcom and Ross agreeing to vote all shares of Ross common
stock and Ross preferred stock beneficially owned by Mr. Griffith, or that he
otherwise has the power to vote:
- in favor of adoption and approval of the merger agreement and the merger
and any other matter necessary for consummation of the transactions
contemplated by the merger agreement; and
- against any proposal for any recapitalization, reorganization,
liquidation, merger, sale of assets or other business combination between
Ross and any person (other than the merger).
As additional assurance to chinadotcom that these shares will be voted in
favor of the merger, Mr. Griffith has granted chinadotcom a proxy to vote shares
of Ross common stock and Ross preferred stock owned by him at the special
meeting of Ross stockholders in the manner described above. It is not intended
that the shares subject to the preferred stockholder agreement be voted more
than once. For example, a vote in favor of the merger and related transactions
by chinadotcom under a proxy will satisfy the requirement that the corresponding
stockholder vote in favor of the merger. Mr. Griffith has further agreed that,
as of immediately prior to the effective time of the merger, all shares of Ross
preferred stock held by him will be converted into shares of Ross common stock.
Mr. Griffith entered into the preferred stockholder agreement in consideration
of chinadotcom's willingness to enter into the merger agreement and in
consideration of the representations and warranties made by chinadotcom in the
preferred stockholder agreement. Mr. Griffith received no additional
consideration for his agreement to enter into the preferred stockholder
agreement.
As of the record date for the Ross special meeting, Messrs. Tinley,
Webster, Johnston and Griffith beneficially owned, excluding stock options, a
total of 239,928 shares of Ross common stock and 500,000 shares of Ross
preferred stock, representing approximately 23.25% of the outstanding shares of
Ross capital stock entitled to vote at the Ross special meeting assuming the
conversion of Mr. Griffith's Ross preferred stock into Ross common stock.
The preferred stockholder agreement was amended on January 31, 2004 and
June 14, 2004 to extend its term. As amended, the preferred stockholder
agreement will terminate upon the first to occur of:
- the completion of the merger;
- the termination of the merger agreement;
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- September 1, 2004;
- written notice by chinadotcom to Mr. Griffith of termination of the
preferred stockholder agreement; and
- the withdrawal or adverse modification by the Ross board of its approval
or recommendation of the merger agreement.
MANAGEMENT SERVICES AGREEMENT
On December 9, 2003, Ross entered into a management services agreement with
Cayman First Tier, the joint venture company through which chinadotcom holds a
51% interest in IMI. Under the management services agreement, Ross agreed to
provide management and consulting services to Cayman First Tier, including
making between 25% and 50% of Mr. Tinley's business time available to Cayman
First Tier, for a fee of $30,000 per month plus expenses. The management
services agreement would terminate upon the closing of the merger. In addition,
either Ross or Cayman First Tier may terminate the agreement upon thirty days'
written notice to the other; provided that Ross shall not have unreasonably
exercised its right to terminate the agreement.
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PROPOSAL NO. 2
POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING
GENERAL
If Ross fails to receive a sufficient number of votes to adopt the merger
agreement and approve the merger, Ross proposes to adjourn the special meeting
for the purpose of soliciting additional proxies to approve these proposals.
Proxies initially cast in favor of the merger agreement and the merger will be
voted in favor of the approval of these proposals at the special meeting
subsequently convened unless those proxies are revoked as described under "The
Ross Special Meeting -- Revocability of Proxies".
Approval of the proposal to adjourn the special meeting for the purpose of
soliciting additional proxies requires the affirmative vote by the holders of a
majority of the shares of the Ross common stock represented at the special
meeting, whether or not a quorum is present.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors recommends a vote "FOR" the approval of the
adjournment of the special meeting, if necessary, to solicit additional proxies.
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THE COMPANIES
CHINADOTCOM
The following information is provided by chinadotcom.
chinadotcom is a leading provider of enterprise software and solutions,
value-added mobile services and applications, and marketing and advertising
services. chinadotcom offers the following services for companies throughout
Greater China and Asia, North America, the United Kingdom and Europe:
- software products and services, including implementation and development
of packaged software for use in enterprise resource planning targeting
mid-market manufacturers;
- value-added mobile services and applications, including offering
value-added short messaging services to mobile phone subscribers in China
and providing mobile development and technology services in Korea for
leading telecom network operators, mobile handset manufacturers and
mobile application and content providers.
- technology services and outsourcing, including offering economical,
high-quality software development services to chinadotcom's enterprise
software customer base utilizing programmers located principally in China
and India; and
- marketing and advertising services, including developing targeted
advertising campaigns utilizing information gathered from chinadotcom's
proprietary databases.
Enterprise resource planning involves the technique of supporting and
automating the processes of an organization. Enterprise software attempts to
achieve company-wide integration of business and technical information across
multiple divisions and organizational boundaries, such as finance,
manufacturing, logistics, human resources and sales, utilizing common databases
and programs that share data real time across multiple business functions.
chinadotcom's enterprise software business focuses on key industry groups
including manufacturing for export, finance and travel, and in key business
areas, including supply chain management, human resource and payroll
administration and customer relationship management. chinadotcom aims to
leverage its expertise in its core business areas through alliances and
partnerships to help drive innovative client solutions. chinadotcom currently
has operations in more than 14 markets internationally, with over 1,400
employees.
In connection with chinadotcom's strategy to increase its high margin
revenue base in the software services and products area, chinadotcom has formed
a separate wholly owned software unit, CDC Software. CDC Software is focused on
building chinadotcom's intellectual property asset base, establishing
partnerships with software vendors and broadening overall software product
offerings in the areas of enterprise solutions and integration. chinadotcom's
management may pursue CDC Software's strategy through acquisitions, strategic
partnerships, joint ventures, consolidation of chinadotcom's software assets and
restructurings or combinations of the foregoing approaches. chinadotcom
currently has approximately 700 installations and more than 540 enterprise
customers in the Asia-Pacific region.
Upon the completion of the merger, Ross would operate under chinadotcom's
CDC Software unit. chinadotcom owns a 51% stake in Cayman First Tier, the
holding company of IMI, and recently acquired 100% of Pivotal. IMI is an
established provider of software to the supply chain management sector
principally servicing customer packaged goods manufacturers and suppliers,
retail stores and wholesale distributors across Europe and the United States.
IMI has developed software solutions for the grocery, specialty goods, and
pharmaceutical and over-the-counter drugs industries. Pivotal is a leading
international customer relationship management company that provides a complete
set of highly flexible customer relationship management applications and
implementation services for mid-sized enterprises, with over 1,700 customers
worldwide.
Through chinadotcom Mobile Interactive Corporation, or CDC Mobile, a newly
formed wholly owned subsidiary, chinadotcom provides mobile services and
applications, mobile technology consulting, and advertising and interactive
media services in Asia. Value-added mobile services have increased in
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popularity in China in recent years. The most popular of these services is short
messaging services, or SMS, which allows subscribers to send short messages and
access various products and services for delivery to their mobile handsets on
demand. In April 2003, CDC Mobile's 81.3% owned subsidiary, hongkong.com
Corporation, or hongkong.com, acquired Newpalm, a leading SMS provider based in
Beijing, China, to deliver chinadotcom's mobile services and products in China.
Newpalm has access to the large mobile subscriber base in China through the two
mobile operators, China Mobile and China Unicom. As of December 31, 2003,
Newpalm had 5.5 million subscriptions and generated revenues of $16.9 million
for the year then ended. CDC Mobile intends to utilize its industry knowledge
and international experience providing mobile technology consulting and
development services through its mobile consulting and development services in
Korea for Korean leading telecom network operators to enhance chinadotcom's
mobile services and applications offerings in China.
Through chinadotcom's wholly owned outsourcing subsidiary, CDC Outsourcing,
chinadotcom provides customers in countries such as the United Kingdom, the
United States and Australia with elements of workflow, such as client and
project management services using technologies and applications sourced from
chinadotcom's low-cost outsourcing centers in China or India. In February 2003,
CDC Outsourcing completed the acquisition of Praxa, an Australian information
technology, or IT, outsourcing and professional services organization focusing
on the development of relationships with large organizations that have a need
for outsourced application development, management and maintenance. Praxa has an
established client base consisting mainly of large enterprises and government
agencies in Australia. chinadotcom anticipates that Praxa will provide a
distribution platform for chinadotcom's self-developed software products, as
well as for the range of software solutions that chinadotcom currently delivers
across the Asia-Pacific region. In May 2003, CDC Outsourcing announced a 51%-49%
joint venture with vMoksha Technologies, or vMoksha, an offshore IT outsourcing
company headquartered in Bangalore, India. The intention of this joint venture
is to provide a broad range of outsourcing related services to major software
vendors and enterprises in the United States, Europe and Asia. CDC Outsourcing
has sales and marketing offices in the United States, the United Kingdom and
Australia, while its offshore development is located in India and China.
chinadotcom provides advertising and marketing services primarily through
Mezzo Business Databases Pty Limited, or Mezzo Business. Mezzo Business
maintains multiple databases containing information about companies and
businesses in Australia and New Zealand, such as standard and proprietary
industry codes, sales revenue turnover, number of employees and company contact
details. Mezzo Business conducts direct marketing activities for clients using
information available from its database, such as telemarketing campaigns
conducted through an in-house call center, direct mailing campaigns, and
management of customer loyalty programs and campaigns. chinadotcom also provides
database marketing services through Mezzo Interactive Pty Limited, or Mezzo
Interactive. Mezzo Interactive focuses on growing chinadotcom's database
marketing business in the areas of traditional direct marketing and e-mail
marketing utilizing data mining techniques, which involves a process of
analyzing significant amounts of data to uncover patterns and relationships.
Data mining has become an important part of customer relationship management as
a method to better understand customer behavior and preferences.
GOALS AND STRATEGY
chinadotcom has historically operated as a pan-Asian integrated Internet
company with a business model centered around its e-business Solutions and
advertising businesses, including e-marketing services, portal services and
other media. chinadotcom's business model has evolved away from a pan-Asian
Internet company, and chinadotcom's goal in enterprise software and outsourced
software development is to become a leading integrated enterprise solutions
company offering a complete range of software products to meet the needs of
mid-sized enterprises, with the capability of providing high quality, low cost
outsourced software development services to develop additional products and
offer support services complementary to its product line to meet its customers'
needs. The key elements of chinadotcom's strategy are as follows:
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Grow chinadotcom's product line through selective
acquisitions. chinadotcom has been growing the breadth of enterprise software
products it offers, and will seek to acquire additional software and
technologies to complement the capabilities which its products offer. In March
2002, chinadotcom acquired OpusOne Technologies International which has
developed several proprietary enterprise software related applications,
including human resources and payroll administration, attendance tracking, Web
based employee self service applications, and financial accounting applications.
In September 2003, chinadotcom acquired a 51% stake in the holding company of
IMI which offers warehouse management, order management and supply chain
management software. In February 2004, chinadotcom completed its acquisition of
Pivotal which offers a complete set of highly flexible CRM applications for
mid-sized enterprises. chinadotcom believes that mid-market manufacturers would
find appealing the ability to contract with a single company which can offer a
complete range of enterprise software products to meet all of their enterprise
software needs, and chinadotcom will continue to seek to acquire from around the
world "best of breed" software and technologies to complement the line of
enterprise software products which it offers.
Extend existing applications and product scope. chinadotcom intends to
continue the development of its applications to add new functionality. For
example, in April 2003, Pivotal introduced Pivotal 5 which features assisted
selling, comprehensive marketing automation functionality, new eService
capabilities, and significant platform enhancements to improve flexibility, ease
of customization, user productivity, and web services enablement. chinadotcom
also released versions 6.1 and 6.2 of its OpusOne human resource and payroll
solution with significantly improved flexibility and functionality. chinadotcom
developed a new "HR Analyzer" module that provides business intelligence
functionality to human resource and payroll databases. In 2004, CDC Software
intends to release version 2.1.5 of Executive Suite, its fully integrated
financial and business performance management application. Version 2.1.5 is
expected to enable double-byte language for the Asia markets and other
functional improvements. chinadotcom believes continued investments in its core
products will increase chinadotcom's competitiveness in attracting new customers
and increase its cross-selling opportunities within its existing customer base.
In addition, chinadotcom plans to offer new versions of its applications that
support a wider variety of international customers and their respective business
practices and languages. chinadotcom also intends to continue to develop
industry products for specific industry segments ("micro-verticals") in high
growth markets where it believe it can cost effectively generate leads and
enhance chinadotcom's product differentiation.
Leverage upon cross-selling opportunities with chinadotcom's expanded
customer base. With the completion of chinadotcom's recent acquisition of
Pivotal, chinadotcom has added an additional 1,700 customers to its
customer-base which totals approximately 3,200 worldwide, including
approximately 1,000 customers from chinadotcom's pending acquisition of Ross.
chinadotcom believes that this large, global customer base provides a solid
platform for cross-selling synergies within the group, and chinadotcom plans on
offering to individual customers the capability of purchasing from its group of
related companies complementary product and service offerings. chinadotcom
further believe that its ability to approach individual customers is further
enhanced with its greater global scale and global marketing presence. Through
chinadotcom's group of related companies, chinadotcom has a presence in North
America, the PRC, India, Japan, Singapore, France, Germany, Ireland, the United
Kingdom, Australia and New Zealand, among other places.
chinadotcom will target the emerging market in Greater China for
applications software and leverage upon its experience and well-recognized brand
name in the Asia Pacific region. While chinadotcom has clients worldwide, one
of chinadotcom's key target markets will be the Greater China market.
chinadotcom believes that the potential growth of the enterprise software and
consulting services market for mid-market manufacturing is significant in
Greater China because many companies are re-locating their manufacturing
operations to Greater China due to lower overhead and labor costs, and because
enterprise software products developed for the mid-market are more appropriate
for the Greater China market due to the facts that in general, such products are
easier to use, can be implemented rapidly and can be easily customized which
helps to yield a low total cost of ownership; yet, such products can also be
scaled with the growing needs of the customer. chinadotcom believes that the
chinadotcom brand is well-recognized throughout
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China, and it intends to leverage upon its knowledge, experience and brand name
in the Asia Pacific region to grow its business.
Expand development and support capabilities, particularly through
outsourcing to China and India. Through CDC Outsourcing, chinadotcom has
invested in its ability to offer high quality, low cost software development and
support capabilities in India and China. chinadotcom's outsourcing capability
has grown through its 51%-49% joint venture with vMoksha technologies, an
offshore IT outsourcing company headquartered in Bangalore, India which
chinadotcom entered into in May 2003 and chinadotcom's February 2003 acquisition
of Praxa, an Australian IT outsourcing and professional services organization.
chinadotcom believes that these are important investments which will ultimately
help its customers lower costs of critical functions such as software
customization and enhancements, research and development, professional services
and technical support. For example, in October 2003, chinadotcom announced that
Ross intends to outsource to chinadotcom's development center in China the
development of an executive analytics application designed to provide users of
Ross' iRenaissance enterprise application with a summary of key performance
indicators of financial metrics, sales, inventory and production information.
chinadotcom will continue to expand its development and support presence in
China and India as part of its strategy to build out its product line and
support its global customer base.
SOFTWARE AND OTHER INVESTMENT INITIATIVES
chinadotcom established CDC Software in 2002 to provide the sales,
marketing, support and localized infrastructure necessary to enter into a master
distributorship and value-added reseller arrangements. CDC Software has since
entered into master distributorship arrangements with a number of software
companies to distribute business applications to the Greater China market,
including arrangements with Vignette to distribute content management and portal
solutions, Best Software to distribute financial accounting and process
manufacturing applications and Ross to distribute enterprise software
applications to process manufacturers.
In March 2002, chinadotcom acquired a majority stake in OpusOne
Technologies, a leading provider of business management software solutions in
the PRC. In May 2003, OpusOne Technologies became a wholly-owned subsidiary of
chinadotcom when chinadotcom purchased the remaining interest in OpusOne
Technologies that it did not otherwise already own. chinadotcom believes the
acquisition of OpusOne Technologies allows chinadotcom to more quickly enter and
gain experience in the enterprise software market because it has developed
several proprietary enterprise software related applications, including PowerHRP
which is used in human resources and payroll administration, PowerATS which is
an attendance tracking system, PowerESS which is a Web-based employee self
service application, and PowerBooks which is a financial accounting application.
Furthermore, the acquisition of OpusOne Technologies enhanced chinadotcom's
intellectual property portfolio. After establishing CDC Software, the
proprietary enterprise software related applications of OpusOne Technologies
have become part of CDC Software.
PK Information Systems In August 2003, chinadotcom acquired PK Information
Systems, an established IT services business in Australia which has specialized
capabilities in the areas of .NET application development and business
intelligence solutions, with clients mainly in the New South Wales state
government sector. The skill sets of PK Information Systems are complementary to
that of Praxa, and the acquisition is expected to result in operational
synergies.
IMI In September 2003, chinadotcom acquired a majority 51% stake in Cayman
First Tier, the holding company of IMI, an established international provider of
software to the supply chain management sector principally across Europe and the
United States, which represented a significant step in chinadotcom's software
development and outsourcing strategy. The acquisition of the controlling stake
in IMI was made through the formation of a joint venture between chinadotcom's
CDC Software unit in which CDC Software holds a 51% interest, and Symphony
Technology Group, a Palo Alto, California-based venture capital company
exclusively focused on software and technology investments, which contributed
IMI to Cayman First Tier, holds the remaining 49% interest in Cayman First Tier.
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chinadotcom and Symphony are the only stakeholders in Cayman First Tier. IMI was
previously a public company listed on Nasdaq until January 2003 when Symphony
Technology Group acquired it through a tender offer for all of the outstanding
shares of its common stock, followed by a merger with a wholly-owned subsidiary
of Symphony Technology Group for consideration of approximately $11.5 million.
As a result of these transactions, Symphony had acquired 100% of IMI.
CDC Software provided this joint venture with a $25 million equity
investment and a securitized loan facility of up to $25 million. Encompassed
within this investment is the ability of the joint venture to purchase up to $25
million in newly issued common shares from chinadotcom. The cash investment and
loan facility will primarily be used for further expansion in the supply chain
management software sector via organic growth and acquisitions. As part of the
joint venture agreement, CDC Software will become a master distributor for IMI's
software products in China as well as extend its current offshore development
efforts to CDC Software's development center in China.
Pivotal Corporation In February 2004, chinadotcom acquired Pivotal for
total consideration of $58.0 million which included $35.9 million in cash, 1.85
million chinadotcom common shares with a value of $21.4 million based on the
trading price of chinadotcom the day the acquisition became effective (the value
for these shares was $20.7 million based on the ten day trading average used in
the purchase price formula), transaction costs of approximately $0.2 million,
and assumption of Pivotal stock options of approximately $0.5 million. The
issuance of chinadotcom common shares resulted in approximately a 2% increase in
the number chinadotcom's common shares outstanding to approximately 104 million.
Pivotal offers customer relationship management software that enables
mid-sized enterprises worldwide to acquire, serve and manage their customers.
Customer relationship management products and services automate and manage
marketing, selling and servicing processes. Pivotal's suite of products includes
applications for sales force automation, marketing automation, service
automation, contact center management, partner relationship management and
electronic commerce. These products enable companies to increase revenues and
decrease costs by increasing efficiency within the sales, marketing and service
activities that ultimately increase customer acquisition and loyalty. To achieve
this, Pivotal's products connect employees, partners and customers into one
unified business network. Pivotal's products are available in English, French,
German, Spanish, Portuguese, Japanese, Chinese and Hebrew. More than 1,700
companies around the world have licensed Pivotal products. The customers Pivotal
serves are typically mid-sized enterprises and divisions of large businesses.
Pivotal's target customers are companies and business units in the revenue range
of $100 million to $3 billion. Many of these businesses are responding to
pressures to implement cross-departmental or enterprise-wide business models in
order to increase revenues, margins and customer loyalty. chinadotcom believes
that Pivotal's approach, product architecture and business implementation
methods will appeal to the requirements of mid-sized enterprises which
chinadotcom is also targeting, particularly in the Asia-Pacific region, because
Pivotal's products can be easily customized, quickly integrated with current
systems and business processes, and rapidly deployed to provide increases in
revenues, margins and customer loyalty. chinadotcom believes that the
combination of Pivotal and chinadotcom will result in synergies, including the
following:
- cross-selling, including opportunities for Pivotal to market its customer
relationship management applications and implementation services, which
complement CDC Software's existing product offerings with limited
customer relationship management functionality, in growth markets for
such software in Asia where CDC Software has an established China
presence;
- lowered product support costs, including opportunities to consolidate
back-office functions in administration and operations with other
companies acquired by chinadotcom; and
- outsourcing opportunities, including opportunities to utilize CDC
Software's China and India-based outsourcing services to develop at
lowered cost, enhancements to Pivotal's product line or integrate
Pivotal's products into the other enterprise software products utilized
by prospective clients.
Finally, chinadotcom believes that the products Pivotal has developed for
service industry groups, including commercial banking, asset management, private
banking, capital markets, and medical device manufactur-
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ing, will provide additional depth to the products chinadotcom offers in key
industry groups it targets, particularly in finance and manufacturing for
export.
It is anticipated that the combination of Ross', IMI's and Pivotal's
established customer base, extensive product channels and broad geographic
spread of sales, together with the software platform that CDC Software has
established in Greater China, should provide sufficient business scale to enable
the company to move forward with the execution of its software development and
outsourcing strategy for the Greater China and international markets.
In connection with chinadotcom's software and investment activities, it may
engage in capital raising initiatives.
INTEGRATION OF RECENTLY ACQUIRED AND PROPOSED TO BE ACQUIRED COMPANIES
The following is a discussion of the current state of integration and
on-going integration plans with chinadotcom for those companies which
chinadotcom has partnered with or acquired in 2003. chinadotcom analyzes the
integration of these companies into chinadotcom's operations based on three
different criteria:
- Back office integration, including human resources, payroll and general
administrative functions;
- Financial integration, including financial reporting and controls; and
- Business integration, including new product development and branding.
Pivotal Corporation:
In February 2004, chinadotcom acquired Pivotal in a cash-and-stock
transaction. Pivotal is a leading international customer relationship management
company that provides a complete set of highly flexible customer relationship
management applications and implementation services for mid-sized enterprises,
with over 1,700 clients worldwide.
chinadotcom and Pivotal continue to engage in discussions to identify
possible synergies and plans for back office, financial and business
integration.
Industri-Matematik International Corp:
In September 2003, chinadotcom acquired a 51% stake in Cayman First Tier,
the holding company of IMI, an international provider of software to the supply
chain management sector principally across Europe and the United States. Cayman
First Tier is a joint venture between chinadotcom's CDC Software unit, which
holds a 51% interest, and Symphony Technology Group, a Palo Alto,
California-based venture capital company, which holds the remaining 49%
interest.
In connection with the joint venture arrangement, chinadotcom and Symphony
have entered into arrangements which set forth controls, procedures and policies
affecting the operations of Cayman First Tier. The material agreements relating
to chinadotcom's acquisition of a 51% stake in Cayman First Tier, including the
relevant Share Purchase Agreement, Shareholders Agreement, Voting Agreement, Put
Option Agreement and lines of credit provided by chinadotcom, have been filed
with the Commission under cover of chinadotcom's Current Report on Form 6-K
filed on September 15, 2003. In addition, amended and restated versions of the
Amended and Restated Memorandum and Articles of Association and Executive
Committee Charter relating to such transaction have been filed with the
Commission under cover of chinadotcom's Current Report on Form 6-K filed on
December 11, 2003. The following summaries of the material provisions of such
agreements are qualified in their entirety by reference to the complete texts of
such agreements.
Voting Agreement
Cayman First Tier's corporate governance documents provide for a five
member board of directors. chinadotcom and Symphony have entered into a voting
agreement providing that under the existing
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shareholdings of each party, each shareholder will vote its shares for the
election of three directors selected by chinadotcom and two directors selected
by Symphony.
Executive Committee Charter
The board of directors of Cayman First Tier has appointed an executive
committee and adopted an executive committee charter which may be amended or
repealed by a majority of the Cayman First Tier board at any time. The executive
committee consists of four members of the Cayman First Tier board, with two
members elected by each of chinadotcom and Symphony. The executive committee
charter delegates the following responsibilities to the executive committee:
- To use commercially reasonable efforts to cause Cayman First Tier to
achieve consistent and profitable results in line with projections;
- To appoint, evaluate and terminate the chief executive officer, although
chinadotcom and Symphony have agreed to appoint Mr. Patrick Tinley,
chairman and chief executive officer of Ross as chief executive officer
of Cayman First Tier. If Mr. Tinley is not hired or serving as the chief
executive officer of Cayman First Tier or any company affiliated with
Cayman First Tier, then the entire Cayman First Tier board may expand the
executive committee from four members to five members, with the fifth
member selected by chinadotcom;
- To nominate a chief financial officer who is appointed by the board of
directors of Cayman First Tier;
- To determine and approve compensation levels for senior management,
including stock option awards and to establish stock option plans,
subject to limits imposed by the entire Cayman First Tier board discussed
below;
- To approve Cayman First Tier's operating budget, subject to limits
imposed by the entire Cayman First Tier board discussed below;
- To evaluate and approve capital expenditures, subject to limits imposed
by the entire Cayman First Tier board discussed below;
- To identify, evaluate and approve acquisitions and divestitures, subject
to limits imposed by the entire Cayman First Tier board discussed below;
- To formulate and approve Cayman First Tier's business and operating
plans;
- To implement policies relating to compliance requirements that are
established by Cayman First Tier's board of directors; and
- To authorize draws under the lines of credit available to Cayman First
Tier provided by chinadotcom.
Notwithstanding the delegation of responsibilities to the executive
committee, the executive committee charter further provides that:
- adjustments to the operating budget of Cayman First Tier to increase
expenses or expenditures by more than 5% per quarter are to be presented
to the entire Cayman First Tier board for recommendation or approval;
- transfers greater than $1 million require the signature of both a Cayman
First Tier director appointed by chinadotcom and Symphony, the signature
of a senior executive of Cayman First Tier, and, if greater than $3
million, a resolution of the entire Cayman First Tier board;
- either chinadotcom or Symphony can terminate the chief executive officer
if Cayman First Tier has negative earnings before interest, taxes,
depreciation and amortization for four quarters, Cayman First Tier misses
its operating budget by more than 15% of revenue and 50% of profits, or
there is a material failure with respect to the compliance requirements;
and
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- the entire Cayman First Tier board and the executive committee each have
the power to remove members of senior management for gross negligence,
willful misconduct or acts of dishonesty.
If chinadotcom fails to utilize its authority under the foregoing controls,
procedures and policies implemented as a part of the joint venture arrangements
with Symphony in connection with the operations of Cayman First Tier,
expenditures at Cayman First Tier could increase more than expected or existing
company policies and directives could be continued longer than prudent.
The executive committee charter further specifies that the entire Cayman
First Tier board has exclusive responsibility for, among other items, the
following:
- selecting the independent auditors, approving changes in significant
accounting policies and instructing the auditors in connection with
quarterly reviews and annual audits;
- selecting a chief financial officer nominated by the executive committee;
- approving stock option plans for which shares representing more than 10%
of the fully diluted capitalization of Cayman First Tier are reserved or
allocated;
- approving increases in employee compensation of more than $200,000;
- having the chief executive officer and chief financial officer
participate in weekly management meetings conducted by chinadotcom;
- approving sales of more than 5% of the Cayman First Tier's assets or
acquisitions in an amount greater than $3 million;
- establishing policies relating to compliance requirements; and
- exercising any power not delegated to the executive committee.
The executive committee charter also provides that the entire Cayman First
Tier board may expand the executive committee from four members to five members,
with the fifth member selected by chinadotcom if:
- Mr. Tinley is not hired or serving as the chief executive officer of
Cayman First Tier or any company affiliated with Cayman First Tier;
- Debt provided by a third party lender becomes senior to the lines of
credit available to Cayman First Tier provided by chinadotcom;
- A payment default occurs and is continuing under the lines of credit
available to Cayman First Tier provided by chinadotcom;
- Cayman First Tier is not solvent which triggers a default under the lines
of credit available to Cayman First Tier provided by chinadotcom; and
- For so long as the $25 million note representing a loan from Cayman First
Tier to Symphony remains outstanding, Symphony fails to certify to Cayman
First Tier that Symphony's net worth is greater than the amount
outstanding under the note, and the loan becomes impaired. See "-- If
Cayman First Tier is unable to recover the full amount owed to it under a
non-recourse $25 million loan to Symphony, it may have a material adverse
effect on chinadotcom's financial statements."
In each such instance where the board is expanded from four members to five
members, the board will reverts back to four members upon cure of the event
which triggered the board expansion to five members.
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Shareholders Agreement
In addition, the terms of the shareholders agreement between chinadotcom
and Symphony, contain the following provisions:
- If chinadotcom wants to sell its shares in Cayman First Tier to a third
party, Symphony has, at its option, a right of first refusal to purchase
those shares or a co-sale right to sell a pro rata portion of its shares
to the third party identified by chinadotcom;
- chinadotcom has the option to participate in an exercise by Symphony of
registration rights granted to it with respect to its 49% interest in
Cayman First Tier. In addition, in the event Cayman First Tier registers
its securities as a result of the exercise of registration rights,
chinadotcom is granted a right to purchase, if necessary, a sufficient
number of shares to maintain a majority interest in Cayman First Tier
upon the same terms offered to other purchasers in the offering; and
- After September 8, 2005, Symphony may request that chinadotcom purchase
the shares of Cayman First Tier held by Symphony. To assist in the
valuation of the shares of Cayman First Tier, each of the parties is
permitted to obtain a valuation from its own investment bank. In the
event the parties do not agree upon a purchase price or chinadotcom
declines to purchase Symphony's shares at an agreed purchase price,
Symphony is permitted to seek third party offers to purchase its shares
in Cayman First Tier. In the event Symphony locates a third party buyer
who is willing to pay either:
- At least 90% of the agreed purchase price negotiated between chinadotcom
and Symphony for which chinadotcom declined to purchase Symphony's
shares in Cayman First Tier; or
- At least the lower of either 90% of the valuation given to the shares by
Symphony's investment bank or 110% of the valuation given to the shares
by chinadotcom's investment bank;
then Symphony can, if the third party requests, require chinadotcom to
sell its shares in Cayman First Tier to the third party purchaser located
by Symphony.
Put Option Agreement
chinadotcom has given an option to Symphony to sell to chinadotcom all of
Symphony's 49% minority interest in Cayman First Tier at any time during the
twelve months following the occurrence of any of the following events:
- the composition of Cayman First Tier's executive committee is altered by
the Cayman First Tier board such that it does not consist of four members
of the Cayman First Tier board, with two members elected by each of
chinadotcom and Symphony; provided, that a change in the composition of
the executive committee to five members permitted under the terms of the
executive committee charter in limited circumstances, does not trigger
Symphony's option;
- a decision of the executive committee, made under the exclusive authority
delegated to it under the executive committee charter is overruled by the
entire Cayman First Tier board; or
- the rights, powers or responsibilities set forth in the executive
committee charter are adjusted or terminated by the entire Cayman First
Tier board without the approval of the directors elected by Symphony.
Upon exercise of Symphony's option, the purchase price for Symphony's
interest in Cayman First Tier is based on the financial performance of Cayman
First Tier, and is set at a fixed multiple of Cayman First Tier's annual
revenues. The multiple is selected based upon a table using Cayman First Tier's
revenue growth and EBITDA as a percentage of revenue as the selected metrics.
The fixed multiple varies from 0.25, in the event revenues for Cayman First Tier
are decreasing greater than 10% per year and EBITDA as a percentage of revenues
for Cayman First Tier is less than 5%, to 6.0, in the event revenues for Cayman
First Tier are increasing greater than 20% per year and EBITDA as a percentage
of revenues for Cayman First Tier is greater than 20%. The parties have agreed
to review the fixed multiples set forth in the table at least once a year so
that the multiples would accurately reflect the fair market value for
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enterprise software companies, or earlier in the event the Nasdaq National
Market composite index changes by more than 30% between periods the multiples
are last reviewed. The form of payment of the purchase price will be determined
by the parties, and may consist of cash, chinadotcom common shares, a
combination of both cash and chinadotcom common shares, or other form of
payment.
Revolving Credit Facilities
In addition to a $25 million investment into Cayman First Tier as
consideration for chinadotcom's majority 51% stake in Cayman First Tier,
chinadotcom provided additional consideration in the form of two loan facilities
under which chinadotcom has agreed to loan up to an aggregate of $25 million.
The two loan facilities, one with Cayman First Tier, as borrower, and the second
with Symphony Enterprise Solutions, S.ar.L., which is a wholly-owned subsidiary
of Cayman First Tier (and unrelated to Symphony Technology Group except through
Symphony's 49% interest in Cayman First Tier), as borrower, have substantially
similar terms. Copies of the loan facilities provided by chinadotcom, have been
filed with the Commission under cover of its Current Report on Form 6-K filed on
September 15, 2003. The following summary of the material provisions of the loan
facilities are qualified in their entirety by reference to the complete texts of
such agreements.
Under the terms of each of the loan facilities which are documented as
revolving credit facilities and expire on September 8, 2008, chinadotcom has
agreed to make advances in the form of cash or shares of chinadotcom
corporation; provided, that issuances of shares of chinadotcom corporation must
be made in compliance with any applicable securities laws. Interest on advances
accrues at the rate of 3% per year, and is payable quarterly in arrears. The
borrower has the option of prepaying borrowed amounts at any time upon three
business days' notice without penalty or premium, in increments of $100,000. The
borrower is required to make a mandatory prepayment of all outstanding advances
in full upon request of chinadotcom in the event any one specified person who is
a competitor of chinadotcom makes an equity investment in Symphony in excess of
$2 million or more than one specified persons who are competitors of chinadotcom
make equity investments in Symphony in excess of $5 million in the aggregate. If
chinadotcom does not enforce the terms under which it has agreed to loan up to
$25 million to Cayman First Tier, it may face additional risks in collecting any
amounts advanced to Cayman First Tier.
Proceeds of advances may be used for the following purposes:
- to acquire assets of, or equity interests in, companies that are in the
business of providing software for warehousing management, logistics and
distribution management, and supply chain execution;
- to provide working capital for any businesses so acquired;
- to make loans and capital contributions to subsidiaries; or
- to repay a then existing loan agreement among affiliates of IMI and
Foothill Capital Corporation.
Under the loan facilities, the borrowers agree that, upon the request of
chinadotcom, it will deliver to chinadotcom guaranties and security agreements
guaranteeing and/or securing payment of the borrower's obligations under the
loan facilities, which could include liens on the assets of the borrower and the
assets and securities of subsidiaries which are acquired. chinadotcom cannot
assure you that any guaranties or security its receives to guarantee and/or
secure payment of the borrower's obligations under the loan facilities will be
adequate or sufficient to secure the full amount of the borrower's obligations
in the event the borrower is unable to make payment under the loan facilities.
In addition, the lines of credit contain other covenants typical for such
facilities, including limitations on liens, limitations on debt and restrictions
on sale of assets. In addition, at any time when chinadotcom is no longer
entitled to appoint a majority of the board of directors of Cayman First Tier,
the borrower is required to comply with the following financial covenants:
- maintain tangible asset value, which is defined as total assets minus
goodwill and other intangible assets, as follows:
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- if the total outstanding advances are less than $15 million, greater
than the total outstanding advances; or
- if the total outstanding advances are greater than $15 million, greater
than $15 million plus a specified percentage of the total outstanding
advances greater than $15 million which percentage is 33% during the
first year of the advance, 66% during the second year of the advance,
and 100% of the advance thereafter;
- maintain positive EBITDA for each fiscal quarter as follows:
- if budgeted EBITDA was at least $3 million, at least 50% of such amount;
or
- if budgeted EBITDA is less than $3 million, not more than $1.5 million
less than the amount budgeted for such quarter;
- make expenditures for fixed or capital assets only to the extent that the
aggregate of all such expenditures in such year do not exceed the lesser
of 3% of the gross revenues of the borrower and the amount equal to 120%
of the amount of such expenditures budgeted for such year; and
- maintain consolidated cash and permitted investments of at least $3
million.
As of May 31, 2004, $7 million had been drawn under the line of credit
between chinadotcom and Cayman First Tier, and no amounts had been drawn under
the line of credit between chinadotcom and Symphony Enterprise Solutions,
S.ar.L. (an entity unrelated to Symphony Technology Group, except through
Symphony's 49% interest in Cayman First Tier).
The $7 million drawn under the line of credit between chinadotcom and
Cayman First Tier has been secured by a first priority pledge by Symphony in
favor of chinadotcom of all of Symphony's right, title and interest in
Symphony's 49% interest in Cayman First Tier.
Promissory Note
On November 14, 2003, Cayman First Tier loaned $25 million to Symphony in
exchange for a non-recourse promissory note from Symphony. Symphony would use
the proceeds from the loan to pursue acquisitions of enterprise resource
planning software companies. Under the terms of the promissory note, Symphony
promised to re-pay the $25 million with interest accruing at the rate of 3% per
annum on November 14, 2007. Accrued interest will become payable quarterly in
the event Symphony's net worth falls below the amount outstanding under the
promissory note. Symphony has the option of prepaying borrowed amounts at any
time upon three business days' notice without penalty or premium, in increments
of $100,000. Symphony's obligations under the promissory note are secured by a
pledge from Symphony in favor of Cayman First Tier of all of Symphony's right,
title and interest in Symphony's 49% interest in Cayman First Tier. The security
interest is subordinate to the security interest Symphony granted in its 49%
interest in Cayman First Tier to secure amounts outstanding under the line of
credit from chinadotcom to Cayman First Tier. The promissory note includes
events of default typical for such promissory notes which permit Cayman First
Tier to declare the note immediately due and payable, including payment
defaults, if Symphony generally does not pay its debts as they become due or
becomes insolvent, or if the security agreement fails to create a valid lien on
the collateral to secure the loan.
Joint Venture Agreement
In connection with the making of the $25 million loan from Cayman First
Tier to Symphony and the $7 million loan from chinadotcom to Cayman First Tier,
on November 14, 2003, Symphony agreed to waive its right to receive, and granted
to chinadotcom, Symphony's pro rata portion of the profits of Cayman First Tier
that are available to be distributed by way of dividend to Symphony during the
two year period between September 30, 2003 and September 30, 2005, up to a
maximum of $10 million per year. If the total profits of Cayman First Tier
during the two year period, however, are less than $20 million, Symphony agreed
that the term of its waiver, and grant to chinadotcom, is to be extended
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until the earlier of March 31, 2006 or such time as the total profits of Cayman
First Tier waived by Symphony equal $20 million.
Symphony has also agreed that its pro rata portion of the actual aggregate
profits of Cayman First Tier that are available to be distributed by way of
dividend to Symphony during the two year period between September 30, 2003 and
September 30, 2005, in excess of $10 million per year is to used to set-off any
amounts of accrued and unpaid interest and outstanding principal under the $25
million loan from Cayman First Tier to Symphony, and evidenced by a promissory
note.
Contingent Option Agreement
In connection with the making of the $25 million loan from Cayman First
Tier to Symphony and the $7 million loan from chinadotcom to Cayman First Tier,
on November 14, 2003, Symphony agreed to grant to Cayman First Tier an option to
purchase from Symphony that amount of securities of the company Symphony
acquired with the proceeds of its $25 million loan to Symphony equal to 5% of
the amount of securities acquired by Symphony in such company. In December 2003,
Symphony used proceeds from the $25 million loan from Cayman First Tier to
acquire a 27.4% interest in Intentia International AB, or Intentia, a public
company traded on the Stockholm Stock Exchange which supplies collaboration
solutions to more than 3,500 customers in the manufacturing, maintenance and
distribution industries in approximately 40 countries. In connection with
Symphony's transaction with Intentia, Symphony invested an initial SEK 256
million in Intentia. Symphony acquired 38.8 million shares at a price of SEK
6.60 per share, and 23 million warrants exercisable over four years into shares
with a strike price of SEK 10.00 per share. The investment gave Symphony an
initial 27.4% of Intentia's shares, and a potential to hold 37.2%. The directed
shares and warrants issued were approved by an extraordinary general meeting of
Intentia's shareholders held on February 6, 2004. Neither chinadotcom nor Cayman
First Tier was a party to any of the agreements between Symphony and Intentia,
and neither chinadotcom nor Cayman First Tier currently hold any interest in
Intentia.
Under the Contingent Option Agreement between Cayman First Tier and
Symphony, the purchase price for the securities to be paid by Cayman First Tier
if it exercises this option was set at 175% of the price Symphony paid for the
acquired securities. The option expires on the earlier of:
- November 14, 2007, or the mutually agreed to extension of the maturity
date of the $25 million promissory note; and
- Ninety days after the expiration of any applicable lock-up on the
securities of Intentia following a public offering of such securities.
Cayman First Tier, with the consent of Symphony, has assigned the option to
chinadotcom.
Back Office Integration. IMI is currently evaluating potential synergies
with other chinadotcom companies with operations in the United States and
Europe, including opportunities to consolidate general and administration
functions of IMI in the United States, the United Kingdom and the Netherlands,
which may result in staff reductions at IMI of approximately 10 to 15 personnel.
In addition, the parties are considering a possible consolidation of offices in
the United Kingdom and the Netherlands, which could result in reduced need for
office space.
Financial Integration. IMI has repaid and terminated a loan facility
maintained with an independent third party lender, and replaced it with debt
drawn on the revolving credit facility made available to it from chinadotcom.
The debt refinancing has lowered IMI's cost of capital, and reduced loan fees.
chinadotcom and Symphony have agreed to appoint Patrick Tinley, who was selected
by chinadotcom, as IMI's chief executive officer. IMI intends to adopt
chinadotcom's financial policies by the first quarter of 2004.
Business Integration. IMI is evaluating opportunities to utilize
outsourced software development capabilities located offshore and available to
chinadotcom to reduce development costs and time to market. In addition, IMI and
chinadotcom are working together to explore opportunities in Europe to utilize
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members of chinadotcom's sales force for its other affiliated companies to
promote IMI's products. The companies are also cooperating to share business
leads in the Americas. The companies believe there is potentially significant
opportunity to cross-sell IMI's warehouse product into the installed customer
base of chinadotcom. As chinadotcom's product portfolio continues to expand, IMI
expects to see further synergies between products and associated markets. At the
same time, chinadotcom hopes to gain further knowledge and experience with IMI's
target markets of process manufacturers and retailers.
CDC Outsourcing - vMoksha Joint Venture:
In May 2003, chinadotcom's wholly-owned subsidiary, CDC Outsourcing
Holdings Ltd., entered into a 51% owned joint venture with vMoksha Technologies
Limited, an information technology outsourcing company headquartered in
Bangalore, India. The joint venture aims to provide a broad range of outsourcing
related services to major software vendors and enterprises in the United States,
Europe and the Asia-Pacific region.
Financial Integration. The joint venture reports its activities on a
weekly basis at the weekly management meeting with chinadotcom's senior
management in Hong Kong.
Business Integration. vMoksha and chinadotcom's representatives in
Australia have worked extensively on joint proposals, and have made joint client
visits and sales presentations. These representatives hold weekly joint sales
calls to discuss ways to efficiently share projects in the pipeline of the other
party, customer lists, account plans, and billing and cost information.
chinadotcom plans to begin similar initiatives between vMoksha and chinadotcom's
representatives in other markets around the world, including the United States,
Hong Kong and Singapore. Members of chinadotcom's sales and software operations
professions have attended presentations to learn about the people at vMoksha and
capabilities of the joint venture. chinadotcom has sought to refer outsourcing
projects generated from the needs of chinadotcom's own software clients to the
joint venture. The joint venture is in discussions with both Ross and IMI with
respect to opportunities to lower the research and development costs at Ross and
IMI by outsourcing software development projects to the joint venture.
Newpalm (China) Information Technology Co., Ltd.:
In April 2003, chinadotcom completed the acquisition of Newpalm, a leading
short message service mobile software platform developer and application service
provider in China, through chinadotcom's mobile applications and portal arm and
81% owned subsidiary, hongkong.com Corporation.
Back Office Integration. Newpalm has adopted the human resource, payroll
and general administration of chinadotcom corporation. In addition, Newpalm has
rationalized its legal department such that legal functions are centralized with
chinadotcom. Newpalm relies upon chinadotcom for services for all contractual
matters.
Financial Integration. Newpalm's management submits weekly management
reports to chinadotcom's senior management in Hong Kong and attends weekly
management calls with senior management. Newpalm has adopted chinadotcom's
financial policies. All financial reporting is made to chinadotcom's finance
department in Hong Kong. chinadotcom may appoint a vice president of finance for
Newpalm who will report directly to chinadotcom's corporate office in Hong Kong.
Business Integration. In conjunction with the portals operated by
chinadotcom, Newpalm has launched several new products, including X-City II, a
subscription based dating and chat service, which subscribers can access either
through chinadotcom's portal or mobile phones, and military news, which makes
content available on chinadotcom's portals available to Newpalm's mobile phone
subscribers, as well. Newpalm and chinadotcom are developing several other new
products, as well, and are conducting joint marketing activities to promote
jointly developed products. The short messaging service available through
chinadotcom's portal has also been integrated with Newpalm's platform so that
messages may be sent from the portal and received by subscribers to Newpalm's
mobile service. In addition, each party has made referrals of potential business
opportunities to the other party.
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PK Information Systems and Praxa Limited:
In August 2003, chinadotcom's wholly-owned subsidiary, CDC Australia Ltd.,
acquired PK Information Systems, an established IT services business in
Australia that has specialized capabilities in the areas of .Net application
development and business intelligence solutions, with clients primarily in the
New South Wales state government sector. In February 2003, chinadotcom's
wholly-owned subsidiary, CDC, completed the acquisition of Praxa, a leading
Australian information technology professional services organization with a
21-year operating history.
Back-office Integration. PK Information Systems and Praxa have
consolidated office space by both locating in Praxa's existing office space.
Financial Integration. PK Information Systems and Praxa have adopted the
human resource, payroll and general administration services of chinadotcom
corporation. In addition, senior management from PK Information Systems attends
weekly management calls with chinadotcom's senior management in Hong Kong. PK
Information Systems and Praxa have adopted chinadotcom's corporate reporting
guidelines.
Business Integration. Representatives of PK Information Systems work
closely with staff from Praxa in sales and business development planning. PK
Information Systems and Praxa are currently recruiting a sales and business
development executive who will focus on projects with the Australian government
to be shared between their respective businesses. PK Information Systems and
Praxa have made joint bids for prospective information technology projects, and
intend to continue to make joint bids where appropriate. PK Information Systems
has provided Praxa with technical assistance and resources to launch the CIP
Executive Suite product in Australia, including technical assistance to develop
a demonstration package for the software and to integrate reporting tools within
the software product.
chinadotcom's integration of Mezzo Business Databases Pty Limited and
OpusOne Technologies Inc. which were acquired in early 2002 has been
successfully achieved.
CHANGE IN BUSINESS SEGMENTAL REPORTING
Subsequent to the year ended December 31, 2002, as a result of the
evolution in chinadotcom's business strategy, in order to present its revenue in
a more representative format, chinadotcom changed its business segmental
reporting from "e-Business Solutions," "Advertising," "Sale of IT Products" and
"Other Income" to "Software and Consulting Services," "Mobile Services and
Applications," "Advertising and Marketing Activities" and "Other Income,"
respectively, effective from January 1, 2003. From the first quarter of 2003
onwards, all prior periods' comparative figures will be adjusted accordingly.
ROSS
Ross is a software company that provides enterprise software solutions to
manufacturers. Ross focuses on the food and beverage, life sciences, chemicals,
metals and natural products industries. Ross' software has been implemented by
over 1,000 customer companies worldwide. Ross' software addresses many aspects
of a manufacturer's enterprise, from manufacturing, financial statements and
supply chain management to customer relationship management, performance
management and regulatory compliance.
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DIRECTORS AND MANAGEMENT OF THE COMBINED COMPANY
After completion of the merger, chinadotcom currently intends that Peter
Yip, Daniel Widdicombe, Steven Chan, Patrick Tinley and Robert Webster will
serve as the directors of Ross, the surviving corporation, operating as a wholly
owned subsidiary of chinadotcom. Under the merger agreement, after completion of
the merger, the then-current officers of Ross will continue as the officers of
Ross, operating as a wholly owned subsidiary of chinadotcom. Completion of the
merger will not affect the composition of chinadotcom's board of directors.
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DESCRIPTION OF CHINADOTCOM SHARE CAPITAL
chinadotcom's authorized share capital consists of 800,000,000 Class A
Common Shares, par value $0.00025 per share, referred to as common shares, and
5,000,000 undesignated preferred shares, par value of $0.001 per share. As of
May 31, 2004, there were 104,213,375 common shares issued and outstanding and no
preferred shares have been issued. There are no other authorized classes of
common shares other than chinadotcom's Class A Common Shares.
chinadotcom is a Cayman Islands company and its affairs are governed by its
amended and restated memorandum and articles of association and the Companies
Law (2003 Revision) of the Cayman Islands. The following are summaries of
material provisions of chinadotcom's amended and restated memorandum and
articles of association and the Companies Law insofar as they relate to the
material terms of chinadotcom's common shares.
COMMON SHARES
General. All the outstanding common shares are fully paid and
nonassessable. Certificates representing the common shares are issued in
registered form. The common shares are not entitled to any sinking fund or
pre-emptive or redemption rights. chinadotcom's shareholders who are
nonresidents of the Cayman Islands may freely hold and vote their shares.
Voting Rights. Each common share is entitled to one vote on all matters
upon which the common shares are entitled to vote, including the election of
directors. Voting at any meeting of shareholders is by show of hands unless a
poll is demanded. A poll may be demanded by the chairman of the meeting or any
shareholder present in person or by proxy, before or on the declaration of the
result of the show of hands.
A quorum required for a meeting of shareholders consists of at least a
number of shareholders present or by proxy and entitled to vote representing the
holders of not less than one-third of chinadotcom's issued voting share capital.
Shareholders' meetings are held annually and may be convened by the board of
directors on its own initiative or upon a request to the directors by
shareholders holding in the aggregate 10% or more of chinadotcom's voting share
capital. Advanced notice of at least ten days is required for the convening of
shareholders' meetings.
Any ordinary resolution to be made by the shareholders requires the
affirmative vote of a simple majority of the votes attaching to the common
shares cast in a general meeting of the company, while a special resolution
requires the affirmative vote of two-thirds of the votes cast attaching to the
common shares. A special resolution is required for matters such as a change of
name or amending the Memorandum and Articles of Association. Holders of common
shares, which are currently the only shares carrying the right to vote at
chinadotcom general meetings, have the power, among other things, to elect
directors, appoint auditors, and make changes in the amount of chinadotcom
authorized share capital.
Dividends. The holders of chinadotcom's common shares are entitled to
receive such dividends as may be declared by the board of directors. Dividends
may be paid only out of profits, which include net earnings and retained
earnings undistributed in prior years, and out of share premium, a concept
analogous to paid-in surplus in the United States, subject to a statutory
solvency test.
Liquidation. If the company is to be liquidated, the liquidator may, with
the approval of the shareholders, divide among the shareholders in cash or in
kind the whole or any part of chinadotcom's assets, in a manner proportionate to
their shareholdings, and may vest the whole or any part of such assets in
trustees upon such trusts for the benefit of the shareholders as the liquidator,
with the approval of the shareholders, thinks fit, provided that a shareholder
shall not be compelled to accept any shares or other assets which would subject
such shareholder to liability.
Miscellaneous. Share certificates registered in the names of two or more
persons are deliverable to any one of them named in the share register, and if
two or more such persons tender a vote, the vote of the person whose name first
appears in the share register will be accepted to the exclusion of any other.
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UNDESIGNATED PREFERRED SHARES
Pursuant to its memorandum and articles of association, chinadotcom's board
of directors has the authority, without further action by the shareholders, to
issue up to 5,000,000 preferred shares in one or more series and to fix the
designations, powers, preferences, privileges, and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the common shares. The board of directors, without shareholder
approval, can issue preferred shares with voting, conversion or other rights
that could adversely affect the voting power and other rights of the holders of
common shares. Subject to the directors' duty of acting in the best interest of
the company, preferred shares can be issued quickly with terms calculated to
delay or prevent a change in control of the company or make removal of
management more difficult. Additionally, the issuance of preferred shares may
have the effect of decreasing the market price of the common shares, and may
adversely affect the voting and other rights of the holders of common shares. No
preferred shares have been issued, and chinadotcom has no present plans to issue
any preferred shares.
RESTRICTIONS ON NONRESIDENT OR FOREIGN SHAREHOLDERS
Under Cayman Islands law there are no limitations on the rights of
nonresident or foreign shareholders to hold or vote chinadotcom's common shares.
INSPECTION OF BOOKS AND RECORDS
Holders of chinadotcom's common shares have no general right under Cayman
Islands law to inspect or obtain copies of chinadotcom's list of shareholders or
chinadotcom's corporate records. However, chinadotcom will provide its
shareholders with annual audited financial statements.
TRANSFER AGENT
chinadotcom has appointed The Bank of New York as the transfer agent and
registrar for the common shares.
SHAREHOLDERS LAWSUITS
Based solely on chinadotcom's inspection of the Register of Writs and Other
Originating Process in the Grand Court of the Cayman Islands, from the date of
chinadotcom's incorporation, except for the petition filed by e-Planet Sdb Bhd,
which was withdrawn on September 16, 2003, there were no actions or petitions
pending against chinadotcom in the Grand Courts of the Cayman Islands as of the
close of business on May 31, 2004.
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COMPARISON OF RIGHTS OF CHINADOTCOM SHAREHOLDERS
AND ROSS STOCKHOLDERS
The rights of Ross stockholders are currently governed by the Delaware
General Corporation Law, or DGCL, and Delaware common law (together with the
DGCL, "Delaware law"), Ross' certificate of incorporation, as amended and Ross'
by-laws. As a result of the merger, Ross stockholders will receive chinadotcom
common shares, the rights and privileges of which are governed by chinadotcom's
amended and restated memorandum and articles of association, the Companies Law
(2003 Revision) of the Cayman Islands (the "Companies law") and the common law
of the Cayman Islands (together with the Companies law, "Cayman Islands law").
The Companies law is modeled after British corporate law but does not follow
recent United Kingdom statutory enactments and differs from laws applicable to
Delaware corporations and their stockholders.
The following is a summary of material differences between the rights of
holders of chinadotcom common shares under chinadotcom's amended and restated
memorandum and articles of association and Cayman Islands law and the rights of
Ross stockholders under Ross' certificate of incorporation and by-laws and
Delaware law. This summary does not purport to be complete and is qualified in
its entirety by reference to chinadotcom's amended and restated memorandum and
articles of association, the Companies law, Ross' certificate of incorporation
and by-laws and the DGCL. Copies of chinadotcom's amended and restated
memorandum and articles of association and Ross' certificate of incorporation
and by-laws are hereby incorporated by reference and will be sent to Ross
stockholders upon request.
APPROVAL OF BUSINESS COMBINATIONS
ROSS CHINADOTCOM
Generally, under Delaware law, unless the The Companies law does not provide a
certificate of incorporation provides for statutory merger procedure. However, there
the vote of a larger portion of the shares, are statutory provisions that facilitate the
completion of a merger or consolidation, or reconstruction and amalgamation of
the sale, lease or exchange of all or companies. The proposed arrangement must be
substantially all of a corporation's assets approved by a majority in number of each
or dissolution requires: class of shareholders and creditors with
whom the arrangement is to be made, and who
- approval of the board of directors; and must in addition represent three-fourths in
value of each such class of shareholders or
- approval by the vote of the holders of a creditors, as the case may be, that are
majority of the outstanding shares or, if present and voting either in person or by
the certificate of incorporation provides proxy at a meeting, or meetings convened for
for more or less than one vote per share, that purpose. The convening of the meetings
a majority of the votes of the outstanding and subsequently the proposed arrangement
shares of a corporation entitled to vote must be sanctioned by the Grand Court of the
on the matter. Cayman Islands.
The Ross certificate of incorporation
neither requires the affirmative vote of a
larger proportion than a majority of the
holders of shares of Ross common stock and
preferred stock for a merger or
consolidation nor provides for more or less
than one vote per share of the outstanding
shares of common stock or preferred stock.
APPRAISAL RIGHTS
ROSS CHINADOTCOM
Delaware law generally provides stockholders While a dissenting shareholder would have
of a corporation involved in a merger the the right to express to the court the view
right to demand and receive payment of the that the transaction should not be approved
fair value of within one
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their shares as determined by the Delaware month of receiving notice of the
Chancery Court. Such appraisal rights are arrangement, the court can be expected to
not available, however, to holders of approve the arrangement if it is satisfied
shares: that:
- listed on a national exchange; - the statutory provisions as to majority
vote have been complied with;
- designated as a national market system
security on an interdealer quotation - the shareholders have been fairly
system operated by the National represented at the meeting in question;
Association of Securities Dealers, Inc.;
or - the arrangement is such as a businessman
would reasonably approve; and
- held of record by more than 2,000
shareholders, - the arrangement is not one that would more
properly be sanctioned under some other
unless the holders are required to accept in provision of the Companies law.
the merger anything other than any
combination of: When a take-over offer is made and accepted
by holders of 90% of the shares within four
- shares or depository receipts of the months, the offeror may, within a two month
surviving corporation in the merger; period, require the holders of the remaining
shares to transfer such shares on the terms
- shares or depository receipts of another of the offer. An objection can be made to
corporation that, at the effective date of the Grand Court of the Cayman Islands, but
the merger, will be: would be unlikely to succeed unless there is
evidence of fraud, bad faith or collusion.
(1) listed on a national securities
exchange; If the arrangement and reconstruction is
thus approved, the dissenting shareholders
(2) designated as a national market system would have no rights comparable to appraisal
security on an interdealer quotation system rights, which would otherwise ordinarily be
operated by the National Association of available to dissenting shareholders of
Securities Dealers, Inc.; or United States corporations, providing rights
to receive payment in cash for the
(3) held of record by more than 2,000 judicially determined value of the shares.
holders; or
- cash instead of fractional shares or
depository receipts received.
CUMULATIVE VOTING
ROSS CHINADOTCOM
Under Delaware law, each stockholder is Under chinadotcom's amended and restated
entitled to one vote per share of stock, memorandum and articles of association, each
unless the certificate of incorporation shareholder is entitled to one vote per
provides otherwise. In addition, under share of stock, subject to any special
Delaware law, cumulative voting in the rights, privileges or restrictions as to
election of directors is only permitted if voting for the time being attached to any
expressly authorized in a corporation's class or classes of shares.
certificate of incorporation. Ross'
certificate of incorporation does not
expressly authorize cumulative voting.
STOCKHOLDER MEETINGS
ROSS CHINADOTCOM
Delaware law requires that an annual meeting The Companies law states that a general
of stockholders be held by every meeting of every company, other than an
corporation. The Ross by-laws provide that exempted company, must be held at least once
annual meetings of the stockholders shall be in every year. An exempted company is not
held on a date and time fixed by the board required to hold any meetings. chinadotcom's
of directors. In the absence of amended and restated
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such designation, the annual meeting will be memorandum and articles of association
held on the third Tuesday of November in states that the company shall in each year
each year (unless a holiday). hold a general meeting as its annual general
meeting in addition to any other meeting in
The Ross by-laws provide that a special that year and shall specify the meeting as
meeting of the stockholders may be called at such in the notices calling it and not more
any time by the board of directors, the than 15 months shall elapse (or such longer
chairman of the board, the president or one period as Nasdaq may authorize) between the
or more stockholders holding shares in the date of one annual general meeting of the
aggregate entitled to cast not less than ten company and that of the next. So as long as
percent (10%) of the votes at such meeting. the first annual general meeting of the
company is held within 15 months from the
date of its incorporation, it need not be
held in the year of its incorporation. The
annual general meeting must be held at such
time and place as the board shall appoint.
Additional general meetings may be convened
by the board or by written request of
shareholders holding not less than one-tenth
of the paid-up capital of the company which
carries the right of voting at general
meetings of the company. General meetings
may also be convened on the written
requisition of any one member of the company
which is a clearing house (or its nominee)
deposited at the registered office of the
company specifying the objects of the
meeting and signed by the requisitionist,
provided that such requisitionist held as of
the date of deposit of the requisition not
less than one-tenth of the paid up capital
of the company which carries the right of
voting at general meetings of the company.
QUORUM REQUIREMENTS
ROSS CHINADOTCOM
Under the Ross by-laws, the presence, in Under chinadotcom's amended and restated
person or by proxy, of the holders of a memorandum and articles of association, the
majority of the outstanding voting power of presence, in person or by proxy, of
the issued and outstanding Ross capital one-third of the shareholders entitled to
stock constitutes a quorum for purposes of vote at the meeting in question constitutes
all meetings of the stockholders. a quorum for purposes of a general meeting
of the shareholders.
ACTIONS BY WRITTEN CONSENT
ROSS CHINADOTCOM
The Ross certificate of incorporation Cayman Islands law provides that, if
prohibits action by written consent of authorized in a company's articles of
stockholders. association, shareholders may take action
requiring a special resolution without a
meeting only by unanimous consent.
chinadotcom's amended and restated
memorandum and articles of association
authorizes actions by written unanimous
written consent of the shareholders.
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RIGHTS AGREEMENT
ROSS CHINADOTCOM
In 1998, the board of directors of Ross chinadotcom does not have a shareholder
adopted a preferred share rights agreement, rights agreement.
that, as amended, provides for the
distribution one preferred share purchase
right for each share outstanding of Ross
common stock. The rights become exercisable
only in the event, with specified exceptions
(including exceptions with respect to
acquisitions of shares of Ross common stock
by Benjamin W. Griffith, III) that an
acquiring party accumulates 15% or more of
the outstanding shares of Ross common stock
or Ross is acquired in a merger or other
business combination transaction or 50% or
more of its consolidated assets or earnings
power are sold after a party acquires 15% or
more of the outstanding shares of Ross
common stock. The rights will not become
exercisable as a result of the merger
because of an amendment made to the rights
agreement immediately prior to the approval
of the merger. Each right entitles the
registered holder to purchase from Ross one
one-thousandth of a share of Ross' Series B
Participating Preferred Stock at an exercise
price of $21.75, subject to adjustment. The
rights expire on August 31, 2008 (or, if the
merger is consummated, immediately prior to
the effective time of the merger).
DIVIDENDS AND DISTRIBUTIONS
ROSS CHINADOTCOM
Under Delaware law, the board of directors, Under Cayman Islands law, the board of
subject to any restrictions in the directors may declare the payment of
corporation's certificate of incorporation, dividends to the shareholders out of:
may declare and pay dividends out of:
- profits; or
- surplus of the corporation, which is
defined as net assets less statutory - the "share premium account," which
capital; or represents the excess of the price paid to
the company on issue of its shares over
- if no surplus exists, out of the net the par or nominal value of those shares.
profits of the corporation for the year in
which the dividend is declared and/or the However, no dividends may be paid if, after
preceding year. payment, the company would not be able to
pay its debts as they come due in the
If, however, the capital of the corporation ordinary course of business.
has been diminished to an amount less than
the aggregate amount of capital represented No Cayman Islands laws or regulations
by the issued and outstanding shares of all restrict the import or export of capital or
classes having preference upon the affect the payment of dividends to
distribution of assets, the board may not non-resident holders of
declare and pay dividends out of
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the corporation's net profits until the ordinary shares.
deficiency in the capital has been repaired.
SHARE REPURCHASES
ROSS CHINADOTCOM
Under Delaware law, any corporation may Under Cayman Islands law, shares of a Cayman
purchase or redeem its own shares, except Islands company may, if so authorized by its
that generally it may not purchase or redeem articles of association, be redeemed or
such shares if the capital of the repurchased. Shares may only be redeemed or
corporation is impaired at the time or would purchased out of the profits of the company,
become impaired as a result of the out of the proceeds of a fresh issue of
redemption. shares made for that purpose or out of
capital, provided that the company has the
ability to pay its debts as they come due in
the ordinary course of business.
NUMBER OF DIRECTORS
ROSS CHINADOTCOM
The Ross by-laws provide that the number of Under chinadotcom's amended and restated
directors on its board will not be less than memorandum and articles of association, the
five or more than seven. The current number minimum number of directors is one and the
of directors of Ross is five. maximum number of directors is fifteen
(exclusive of alternate directors). The
current number of directors of chinadotcom
is six. chinadotcom's amended and restated
memorandum and articles of association
requires it to maintain a minimum of three
independent directors on its board so long
as the shares of the company are listed on
the Nasdaq National Market.
VACANCIES ON THE BOARD OF DIRECTORS
ROSS CHINADOTCOM
The Ross by-laws provide that vacancies on chinadotcom's amended and restated
the board of directors may be filled by a memorandum an articles of association
majority vote of the remaining directors, provides that any vacancy on the board of
with the exception that a vacancy created by directors may be filled by the board of
the removal of a directors by a majority directors or by an ordinary resolution of
vote of the stockholders or by court order the shareholders. Such resolution requires a
may be filled only by the affirmative vote simple majority of the votes of such
of a majority of the shares represented and shareholders of the company as, being
voting at a stockholder meeting at which a entitled to do so, vote in person or, where
quorum is present. proxies are allowed, by proxy or, in the
case of corporations, by their duly
authorized representatives. Any director
appointed by the board of directors shall
hold office only until the next following
annual general meeting of the company and
shall then be eligible for re-election at
that meeting.
REMOVAL OF DIRECTORS
ROSS CHINADOTCOM
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The Ross by-laws provide that directors may chinadotcom's amended and restated
be removed by a majority vote of the memorandum and articles of association
stockholders. provides for a classified board of directors
and also provide that a director may be
removed by the special resolution of the
shareholders. Such a special resolution
requires not less than two-thirds of the
votes of the shareholders, as further
described in "-- Amendment of Governing
Documents," below. In addition, a director
may be removed by notice in writing served
upon him signed by not less than
three-fourths in number (or, if that is not
a round number, the nearest lower round
number) of all directors (including the
removed director) then in office.
AMENDMENT OF GOVERNING DOCUMENTS
ROSS CHINADOTCOM
Under Delaware law, Ross' certificate of Under the Companies law, amendment of
incorporation may only be amended by a vote chinadotcom's memorandum and articles of
of the holders of a majority of the association requires a special resolution
outstanding shares of Ross capital stock. passed by the shareholders. Under the
The by-laws of Ross may be amended by the Companies law, a resolution is a special
board of directors of Ross. resolution when:
- it has been passed by a majority of not
less than two-thirds (or such greater number
as may be specified in the articles of
association of the company) of such
shareholders as, being entitled to do so,
vote in person or, if proxies are allowed,
by proxy at a general meeting of which
notice specifying the intention to propose
the resolution as a special resolution has
been duly given; or
- if so authorized by its articles of
association, it has been approved in writing
by all of the shareholders entitled to
vote at a general meeting of the company
in one or more instruments each signed by
one or more of such shareholders, and the
effective date of the special resolution
shall be the date on which the instrument
or the last of such instruments, if more
than one, is executed.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
ROSS CHINADOTCOM
The Ross by-laws provide that Ross will The Companies law does not limit the extent
indemnify, to the fullest extent permitted to which a company's articles of association
by the DGCL, its directors and officers may provide for indemnification of officers
against expenses (including attorney's and directors, except to the extent any such
fees), judgments, fines and amounts paid in provision may be held by the Cayman Islands
settlement incurred in connection with any courts to be contrary to public policy, such
action, suit or proceeding to which such as to provide indemnification against civil
person is or was a party due to the fact fraud or the consequences of committing a
that such person was a director or officer crime.
of Ross.
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chinadotcom's amended and restated
The DGCL permits indemnification so long as memorandum and articles of association
the director, officer, employee or agent of provides for indemnification of officers and
the corporation acted in good faith, in the directors for all actions, proceedings,
best interests of the corporation and, with charges, losses, damages, costs and expenses
respect to criminal matters, had no incurred in their capacities as such, except
reasonable cause to believe that the actions such (if any) as they may incur or sustain
in question were unlawful. No by or through their own willful neglect or
indemnification is permitted where the default respectively.
person has been adjudged liable to the
corporation, unless a court finds the
director, officer, employee or agent
entitled to such indemnification.
LIMITED LIABILITY OF DIRECTORS
ROSS CHINADOTCOM
Ross' certificate of incorporation provides Cayman Islands law will not allow the
that, to the fullest extent permitted by the limitation of a director's liability for his
DGCL, its directors will not be personally own fraud, willful neglect or willful
liable to Ross. default.
The DGCL permits the limitation of a chinadotcom's amended and restated
director's liability except with respect to memorandum and articles of association
(a) any breach of duty of loyalty to the provide that no director, officer or trustee
corporation or its stockholders; (b) acts or will be answerable for the acts, receipts,
omissions not in good faith or which involve neglects or defaults of any other director,
intentional misconduct or a knowing officer or trustee or for joining in any
violation of the law; (c) under Section 174 receipt for the sake of conformity or for
of the DGCL (declaration of an improper the solvency or honesty of any banker or
dividend or improper redemption of stock); other persons with whom any monies or
or (d) any transaction from which the effects belonging to the company may be
director derived any improper personal lodged or deposited for safe custody or for
benefit. any insufficiency of any security upon which
any monies of the company may be invested or
for any other loss or damage due to any such
cause as aforesaid or which may happen in or
about the execution of his office or trust
unless the same shall happen through the
willful neglect or default of such director,
officer or trustee.
CORPORATE GOVERNANCE
ROSS CHINADOTCOM
Delaware law generally prohibits interested There are no restrictions on transactions
director transactions, except in specified with directors under Cayman Islands law.
instances. Delaware law provides that the Transactions between the company and
board of directors owe fiduciary duties of directors or parties related to directors
care and loyalty to corporations for which are not prohibited, provided that such
they serve as directors. Directors of director must, if his interest in such
Delaware corporations also owe fiduciary contract or arrangement is material, declare
duties of care and loyalty to stockholders. the nature of his interest at the earliest
Directors are obligated to exercise informed meeting of the board of directors at which
it is practicable for
147
business judgment in performance of their him to do so, either specifically or by way
duties. of a general notice stating that, by reason
of the facts specified in the notice, he is
to be regarded as interested in any
contracts of a specified description which
may subsequently be made by chinadotcom.
However, under Cayman Islands common law,
directors must exercise a duty of care and
owe a fiduciary duty to the companies for
which they serve as directors.
STOCKHOLDER SUITS
ROSS CHINADOTCOM
Under Delaware law, a stockholder may bring In principle, a Cayman Islands company will
a derivative action on behalf of the normally be the proper plaintiff in a an
corporation to enforce the rights of the action to enforce the rights of the company,
corporation. Delaware law expressly and a derivative action may not be brought
authorizes stockholder derivative suits on by a minority shareholder. However, based on
the condition that the stockholder either English authorities, including the Foss v.
held the stock at the time of the Harbottle case, which would in all
transaction of which the stockholder likelihood be of persuasive authority in the
complains, or acquired the stock thereafter Cayman Islands, exceptions to the foregoing
by operation of law and continues to hold it principle permit a minority shareholder in a
throughout the duration of the suit. An Cayman Islands company to commence a class
individual may also commence a class action action against, or a derivative action in
suit on behalf of himself and other the name of, the company to challenge:
similarly situated stockholders where the
requirements for maintaining a class action - an act which is beyond the corporate power
under Delaware law have been met. A of the company or illegal;
plaintiff instituting a derivative suit is
required to serve a demand on the - an act which constitutes a fraud against
corporation before bringing suit, unless the company or the minority shareholders; or
such demand would be futile.
- an act that requires approval by a greater
percentage of the company's shareholders
than actually approved it.
RESTRICTIONS ON BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
ROSS CHINADOTCOM
The DGCL restricts "business combinations" The Companies law does not restrict business
-- including mergers, sales and leases of combinations with interested shareholders.
assets, issuances of securities and similar
transactions -- between a Delaware
corporation and an "interested stockholder"
(who beneficially owns 15% or more of a
corporation's voting shares for a period of
three years after the interested stockholder
acquired its 15% position, unless certain
exceptions are satisfied) for a period of
three years following the time that such
148
stockholder became an interested
stockholder, unless:
- the business combination, or the
transaction that resulted in the
interested stockholder becoming an
interested stockholder, was approved by
the corporation's board of directors
before the other party to the business
combination became an interested
stockholder;
- upon consummation of the transaction that
resulted in the interested stockholder
becoming an interested stockholder, the
interested stockholder owned at least 85%
of the voting shares of the corporation
outstanding at the commencement of the
transaction (excluding voting shares owned
by directors who are also officers or held
in employee stock plans in which the
employees do not have a right to determine
confidentially whether to tender shares
held by the plan); or
- the business combination was approved by
the corporation's board of directors and
ratified by 66% of the voting shares that
the interested stockholder did not own.
The three-year prohibition does not apply
to certain business combinations proposed
by an interested stockholder following the
announcement or notification of certain
extraordinary transactions involving the
corporation and a person who had not been
an interested stockholder during the
previous three years or who became an
interested stockholder with the approval
of a majority of the corporation's
directors.
The term "business combination" is defined
generally to include:
- mergers or consolidations between the
corporation and an interested stockholder;
- transactions with an interested
stockholder involving the assets or shares
of the corporation or its majority-owned
subsidiaries; and
- transactions that increase an interested
stockholder's percentage ownership of
shares.
149
INSPECTION OF BOOKS AND RECORDS
ROSS CHINADOTCOM
Delaware law provides each Ross stockholder Holders of chinadotcom common shares will
with the right: have no general right under Cayman Islands
law to inspect or obtain copies of
- to inspect the corporation's stock ledger, chinadotcom's list of shareholders or
a list of its stockholders, and its other corporate records.
books and records; and
Although there is no general public right of
- to make copies or extracts of those inspection under the Companies law, there
records during normal business hours; are provisions of the Companies law that
permit inspection. The Grand Court of the
provided that, the stockholder makes a Cayman Islands may appoint an inspector upon
written request under oath stating the application of one-fifth of shareholders of
purpose of his inspection, and the a company or the company itself may appoint
inspection is for a purpose reasonably an inspector by special resolution. The
related to the person's interest as a inspector will then inspect books and
stockholder. records and issue a report, to the Court if
the inspector is Court appointed and to the
company if the inspector is company
appointed. Reports to the Court will not be
open to public inspection. The report will
be admissible as evidence in any legal
proceedings.
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APPRAISAL RIGHTS
If the merger is completed, holders of shares of Ross common stock are
entitled to appraisal rights under Section 262 of the Delaware General
Corporation Law, provided that they strictly comply with the conditions
established by Section 262.
Section 262 is reprinted in its entirety as Annex F to this proxy
statement/prospectus. The following discussion is not a complete statement of
the law relating to appraisal rights and is qualified in its entirety by
reference to Annex F. This discussion and Annex F should be reviewed carefully
by any Ross stockholder who wishes to exercise statutory appraisal rights or who
wishes to preserve the right to do so, as failure to strictly comply with the
procedures set forth in this section of the proxy statement/prospectus or
Section 262 will result in the loss of appraisal rights.
A record holder of shares of Ross common stock:
- who makes the demand described below with respect to those shares;
- who continuously is the record holder of those shares through the
effective time of the merger;
- who otherwise complies with the statutory requirements of Section 262;
and
- who neither votes in favor of the merger agreement nor consents to such
approval in writing
will be entitled to an appraisal by the Delaware Court of Chancery of the fair
value of his or her shares of Ross common stock. All references in this summary
of appraisal rights to a "stockholder" or "holders of shares of Ross common
stock" are to the record holder or holders of shares of Ross common stock.
Except as set forth in this section, Ross stockholders will not be entitled to
appraisal rights in connection with the merger.
Under Section 262, where a merger agreement is to be submitted for approval
at a meeting of stockholders, such as the Ross special meeting, the corporation,
not less than 20 days prior to the meeting, must notify each of the holders of
its stock for whom appraisal rights are available that such appraisal rights are
available and include in each such notice a copy of Section 262. This proxy
statement/prospectus shall constitute that notice to the record holders of Ross
common stock.
Holders of shares of Ross common stock who desire to exercise their
appraisal rights must not vote in favor of the merger agreement, and must
deliver a separate written demand for appraisal to Ross prior to the vote by
Ross' stockholders on the merger agreement at the Ross special meeting. A demand
for appraisal must be executed by or on behalf of the stockholder of record and
must reasonably inform Ross of the identity of the stockholder of record and
that such stockholder intends to demand appraisal of his or her shares of Ross
common stock. A proxy or vote against the merger agreement will not by itself
constitute such a demand. Within 10 days after the effective time of the merger,
Ross must provide notice of the effective time of the merger to all stockholders
who have complied with Section 262 and have not voted in favor of or consented
to the merger.
A stockholder who elects to exercise appraisal rights should mail or
deliver his or her written demand to the attention of Ross' Corporate Secretary
at Ross' offices located at 2 Concourse Parkway, Suite 800, Atlanta, Georgia
30328.
A person having a beneficial interest in shares of Ross common stock that
are held of record in the name of another person, such as a broker, fiduciary,
depositary or other nominee, must act promptly to cause the record holder to
follow the steps summarized in this section properly and in a timely manner to
perfect appraisal rights. If the shares of Ross common stock are owned of record
by a person other than the beneficial owner, including a broker, fiduciary (such
as a trustee, guardian or custodian), depositary or other nominee, such demand
must be executed by or for the record owner. If the shares of Ross common stock
are owned of record by more than one person, as in a joint tenancy or tenancy in
common, such demand must be executed by or for all joint owners. An authorized
agent, including an agent for two or more joint owners, may execute the demand
for appraisal for a stockholder of record; however, the agent must identify the
record owner and expressly disclose the fact that, in exercising the demand,
such person
151
is acting as agent for the record owner. If a stockholder holds shares of Ross
common stock through a broker who in turn holds the shares through a central
securities depository nominee such as Cede & Co., a demand for appraisal of such
shares must be made by or on behalf of the depository nominee and must identify
the depository nominee as record holder.
A record holder, such as a broker, fiduciary, depositary or other nominee,
who holds shares of Ross common stock as a nominee for several beneficial
owners, may exercise appraisal rights with respect to the shares held for all or
less than all beneficial owners of shares as to which such person is the record
owner. In that case, the written demand must set forth the number of shares
covered by the demand. Where the number of shares is not expressly stated, the
demand will be presumed to cover all shares of Ross common stock outstanding in
the name of that record owner. Stockholders who hold their shares in brokerage
accounts or other nominee forms and who wish to exercise appraisal rights are
urged to consult with their brokers to determine the appropriate procedure for
the making of a demand for appraisal by such a nominee.
Within 120 days after the effective time of the merger, either Ross or any
stockholder who has complied with the required conditions of Section 262 may
file a petition in the Delaware Court of Chancery demanding a determination of
the fair value of the shares of all dissenting stockholders. There is no present
intent on Ross' part to file an appraisal petition, and stockholders seeking to
exercise appraisal rights should not assume that Ross will file such a petition
or that Ross will initiate any negotiations with respect to the fair value of
such shares. Accordingly, holders of Ross common stock who desire to have their
shares appraised should initiate any petitions necessary for the perfection of
their appraisal rights within the time periods and in the manner prescribed in
Section 262. Within 120 days after the effective time of the merger, any
stockholder who has theretofore complied with the applicable provisions of
Section 262 will be entitled, upon written request, to receive from Ross a
statement setting forth the aggregate number of shares of Ross common stock not
voting in favor of the merger agreement and with respect to which demands for
appraisal were received by Ross and the number of holders of such shares. This
statement must be mailed by the later of:
- within 10 days after the written request for this statement has been
received by Ross; or
- within 10 days after the expiration of the period for the delivery of
demands as described above.
If a petition for an appraisal is timely filed and a copy of that petition
is served upon Ross, Ross will then be obligated within 20 days to file with the
Delaware Register in Chancery a duly verified list containing the names and
addresses of all of the Ross stockholders who have demanded an appraisal of
their shares and with whom agreements as to the value of their shares have not
been reached. After notice to such stockholders as required by the Court, the
Delaware Court of Chancery is empowered to conduct a hearing on such petition to
determine which stockholders are entitled to appraisal rights. The Delaware
Court of Chancery may require the stockholders who have demanded an appraisal of
their shares and who hold stock represented by certificates to submit their
certificates of stock to the Delaware Register in Chancery for notation on those
certificates of the pendency of the appraisal proceedings, and if any
stockholder fails to comply with such direction, the Delaware Court of Chancery
may dismiss the proceedings as to that stockholder. Where proceedings are not
dismissed, the Delaware Court of Chancery will appraise the shares of Ross
common stock owned by those stockholders, determining the fair value of those
shares exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value.
ALTHOUGH ROSS BELIEVES THAT THE MERGER CONSIDERATION IS FAIR, NO
REPRESENTATION IS MADE AS TO THE OUTCOME OF THE APPRAISAL OF FAIR VALUE AS
DETERMINED BY THE DELAWARE COURT OF CHANCERY, AND ROSS' STOCKHOLDERS SHOULD
RECOGNIZE THAT AN APPRAISAL COULD RESULT IN A DETERMINATION OF A VALUE HIGHER OR
LOWER THAN, OR THE SAME AS, THE MERGER CONSIDERATION.
Moreover, Ross does not anticipate offering more than the merger
consideration to any stockholder exercising appraisal rights and reserve the
right to assert, in any appraisal proceeding, that, for purposes of
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Section 262, the "fair value" of a share of Ross common stock is less than the
merger consideration. In determining "fair value," the Delaware Court of
Chancery is required to take into account all relevant factors. In Weinberger v.
UOP, Inc., the Delaware Supreme Court discussed the factors that could be
considered in determining fair value in an appraisal proceeding, stating that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered and that "[f]air price obviously requires consideration of all
relevant factors involving the value of a company." The Delaware Supreme Court
has stated that in making this determination of fair value, the court must
consider market value, asset value, dividends, earnings prospects, the nature of
the enterprise and any other facts which could be ascertained as of the date of
the merger which throw any light on future prospects of the combined company.
Section 262 provides that fair value is to be "exclusive of any element of value
arising from the accomplishment or expectation of the merger." In Cede & Co. v.
Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a
"narrow exclusion [that] does not encompass known elements of value," but which
rather applies only to the speculative elements of value arising from such
accomplishment or expectation. In Weinberger, the Delaware Supreme Court
construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof, as of the
date of the merger and not the product of speculation, may be considered."
The cost of the appraisal proceeding may be determined by the Delaware
Court of Chancery and taxed against the parties as the Court deems equitable in
the circumstances. However, costs do not include legal and expert witness fees.
Each dissenting stockholder is responsible for his or her legal and expert
witness expenses, although, upon application of a dissenting stockholder, the
Delaware Court of Chancery may order that all or a portion of the expenses
incurred by a dissenting stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable legal fees and the fees
and expenses of experts, be charged pro rata against the value of all shares of
stock entitled to appraisal.
Any holder of shares of Ross common stock who has duly demanded appraisal
in compliance with Section 262 will not, after the effective time of the merger,
be entitled to vote for any purpose any shares subject to that demand or to
receive payment of dividends or other distributions on those shares, except for
dividends or distributions payable to stockholders of record at a date prior to
the effective time.
At any time within 60 days after the effective time of the merger, any
stockholder will have the right to withdraw his or her demand for appraisal and
to accept the merger consideration. If no petition for appraisal is filed with
the Delaware Court of Chancery within 120 days after the effective time of the
merger, Ross' stockholders' rights to appraisal shall cease, and all holders of
shares of Ross common stock will be entitled to receive the merger
consideration. Since Ross has no obligation to file such a petition, and has no
present intention to do so, any holder of shares of Ross common stock who
desires such a petition to be filed is advised to file it on a timely basis. Any
stockholder may withdraw his or her demand for appraisal by delivering to Ross a
written withdrawal of the demand for appraisal and acceptance of the merger
consideration, except:
- that any such attempt to withdraw made more than 60 days after the
effective time of the merger will require Ross' written approval; and
- that no appraisal proceeding in the Delaware Court of Chancery shall be
dismissed as to any stockholder without the approval of the Delaware
Court of Chancery, and such approval may be conditioned upon such terms
as the Delaware Court of Chancery deems just.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 FOR PERFECTING
APPRAISAL RIGHTS WILL RESULT IN THE LOSS OF THOSE RIGHTS.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of the material U.S. federal income tax
consequences of the merger and of the ownership and disposition of chinadotcom
shares.
This discussion does not purport to be a comprehensive description of all
the U.S. federal income tax consequences that may be relevant to any particular
Ross stockholder. In particular, the discussion addresses only U.S. holders that
hold their Ross common stock and that will hold their chinadotcom common shares
as capital assets. The discussion does not address U.S. state or local taxation.
As used in this discussion, the term "U.S. holder" means, before the
merger, a beneficial owner of Ross common stock, and, after the merger, a
beneficial owner of chinadotcom common shares, who is for U.S. federal income
tax purposes an individual U.S. citizen or resident, a U.S. corporation or
otherwise subject to U.S. federal income tax on a net income basis in respect of
Ross stock or chinadotcom shares, as the case may be.
This discussion does not address the tax treatment of Ross stockholders
that are subject to special rules, such as foreign persons, tax-exempt entities,
banks, insurance companies, dealers in securities, persons that elect
mark-to-market treatment, persons that hold Ross preferred stock, persons that
hold their Ross stock or that will hold their chinadotcom shares as a position
in part of a straddle, conversion transaction, constructive sale or other
integrated investment, persons that own or will own directly or indirectly ten
percent (10%) or more of chinadotcom's voting shares, persons whose functional
currency is not the U.S. dollar, persons that exercise their right to dissent
from the merger, and persons that received their Ross stock by exercising
employee stock options or otherwise as compensation.
This discussion is based on existing U.S. federal income tax law including
the Internal Revenue Code of 1986, as amended (or the Code), statutes,
regulations, administrative rulings and court decisions, all as in effect on the
date of this document. All of these authorities are subject to change, or change
in interpretation (possibly with retroactive effect). The discussion assumes
that the merger will be completed in accordance with the terms of the merger
agreement and that the non-stock consideration paid pursuant to such agreement
exceeds 20% of the total consideration. Any change in any of the foregoing
authorities or failure of the assumptions to be true could alter the tax
consequences discussed below.
STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE U.S. FEDERAL
INCOME TAX AND ANY ESTATE, INHERITANCE, GIFT, STATE, LOCAL, NON-U.S. AND OTHER
TAX CONSEQUENCES TO THEM OF THE MERGER AND THE OWNERSHIP AND DISPOSITION OF
CHINADOTCOM SHARES.
This discussion represents the views of Paul Hastings Janofsky & Walker
LLP, special tax counsel to chinadotcom, and, to the extent it describes matters
of law and legal conclusions, is, in the opinion of Paul Hastings Janofsky &
Walker LLP, a discussion of the material U.S. federal income tax consequences of
the merger and the ownership and disposition of chinadotcom shares.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
CONSEQUENCES OF THE MERGER TO U.S. HOLDERS
A U.S. holder of Ross stock will recognize taxable gain or loss equal to
the difference between the fair market value, as of the effective time of the
merger, of the chinadotcom shares received plus the cash received (including
cash in lieu of fractional shares), and the holder's tax basis in its Ross stock
exchanged in the merger. Any taxable gain or loss recognized in connection with
the merger will generally be treated as capital gain or loss and will be
long-term capital gain or loss with respect to Ross stock held for more than 12
months at the effective time of the merger. Under recently enacted legislation,
the maximum rate of tax on long term capital gain is generally reduced to 15%
for taxpayers other than corporations. The deductibility of capital losses is
subject to certain limitations. The aggregate tax basis of the chinadotcom
shares received in the merger by a Ross stockholder will be equal to their fair
market value as of the effective time of the merger. The holding period of such
chinadotcom shares will begin the day after the closing of the merger.
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U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting and backup withholding with respect to the amount of
cash received may be required unless the U.S. holder provides proof of an
applicable exemption or a valid taxpayer identification number and otherwise
complies with applicable backup withholding rules. Any amount withheld under
backup withholding rules is not an additional tax and may be refunded or
credited against your federal income tax liability as long as the requisite
information is timely furnished to the IRS.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF OWNERSHIP AND DISPOSITION
The following is a discussion of the material U.S. federal income tax
considerations related to the ownership and disposition by U.S. holders of
chinadotcom common shares.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
Special U.S. federal income tax rules apply to U.S. holders of shares of a
foreign corporation that is classified as a "passive foreign investment
company," or PFIC, under Section 1297 of the Code. Based on an analysis of its
income and assets for the year 2003, chinadotcom believes that it was a PFIC
during 2003, and based upon an analysis of its projected income and assets for
the year 2004, chinadotcom believes that it may be a PFIC during 2004. PFIC
status depends upon the composition of income and assets and the market value of
assets from time to time, which may be especially volatile in a technology-
related enterprise, and therefore, there can be no assurance that chinadotcom
will not be classified as a PFIC for 2004 or any future tax year.
PFIC Status. chinadotcom will be a PFIC with respect to a U.S. holder if,
for any taxable year in which the holder owns common shares, at least 75% of
chinadotcom's gross income for such taxable year is passive income or at least
50% of chinadotcom's assets, measured by value on a quarterly average basis,
produce or are held for the production of passive income. For this purpose,
passive income generally includes dividends, interest, rents, royalties (other
than certain rents and royalties derived in the active conduct of a trade or
business), annuities, gains from assets that produce passive income, net income
from notional principal contracts and certain payments with respect to
securities loans. If chinadotcom owns, directly or indirectly, at least 25% by
value of the stock of another corporation, it will be treated as owning its
proportionate share of the assets of the other corporation and as receiving
directly its proportionate share of the other corporation's income.
Taxation of Excess Distributions (Including Gain on Sale of chinadotcom
Shares). Subject to the discussion of the qualified electing fund, or QEF,
election and the mark-to-market election below, if chinadotcom were a PFIC for
any taxable year during which a U.S. holder holds shares, the U.S. holder would
be subject to special tax rules, regardless of whether chinadotcom ceased to be
a PFIC in a subsequent year, with respect to any excess distributions and any
gain from the sale or disposition (including an indirect disposition, such as a
pledge) of its chinadotcom shares. An excess distribution is the amount of any
distribution by chinadotcom to a U.S. holder, possibly including any return of
capital distributions, received by the holder in a taxable year, that is greater
than 125% of the average annual distributions received by the holder in the
three preceding taxable years, or the holder's holding period for the
chinadotcom shares, if shorter. An excess distribution includes gain from the
sale or other disposition of shares in a PFIC.
Under the special tax rules above, any excess distribution, including any
gain from a subsequent sale or other disposition of chinadotcom shares, would be
allocated ratably over the U.S. holder's holding period. The amount allocated to
the current taxable year and any taxable year prior to the first taxable year in
which chinadotcom was a PFIC during the holder's holding period would be treated
as ordinary income in the year in which the excess distribution occurs. The
amount allocated to each other year would be taxed as ordinary income at the
highest tax rate in effect for that year and the interest charge applicable to
underpayments of tax for such year would be imposed on the resulting tax
attributable to such year.
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If chinadotcom is a PFIC in any year, U.S. holders will be required to make
an annual return on IRS Form 8621 regarding distributions received with respect
to the chinadotcom common shares and any gain realized on the sale or other
disposition of such shares.
QEF Election. As an alternative to the special excess distribution rules
above, a U.S. holder can make a QEF election to include annually its pro rata
share of a PFIC's ordinary earnings and net capital gain currently in income
each year, regardless of whether or not dividend distributions are actually
made. This means a U.S. holder could have a tax liability attributable to the
earnings or gain without a corresponding receipt of cash. The U.S. holder's
basis in the common shares will be increased to reflect the amount of the taxed
but undistributed income. Distributions of income that had previously been taxed
will result in a corresponding reduction of basis in the common shares and will
not be taxed again as a distribution to the U.S. holder. Each U.S. holder who
desires QEF treatment must individually make a QEF election with a timely filed
U.S. federal income tax return for the year in question.
If a U.S. holder makes a QEF election with respect to stock of a foreign
corporation in the first year in which the foreign corporation is a PFIC during
such holder's holding period, then the U.S. holder will not be subject to the
special rules discussed above regarding the treatment of excess distributions
and gain from the sale or other disposition of PFIC stock. Such a PFIC is
referred to as a "pedigreed QEF" with respect to such electing U.S. holder. If a
U.S. holder makes a QEF election in a year after the first year in which the
foreign corporation is a PFIC during such holder's holding period, then the U.S.
holder will remain subject to the special excess distribution rules discussed
above, subject to certain modifications to account for any year during which the
holder's QEF election is in effect. Such a PFIC is referred to as an
"unpedigreed QEF." A U.S. holder may make a special "deemed sale" election in
conjunction with the QEF election under which it would be treated as if it sold
its PFIC shares in a taxable transaction as of the effective date of the
election. A U.S. holder that makes such an election will thereafter be treated
as owning a pedigreed QEF. However, any gain recognized on the deemed sale would
be treated as an excess distribution subject to the special excess distribution
rules discussed above and thus would be taxed at ordinary income rates.
If chinadotcom is a pedigreed QEF with respect to an electing U.S. holder,
then excess distributions (including sales proceeds) received by the holder with
respect to those shares would not be subject to the special excess distribution
rules discussed above, and a subsequent sale or other disposition by the holder
of those shares would generally result in capital gain or loss. If chinadotcom
is instead an unpedigreed QEF with respect to an electing U.S. holder,
distributions and gain from a subsequent sale or other disposition of the
holder's shares would be subject to the special excess distribution rules
discussed above (subject to certain modifications to account for any year during
which the holder's QEF election is in effect) and no portion of any gain on the
subsequent sale or other disposition of such shares would be treated as capital
gain.
U.S. holders that exchange their Ross stock for chinadotcom shares in the
merger will have a holding period with respect to such shares that begins the
day after the closing of the merger, and thus, if a timely QEF election is made
with respect to such chinadotcom shares for the year of the merger (and the
holder owns no other chinadotcom shares), chinadotcom should be treated as a
pedigreed QEF with respect to such electing holder as long as the holder
complies with the QEF election requirements.
To make a QEF election a U.S. holder will need to obtain an annual
information statement from the PFIC setting forth the earnings and capital gains
for the year. As a PFIC, chinadotcom would supply the PFIC annual information
statement to any shareholder or former shareholder who requests it. In general,
a U.S. holder must make a QEF election on or before the due date for filing its
income tax return for the first year to which the QEF election will apply (as
discussed above). A U.S. holder will be permitted to make a retroactive election
in particular circumstances, including if the U.S. holder had a reasonable
belief that the foreign corporation was not a PFIC and filed a protective
election.
Although chinadotcom generally will be treated as a PFIC as to any U.S.
holder if it is a PFIC for any year during a U.S. holder's holding period, if
chinadotcom ceases to satisfy the requirements for PFIC classification in a
future year, a U.S. holder may avoid such classification for such future year
and
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subsequent years if (1) chinadotcom is a pedigreed QEF with respect to the U.S.
holder, or (2) the holder elects to recognize gain based on the realized
appreciation in the chinadotcom shares through the close of the last tax year in
which chinadotcom was classified as a PFIC. Any gain recognized as a result of
such election would be treated as ordinary income and possibly subject to an
interest charge.
ROSS STOCKHOLDERS SHOULD CONSULT THEIR TAX ADVISORS AS TO WHETHER TO MAKE A QEF
ELECTION OR A PROTECTIVE ELECTION AND AS TO THE TAX CONSEQUENCES OF THE QEF OR
PROTECTIVE ELECTION TO THEM IN THEIR PARTICULAR CIRCUMSTANCES.
Mark-to-Market Election. As a second alternative to the special excess
distribution rules discussed above, a U.S. holder may elect to treat its
chinadotcom shares that constitute marketable stock as if those shares were sold
and immediately repurchased by the U.S. holder at the close of each taxable
year, known as a "mark-to-market election." chinadotcom expects that the
chinadotcom common shares will be marketable within the meaning of the
applicable U.S. Treasury regulations.
If the mark-to-market election is made, the electing U.S. holder would be
required to include as ordinary income in any taxable year for which the
election is in effect an amount equal to the excess, if any, of the fair market
value of its chinadotcom shares at the close of such year over the holder's
adjusted basis in the shares. For each taxable year for which the election is in
effect, the U.S. holder would be allowed an ordinary deduction in an amount
equal to the excess, if any, of the holder's adjusted basis over the fair market
value of its chinadotcom shares at the close of such year, up to the amount of
any prior income inclusions attributable to the election that have not
previously been taken into account in calculating allowable deductions. The U.S.
holder's basis in its shares would be increased by the amount of any ordinary
income, and reduced by the amount of any deduction, attributable to the
mark-to-market election.
In the case of a sale or other disposition of chinadotcom shares as to
which a mark-to-market election is in effect, any gain realized on the sale or
other disposition would be treated as ordinary income. Any loss realized on the
sale or other disposition would be treated as an ordinary deduction, up to the
amount of any prior income inclusions attributable to the mark-to-market
election that have not previously been taken into account in calculating
allowable deductions, and as a capital loss to the extent of any excess.
ROSS STOCKHOLDERS SHOULD CONSULT THEIR TAX ADVISORS AS TO WHETHER TO MAKE A
MARK-TO-MARKET ELECTION AND AS TO THE TAX CONSEQUENCES OF SUCH ELECTION TO THEM
IN THEIR PARTICULAR CIRCUMSTANCES.
chinadotcom has made its 2003 PFIC annual information statement and other
PFIC-related information available under a link entitled "Tax Information
(PFIC)" on its corporate website which may be accessed at
http://www.corp.china.com/. Information contained on the website does not
constitute a part of this registration statement.
DIVIDENDS
Subject to the discussion in "Passive Foreign Investment Company Rules"
above, in the event that a U.S. holder receives a distribution with respect to
its chinadotcom shares, other than pro rata distributions of chinadotcom shares
or rights with respect to such shares, the U.S. holder will be required to
include the distribution in gross income as a taxable dividend to the extent
such distribution is paid from current or accumulated earnings and profits as
determined for U.S. federal income tax purposes. Distributions in excess of
chinadotcom's current and accumulated earnings and profits will first be treated
as a nontaxable return on capital to the extent of the U.S. holder's basis in
the common shares and thereafter as gain from the sale or exchange of a capital
asset. Dividends paid by chinadotcom will not be eligible for the corporate
dividends received deduction. In addition, dividends paid by chinadotcom at a
time when it is classified as a PFIC will not be eligible for recently enacted,
capital gains rates applicable to "qualified dividends." The amount of any
distribution of property other than cash will be the fair market value of such
property on the date of distribution.
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DISPOSITIONS
Subject to the discussion in "Passive Foreign Investment Company Rules"
above, gain or loss realized by a U.S. holder on the sale or other disposition
of the chinadotcom shares will be subject to U.S. federal income tax as capital
gain or loss in an amount equal to the difference between the amount realized on
the disposition and that holder's tax basis in such shares. Such capital gain or
loss will be long-term capital gain or loss if the U.S. holder's holding period
for the shares exceeds one year at the time of the sale or exchange. Under
recently enacted legislation, the maximum rate of tax on long term capital gain
is generally reduced to 15% for taxpayers other than corporations. The
deductibility of capital losses is subject to certain limitations.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting and backup withholding with respect to dividends and
proceeds from the sale or disposition of chinadotcom shares may be required
unless the U.S. holder provides proof of an applicable exemption or a valid
taxpayer identification number and otherwise complies with applicable backup
withholding rules. Any amount withheld under backup withholding rules is not an
additional tax and may be refunded or credited against the holder's federal
income tax liability as long as the requisite information is timely furnished to
the IRS.
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LEGAL MATTERS
The validity of the common shares offered by this proxy
statement/prospectus will be passed upon for chinadotcom by Maples and Calder.
Certain matters as to U.S. federal income tax consequences of the merger and the
ownership and disposition of chinadotcom shares will be passed upon for
chinadotcom by Paul Hastings Janofsky & Walker LLP.
EXPERTS
The consolidated financial statements of chinadotcom corporation at
December 31, 2003 and 2002, and for each of the three years in the period ended
December 31, 2003, appearing in chinadotcom corporation's annual report on Form
20-F as amended by Form 20-F/A, for the year ended December 31, 2003, have been
audited by Ernst & Young, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements and schedule of Ross Systems, Inc.
and subsidiaries as of June 30, 2003 and 2002, and for the years then ended
incorporated by reference in this joint proxy statement/prospectus have been
audited by BDO Seidman, LLP, independent registered public accountants, to the
extent set forth in their report incorporated herein by reference, and are
incorporated herein in reliance upon such report given upon the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Ross Systems, Inc. and
subsidiaries for the years ended June 30, 2001, included in the Annual Report on
Form 10-K, as amended by Form 10-K/A, for the year ended June 30, 2003, and
incorporated by reference into this joint proxy statement/prospectus, to the
extent and for the periods indicated in their report, have been audited by
Arthur Andersen LLP, independent certified public accountants, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing. Arthur Andersen LLP has not consented to the incorporation by
reference of their report in this joint proxy statement/prospectus, and Ross has
dispensed with the requirement to file their consent in reliance upon Rule 437a
of the Securities Act. Because Arthur Andersen LLP has not consented to the
incorporation by reference of their report in this joint proxy
statement/prospectus, you will not be able to recover against Arthur Andersen
LLP under Section 11 of the Securities Act for any untrue statements of a
material fact contained in the financial statements audited by Arthur Andersen
LLP or any omissions to state a material fact required to be stated therein.
The consolidated financial statements of IMI and subsidiaries for the
period May 1, 2002 through December 10, 2002 and years ended April 30, 2001 and
April 30, 2002 included in this proxy statement/ prospectus have been audited by
PricewaterhouseCoopers AB, independent certified public accountants, and are
included herein in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting. The combined consolidated financial
statements of STG, IMI Global Holdings Ireland Limited and subsidiaries for the
period from the date of incorporation, October 23, 2002, through April 30, 2003
included in this proxy statement/prospectus have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants, and are
included herein in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting. The consolidated financial
statements of IMI Global Holdings Ireland Limited for the period September 9,
2003 through December 31, 2003 have been audited by PricewaterhouseCoopers LLP,
independent certified public accountants, and have been consolidated into the
Company's financial statements for the year ended December 31, 2003 in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements of Pivotal and subsidiaries as of
June 30, 2003 and 2002 and the three years in the period ended June 30, 2003
incorporated by reference in this proxy statement/ prospectus have been audited
by Deloitte & Touche LLP, an independent registered chartered accounting
159
firm, as stated in their report incorporated by reference herein (which report
expresses an unqualified opinion and includes explanatory paragraphs referring
to the Company's adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" and that on July 23, 2003, the
Company reported separately to the shareholders of Pivotal on the consolidated
financial statements for the same periods, audited in accordance with Canadian
generally accepted auditing standards and prepared in accordance with Canadian
generally accepted accounting principles), and have been so incorporated herein
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The fair value of the assets associated with the acquisition of Ross
Systems, Inc. was determined based on analysis performed by chinadotcom with the
assistance of American Appraisal China Ltd., an independent valuation
consultant. The results of their valuation study is contained in their report
dated December 15, 2003. The information in such report are included in the
purchase price allocation performed by chinadotcom in the unaudited pro forma
consolidated financial data section in reliance upon such report given on the
authority of such firm as experts in external independent valuation.
The fair value of the assets associated with the acquisition of Pivotal was
determined based on analysis performed by chinadotcom with the assistance of
American Appraisal Associates, Inc., an independent valuation consultant. The
results of their valuation study is contained in their report dated March 26,
2004. The information in such report are included in the purchase price
allocation performed by chinadotcom in the unaudited pro forma consolidated
financial data section in reliance upon such report given on the authority of
such firm as experts in external independent valuation.
OTHER MATTERS
As of the date of this proxy statement/prospectus, the Ross board of
directors does not know of any matters that will be presented for consideration
at the special meeting other than as described in this proxy
statement/prospectus. If any other matters come before the meeting or any
adjournments or postponements and are voted upon, the enclosed proxy will confer
discretionary authority on the individuals named as proxies to vote the shares
represented by the proxy as to any other matters. The individuals named as
proxies intend to vote in accordance with their best judgment as to any other
matters.
WHERE YOU CAN FIND MORE INFORMATION
chinadotcom files annual and special reports and other information, and
Ross files annual, quarterly and special reports, proxy statements and other
information, with the Commission. You may read and copy any of this information
at the Commission's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information
on the public reference room. The Commission also maintains an Internet Web site
that contains reports, proxy statements and other information regarding issuers,
including chinadotcom and Ross, who file electronically with the Commission. The
address of that site is http://www.sec.gov. The information contained on the
Commission's Web site is expressly not incorporated by reference into this proxy
statement/prospectus.
chinadotcom has filed with the Commission a registration statement on Form
F-4 of which this proxy statement/prospectus forms a part. The registration
statement registers the chinadotcom common shares to be issued to Ross
stockholders in connection with the merger. The registration statement,
including the attached exhibits and schedules, contains additional relevant
information about chinadotcom's common shares. The rules and regulations of the
Commission allow chinadotcom to omit certain information included in the
registration statement from this proxy statement/prospectus.
CHANGE IN BUSINESS SEGMENTAL REPORTING
Subsequent to the year ending December 31, 2002, due to changes in
chinadotcom's business model and its shift to enterprise software and mobile
application services, in order to present its revenue in a more representative
format, chinadotcom changed its business segmental reporting from "e-Business
Solutions," "Advertising," "Sale of IT Products" and "Other Income" to "Software
and Consulting
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Services," "Mobile Services and Applications", "Advertising and Marketing
Activities," and "Other Income," respectively, effective from January 1, 2003.
From the first quarter of 2003 onwards, all prior periods' comparative figures
will be adjusted accordingly.
INCORPORATION BY REFERENCE
In addition, the Commission allows chinadotcom and Ross to disclose
important information to you by referring you to other documents filed
separately with the Commission. This information is considered to be a part of
this proxy statement/prospectus, except for any information that is superseded
by information included directly in this document.
This proxy statement/prospectus incorporates by reference the documents
listed below that chinadotcom and Ross have previously filed or will file with
the Commission. These documents contain important information about chinadotcom
and Ross.
CHINADOTCOM COMMISSION FILINGS
(COMMISSION FILE NO. 000-30134) FILING DATE
------------------------------- -----------
Amendment No. 1 to Annual Report on Form Filed on:
20-F/A for the year ended December 31, July 7, 2004
2003
Current Report on Form 6-K May 17, 2004
Current Report on Form 6-K June 17, 2004
ROSS COMMISSION FILINGS
(COMMISSION FILE NO. 000-30134) PERIOD/FILING DATE
------------------------------- ------------------
Annual Report on Form 10-K/A Fiscal year ended June 30, 2003, filed
with the Commission on May 7, 2004
Current Report on Form 8-K Filed on October 14, 2003
Current Report on Form 8-K Filed on November 4, 2003
Quarterly Report on Form 10-Q For the quarter ended September 30, 2003,
filed with the Commission on November 5,
2003
Current Report on Form 8-K Filed on January 8, 2004
Current Report on Form 8-K Filed on January 13, 2004
Current Report on Form 8-K Filed on February 13, 2004
Quarterly Report on Form 10-Q For the quarter ended December 31, 2003,
filed with the Commission on February 17,
2004
Current Report on Form 8-K Filed on April 30, 2004
Current Report on Form 8-K Filed on May 13, 2004
Quarterly Report on Form 10-Q For the quarter ended March 31, 2004,
filed with the Commission on May 17, 2004
Current Report on Form 8-K/A Filed on July 7, 2004
Ross' Annual Report on Form 10-K, as amended by Form 10-K/A, for the fiscal
year ended June 30, 2003, and Quarterly Report on Form 10-Q for the three months
ended March 31, 2004 are provided with this proxy statement/prospectus.
chinadotcom incorporates by reference the Quarterly Report on Form 10-Q of
IMI for the quarterly periods ended July 31, 2002, and October 31, 2002 filed
with the Commission on September 16, 2002 and December 16, 2002 respectively.
chinadotcom incorporates by reference the financial statements included
within the Annual Report on Form 10-K of Pivotal for the fiscal year ended June
30, 2003 filed with the Commission on September 29, 2003 and the Quarterly
Report on Form 10-Q of Pivotal for the three months ended September 30, 2003
161
filed with the Commission on November 14, 2003 and Quarterly Report on Form 10-Q
of Pivotal for the three months ended December 31, 2003 filed with the
Commission on February 17, 2004.
In addition, chinadotcom incorporates by reference any future filings it
makes with the Commission under Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this proxy statement/prospectus and prior to the
date on which the offering of securities covered by this proxy
statement/prospectus is completed. Such documents are considered to be a part of
this proxy statement/prospectus, effective as of the date such documents are
filed. In the event of conflicting information in these documents, the
information in the latest filed document should be considered correct.
You can obtain any of the other documents listed above from the Commission,
through the Commission's Web site at the address described above, or from
chinadotcom or Ross by requesting them in writing or by telephone at the
following addresses:
chinadotcom corporation Ross Systems, Inc.
34/F Citicorp Centre 2 Concourse Parkway
18 Whitfield Road Suite 800
Causeway Bay Atlanta, Georgia 30328
Hong Kong (770) 351-9600
(852) 2893-8200 Attention: Investor
Attention: Investor Relations
Relations
These documents are available without charge, excluding any exhibits to
them unless the exhibit is specifically listed as an exhibit to the registration
statement of which this proxy statement/prospectus forms a part.
If you are a stockholder of Ross and would like to request documents,
please do so by August 18, 2004 to receive them before the Ross special meeting.
If you request any documents from chinadotcom, chinadotcom will mail them to you
by first class mail, or another equally prompt means, within one business day
after chinadotcom receives your request.
This document is a prospectus of chinadotcom and a proxy statement of Ross.
Neither chinadotcom nor Ross has authorized anyone to give any information or
make any representation about the merger or chinadotcom or Ross that is
different from, or in addition to, that contained in this proxy
statement/prospectus or in any of the materials that chinadotcom or Ross have
incorporated into this document. Therefore, if anyone does give you information
of this sort, you should not rely on it. The information contained in this
document speaks only as of the date of this document unless the information
specifically indicates that another date applies.
162
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CHINADOTCOM CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
PAGE
----
Pro Forma Consolidated Balance Sheet as of March 31, 2004... 167
Pro Forma Consolidated Statement of Operations for the Year
Ended December 31, 2003................................... 169
Pro Forma Consolidated Statement of Operations for the Three
Months Ended March 31, 2004............................... 171
Notes to Unaudited Pro Forma Consolidated Financial
Statements................................................ 173
INDUSTRI-MATEMATIK INTERNATIONAL CORPORATION
Industri-Matematik International Corp. and Subsidiaries
Consolidated Financial Statements for the Period May 1,
2002 through December 10, 2002 and Years Ended April 30,
2002 and April 30, 2001................................... 186
STG, IMI Global Holdings Ireland Limited and Subsidiaries
Combined Consolidated Financial Statements for the Three
Months Ended July 31, 2003 (unaudited) and the Period from
the Date of Incorporation, October 23, 2002, through April
30, 2003.................................................. 218
163
CHINADOTCOM CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated financial information for chinadotcom
corporation ("chinadotcom") has been prepared to illustrate the effects of the
acquisitions of Industri-Matematik International Corp. ("IMI") and Pivotal
Corporation ("Pivotal") and the probable acquisition of Ross Systems, Inc.
("Ross").
Pursuant to a definitive agreement dated September 9, 2003 between Symphony
Technology Group and chinadotcom Capital Limited, chinadotcom Capital Limited
agreed to acquire a majority stake of IMI through a cash investment of $25
million into a joint venture formed between Symphony and chinadotcom Capital
Limited as a result of the transaction. The transaction was completed on
September 9, 2003.
Pursuant to a definitive agreement dated December 6, 2003 and amended on
January 19, 2004 among Pivotal, chinadotcom and CDC Software Corporation,
chinadotcom agreed to acquire Pivotal by way of either an all-cash or a
cash-and-share transaction. Under the terms of the agreement, chinadotcom
offered to acquire all of the outstanding shares of Pivotal under a plan of
arrangement that will permit Pivotal shareholders to elect to receive, for each
Pivotal share, either $2.00 in cash, or $2.14 comprised of $1.00 in cash plus
$1.14 of common shares of chinadotcom. The acquisition of Pivotal was completed
on February 25, 2004 for total consideration of $58.0 million which included
$35.9 million in cash, 1.85 million chinadotcom common shares with a value of
$21.4 million based on the trading price of chinadotcom the day the acquisition
became effective (the value for these shares was $20.7 million based on the ten
day trading average used in the purchase price formula), transaction costs of
approximately $0.2 million, and assumption of Pivotal stock options of
approximately $0.5 million.
Pursuant to a definitive agreement dated September 4, 2003, amended on
October 3, 2003 and January 7, 2004 among Ross, chinadotcom and CDC Software
Holdings, Inc, chinadotcom proposes to acquire Ross in a merger. Under the terms
of the amended merger agreement, for each share of Ross common stock held, Ross
stockholders can elect to receive either:
- $17.00 in cash; or
- $19.00 in a combination of cash and chinadotcom Class A common shares,
$5.00 of which will be paid in cash, and the remainder of which will be
paid in chinadotcom Class A common shares.
Each Ross stockholder that elects to receive cash and shares will receive a
number of chinadotcom Class A common shares equal to an exchange ratio, the
numerator of which is $14.00, and the denominator of which is the average
closing price of chinadotcom Class A common shares for the ten trading days
ending on, and including, the second trading day before the closing date of the
merger. However, in the event the ten trading day average closing price of
chinadotcom Class A common shares is less than $8.50, chinadotcom may elect to
adjust the exchange ratio to increase the amount of cash paid and reduce the
number of chinadotcom Class A common shares otherwise issuable upon conversion
of Ross common stock based on the exchange ratio. If chinadotcom elects to
adjust the exchange ratio, a Ross stockholder that elects to receive cash and
shares will receive for each share of Ross common stock:
- $5.00 in cash;
- a number of chinadotcom Class A common shares equal to an adjusted
exchange ratio, the numerator of which is $14.00, the denominator of
which is a number to be determined by chinadotcom, between the ten
trading day average closing price of chinadotcom Class A common shares
and $8.50, this fraction being referred to as the adjusted exchange
ratio; and
- cash in an amount equal to the product of (a) the ten trading day average
closing price of chinadotcom Class A common shares, multiplied by (b) the
excess of the exchange ratio over the adjusted exchange ratio.
Even if the ten trading day average closing price of chinadotcom Class A
common shares is equal to or greater than $8.50, chinadotcom is nonetheless
required to elect to adjust the exchange ratio as set forth
164
CHINADOTCOM CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
above if the number of shares issuable in the merger would require approval by
the shareholders of chinadotcom under Nasdaq rules or other applicable laws.
chinadotcom accounts for the acquisitions of IMI and Pivotal and the
proposed acquisition of Ross in its consolidated financial statements prepared
in accordance with U.S. GAAP using the purchase method of accounting pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations". The assets acquired and liabilities assumed from IMI, Pivotal and
Ross are recorded at their fair values as of the date of the merger or
acquisition, as applicable. Any excess of the purchase price over the fair value
of the net tangible assets and identifiable intangible assets acquired is
recorded as goodwill. The results of operations of IMI, Pivotal and Ross are
included in chinadotcom's results of operations from the date of the closing of
the respective merger or acquisition, as applicable. A final determination of
the required purchase accounting adjustments and the fair values of the assets
and liabilities of IMI, Pivotal and Ross has not yet been made. Accordingly, the
purchase accounting adjustments reflected in the unaudited pro forma
consolidated financial information included herein are preliminary and subject
to change.
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 2003 gives effect to the acquisitions of IMI and Pivotal and
the proposed acquisition of Ross as if they had occurred on January 1, 2003. The
unaudited pro forma consolidated statement of operations for the year ended
December 31, 2003 has been prepared by adding: (i) the consolidated results of
operations of chinadotcom for the year ended December 31, 2003; (ii) the results
of operations of Ross and Pivotal for the twelve months ended December 31, 2003,
as derived from adding the respective four quarterly financial statement
results; and (iii) the results of operations of IMI for the nine months ended
July 31, 2003, as derived from adding its former pre-acquisition consolidated
financial statements for the period from May 1, 2002 to December 10, 2002, and
its former post-acquisition combined consolidated financial statements for the
period ended April 30, 2003, and after deducting the quarterly financial
statement results for the quarters ended July 31, 2002 and October 31, 2002, and
adding the quarterly financial statement results for the quarter ended July 31,
2003. The results of operations of IMI for the post-acquisition period
commencing September 2003 have been incorporated in the consolidated results of
operations of chinadotcom for the year ended December 31, 2003. IMI's results
for the month of September 2003 have been excluded from the unaudited pro forma
consolidated statement of operations for the year ended December 31, 2003 in
order to achieve a consistent period of presentation. Because IMI's fiscal year
ends on April 30, the results of operations of IMI for the nine months ended
July 31, 2003 have been used in preparing the pro forma consolidated statement
of operations.
The unaudited pro forma consolidated statement of operations for the three
months ended March 31, 2004 gives effect to the acquisitions of IMI and Pivotal
and the proposed acquisition of Ross as if they had occurred on January 1, 2003.
The unaudited pro forma consolidated statement of operations for the period
ended March 31, 2004 has been prepared by adding the consolidated results of
operations for chinadotcom for the three months period ended March 31, 2004, the
results of operations of Pivotal for the two months period ended February 29,
2004 and the results of operations of Ross for the three months period ended
March 31, 2004. The unaudited pro forma consolidated balance sheet as of March
31, 2004 gives effect to the acquisition of Ross as if it had occurred on March
31, 2004. The financial positions of IMI and Pivotal as of March 31, 2004 had
been included in the consolidated financial position of chinadotcom as of March
31, 2004.
chinadotcom's unaudited pro forma consolidated financial information should
be read in conjunction with its audited consolidated financial statements and
the notes thereto for the year ended December 31, 2003 and unaudited
consolidated financial statements for the three months ended March 31, 2004.
chinadotcom's unaudited pro forma consolidated financial information has
been prepared to illustrate the effects of the Ross, Pivotal and IMI
acquisitions. The unaudited pro forma consolidated financial
165
CHINADOTCOM CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
information does not necessarily present its financial position or results of
operations as they would have been if the companies involved had constituted one
entity for the periods presented and is not necessarily indicative of its future
results of operations or the results that might have occurred if the forgoing
transactions had been consummated on the indicated dates.
166
CHINADOTCOM CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2004
(In thousands of U.S. dollars, except number of shares and per share data)
CHINADOTCOM ROSS AS OF ROSS
AS OF MARCH 31, MARCH 31, PRO FORMA
2004 2004(5) ADJUSTMENTS NOTES PRO FORMA
--------------- ----------- ----------- ----- ---------
Current assets:
Cash and cash equivalents............ $125,510 $ 8,751 $(16,464) 6(a) $117,797
Restricted cash...................... 5,931 5,931
Accounts receivable.................. 25,837 14,967 40,804
Deposits, prepayments and other
receivables....................... 13,355 805 14,160
Loan receivables..................... 1,200 1,200
Available-for-sale debt securities... 118,119 118,119
Restricted debt securities........... 92,656 92,656
Deferred tax assets.................. 240 240
-------- ------- -------- --------
Total current assets................... 382,848 24,523 (16,464) 390,907
Loan receivable........................ 25,000 25,000
Property and equipment, net............ 8,789 1,208 9,997
Goodwill............................... 121,838 2,181 22,328 6(c) 146,347
Intangible assets...................... 67,730 12,617 24,783 6(b) 110,630
5,500 6(c)
Investment in equity investees......... 439 439
Investments under cost method.......... 609 609
Available-for-sale debt securities..... 9,700 9,700
Restricted debt securities............. 11,908 11,908
Available-for-sale equity securities... 690 690
Deferred tax assets.................... 305 305
Other assets........................... 4,469 812 5,281
-------- ------- -------- --------
Total assets........................... $634,325 $41,341 $ 36,147 $711,813
======== ======= ======== ========
167
CHINADOTCOM CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2004
(In thousands of U.S. dollars, except number of shares and per share data)
CHINADOTCOM
AS OF ROSS AS OF ROSS
MARCH 31, MARCH 31, PRO FORMA
2004 2004(5) ADJUSTMENTS NOTES PRO FORMA
----------- ----------- ----------- ----- ---------
Current Liabilities:
Accounts payable........................... $ 7,835 $ 1,436 $ $ 9,271
Other payables............................. 3,897 3,897
Accrued liabilities........................ 41,819 5,055 3,848 6(d) 50,722
Short-term bank loans...................... 77,180 5,049 82,229
Long-term bank loans, current portion...... 171 171
Deferred revenue........................... 20,717 11,944 32,661
Income tax payable......................... 1,011 177 1,188
Note payable...............................
--------- -------- -------- ---------
Total current liabilities.................... 152,630 23,661 3,848 180,139
Deferred tax liabilities..................... 1,206 1,206
Long-term bank loans, net of current
portion.................................... 11,574 11,574
Accrued pension liability.................... 2,005 2,005
Minority interests........................... 46,648 46,648
Shareholders' equity:
Convertible preferred stock................ -- 2,000 (2,000) --
Share capital.............................. 26 28 (27) 27
Additional paid-in capital................. 639,108 87,275 (41,364) 685,019
Treasury stock............................. (4,067) (1,120) 5,187 --
Accumulated deficit........................ (214,559) (68,669) 68,669 (214,559)
Accumulated other comprehensive income..... (246) (1,834) 1,834 (246)
--------- -------- -------- ---------
Total shareholders' equity................... $ 420,262 $ 17,680 $ 32,299 6(e) $ 470,241
========= ======== ======== =========
Total liabilities and shareholders' equity... $ 634,325 $ 41,341 $ 36,147 $ 711,813
========= ======== ======== =========
Book value per share......................... 4.04 9 4.30
168
CHINADOTCOM CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 2003
(In thousands of U.S. dollars, except number of shares and per share data)
CHINADOTCOM IMI PIVOTAL
TWELVE NINE TWELVE
MONTHS MONTHS EXCLUDE IMI MONTHS
ENDED ENDED SEPTEMBER 2003 IMI CHINADOTCOM ENDED
DECEMBER 31, JULY 31, FROM CDC PRO FORMA AND IMI DECEMBER 31,
2003 2003 ADJUSTMENTS ADJUSTMENTS NOTES SUB-TOTAL 2003
------------ -------- -------------- ----------- ----- ----------- ------------
Income Statement Data:
REVENUES:
Software and consulting
services................... $ 50,699 $32,082 $(3,027) $ (312) 2(c) $ 79,442 $ 55,292
Mobile services and
applications............... 16,876 16,876
Advertising and marketing
activities................. 19,558 19,558
Other income................. 2,299 2,299
-------- ------- ------- ------- -------- --------
Total revenue.................. $ 89,432 $32,082 $(3,027) $ (312) $118,175 $ 55,292
======== ======= ======= ======= ======== ========
Less: Cost of revenues
Software and consulting
services................... (31,820) (20,312) 1,908 101 2(c) (50,123) (18,935)
Mobile services and
applications............... (2,247) (2,247)
Advertising and marketing
activities................. (12,966) (12,966)
Other income................. (1,084) (1,084)
-------- ------- ------- ------- -------- --------
Gross margin................... 41,315 11,770 (1,119) (211) 51,755 36,357
Selling, general and
administrative expenses...... (34,325) (4,236) 459 135 2(c) (37,967) (27,034)
Depreciation and amortization
expenses..................... (7,182) (1,070) 199 290 2(a) (7,763) (1,604)
Research and development after
deduction of capitalized
software costs............... (3,460) 338 110 2(c) (3,012) (14,222)
Restructuring costs............ (2,584) (2,584) (2,270)
Impairment of capitalized
software costs............... (1,200) (1,200)
Transaction-related costs...... (2,906)
Litigation settlement..........
-------- ------- ------- ------- -------- --------
Operating income/(loss)........ $ (192) $ (780) $ (123) $ 324 $ (771) $(11,679)
Interest income................ 13,440 106 (1) 13,545 118
Interest expense............... (1,070) (374) 24 (1,420) (15)
Gain/(loss) on disposal of
available-for-sale
securities................... 4,599 4,599 (275)
ROSS
TWELVE
MONTHS
PIVOTAL ENDED ROSS
PRO FORMA DECEMBER 31, PRO FORMA PRO FORMA
ADJUSTMENTS NOTES 2003 ADJUSTMENTS NOTES TOTAL
----------- ----- ------------ ----------- ----- -----------
Income Statement Data:
REVENUES:
Software and consulting
services................... $ $ 49,776 $ $ 184,510
Mobile services and
applications............... 16,876
Advertising and marketing
activities................. 19,558
Other income................. 2,299
------- -------- ------- -----------
Total revenue.................. $ $ 49,776 $ $ 223,243
======= ======== ======= ===========
Less: Cost of revenues
Software and consulting
services................... (2,211) 4(b) (25,974) 779 6(b) (96,464)
Mobile services and
applications............... (2,247)
Advertising and marketing
activities................. (12,966)
Other income................. (1,084)
------- -------- ------- -----------
Gross margin................... (2,211) 23,802 779 110,482
Selling, general and
administrative expenses...... (759) 4(d) (14,531) (1,606) 6(f) (81,897)
Depreciation and amortization
expenses..................... (3,667) 4(b) (721) (1,200) 6(b) (14,955)
Research and development after
deduction of capitalized
software costs............... (3,986) (21,220)
Restructuring costs............ (4,854)
Impairment of capitalized
software costs............... (1,200)
Transaction-related costs...... 1,500 4(d) (1,406)
Litigation settlement.......... (1,896) (1,896)
------- -------- ------- -----------
Operating income/(loss)........ $(5,137) $ 2,668 $(2,027) $ (16,946)
Interest income................ 18 13,681
Interest expense............... (112) (1,547)
Gain/(loss) on disposal of
available-for-sale
securities................... 4,324
169
CHINADOTCOM CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 2003
(In thousands of U.S. dollars, except number of shares and per share data)
CHINADOTCOM IMI PIVOTAL
TWELVE NINE TWELVE
MONTHS MONTHS EXCLUDE IMI MONTHS
ENDED ENDED SEPTEMBER 2003 IMI CHINADOTCOM ENDED
DECEMBER 31, JULY 31, FROM CDC PRO FORMA AND IMI DECEMBER 31,
2003 2003 ADJUSTMENTS ADJUSTMENTS NOTES SUB-TOTAL 2003
------------ -------- -------------- ----------- ----- ----------- ------------
Gain on disposal of
subsidiaries and cost
investments.................. $ 469 $ $ $ $ 469 $
Other non-operating gains...... 961 961 (21)
Other non-operating losses..... (153) (554) 17 (25) 2(c) (715) (451)
Share of losses in equity
investees.................... (115) (115)
-------- ------- ------- ------- -------- --------
Income/(loss) before income
taxes........................ 17,939 (1,602) (83) 299 16,553 (12,323)
Income tax benefits/(income
taxes)....................... 689 (771) 6 8 2(c) (167) (419)
(99) 2(d)
-------- ------- ------- ------- -------- --------
Income/(loss) before minority
interests.................... 18,628 (2,373) (77) 208 16,386 (12,742)
Minority interests in losses of
consolidated subsidiaries.... (2,204) 1,215 2(b) (989)
-------- ------- ------- ------- -------- --------
Income/(loss) from continuing
operations................... $ 16,424 $(2,373) $ (77) $ 1,423 $ 15,397 $(12,742)
======== ======= ======= ======= ======== ========
Earnings per share from
continuing operations:
Basic........................ 0.16
Diluted...................... 0.16
Cash dividends declared per
share
Weighted average number of
shares:
Basic........................ 100,532,594
Diluted...................... 103,199,421
ROSS
TWELVE
MONTHS
PIVOTAL ENDED ROSS
PRO FORMA DECEMBER 31, PRO FORMA PRO FORMA
ADJUSTMENTS NOTES 2003 ADJUSTMENTS NOTES TOTAL
----------- ----- ------------ ----------- ----- -----------
Gain on disposal of
subsidiaries and cost
investments.................. $ $ $ $ 469
Other non-operating gains...... 9 949
Other non-operating losses..... (997) (2,163)
Share of losses in equity
investees.................... (115)
------- -------- ------- -----------
Income/(loss) before income
taxes........................ (5,137) 1,586 (2,027) (1,348)
Income tax benefits/(income
taxes)....................... 1,999 4(d) (334) 143 6(f) 1,222
------- -------- ------- -----------
Income/(loss) before minority
interests.................... (3,138) 1,252 (1,884) (126)
Minority interests in losses of
consolidated subsidiaries.... (989)
------- -------- ------- -----------
Income/(loss) from continuing
operations................... $(3,138) $ 1,252 $(1,884) $ (1,115)
======= ======== ======= ===========
Earnings per share from
continuing operations:
Basic........................ 8 (0.01)
Diluted...................... 8 (0.01)
Cash dividends declared per
share
Weighted average number of
shares:
Basic........................ 1,846,429 5,401,059 8 107,780,082
Diluted...................... 1,888,002 5,879,883 8 110,967,306
170
CHINADOTCOM CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2004
(In thousands of U.S. dollars, except number of shares and per share data)
CHINADOTCOM PIVOTAL ROSS
THREE MONTHS TWO MONTHS THREE MONTHS
ENDED ENDED PIVOTAL ENDED ROSS
MARCH 31, FEBRUARY 29, PRO FORMA MARCH 31, PRO FORMA
2004 2004 ADJUSTMENTS NOTES 2004 ADJUSTMENTS NOTES PRO FORMA
------------ ------------ ----------- ----- ------------ ----------- ----- ---------
Income Statement Data:
REVENUES:
Software and consulting
services................ $26,887 $ 7,126 $ $13,672 $ $ 47,685
Mobile services and
applications............ 6,467 6,467
Advertising and marketing
activities.............. 2,384 2,384
Other income............... 121 121
------- -------- ------- ------- ----- --------
Total revenue................ $35,859 $ 7,126 $ $13,672 $ $ 56,657
======= ======== ======= ======= ===== ========
Less: Cost of revenues
Software and consulting
services................ (14,874) (2,948) (387) 4(b) (7,077) 192 6(b) (25,094)
Mobile services and
applications............ (1,053) (1,053)
Advertising and marketing
activities.............. (981) (981)
Other income............... (70) (70)
------- -------- ------- ------- ----- --------
Gross margin................. 18,881 4,178 (387) 6,595 192 29,459
Selling, general and
administrative expenses.... (13,690) (4,256) (61) 4(d) (3,056) (256) 6(f) (21,319)
Depreciation and amortization
expenses................... (2,315) (272) (611) 4(b) (1,299) (300) 6(b) (4,797)
Research and development
after deduction of
capitalized software
costs...................... (674) (1,999) (778) (3,451)
Transaction-related costs.... -- (3,134) 3,134 4(d) -- -- --
------- -------- ------- ------- ----- --------
Operating income/(loss)...... $ 2,202 $ (5,483) $ 2,075 $ 1,462 $(364) $ (108)
Interest income.............. 2,797 3 2,800
Interest expense............. (392) (9) (33) (434)
Gain/(loss) on disposal of
available-for-sale
securities................. 299 299
171
CHINADOTCOM CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
MARCH 31, 2004
(In thousands of U.S. dollars, except number of shares and per share data)
CHINADOTCOM PIVOTAL ROSS
THREE MONTHS TWO MONTHS THREE MONTHS
ENDED ENDED PIVOTAL ENDED ROSS
MARCH 31, FEBRUARY 29, PRO FORMA MARCH 31, PRO FORMA
2004 2004 ADJUSTMENTS NOTES 2004 ADJUSTMENTS
------------ ------------ ----------- ----- ------------ -----------
Gain on disposal of subsidiaries and cost
investments................................. $ 53 $ $ $ $
Other non-operating losses.................... (139)
Share of losses in equity investees........... 6
----------- -------- --------- ------ ---------
Income/(loss) before income taxes............. 4,965 (5,492) 2,075 1,293 (364)
Income tax benefits/(income taxes)............ (19) (49) 339 4(d) (22) 36
----------- -------- --------- ------ ---------
Income/(loss) before minority interests....... 4,946 (5,541) 2,414 1,271 (328)
Minority interests in losses of consolidated
subsidiaries................................ (665)
----------- -------- --------- ------ ---------
Income/(loss) from continuing operations...... $ 4,281 $ (5,541) $ 2,414 $1,271 $ (328)
=========== ======== ========= ====== =========
Earning per share from continuing operations:
Basic....................................... 0.04
Diluted..................................... 0.04
Weighted average number of shares:
Basic....................................... 102,611,756 5,401,059
Diluted..................................... 106,788,279 5,879,883
NOTES PRO FORMA
----- -------------
Gain on disposal of subsidiaries and cost
investments................................. $ 53
Other non-operating losses.................... (139)
Share of losses in equity investees........... 6
-------------
Income/(loss) before income taxes............. 2,477
Income tax benefits/(income taxes)............ 6(f) 285
-------------
Income/(loss) before minority interests....... 2,762
Minority interests in losses of consolidated
subsidiaries................................ (665)
-------------
Income/(loss) from continuing operations...... $ 2,097
=============
Earning per share from continuing operations:
Basic....................................... 8 0.02
Diluted..................................... 8 0.02
Weighted average number of shares:
Basic....................................... 8 108,012,815
Diluted..................................... 8 112,668,162
172
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
1. IMI BASIS OF PRO FORMA PRESENTATION
On September 9, 2003 CDC Software acquired a majority stake of IMI, a
leading provider of supply chain management solutions in the United States and
Europe.
chinadotcom's stake in IMI resulted from the formation of a joint venture
in which chinadotcom's software unit, CDC Software, holds a 51% interest and
Symphony Technology Group, or Symphony, a Palo Alto, California-based private
equity firm focused on enterprise software and services, holds the remaining 49%
interest. In consideration for its 51% stake in the joint venture, CDC Software
has invested $25 million into the joint venture, and has also agreed to finance
a loan facility for the joint venture of up to a further $25 million. All funds
provided to the joint venture will be used primarily for further expansion in
the supply chain management software sector via acquisitions, strategic
investments and organic growth. Additional terms of the transaction designate
CDC Software as the master distributor for IMI's software products in China, as
well as an outsourcing partner for IMI. The estimated direct transaction costs
are $1 million.
The total purchase price for the IMI acquisition was allocated as
follows (in thousands):
Cash consideration.......................................... $25,000
Transaction costs........................................... 1,000
-------
Total purchase consideration.............................. $26,000
=======
Under the purchase method of accounting, the total estimated purchase price
as shown in the table above is allocated to IMI's net tangible and identifiable
intangible assets based on their estimated fair values as of the date of the
completion of the acquisition. Based on the management's preliminary internal
valuation, and subject to material changes upon the final determination of the
required purchase accounting adjustments and the fair values of assets and
liabilities of IMI, the preliminary estimated purchase price is allocated as
follows (in thousands):
Net tangible assets......................................... $15,364
Amortizable intangible assets:
Developed technologies................................. 2,500
Customer base.......................................... 2,700
Goodwill.................................................... 15,512
Minority interest........................................... (10,076)
-------
Total preliminary estimated purchase price allocation..... $26,000
=======
Of the total estimated purchase price, a preliminary estimate of $7.8
million has been allocated to net tangible assets acquired and approximately
$2.7 million has been allocated to amortizable intangible assets acquired.
Developed technologies, which comprises products that have reached
technological feasibility, include products in most of IMI's product lines. IMI
offers a family of software solutions including IMI Order, IMI Warehouse, IMI
Collaboration, IMI Replenishment and IMI Store, which represents an integrated
suite of order fulfillment and order management solution, warehouse management,
supply chain coordination tool and inventory and sales forecasting capabilities.
Core technology and patents represent a combination of IMI processes, patents
and trade secrets developed through years of experience in design and
development. This proprietary know-how can be leveraged by IMI to develop new
technology and improved products and production processes. chinadotcom expects
to amortize the developed and core technology and patents on the straight-line
basis over an average estimated life of 4 years.
173
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
1. IMI BASIS OF PRO FORMA PRESENTATION (CONTINUED)
Customer base consists of IMI's customer contracts and related customer
relationships, as set out in paragraph A20 of SFAS No. 141. IMI's relationships
with its ongoing customer base are defined by long-standing and ongoing software
licenses, professional service and software support agreements. IMI's existing
customer base comprises of approximately 60 companies. chinadotcom expects to
amortize the fair value of customer base on the straight-line basis over an
average estimated life of 10 years.
Of the total estimated purchase price, approximately $15.5 million has been
allocated to goodwill. Goodwill represents the excess of the purchase price of
an acquired business over the fair value of the underlying net tangible and
identifiable intangible assets attributable to chinadotcom.
In accordance with SFAS 142, "Goodwill and Other Intangible Assets",
goodwill and intangible assets with indefinite lives resulting from business
combinations will not be amortized but instead will be tested for impairment at
least annually (more frequently if certain indicators are present). In the event
that the management of the combined company determines that the value of
goodwill or intangible assets with indefinite lives has become impaired, the
combined company will incur an accounting charge for the amount of impairment
during the fiscal quarter in which the determination is made.
2. IMI PRO FORMA ADJUSTMENTS
Pro forma adjustments are necessary to reflect the amortization expense
related to the estimated amortizable intangible assets, to reflect the income
tax effect related to the pro forma adjustments, to carve out the discontinued
operations of IMI during the pro forma period, and to eliminate the minority
interest in IMI.
Intercompany balances or transactions between chinadotcom and IMI were not
significant. No pro forma adjustments were required to conform IMI's accounting
policies to chinadotcom's accounting policies. Certain reclassifications have
been made to conform IMI's historical amounts to chinadotcom's presentation.
chinadotcom has not identified any pre-acquisition contingencies where the
related asset, liability or impairment is probable and the amount of the asset,
liability or impairment can be reasonably estimated. Prior to the end of the
purchase price allocation period, if information becomes available which would
indicate it is probable that such events have occurred and the amounts can be
reasonably estimated, such items will be included in the purchase price
allocation.
The pro forma adjustments included in the unaudited pro forma consolidated
financial information are as follows:
(a) Adjustment to reflect the preliminary estimate of the fair
value of amortizable intangible assets (in thousands):
DECREASE IN
AMORTIZATION
FOR THE
HISTORICAL PRELIMINARY NINE MONTHS USEFUL
AMOUNT, ESTIMATED ENDED LIFE
NET FAIR VALUE DECREASE JULY 31, 2003 (YEARS)
----------- ----------- -------- ------------- -------
Developed technologies.................... $2,645 $2,500 $(145) $(286) 4
Customer base............................. 2,894 2,700 (194) (4) 10
------ ------ ----- -----
$5,539 $5,200 $(339) $(290)
====== ====== ===== =====
(b) Adjustment to eliminate 49% minority interests of IMI.
174
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
2. IMI PRO FORMA ADJUSTMENTS (CONTINUED)
(c) Adjustment to carve out Industri-Matematik Abalon AB, or
Abalon, discontinued operations of IMI, for the twelve months ended
October 31, 2002 as the pre-acquisition consolidated financial
statements for the period from May 1, 2002 to December 10, 2002 do not
present the discontinued operations that were subsequently discontinued
by the then acquirer as reflected in the post-acquisition combined
consolidated financial statements for the period from October 23, 2002
to July 31, 2003.
The net adjustments to the unaudited pro forma consolidated
statement of operations for the nine months ended July 31, 2003 is $0.02
million.
(d) Adjustment to record the related tax effect of item (a) above.
3. PIVOTAL BASIS OF PRO FORMA PRESENTATION
On December 6, 2003, Pivotal, chinadotcom and CDC Software Corporation
entered into a merger agreement, pursuant to which CDC would acquire all of the
outstanding shares of Pivotal in exchange for, at the option of each Pivotal
shareholder, either (i) $2.00 cash per Pivotal share or (ii) $2.14 per Pivotal
share, comprising of (a) $1.00 cash plus (b) $1.14 of chinadotcom Class A common
shares. At the effective time of the merger, each outstanding Pivotal stock
option, whether vested or unvested, with an exercise price of $2.00 or less,
would be converted, based on a fixed exchange ratio, into options to acquire
chinadotcom Class A common shares. The fair value of chinadotcom stock options
issued in exchange for the vested Pivotal stock options is included in the
purchase price.
The acquisition of Pivotal was completed on February 25, 2004 for a total
purchase price of approximately $58.0 million, which comprised of cash of $35.9
million, chinadotcom Class A common shares valued at $21.4 million, chinadotcom
stock options issued in exchange for vested in-the-money Pivotal stock options
with a fair value of $0.5 million and estimated transaction costs of $0.2
million.
The total purchase price of the Pivotal acquisition was allocated as
follows (amount in thousands):
Value of chinadotcom Class A common shares issued (1,846,429
shares)................................................... $21,363
Assumption of Pivotal stock options......................... 481
-------
Total value of chinadotcom securities..................... 21,844
Cash consideration.......................................... 35,925
Transaction costs........................................... 200
-------
Total purchase consideration.............................. $57,969
=======
Under the purchase method of accounting, the total estimated purchase price
as shown in the table above is allocated to Pivotal's net tangible liabilities
and identifiable intangible assets based on their estimated fair values as of
the date of the completion of the acquisition. The preliminary purchase price
allocation reflects management's decision to restructure operations including:
closure/disposition of excess facilities in North America, restructuring of
German operations, and terminations of redundant personnel. CDC has accrued
approximately $8.2 million in associated exit costs. In addition, as part of its
fair value adjustments, CDC recorded a reduction in the value of its net assets
of approximately $1.4 million, relating to fixed assets and prepayments. These
cost amounts have been included in the estimated net tangible assets on
acquisition. Based on management's preliminary assessment, and subject to
material changes upon the final determination of the required purchase
accounting adjustments and the fair value of
175
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
3. PIVOTAL BASIS OF PRO FORMA PRESENTATION (CONTINUED)
the assets and liabilities of Pivotal, the preliminary estimated purchase price
is allocated as follows (in thousands):
Net tangible liabilities.................................... $(20,927)
Amortizable intangible assets:
Developed technologies.................................... 13,798
Customer base............................................. 18,333
Intangible assets with indefinite lives..................... 7,338
Goodwill.................................................... 39,427
--------
Total preliminary estimated purchase price allocation..... $ 57,969
========
Of the total estimated purchase price, a preliminary estimate of $20.9
million has been allocated to net tangible liabilities assumed, and
approximately $32.1 million has been allocated to amortizable intangible assets
acquired. The amortization related to the fair value adjustments to amortizable
intangible assets is reflected as a pro forma adjustment to the unaudited pro
forma consolidated statement of operations.
Developed technologies, which comprise products that have reached
technological feasibility, includes products in most of Pivotal's product lines.
Pivotal offers customer relationship management ("CRM") software that enables
mid-sized enterprises to acquire, serve and manage their customers. The Pivotal
CRM suite includes the Pivotal Sales Suite, the Pivotal Marketing Suite, the
Pivotal Services Suite, the Pivotal Interactive Selling Suite, and the Pivotal
Partner Management Suite. chinadotcom expects to amortize intangible assets
related to the developed technologies on the straight-line basis over an average
estimated life of 5 years.
Customer base consists of customer contracts and the related customer
relationships, as set out in paragraph A20 of SFAS 141, and is defined by
Pivotal as customers who have purchased new or renewal maintenance subscriptions
within the prior year. Many of Pivotal's customers, including approximately
one-third of the top 25 customers, have had relationships with Pivotal for more
than 5 years. chinadotcom expects to amortize the fair value of intangible
assets related to its customer base on the straight-line basis over the average
estimated life of 5 years.
Of the total estimated purchase price, approximately $39.4 million will be
allocated to goodwill and approximately $7.3 million will be allocated to
intangible assets with indefinite lives. Goodwill represents the excess of the
purchase price of an acquired business over the fair value of the underlying net
tangible and identifiable intangible assets. Intangible assets with indefinite
lives consist primarily of the estimated fair value allocated to trademarks. The
assumption used in the preliminary valuation is that the intangible assets
related to trademarks will not be amortized and will have an indefinite
remaining useful life. If chinadotcom management should change the assumptions
used in the valuation, amounts preliminarily allocated to intangible assets with
definite lives may significantly increase or decrease or be eliminated, and
amounts allocated to intangible assets with indefinite lives may increase or
decrease significantly, which could result in material differences in the
amortization of intangible assets.
In accordance with SFAS 142, "Goodwill and Other Intangible Assets",
goodwill and intangible assets with indefinite lives resulting from business
combinations will not be amortized but instead will be tested for impairment at
least annually (more frequently if certain indicators are present). In the event
that the management of the combined company determines that the value of
goodwill or intangible assets
176
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
3. PIVOTAL BASIS OF PRO FORMA PRESENTATION (CONTINUED)
with indefinite lives has become impaired, the combined company will incur an
accounting charge for the amount of impairment during the fiscal period in which
the determination is made.
4. PIVOTAL PRO FORMA ADJUSTMENTS
Pro forma adjustments are necessary to reflect the estimated purchase
price, to adjust amounts related to Pivotal's net tangible and intangible assets
to a preliminary estimate of their fair values, and to reflect the amortization
expense related to the estimated amortizable intangible assets.
The pro forma adjustments included in the attached unaudited pro forma
consolidated financial information have been prepared based on the actual
consideration for all of the outstanding shares of Pivotal. The amount of cash
paid is approximately $35.9 million, the resulting goodwill amount is
approximately $39.4 million, and the increase in consolidated share capital is
approximately $21.8 million.
No pro forma adjustments are required to conform Pivotal's accounting
policies to chinadotcom's accounting policies. Certain reclassifications have
been made to conform Pivotal's historical amounts to chinadotcom's presentation.
chinadotcom has not identified any pre-acquisition contingencies where the
related asset, liability or impairment is probable and the amount of the asset,
liability or impairment can be reasonably estimated. Prior to the end of the
purchase price allocation period, if information becomes available which would
indicate it is probable that such events have occurred and the amounts can be
reasonably estimated, such items will be included in the purchase price
allocation.
The pro forma adjustments included in the unaudited pro forma consolidated
financial information are as follows:
(a) Adjustment to reflect the cash consideration paid to
stockholders of Pivotal under the merger agreement.
(b) Adjustments to reflect the preliminary estimate of the fair
value of amortizable intangible assets and the resulting increase in
amortization expense, are as follows (in thousands):
INCREASE IN
AMORTIZATION
FOR THE
HISTORICAL PRELIMINARY TWELVE MONTHS USEFUL
AMOUNT, ESTIMATED ENDED LIFE
NET FAIR VALUE INCREASE DEC. 31, 2003 (YEARS)
----------- ----------- -------- ------------- -------
Developed technologies....................... $437 $13,798 $13,361 $2,211 5
Customer base................................ -- 18,333 18,333 3,667 5
---- ------- ------- ------
$437 $32,131 $31,694 $5,878
==== ======= ======= ======
177
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
4. PIVOTAL PRO FORMA ADJUSTMENTS (CONTINUED)
INCREASE IN
AMORTIZATION
FOR THE
PRELIMINARY TWO MONTHS USEFUL
HISTORICAL ESTIMATED ENDED LIFE
AMOUNT, NET FAIR VALUE INCREASE FEB. 29, 2004 (YEARS)
------------- ----------- -------- ------------- -------
Developed technologies..................... $363 $13,798 13,435 387 5
Customer base.............................. -- 18,333 18,333 611 5
---- ------- ------- ------
$363 $32,131 $31,768 $ 998
==== ======= ======= ======
(c) Adjustment for estimated transaction costs associated with the
merger is $200,000.
The transaction costs of approximately $0.2 million have been included in
the unaudited pro forma consolidated balance sheet as of March 31, 2004. An
adjustment for an estimate of the restructuring costs to be incurred by
chinadotcom has not been included in the unaudited pro forma consolidated
statement of operations since such an adjustment is non-recurring in nature and
is not yet determinable. These estimates are preliminary and subject to change.
Transaction-related costs incurred by Pivotal amounting to $1.5 million and $3.1
million in the twelve-month period ended December 31, 2003 and the two-month
period ended February 28, 2004, respectively have been excluded from the
unaudited pro forma consolidated statement of operations since the cost was
non-recurring in nature and resulted directly from the transaction.
(d) Adjustments to net income/(loss) (in thousands):
TWELVE MONTHS TWO MONTHS
ENDED ENDED
DEC. 31, 2003 FEB. 29, 2004
------------- -------------
(i) To record the increase in amortization expense
resulting from the fair value adjustment to
amortizable intangible assets as noted in (b)
above............................................... $(5,878) $ (998)
(ii) To record the amortization of deferred share-based
compensation........................................ (759) (61)
(iii) To eliminate transaction-related costs included in
earnings as noted in (c) above...................... 1,500 3,134
(iv) To record the related tax effect of item (i) above... 1,999 339
------- -------
$(3,138) $ 2,414
======= =======
5. ROSS BASIS OF PRO FORMA PRESENTATION
On September 4, 2003, Ross, chinadotcom and CDC entered into a merger
agreement, as amended on January 7, 2004, which contemplates Ross becoming a
wholly-owned subsidiary of chinadotcom in a transaction to be accounted for
using the purchase method. Under the terms of the amended agreement, holders of
Ross shares may elect to receive, for each share of Ross, either (a) $19.00
comprised of (i) $5.00 cash and (ii) chinadotcom Class A common shares valued at
$14.00, or (b) $17.00 cash. Moreover, if the calculated average price of
chinadotcom Class A common shares is below $8.50, chinadotcom may elect to
increase the amount of cash and decrease the number of chinadotcom Class A
common shares that Ross holders will receive.
The total estimated purchase price is approximately $68.2 million under the
cash-and-share scenario (comprised of cash of $16.5 million, chinadotcom Class A
common shares valued at $45.9 million,
178
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
5. ROSS BASIS OF PRO FORMA PRESENTATION (CONTINUED)
chinadotcom stock options with a fair value of $4.0 million and estimated direct
transaction costs of $1.8 million) or approximately $61.8 million under the
all-cash scenario (comprised of cash of $56.0 million, chinadotcom stock options
with a fair value of $4.0 million and estimated direct transaction costs of $1.8
million). Change of control payments are estimated to be an additional $2.0
million.
The unaudited pro forma consolidated financial information were prepared on
the basis that all Ross stockholders elect the cash-and-share scenario and that
the average chinadotcom share price for the ten consecutive trading days ending
on, and including, the trading day that is two trading days prior to the closing
date of the merger, is above $8.50. In the event that some or all of the Ross
stockholders elect to receive the cash-and-share scenario or in the event that
the calculated average price of chinadotcom Class A common shares is below
$8.50, then the cash and cash equivalents, goodwill and share capital amounts
will differ from those presented in the pro forma financial information.
chinadotcom estimates that the amount of cash paid, the increase in share
capital, and the resulting goodwill will be $16.5 million, $50.0 million and
$24.5 million, respectively, if all Ross stockholders elect the cash-and-share
scenario (assuming the calculated average chinadotcom share price is greater
than $8.50), and the respective amounts will be $56.0 million, $4.0 million and
$18.1 million if all Ross stockholders elect the all-cash scenario.
At the effective time of the merger, chinadotcom will substitute, for each
stock option outstanding under Ross' 1988 Stock Option Plan and 1998 Stock
Option Plan with an exercise price of $19.00 per share or less (other than stock
options granted to certain executives), stock options to purchase chinadotcom
Class A common shares. Each substituted Ross stock option, whether vested or
unvested, will be converted into an option to acquire a number of chinadotcom
Class A common shares. The fair value of chinadotcom stock options issued in
exchange for the vested Ross stock options is included in the estimated purchase
price.
The estimated total purchase price of the Ross merger under the two
scenarios are as follows (amount in thousands):
(CASH-AND-SHARE
SCENARIO)
---------------
Value of chinadotcom Class A common shares issued (5,401,059
shares if at $8.50 per share)............................. $45,909
Assumption of Ross stock options............................ 4,070
-------
Total value of chinadotcom securities..................... 49,979
Cash consideration.......................................... 16,464
Transaction costs........................................... 1,800
-------
Total purchase consideration.............................. $68,243
=======
(ALL-CASH SCENARIO)
-------------------
Cash consideration.......................................... $55,977
Assumption of Ross stock options............................ 4,070
Transaction costs........................................... 1,800
-------
Total purchase consideration.............................. $61,847
=======
Under the purchase method of accounting, the total estimated purchase price
as shown in the table above is allocated to Ross' net tangible liabilities and
identifiable intangible assets based on their estimated
179
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
5. ROSS BASIS OF PRO FORMA PRESENTATION (CONTINUED)
fair values as of the date of the completion of the merger. Based on
management's preliminary assessment, and subject to material changes upon the
final determination of the required purchase accounting adjustments and the fair
value of the assets and liabilities of Ross, the preliminary estimated purchase
price is allocated as follows (in thousands):
(CASH-AND-SHARE
SCENARIO)
---------------
Net tangible assets......................................... $ 834
Amortizable intangible assets:
Developed technologies.................................... 29,000
Customer base............................................. 8,400
Intangible assets with indefinite lives..................... 5,500
Goodwill.................................................... 24,509
-------
Total preliminary estimated purchase price allocation..... $68,243
=======
(ALL-CASH SCENARIO)
-------------------
Net tangible assets......................................... $ 834
Amortizable intangible assets:
Developed technologies.................................... 29,000
Customer base............................................. 8,400
Intangible assets with indefinite lives..................... 5,500
Goodwill.................................................... 18,113
-------
Total preliminary estimated purchase price allocation..... $61,847
=======
Of the total estimated purchase price, a preliminary estimate of $0.8
million has been allocated to net tangible assets acquired and approximately
$37.4 million has been allocated to amortizable intangible assets acquired. The
depreciation and amortization related to the fair value adjustment to net
tangible assets and the amortization related to the amortizable intangible
assets are reflected as pro forma adjustments to the unaudited pro forma
consolidated statement of operations.
Developed technologies, which comprises products that have reached
technological feasibility, includes products in most of Ross' product lines.
Ross offers a family of software solutions under the brand name of iRenaissance,
which represents an integrated suite of enterprise resource planning,
financials, materials management, manufacturing and distribution, supply chain
management, advanced planning and scheduling, customer relationship management,
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 investments as well as a combination of Ross processes
and trade secrets developed through years of experience in design and
development. This proprietary know-how can be leveraged by Ross to develop new
technology and improved products and production processes. chinadotcom expects
to amortize the developed and core technologies on the straight-line basis over
an average estimated life of 7 years.
Customer base consists of customer contracts and the related customer
relationships, as set out in paragraph A20 of SFAS 141. Once implemented, the
Ross system constitutes the customer's core accounting and production management
software backbone. It is expensive and disruptive to change from the Ross system
to another. Many of Ross's customers have been with Ross for more than 10 years.
180
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
5. ROSS BASIS OF PRO FORMA PRESENTATION (CONTINUED)
chinadotcom expects to amortize the fair value of customer base on the
straight-line basis over an average estimated life of 7 years.
Of the total estimated purchase price, approximately $24.5 million (under
the cash-and-share scenario) to $18.1 million (under the all-cash scenario) will
be allocated to goodwill, and approximately $5.5 million will be allocated to
intangible assets with indefinite lives. Goodwill represents the excess of the
purchase price of an acquired business over the fair value of the underlying net
tangible and identifiable intangible assets. Intangible assets with indefinite
lives consist primarily of the estimated fair value allocated to the Ross
company trademark and iRenaissance brand trademark. The assumption used in the
preliminary valuation is that the Ross company trademark and iRenaissance brand
trademark will not be amortized and will have an indefinite remaining useful
life based on many factors and considerations, including the length of time that
the Ross name has been in use, the iRenaissance brand awareness and market
position, and the assumption of continued use of the Ross and iRenaissance
trademark within chinadotcom's overall product portfolio. If chinadotcom
management should change the assumption used in the valuation, and amounts
allocated to intangible assets with indefinite lives may change accordingly,
which could result in a material differences in amortization of intangible
assets.
In accordance with SFAS 142, "Goodwill and Other Intangible Assets",
goodwill and intangible assets with indefinite lives resulting from business
combinations will not be amortized but instead will be tested for impairment at
least annually (more frequently if certain indicators are present). In the event
that the management of the combined company determines that the value of
goodwill or intangible assets with indefinite lives has become impaired, the
combined company will incur an accounting charge for the amount of impairment
during the fiscal quarter in which the determination is made. chinadotcom has
appointed American Appraisal as its third party external valuation expert to
value Ross' trademarks using the "relief from royalty" method. The following
assumptions have been made:
- Ross owns the trademarks, and does not simply have a license to use the
products;
- Ross is a going concern;
- Ross will continue to generate royalty savings for the foreseeable future
at a royalty rate which is certain; and
- The fair royalty rate is greater than 1.0%.
Any adjustment that may results from the changes in any of the above
assumptions will be included in the determination of net income in the period in
which the adjustment is determined. chinadotcom, however, does not foresee
changes in the above assumptions for the foreseeable future.
6. ROSS PRO FORMA ADJUSTMENTS
Pro forma adjustments are necessary to reflect the estimated purchase
price, to adjust amounts related to Ross' net tangible and intangible assets to
a preliminary estimate of their fair values, to reflect the amortization expense
related to the estimated amortizable intangible assets, and to reflect the
income tax effect related to the pro forma adjustments.
Intercompany balances or transactions between chinadotcom and Ross were not
significant. No pro forma adjustments were required to conform Ross' accounting
policies to chinadotcom's accounting policies. Certain reclassifications have
been made to conform Ross' historical amounts to chinadotcom's presentation.
181
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
6. ROSS PRO FORMA ADJUSTMENTS (CONTINUED)
chinadotcom has not identified any pre-acquisition contingencies where the
related asset, liability or impairment is probable and the amount of the asset,
liability or impairment can be reasonably estimated. Prior to the end of the
purchase price allocation period, if information becomes available which would
indicate it is probable that such events have occurred and the amounts can be
reasonably estimated, such items will be included in the purchase price
allocation.
The pro forma adjustments included in the unaudited pro forma consolidated
financial information are as follows:
(a) Adjustments to reflect the cash considerations paid to
stockholders of Ross under the merger agreement. This amount may differ
as outlined above, depending on the proportion of Ross stockholders that
elect all-cash consideration versus a combination of cash-and-share
consideration, and also depending on whether the average closing price
of chinadotcom shares is below $8.50 for the 10 trading days preceding
the second trading day before the closing date.
(b) Adjustments to reflect the preliminary estimate of the fair
value of amortizable intangible assets and the resulting increase in
amortization expense, are as follows (in thousands):
INCREASE/(DECREASE)
IN AMORTIZATION FOR
HISTORICAL THE TWELVE MONTHS USEFUL
AMOUNT, PRELIMINARY ENDED DEC. 31, LIFE
NET FAIR VALUE INCREASE 2003 (YEARS)
----------- ----------- -------- ------------------- -------
Developed technologies................... $12,832 $29,000 $16,168 $ (779) 7
Customer base............................ -- 8,400 8,400 1,200 7
------- ------- ------- ------
$12,832 $37,400 $24,568 $ 421
======= ======= ======= ======
INCREASE/(DECREASE)
IN AMORTIZATION FOR
HISTORICAL THE THREE MONTHS USEFUL
AMOUNT, PRELIMINARY ENDED MAR 31, LIFE
NET FAIR VALUE INCREASE 2004 (YEARS)
----------- ----------- -------- ------------------- -------
Developed technologies................... $12,617 $29,000 $16,383 $(192) 7
Customer base............................ -- 8,400 8,400 300 7
------- ------- ------- -----
$12,617 $37,400 $24,783 $ 108
======= ======= ======= =====
(c) Adjustments to reflect the preliminary estimate of the fair
value of goodwill and intangible assets with indefinite lives, are as
follows (in thousands):
(CASH-AND-SHARE SCENARIO)
------------------------------------
HISTORICAL PRELIMINARY
AMOUNT, NET FAIR VALUE INCREASE
----------- ----------- --------
Intangible assets with indefinite lives.............. $ -- $ 5,500 $ 5,500
Goodwill............................................. 2,181 24,509 22,328
------ ------- -------
$2,181 $30,009 $27,828
====== ======= =======
182
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
6. ROSS PRO FORMA ADJUSTMENTS (CONTINUED)
(ALL-CASH SCENARIO)
------------------------------------
HISTORICAL PRELIMINARY
AMOUNT, NET FAIR VALUE INCREASE
----------- ----------- --------
Intangible assets with indefinite lives.............. $ -- $ 5,500 $ 5,500
Goodwill............................................. 2,181 18,113 15,932
------ ------- -------
$2,181 $23,613 $21,432
====== ======= =======
The goodwill adjustment may differ as outlined above, depending on the
proportion of Ross stockholders that elect all-cash consideration versus a
combination of cash-and-share consideration, and also depending on whether the
average closing price of chinadotcom shares is below $8.50 for the 10 trading
days preceding the second trading day before the close date.
(d) Adjustments to reflect the estimated costs associated with
change of control payments and the merger (in thousands):
Adjustment for an estimate of costs associated with change
of control payments....................................... $2,048
Adjustment for an estimate of transaction costs associated
with the merger........................................... 1,800
------
$3,848
======
Based on a preliminary analysis, chinadotcom expects to incur, upon
completion of the merger or in subsequent quarters, costs of $2.0 million for
change of control payments and $1.8 million for transaction costs. The pro forma
adjustments above for $3.8 million has been included in the unaudited pro forma
consolidated balance sheet as of March 31, 2004. An adjustment for an estimate
of the restructuring costs to be incurred by chinadotcom has not been included
in the unaudited pro forma consolidated statements of operations since such
adjustment is non-recurring in nature and not yet determinable. These estimates
are preliminary and subject to change based on chinadotcom's finalization of its
restructuring and integration plans.
(e) Adjustments to shareholders' equity (in thousands):
(CASH-AND-SHARE
SCENARIO)
---------------
To record the estimated value of chinadotcom shares to be
issued and Ross options to be assumed in the transaction,
assuming chinadotcom share price on the last trading date
and the average chinadotcom share price for the ten
consecutive trading days ending on, and including, the
trading day that is two trading days prior to the closing
date of the merger, is $8.50.............................. $ 49,979
To eliminate Ross' historical shareholders' equity.......... (17,680)
--------
$ 32,299
========
183
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
6. ROSS PRO FORMA ADJUSTMENTS (CONTINUED)
(ALL-CASH SCENARIO)
-------------------
To record the estimated value of chinadotcom shares to be
issued and Ross options to be assumed in the transaction,
assuming chinadotcom share price on the last trading date
and the average chinadotcom share price for the ten
consecutive trading days ending on, and including, the
trading day that is two trading days prior to the closing
date of the merger, is $8.50.............................. $ 4,070
To eliminate Ross' historical stockholders' equity.......... (17,680)
--------
$(13,610)
========
The additional paid-in capital adjustment may differ as outlined above,
depending on the proportion of Ross stockholders that elect all-cash
consideration versus a combination of cash-and-share consideration, and also
depending on whether the average closing price of chinadotcom Class A common
shares is below $8.50 for the 10 trading days preceding the second trading day
before the closing date.
(f) Adjustments to net income/(loss) (in thousands):
TWELVE THREE
MONTHS ENDED MONTHS ENDED
DEC. 31, 2003 MAR 31, 2004
------------- ------------
(i) To record the related amortization expenses resulting
from the fair value adjustment to amortizable
intangible assets as noted in 6(b) above............. $ (421) $(108)
(ii) To record the related compensation expense resulting
from the replacement of chinadotcom stock options for
Ross stock options................................... (1,606) (256)
(iii) To record the related tax effect of item (i) above... 143 36
------- -----
$(1,884) $(328)
======= =====
7. INTEREST INCOME
No adjustment has been made for lost interest income on the cash funds used
to effect the acquisitions of IMI, Pivotal and Ross, which as been assumed to
have taken place on January 1, 2003. Such an adjustment would have the effect of
reducing income by approximately $773,000 and $193,000 for the year ended
December 31, 2003 and for the three months period ended March 31, 2004
respectively.
PER SHARE INFORMATION
8. PRO FORMA EARNINGS (LOSS) PER SHARE
The pro forma basic and diluted earnings/(loss) per share are based on the
weighted average number of chinadotcom Class A common shares outstanding plus
the number of chinadotcom Class A common shares issued to Pivotal shareholders
and the weighted average number of shares of Ross common stock outstanding
multiplied by the exchange ratio, assuming the average chinadotcom share price
for the ten consecutive trading days ending on, and including, the trading day
that is two trading days prior to the closing date of the merger, is $8.50.
184
CHINADOTCOM CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
9. BOOK VALUE PER SHARE
The book value per share is based on shareholders' equity net of preferred
shares over the number of chinadotcom Class A common shares outstanding plus the
number of chinadotcom Class A common shares issued to Pivotal shareholders and
the number of shares of Ross' common stock outstanding multiplied by the
exchange ratio, assuming the average closing share price of chinadotcom for the
ten consecutive trading days ending on, and including, the trading day that is
two days prior to the closing date of the merger, is $8.50. The pro forma number
of shares for the calculation of the pro forma book value per share at March 31,
2004 is 109,383,208.
185
INDUSTRI-MATEMATIK
INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
PERIOD MAY 1, 2002 THROUGH DECEMBER 10, 2002 AND
YEARS ENDED APRIL 30, 2002 AND APRIL 30, 2001
186
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
INDEX
PERIOD MAY 1, 2002 THROUGH DECEMBER 10, 2002 AND
YEARS ENDED APRIL 30, 2002 AND APRIL 30, 2001
PAGE(S)
-------
REPORT OF INDEPENDENT AUDITORS.............................. 188
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets................................. 189
Consolidated Statements of Operations....................... 190
Consolidated Statements of Changes in Stockholder's
Equity.................................................... 191
Consolidated Statements of Cash Flows....................... 192
Notes to Consolidated Financial Statements.................. 193
187
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Industri-Matematik International Corp.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Industri-Matematik International Corp. and its subsidiaries at December 10,
2002, April 30, 2002 and April 30, 2001 and the results of their operations and
their cash flows for the period May 1, 2002 through December 10, 2002 and the
fiscal years ended April 30, 2002 and 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these statements based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 7 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" on May 1, 2002.
As discussed in Note 1, on December 10, 2002 the Company was acquired by
IMI Global Holdings Ireland Limited.
PricewaterhouseCoopers AB
Stockholm, Sweden
October 4, 2003, except for paragraph 3 of Note 17
as to which the date is October 15, 2003
188
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 10, 2002, APRIL 30, 2002 AND APRIL 30, 2001
(IN THOUSANDS OF DOLLAR, EXCEPT SHARES AND PER SHARE DATA)
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
ASSETS
Current assets
Cash and cash equivalents................................. $ 9,475 $16,422 $ 12,053
Short-term investments.................................... -- -- 12,866
Accounts receivable, less allowance for doubtful accounts
of $31, $1,058 and $1,143 at December 10, 2002, April
30, 2002 and April 30, 2001, respectively.............. 10,528 7,953 10,952
Unbilled receivable....................................... 1,905 2,218 1,861
Prepaid expenses.......................................... 1,960 1,688 1,726
Income taxes receivable................................... -- 3 217
Other current assets...................................... 225 384 640
--------- ------- --------
Total current assets................................... 24,093 28,668 40,315
--------- ------- --------
Noncurrent assets
Property and equipment, net............................... 2,277 3,135 4,753
Goodwill.................................................. 1,939 2,989 3,739
Long-term cash deposit.................................... 2,605 2,728 2,794
Other noncurrent assets................................... 731 889 909
--------- ------- --------
Total noncurrent assets................................ 7,552 9,741 12,195
--------- ------- --------
Total assets........................................... $ 31,645 $38,409 $ 52,510
========= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 956 $ 1,341 $ 1,129
Accrued expenses and other current liabilities............ 7,762 6,136 8,071
Accrued payroll and employee benefits..................... 7,629 4,562 7,595
Deferred revenue.......................................... 5,738 5,148 7,045
--------- ------- --------
Total current liabilities.............................. 22,085 17,187 23,840
--------- ------- --------
Long-term liabilities
Accrued pension liability................................. 2,082 2,093 2,880
Other long-term liabilities............................... 107 153 --
--------- ------- --------
Total long-term liabilities............................ 2,189 2,246 2,880
--------- ------- --------
Total liabilities...................................... 24,274 19,433 26,720
--------- ------- --------
Commitments and contingencies (Note 14)
Stockholders' equity
Preferred stock, $.01 par value, 15,000,000 shares
authorized, 0, 0, and 0 issued and outstanding
Common stock, $.01 par value; 75,000,000 shares
authorized, 31,966,883, 31,945,303 and 32,274,265
issued and outstanding................................. 320 319 323
Additional paid-in capital................................ 120,860 120,849 125,206
Accumulated deficit....................................... (106,474) (94,623) (88,022)
Accumulated other comprehensive loss...................... (5,881) (6,214) (5,835)
Notes receivable from stockholders (Note 13).............. (1,454) (1,355) (5,882)
--------- ------- --------
Total stockholders' equity............................. 7,371 18,976 25,790
--------- ------- --------
Total liabilities and stockholders' equity............. $ 31,645 $38,409 $ 52,510
========= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
189
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD MAY 1, 2002 THROUGH DECEMBER 10, 2002 AND
YEARS ENDED APRIL 30, 2002 AND APRIL 30, 2001
(IN THOUSANDS OF DOLLAR, EXCEPT SHARES AND PER SHARE DATA)
PERIOD MAY 1,
2002 THROUGH
DECEMBER 10, YEAR ENDED YEAR ENDED
2002 APRIL 30, 2002 APRIL 30, 2001
------------- -------------- --------------
REVENUES
Licenses.............................................. $ 871 $ 4,479 $ 13,478
Services and maintenance.............................. 27,508 48,239 53,313
Other................................................. 1,408 2,562 2,564
----------- ----------- -----------
Total revenues...................................... 29,787 55,280 69,355
----------- ----------- -----------
COST OF REVENUES
Licenses.............................................. 343 307 1,336
Services and maintenance.............................. 17,325 31,870 37,375
Other................................................. 604 935 520
----------- ----------- -----------
Total cost of revenues.............................. 18,272 33,112 39,231
----------- ----------- -----------
Gross profit........................................ 11,515 22,168 30,124
----------- ----------- -----------
OPERATING EXPENSES
Product development................................... 6,320 10,458 15,479
Sales and marketing................................... 5,617 10,658 15,878
General and administrative............................ 4,208 7,579 9,026
Amortization of goodwill and other intangibles........ -- 741 4,506
Restructuring costs................................... 5,481 -- 5,391
Goodwill impairment................................... 1,200 -- --
----------- ----------- -----------
Total operating expenses............................ 22,826 29,436 50,280
----------- ----------- -----------
Loss from operations.................................. (11,311) (7,268) (20,156)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income....................................... 219 560 1,561
Interest expense...................................... (1) (3) (13)
Miscellaneous income (expense), net................... (520) 109 (1,219)
----------- ----------- -----------
Loss from operations before income taxes.............. (11,613) (6,602) (19,827)
Provision for income taxes............................ (238) -- (15,424)
----------- ----------- -----------
Net loss............................................ $ (11,851) $ (6,602) $ (35,251)
=========== =========== ===========
Net loss per share data
Net loss per share.................................. $ (0.37) $ (0.20) $ (1.10)
=========== =========== ===========
Net loss per share data assuming dilution
Net loss per share.................................. (0.37) (0.20) (1.10)
=========== =========== ===========
Weighted average shares outstanding, basic and diluted
(Note 12)........................................... 31,961,006 32,198,401 31,985,991
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
190
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
PERIOD MAY 1, 2002 THROUGH DECEMBER 10, 2002 AND
YEARS ENDED APRIL 30, 2002 AND APRIL 30, 2001
(IN THOUSANDS OF DOLLAR, EXCEPT SHARES AND PER SHARE DATA)
ACCUMULATED NOTES
CLASS B ADDITIONAL OTHER RECEIVABLE TOTAL
COMPREHENSIVE COMMON COMMON PAID-IN ACCUMULATED COMPREHENSIVE FROM STOCKHOLDERS'
LOSS STOCK STOCK CAPITAL DEFICIT LOSS STOCKHOLDERS EQUITY
------------- ------ ------- ---------- ----------- ------------- ------------ -------------
BALANCE AS OF APRIL
30, 2000........... $(23,761) $318 $ -- $124,310 $ (52,771) $(4,476) $(5,922) $61,459
Issuance of 284,756
shares of common
stock under ESPP... -- 3 -- 592 -- -- -- 595
Issuance of 151,900
shares of common
stock under Stock
Option Plan........ -- 2 -- 304 -- -- -- 306
Payments on notes
receivable......... -- -- -- -- -- -- 40 40
Net loss............. (35,251) -- -- -- (35,251) -- -- (35,251)
Currency translation
adjustment......... (1,359) -- -- -- -- (1,359) -- (1,359)
-------- ---- ------- -------- --------- ------- ------- -------
BALANCE AS OF APRIL
30, 2001........... (36,610) 323 -- 125,206 (88,022) (5,835) (5,882) 25,790
Issuance of 103,038
shares of common
stock under ESPP... -- 1 -- 150 -- -- -- 151
Subsidiary stock
incentive plan..... -- -- -- 15 -- -- -- 15
Cancellation of notes
from
shareholders....... -- (4) -- (4,523) -- -- 4,527 --
Net loss............. (6,602) -- -- -- (6,602) -- -- (6,602)
Currency translation
adjustment......... (378) (1) -- 1 1 (379) -- (378)
-------- ---- ------- -------- --------- ------- ------- -------
BALANCE AS OF APRIL
30, 2002........... (6,980) 319 -- 120,849 (94,623) (6,214) (1,355) 18,976
Issuance of 21,580
shares of common
stock under ESPP... -- 1 -- 11 -- -- -- 12
Issuance of notes
receivable from
stockholders....... -- -- -- -- -- -- (99) (99)
Net loss............. (11,851) -- -- -- (11,851) -- -- (11,851)
Currency translation
adjustment......... 333 -- -- -- -- 333 -- 333
-------- ---- ------- -------- --------- ------- ------- -------
BALANCE AS OF
DECEMBER 10, 2002.. $(11,518) $320 $ -- $120,860 $(106,474) $(5,881) $(1,454) $ 7,371
======== ==== ======= ======== ========= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
191
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD MAY 1, 2002 THROUGH DECEMBER 10, 2002 AND
YEARS ENDED APRIL 30, 2002 AND APRIL 30, 2001
(IN THOUSANDS OF DOLLAR, EXCEPT SHARES AND PER SHARE DATA)
PERIOD
MAY 1, 2002 YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(11,851) $(6,602) $(35,251)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization............................. 959 2,924 4,291
Provision for (recoveries of) doubtful accounts........... 99 (84) (1,421)
Deferred income taxes..................................... -- -- 15,424
(Gain) loss on disposal of property and equipment......... 17 (104) 16
Gain on disposal of other shares.......................... -- (373) --
Write-down of property and equipment...................... 274 26 1,576
Write-down of goodwill and other intangibles.............. 1,200 -- 3,010
Changes in operating assets and liabilities
Accounts receivable.................................... (2,575) 3,027 9,738
Accrued income and prepaid expenses.................... 41 (326) (175)
Income taxes........................................... 73 213 --
Other assets........................................... 247 272 203
Accounts payable....................................... (385) 211 (778)
Accrued expenses and other current liabilities......... 1,626 (1,889) 761
Accrued payroll and employee benefits and deferred
revenue.............................................. 3,657 (4,844) 1,274
Accrued pension liability.............................. (11) (749) 353
Other liabilities...................................... (46) -- --
-------- ------- --------
Net cash flows used in operating activities.......... (6,675) (8,298) (979)
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments.......................... -- -- (118,640)
Proceeds from maturity of short-term investments............ -- 12,866 125,595
Additions to property and equipment......................... (271) (725) (3,057)
Long-term cash deposit...................................... 123 17 (2,786)
Proceeds from sale of property and equipment................ 1 104 15
Proceeds from sale of other shares.......................... -- 373 --
Payment for subsidiary...................................... (70) -- --
(Issuance) collection of notes receivable................... (99) -- 40
-------- ------- --------
Net cash flows provided by (used in) investing
activities........................................ (316) 12,635 1,167
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable................................... -- -- (303)
Issuance of common stock.................................... 11 151 901
Other....................................................... (363) (151) (242)
-------- ------- --------
Net cash flows provided by (used in) financing
activities........................................ $ (352) $ -- $ 356
======== ======= ========
Translation differences on cash and cash equivalents........ 396 32 (527)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents........ (6,947) 4,369 17
Cash and cash equivalents at beginning of period............ 16,422 12,053 12,036
-------- ------- --------
Cash and cash equivalents at end of period.................. $ 9,475 $16,422 $ 12,053
======== ======= ========
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest............................................... $ 1 $ 10 $ 11
Income taxes........................................... $ -- $ 312 $ 526
The accompanying notes are an integral part of the consolidated financial
statements.
192
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD MAY 1, 2002 THROUGH DECEMBER 10, 2002 AND
YEARS ENDED APRIL 30, 2002 AND APRIL 30, 2001
(IN THOUSANDS OF DOLLAR, EXCEPT SHARES AND PER SHARE DATA)
1. NATURE OF BUSINESS AND ORGANIZATION
Industri-Matematik International Corp. ("IMIC" or "Company") was
incorporated in the State of Delaware in 1995 and conducts it business through
domestic and international subsidiaries. The Company's business was founded in
1967 by incorporation in Sweden as Industri-Matematik AB ("IMAB"). In May 1995,
the then stockholders of IMAB exchanged all of their IMAB shares for shares of
the Company's capital stock and IMAB became a wholly-owned subsidiary of the
Company. Pursuant to a Prospectus dated September 25, 1996, 5,060,000 shares of
the Company's common stock were sold to the public in an initial public offering
and the Company's common stock began trading on the NASDAQ under the symbol
"IMIC." During fiscal 1998, pursuant to a Prospectus dated October 31, 1997, the
Company completed a secondary public offering of 8,136,250 shares of common
stock.
IMIC was formed on May 1, 1995 as the parent of Industri-Matematik AB
("IMAB"), a company domiciled in Sweden, pursuant to a corporate reorganization.
The reorganization was effected by issuing all the shares of IMIC's stock to the
shareholders of IMAB, based on the number and class of shares of IMAB owned by
each in exchange for all of the outstanding stock of IMAB. The reorganization
was accounted for in a manner similar to pooling-of-interests.
IMIC develops, markets and supports client/server and Internet-based
application software that enables manufacturers, distributors, wholesalers,
retailers, logistics service providers and e-businesses to more effectively
manage their supply chains and their customer relationships. Supply chain
management encompasses the execution of multiple customer-focused order
fulfillment processes, including order management, pricing and promotion,
handling, sourcing, warehouse management, transportation management, service
management, customer relationship management and replenishment planning and
coordination. IMIC's software products monitor and manage events beyond the
physical limitations of the enterprise. The Company's software products are
designed to meet the complex fulfillment and customer service needs of
distribution-intensive businesses. These products allow customers to leverage
the value of their existing enterprise systems by integrating with legacy, new
client/server and new Internet-based manufacturing, advanced planning and
financial management systems. The Company has a professional services
organization and relationships with third-party technology vendors and system
integrators that configure solutions for clients.
On December 10, 2002, the Company was acquired by IMI Global Holdings
Ireland Limited ("IMI Ireland"), a private limited liability company
incorporated and organized under the laws of the Republic of Ireland. IMI
Ireland was incorporated on November 8, 2002 and was, at that time, owned by
Symphony Technology II-A L. P. ("Symphony"), a Delaware limited liability
partnership. As a result of IMI Ireland having acquired the Company, IMIC was
delisted from the NASDAQ.
These financial statements as of December 10, 2002 do not reflect the
acquisition of IMIC by Symphony.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of IMIC and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
193
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
License revenues represent sales of the Company's software. Service
revenues represent sales from consulting implementation and training services
(together referred to as professional services). Annual maintenance and support
revenues consist of ongoing support and sales of product updates. Other revenues
primarily represent hardware sales. Revenue is recognized when the basic
criteria in Statement of Position ("SOP") 97-2, Software Revenue Recognition,
have been met -- which are that persuasive evidence of an arrangement exists and
delivery has occurred, the fee is fixed and determinable, collectibility is
probable and the arrangement does not require significant customization of the
software.
The Company typically licenses its software in multiple element
arrangements in which the customer purchases a combination of software,
maintenance/support and/or professional services. The Company is able to
determine fair value for professional services and support and maintenance based
on the price charged when these elements are sold separately. For professional
service engagements, the Company's estimates of fair value are supported by
hourly rates charged to customers in professional service engagements where
there is no associated license or maintenance/support arrangements. For
maintenance/support contracts, pricing of contract renewals after the initial
contract term has expired supports the Company's estimates of fair value. The
Company does not sell its software product on a stand-alone basis; its software
product is always sold with maintenance/support services. Accordingly, the fair
value of the software is determined using the residual approach in these
multiple-element arrangements.
Maintenance and support revenue is deferred and recognized ratably over the
term of the agreement, generally one year. Service revenue is recognized as the
Company performs the services in accordance with the contract.
The Company considers a license fee payable on extended terms to be fixed
and determinable and accounts for it as accrued revenue when there is no
continuing obligation on the part of the Company, the customer is financially
viable, the term of the license extends past the last payment, there are no
issues regarding potential obsolescence of the software, the customer has no
intent to upgrade and the Company has a history of collecting full payment under
equivalent payment terms without concession. The Company's standard terms for
license arrangements typically are for a perpetual license with payment terms
typically within 90 days. When the Company agrees to accept some portion of its
payment pursuant to a license fee outside of its normal payment terms,
management determines on a contract-by-contract basis whether the future payment
is fixed and determinable based upon the factors set forth in Technical Practice
Aid ("TPA") 5100.56, Concessions and Software Revenue Recognition, and TPA
5100.57, Overcoming Presumption of Concessions in Extended Payment Term
Arrangements and Software Revenue Recognition. When making such a determination
on the basis of TPA 5100.56 and TPA 5100.57, the factors that the Company most
often considers include comparing the current class of customer, the current
types of products and current payment term length against the Company's
historical arrangements. In those license fee arrangements with extended payment
terms, the rest of the contract terms do not differ from the Company's other
standard terms and conditions. The Company has historically received full
payment on these license fee arrangements without concession.
In a multiple element arrangement when fair value exists for all of the
undelivered elements in the arrangement, but does not exist for one of the
delivered elements in the arrangement, the Company recognizes revenue using the
"residual method" in accordance with SOP 98-9, Software Revenue Recognition in
Respect to Certain Arrangements. Under the "residual method", the Company defers
revenue for the fair value of its undelivered elements (typically, professional
services and maintenance) and recognizes revenue for the remainder of the
arrangement fee attributable to the delivered elements (typically, the software
product) when the basic criteria in SOP 97-2, Software Revenue Recognition, have
been met.
194
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company provides services on a fixed price contract, or the services
are considered essential to the functionality of software products sold, or if
software sold requires significant production, modification or customization,
license and services revenue is accounted for in accordance with SOP 81-1,
Accounting for Performance of Construction Type and Certain Production Type
Contracts, which requires the use of the percentage-of-completion method of
revenue recognition. In these cases, software revenue is recognized based on
labor hours incurred to date compared to total estimated labor hours for the
contract. Out of the Company's unbilled receivables at December 10, 2002, $1,200
relates to the projects accounted for in accordance with percentage of
completion method.
Under the terms of the Company's License Agreements and Professional
Service Agreements, in general, the only warranties provided are that the
software will function in accordance with the applicable software documentation
by a specified date. As these warranties are effective for a very limited time
period and historically the Company has not had any significant warranty claims,
the Company's policy has been to record no warranty provision upon the
recognition of license revenues. In addition, due to the Company's insignificant
product returns and price adjustments in past years, no provision is made for
product returns and price adjustments upon recognition of software license
revenues. The Company reviews on a project-by-project basis the cost of claims
that it considers to be "warranty" type claims under Professional Services
Agreements by establishing project reserves. The Company will continue to
evaluate the need for recording a warranty provision upon recognition of
software license revenues and delivery of customer modification work.
PRODUCT DEVELOPMENT COSTS
Software development costs are accounted for in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed.
Costs incurred in the product development of new software products are
expensed as incurred until technological feasibility has been established. To
date, the establishment of technological feasibility of the Company's products
and general release substantially coincide. As a result, the Company has not
capitalized any software development costs since such costs have been
immaterial.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method based upon estimated useful lives of the assets as follows:
Computer equipment.......................................... 3 years
Furniture and fixtures...................................... 1 to 10 years
Leasehold improvements...................................... 5 years
Software acquired........................................... 1 to 3 years
Equipment purchased under capital leases is amortized on a straight-line
basis over the lesser of the estimated useful life of the asset or the lease
term.
Upon retirement or sale of property and equipment, cost and accumulated
depreciation on such assets are removed from the accounts and any gains or
losses are reflected in the statement of operations. Maintenance and repairs are
charged to expense as incurred.
195
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-LIVED ASSETS
Prior to May 1, 2002, The Company assessed the impairment of Long-lived
assets in accordance with SFAS No. 121, Accounting for the impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of. On May 1, 2002,
the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 provides new guidance on the recognition of
impairment losses on long-lived assets to be held and used or to be disposed of,
and also broadens the definition of what constitutes a discontinued operation
and how the results of a discontinued operation are to be measured and
presented.
The carrying values of long-lived assets are evaluated for impairment
whenever events or changes in circumstances indicate the carrying amount may not
be recoverable. An impairment would be determined based on a comparison of
future undiscounted cash flows to the underlying assets. If required,
adjustments would be measured based on discounted cash flows. The adoption of
SFAS No. 144 did not have a material impact on the Company.
FOREIGN CURRENCY TRANSLATION
The functional currency of IMIC's foreign subsidiaries is the applicable
local currency. The translation from the respective foreign currencies to U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for income statement accounts using a
weighted average exchange rate during the period. Gains or losses resulting from
such translation are included as a separate component of accumulated other
comprehensive loss. Gains or losses resulting from foreign currency transactions
are included in miscellaneous income (expense) except for the effect of exchange
rates on intercompany transactions of a long-term investment nature, which are
accumulated and credited or charged to other comprehensive loss.
CONCENTRATION OF RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable with
customers and short-term investments. Credit risk with respect to accounts
receivable, however, is limited due to the number of customers comprising the
Company's customer base and their dispersion principally across the United
States, Scandinavia, the United Kingdom, the Netherlands and Australia. The
Company's customers are generally multi-national companies in the food and
beverage, pharmaceutical, consumer electronics, automotive parts and industrial
sector industries. The Company performs ongoing credit evaluations of its
customers and does not require collateral. The Company maintains allowances for
potential credit losses. Short-term investments are placed with high credit
quality financial institutions or in short-duration, high quality debt
securities.
A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar (the currency in which its financial statements are
stated), primarily the Swedish krona and, to a lesser extent, the U.K. pound
sterling, the Euro, the Australian dollar and the Canadian dollar. The Company
incurs a significant portion of its expenses in Swedish krona, including a
significant portion of its product development expenses and a substantial
portion of its general and administrative expenses. As a result, appreciation of
the value of the Swedish krona relative to the other currencies in which the
Company generates revenues, particularly the U.S. dollar, could adversely affect
operating results. The Company does not currently undertake hedging transactions
to cover its currency exposure, but the Company may choose to hedge a portion of
its currency exposure in the future as it deems appropriate.
License and service and maintenance revenues related to the Company's
software products have represented a substantial portion of the Company's
revenues in recent years and are expected to continue to represent a substantial
portion of the Company's revenue in the future. The Company's success depends
196
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on continued market acceptance of its suite of software and services as well as
the Company's ability to introduce new versions of software or other products to
meet the evolving needs of its customers.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid, low risk debt instruments
purchased with original maturity dates of three months or less to be cash
equivalents. The Company's short-term investments comprise fixed income
securities with original maturities of more than 90 days at the time of
purchase. The Company classifies its short-term investments in fixed income
securities as available-for-sale securities, which are carried at their fair
value based upon the quoted market prices of those investments at the respective
balance sheet date. Accordingly, the change in unrealized gains and losses with
respect to these securities is recorded as a direct increase or decrease in
stockholders' equity, net of deferred income tax, if any (Note 3).
Fixed income securities available for sale are purchased with the original
intent to hold to maturity, but which may be available for sale if market
conditions warrant, or if the Company's investment policies dictate, in order to
maximize the Company's investment yield. Realized gains and losses are included
in earnings and are derived using the specific identification method for
determining the cost of securities sold. When impairment of the value of an
investment is considered other than temporary, the decrease in value is reported
in earnings as a realized investment loss and a new cost basis is established.
UNBILLED RECEIVABLES
Unbilled receivables represent unbilled income recognized on fixed price
services contracts and scheduled amounts due from customers on terms which are
longer than typical trade terms.
The Company considers a license fee payable on extended terms to be fixed
and determinable and accounts for it as accrued revenue when there is no
continuing obligation of the part of the Company, the customer is financially
viable, the term of the license extends past the last payment, there are no
issues regarding potential obsolescence of the software and the customer has no
intent to upgrade.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting years. Actual
results could differ from those estimates.
COMPREHENSIVE LOSS
The Company follows SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and displaying comprehensive income and its
components. "Comprehensive loss" includes foreign currency translation gains and
losses that have been previously excluded from net loss and reflected instead in
equity. The Company has reported the components of comprehensive loss on its
consolidated statements of changes in stockholders' equity.
NET LOSS PER SHARE
Net loss per share amounts have been computed in accordance with SFAS No.
128, Earnings Per Share. For each of the periods presented, net loss per share
amounts were computed based on the weighted average number of shares of common
stock outstanding during the period. Net loss per share, assuming dilution
amounts were computed based on the weighted average number of shares of common
197
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock and potential common stock outstanding during the period. Potential common
stock relates to stock options outstanding for which the dilutive effect is
calculated using the treasury stock method. The computations of net loss per
share, assuming dilution for the period May 1, 2002 through December 10, 2002
and the years ended April 30, 2002 and 2001, do not assume the exercise of stock
options since the effect would be antidilutive as a result of the losses for
those fiscal years.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, ("APB No. 25") in accounting for its stock-based
compensation plans. Under APB No. 25, no compensation expense is recognized for
the Company's stock-based compensation plans since the exercise prices of awards
under the Company's plans are at current market prices of the Company's stock on
the date of grant.
CASH FLOW INFORMATION
Cash flows in foreign currencies have been converted to U.S. dollars at an
approximate weighted average exchange rate.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses the estimated fair values for all financial
instruments for which it is practicable to estimate fair value. Financial
instruments including cash and cash equivalents, receivables and payables,
derivative instruments and current portions of long-term debt are deemed to
approximate fair value due to their short maturities.
HEDGE ACCOUNTING
SFAS No. 133, as amended by SFAS No. 138, requires that an entity
recognizes all derivative instruments as either assets or liabilities in the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if it is, the type of hedge transaction.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured by applying enacted
statutory tax rates that are applicable to the future years in which deferred
tax assets or liabilities are expected to be settled or realized, to the
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in net income in the period in
which the tax rate change in enacted. The statement also requires a valuation
allowance against net deferred tax assets if, based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets may not
be realized.
EFFECT OF RECENT PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others ("FIN No.
45"). FIN No. 45 requires that a guarantor recognize a liability at inception of
certain guarantees and disclose certain other types of guarantees, even if the
likelihood of requiring the guarantor's performance is remote. The initial
recognition and measurement
198
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provisions of FIN No. 45 are applicable to guarantees issued or modified after
December 31, 2002. The disclosure provisions of FIN No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002.
The Company's standard product license agreement contains clauses whereby
the Company warrants that the licensed software does not infringe any
third-party copyright or patent. The Company's obligations for a breach of this
warranty shall be to modify or replace the licensed software at the Company's
expense with functionally equivalent software so as to eliminate the
infringement and to indemnify the Customer from any third party infringement
claim. The Company does not expect to incur any infringement liability as a
result of the customer indemnification clauses.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, Consolidation of Variable Entities ("FIN No. 46"),
an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, which addresses the criteria for consolidation by business
enterprises of variable interest entities. The Company does not have variable
interest entities and, therefore, FIN No. 46 will have no impact on the
financial position or results of operations of the Company.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143, which is effective for fiscal years beginning after
June 15, 2002, establishes accounting standards for the recognition and
measurement of a liability for an asset retirement obligation and the associated
asset retirement cost. IMIC adopted the provisions of SFAS No. 143 as of May 1,
2002. SFAS No. 143 did not have an effect on the Company's financial position or
results of its operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to fair value method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company will adopt the
disclosure provisions of SFAS No. 148 beginning May 1, 2003.
3. SHORT TERM INVESTMENTS
Short-term investments are comprised of fixed income securities which are
classified as available-for-sale securities. As of December 10, 2002 and April
30, 2002, the Company had no short-term investments. As of April 30, 2001, the
Company had two Federal Agency securities with an amortized cost of $4,000 and
$6,900 which approximated fair value. The Federal Agency securities matured
within one year. During the years ended April 30, 2002 and April 30, 2001,
maturities of fixed income securities resulted in aggregate proceeds of $12,900
and $125,600, respectively.
199
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following table provides a summary of the activity in the accounts
receivable allowance for doubtful accounts for the period May 1, 2002 through
December 10, 2002, and the years ended April 30, 2002 and April 30, 2001:
PERIOD
MAY 1, 2002 YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Balance at beginning of period........................ $ 1,058 $1,143 $ 2,486
Charged (credited) to expense......................... 99 (70) 422
Deductions............................................ (1,126) (15) (1,765)
------- ------ -------
Balance at end of year................................ $ 31 $1,058 $ 1,143
======= ====== =======
A significant portion of the amount in the allowance for doubtful accounts
at April 30, 2002 related to an ongoing dispute with a former customer. In
fiscal 2002, the Company obtained an arbitration award against the former
customer (subsequently reduced to judgment). The Company has subsequently
determined that it will be unable to collect this receivable due to the
financial position of the former customer. Accordingly, the Company has written
off this receivable, utilizing the allowance previously established.
5. FOREIGN CURRENCY TRANSLATION
For the period May 1, 2002 through December 10, 2002 and years ended April
30, 2002 and 2001, respectively, foreign exchange gains (losses) of ($176), $155
and $380 were recorded by the Company.
6. PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost, less accumulated depreciation.
Property and equipment consist of:
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Computer equipment................................. $ 8,546 $ 8,838 $ 8,980
Furniture and fixtures............................. 3,918 3,588 4,025
Leasehold improvements............................. 697 922 873
Software acquired.................................. 238 221 3,396
-------- -------- --------
13,399 13,569 17,274
Less accumulated depreciation and amortization..... (11,122) (10,434) (12,521)
-------- -------- --------
$ 2,277 $ 3,135 $ 4,753
======== ======== ========
During the year ended April 30, 2001, the Company reorganized its reporting
units providing more geographical responsibility. This resulted in the
cancellation of projects related to building worldwide internal accounting and
reporting systems. Along with this decision, it was determined that capitalized
software and implementation costs were impaired as they would no longer provide
an economic benefit to the new structure. This resulted in a net book value
write-off of $1,490.
200
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in property and equipment are assets leased under capital lease
obligations as follows:
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Computer equipment.................................... $ 73 $ 73 $ 73
Furniture and fixtures................................ 120 120 120
----- ----- -----
193 193 193
Less accumulated depreciation and amortization........ (193) (193) (193)
----- ----- -----
$ -- $ -- $ --
===== ===== =====
The amortization expense on capital leases amounted to $0, $0 and $11 for
the period May 1, 2002 through December 10, 2002 and the years ended April 30,
2002 and April 30, 2001, respectively.
7. GOODWILL AND OTHER INTANGIBLES
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 142 eliminates amortization of goodwill and
intangible assets with indefinite lives and requires a transitional impairment
test of these assets within six months of the date of adoption and an annual
impairment test thereafter and in certain circumstances. The Company adopted
SFAS No. 141 effective July 1, 2001 and adopted SFAS No. 142 effective May 1,
2002. The Company had completed the transitional impairment test of goodwill as
of May 1, 2002, and no impairment was noted.
During the period ended December 10, 2002, the business operations of
Abalon AB continued to significantly under perform compared to the Company's
operating plan. As a result, the Company determined that there was a need to
reassess the goodwill associated with Abalon AB. As a result of this analysis,
the Company recorded an impairment charge of $1,200 against the carrying value
of goodwill related to Abalon AB during the period ended December 10, 2002.
The following is a reconciliation of the net loss and loss per share of
common stock between the amounts reported by the Company and the adjusted
amounts reflecting the new accounting requirements related to goodwill
amortization for the periods presented:
PERIOD
MAY 1, 2002 YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Net loss as reported................................ $(11,851) $(6,602) $(35,251)
Add back goodwill amortization, net of tax.......... -- 1,042 1,431
-------- ------- --------
Net loss as adjusted................................ $(11,851) $(5,560) $(33,820)
======== ======= ========
Net loss per share as reported...................... (0.37) (0.20) (1.10)
Net loss per share as adjusted...................... (0.37) (0.17) (1.06)
201
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT IN GOODWILL
The changes in the carrying value of goodwill for the period May 1, 2002
through December 10, 2002 and the years ended April 30, 2002 and 2001 were as
follows:
ABALON AB OTHERS TOTAL
--------- ------ ------
Beginning balance, May 1, 2000........................... $3,939 $1,003 $4,942
Impairment............................................... (106) -- (106)
Contingent consideration................................. -- 334 334
Amortization............................................. (841) (590) (1,431)
------ ------ ------
Ending balance, April 30, 2001........................... 2,992 747 3,739
Additions................................................ -- 367 367
Amortization............................................. (834) (208) (1,042)
Currency effect.......................................... -- (75) (75)
------ ------ ------
Ending balance, April 30, 2002........................... 2,158 831 2,989
Additions................................................ -- 70 70
Impairment............................................... (1,200) -- (1,200)
Currency effect.......................................... -- 80 80
------ ------ ------
Ending Balance, December 10, 2002........................ $ 958 $ 981 $1,939
====== ====== ======
Amortization of other intangibles amounted to $513 during the year ended
April 30, 2001. After April 30, 2001, all intangibles were fully amortized.
8. INCOME TAXES
Loss from continuing operations before income taxes was distributed
geographically as follows:
PERIOD
MAY 1, 2002 YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Domestic U.S. ...................................... $ (6,022) $(4,754) $ (2,549)
Foreign............................................. (5,591) (1,848) (17,278)
-------- ------- --------
$(11,613) $(6,602) $(19,827)
======== ======= ========
202
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of the provision for income taxes are as follows:
PERIOD
MAY 1, 2002 YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
CURRENT
Federal.............................................. $ -- $ -- $ --
State................................................ -- -- --
Foreign.............................................. (238) -- --
----- ------- --------
Total current provision............................ (238) -- --
----- ------- --------
DEFERRED
Federal.............................................. -- -- (7,382)
State................................................ -- -- (2,204)
Foreign.............................................. -- -- (5,839)
----- ------- --------
Total deferred provision........................... -- -- (15,425)
----- ------- --------
Total provision for income taxes................... $(238) $ -- $(15,425)
===== ======= ========
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
DEFERRED INCOME TAXES, NONCURRENT ASSET
Net operating loss carryforwards..................... $33,340 $31,275 $29,332
Allowance for doubtful accounts...................... 12 347 359
Restructuring........................................ 51 (1,078) 1,078
Depreciation......................................... 400 191 19
Capital loss carryover............................... 251 -- --
Other................................................ 750 258 35
------- ------- -------
Total deferred income taxes, noncurrent asset...... 34,804 30,993 30,823
Valuation allowance................................ (34,804) (30,993) (30,823)
------- ------- -------
Total net deferred income taxes, noncurrent asset.... $ -- $ -- $ --
======= ======= =======
203
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the provision for income taxes to the amount computed
by applying the statutory rates is as follows:
PERIOD MAY 1, YEAR ENDED
2002 THROUGH ------------------------------
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
-------------- ------------- --------------
Statutory rate....................... $3,948 34% $ 2,245 34% $ 6,741 34%
Valuation of temporary differences... (3,439) (30) (1,665) (26) (3,867) (20)
Increase in valuation allowance of
deferred tax asset................. -- -- -- -- (15,424) (78)
Foreign taxes........................ (242) (2) (293) (4) (1,326) (6)
Permanent differences................ (477) (4) (287) (4) (1,611) (8)
Other................................ (28) -- -- -- 63 --
------ --- ------- --- -------- ---
Effective tax rate................. $ (238) (2)% $ -- 0% $(15,424) (78)%
====== === ======= === ======== ===
The Company has applied a full valuation allowance to deferred tax assets
generated after April 30, 1999. In April 2001, the Company recorded an
additional charge to income amounting to $15,400 by increasing the valuation
allowance by the same amount. A 100 percent allowance was applied by management
based upon the Company's continuing nonprofitable operations and inability to
predict when this asset could be realized. At April 30, 2002 and December 10,
2002, 100 percent valuation allowances were applied against the Company's
deferred tax assets. Of the net operating loss carryforwards, $33,685 were
incurred in the United States and $52,414 were incurred in Sweden. The net
operating loss carryforwards, of which substantially all were incurred after
April 30, 1998, may be carried forward to offset future income up to 20 years in
the United States and indefinitely in Sweden.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Accrued purchases..................................... $1,539 $1,586 $2,274
Project reserves...................................... -- 63 148
Accrued consultancy................................... 342 293 645
Accrued restructuring costs (Note 16)................. 176 -- 1,355
Accrued pension taxes................................. 1,009 588 588
Short-term portion pension liability.................. 667 700 --
Value-added tax....................................... 448 225 374
Employee withholding taxes............................ -- 470 580
Fair value provision for put option................... 2,009 1,620 1,384
Other................................................. 1,572 591 723
------ ------ ------
$7,762 $6,136 $8,071
====== ====== ======
Short-term portion of pension liability relates to a scheduled reduction of
pension debt by paying premiums and transferring employees from the pension plan
administered by Swedish PRI authority to the Swedish National Pension
Organization Plan administered by Alecta (Note 11). The pension debt will be
reduced each year going forward by approximately the same amount for the next
three and a half years.
During November 2000, the Company entered into a hedge transaction with a
bank to offset potential Swedish social security fee liability upon exercise of
stock options by employees living in Sweden. The
204
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
arrangement involved the issuance by the bank of a call to the Company
settleable in cash, which the bank elected to cover by purchasing shares of the
Company's common stock. The Company offset a portion of the cost of the call by
issuing to the bank a right to put shares of Company common stock to the
Company. Gain or loss to the Company on the closing of the transaction will be
realized based upon the increase or decrease in the price of the Company's
common stock. As a result of the decline in the value of the Company's common
stock, as of December 10, 2002, April 30, 2002 and April 30, 2001, the Company
has a provision for the decline in fair value recorded in its books relating to
the put issued to the bank amounting to $2,000, $1,600 and $1,400, respectively.
Adjustments to this provision to reflect movements in the Company's common
stock price have resulted in nonoperating charges during the period May 1, 2002
through December 10, 2002 and in fiscal year 2002 and fiscal year 2001 of $400,
$200 and $1,400, respectively. The provision is reviewed quarterly and adjusted
to reflect the underlying common stock value and will be reversed in full if the
price of the common stock reaches $4.536 per share, which is the exercise price
of the put. On December 10, 2002, April 30, 2002 and April 30, 2001, the
exercise price of the call option ($4.536) used to hedge potential Swedish
social security fees was above the market price of the Company's common stock.
Since there was no active market for these types of options, the value of the
call option was limited to a calculated option premium, which was offset in the
financial statements by the corresponding premium on the put option. The
original net premium of $50 will be amortized over the five-year term of the
option. The number of shares of Company common stock subject to the call at any
given time, which depends on the number of options outstanding form time to
time, is presently 450,000 and is not expected to exceed that number. As part of
that transaction, the Company deposited $2,100 with the bank and recorded a
noncurrent asset in that amount.
10. ACCRUED PAYROLL AND EMPLOYEE BENEFITS
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Accrued commissions................................... $ 34 $ 79 $ 398
Accrued payroll taxes................................. 175 398 977
Accrued vacation pay.................................. 1,425 1,807 1,571
Accrued salaries and bonus............................ 1,059 1,118 1,398
Accrued restructuring costs (Note 16)................. 4,414 -- 2,256
Accrued severance costs............................... -- 439 --
Accrued pension expenses.............................. 520 529 703
Debt for ESPP......................................... 2 17 145
Other................................................. -- 175 147
------ ------ ------
$7,629 $4,562 $7,595
====== ====== ======
11. EMPLOYEE BENEFIT PLANS
The Company provides retirement benefits for substantially all employees in
the United States and in foreign locations. In the U.S., the U.K. and the
Netherlands, the Company sponsors defined contribution plans. In addition, IMAB
has a supplemental defined contribution plan for certain key management
employees.
IMAB participates in several pension plans (noncontributory for employees)
which cover substantially all employees of its Swedish operations. The plans are
in accordance with a nationally-agreed standard plan, the ITP Plan, and
administered by a national organization, Pensionsregisteringsinstitutet ("PRI").
205
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The level of benefits and actuarial assumptions are calculated and established
by the national organization and, accordingly, IMAB may not change benefit
levels or actuarial assumptions. The Company accounts for pensions in accordance
with SFAS No. 87, Employers" Accounting for Pensions. In March 2001, IMAB
amended its financing of these plans from financing via corporate assets to
financing via premiums paid to Alecta, the Swedish National Pension
Organization. The pension book reserve will, in the future, only increase with
an interest component. IMAB has provided a guaranty to Forsakringsbolaget
Pensions Garanti ("FPG"), a third party guarantor of pension liabilities, in the
amount of $650. This guaranty is in the form of a collateralized bank deposit of
the same amount and is recorded as a noncurrent asset. During the period May 1,
2002 through December 10, 2002, IMAB has amortized its liability by $565. It is
expected that IMAB will continue to amortize its remaining liability by
approximately $650 per year for the next 3 1/2 years.
Effective April 30, 1999, the Company adopted SFAS No. 132, Employers'
Disclosures About Pensions and Other Postretirement Benefits. SFAS No. 132 does
not change the measurement or recognition of those plans, but revises the
disclosure requirements for pension and other postretirement benefit plans for
all years presented. The net periodic benefit cost for the IMAB's defined
benefit retirement plan in Sweden include the following components:
PERIOD
MAY 1, 2002 YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Service cost.......................................... $ -- $ -- $337
Interest cost......................................... 110 168 167
Amortization of actuarial net loss.................... 1 2 8
Amortization of transition obligation................. 1 -- 2
---- ---- ----
Net periodic benefit cost........................... $112 $170 $514
==== ==== ====
The following table sets forth the change in the benefit obligation for
IMAB's defined benefit plan in Sweden:
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Change in benefit obligation
Benefit obligation at beginning of period........... $3,170 $3,047 $3,094
Service cost........................................ -- -- 337
Interest cost....................................... 110 168 167
Actuarial loss...................................... 372 322 --
Benefits paid....................................... (4) (7) (19)
Settlement.......................................... (565) (313) --
Effect of foreign currency exchange rates........... 445 (47) (532)
------ ------ ------
Benefit obligation at end of period................. $3,528 $3,170 $3,047
====== ====== ======
206
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the Plan's funded status and amounts recognized
in the consolidated balance sheet:
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Actuarial present value of benefit obligation
Funded status...................................... $(3,528) $(3,170) $(3,047)
Unrecognized actuarial loss........................ 776 373 159
Unrecognized transition obligation................. 3 4 8
------- ------- -------
$(2,749) $(2,793) $(2,880)
======= ======= =======
Out of which long-term liability................... (2,082) (2,093) (2,880)
Out of which short-term liability.................. (667) (700) --
The following assumptions were used to determine the IMAB's obligation
under the Swedish plan:
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Discount rate......................................... 5.30% 5.75% 5.75%
Salary increase....................................... 3.00% 3.00% 3.00%
Inflation............................................. 2.00% 2.00% 2.00%
DEFINED CONTRIBUTION PLAN
Contributions by the Company relating to its defined contribution plans for
the period ended May 1, 2002 through December 10, 2002 and years ended April 30,
2002 and April 30, 2001 were $1,900, $2,493 and $2,606, respectively. During the
period May 1, 2002 through December 10, 2002 and fiscal year 2002, the Company
received refunds from the Swedish National Pension Organization, Alecta,
amounting to $0 and $802, respectively. These refunds were related to an
overfunding of the pension plans administered by Alecta in earlier years. Alecta
was required by the Swedish Government to return the overfunded portion of these
funds to the contributing employers.
12. STOCKHOLDERS' EQUITY AND NUMBER OF SHARE INFORMATION
IMIC's Amended and Restated Certificate of Incorporation as in effect on
December 10, 2002, authorizes (i) 15,000,000 shares of preferred stock with a
par value of $0.01, and (ii) 75,000,000 shares of common stock with a par value
of $0.01 of which 12,500,000 shares have been designated as Class B common
stock. No shares of preferred stock or Class B common stock were outstanding at
December 10, 2002. On April 30, 2003, IMIC amended and restated its Certificate
of Incorporation to (1) eliminate its preferred and Class B common stock, and
(2) reduce its authorized stock to 3,000 shares of common stock, par value $0.01
per share.
As of December 10, 2002, total shareholders' equity includes an amount of
SEK 40,800,000 (approximately U.S. $4,300) in IMAB which is restricted as to
usage according to Swedish Company Law. The amount only can be used to cover a
net deficit, for an increase in share capital, or for other uses as agreed by
the courts.
On January 31, 2002, the Company and the shareholders concerned cancelled
purchases aggregating 432,000 shares of common stock. Accordingly, the number of
shares outstanding and the related notes receivable from shareholders have been
adjusted.
There have not been any repurchases of common stock during the period May
1, 2002 through December 10, 2002 or the years ended April 30, 2002 and 2001.
207
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHARE INFORMATION
For each of the periods presented, income available to common shareholders
(the numerator) used in the computation of net loss per share was the same as
the numerator used in the computation of net loss per share assuming dilution. A
reconciliation of the denominators used in the computations of net loss per
share and net loss per share assuming dilution is as follows:
PERIOD
MAY 1, 2002
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ ---------- ----------
Weighted average shares outstanding............. 31,961,006 32,198,401 31,985,991
Effect of dilutive stock options................ -- -- --
---------- ---------- ----------
Adjusted weighted average shares outstanding
assuming dilution............................. 31,961,006 32,198,401 31,985,991
========== ========== ==========
13. STOCK COMPENSATION PLANS
STOCK OPTION PLANS
In May 1995, IMIC adopted the Industri-Matematik International Corp. Stock
Option Plan ("1995 Plan"), and in October 1998, IMIC adopted the
Industri-Matematik International Corp. 1998 Stock Option Plan ("1998 Plan") (the
1995 Plan and 1998 Plan, collectively, "U.S. Plans").
The U.S. Plans provide for grants of incentive stock options to key
employees (including officers and employee directors) of the Company and
nonincentive stock options to key employees and members of IMIC's Board of
Directors, consultants and other advisors of the Company who are not employees.
The maximum term for either form of option is ten years, and the options which
have been granted have had vesting periods of three to five years. A total of
3,000,000 shares of common stock were reserved for future issuance under the
1995 Plan, of which 2,259,500 were available for grant as of December 10, 2002.
Of the total of 4,000,000 shares reserved for issuance under the 1998 Plan,
1,513,500 were available for grant as of December 10, 2002.
Since there has been a public market for the Company's common stock, all
stock options have been granted with an exercise price equal to or exceeding the
market price. IMIC's Board of Directors believes that all stock options granted
prior to there being such public market were granted with an exercise period
equal to or exceeding the fair value of such common stock on the date of the
grant, based on the facts, circumstances and limitations existing at the time of
their determinations.
Pursuant to the acquisition of IMIC by IMI Ireland, the U.S. Plans were
cancelled in early 2003.
208
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of option transactions and exercise prices as it
relates to the U.S. Plans.
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE PER OPTION PRICE
---------- ------------------ --------
Outstanding at April 30, 2000.................. 3,984,850 $1.91 -- $26.38 $5.27
Granted...................................... 270,500 $1.72 -- $3.50 $2.24
Exercised.................................... (151,900) $1.91 -- $4.00 $2.03
Terminated................................... (914,000) $1.91 -- $20.38 $4.61
Outstanding at April 30, 2001.................. 3,189,450 $1.72 -- $26.38 $5.31
Granted...................................... 1,753,500 $0.65 -- $1.15 $0.96
Exercised.................................... -- $ -- -- $ -- $ --
Terminated................................... (1,305,950) $1.00 -- $26.38 $8.29
Outstanding at April 30, 2002.................. 3,637,000 $0.65 -- $26.38 $2.91
Granted...................................... 280,000 $0.70 -- $0.93 $0.77
Exercised.................................... -- $ -- -- $ -- $ --
Terminated................................... (690,500) $0.83 -- $6.00 $1.44
Outstanding at December 10, 2002............... 3,226,500 $0.65 -- $26.38 $3.04
Vested at December 10, 2002.................... 1,994,091 $0.65 -- $26.38 $3.74
The following table summarizes information concerning outstanding and
exercisable options as of December 10, 2002.
OPTIONS EXERCISABLE
WEIGHTED AVERAGE ---------------------
---------------------------------------------------- WEIGHTED
REMAINING AVERAGE
RANGE OF NUMBER OF LIFE EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS (YEARS) PRICE OPTIONS PRICE
----------------- ---------- --------- -------- ---------- --------
$0.65 -- $ 2.00 1,785,400 8.4 $ 1.10 861,816 $ 1.29
$3.00 -- $ 3.69 617,600 7.0 $ 3.67 456,575 $ 3.68
$4.00 -- $ 6.00 704,000 5.8 $ 5.97 560,200 $ 5.97
$9.00 -- $26.38 119,500 4.3 $11.41 115,500 $11.38
----- ------ --------- --- ------ --------- ------
$0.65 -- $26.38 3,226,500 7.4 $ 3.04 1,994,091 $ 3.74
===== ====== ========= === ====== ========= ======
TRANSFERABLE STOCK OPTION PLAN
In October 2000, the Company instituted a Transferable Stock Option Plan
("Swedish Plan") which supplements the U.S. Plans for the benefit of selected
employees subject to Swedish income taxation. Pursuant to the Swedish Plan,
options may be sold to employees giving them the right to purchase shares of
Company common stock at a purchase price equal to the market value of the common
stock on the date of sale of the option. The purchase price for the option is
its fair market value on the date of sale. The options are transferable, and if
an employee owning an option terminates his employment with the Company, the
Company has the right to repurchase his options at their then market value, or
if the options are not publicly traded, at the original purchase price plus
interest. A total of 500,000 shares were reserved for issuance under the Swedish
Plan, all of which were available for grant as of December 10, 2002. Pursuant to
the acquisition of IMIC by IMI Ireland, the Swedish Plan was cancelled in early
2003.
In May 2001, the Company instituted a Transferable Stock Option Plan for
Abalon AB ("Abalon Plan"), a wholly owned subsidiary. The Plan is for the
benefit of selected employees subject to Swedish
209
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
income taxation. Pursuant to the Abalon Plan, options may be sold to employees
giving them the right to purchase shares of Abalon AB common stock at a purchase
price equal to the market value of the common stock on the date of sale of the
option. The purchase price for the option is its fair market value on the date
of sale. The options are transferable, and if an employee owning an option
terminates his or her employment with the Company, the Company has the right to
repurchase the employee's options at their then market value, or if the options
are not publicly traded, at the original purchase price plus interest. The
Abalon Plan provides for the possibility to issue up to 20 percent of the
subsidiaries outstanding common stock. At April 30, 2002, there were 310,000
Abalon AB options outstanding representing 3 percent of the subsidiaries
outstanding common stock. During the period ended December 10, 2002, the Company
exercised its right to repurchase all of the options issued under the Abalon
Plan. Prior to December 10, 2002, the Company terminated the Plan, and so there
were no Abalon AB options outstanding at that date.
RESTRICTED STOCK PROGRAM
In May 1995, the Company instituted a restricted stock program pursuant to
which shares of IMIC's common stock were purchased by certain key employees who
may be taxable pursuant to the laws of Sweden in exchange for nonrecourse
promissory notes ("Restricted Stock Program"). The shares were issued through a
wholly owned subsidiary of IMIC, Software Finance Corporation ("SFC"). Principal
on the promissory notes is due either nine or ten years after issuance with
interest being due and payable annually.
No shares were sold during the period May 1, 2002 through December 10, 2002
or in fiscal years ended April 30, 2002 and 2001.
Under the terms of the Restricted Stock Program, SFC has an option to
repurchase the shares issued to each employee provided it pays an annual option
premium. The exercise price to be paid by SFC upon exercise of a purchase option
is the fair market value, provided that if the option to purchase is exercised
prior to the end of a stated period, then the exercise price is the initial
purchase price for a percentage of the shares after the first anniversary of the
option agreement, generally decreasing by 20 percent each subsequent year and
the exercise price for the balance of the shares is fair market value. The
annual option premium paid by SFC is at a rate substantially equal to the
interest due on the nonrecourse promissory note. If it exercises an option, SFC
has the right and obligation to apply against the payment of any principal due
on the employee's promissory note any amounts payable by SFC to the recipient of
the shares as the exercise price under the Option Agreement. The individual
employee has no personal obligation under the note; liability is limited to the
shares sold.
The shares sold pursuant to the Restricted Stock Program are included
within common stock and additional paid-in capital in Stockholders' equity while
the nonrecourse promissory notes are classified as a contra-account as notes
receivable from Stockholders, and shown in Stockholders' equity. The Company has
the ability to prevent the recipients from selling the purchased securities. The
Company has not recognized any compensation expense in respect of the restricted
stock in the statements of operations since the purchase price of the restricted
stock did not differ from the estimated fair market value of the common stock on
the date of issuance. The shares sold pursuant to the Restricted Stock Program
and dividends paid thereon are subject to a pledge and security interest held by
SFC.
During the year ended April 30, 2002, one former employee and certain
current employees terminated their interest in 432,000 shares and the related
notes were cancelled. As of April 30, 2002, 634,995 shares sold pursuant to the
Restricted Stock Program, with respect to which the related non-recourse
promissory notes remained unpaid, were outstanding. There was no activity in the
program during the period from May 1, 2002 through December 10, 2002. In
November and December 2002, the program was terminated in contemplation of
IMIC's acquisition by IMI Ireland. SFC took possession of the remaining 634,995
210
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding IMIC shares, and the related non-recourse notes held by SFC were
cancelled pursuant to termination agreements. On December 11, 2002, SFC's
non-recourse notes to IMIC were cancelled and SFC gave possession of the shares
to IMIC. IMIC's transfer agent cancelled the shares in January 2003.
EMPLOYEE STOCK PURCHASE PLAN
Effective February 26, 1997, IMIC adopted the Industri-Matematik
International Corp. 1997 Employee Stock Purchase Plan ("ESPP") to provide
eligible employees an opportunity to purchase shares of IMIC common stock at a
discount from market value through payroll deductions and other contributions.
600,000 shares were reserved for purchase pursuant to the ESPP in December 1998,
and May 2000, respectively. The ESPP establishes purchase periods of up to 23
months and two 6-month periods per calendar year commencing each January 1 and
July 1. On the last day of each accrual period, participant account balances are
used to purchase shares of common stock at the lesser of 85 percent of the fair
market value of the common stock on such date or on the first day of the
purchase period. No participant may purchase more than 500 shares in any accrual
period or shares having a value in excess of $21 in any calendar year. Employees
purchased 21,580, 103,038 and 284,756 shares at an average price of $0.51, $1.47
and $2.09 per share under the ESPP during the period May 1, 2002 through
December 10, 2002 and the years ended April 30, 2002 and 2001.
PRO FORMA NET LOSS IN ACCORDANCE WITH SFAS NO. 123
As permitted by the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company applies APB Opinion 25 "Accounting for Stock issued
to Employees" and related interpretations in accounting for its stock-based
employee compensation plans. Accordingly, no compensation cost has been
recognized for the stock options or for purchases under the ESPP. If
compensation cost for stock option plans and its ESPP has been determined based
on the fair value at the grant dates as defined by SFAS No. 123, the Company's
pro forma net loss and loss per share would have been as follows:
PERIOD
MAY 1, 2002 YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
NET LOSS
As reported....................................... $(11,851) $(6,602) $(35,251)
Pro forma......................................... $(12,368) $(6,438) $(39,883)
NET LOSS PER SHARE
As reported....................................... $ (0.37) $ (0.20) $ (1.10)
Pro forma......................................... $ (0.39) $ (0.20) $ (1.25)
211
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes options-pricing model with the following weighted
average assumptions used for grants in the period May 1, 2002 through December
10, 2002 and the years ended April 30, 2002 and 2001:
PERIOD
MAY 1, 2002 YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Expected term (years)................................. 5 5 5
Volatility factor..................................... 101% 101% 100%
Risk-free interest rate............................... 4.42% 4.47% 5.21%
Dividend yield........................................ 0.00% 0.00% 0.00%
Fair value............................................ $0.59 $0.74 $1.73
Shares issued under the ESPP were valued at the difference between the
market value of the stock and the discounted purchase price of the shares on the
date of the purchase. The date of grant and the date of purchase coincide for
this plan.
The weighted average fair value of shares issued to employees under the
ESPP was $0.17, $0.49 and $0.68 during the period May 1, 2002 through December
10, 2002 and the years ended April 30, 2002 and 2001.
14. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office facilities and certain office equipment under
various noncancellable operating lease agreements. Aggregate future minimum
lease payments under noncancellable operating leases are as follows as of
December 10, 2002:
PERIOD ENDING APRIL 30,
2003........................................................ $ 1,520
2004........................................................ 3,667
2005........................................................ 2,687
2006........................................................ 1,532
2007........................................................ 1,339
2008........................................................ 929
Thereafter.................................................. 3,114
-------
Total future minimum lease payments....................... 14,788
Less: Future lease payments receivable in respect of
subleases................................................. (7,420)
-------
$ 7,368
=======
Of the $7,420 of future lease payments receivable in respect of subleases,
$4,383 is contingent upon a sublease not exercising a termination clause in
March 2006.
Total rent expense under the leases was $1,839, $5,558 and $5,371 for the
period May 1, 2002 through December 10, 2002 and the years ended April 30, 2002
and April 30, 2001, respectively.
The Company is liable to pay social fees on the gains in connection with
the exercise of the Company's stock options by its employees in Sweden. The
amount of the future liability is dependent upon the number of options exercised
and the market price. Social fees in Sweden are approximately 33 percent.
212
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
To offset this potential liability, during November 2000, the Company entered
into a hedge transaction (Note 9).
During the period May 1, 2002 through December 10, 2002, IMAB has amortized
its liability under the nationally-agreed standard pension plan, the ITP Plan,
administered by the Swedish PRI Authority. The liability was reduced by $565. It
is expected that IMAB will continue to amortize its remaining liability by
approximately $650 per year for the next three and one-half years.
LITIGATION
In February 1999, a class action lawsuit was commenced by service of a
complaint against the Company, certain of its officers, directors and
controlling shareholders who sold shares of common stock during the class
period, and its underwriters claiming violation of the Federal securities laws.
The complaint was dismissed, but the plaintiff had the right and did serve a new
complaint. A motion to dismiss the second complaint has been submitted. No
answer to either complaint was filed. While management believes this action to
be without merit, an unfavorable outcome in the class or any other action which
may be brought against the Company may have a material adverse effect upon the
Company business, operating results and financial condition.
15. SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," the Company operates in one industry
segment, the design, development, marketing, licensing and support of
client/server application software. The Company is managed on a geographic basis
and the Company's management evaluates the performance of its segments and
allocates resources to them based upon income (loss) from operations. Income
(loss) for operations for the geographic segments excludes general corporate
expenses and product development costs. The majority of software development
occurs in Sweden although the Company maintains some development facilities in
the United States. Product development costs and general corporate expenses are
reported in the Corporate segment. Assets by reportable segment are not
disclosed since the Company's management does not review segmented balance sheet
information. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. Segment data
includes intersegment revenues.
The table below presents information about the Company's reportable
segments:
PERIOD
MAY 1, 2002 YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Revenues
United States...................................... $ 8,219 $19,974 $28,220
Nordic............................................. 15,900 24,214 28,383
United Kingdom..................................... 3,753 6,658 6,316
Netherlands........................................ 4,977 5,771 7,325
Australia.......................................... 412 637 1,194
Intercompany....................................... (3,474) (2,845) (2,744)
Corporate.......................................... -- 871 661
------- ------- -------
Total revenues.................................. $29,787 $55,280 $69,355
======= ======= =======
213
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in the revenues of Nordic for the period May 1, 2002 through
December 10, 2002 and the year ended April 30, 2002, respectively, $2,414 and
$1,804 were revenues earned from other companies within the group
("Intercompany"). Included in the revenues for United Kingdom for the period May
1, 2002 through December 10, 2002 and the year ended April 30, 2002,
respectively, $1,059 and $1,026 were intercompany revenues. Included in the
revenues for various countries, for the period May 1, 2002 through December 10,
2002 and the year ended April 30, 2002, respectively, $0 and $15 were
intercompany revenues. Various countries consist of Netherlands, Australia and
the United States.
PERIOD
MAY 1, 2002 YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Loss from operations
United States.................................... $ (1,613) $ 1,602 $ 7,795
Nordic........................................... (8,513) 2,244 2,039
United Kingdom................................... 609 1,304 1
Netherlands...................................... 163 279 1,918
Other Europe..................................... 672 (1) (160)
Australia........................................ (118) 22 (228)
Canada........................................... (16) (3) (3)
Intercompany..................................... 57 (64) (2,072)
Corporate........................................ (2,552) (12,651) (29,446)
-------- -------- --------
Total loss from operations.................... $(11,311) $ (7,268) $(20,156)
======== ======== ========
214
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic data for revenues based upon customer location and long-lived
assets (which consist of noncurrent assets other than goodwill and other
intangible assets) were as follows:
PERIOD
MAY 1, 2002 YEAR YEAR
THROUGH ENDED ENDED
DECEMBER 10, APRIL 30, APRIL 30,
2002 2002 2001
------------ --------- ---------
Revenues
United States...................................... $ 6,756 $17,311 $23,086
Nordic............................................. 13,404 22,065 25,546
United Kingdom..................................... 2,950 5,225 6,657
Netherlands........................................ 3,445 5,953 6,561
Other Europe....................................... 1,874 1,440 1,218
Asia/Pacific....................................... 412 638 1,455
Rest of Americas................................... 946 2,648 4,832
------- ------- -------
Total revenues.................................. $29,787 $55,280 $69,355
======= ======= =======
Long-lived assets
United States...................................... $ 569 $ 885 $ 1,732
Nordic............................................. 1,517 1,770 2,387
United Kingdom..................................... 73 346 410
Netherlands........................................ 106 116 158
Australia.......................................... 12 18 66
------- ------- -------
Total long-lived assets......................... $ 2,277 $ 3,135 $ 4,753
======= ======= =======
MAJOR CUSTOMERS
For the period May 1, 2002 through December 10, 2002 and the year ended
April 30, 2001, the Company had no single customer with sales comprising more
than 10 percent of total revenues. For the year ended April 30, 2002, the
Company had one single customer, Sherwin Williams, with sales comprising 10.4
percent of total revenues.
16. RESTRUCTURING
On October 10, 2002, the Company announced a restructuring designed to
reduce its operating costs. The restructuring has resulted in a charge of
$5,500, which has been recorded in the second quarter of fiscal year 2003. As of
December 10, 2002, $4,600 of that amount remains as a liability and has not yet
been paid. The Company anticipates that approximately $1,500 and $1,500 of that
amount will be paid in the third and fourth quarters of fiscal year 2003,
respectively. The remaining amount of $1,600 will be paid in fiscal 2004.
215
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the components of the charge included:
UNITED REST OF
SWEDEN STATES WORLD TOTAL
------ ------ ------- ------
Severance benefits.................................. $4,561 $254 $381 $5,196
Lease obligations and terminations.................. -- -- 53 53
Other............................................... 110 30 92 232
------ ---- ---- ------
Total restructuring charge........................ $4,671 $284 $526 $5,481
====== ==== ==== ======
Of the 68 employees terminated in Sweden, 6 worked in administration, 7
worked in sales and marketing, 26 worked in services and support and 29 worked
in product development. Of the 15 employees terminated in the United States, 2
worked in administration, 7 worked in service and support, 4 worked in product
development and 2 worked in sales and marketing. Of the 8 employees terminated
in the Netherlands, 1 worked in administration, 2 worked in service and support
and 5 worked in sales and marketing. The lease termination expenses were related
to the space occupied by terminated employees.
The following table presents the components of the accrual at October 10,
2002 and the restructuring activity through December 10, 2002:
ACCRUAL AS OF
INITIAL UTILIZATION DECEMBER 10,
CHARGE OF ACCRUAL 2002
------- ----------- -------------
Severance benefits................................... $5,196 $(782) $4,414
Lease obligations and terminations................... 53 -- 53
Other................................................ 232 (110) 122
------ ----- ------
$5,481 $(892) $4,589
====== ===== ======
In April 2001, in order to reduce costs and increase efficiency, the
Company announced a reorganization of its operations into four regional units
each made up of sales, services, support and operations staff. In connection
with the reorganization, the Company recorded a restructuring charge of $5,400
consisting primarily of employee severance costs, lease termination expenses and
write-downs of certain property and equipment, of which $1,500 was utilized by
April 30, 2001, and the balance utilized during the fiscal year ended April 30,
2002. The components of the charge included:
SWEDEN U.S. TOTAL
------ ---- ------
Severance benefits.......................................... $2,431 $366 $2,797
Lease obligations........................................... 1,057 -- 1,057
Write-down on fixed assets.................................. 1,490 -- 1,490
Other....................................................... 47 -- 47
------ ---- ------
Total restructuring charge................................ $5,025 $366 $5,391
====== ==== ======
216
INDUSTRI-MATEMATIK INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the components of the activity relating to the
fiscal 2001 restructuring through April 30, 2002. No accrual remained at
December 10, 2002:
INITIAL ACCRUAL ACCRUAL
CHARGE AS OF AS OF
APRIL 30, APRIL 30, UTILIZATION CURRENCY APRIL 30,
2001 2001 OF ACCRUAL EFFECT 2002
--------- --------- ----------- -------- ---------
Severance benefits.................... $2,797 $2,621 $(2,550) $ (71) $--
Lease obligations and terminations.... 1,057 990 (958) (32) --
Writedown of fixed assets............. 1,490 -- -- -- --
Other................................. 47 47 (47) -- --
------ ------ ------- ----- --
$5,391 $3,658 $(3,555) $(103) $--
====== ====== ======= ===== ==
17. SUBSEQUENT EVENTS
In May 2003, the Company transferred the operations of its Swedish,
Netherlands and United Kingdom subsidiaries, together with the intellectual
property of the IMIC business, to IMI Ireland as part of a corporate
reorganization.
On September 9, 2003, Chinadotcom Corporation ("Chinadotcom") purchased a
51% interest in IMI Ireland for a contribution of $25,000 into a parent company
of IMI. Chinadotcom is a Cayman Islands company incorporated with limited
liability that trades on NASDAQ under the symbol CHINA.
In October 2003, the Company sold the operations of its Abalon operations
for $1,000. There was an insignificant gain recorded as a result of this
transaction. This disposal was planned as part of IMI Ireland's acquisition of
the Company.
217
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
COMBINED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED)
AND THE PERIOD FROM DATE OF INCORPORATION,
OCTOBER 23, 2002, THROUGH APRIL 30, 2003
218
INDEX
PAGE(S)
-------
REPORT OF INDEPENDENT AUDITORS.............................. 220
FINANCIAL STATEMENTS
Combined Consolidated Balance Sheet......................... 221
Combined Consolidated Statement of Operations............... 222
Combined Consolidated Statement of Changes in Stockholders'
Equity (Deficit).......................................... 223
Combined Consolidated Statement of Cash Flows............... 224
Notes to the Combined Consolidated Financial Statements..... 225
219
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors and Stockholder of
STG and IMI Global Holdings Ireland Limited
In our opinion, the accompanying combined consolidated balance sheet and
the related combined consolidated statements of operations, changes in
stockholder's deficit and cash flows present fairly, in all material respects,
the financial position of STG, IMI Global Holdings Ireland Limited and their
respective subsidiaries (the "Company") at April 30, 2003 and the results of
their operations and their cash flows for the period from the date of
incorporation, October 23, 2002 through April 30, 2003 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these statements based on our audit.
We conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 4, 2003, except for paragraph 2 of Note 7 and
paragraph 2 of Note 19, as to which the date is
October 15, 2003
220
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEET
JULY 31, 2003 (UNAUDITED) AND APRIL 30, 2003
(IN THOUSANDS OF DOLLARS, EXCEPT SHARES AND PER SHARE DATA)
JULY 31, APRIL 30,
2003 2003
----------- ---------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents................................. $ 4,598 $ 9,961
Accounts receivable, less allowance for doubtful accounts
of $31 at July 31, 2003 and April 30, 2003.............. 5,029 5,846
Unbilled receivables...................................... 238 205
Prepaid expenses.......................................... 2,062 2,029
Other current assets...................................... 300 870
Current assets of discontinued operations held for sale... 924 1,419
------- -------
Total current assets.................................... 13,151 20,330
------- -------
Noncurrent assets
Property and equipment, net............................... 1,821 1,818
Goodwill and other intangible assets...................... 9,405 9,836
Long-term cash deposit.................................... 461 461
Other noncurrent assets................................... 817 811
Non-current assets of discontinued operations held for
sale (includes goodwill of $938 and $718,
respectively)........................................... 967 756
------- -------
Total noncurrent assets................................. 13,471 13,682
------- -------
Total assets............................................ $26,622 $34,012
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of long-term debt......................... $ 1,750 $ 1,750
Note payable to Stockholder............................... -- 3,953
Accounts payable.......................................... 1,383 1,477
Accrued expenses and other current liabilities............ 2,841 3,886
Accrued payroll and employee benefits..................... 1,965 3,323
Accrued restructuring and transaction costs............... 3,012 4,852
Deferred revenue.......................................... 6,621 6,797
Current liabilities of discontinued operations held for
sale.................................................... 941 1,225
------- -------
Total current liabilities............................... 18,513 27,263
------- -------
Long-term liabilities
Long-term debt, net of current portion.................... 4,521 4,958
Accrued pension liability................................. 2,552 2,550
Other long-term liabilities............................... 46 70
------- -------
Total long-term liabilities............................. 7,119 7,578
------- -------
Total liabilities....................................... 25,632 34,841
------- -------
Commitments and contingencies (Note 15)
Stockholder's equity (deficit)
Common stock of STG, $1.00 par value; 50,000 shares
authorized, $50,000 issued and outstanding.............. 50 50
Preferred stock of IMI Global Holdings Ireland Limited,
34,000,000 10% Cumulative Preference shares, $0.001 par
value shares authorized, issued and outstanding......... 34 --
Common stock of IMI Global Holdings Ireland Limited, 1
ordinary share Euro 1.00 par value; 40,000,000 ordinary
shares, $0.001 par value, 1 ordinary share Euro 1.00
issued and outstanding.................................. -- --
Additional paid-in capital................................ 1,966 --
Receivable from Stockholder............................... (37) (37)
Accumulated deficit....................................... (700) (522)
Accumulated other comprehensive loss...................... (323) (320)
------- -------
Total Stockholder's equity (deficit).................... 990 (829)
------- -------
Total liabilities and Stockholders' equity (deficit).... $26,622 $34,012
======= =======
The accompanying notes are an integral part of the combined consolidated
financial statements.
221
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) AND THE PERIOD FROM THE
DATE OF INCORPORATION, OCTOBER 23, 2002, THROUGH APRIL 30, 2003
(IN THOUSANDS OF DOLLARS, EXCEPT SHARES DATA)
THREE OCTOBER 23,
MONTHS 2002
ENDED THROUGH
JULY 31, APRIL 30,
2003 2003
----------- -----------
(UNAUDITED)
REVENUES
Licenses.................................................... $ 567 $1,006
Services and maintenance.................................... 8,445 14,967
Other....................................................... 460 649
------ ------
Total revenues............................................ 9,472 16,622
------ ------
COST OF REVENUES
Licenses.................................................... 84 329
Services and maintenance.................................... 5,614 9,190
Other....................................................... 169 227
------ ------
Total cost of revenues.................................... 5,867 9,746
------ ------
Gross profit.............................................. 3,605 6,876
------ ------
OPERATING EXPENSES
Product development......................................... 940 2,000
Sales and marketing......................................... 747 1,591
General and administrative.................................. 1,056 1,627
Amortization of other intangible assets..................... 360 601
Reorganization related costs................................ 95 824
------ ------
Total operating expenses.................................. 3,198 6,643
------ ------
Operating income............................................ 407 233
------ ------
OTHER INCOME (EXPENSE)
Interest income............................................. 25 64
Interest expense............................................ (161) (213)
Miscellaneous expense, net.................................. (151) (90)
------ ------
Income (loss) from continuing operations before income
taxes..................................................... 120 (6)
Provision for income taxes.................................. (88) (622)
------ ------
Net income (loss) from continuing operations................ 32 (628)
Income (loss) from discontinued operations, net of tax of
$0........................................................ (210) 106
------ ------
Net loss.................................................. $ (178) $ (522)
====== ======
The accompanying notes are an integral part of the combined consolidated
financial statements.
222
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) AND THE
PERIOD FROM THE DATE OF INCORPORATION, OCTOBER 23, 2002, THROUGH APRIL 30, 2003
(IN THOUSANDS OF DOLLAR, EXCEPT SHARE DATA)
COMMON PREFERRED
STOCK OF STOCK OF
IMI GLOBAL IMI GLOBAL ACCUMULATED
COMMON HOLDINGS HOLDINGS ADDITIONAL OTHER
COMPREHENSIVE STOCK OF IRELAND IRELAND PAID-IN ACCUMULATED COMPREHENSIVE
LOSS STG LIMITED LIMITED CAPITAL DEFICIT LOSS
------------- -------- ---------- ---------- ---------- ----------- -------------
BALANCE AS OF OCTOBER 23,
2002.......................... $ -- $-- $-- $-- $ -- $ -- $ --
Issuance of 50,000 shares of
common stock of STG on October
23, 2002...................... -- 50 -- -- -- -- --
Issuance of one share of common
stock of IMI Global Holdings
Ireland Limited on November 8,
2002.......................... -- -- -- -- -- -- --
Net loss....................... (522) -- -- -- -- (522) --
Currency translation
adjustment.................... (320) -- -- -- -- -- (320)
----- --- -- --- ------ ----- -----
BALANCE AS OF APRIL 30, 2003... (842) 50 -- -- -- (522) (320)
----- --- -- --- ------ ----- -----
Issuance of 34,000,000 10%
Cumulative Preference Shares
on May 1, 2003................ -- -- -- 34 1,966 -- --
Net loss....................... (178) -- -- -- -- (178) --
Currency translation
adjustment.................... (3) -- -- -- -- -- (3)
----- --- -- --- ------ ----- -----
BALANCE AS OF JULY 31, 2003
(UNAUDITED)................... $(181) $50 $-- $34 $1,966 $(700) $(323)
===== === == === ====== ===== =====
NOTE TOTAL
RECEIVABLE STOCKHOLDER'S
FROM EQUITY
STOCKHOLDER (DEFICIT)
----------- -------------
BALANCE AS OF OCTOBER 23,
2002.......................... $ -- $ --
Issuance of 50,000 shares of
common stock of STG on October
23, 2002...................... (37) 13
Issuance of one share of common
stock of IMI Global Holdings
Ireland Limited on November 8,
2002.......................... -- --
Net loss....................... -- (522)
Currency translation
adjustment.................... -- (320)
---- ------
BALANCE AS OF APRIL 30, 2003... (37) (829)
---- ------
Issuance of 34,000,000 10%
Cumulative Preference Shares
on May 1, 2003................ -- 2,000
Net loss....................... -- (178)
Currency translation
adjustment.................... -- (3)
---- ------
BALANCE AS OF JULY 31, 2003
(UNAUDITED)................... $(37) $ 990
==== ======
The accompanying notes are an integral part of the combined consolidated
financial statements.
223
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) AND THE
PERIOD FROM THE DATE OF INCORPORATION, OCTOBER 23, 2002, THROUGH APRIL 30, 2003
(IN THOUSANDS OF DOLLAR)
THREE OCTOBER 23,
MONTHS 2002
ENDED THROUGH
JULY 31, APRIL 30,
2003 2003
----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (178) $ (522)
Less: (Income) loss from discontinued operations............ 210 (106)
------- -------
Net income (loss) from continuing operations................ 32 (628)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization............................. 655 1,080
Impairment of property and equipment...................... 23 184
Deferred income taxes..................................... 49 565
Changes in operating assets and liabilities
Accounts receivable.................................... 817 3,881
Accrued income and prepaid expenses.................... (98) 1,147
Income taxes........................................... -- 140
Other assets........................................... 564 1,820
Accounts payable....................................... (94) 566
Accrued expenses and other current liabilities......... (2,885) (7,306)
Accrued payroll and employee benefits.................. (1,358) (1,155)
Deferred revenue....................................... (176) 1,542
Accrued pension liability.............................. 2 9
Other liabilities...................................... (24) (37)
Other.................................................. (140) (259)
------- -------
Net cash flows (used in) provided by operating
activities.......................................... (2,633) 1,549
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment......................... (339) (263)
Payment for subsidiary, net of cash acquired of $9,379...... -- (1,574)
------- -------
Net cash flows used in investing activities.......... (339) (1,837)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loan from stockholder......................... -- 10,953
Repayments of loan to stockholder........................... (1,953) (7,000)
Proceeds from term loan..................................... -- 7,000
Issuance of common stock.................................... -- 13
Financing costs on term loan................................ -- (517)
Installment payment on term loan............................ (438) (292)
------- -------
Net cash flows (used in) provided by financing
activities.......................................... $(2,391) $10,157
------- -------
Translation differences on cash and cash equivalents........ -- 92
------- -------
Net increase in cash and cash equivalents................... (5,363) 9,961
Cash and cash equivalents at beginning of period............ 9,961 --
------- -------
Cash and cash equivalents at end of period.................. $ 4,598 $ 9,961
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest.................................................. $ 183 $ 133
Income taxes.............................................. $ -- $ --
NON-CASH FINANCING ACTIVITY
Issuance of common stock of STG for note receivable......... $ -- $ 37
Issuance of preferred stock of IMI Global Holdings in
exchange for cancellation of note payable................. $ 2,000 $ --
The accompanying notes are an integral part of the combined consolidated
financial statements.
224
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) AND THE PERIOD FROM THE
DATE OF INCORPORATION, OCTOBER 23, 2002, THROUGH APRIL 30, 2003
(IN THOUSANDS OF DOLLARS)
1. ORGANIZATION AND NATURE OF BUSINESS
These are the combined consolidated financial statements for the three
months ended July 31, 2003 and the period from October 23, 2002 through April
30, 2003 for the following related companies and their respective subsidiaries:
- STG, a Cayman Islands exempted company with limited liability that was
incorporated on October 23, 2002.
- IMI Global Holdings Ireland Limited ("IMI Ireland"), a private limited
liability company incorporated and organized under the laws of the
Republic of Ireland. IMI Ireland was incorporated on November 8, 2002
under the name of STG OMS Ireland Limited. On January 25, 2003, its name
was changed to IMI Global Holdings Ireland Limited.
STG and IMI Ireland (together with their respective subsidiaries, "IMI" or
the "Company") were wholly owned subsidiaries of and under the common control of
Symphony Technology II-A L.P. ("Symphony" or "Stockholder"), a Delaware limited
liability partnership, for the period from their respective incorporations until
May 14, 2003. On May 14, 2003, STG acquired IMI Ireland and its subsidiaries
from Symphony pursuant to a corporate reorganization. This reorganization did
not result in a change in the historical book values of the assets and
liabilities of IMI Ireland since STG and IMI Ireland are under the common
control of Symphony.
The Company was inactive until December 11, 2002, when IMI Ireland acquired
the entire issued common stock of Industri-Matematik International Corporation
("IMIC") for $11.0 million. IMIC was a Delaware corporation that was previously
traded on the NASDAQ National Market ("NASDAQ") under the symbol IMIC. Funding
for the acquisition of IMIC was provided to IMI Ireland in the form of both a
short-term note payable and a partial capital contribution from Symphony (Note
12).
As a result of its acquisition by IMI Ireland, IMIC was delisted from
NASDAQ. These combined consolidated financial statements cover the three months
ended July 31, 2003 and the period from October 23, 2002 (the date of
incorporation of STG) through April 30, 2003. These combined consolidated
financial statements include the results of operations of the IMIC business for
the three months ended July 31, 2003 and the period December 11, 2002 (the date
of IMIC's acquisition by IMI Ireland) through April 30, 2003.
Effective May 1, 2003, the Company will begin to prepare consolidated
financial statements on a calendar year closing period ending the twelve months,
December of the respective calendar year. For the calendar year 2003, results
will only reflect financial information for the eight months ended December 31,
2003 given this change during the calendar year.
IMI develops, market and supports client/server and Internet-based
application software that enables manufacturers, distributors, wholesalers,
retailers, logistics service providers and e-businesses to more effectively
manage their supply chains and their customer relationships. Supply chain
management encompasses the execution of multiple customer-focused order
fulfillment processes, including order management, pricing and promotion,
handling, sourcing, warehouse management, transportation management, service
management, customer relationship management and replenishment planning and
coordination. IMI's software products monitor and manage event beyond the
physical limitations of the enterprise. IMI's software products are designed to
meet the complex fulfillment and customer service needs of
distribution-intensive businesses. These products allow customers to leverage
the value of their existing enterprise systems by integrating with legacy, new
client/server and new Internet-based manufacturing,
225
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
advanced planning and financial management systems. IMI has a professional
services organization and relationships with third-party technology vendors and
system integrators that configure solutions for clients.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The combined consolidated financial statements include the accounts of STG,
IMI Ireland and their respective subsidiaries, whose ultimate parent during the
period presented was Symphony. All significant intercompany accounts and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
License revenues represent sales of the Company's software. Service
revenues represent sales from consulting implementation and training services
(together referred to as "professional services"). Annual maintenance and
support revenues consist of ongoing support and sales of product updates. Other
revenues primarily represent hardware sales. Revenue is recognized when the
basic criteria in Statement of Position ("SOP") 97-2, Software Revenue
Recognition, have been met -- which are that persuasive evidence of an
arrangement exists and delivery has occurred, the fee fixed and determinable,
collectibility is probable and the arrangement does not require significant
customization of the software.
The Company typically licenses its software in multiple element
arrangements in which the customer purchases a combination of software,
maintenance/support and/or professional services. The Company is able to
determine fair value for professional service and support and maintenance based
on the price charged when these elements are sold separately. For professional
service engagements, the Company's estimates of fair value are supported by
hourly rates charged to customers in professional service engagements where
there is no associated license or maintenance/support arrangements. For
maintenance/ support contracts, pricing of contract renewals after the initial
contract term has expired supports the Company's estimates of fair value. The
Company does not sell its software product on a stand-alone basis; it is always
sold with maintenance/support services. Accordingly, the fair value of the
software is determined using the residual approach in these multiple-element
arrangements.
Maintenance and support revenue is deferred and recognized ratably over the
term of the agreement, generally one year. Service revenue is recognized as the
Company performs the services in accordance with the contract.
In a multiple element arrangement when fair value exists for all of the
undelivered elements in the arrangement, but does not exist for one of the
delivered elements in the arrangement, the Company recognizes revenue using the
"residual method" in accordance with SOP 98-9, Software Revenue Recognition in
Respect to Certain Arrangements. Under the "residual method," the Company defers
revenue for the fair value of its undelivered elements (typically, professional
services and maintenance) and recognizes revenue for the remainder of the
arrangement fee attributable to the delivered elements (typically, the software
product) when the basic criteria in SOP 97-2, Software Revenue Recognition, have
been met.
If the Company provides services on a fixed price contract, or the services
are considered essential to the functionality of software products sold, or if
software sold requires significant production, modification or customization,
license and services revenue is accounted for in accordance with SOP 81-1,
Accounting for Performance of Construction Type and Certain Production Type
Contracts, which requires the used of the percentage-of-completion method of
revenue recognition. In these cases, software revenue is recognized based on
labor hours incurred to date compared to total estimated labor hours for the
contract.
226
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of the Company's License Agreements and Professional
Service Agreements, in general, the only warranties provided are that the
software will function in accordance with the applicable software documentation
by a specified date. As these warranties are effective for a very limited time
period and historically the Company has not had any significant warranty claims,
the Company's policy has been to record no warranty provision upon the
recognition of license revenues. In addition, due to the Company's insignificant
product returns and price adjustments in past years, no provision is made for
product returns and price adjustments upon recognition of software license
revenues. The Company reviews on a project-by-project basis the cost of claims
that it considers to be "warranty" type claims under Professional Services
Agreements by establishing project reserves. The Company will continue to
evaluate the need for recording a warranty provision upon recognition of
software license revenues and delivery of customer modification work.
PRODUCT DEVELOPMENT COSTS
Software development costs are accounted for in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed.
Costs incurred in the product development of new software products are
expensed as incurred until technological feasibility has been established. To
date, the establishment of technological feasibility of the Company's products
and general release substantially coincide. As a result, the Company has not
capitalized any software development costs since such costs have been
immaterial.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method based upon estimated useful lives of the assets as follows:
Computer equipment.......................................... 3 years
Furniture and fixtures...................................... 1 to 10 years
Computer equipment.......................................... 5 years
Software acquired........................................... 1 to 3 years
Equipment purchased under capital leases is amortized on a straight-line
basis over the lesser of the estimated useful life of the asset or the lease
term.
Upon retirement or sale of property and equipment, cost and accumulated
depreciation on such assets are removed from the accounts and any gains or
losses are reflected in the statement of operations. Maintenance and repairs are
charged to expense as incurred.
INTANGIBLE ASSETS
Intangible assets are valued at their historic cost and are reviewed
periodically and adjusted for any reduction in value. Intangibles are amortized
to income on a straight-line basis over their useful life. The amortization
period is determined at time of acquisition, based upon management's evaluation
and considering factors such as existing market share, potential sales growth
and other factors in the acquired asset.
The useful lives assigned to intangibles currently on the balance sheet
are:
Customer contracts and relationships........................ 10 years
Completed software technology............................... 3 years
227
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-LIVED ASSETS
The Company follows SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets which provides guidance on the recognition of impairment
losses on long-lived assets to be held and used or to be disposed of, and
defines what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented.
The carrying values of long-lived assets are evaluated for impairment
whenever events or changes in circumstances indicate the carrying amount may not
be recoverable. Impairment would be determined based on a comparison of future
undiscounted cash flows to the underlying assets. If required, adjustments would
be measured based on discounted cash flows.
FOREIGN CURRENCY TRANSLATION
The functional currency of IMI's foreign subsidiaries is the applicable
local currency. The translation from the respective foreign currencies to U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for income statement accounts using a
weighted average exchange rate during the period. Gains or losses resulting from
such translation are included in miscellaneous expense, except for the effect of
exchange rates on intercompany transactions of a long-term nature, which are
accumulated and credited or charged to other comprehensive loss.
CONCENTRATION OF RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable with
customers and cash balances with financial institutions in excess of federally
insured amounts. The Company monitors the credit quality of such financial
institutions. Credit risk with respect to accounts receivable, however, is
limited due to the number of customers comprising the Company's customer base
and their dispersion principally across the United States, Scandinavia, the
United Kingdom, the Netherlands and Australia. The Company's customers are
generally multi-national companies in the food and beverage, pharmaceutical,
consumer electronics, automotive parts and industrial sector industries. The
Company performs ongoing credit evaluations of its customers and does not
require collateral. The Company maintains allowances for potential credit
losses.
A significant portion of the Company's business is conducted in currencies
other than the U.S. dollar (the currency in which its financial statements are
stated), primarily the Swedish krona and, to a lesser extent, the U.K. pound
sterling, the Euro, the Australian dollar and the Canadian dollar. The Company
incurs a significant portion of its expenses in Swedish krona, including a
significant portion of its product development expenses and a substantial
portion of its general and administrative expenses. As a result, appreciation of
the value of the Swedish krona relative to the other currencies in which the
Company generates revenues, particularly the U.S. dollar, could adversely affect
operating results. The Company does not currently undertake hedging transactions
to cover its currency exposure, but the Company may choose to hedge a portion of
its currency exposure in the future as it deems appropriate.
License and service and maintenance revenues related to the Company's
software products are expected to represent a substantial portion of the
Company's revenues in the future. The Company's success depends on continued
market acceptance of its suite of software and services as well as the Company's
ability to introduce new versions of software or other products to meet the
evolving needs of its customers.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid, low risk debt instruments
purchased with original maturity dates of three months or less to be cash
equivalents.
228
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNBILLED RECEIVABLES
Unbilled receivables represents unbilled income recognized on fixed price
services contracts and scheduled amounts due from customers on terms, which are
longer than typical trade terms.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and contingent liabilities at the date of the financial statements an the
reported amounts of revenues and expenses during the reporting years. Actual
results could differ from those estimates.
COMPREHENSIVE LOSS
The Company follows SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and displaying comprehensive income and its
components. "Comprehensive loss" includes foreign currency translation gains and
losses that have been previously excluded from net loss and reflected instead in
equity. The Company has reported the components of comprehensive loss on its
combined consolidated statements of stockholders' equity.
CASH FLOW INFORMATION
Cash flows in foreign currencies have been converted to U.S. dollars at an
approximate weighted average exchange rate.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses the estimated fair values for all financial
instruments for which it is practicable to estimate fair value. Financial
instruments including cash and cash equivalents, receivables and payables,
derivative instruments and current portions of long-term debt are deemed to
approximate fair value due to their short maturities. The carrying amount of
long-term debt with banks are also deemed to approximate their fair value.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the future
tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured by applying enacted
statutory tax rates that are applicable to the future years in which deferred
tax assets or liabilities are expected to be settled or realized, to the
differences between the financial statements carrying amount and the tax bases
of existing assets and liabilities. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in net income in the period in
which the tax rate change in enacted. The statement also requires a valuation
allowance against net deferred tax assets if, based upon the available evidence,
it is more likely that not that some or all of the deferred tax assets may not
be realized.
DEFERRED FINANCING COSTS
External professional costs incurred in connection with the issuance of
long-term borrowings are capitalized as an asset and amortized over the term of
the debt facility.
229
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EFFECT OF RECENT PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others ("FIN No. 45"). FIN No. 45 requires that a
guarantor recognize a liability at inception of certain guarantees and disclose
certain other types of guarantees, even if the likelihood of requiring the
guarantor's performance is remote. The initial recognition and measurement
provisions of FIN No. 45 are applicable to guarantees issued or modified after
December 31, 2002. The disclosure provisions of FIN No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002.
The Company's standard product license agreement contains clauses whereby
the Company warrants that the licensed software does not infringe any
third-party copyright or patent. The Company's obligations for a breach of this
warranty shall be to modify or replace the licensed software at the Company's
expense with functionally equivalent software so as to eliminate the
infringement and to indemnify the Customer from any third party infringement
claim. The Company does not expect to incur any infringement liability as a
result of the customer indemnification clauses.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, Consolidation of Variable Entities ("FIN No. 46"),
an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, which addresses the criteria for consolidation by business
enterprises of variable interest entities. We do not have variable interest
entities and, therefore, FIN No. 46 will have no impact on our financial
position or results of operations.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued in June 2002 and became effective for exit or disposal
activities initiated after December 31, 2002. SFAS No. 146 nullifies Emerging
Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit Activity. SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred and states that an entity's commitment
to an exit plan, by itself, does not create a present obligation that meets the
definition of a liability. SFAS No. 146 also establishes that fair value is the
objective for initial measurement of the liability. The Company's adoption of
SFAS No. 146 did not have a material impact on the Company's financial position
or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS No.
150"). SFAS No. 150 establishes standards for classification and measurement in
the statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation of
the issuer. SFAS No. 150 is effective for all financial instruments created or
modified after May 31, 2003, and to other instruments at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS No. 150
did not have a material effect on the Company's results of operations,
liquidity, or financial condition.
230
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following table provides a summary of the activity in the accounts
receivable allowance for doubtful accounts for the periods October 23, 2003
through April 30, 2003 and April 30, 2003 through July 31, 2003:
Balance at October 23, 2003................................. $--
Arising on acquisition of IMIC.............................. 31
Charged to expense.......................................... --
Deductions.................................................. --
---
Balance at April 30, 2003................................... 31
---
Charged to expense.......................................... --
Deductions.................................................. --
---
Balance at July 31, 2003 (unaudited)........................ $31
===
4. FOREIGN CURRENCY TRANSLATION
For the three months ended July 31, 2003 (unaudited) and the period October
23, 2002 through April 30, 2003, the Company recorded foreign exchange losses of
$82 and $118, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost, less accumulated depreciation
and amortization. Property and equipment consist of:
JULY 31, APRIL 30,
2003 2003
----------- ---------
(UNAUDITED)
Computer software and equipment............................. $1,666 $1,345
Furniture and fixtures...................................... 727 732
Leasehold improvements...................................... 220 220
------ ------
2,613 2,297
Less accumulated depreciation and amortization.............. (792) (479)
------ ------
$1,821 $1,818
====== ======
6. GOODWILL AND INTANGIBLE ASSETS
The Company follows SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations. SFAS No. 142
eliminates amortization of goodwill and intangible assets with indefinite lives
and requires a transitional impairment test of these assets within six months of
the date of adoption and an annual impairment test thereafter and in certain
circumstances.
On December 11, 2002, the Company acquired the outstanding common stock of
IMIC with all of its net assets (Note 1). The results of IMIC's operations have
been included in the combined consolidated financial statements since that date.
Tangible assets and liabilities were recorded based on their respective fair
values. Identifiable intangible assets as of the acquisition date consisted of
existing proprietary software technology, customer contracts and related
relationships. These too have been recorded at fair value, based
231
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
upon management's assessments of discontinued future cash flows, in addition to
considering the results of a valuation carried out by an independent third party
firm of appraisers.
The aggregate purchase price was $10,953 in cash less $9,379 of cash
acquired. The following table summarizes the estimated fair values of the assets
acquired and the liabilities assumed at the date of acquisition, based on the
third party valuation. Goodwill, being the excess of the purchase price over the
fair value of the assets and liabilities acquired, has been recorded in the
books as follows:
CONSIDERATION
Cash paid net of cash of $9,379 acquired.................... $ 1,574
Assumed liabilities at fair value........................... 24,214
Accrued restructuring costs................................. 3,343
Accrued transaction costs................................... 1,883
-------
Total consideration....................................... 31,014
ASSETS ACQUIRED
Current assets, less cash................................... 13,730
Other assets................................................ 3,336
Net assets of discontinued operations held for sale (Note
7)........................................................ 126
Fixed assets................................................ 2,102
Intangible assets........................................... 6,500
-------
Total assets acquired..................................... 25,794
-------
Goodwill on date of acquisition of IMIC..................... $ 5,220
=======
Portion of goodwill attributable to discontinued operations
held for sale............................................. $ 718
=======
At July 31, 2003, the Company has $4,804 of goodwill, of which $938 is
attributable to assets of discontinued operations held for sale, and $5,539 of
unamortized identifiable intangible assets. The Company has adopted the
provisions of SFAS No. 142 and accordingly, does not record amortization
relating to its existing goodwill.
The changes in the carrying amount of goodwill for the periods ended April
30, 2003 and the three months ended July 31, 2003 (unaudited), are as follows:
GOODWILL
--------
Balance at date of incorporation............................ $ --
Plus: Amount arising out of the acquisition of IMIC (of
which $718 is attributable to net assets of discontinued
operations held for sale)................................. 5,220
Less: Adjustment resulting from the reversal of an opening
balance sheet deferred tax asset valuation allowance on
subsequently utilized net operating loss carryforwards.... (565)
------
Balance at April 30, 2003................................... 4,655
Plus: Adjustment resulting from change in net assets of
discontinued operations held for sale..................... 198
Less: Adjustment resulting from the reversal of an opening
balance sheet deferred tax asset valuation allowance on
subsequently utilized net operating loss carryforwards.... (49)
------
Balance at July 31, 2003.................................... $4,804
======
232
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are identifiable intangible assets that have finite lives and
are subject to amortization:
AS OF APRIL 30, 2003
-----------------------------------------------
GROSS NET
ESTIMATED CARRYING ACCUMULATED CARRYING
LIFE AMOUNT AMORTIZATION AMOUNT
--------- -------- ------------- --------
INTANGIBLE ASSETS
Customer contracts and related
relationships.............................. 10 years $3,100 $(129) $2,971
Existing software technology................. 3 years 3,400 (472) 2,928
------ ----- ------
$6,500 $(601) $5,899
====== ===== ======
AS OF JULY 31, 2003 (UNAUDITED)
----------------------------------------------
GROSS NET
ESTIMATED CARRYING ACCUMULATED CARRYING
LIFE AMOUNT AMORTIZATION AMOUNT
--------- -------- ------------ --------
INTANGIBLE ASSETS
Customer contracts and related
relationships.............................. 10 years $3,100 $(206) $2,894
Existing software technology................. 3 years 3,400 (755) 2,645
------ ----- ------
$6,500 $(961) $5,539
====== ===== ======
The total amortization expense for three months ended July 31,
2003(unaudited) and the period ended April 30, 2003 is $360 and $601,
respectively. The estimated aggregate amortization expense for the next five
succeeding fiscal periods is:
FOR THE PERIOD ENDED APRIL 30,
2004........................................................ $1,083
2005........................................................ 1,443
2006........................................................ 972
2007........................................................ 310
2008........................................................ 310
Thereafter.................................................. 1,421
------
$5,539
======
The Company had no identifiable intangible assets with indefinite lives
that are not subject to amortization at July 31, 2003 or April 30, 2003.
7. DISCONTINUED OPERATIONS
As a result of the acquisition of IMIC, the Company has acquired a 100
percent ownership interest in Industri-Matematik Abalon AB ("Abalon"). The
Company held Abalon exclusively with a view for subsequent sale, and,
accordingly, the net results of the operations of Abalon are classified as
income from discontinued operations in these combined consolidated financial
statements. The assets and liabilities of Abalon are classified as being held
for sale, and accordingly, these are presented separately in the assets and
liability sections in the combined consolidated balance sheet. The Company did
not receive any dividends from Abalon during the period ended April 30, 2003.
The Company disposed of all of its interest in Abalon on October 15, 2003
for cash consideration. Under the terms of the transaction, the Company will
enter into a non-exclusive reseller agreement with Abalon so that it can
continue to sell Abalon software products to existing customers and as part of a
suite of IMI products. The terms of the reseller agreement will be at arms
length.
233
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IMI's net investment in Abalon at July 31, 2003 (unaudited) and April 30,
2003 comprises the following:
Expected disposal proceeds.................................. $1,000
Expected costs of disposal.................................. (50)
------
Net assets of discontinued operations held for sale......... $ 950
======
Following are the condensed results of Abalon for the periods:
JULY 31, APRIL 30,
2003 2003
----------- ---------
(UNAUDITED)
Revenues.................................................... $ 932 $1,830
Cost of Revenues............................................ 577 913
Operating expenses.......................................... 562 864
Miscellaneous income (expense).............................. (3) 53
----- ------
Income (loss) from discontinued operations, net of tax of
$0........................................................ $(210) $ 106
===== ======
The condensed balance sheet of Abalon was as follows:
JULY 31, APRIL 30,
2003 2003
----------- ---------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents................................... $230 $ 89
Accounts receivable......................................... 362 860
Prepaid expenses and accrued income......................... 267 420
Other current assets........................................ 65 50
---- ------
Current assets of discontinued operations held for sale... 924 1,419
---- ------
NONCURRENT ASSETS
Property and equipment, net................................. 29 38
Goodwill.................................................... 938 718
---- ------
Noncurrent assets of discontinued operations held for
sale................................................... 967 756
---- ------
CURRENT LIABILITIES
Accounts payable, including amounts due to IMI.............. 57 206
Accrued expenses and other current liabilities.............. 208 216
Accrued payroll and employee benefits....................... 155 236
Deferred revenue............................................ 521 567
---- ------
Current liabilities of discontinued operations held for
sale................................................... 941 1,225
---- ------
Net assets of discontinued operations held for sale......... $950 $ 950
==== ======
234
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Loss from continuing operations before income taxes for the period ended
April 30, 2003 was distributed geographically as follows:
U.S......................................................... $ 414
Ireland..................................................... (1,695)
Foreign..................................................... 1,275
-------
$ (6)
=======
Components of the provision for income taxes for the period ended April 30,
2003 are as follows:
APRIL 30,
2003
---------
CURRENT
U.S. Federal................................................ $ --
U.S. State.................................................. --
Ireland..................................................... --
Foreign..................................................... 56
----
Total current provision................................... 56
----
DEFERRED
U.S. Federal................................................ 164
U.S. State.................................................. --
Ireland..................................................... --
Foreign..................................................... 402
----
Total deferred provision.................................. 566
----
Total provision for income taxes.......................... $622
====
DATE OF
ACQUISITION
OF IMIC
APRIL 30, DECEMBER 11,
2003 2002
--------- ------------
DEFERRED INCOME TAXES, NONCURRENT ASSET
Net operating loss carryforwards............................ $ 34,044 $ 33,827
Allowance for doubtful accounts............................. 36 12
Restructuring............................................... 1,011 1,827
Depreciation................................................ 397 400
Other....................................................... 710 1,001
Intangible assets........................................... (2,006) (2,210)
-------- --------
Total deferred income taxes, noncurrent asset............. 34,192 34,857
Valuation allowance....................................... (34,192) (34,857)
-------- --------
Total net deferred income taxes, noncurrent asset........... $ -- $ --
======== ========
235
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the provision for income taxes to the amount computed
by applying the statutory rates is as follows:
U.S. Statutory rate......................................... $ 2
U.S. tax.................................................... (144)
Foreign taxes............................................... (458)
Permanent differences....................................... (20)
Other....................................................... (2)
-----
Effective tax rate........................................ $(622)
=====
The Company has applied a full valuation allowance to deferred tax assets.
A 100 percent allowance was applied by management based upon the Company's
nonprofitable operations and inability to predict when this asset could be
realized. At October 23, 2002 to April 30, 2003, the Company's deferred tax
asset, which amounted to $34,192 ($34,044 related to net operating loss
carryforward plus $148 related to other temporary differences), was offset by
applying a valuation allowance resulting in a net deferred tax asset at April
30, 2003, of $0. Of the net operating loss carryforwards, $28,675 were incurred
in the United States and $48,429 were incurred in Sweden. The net operating loss
carryforwards may be carried forward to offset future income up to 20 years in
the United States and indefinitely in Sweden. However, should the Company begin
to make a profit in the U.S., its acquired U.S. net operating loss carryforwards
will be subject to annual limitations due to the change in ownership as defined
under Section 382 of the Internal Revenue Code of 1986. The decrease in the
valuation allowance of $665 is due to a decrease in deferred tax assets in the
amount of $100 and utilization of $565 in deferred tax assets related to
acquired net operating loss carryforwards which were realized and recorded
against goodwill.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
JULY 31, APRIL 30,
2003 2003
----------- ---------
(UNAUDITED)
Accrued interest............................................ $ 50 $ 104
Accrued purchases........................................... 790 1,122
Short-term portion pension liability........................ 730 725
Value-added tax............................................. -- 293
Employee withholding taxes.................................. 368 431
Income and other taxes payable.............................. 714 855
Other....................................................... 189 356
------ ------
$2,841 $3,886
====== ======
Short-term portion of pension liability relates to a scheduled
reduction of pension debt by paying premiums and transferring employees
from the pension plan administered by Swedish PRI authority to the Swedish
National Pension Organization Plan administered by Alecta (Note 13). The
pension debt will be reduced each year going forward by approximately the
same amount for the next three years.
236
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. ACCRUED PAYROLL AND EMPLOYEE BENEFITS
JULY 31, APRIL 30,
2003 2003
----------- ---------
(UNAUDITED)
Accrued commissions......................................... $ 21 $ 31
Accrued payroll taxes....................................... 175 175
Accrued vacation pay........................................ 724 1,418
Accrued salaries and bonus.................................. 683 1,278
Accrued pension expenses.................................... 362 421
------ ------
$1,965 $3,323
====== ======
11. LONG-TERM DEBT
The Company secured a bank loan of $7,000 in January 2003. The interest
rate of this term loan is the bank's prime rate plus 3 percent. The bank loan is
secured by a debenture containing fixed and floating charges over the assets of
the Company. The loan is repayable in monthly installments with aggregate annual
repayment amounts as follows:
APRIL 30,
2003
---------
2004........................................................ $ 1,750
2005........................................................ 1,750
2006........................................................ 1,750
2007........................................................ 1,458
-------
6,708
Less: Current portion....................................... (1,750)
-------
Long-term debt, net of current portion...................... $ 4,958
=======
At July 31, 2003 and April 30, 2003, the Company was in compliance with its
debt covenants. Subsequent to the balance sheet date, the Company breached its
debt covenants, as a result of various matters including the late filing of
financial statements and also because it did not obtain the necessary consents
from the bank in relation to IMI's acquisition by Chinadotcom Corporation
("Chinadotcom") described in Note 19 below. The Company decided not to attempt
to return to compliance with these covenants or seek waivers from the bank, as
it was the intention of Chinadotcom to repay the debt with the proceeds of the
contribution into the parent company of IMI referred to in Note 19.
On October 31, 2003, the Company repaid the entire principal balance
outstanding along with all accrued interest to date and prepayment penalties and
fees as outlined in the term loan agreement. Unamortized deferred financing
costs associated with the term loan were charged to operating profit.
12. RELATED PARTY TRANSACTIONS
The Company's acquisition of IMIC in December 2002 was funded by a $10,953
advance from the Stockholder. On January 25, 2003, the Company secured a $7,000
loan from a commercial bank (Note 11). The proceeds from this loan were remitted
to the Stockholder, so as to reduce the amount of the advance from the
Stockholder to $3,953. On January 27, 2003, the remaining advance was formally
converted into a note payable to the Stockholder. The terms of this note are
that it is unsecured,
237
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subordinated to the bank loan and it accrues interest at 5.06 percent. At April
30, 2003, interest of $54 was accrued and unpaid on this note.
On May 1, 2003, the Company cancelled $2,000 of the indebtedness related to
this note in exchange for payment for 34,000,000, 10 percent Cumulative
Preference Shares of IMI Ireland that were issued to the Stockholder. On June
25, 2003, the Company repaid the remaining $1,953, together with accrued
interest of $66 to the Stockholder.
During January 2003, the Company entered into an agreement for the
provision of strategic advisory and board directorship services from the
Stockholder. The agreement was effective January 1, 2003 and calls for payment
by IMI to the Stockholder of $50 per quarter for these services. As of July 31,
2003, the Company had accrued expenses of $107 in respect of the services
provided by the Stockholder. No payment had been made to the Stockholder in
respect of this agreement prior to July 31, 2003.
During May 2003, the Company entered into an agreement to license software
for resale with a wholly owned subsidiary of Symphony. Under the terms of this
agreement, the Company paid $287 for test and development licenses for this
software and $36 for the first annual maintenance and support services fee. This
agreement also calls for the Company to make two installments of $250 by the end
of 2003 representing prepayment of royalties due for activities related to
sublicensing and distributing this software.
13. EMPLOYEE BENEFIT PLANS
The Company provides retirement benefits for substantially all employees in
the United States and in foreign locations. In the U.S., the U.K. and the
Netherlands, the Company sponsors defined contribution plans. In addition, IMI's
Swedish subsidiary, IMAB has a supplemental defined contribution plan for
certain key management employees. Contributions by the Company relating to its
defined contribution plans for the three months ended July 31, 2002 and the
period ended October 23, 2002 through April 30, 2003 were $1,078 and $1,114,
respectively.
IMAB also participates in several pension plans (noncontributory for
employees) which cover substantially all employees of its Swedish operations.
The plans are in accordance with a nationally-agreed standard plan, the ITP
Plan, and administered by a national organization,
Pensionsregisteringsinstitutet ("PRI"). The level of benefits and actuarial
assumptions are calculated and established by the national organization and,
accordingly, IMAB may not change benefit levels or actuarial assumptions. The
Company accounts for pensions in accordance with SFAS No. 87, Employers'
Accounting for Pensions. In March 2001, IMAB amended its financing of these
plans from financing via corporate assets to financing via premiums paid to
Alecta, the Swedish National Pension Organization. The pension book reserve
will, in the future, only increase with an interest component. IMAB has provided
a guaranty to Forsakringsbolaget Pensions Garanti ("FPG"), a third party
guarantor of pension liabilities, in the amount of $650. This guaranty is in the
form of a collateralized bank deposit of the same amount and is recorded as a
noncurrent asset. During the three months ended July 31, 2003 and the period
October 23, 2002 through April 30, 2003, IMAB has amortized its liability by $0
and $364, respectively. It is expected that IMAB will continue to amortize its
remaining liability by approximately $650 per year for the next three years.
238
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net periodic benefit cost for the IMAB's defined benefit retirement
plan in Sweden include the following components:
OCTOBER 23,
2002
THROUGH
APRIL 30,
2003
-----------
Service cost................................................ $--
Interest cost............................................... 69
---
Net periodic benefit cost................................. $69
===
The following table sets forth the change in the benefit obligation for
IMAB's defined benefit plan in Sweden:
APRIL 30,
2003
---------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ --
Arising on acquisition of IMIC.............................. 3,528
Service cost................................................ --
Interest cost............................................... 69
Benefits paid............................................... --
Settlement.................................................. (187)
Effect of foreign currency exchange rates................... (135)
------
Benefit obligation at end of period......................... $3,275
======
The following table shows the Plan's funded status and amounts recognized
in the combined consolidated balance sheet:
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATION AS OF APRIL
30, 2003
Unfunded status............................................. $3,275
Out of which long-term liability............................ 2,550
Out of which short-term liability........................... 725
The following assumptions were used to determine the IMAB's obligation
under the Swedish plan:
Discount rate............................................... 5.30%
Rate of increase in salaries................................ 3.00%
Inflation rate.............................................. 2.00%
14. STOCKHOLDERS' EQUITY, NUMBER OF SHARE INFORMATION AND STOCK COMPENSATION
PLANS
The articles of association of STG authorize 50,000 shares of common stock
with a par value of $1.00. All of these authorized shares have been issued and
are outstanding. The articles of association of IMI Ireland authorize 1 ordinary
share of common stock with a par value of Euro 1.00, 40,000,000 shares of common
stock with a par value of $0.001 and 34,000,000 10 percent Cumulative Preference
shares of $0.001. The 1 ordinary share with par value of Euro 1.00 is issued and
outstanding. The 34,000,000 preference shares with par value $0.001 are issued
and outstanding (Note 12). No other IMI Ireland authorized shares have been
issued as of July 31, 2003.
239
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the terms of their respective letters of employment, three members of
the Company's management team are entitled to receive common stock options equal
to 5.0 percent of the authorized shares of IMI Ireland and 2.0 percent of the
authorized shares of a subsidiary of STG.
In July 2003, the board of IMI Ireland approved a strike price of $0.02 per
share for the common stock entitlements for two of the three employees. The
entitlements for these two employees represented 3.5 percent of the total
authorized shares of IMI Ireland. The approved strike price reflected the fair
market value of the common stock options. As of July 31, 2003, no grants of
options had been made for any of these stock option commitments.
15. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office facilities and certain office equipment under
various noncancellable operating lease agreements. Aggregate future minimum
lease payments under noncancellable operating leases are as follows as of April
30, 2003.
YEAR ENDING APRIL 30, 2003,
2004........................................................ $ 3,667
2005........................................................ 2,687
2006........................................................ 1,532
2007........................................................ 1,339
2008........................................................ 929
Thereafter.................................................. 3,114
-------
Total future minimum lease payments....................... $13,268
=======
Less: Future lease payments receivable in respect of
subleases................................................. $(7,260)
-------
$ 6,008
=======
Of the $7,260 of future lease payments receivable in respect of subleases,
$4,383 is contingent upon a sublease not exercising a termination clause in
March 2006.
Total net rent expense under the leases was $777 and $1,163 for the three
months ended July 31, 2003 (unaudited) and the period October 23, 2002 through
April 30, 2003, respectively.
During the period October 23, 2002 through April 30, 2003, IMAB has
amortized its liability under the nationally-agreed standard pension plan, the
ITP Plan, administered by PRI. The liability was reduced by $364. It is expected
that IMAB will continue to amortize its remaining liability by approximately
$650 per year for the next three years.
As a result of the acquisition of IMIC, the Company has assumed a
contingent liability related to a class action lawsuit against IMIC. There has
been no activity with regard to this lawsuit since the acquisition of IMIC. The
lawsuit was originally commenced by service of a complaint against IMIC, certain
of its officers, directors and controlling shareholders who sold shares of
common stock during the class period, and its underwriters claiming violation of
the Federal securities laws. The complaint was dismissed, but the plaintiff had
the right and did serve a new complaint. A motion to dismiss the second
complaint has been submitted. No answer to either complaint was filed. While
management believes this action to be without merit, an unfavorable outcome in
the class or any other action, which may be brought against IMIC may have a
material adverse effect upon the Company business, operating results and
financial condition.
240
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENT INFORMATION
The Company operates in one industry segment, the design, development,
marketing, licensing and support of client/server application software. The
Company is managed on a geographic basis and the Company's management evaluates
the performance of its segments and allocates resources to them based upon
income from operations. Income for operations for the geographic segments
excludes general corporate expenses and product development costs. The majority
of software development occurs in Sweden although the Company maintains some
development facilities in the United States. Product development costs and
general corporate expenses are reported in the Corporate segment. Assets by
reportable segment are not disclosed since the Company's management does not
review segmented balance sheet information. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. Segment data includes intersegment revenues.
The table below presents information about the Company's reportable
segments for the period ended April 30, 2003 and the three months ended July 31,
2003 (unaudited):
THREE OCTOBER 23,
MONTHS 2002
ENDED THROUGH
JULY 31, APRIL 30,
2003 2003
----------- -----------
(UNAUDITED)
REVENUES
United States............................................... $2,679 $ 5,382
Nordic region............................................... 4,211 8,692
United Kingdom.............................................. 1,424 2,735
Netherlands................................................. 1,158 2,659
Australia................................................... -- 40
Intercompany................................................ -- (2,886)
------ -------
Total revenues............................................ $9,472 $16,622
====== =======
Included in the revenues of the Nordic region for the three months ended
July 31, 2003 and the period October 23, 2002 through April 30, 2003, $0 and
$1,718 were revenues earned from other companies within the group, respectively.
Included in the revenues for United Kingdom for the three months ended July 31,
2003 (unaudited) and the period October 23, 2002 through April 30, 2003, $0 and
$1,168 were revenues earned from other companies within the group, respectively.
THREE OCTOBER 23,
MONTHS 2002
ENDED THROUGH
JULY 31, APRIL 30,
2003 2003
----------- -----------
(UNAUDITED)
INCOME FROM OPERATIONS
United States............................................... $ 214 $1,331
Nordic region............................................... (962) (659)
United Kingdom.............................................. 823 (872)
Netherlands................................................. 112 768
Rest of world............................................... -- 70
Corporate................................................... 220 (405)
----- ------
Total income from operations.............................. $ 407 $ 233
===== ======
241
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic data for revenues based upon customer location and long-lived
assets (which consist of noncurrent assets other than goodwill and other
intangible assets) were as follows:
OCTOBER
THREE 23,
MONTHS 2002
ENDED THROUGH
JULY 31, APRIL 30,
2003 2003
----------- ---------
(UNAUDITED)
REVENUES
United States............................................... $ 2,192 $ 4,595
Nordic region............................................... 4,405 7,269
United Kingdom.............................................. 1,520 2,129
Netherlands................................................. 966 1,933
Rest of world............................................... 389 696
------- -------
Total revenues............................................ $ 9,472 $16,622
======= =======
LONG-LIVED ASSETS
Ireland..................................................... $ 9,729 $ 9,836
United States............................................... 292 381
Nordic region............................................... 1,093 1,290
United Kingdom.............................................. 27 50
Netherlands................................................. 85 97
------- -------
Total long-lived assets................................... $11,226 $11,654
======= =======
MAJOR CUSTOMERS
For the three months ended July 31, 2003 (unaudited) and the period October
23, 2002 through April 30, 2003, no customer of the Company accounted for more
than 10 percent of total revenues.
17. ACCRUED RESTRUCTURING AND TRANSACTION COSTS
The following table summarizes the components of the accrued restructuring
and transaction costs at:
JULY 31, APRIL 30,
2003 2003
----------- ---------
(UNAUDITED)
2003 US Services business restructuring costs............... $ 38 $ --
Restructuring and transaction costs arising from IMIC
acquisition............................................... 1,726 3,169
Remaining liability of assumed October 2002 IMIC
restructuring costs....................................... 1,248 1,683
------ ------
Total accrued restructuring and transaction costs......... $3,012 $4,852
====== ======
2003 US SERVICE BUSINESS RESTRUCTURING COSTS
In June 2003, the Company executed a restructuring initiative related to a
downturn in its US Service business, which resulted in the termination of six
employees. The employee severance costs related to this restructuring were $95.
As of July 31, 2003, $38 of the liability relating to this initiative remains
unpaid. The Company paid this in August and September 2003.
242
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESTRUCTURING AND TRANSACTION COSTS ARISING FROM IMIC ACQUISITION
On December 11, 2002, the Company acquired the entire issued common stock
of IMIC for $10,953 (Note 1). Transaction costs of $1,883 were incurred and
reflected on the opening balance sheet of the Company. The transaction costs
primarily related to professional fees incurred in connection with the
transaction and $472 of costs to establish indemnity insurance for the former
directors and officers of IMIC, which had no future benefits to the Company.
Further, the Company announced a restructuring initiative that resulted in
$3,343 opening balance sheet accrual on December 11, 2002 (Note 6). As of July
31, 2003, $1,726 of the cumulative liability relating to acquisition and
restructuring charges remains as a liability and has not yet been paid. The
Company anticipates that these remaining amounts will be paid by mid-2004.
The following table presents the components of these restructuring and
transaction related costs:
UNITED REST OF
CORPORATE SWEDEN STATES WORLD TOTAL
--------- ------ ------ ------- ------
Transaction costs......................... $1,883 $ -- $ -- $ -- $1,883
Severance benefits........................ -- 1,636 853 227 2,716
Residual lease obligations................ -- 514 122 (9) 627
------ ------ ---- ---- ------
Total restructuring and transaction
costs................................ $1,883 $2,150 $975 $218 $5,226
====== ====== ==== ==== ======
The restructuring initiative related to the IMIC acquisition resulted in
termination of 65 employees. Of these terminated employees, 37 were in service
and support, 15 were in sales and marketing, 10 were in development and 3 were
in administrative functions. The $627 of residual lease obligation costs arose
from the closure and consolidation of facilities that has been undertaken as a
result of the acquisition of IMIC. The leases relating to facilities that the
Company has exited expire in 2003 and 2004.
The following table presents the components of the provisions at December
11, 2002 and the related activity through July 31, 2003:
ACCRUAL AT ACCRUAL AT
INITIAL UTILIZATION APRIL 30, UTILIZATION JULY 31,
CHARGE OF ACCRUAL 2003 OF ACCRUAL 2003
------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Transaction costs................ $1,883 $(1,177) $ 706 $ (483) $ 223
Severance benefits............... 2,716 (839) 1,877 (741) 1,136
Residual lease obligations....... 627 (41) 586 (219) 367
------ ------- ------ ------- ------
$5,226 $(2,057) $3,169 $(1,443) $1,726
====== ======= ====== ======= ======
OCTOBER 2002 IMIC RESTRUCTURING COSTS
Upon the acquisition of IMIC, the Company assumed $4,589 of liabilities to
the restructuring that IMIC announced in October 2002.
243
STG, IMI GLOBAL HOLDINGS IRELAND LIMITED AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the components of the provisions at December
11, 2002 and the related activity through July 2003:
ACCRUAL AT ACCRUAL AT ACCRUAL AT
DECEMBER 11, UTILIZATION APRIL 30, UTILIZATION JULY 31,
2002 OF ACCRUAL 2003 OF ACCRUAL 2003
------------ ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Severance benefits........... $4,414 $(2,780) $1,634 $(386) $1,248
Residual lease obligations
and other costs............ 175 (126) 49 (49) --
------ ------- ------ ----- ------
Total accrued restructuring
costs................... $4,589 $(2,906) $1,683 $(435) $1,248
====== ======= ====== ===== ======
The Company anticipates that these remaining amounts will be paid by
mid-2004.
The October 2002 restructuring initiative resulted in the termination of 91
employees. Of these terminated employees, 35 were in service and support, 14
were in sales and marketing, 33 were in development and 9 were in administrative
functions.
18. REORGANIZATION COSTS
In June 2003, the Company executed a restructuring initiative related to a
downturn in its US Services business, which resulted in the termination of six
employees. The employee severance costs related to this restructuring were $95.
During the period October 23, 2002 through April 30, 2003, the Company
incurred and expensed $824 of costs related to a corporate reorganization. The
corporate reorganization has been undertaken in conjunction with the acquisition
of IMIC to provide a new legal structure for the group that will give rise to
reduced future taxation rates. These costs primarily consist of professional
fees incurred to effect the reorganization.
19. SUBSEQUENT EVENTS
On September 9, 2003, Chinadotcom purchased a 51 percent interest in IMI
for a contribution of $25.0 million into a parent company of IMI. Chinadotcom is
a Cayman Islands company incorporated with limited liability that trades on
NASDAQ under the symbol CHINA.
In October 2003, the Company sold its Abalon operations for $1.0 million.
There was an insignificant gain recorded as a result of this transaction. This
disposal was planned as part of IMI Ireland's acquisition of the IMIC.
(UNAUDITED)
On December 19, 2003, the court granted the motion dismissing the class
action lawsuit against IMIC (Note 15) without leave to amend. The deadline for
filing an appeal has not expired.
244
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
CHINADOTCOM CORPORATION
CDC SOFTWARE HOLDINGS, INC.
AND
ROSS SYSTEMS, INC.
DATED AS OF SEPTEMBER 4, 2003
TABLE OF CONTENTS
PAGE
----
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions................................................. A-1
SECTION 1.02. Other Definitions........................................... A-5
SECTION 1.03. Construction................................................ A-7
ARTICLE II
THE MERGER
SECTION 2.01. The Merger.................................................. A-7
SECTION 2.02. Effective Time; Closing..................................... A-7
SECTION 2.03. Effect of the Merger........................................ A-7
SECTION 2.04. Conversion of Securities.................................... A-8
SECTION 2.05. Exchange of Certificates.................................... A-8
SECTION 2.06. Stock Transfer Books........................................ A-10
ARTICLE III
THE SURVIVING CORPORATION
SECTION 3.01. Certificate of Incorporation; By-laws....................... A-10
SECTION 3.02. Directors and Officers...................................... A-11
SECTION 3.03. Employee Stock Options; Employee Stock Purchase Plan........ A-11
SECTION 3.04. Dissenting Shares........................................... A-11
SECTION 3.05. Further Assurances.......................................... A-12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 4.01. Organization and Qualification; Subsidiaries................ A-12
SECTION 4.02. Certificate of Incorporation and By-laws.................... A-12
SECTION 4.03 Capitalization.............................................. A-13
SECTION 4.04. Authority Relative to This Agreement........................ A-13
SECTION 4.05. Section 203................................................. A-14
SECTION 4.06. No Conflict; Required Filings and Consents.................. A-14
SECTION 4.07. Permits; Compliance......................................... A-14
SECTION 4.08. SEC Filings; Financial Statements........................... A-15
SECTION 4.09. Absence of Certain Changes or Events........................ A-16
SECTION 4.10. Absence of Litigation....................................... A-16
SECTION 4.11. Employee Benefit Plans...................................... A-17
SECTION 4.12. Labor and Employment Matters................................ A-18
SECTION 4.13. Form F-4; Proxy Statement................................... A-19
SECTION 4.14. Property and Leases......................................... A-20
SECTION 4.15. Intellectual Property....................................... A-20
SECTION 4.16. Taxes....................................................... A-25
SECTION 4.17. Environmental Matters....................................... A-26
SECTION 4.18. Material Contracts.......................................... A-26
SECTION 4.19. Insurance................................................... A-27
SECTION 4.20. Brokers and Fees............................................ A-28
SECTION 4.21. Customers................................................... A-28
SECTION 4.22. Sale of Products; Performance of Services................... A-28
SECTION 4.23. Compliance with Law......................................... A-28
A-i
PAGE
----
SECTION 4.24. Certain Business Practices.................................. A-28
SECTION 4.25. Transactions with Affiliates................................ A-29
SECTION 4.26. Vote Required............................................... A-29
SECTION 4.27. Fairness Opinion............................................ A-29
SECTION 4.28. Company Rights Agreement.................................... A-29
SECTION 4.29. Silicon Valley Bank......................................... A-29
SECTION 4.30. Accounts Receivable......................................... A-29
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
SECTION 5.01. Corporate Organization...................................... A-29
SECTION 5.02. Authority Relative to This Agreement........................ A-29
SECTION 5.03. No Conflict; Required Filings and Consents.................. A-30
SECTION 5.04. Financing................................................... A-30
SECTION 5.05. Form F-4; Proxy Statement................................... A-30
SECTION 5.06. Brokers..................................................... A-31
SECTION 5.07. Capitalization.............................................. A-31
SECTION 5.08. SEC Filings; Financial Statements........................... A-31
SECTION 5.09. Compliance with Law......................................... A-32
SECTION 5.10. Absence of Litigation....................................... A-32
SECTION 5.11. No Vote Required............................................ A-32
SECTION 5.12. Operations of Merger Sub.................................... A-32
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.01. Conduct of Business by the Company Pending the Merger....... A-32
SECTION 6.02. Conduct of Business by Parent and Merger Sub Pending the A-35
Merger......................................................
SECTION 6.03. Tax Matters................................................. A-35
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.01. Stockholders' Meeting....................................... A-36
SECTION 7.02. Proxy Statement............................................. A-36
SECTION 7.03. Registration Statement...................................... A-36
SECTION 7.04. Access to Information; Confidentiality...................... A-37
SECTION 7.05. No Solicitation of Transactions............................. A-37
SECTION 7.06. Employee Benefits Matters................................... A-38
SECTION 7.07. Directors' and Officers' Indemnification and Insurance...... A-38
SECTION 7.08. Notification of Certain Matters............................. A-39
SECTION 7.09. Further Action; Reasonable Best Efforts..................... A-39
SECTION 7.10. Regulatory Authorization.................................... A-39
SECTION 7.11. Public Announcements........................................ A-40
SECTION 7.12. Resignation of Officers and Directors....................... A-40
SECTION 7.13. General Cooperation......................................... A-40
SECTION 7.14. Conveyance Taxes............................................ A-40
A-ii
PAGE
----
SECTION 7.15. Affiliates.................................................. A-40
SECTION 7.16. Plan of Reorganization...................................... A-40
SECTION 7.17. Nasdaq Quotation............................................ A-41
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.01. Conditions to the Obligations of Each Party................. A-41
SECTION 8.02. Conditions to the Obligations of Parent and Merger Sub...... A-41
SECTION 8.03. Conditions to the Obligations of the Company................ A-42
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.01. Termination................................................. A-42
SECTION 9.02. Effect of Termination....................................... A-43
SECTION 9.03. Fees and Expenses........................................... A-43
SECTION 9.04. Amendment................................................... A-44
SECTION 9.05. Waiver...................................................... A-44
ARTICLE X
GENERAL PROVISIONS
SECTION 10.01. Notices..................................................... A-45
SECTION 10.02. Severability................................................ A-45
SECTION 10.03. Entire Agreement; Assignment................................ A-45
SECTION 10.04. Parties in Interest......................................... A-46
SECTION 10.05. Specific Performance........................................ A-46
SECTION 10.06. Governing Law............................................... A-46
SECTION 10.07. Waiver of Jury Trial........................................ A-46
SECTION 10.08. Headings.................................................... A-46
SECTION 10.09. Counterparts................................................ A-46
A-iii
THIS AGREEMENT AND PLAN OF MERGER is dated as of September 4, 2003 (the
"Agreement") by and among CHINADOTCOM CORPORATION, a company organized under the
laws of the Cayman Islands ("Parent"), CDC SOFTWARE HOLDINGS, INC., a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and ROSS
SYSTEMS, INC., a Delaware corporation (the "Company").
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have
each determined that it is in the best interests of their respective
stockholders to consummate, and have approved, the business combination
transaction provided for herein, pursuant to which and upon the terms and
subject to the conditions set forth herein, Merger Sub will merge with and into
the Company (the "Merger");
WHEREAS, the Board of Directors of the Company (the "Board") has approved
the Merger and declared its advisability, and resolved to recommend that holders
of shares of common stock, par value $0.001 per share of the Company (the
"Shares"), vote their Shares in favor of the Merger; and
WHEREAS, Parent, Merger Sub and certain stockholders of the Company set
forth in Schedule I hereto (the "Principal Stockholders") have entered into
stockholder agreements dated as of the date hereof (the "Stockholder
Agreements"), providing that, among other things, such Principal Stockholders
shall vote their Shares or Preferred Shares (as defined below), as applicable,
in favor of the Merger on the terms and subject to the conditions set forth
therein.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, Parent, Merger Sub
and the Company hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. (a) For purposes of this Agreement:
"ACQUISITION PROPOSAL" means (i) any proposal or offer from any Person
other than Parent or Merger Sub relating to any direct or indirect
acquisition of (A) all or a substantial part of the assets of the Company
and its consolidated Subsidiaries, taken as a whole or (B) over 15% of any
class of equity securities of the Company or of any material consolidated
Subsidiary; (ii) any tender offer or exchange offer, as defined pursuant to
the Exchange Act, that, if consummated, would result in any Person
beneficially owning 15% or more of any class of equity securities of the
Company or any consolidated Subsidiary; or (iii) any proposal or offer from
any Person other than Parent or Merger Sub regarding any merger,
consolidation, business combination, recapitalization, liquidation,
dissolution or similar transaction involving the Company or any
consolidated Subsidiary, other than the Transactions.
"AFFILIATE" of a specified Person means a Person who, directly or
indirectly through one or more intermediaries, controls, is controlled by,
or is under common control with, such specified Person.
"BENEFICIAL OWNER" means a Person with respect to any Shares (i) which
such Person or any of its affiliates or associates (as such term is defined
in Rule 12b-2 promulgated under the Exchange Act) beneficially owns,
directly or indirectly, (ii) which such Person or any of its affiliates or
associates has, directly or indirectly, (A) the right to acquire (whether
such right is exercisable immediately or subject to the passage of time or
other conditions), pursuant to any agreement, arrangement or understanding
or upon the exercise of conversion rights, exchange rights, warrants or
options, or otherwise, or (B) the right to vote pursuant to any agreement,
arrangement or understanding or (iii) which are beneficially owned,
directly or indirectly, by any other Persons with whom such Person or any
of its affiliates or associates or Person with whom such Person or any of
its affiliates or associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of
any Shares.
A-1
"BUSINESS DAY" means any day, other than a Saturday, Sunday or other
day on which commercial banks are required or authorized to close in the
City of New York.
"CERTIFICATE OF DESIGNATIONS" means the Certificate of Designations of
Rights, Preferences and Privileges with respect to the Preferred Shares
dated June 29, 2001.
"COMPANY DISCLOSURE SCHEDULE" means the corresponding disclosure
schedule dated the date hereof and delivered to Parent and Merger Sub by
the Company concurrently with the execution and delivery of this Agreement.
"COMPANY INDEBTEDNESS" means all obligations and liabilities created,
issued or incurred by the Company or any Subsidiary for borrowed money or
long term debt, including bank loans, mortgages, notes payable, purchase
money installment debt, capital lease obligations, guarantees of
indebtedness of others, loans from stockholders or other Affiliates of the
Company or any Subsidiary, and all principal, interest, fees prepayment
penalties or amounts due or owing with respect thereto.
"COMPANY MATERIAL ADVERSE EFFECT" means any change, event,
circumstance, development or effect on the Company and its Subsidiaries
that is or is reasonably likely to be materially adverse to the business,
assets, properties, financial condition or results of operations of the
Company and its Subsidiaries, taken as a whole; provided, however, that
"Company Material Adverse Effect" shall not include any effect arising out
of or attributable to: (a) any change, event, circumstance, development or
effect resulting from a change in general economic or financial market
conditions; (b) any change, event, circumstance, development or effect
resulting from or relating to any acts of terrorism or war; (c) any change,
event, circumstance, development or effect resulting from a change in
industry conditions, except, in the case of (a), (b), or (c), to the extent
such change, event, circumstance, development or effect disproportionately
affects the Company as compared to the technology industry as a whole; (d)
any change, event, circumstance, development or effect resulting from the
announcement of the execution of this Agreement or the pendency or
consummation of the Transactions; or (e) any change, event, circumstance,
development or effect resulting from or relating to compliance with the
terms of, or the taking of any action required by, this Agreement;
provided, however, that for purposes of clauses (d) and (e), the Company
shall have used its reasonable best efforts to ameliorate or prevent any
such adverse change, event, circumstance, development or effect.
"COMPANY OWNED INTELLECTUAL PROPERTY" means all Intellectual Property
in which the Company or any Subsidiary has (or purports to have) an
ownership interest.
"CONFIDENTIALITY AGREEMENT" means that certain confidentiality
agreement, dated November 21, 2002, between the Company and a subsidiary of
Parent.
"CONTRACT" means any written, oral or other agreement, contract,
subcontract, lease, understanding, instrument, note, option, warranty,
purchase order, license, sublicense, insurance policy, benefit plan or
legally binding commitment or undertaking of any nature.
"CONTROL" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly, or as trustee
or executor, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of
voting securities, as trustee or executor, by Contract or credit
arrangement or otherwise.
"DELAWARE LAW" means the General Corporation Law of the State of
Delaware.
"DISCLOSURE SCHEDULES" means the Company Disclosure Schedule and the
Parent Disclosure Schedule.
"ENVIRONMENTAL LAWS" means any Laws of any Governmental Authority
relating to (i) releases or threatened releases of Hazardous Substances or
materials containing Hazardous Substances; (ii) the manufacture, handling,
transport, use, treatment, storage or disposal of Hazardous Substances or
materials containing Hazardous Substances; or (iii) pollution or protection
of the environment, health or natural resources.
A-2
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXECUTIVE OPTIONS" means the Options held by the persons set forth on
Schedule II attached hereto.
"GOVERNMENTAL AUTHORITY" means any United States federal, state,
county or local or non-United States government, governmental, regulatory
or administrative authority, agency, instrumentality or commission or any
court, tribunal, or judicial or arbitral body.
"HAZARDOUS SUBSTANCES" means (i) those substances defined in or
regulated under the following United States federal Laws and their state
counterparts, as each may be amended from time to time, and all regulations
thereunder: the Hazardous Materials Transportation Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Clean Water Act, the Safe Drinking
Water Act, the Atomic Energy Act, the Federal Insecticide, Fungicide, and
Rodenticide Act and the Clean Air Act; (ii) petroleum and petroleum
products, including crude oil and any fractions thereof; (iii) natural gas,
synthetic gas, and any mixtures thereof; (iv) polychlorinated biphenyls,
asbestos or asbestos containing materials, radon, lead and lead-based
paint; and (v) any substance, material or waste regulated by any
Governmental Authority pursuant to any Environmental Law.
"INTELLECTUAL PROPERTY" means and includes all past, present, and
future rights of the following types, which may exist or be created under
the Laws of any jurisdiction in the world: (i) patents, patent applications
and statutory invention registrations, (ii) trademarks, service marks,
trade dress, logos, trade names, corporate names and other source
identifiers, and registrations and applications for registration thereof,
(iii) rights associated with works of authorship, including exploitation
rights, copyrights, moral rights, mask works and registrations and
applications for registration thereof, (iv) confidential and proprietary
information, including trade secrets, technical information and know-how,
customer lists, confidential marketing and customer information, (v)
Software, (vi) domain names, URLs, world wide web pages, internet and
intranet sites (including all content thereof), together with member or
user lists and information associated therewith, (vii) other intellectual
property rights of every kind and nature and (viii) rights in or relating
to registrations, renewals, extensions, combinations, divisions, and
reissues of, and applications for, any of the rights referred to in clauses
(i) through (vii) above.
"KNOWLEDGE" means (i) with respect to the Company, the actual
knowledge of the following persons: Frank M. Dickerson, J. William Goodhew,
III, Verome Johnston, Eric W. Musser, Rick Marquardt, Bruce J. Ryan,
Richard Thomas, J. Patrick Tinley and Robert B. Webster and; and (ii) with
respect to Parent, the actual knowledge of the following persons: Peter
Yip, Daniel Widdicombe and Steven Chan.
"LAW" means any United States or non-United States statute, law,
ordinance, regulation, rule, code, common law standard or obligation,
executive order, governmental directive, injunction, judgment, decree or
other order.
"NASDAQ" means The Nasdaq National Market.
"OPTIONS" means the options, issued by the Company, to purchase Shares
under the Option Plans.
"OPTION PLANS" means, collectively, the Company 1998 Stock Option
Plan, as amended, and the Company 1988 Stock Option Plan, as amended.
"PARENT COMMON STOCK" means the Class A Common Shares, par value
$0.00025 per share, of Parent.
"PARENT DISCLOSURE SCHEDULE" means the corresponding disclosure
schedule dated the date hereof and delivered to the Company by Parent
concurrently with the execution and delivery of this Agreement.
A-3
"PARENT MATERIAL ADVERSE EFFECT" means any change, event,
circumstance, development or effect on Parent and its controlled
subsidiaries that is or is reasonably likely to be materially adverse to
the business, assets, properties, financial condition or results of
operations of Parent and its controlled subsidiaries, taken as a whole;
provided, however, that "Parent Material Adverse Effect" shall not include
any effect arising out of or attributable to: (a) any change, event,
circumstance, development or effect resulting from a change in general
economic or financial market conditions; (b) any change, event,
circumstance, development or effect resulting from or relating to any acts
of terrorism or war; (c) any change, event, circumstance, development or
effect resulting from a change in industry conditions, except, in the case
of (a), (b), or (c), to the extent such change, event, circumstance,
development or effect disproportionately affects Parent as compared to the
technology industry as a whole; (d) any change, event, circumstance,
development or effect resulting from the announcement of the execution of
this Agreement or the pendency or consummation of the Transactions; or (e)
any change, event, circumstance, development or effect resulting from or
relating to compliance with the terms of, or the taking of any action
required by, this Agreement; provided, however, that for purposes of
clauses (d) and (e), Parent shall have used its reasonable best efforts to
ameliorate or prevent any such adverse change, event, circumstance,
development or effect.
"PARENT MEAN PRICE" means the average of the per share closing prices
of Parent Common Stock on the Nasdaq during the ten consecutive trading
days ending on (and including) the trading day that is two trading days
prior to the date of the Effective Time.
"PARENT PRICE" means the average of the per share closing prices of
Parent Common Stock on the Nasdaq during the ten consecutive trading days
ending on (and including) the trading day that is two trading days prior to
the date of the Effective Time; provided, however, that for purposes of
this Agreement and subject to the provisions of Section 9.01(e), the Parent
Price shall not be greater than $10.50 or less than $8.50.
"PERSON" means an individual, corporation, partnership, limited
partnership, joint venture, limited liability company, syndicate, person
(including a "person" as defined in Section 13(d)(3) of the Exchange Act),
trust, association or entity or government, political subdivision, agency
or instrumentality of a government.
"PREFERRED SHARES" means shares of 7.5% Series A Convertible Preferred
Stock, par value $0.001 per share, of the Company.
"PREFERRED STOCKHOLDER AGREEMENT" means the Stockholder Agreement
entered into among Parent, Merger Sub and Benjamin W. Griffith, III.
"REGISTERED IP" means all Intellectual Property that is registered,
filed, or issued under the authority of any Governmental Authority,
including all patents, copyright registrations, mask work registrations and
trademark registrations and all applications for any of the foregoing.
"REPRESENTATIVES" of any entity means such entity's directors,
officers, employees, legal, investment banking and financial advisors,
accountants and any other agents and representatives.
"SEC" means the United States Securities and Exchange Commission.
"SOFTWARE" means computer software, programs and databases in any
form, including source code, object code, operating systems and
specifications, data, databases, database management code, utilities,
graphical user interfaces, menus, images, icons, forms, methods of
processing, software engines, platforms, and data formats, all versions,
updates, corrections, enhancements, and modifications thereof, and all
related documentation, developer notes, comments and annotations.
"SUBSIDIARY" or "SUBSIDIARIES" means, with respect to the Company, any
Person the majority of the voting or equity interests of which is
controlled by the Company, directly or indirectly through one or more
intermediaries.
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"SUPERIOR PROPOSAL" means any Acquisition Proposal not solicited or
initiated in violation of Section 7.05(a) that (i) relates to more than 50%
of the outstanding Shares or all or substantially all of the assets of the
Company and its Subsidiaries taken as a whole, (ii) is made by a Person who
the Board has reasonably concluded in good faith will have adequate sources
of financing to consummate such Superior Proposal, and (iii) is on terms
that the Board determines in its good faith judgment (after receiving the
advice of a financial advisor of nationally-recognized reputation, and
after taking into account all the terms and conditions of the Acquisition
Proposal, including any regulatory obstacles, break-up fees, expense
reimbursement provisions and conditions to consummation) are more favorable
to the Company's stockholders than this Agreement and the Merger, taken as
a whole.
"TAXES" means any and all taxes, fees, levies, duties, tariffs,
imposts and other charges of any kind (together with any and all interest,
penalties, additions to tax and additional amounts imposed with respect
thereto) imposed by any Governmental Authority or taxing authority,
including: taxes or other charges on or with respect to income, franchise,
windfall or other profits, gross receipts, property, sales, use, capital
stock, payroll, employment, social security, workers' compensation,
unemployment compensation or net worth; taxes or other charges in the
nature of excise, withholding, ad valorem, stamp, transfer, value-added or
gains taxes; license, registration and documentation fees; and customers'
duties, tariffs and similar charges.
"TRANSACTIONS" means the transactions contemplated hereunder,
including the Merger and the transactions contemplated by the Stockholder
Agreements.
"UNAUDITED INTERIM BALANCE SHEET" means the unaudited consolidated
balance sheet of the Company and its consolidated subsidiaries as of March
31, 2003, included in the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2003, and as filed with the SEC prior to the
date of this Agreement.
"WARRANT" means the Ross Systems, Inc. Stock Purchase Warrant dated
June 29, 2001 pursuant to which the holder thereof is entitled to purchase
47,244 Shares in accordance with the terms and subject to the conditions
set forth therein.
SECTION 1.02. Other Definitions. Each of the following terms is defined
in the section set forth opposite such term:
DEFINED TERM LOCATION OF DEFINITION
------------ ----------------------
2002 Balance Sheet.......................................... 4.08(c)
Action...................................................... 4.10(a)
Agreement................................................... Preamble
Assumed Options............................................. 3.03(a)
Blue Sky Laws............................................... 4.06(b)
Board....................................................... Recitals
Broadview................................................... 4.20
Certificate of Incorporation................................ 4.02
Certificate of Merger....................................... 2.02
Certificate................................................. 2.05(b)
Closing Date................................................ 2.02
Code........................................................ Recitals
Company..................................................... Preamble
Company Licensed Intellectual Property...................... 4.15(g)(v)
Company Preferred Stock..................................... 4.03(a)
Company Rights.............................................. 4.03(a)
Company Rights Agreement.................................... 4.03(a)
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DEFINED TERM LOCATION OF DEFINITION
------------ ----------------------
Company Series B Preferred Stock............................ 4.03(a)
Company Stockholders' Approval.............................. 7.01
Conversion Ratio............................................ 3.03(a)
Dissenting Shares........................................... 3.04(a)
DOJ......................................................... 7.10
Effective Time.............................................. 2.02
Environmental Permits....................................... 4.17
ERISA....................................................... 4.11(a)
ESPP........................................................ 3.03(b)
ESPP Date................................................... 3.03(c)
Exchange Ratio.............................................. 2.04(a)(i)
Expenses.................................................... 9.03(a)
Fee......................................................... 9.03(b)
FTC......................................................... 7.10
GAAP........................................................ 4.08(b)
HSR Act..................................................... 4.06(b)
incentive stock options..................................... 3.03(a)
IRS......................................................... 4.11(a)
Liens....................................................... 4.14(b)
Material Contracts.......................................... 4.18(a)
Merger...................................................... Recitals
Merger Consideration........................................ 2.04(a)(i)
Merger Sub.................................................. Preamble
Multiemployer Plan.......................................... 4.11(b)
Multiple Employer Plan...................................... 4.11(b)
Number of Optioned Shares................................... 3.03(b)
Options..................................................... 3.03(a)
Parent...................................................... Preamble
Parent SEC Reports.......................................... 5.08(a)
Parent Preferred Stock...................................... 5.07(a)
Paying Agent................................................ 2.05(a)
Payment Fund................................................ 2.05(a)
Per Share Amount............................................ 2.04(a)
Permits..................................................... 4.06
Permitted Investments....................................... 2.05(a)
Permitted Liens............................................. 4.14(b)
Plans....................................................... 4.11(a)
Principal Stockholders...................................... Recitals
Proxy Statement............................................. 7.02
Registration Statement...................................... 7.03
SEC Reports................................................. 4.08(a)
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DEFINED TERM LOCATION OF DEFINITION
------------ ----------------------
Securities Act.............................................. 4.08(a)
Shares...................................................... Recitals
Standard Form Confidentiality Agreement..................... 4.12(d)
Stockholder Agreements...................................... Recitals
Stockholders' Meeting....................................... 7.01
Surviving Corporation....................................... 2.03
SVB......................................................... 4.29
Tail Policy................................................. 7.07(b)
Tax Opinion................................................. 7.16(a)
Warrants.................................................... 4.03(b)
SECTION 1.03. Construction. Unless the context of this Agreement
otherwise clearly requires, (a) references to the plural include the singular,
and references to the singular include the plural, (b) references to any gender
include the other genders, (c) the words "include," "includes" and "including"
do not limit the preceding terms or words and shall be deemed to be followed by
the words "without limitation", (d) the terms "hereof", "herein", "hereunder",
"hereto" and similar terms in this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement, (e) the terms "day" and
"days" mean and refer to calendar day(s) and (f) the terms "year" and "years"
mean and refer to calendar year(s). Unless otherwise set forth herein,
references in this Agreement to (i) any document, instrument or agreement
(including this Agreement) (A) includes and incorporates all exhibits, schedules
and other attachments thereto, (B) includes all documents, instruments or
agreements issued or executed in replacement thereof and (C) means such
document, instrument or agreement, or replacement or predecessor thereto, as
amended, modified or supplemented from time to time in accordance with its terms
and in effect at any given time, and (ii) a particular Law means such Law as
amended, modified, supplemented or succeeded, from time to time and in effect at
any given time. All Article, Section, Schedule and Exhibit references herein are
to Articles, Sections and Exhibits of this Agreement, the Company Disclosure
Schedule or the Parent Disclosure Schedule, unless otherwise specified. This
Agreement shall not be construed as if prepared by one of the Parties, but
rather according to its fair meaning as a whole, as if all Parties had prepared
it.
ARTICLE II
THE MERGER
SECTION 2.01. The Merger. Upon the terms and subject to the conditions
set forth in Article VIII and Section 7.16(b), Merger Sub shall be merged with
and into the Company at the Effective Time in accordance with Delaware Law.
SECTION 2.02. Effective Time; Closing. Subject to the terms and
conditions of this Agreement, as promptly as practicable after the satisfaction
or, if permissible, waiver of the conditions set forth in Article VIII, the
parties hereto shall cause the Merger to be consummated by filing a certificate
of merger (the "Certificate of Merger") with the Secretary of State of the State
of Delaware in such form as is required by, and executed in accordance with, the
relevant provisions of Delaware Law (the date and time of such filing being, the
"Effective Time"). Immediately prior to such filing, a closing shall be held at
the offices of King & Spalding LLP, 191 Peachtree Street, Atlanta, Georgia
30303, or such other place as the parties shall agree, for the purpose of
confirming the satisfaction or waiver, as the case may be, of the conditions set
forth in Article VIII (the "Closing Date").
SECTION 2.03. Effect of the Merger. Subject to Section 7.16(b), at the
Effective Time, the separate corporate existence of Merger Sub shall cease, the
Company shall continue as the surviving corporation in the Merger (the
"Surviving Corporation"), and the effect of the Merger shall be as
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provided in the applicable provisions of Delaware Law. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all the
property, rights, privileges, powers and franchises of the Company and Merger
Sub shall vest in the Surviving Corporation, and all debts, liabilities,
obligations, restrictions, disabilities and duties of the Company and Merger Sub
shall become the debts, liabilities, obligations, restrictions, disabilities and
duties of the Surviving Corporation.
SECTION 2.04(a) Conversion of Securities. At the Effective Time, by
virtue of the Merger and without any action on the part of Merger Sub, the
Company or the holders of any of the following securities:
(i) subject to the provisions of Sections 2.05 and 9.01(e), each
Share (together with the associated Company Right) issued and
outstanding immediately prior to the Effective Time (other than any
Shares to be canceled pursuant to Section 2.04(a)(ii) and any Dissenting
Shares (as hereinafter defined)) shall be canceled and converted
automatically into the right to receive (A) the number (the "Exchange
Ratio") of shares of Parent Common Stock determined by dividing $14.00
by the Parent Price and rounding the result to the nearest one
thousandth of a share, payable upon surrender, in the manner provided in
Section 2.05, of the certificate that formerly evidenced such Share; and
(B) $5.00 in cash ((A) and (B) together being the "Merger
Consideration");
(ii) each Share (together with the associated Company Right) held
in the treasury of the Company and each Share (together with the
associated Company Right) owned by Merger Sub, Parent or any direct or
indirect wholly owned subsidiary of Parent or of the Company immediately
prior to the Effective Time shall be canceled without any conversion
thereof and payment or other consideration made with respect thereto;
and
(iii) each share of common stock, par value $0.001 per share, of
Merger Sub issued and outstanding immediately prior to the Effective
Time shall be converted into and exchanged for one validly issued, fully
paid and non-assessable share of common stock, par value $.0001 per
share, of the Surviving Corporation.
(b) Immediately prior to the Effective Time, all Preferred Shares
issued and outstanding immediately prior to the Effective Time shall be
converted into Shares in accordance with terms of the Certificate of
Designations and the Preferred Stockholder Agreement.
(c) Upon exercise of the Warrant, the holder of the Warrant shall have
the right to receive the Merger Consideration for each Share issuable upon
such exercise in accordance with the terms of the Warrant. The Company
shall use its reasonable best efforts to cause the Warrant to be either
vested and exercised or redeemed prior to the Effective Time.
SECTION 2.05. Exchange of Certificates. (a) Paying Agent. Prior to the
Closing Date, Parent shall designate a bank or trust company reasonably
satisfactory to the Company to act as agent (the "Paying Agent") for the holders
of Shares to receive the funds and Parent Common Stock to which holders of
Shares shall become entitled pursuant to Section 2.04. As of the Effective Time,
Parent shall deposit or shall cause to be deposited with the Paying Agent in a
separate fund established for the benefit of the holders of Shares, for payment
in accordance with this Article II through the Paying Agent, (i) certificates
representing the shares of Parent Common Stock issuable pursuant to Section 2.04
as of the Effective Time, (ii) cash in amounts payable pursuant to Section 2.04
as of the Effective Time, and (iii) cash, from time to time as required to make
payments in lieu of any fractional shares pursuant to Section 2.05(c) (such cash
and certificates for shares of Parent Common Stock, together with any dividends
or distributions with respect thereto being, the "Payment Fund"). The Paying
Agent shall, pursuant to irrevocable instructions, pay the Merger Consideration
payable pursuant to Section 2.04 out of the Payment Fund. The Paying Agent shall
invest cash portions of the Payment Fund as Parent directs in obligations of or
guaranteed by the United States of America, in commercial paper obligations
receiving the highest investment grade rating from both Moody's Investors
Services, Inc. and Standard & Poor's Corporation, or in certificates of deposit,
bank repurchase agreements or banker's acceptances of
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commercial banks with capital exceeding $1,000,000,000 (collectively, "Permitted
Investments"); provided, however, that the maturities of Permitted Investments
shall be such as to permit the Paying Agent to make prompt payment to former
holders of the Shares entitled thereto as contemplated by this Agreement. All
earnings on Permitted Investments shall be the sole and exclusive property of
Parent and no part of the earnings shall accrue to the benefit of holders of
Shares. If for any reason the Payment Fund is inadequate to pay the amounts to
which holders of Shares shall be entitled, Parent and the Surviving Corporation
shall in any event be liable for payment thereof. The Payment Fund shall not be
used for any purpose except as expressly provided in this Agreement.
(b) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause the Paying Agent to mail to each Person who was, at the Effective Time, a
holder of record of a certificate (a "Certificate") which immediately prior to
the Effective Time represented outstanding Shares (and associated Company
Rights) entitled to receive the Merger Consideration pursuant to this Article II
a letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon proper
delivery of the Certificates to the Paying Agent) and instructions for use in
effecting the surrender of the Certificates to the Paying Agent pursuant to such
letter of transmittal. Upon surrender to the Paying Agent of a Certificate,
together with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, and such other documents as may be
reasonably required pursuant to such instructions, the holder of such
Certificate shall be entitled to receive in exchange therefor: (i) the Merger
Consideration for each Share formerly evidenced by such Certificate (with the
portion of the Merger Consideration consisting of Parent Common Stock being
evidenced by certificates representing that number of whole shares of Parent
Common Stock which such holder has the right to receive pursuant to Section
2.04), (ii) cash in lieu of any fractional shares of Parent Common Stock to
which such holder is entitled pursuant to Section 2.05(c) and (iii) any other
dividends or other distributions to which such holder is entitled pursuant to
Section 2.05(d), and such Certificate shall then be canceled. No interest shall
accrue or be paid on the Merger Consideration payable upon the surrender of any
Certificate for the benefit of the holder of such Certificate, including any
interest accrued in respect of the Payment Fund. If the payment under this
Section 2.05(b) is to be made to a Person other than the Person in whose name
the surrendered certificate formerly evidencing Shares is registered on the
stock transfer books of the Company, it shall be a condition of payment that the
Certificate so surrendered shall be endorsed properly or otherwise be in proper
form for transfer and that the Person requesting such payment shall have paid
all transfer and other taxes required by reason of the payment of the Merger
Consideration to a Person other than the registered holder of the Certificate
surrendered, or shall have established to the satisfaction of Parent that such
taxes either have been paid or are not applicable. After the Effective Time, the
holders of Certificates shall cease to have rights with respect to such
Certificates (except such rights, if any, as they may have as dissenting
shareholders), and except as aforesaid their sole rights shall be to exchange
said Certificates for the amounts payable pursuant to this Agreement.
(c) No Fractional Shares. No certificates or scrip representing fractional
shares of Parent Common Stock will be issued upon the surrender for exchange of
Certificates, but in lieu thereof, each holder of a fractional share interest
shall be paid an amount in cash (without interest) equal to the product obtained
by multiplying (i) such fractional share interest which such holder (after
taking into account all fractional share interests then held by such holder)
would otherwise be entitled by (ii) the Parent Mean Price.
(d) Distributions with Respect to Unexchanged Shares of Parent Common
Stock. No dividends or other distributions declared or made after the Effective
Time with respect to the Parent Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Common Stock represented thereby, and no cash
payment in lieu of any fractional shares shall be paid to any such holder
pursuant to Section 2.05(c), until the holder of such Certificate shall
surrender such Certificate. Subject to the effect of escheat, tax or other
applicable Laws, following surrender of any such Certificate, there shall be
paid to the holder of the certificates representing whole shares of Parent
Common Stock issued in exchange therefor, without interest, (i) promptly, the
amount of any cash payable with respect to a fractional share of Parent Common
Stock to which such holder is entitled pursuant to Section 2.05(c) and the
amount of dividends or other distributions with a
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record date after the Effective Time and theretofore paid with respect to such
whole shares of Parent Common Stock, and (ii) at the appropriate payment date,
the amount of dividends or other distributions, with a record date after the
Effective Time but prior to surrender and a payment date occurring after
surrender, payable with respect to such whole shares of Parent Common Stock.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to
reflect appropriately the effect of any stock split, reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock or Shares), extraordinary cash dividends, reorganization,
recapitalization, reclassification, combination, exchange of shares or other
like change with respect to Parent Common Stock or Shares occurring on or after
the date hereof and prior to the Effective Time.
(f) Lost Certificates. In the event that any Certificate shall have been
lost, stolen or destroyed, the Paying Agent shall issue in exchange for such
lost, stolen or destroyed Certificate, upon the making of an affidavit of that
fact by the holder thereof, for each Share, the Merger Consideration, any cash
in lieu of fractional shares to which such holder is entitled pursuant to
Section 2.05(c) and any dividends or other distributions to which such holder is
entitled pursuant to Section 2.05(d); provided, however, that Parent may, in its
discretion and as a condition precedent to the issuance of such Merger
Consideration, require the owner of such lost, stolen or destroyed Certificate
to deliver a bond in such sum as it may reasonably direct as indemnity against
any claim that may be made against Parent, the Surviving Corporation or the
Paying Agent with respect to the Certificate alleged to have been lost, stolen
or destroyed.
(g) Termination of Payment Fund. Any portion of the Payment Fund that
remains undistributed to the holders of Shares for 180 days after the Effective
Time shall be delivered to Parent, upon demand, and any holders of Shares who
have not theretofore complied with this Article II shall thereafter look only to
Parent for the Merger Consideration, any cash in lieu of fractional shares of
Parent Common Stock payable pursuant to Section 2.05(c) and any dividends or
other distributions with respect to the Parent Common Stock payable pursuant to
Section 2.05(d); provided, however, that none of Parent, Surviving Corporation
or the Paying Agent shall be liable to any holder of a Share for any Merger
Consideration delivered in respect of such Share to a public official pursuant
to any abandoned property, escheat or other similar Law.
(h) Withholding Rights. Parent shall be entitled to deduct and withhold
from the consideration otherwise payable pursuant to this Agreement to any
holder of Shares such amounts as Parent is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or foreign tax Law. To the extent that amounts are so withheld by Parent,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of Shares in respect of which such deduction and
withholding was made by Parent.
SECTION 2.06. Stock Transfer Books. At the close of business on the day
of the Effective Time, the stock transfer books of the Company shall be closed
and thereafter there shall be no further registration of transfers of Shares on
the records of the Company.
ARTICLE III
THE SURVIVING CORPORATION
SECTION 3.01. Certificate of Incorporation; By-laws. (a) At the Effective
Time the Certificate of Incorporation of Merger Sub, as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter amended as provided by Law and such
Certificate of Incorporation; provided, however, that, at the Effective Time,
Article I of the Certificate of Incorporation of the Surviving Corporation shall
be amended to read as follows: "The name of the corporation is Ross Systems,
Inc."
(b) Unless otherwise determined by Parent prior to the Effective Time, the
By-laws of Merger Sub, as in effect immediately prior to the Effective Time
shall be the By-laws of the Surviving Corporation
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until thereafter amended as provided by Law, the Certificate of Incorporation of
the Surviving Corporation and such By-laws.
SECTION 3.02. Directors and Officers. The directors of Merger Sub
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-laws of the Surviving Corporation, and the officers of
Merger Sub immediately prior to the Effective Time (which shall include the
officers of the Company immediately prior to the Effective Time) shall be the
initial officers of the Surviving Corporation, in each case until their
respective successors are duly elected or appointed and qualified or until their
earlier death, resignation or removal.
SECTION 3.03. Employee Stock Options; Employee Stock Purchase Plan. (a)
Effective as of the Effective Time, Parent shall, for each Option (not including
any Executive Options) then outstanding with an exercise price of $19.00 or less
(the "Substituted Options"), substitute such Options with stock options to
purchase Parent Common Stock. Each Substituted Option, whether vested or
unvested, shall be converted into an option to acquire, on the same terms and
conditions as were applicable under the Option Plans, a number of shares of
Parent Common Stock equal to the product of (i) the number of Shares subject to
such Substituted Option multiplied by (ii) the Conversion Ratio (as defined
below), at an exercise price per share of Parent Common Stock equal to the
quotient of (x) the per share exercise price of the Option to purchase Shares,
divided by (y) the Conversion Ratio; provided, however, that in the case of any
option to which Section 421 of the Code applies by reason of its qualification
under Section 422 of the Code ("incentive stock options"), the option price and
the number of shares purchasable pursuant to such option shall be determined in
order to comply with Section 424(a) of the Code. Any such stock options to
purchase Parent Common Stock shall be issued contingent upon the consummation of
the Transactions and shall include an acknowledgement by the optionee that such
stock options to purchase Parent Common Stock are being substituted for the
Substituted Options.
(b) For purposes of Section 3.03(a), the "Conversion Ratio" shall be the
sum of (i) the quotient of (A) $14.00, divided by (B) the Parent Price (or, in
the event Parent agrees in writing pursuant to Section 9.01(e) that the Exchange
Ratio shall be determined based on the Parent Mean Price, then the Parent Mean
Price), plus (ii) the quotient of (X) $5.00, divided by (Y) the closing sales
price of Parent Common Stock on the Nasdaq for the last trading day prior to the
date of the Effective Time.
(c) As of the last day of the payroll period immediately preceding the
Effective Time (the "ESPP Date"), all offering and purchase periods under way
under the Company's Employee Stock Purchase Plan (the "ESPP"), shall be
terminated and, as of the date of this Agreement, no new offering or purchase
periods shall be commenced. Unless a participant in the ESPP has withdrawn from
the ESPP in accordance with its terms, such participant's option to purchase
Shares under the ESPP shall be exercised automatically on the ESPP Date in
accordance with the terms of the ESPP. All Shares acquired by such participant
pursuant to the ESPP as of the Effective Time shall, at the Effective Time, be
converted into the right to receive the Merger Consideration in accordance with
Section 2.04(a).
(d) The Company shall use take all actions necessary to effectuate the
provisions of this Section 3.03.
SECTION 3.04. Dissenting Shares. (a) Notwithstanding any provision of
this Agreement to the contrary, Shares that are outstanding immediately prior to
the Effective Time and that are held by stockholders who shall have not voted in
favor of the Merger and who shall have demanded properly in writing appraisal
for such Shares in accordance with Section 262 of Delaware Law and who shall
have not effectively withdrawn or lost such right to appraisal (collectively,
the "Dissenting Shares") shall not be converted into, or represent the right to
receive, the Merger Consideration pursuant to Section 2.04. Such stockholders
shall be entitled to receive payment of the appraised value of such Shares held
by them, in accordance with the provisions of such Section 262, except that all
Dissenting Shares held by stockholders who shall have failed to perfect or who
effectively shall have withdrawn or lost their rights to appraisal with respect
to such Shares under such Section 262 shall thereupon be deemed to have been
converted into, and to have become exchangeable for, as of the Effective Time,
the right to receive the Merger
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Consideration, without any interest thereon, upon surrender, in the manner
provided in Section 2.05, of the certificate or certificates that formerly
evidenced such Shares.
(b) The Company shall give Parent (i) prompt notice of any written demands
for appraisal received by the Company, withdrawals of such demands, and any
other instruments served pursuant to Delaware Law and received by the Company
and (ii) the opportunity to direct all negotiations and proceedings with respect
to demands for appraisal under Delaware Law. The Company shall not, except with
the prior written consent of Parent, make any payment with respect to any
demands for appraisal or offer to settle or settle any such demands.
SECTION 3.05. Further Assurances. Each party hereto will, either prior to
or after the Effective Time, execute such further documents, instruments, deeds,
bills of sale, assignments and assurances and take such further actions as may
reasonably be requested by one or more of the others to consummate the Merger,
to vest the Surviving Corporation at or following the Effective Time with full
title to all assets, properties, privileges, rights, approvals, immunities and
franchises of either of the Merger Sub or the Company or to effect the other
purposes of this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to Parent and Merger Sub to enter into this Agreement, the
Company hereby represents and warrants to Parent and Merger Sub as follows:
SECTION 4.01. Organization and Qualification; Subsidiaries. (a) Each of
the Company and each Subsidiary is a corporation duly organized, validly
existing and, to the extent applicable, in good standing under the Laws of the
jurisdiction of its incorporation and has the requisite corporate power and
authority and all necessary governmental approvals to own, lease and operate its
properties and to carry on its business as it is now being conducted. Each of
the Company and each Subsidiary is duly qualified or licensed as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of the properties owned, leased or operated by it or the nature of
its business makes such qualification or licensing necessary, except where the
failure to be so qualified, licensed or in good standing would not have a
Company Material Adverse Effect.
(b) A true and complete list of all the Subsidiaries, together with the
jurisdiction of incorporation of each Subsidiary, the percentage of the
outstanding capital stock of each Subsidiary owned by the Company and each other
Subsidiary and the authorized capital stock, the number of issued and authorized
shares of capital stock and the record owner of such shares, is set forth in
Section 4.01(b) of the Company Disclosure Schedule. Except as disclosed in
Section 4.01(b) of the Company Disclosure Schedule, the Company does not
directly or indirectly own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity. Neither the Company nor any Subsidiary has agreed or is
obligated to make, or is bound by any written, oral or other agreement,
Contract, subcontract, lease, binding understanding, instrument, note, option,
warranty, purchase order, license, sublicense, insurance policy, benefit plan or
legally binding commitment or undertaking of any nature, as in effect as of the
date hereof or as may hereafter be in effect under which it may become obligated
to make any future material investment in or material capital contribution to
any other entity. Neither the Company, nor any Subsidiary, is a general partner
of any general partnership, limited partnership or other similar entity.
SECTION 4.02. Certificate of Incorporation and By-laws. The Company has
heretofore made available to Parent a complete and correct copy of the
Certificate of Incorporation (the "Certificate of Incorporation") and the
By-laws or equivalent organizational documents, each as amended to date, of the
Company and each Subsidiary. Such Certificate of Incorporation, By-laws or
equivalent organizational documents are in full force and effect. Neither the
Company nor any Subsidiary is in material violation of any of the provisions of
its Certificate of Incorporation, By-laws or equivalent organizational
documents.
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SECTION 4.03. Capitalization. (a) The authorized capital stock of the
Company consists of 15,000,000 Shares and 5,000,000 shares of preferred stock,
no par value ("Company Preferred Stock"), 35,000 of which shares have been
designated as Series B Participating Preferred Stock ("Company Series B
Preferred Stock") and have been reserved for issuance upon exercise of preferred
stock purchase rights (the "Company Rights") issuable pursuant to that certain
Amended and Restated Preferred Stock Rights Agreement, dated as of July 6, 2001
between the Company and Fleet National Bank (the "Company Rights Agreement"),
and 500,000 of which shares have been designated as Preferred Shares. As of the
date hereof, (i) 2,681,848 Shares are issued and outstanding, all of which are
validly issued, fully paid and nonassessable, (ii) no shares of Company Series B
Preferred Stock were issued and outstanding, (iii) 500,000 Preferred Shares are
issued and outstanding, all of which are validly issued, fully paid and
nonassessable, (iv) 133,977 Shares are held in the treasury of the Company, (v)
no Shares are held by any Subsidiary, (vi) 738,014 Shares are reserved for
future issuance pursuant to outstanding employee stock options or stock
incentive rights granted pursuant to the Option Plans and (vii) rights to
purchase 6,472 Shares are outstanding pursuant to the ESPP.
(b) As of the date hereof, except as set forth in Section 4.03(b) of the
Company Disclosure Schedule and except pursuant to (i) the Stockholder
Agreements, (ii) the Warrant, (iii) the ESPP, and (iv) the Company Rights
Agreement, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock of the Company or any Subsidiary or obligating the Company or any
Subsidiary to issue or sell any shares of capital stock of, or other equity
interests in, the Company or any Subsidiary. Section 4.03(b) of the Company
Disclosure Schedule accurately sets forth as of the date hereof information
regarding the holder, particular plan or program under which such Options were
granted, the exercise price, the grant date, the vesting schedule and the extent
to which the Option is vested, the date of expiration and the number of
underlying Shares issuable in respect of each Warrant, as applicable, and
Option, and in respect of each right to purchase Shares pursuant to the ESPP
(through the end of the ESPP's current offer period ending June 30, 2003) and
the number of underlying Shares issuable pursuant to vested Options as of the
date hereof. All Shares subject to issuance as aforesaid, upon issuance on the
terms and conditions specified in the instruments pursuant to which they are
issuable, will be duly authorized, validly issued, fully paid and nonassessable.
Section 4.03(b) of the Company Disclosure Schedule sets forth as of the date
hereof the number of unvested or unexercisable Options that will accelerate upon
the closing of the Merger and the number of Shares issuable upon exercise
thereof. As of the date hereof, the total number of Shares issuable pursuant to
the exercise of all Options and warrants held by all Principal Stockholders is
401,215.
(c) All of the outstanding shares of capital stock of each Subsidiary are
duly authorized, validly issued, fully paid and nonassessable and are owned,
beneficially and of record, by the Company or a Subsidiary wholly owned,
directly or indirectly, by the Company, free and clear of any Liens. There are
no (i) outstanding options obligating the Company or any Subsidiary to issue or
sell any shares of capital stock of any Subsidiary or to grant, extend or enter
into any such option or (ii) voting trusts, proxies or other commitments,
understandings, restrictions or arrangements in favor of any Person other than
the Company or a Subsidiary wholly owned, directly or indirectly, by the Company
with respect to the voting of or the right to participate in dividends or other
earnings on any capital stock of any Subsidiary.
(d) There are no outstanding contractual obligations of the Company or any
Subsidiary to repurchase, redeem or otherwise acquire any Shares or any other
capital stock or other securities of the Company or any Subsidiary or to provide
funds to, or make any investment (in the form of a loan, capital contribution or
otherwise) in, any Subsidiary or any other Person.
SECTION 4.04. Authority Relative to This Agreement. The Company has all
necessary corporate power and authority to enter into and to perform its
obligations under this Agreement and the Transactions. The Board (at a meeting
duly called and held) has (a) determined that this Agreement and the
Transactions, including the Merger, are fair to and in the best interests of the
Company's stockholders, (b) approved and adopted this Agreement and the
Transactions in accordance with the requirements of Delaware Law, (c) declared
that this Agreement is advisable, (d) resolved to recommend that stockholders of
the Company vote to adopt and approve this Agreement and to approve the Merger,
and
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(e) to the extent necessary, adopted a resolution for the purpose of causing the
Company not to be subject to any state takeover Law or similar Law, that might
otherwise apply to the Merger or any of the other Transactions. This Agreement
has been duly executed and delivered by the Company and, assuming due and valid
authorization, execution and delivery thereof by Parent and Merger Sub, this
Agreement is a valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, subject to (i) Laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of Law governing specific performance, injunctive relief and other
equitable remedies.
SECTION 4.05. Section 203. As of the date hereof and at all times on or
prior to the Effective Time, the Board has and will take all actions necessary
to ensure that the restrictions applicable to business combinations contained in
Section 203 of Delaware Law are not, and will not be, applicable to the
execution, delivery or performance of this Agreement or to the consummation of
the Merger or any of the other Transactions. Other than Section 203 of Delaware
Law, there is no anti-takeover Law of any state that is applicable to this
Agreement and the Transactions.
SECTION 4.06. No Conflict; Required Filings and Consents. (a) The
execution and delivery of this Agreement by the Company do not, and the
performance of this Agreement and the Transactions by the Company will not, (i)
conflict with or violate the Certificate of Incorporation or By-laws of the
Company or equivalent organizational documents of any Subsidiary, (ii) subject
to obtaining the Company Stockholders' Approval and compliance with the
requirements described in Section 4.06(b) below, conflict with or violate any
Laws of any Governmental Authority applicable to the Company or any Subsidiary
or by which any property or asset of the Company or any Subsidiary is bound or
affected, or (iii) result in any breach of or constitute a default (or an event
which, with notice or lapse of time or both, would become a default) under, or
give to others any right of termination, amendment, acceleration or cancellation
of, or result in the creation of a Lien or other encumbrance on any property or
asset of the Company or any Subsidiary pursuant to, any note, bond, mortgage,
indenture, Contract, agreement, lease, license, permit, franchise or other
instrument or obligation, except as disclosed in Section 4.06 of the Company
Disclosure Schedule, and with respect to clauses (ii) and (iii), except for any
such conflicts, violations, breaches, defaults or other occurrences which would
not, individually or in the aggregate, prevent or materially delay consummation
of the Transactions and would not have a Company Material Adverse Effect.
(b) The execution and delivery of this Agreement by the Company do not, and
the performance of this Agreement by the Company will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
Governmental Authority, except (i) for applicable requirements, if any, of the
Exchange Act, state securities or "blue sky" Laws ("Blue Sky Laws"), and filing
and recordation of appropriate merger documents as required by Delaware Law,
(ii) for the filing of the Proxy Statement with the SEC pursuant to the Exchange
Act, (iii) for the filing of the Certificate of Merger and other appropriate
merger documents required by Delaware Law with the Secretary of State of the
State of Delaware and appropriate documents with the relevant authorities in
which the Merger Sub and the Company are qualified to do business, (iv) for the
filing of a premerger notification report by the Company under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations thereunder (the "HSR Act"), and (v) where the failure to obtain
such consents, approvals or action of, filings with or notices to any
Governmental Authority would not have a Company Material Adverse Effect.
SECTION 4.07. Permits; Compliance. Each of the Company and the
Subsidiaries is in possession of all registrations, franchises, grants,
authorizations, licenses, permits, easements, variances, exceptions, consents,
certificates, approvals and orders of any Governmental Authority necessary for
each of the Company or the Subsidiaries to own, lease and operate its properties
or to carry on its business as it is now being conducted (the "Permits"), except
where the failure to have, or the suspension or cancellation of, any of the
Permits, individually or in the aggregate, would not prevent or materially delay
consummation of the Transactions and would not have a Company Material Adverse
Effect. As of the date hereof, no suspension or cancellation of any of the
Permits is pending or, to the knowledge of the Company,
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threatened, except where the failure to have, or the suspension or cancellation
of, any of the Permits, individually or in the aggregate, would not prevent or
materially delay consummation of the Transactions and would not have a Company
Material Adverse Effect. Neither the Company nor any Subsidiary is in conflict
with, or in default, breach or violation of, (a) any Law applicable to the
Company or any Subsidiary or by which any property or asset of the Company or
any Subsidiary is bound or affected, or (b) any note, bond, mortgage, indenture,
Contract, agreement, lease, license, Permit, franchise or other instrument or
obligation to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary or any property or asset of the Company or any
Subsidiary is bound, except for any such conflicts, defaults, breaches or
violations, individually or in the aggregate, that would not prevent or
materially delay consummation of the Transactions and would not have a Company
Material Adverse Effect.
SECTION 4.08. SEC Filings; Financial Statements. (a) The Company has
filed all forms, reports and documents required to be filed by it with the SEC
since July 1, 2001 and has heretofore made available to Parent, in the form
filed with the SEC, (i) its Annual Reports on Form 10-K for the fiscal years
ended June 30, 2001 and 2002, respectively, (ii) its Quarterly Reports on Form
10-Q for the periods ended September 30, 2002 and December 31, 2002 and March
31, 2003, (iii) all proxy statements relating to the Company's meetings of
stockholders (whether annual or special) held since July 1, 2001, (iv) all other
forms including reports on Form 8-K and other registration statements (other
than Quarterly Reports on Form 10-Q not referred to in clause (ii) above) filed
by the Company with the SEC since January 1, 2003 and (v) all other statements,
reports, schedules, forms and other documents filed by the Company with the SEC
since July 1, 2001 (each of the above referred to in clauses (i), (ii), (iii)
and (iv) above being, collectively, the "SEC Reports"). The SEC Reports (i) were
prepared in accordance with either the requirements of the Securities Act of
1933 (together with the rules and regulations promulgated thereunder, the
"Securities Act"), or the Exchange Act, as the case may be, and the rules and
regulations promulgated thereunder, and (ii) did not, at the time they were
filed, or, if amended, as of the date of such amendment, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading. No
consolidated Subsidiary is required to file any form, report or other document
with the SEC. The Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2003 (x) will be prepared in accordance with the requirements of the
Exchange Act and the rules and regulations promulgated thereunder, and (y) will
not, at the time it is filed, or, if amended, as of the date of such amendment,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
(b) Each of the audited and unaudited consolidated financial statements
(including, in each case, any notes thereto) contained in the SEC Reports
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC applicable
thereto and was prepared in accordance with United States generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods indicated (except as may be indicated in the notes thereto or, in the
case of unaudited statements, as permitted by Form 10-Q of the SEC, and except
that the unaudited financial statements may not contain footnotes and are
subject to normal and recurring year-end adjustments), and each fairly present,
in all material respects, the consolidated financial position of the Company and
its consolidated Subsidiaries as at the respective dates thereof and for the
respective periods indicated therein (except as may be indicated in the notes
thereto or, in the case of unaudited statements, as permitted by Form 10-Q of
the SEC, and except that the unaudited financial statements may not contain
footnotes and are subject to normal and recurring year-end adjustments). The
unaudited consolidated balance sheet of the Company and the Subsidiaries as of
June 30, 2003, along with the related unaudited consolidated statements of
income and cash flows will be prepared in accordance with GAAP applied on a
consistent basis (except as may be indicated in any notes thereto or as
permitted by Form 10-Q of the SEC, and except that the unaudited financial
statements may not contain footnotes and are subject to normal and recurring
year-end adjustments) and will fairly present, in all material respects, the
consolidated financial position of the Company and its consolidated Subsidiaries
as at the date thereof.
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(c) Except as and to the extent set forth on the consolidated balance sheet
of the Company and its consolidated Subsidiaries as at June 30, 2002, including
the notes thereto (the "2002 Balance Sheet"), neither the Company nor any
consolidated Subsidiary has any accrued, contingent or other liabilities of any
nature, either matured or unmatured, required to be reflected on the balance
sheet of the Company except for: (i) liabilities identified as such in the
"liabilities" column of the Unaudited Interim Balance Sheet; (ii) normal and
recurring current liabilities (consistent in type and magnitude with those
reflected on the Unaudited Interim Balance Sheet) that have been incurred by the
Company or any Subsidiary since March 31, 2003 in the ordinary course of
business and consistent with past practices; and (iii) liabilities described in
Section 4.08(c) of the Company Disclosure Schedule.
(d) Except as and to the extent set forth on the Unaudited Interim Balance
Sheet or as set forth in Section 4.08(d) of the Company Disclosure Schedule, as
of the date of this Agreement, none of the Company nor any consolidated
Subsidiary has any material liability for Company Indebtedness.
(e) Except as disclosed in Section 4.08(e) of the Company Disclosure
Schedule, the Company has filed with the SEC all Material Contracts required to
be filed pursuant to the Securities Act or the Exchange Act.
(f) The Company has in place the "disclosure controls and procedures" (as
defined in Rules 13a-14(c) and 15d-14(c) of the Exchange Act) required in order
for the Chief Executive Officer and Chief Financial Officer of the Company to
engage in the review and evaluation process mandated by the Exchange Act. The
Company's "disclosure controls and procedures" are reasonably designed to ensure
that all information (both financial and non-financial) required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC, and that all such information is accumulated
and communicated to the Company's management as appropriate to allow timely
decisions regarding required disclosure and to make the certifications of the
Chief Executive Officer and Chief Financial Officer of the Company required
under the Exchange Act with respect to such reports.
SECTION 4.09. Absence of Certain Changes or Events. Except as disclosed
in the Company SEC Reports filed prior to the date of this Agreement or as set
forth in Section 4.09 of the Company Disclosure Schedule, since March 31, 2003
(a) the Company and the Subsidiaries have conducted their businesses only in the
ordinary course and in a manner consistent with past practice, (b) there has not
been any Company Material Adverse Effect, (c) there has not been any revaluation
by the Company of any of its material assets, other than in the ordinary course
of business, and (d) there has not been any damage, destruction or other
casualty loss (whether or not covered by insurance) affecting the business or
assets of the Company or any Subsidiary that has had individually or in the
aggregate, a Company Material Adverse Effect on the Company.
SECTION 4.10. Absence of Litigation. Except as set forth in Section
4.10(a) of the Company Disclosure Schedule, there is no litigation, suit, claim,
action, proceeding or investigation (an "Action") and (to the knowledge of the
Company) no Person has threatened to commence any Action: (i) that involves the
Company or any Subsidiary or any of the assets owned or used by the Company or
any Subsidiary; or (ii) that seeks to materially delay or prevent the
consummation of the Merger. As of the date hereof, no director or executive
officer of the Company or any Subsidiary has asserted a claim to seek
indemnification from the Company under the Certificate of Incorporation or
By-laws of the Company or any Subsidiary or any indemnification agreement
between the Company or any Subsidiary and such Person.
(b) There is no material order, writ, injunction, judgment or decree to
which the Company or any Subsidiary, or any of the assets owned or used by the
Company or any Subsidiary, is subject. To the knowledge of the Company, no
executive officer of the Company is subject to any order, writ, injunction,
judgment or decree that prohibits such officer from engaging in or continuing
any conduct, activity or practice relating to the business of the Company or any
Subsidiary.
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SECTION 4.11. Employee Benefit Plans. (a) Section 4.11(a) of the Company
Disclosure Schedule lists (i) all employee benefit plans (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) and all bonus, stock option, stock purchase, restricted stock,
incentive, compensation, deferred compensation, retiree medical or life
insurance, supplemental retirement, severance or other benefit plans, programs
or arrangements, and all employment, termination, change in control, severance
or other Contracts or agreements, whether legally enforceable or not, to which
the Company or any Subsidiary is a party, with respect to which the Company or
any Subsidiary has any obligation or which are maintained, contributed to or
sponsored by the Company or any Subsidiary for the benefit of any current or
former employee, officer or director of the Company or any Subsidiary, (ii) each
employee benefit plan for which the Company or any Subsidiary would incur
liability under Section 4069 of ERISA in the event such plan has been or were to
be terminated, (iii) any plan in respect of which the Company or any Subsidiary
would incur liability under Section 4212(c) of ERISA, and (iv) any Contracts,
arrangements or understandings between the Company or any Subsidiary and any
employee of the Company or any Subsidiary including any Contracts, arrangements
or understandings relating in any way to a sale of the Company or any Subsidiary
(collectively, the "Plans"). Each Plan is in writing and the Company has
furnished to Merger Sub a true and complete copy of each Plan and each material
document, if any, prepared in connection with each such Plan, including (i) a
copy of each trust or other funding arrangement, (ii) each summary plan
description and summary of material modifications, (iii) the most recently filed
Internal Revenue Service ("IRS") Form 5500, (iv) the most recently received IRS
determination letter for each such Plan, and (v) the most recently prepared
actuarial report and financial statement in connection with each such Plan.
Neither the Company nor any Subsidiary has any express or implied commitment,
whether legally enforceable or not, (i) to create, incur liability with respect
to or cause to exist any other employee benefit plan, program or arrangement,
(ii) to enter into any Contract or agreement to provide compensation or benefits
to any individual, or (iii) to modify, change or terminate any Plan, other than
with respect to a modification, change or termination required by this
Agreement, ERISA or the Code.
(b) None of the Plans is a multiemployer plan (within the meaning of
Section 3(37) or 4001(a)(3) of ERISA) (a "Multiemployer Plan") or a single
employer pension plan (within the meaning of Section 4001(a)(15) of ERISA) for
which the Company or any Subsidiary would incur liability under Section 4063 or
4064 of ERISA (a "Multiple Employer Plan"). Except as set forth in Section
4.11(b) of the Company Disclosure Schedule, none of the Plans (i) provides for
the payment of separation, severance, termination or similar-type benefits to
any Person, (ii) obligates the Company or any Subsidiary to pay separation,
severance, termination or similar-type benefits solely or partially as a result
of any transaction contemplated by this Agreement, or (iii) obligates the
Company or any Subsidiary to make any payment or provide any benefit as a result
of a "change in control", within the meaning of such term under Section 280G of
the Code. None of the Plans provides for or promises retiree medical, disability
or life insurance benefits to any current or former employee, officer or
director of the Company or any Subsidiary. Each of the Plans is subject only to
the Laws of the United States or a political subdivision thereof.
(c) Each Plan is now, and during the past six years has been, operated in
all material respects in accordance with its terms and the requirements of all
applicable Law including ERISA and the Code, except where the failure to do so
would not have a Company Material Adverse Effect. The Company and the
Subsidiaries have performed all material obligations required to be performed by
them under, are not in any respect in default under or in violation of, and have
no knowledge of any default or violation by any party to, any Plan. No Action is
pending or, to the knowledge of the Company, threatened with respect to any Plan
(other than claims for benefits in the ordinary course) and, to the knowledge of
the Company (after such inquiry as the relevant officer of the Company has
determined to be reasonably appropriate under the circumstances), no fact or
event exists that could give rise to any such Action.
(d) Each Plan that is intended to be qualified under Section 401(a) of the
Code or Section 401(k) of the Code (i) has timely received a favorable
determination letter from the IRS covering all of the provisions applicable to
the Plan for which determination letters are currently available, (ii) is so
qualified
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and (iii) each trust established in connection with any Plan which is intended
to be exempt from federal income taxation under Section 501(a) of the Code has
received a determination letter from the IRS that it is so exempt, and, to the
knowledge of the Company (after such inquiry as the relevant officer of the
Company has determined to be reasonably appropriate under the circumstances), no
fact or event has occurred since the date of such determination letter or
letters from the IRS to adversely affect the qualified status of any such Plan
or the exempt status of any such trust.
(e) To the knowledge of the Company, there has not been any prohibited
transaction (within the meaning of Section 406 of ERISA or Section 4975 of the
Code) within the last six years with respect to any Plan. Neither the Company
nor any Subsidiary has incurred any liability under, arising out of or by
operation of Title IV of ERISA (other than liability for premiums to the Pension
Benefit Guaranty Corporation arising in the ordinary course), including any
liability in connection with (i) the termination or reorganization of any
employee benefit plan subject to Title IV of ERISA, or (ii) the withdrawal from
any Multiemployer Plan or Multiple Employer Plan, and, to the knowledge of the
Company (after such inquiry as the relevant officer of the Company has
determined to be reasonably appropriate under the circumstances), no fact or
event exists which could give rise to any such liability.
(f) All contributions, premiums or payments required to be made with
respect to any Plan have been made on or before their due dates. All such
contributions have been fully deducted for income tax purposes and no such
deduction has been challenged or disallowed by any Governmental Authority and,
to the knowledge of the Company (after such inquiry as the relevant officer of
the Company has determined to be reasonably appropriate under the
circumstances), no fact or event exists which could give rise to any such
challenge or disallowance.
(g) Except as set forth in Section 4.11(g) of the Company Disclosure
Schedule, no Plan provides for the payment to any present or former employee of
the Company or its Subsidiaries of any money or other property or accelerate or
provide any other rights or benefits to any present or former employee of the
Company or its Subsidiaries as a result of the Transactions, whether or not such
payment would constitute a parachute payment within the meaning of Code Section
280G.
(h) Any amount or economic benefit that could be received (whether in cash
or property or the vesting of property) by any current or former director,
officer, employee or consultant of the Company or any Subsidiary who is a
"disqualified individual" (as such term is defined in proposed Treasury
Regulation Section 1.280G-1) under any Plan, employment agreement or otherwise
as a result of the execution and delivery of this Agreement by the Company or
the consummation of the Merger or any other Transaction (including as a result
of termination of employment on or following the Effective Time) would not be
characterized as an "excess parachute payment" (as defined in Section 280G(b)(1)
of the Code).
SECTION 4.12. Labor and Employment Matters. (a) There are no
controversies or claims pending or, to the knowledge of the Company, threatened
between the Company or any Subsidiary and any of their respective employees,
which controversies or claims, individually or in the aggregate, would prevent
or materially delay consummation of the Merger or would have a Company Material
Adverse Effect. Neither the Company nor any Subsidiary is a party to any
collective bargaining agreement, work council agreement, work force agreement or
other labor union Contract applicable to Persons employed by the Company or any
Subsidiary, nor, to the knowledge of the Company, are there any activities or
proceedings of any labor union to organize any such employees. There are no
unfair labor practice complaints pending against the Company or any Subsidiary
before the National Labor Relations Board, any other court or tribunal or any
current union representation questions involving employees of the Company or any
Subsidiary and there is no strike, slowdown, work stoppage or lockout, or, to
the knowledge of the Company, threat thereof, by or with respect to any
employees of the Company or any Subsidiary.
(b) The Company and the Subsidiaries are in compliance in all material
respects with all applicable Laws relating to the employment of labor and
employment practices, including those related to wages, hours, collective
bargaining and the payment and withholding of taxes and other sums as required
by the appropriate Governmental Authority and has withheld and paid to the
appropriate Governmental Authority
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or are holding for payment not yet due to such Governmental Authority all
amounts required to be withheld from employees of the Company or any Subsidiary
and are not liable for any arrears of wages, taxes, penalties or other sums for
failure to comply with any of the foregoing. The Company and the Subsidiaries
have paid in full to all employees or adequately accrued in accordance with
GAAP, all wages, salaries, commissions, bonuses, benefits and other compensation
due to or on behalf of such employees and there is no claim with respect to
payment of wages, salary or overtime pay that has been asserted or is now
pending or, to the knowledge of the Company, threatened before any Governmental
Authority with respect to any Persons currently or formerly employed by the
Company or any Subsidiary. Neither the Company nor any Subsidiary is a party to,
or otherwise bound by, any consent decree with, or citation by, any Governmental
Authority relating to employees or employment practices. There is no charge or
proceeding with respect to a violation of any occupational safety or health
standards that has been asserted or is now pending or, to the knowledge of the
Company, threatened with respect to the Company. There is no charge of
discrimination in employment or employment practices, for any reason, including
age, gender, race, religion or other legally protected category, which has been
asserted or is now pending or, to the knowledge of the Company, threatened
before the United States Equal Employment Opportunity Commission, or any other
Governmental Authority in any jurisdiction in which the Company or any
Subsidiary have employed or employ any Person.
(c) Except as set forth in Section 4.12(c) of the Company Disclosure
Schedule, (i) all subsisting Contracts of employment to which the Company or any
Subsidiary is a party are terminable by the Company or any Subsidiary on three
months' notice or less without compensation (other than in accordance with
applicable legislation); (ii) there are no customs, established practices or
discretionary arrangements of the Company or any Subsidiary in relation to the
termination of employment of any of its employees (whether voluntary or
involuntary); (iii) neither the Company nor any Subsidiary has any outstanding
liability to pay compensation for loss of office or employment or a redundancy
payment to any present or former employee or to make any payment for breach of
any agreement listed in Section 4.12(c) of the Company Disclosure Schedule; and
(iv) there is no term of employment of any employee of the Company or any
Subsidiary which shall entitle that employee to treat the consummation of the
Transactions as amounting to a breach of his Contract of employment or entitling
the employee to any payment or benefit whatsoever or entitling the employee to
treat himself or herself as redundant or otherwise dismissed or released from
any obligation.
(d) All directors, officers, management employees, and technical and
professional employees of the Company and the Subsidiaries have entered into the
standard form assignment of proprietary information and confidentiality
agreement of the Company (the "Standard Form Confidentiality Agreement") a form
of which is attached at Section 4.12(d) of the Company Disclosure Schedule. To
the Company's knowledge, no employee of the Company or any Subsidiary has
materially violated any employment Contract, nondisclosure agreement or
noncompetition agreement by which such employee is bound due to such employee
being employed by the Company and disclosure to the Company or using trade
secrets or proprietary information of any other Person.
(e) The information made available to Parent by the Company prior to the
Effective Time regarding current fiscal year employment, salary and other
compensation information with respect to each current salaried employee,
officer, director, consultant or agent of the Company and each Subsidiary was,
as of the date that such information was made available to Parent, true and
correct in all material respects.
SECTION 4.13. Form F-4; Proxy Statement. The information supplied by or
on behalf of the Company for inclusion in the Registration Statement will not,
at the time the Registration Statement is filed with the SEC and at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact, or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not false or misleading. The
information supplied by or on behalf of the Company for inclusion in the Proxy
Statement will not, at the date the Proxy Statement (or any amendment or
supplement thereto) is filed with the SEC, at the date it is first mailed to
stockholders of the Company, at the time of the Stockholders' Meeting or at the
Effective Time, contain any untrue statement of a material fact, or omit
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to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not false or misleading, or necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the
Stockholders' Meeting which will have become false or misleading.
Notwithstanding the foregoing, the Company makes no representation or warranty
with respect to any information supplied by or on behalf of Parent or any of its
representatives for inclusion in any of the foregoing documents. The Proxy
Statement will comply in all material respects as to form with the requirements
of the Exchange Act and the rules and regulations thereunder.
SECTION 4.14. Property and Leases. (a) The Company and the Subsidiaries
have sufficient title to all their properties and assets to conduct their
respective businesses as currently conducted, with only such exceptions as would
not, individually or in the aggregate, have a Company Material Adverse Effect.
(b) Neither the Company nor any Subsidiary owns any real property. Each
parcel of real property leased by the Company or any Subsidiary (i) is leased
free and clear of all mortgages, pledges, liens, security interests, conditional
and installment sale agreements, encumbrances, charges or other restrictions of
any kind against the Company or any Subsidiary, including any easement, right of
way or other encumbrance to title, or any option, right of first refusal, or
right of first offer applicable to the Company or any Subsidiary (collectively,
"Liens"), other than (A) Liens for current taxes and assessments not yet past
due, (B) inchoate mechanics' and materialmen's Liens for construction in
progress, (C) workmen's, repairmen's, warehousemen's and carriers' Liens arising
in the ordinary course of business of the Company or such Subsidiary consistent
with past practice, and (D) all matters of record, Liens and other imperfections
of title and encumbrances that, individually or in the aggregate, would not have
a Company Material Adverse Effect (collectively, "Permitted Liens"), and (ii) is
neither subject to any governmental decree or order to be sold nor is being
condemned, expropriated or otherwise taken by any public authority with or
without payment of compensation therefor, nor, to the knowledge of the Company,
has any such condemnation, expropriation or taking been proposed.
(c) All leases of real property leased for the use or benefit of the
Company or any Subsidiary to which the Company or any Subsidiary is a party, and
all amendments and modifications thereto, are in full force and effect and have
not been modified or amended, and there exists no default under any such lease
by the Company or any Subsidiary, nor any event which, with notice or lapse of
time or both, would constitute a default thereunder by the Company or any
Subsidiary, except as would not, individually or in the aggregate, prevent or
materially delay consummation of the Merger or would not, individually or in the
aggregate, have a Company Material Adverse Effect.
(d) To the knowledge of the Company, there are no contractual or legal
restrictions that preclude or materially restrict the ability to use any real
property leased by the Company or any Subsidiary for the purposes for which it
is currently being used. To the knowledge of the Company, there are no material
latent defects or material adverse physical conditions affecting the real
property, and improvements thereon, leased by the Company or any Subsidiary.
SECTION 4.15. Intellectual Property. (a) Section 4.15(a) of the Company
Disclosure Schedule accurately identifies the following information:
(i) Section 4.15(a)(i) of the Company Disclosure Schedule accurately
identifies (A) each current and material proprietary product or service
developed, manufactured, marketed, or sold by the Company or any
Subsidiary, including any product or service currently under development by
the Company or any Subsidiary, (B) all registered and unregistered
trademarks, trade names, service marks, and applications therefor,
registered copyrights and applications therefor, patents and patent
applications, in each case owned by the Company or any Subsidiary and
indicating whether owned by the Company or a Subsidiary and (C) all domain
names owned by or registered to the Company or any Subsidiary.
(ii) Section 4.15(a)(ii) of the Company Disclosure Schedule accurately
identifies (A) each item of Registered IP in which the Company or any
Subsidiary has or purports to have an ownership
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interest of any nature (whether exclusively, jointly with another Person,
or otherwise), (B) the jurisdiction in which such item of Registered IP has
been registered or filed and the applicable registration or serial number
and (C) any other Person that has an ownership interest in such item of
Registered IP and the nature of such ownership interest. The Company has
made available to Parent complete and accurate copies of all applications,
material correspondence and other material documents related to each such
item of Registered IP.
(iii) Section 4.15(a)(iii) of the Company Disclosure Schedule
accurately identifies (A) all Intellectual Property licensed to the Company
or any Subsidiary (other than any non-customized software that (1) is not
incorporated into, or used directly in the development, manufacturing, or
distribution of, the products or services of the Company or any Subsidiary
and (2) is generally available on standard terms for less than $5,000), (B)
the corresponding Contract or Contracts pursuant to which such Intellectual
Property is licensed to the the Company or any Subsidiary, and (C) whether
the license or licenses granted to the Company or any Subsidiary are
exclusive or nonexclusive.
(iv) Section 4.15(a)(iv) of the Company Disclosure Schedule accurately
identifies each Contract in which the aggregate unpaid fees and royalties
(including maintenance and support fees for the first year of maintenance
and support, if any) payable to the Company or any Subsidiary equal or
exceed $100,000 and pursuant to which any Person has been granted any
license under, or otherwise has received or acquired any right (whether or
not currently exercisable) or interest in, any Company Owned Intellectual
Property. Except as set forth in Section 4.15 of the Company Disclosure
Schedule, none of the Company or any Subsidiary is bound by, and no Company
Owned Intellectual Property is subject to, any Contract containing any
covenant or other provision that in any way limits or restricts the ability
of the Company or any Subsidiary to use, exploit, assert, or enforce any
Company Owned Intellectual Property anywhere in the world.
(b) The Company has provided to Parent a complete and accurate copy of each
standard form of Company Owned Intellectual Property Contract used currently by
the Company or any Subsidiary, including each standard form of (A) end user
software license and professional services agreement, (B) development agreement,
(C) distributor or reseller agreement, (D) employee agreement together with
assignment or license of Intellectual Property rights or any confidentiality
provision, including the Standard Form Confidentiality Agreement, (E) consulting
or independent contractor agreement containing any assignment or license of
Intellectual Property or any confidentiality provision or (F) confidentiality or
nondisclosure agreement. Section 4.15(b) of the Company Disclosure Schedule
accurately identifies (i) each Company Owned Intellectual Property Contract
entered into in the past two years, and (ii) each maintenance and support
agreement entered into with the Company's 100 largest maintenance and support
customers (measured by the total maintenance and support amounts invoiced to
such customers in fiscal year 2003), in each case, in which there is a material
deviation from the corresponding standard form agreement provided to Parent. For
purposes of this Section 4.15(b), "material deviation" shall mean any (1)
"source code escrow" or source code licensing provision, (2) non-standard
assignment or termination provision, (3) most-favored customer provision, (4)
non-standard limitation of liability or warranty provision, (5) exclusivity
arrangement, or (6) any Contract with any Governmental Body.
(c) Except as set forth in Section 4.15(c) of the Company Disclosure
Schedule, the Company and each Subsidiary owns all right, title, and interest to
and in or has a valid and enforceable license to use all Intellectual Property
necessary to conduct the business of the Company and each Subsidiary as
currently conducted and presently planned by each of Company and each Subsidiary
to be conducted (other than Intellectual Property exclusively licensed to the
Company or any Subsidiary, as identified in Section 4.15(a)(iv) of the Company
Disclosure Schedule) free and clear of any encumbrances (other than licenses
granted pursuant to the Contracts listed in the Company Disclosure Schedule and
licenses granted to customers in the ordinary course of business). Without
limiting the generality of the foregoing:
(i) Each Person who is or was an employee or contractor of the Company
or any Subsidiary after September 30, 2001, and who is or was involved in
the creation or development of any Company
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Owned Intellectual Property, has signed a valid, enforceable agreement
containing an assignment of Company Owned Intellectual Property to the
Company and/or any Subsidiary and confidentiality provisions protecting the
Company Owned Intellectual Property. Prior to September 30, 2001, the
Company had procedures in place to cause employees and contractors of the
Company or any Subsidiary who were involved in the creation or development
of any Company Owned Intellectual Property to assign such Company Owned
Intellectual Property to the Company and/or any Subsidiary and to maintain
the confidentiality of such Company Owned Intellectual Property. No current
or former stockholder, officer, director, contractor or employee of the
Company or any Subsidiary has any claim, right (whether or not currently
exercisable), or interest to or in any Company Owned Intellectual Property.
To the knowledge of the Company, no employee of the Company or any
Subsidiary is (A) bound by or otherwise subject to any Contract restricting
him or her from performing his or her duties for the Company or any
Subsidiary or (B) in breach of any Contract with any former employer or
other Person concerning Intellectual Property or confidentiality.
(ii) No funding, facilities, or personnel of any Governmental
Authority were used, directly or indirectly, to develop or create, in whole
or in part, any Company Owned Intellectual Property.
(iii) Each of the Company and each Subsidiary has taken reasonable
steps to maintain the confidentiality of and otherwise protect and enforce
their rights in all Intellectual Property the value of which is dependent
upon its confidentiality, including proprietary information held by the
Company or any Subsidiary, or purported to be held by the Company or any
Subsidiary, as a trade secret.
(iv) Except as set forth in Section 4.15(c) of the Company Disclosure
Schedule, since January 1, 2000, none of the Company or any Subsidiary has
assigned or otherwise transferred ownership of, or agreed to assign or
otherwise transfer ownership of, any Intellectual Property to any other
Person.
(v) None of the Company or any Subsidiary is now or ever was a member
or promoter of, or a contributor to, any industry standards body or similar
organization that could require or obligate the Company or any Subsidiary
to grant or offer to any other Person any license or right to any Company
Owned Intellectual Property.
(vi) To the knowledge of the Company after reasonable inquiry, each
license of the Company Licensed Intellectual Property is valid and
enforceable, subject to applicable bankruptcy, insolvency, moratorium or
other similar Laws relating to creditors' rights and general principles of
equity, is binding on all parties to such license, and is in full force and
effect.
(vii) To the knowledge of the Company, no party to any license of the
Company Licensed Intellectual Property is in breach thereof or default
thereunder in any material respect and no event has occurred that, with
notice or lapse of time, would constitute such breach or default or permit
the termination or cancellation of the license.
(viii) Neither the Company nor any Subsidiary has received any notice
of termination or cancellation under any license for the Company Licensed
Intellectual Property.
(d) To the knowledge of the Company, all Company Owned Intellectual
Property is valid, subsisting, and enforceable. Without limiting the generality
of the foregoing, except as set forth in Section 4.15(d) of the Company
Disclosure Schedule:
(i) Neither the Company nor any Subsidiary owns (or purports to own)
or has filed any U.S. or foreign patent applications or foreign patents.
(ii) Each item of Company Owned Intellectual Property that is
Registered IP is and, to the knowledge of the Company, at all times has
been in compliance with all applicable requirements of the applicable
issuing Governmental Authority, and all filings, payments, and other
actions required to be made or taken to maintain such item of Company Owned
Intellectual Property in full force and effect have been made by the
applicable deadline. No application for a patent or for a copyright
registration, mask work registration or trademark registration or any other
type of Registered IP filed
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by or on behalf of the Company or any Subsidiary has been abandoned,
allowed to lapse, or rejected (other than for non-use of a trademark) since
January 1, 2000. Section 4.15(d)(iii) of the Company Disclosure Schedule
accurately identifies and describes each filing, payment, and action that
must be made or taken on or before the date that is 90 days after the date
hereof in order to maintain each such item of Company Owned Intellectual
Property in full force and effect.
(iii) No interference, opposition, reissue, reexamination, or other
Proceeding of any nature is or has been pending or threatened, in which the
scope, validity, or enforceability of any Company Owned Intellectual
Property is being, has been, or could reasonably be expected to be
contested or challenged. To the knowledge of the Company, there is no basis
for a claim that any Company Owned Intellectual Property is invalid or
unenforceable.
(e) To the knowledge of the Company, no Person has infringed,
misappropriated, or otherwise violated, and no Person is currently infringing,
misappropriating, or otherwise violating, any Company Owned Intellectual
Property. Section 4.15(e) of the Company Disclosure Schedule accurately
identifies, and the Company has provided to Parent a complete and accurate copy
of each letter or other written or electronic communication or correspondence
that has been sent or otherwise delivered by or to the Company or any Subsidiary
or any Representative of the Company or any Subsidiary regarding, any actual,
alleged, or suspected infringement or misappropriation of any Company Owned
Intellectual Property since January 1, 2000, and provides a brief description of
the current status of the matter referred to in such letter, communication or
correspondence.
(f) Except as described in Section 4.15(a)(iii) of the Company Disclosure
Schedule, neither the execution, delivery or performance of this Agreement (or
any of the ancillary agreements) nor the consummation of any of the Transactions
(or any of the ancillary agreements) will, with or without notice or the lapse
of time, (x) adversely affect any of the Company's or any Subsidiary's rights
with respect to the Company Owned Intellectual Property or the Company Licensed
Intellectual Property or (y) result in or give any other Person the right or
option to cause or declare, (i) a loss of, or encumbrance on, any Company Owned
Intellectual Property; (ii) a breach of any Contract listed or required to be
listed in Section 4.15(a)(iii) of the Company Disclosure Schedule; (iii) the
release, disclosure or delivery of any Company Owned Intellectual Property by or
to any escrow agent or other Person; or (iv) the grant, assignment or transfer
to any other Person of any license or other right or interest under, to or in
any of the Company Owned Intellectual Property.
(g) Except as described in Section 4.15(g) of the Company Disclosure
Schedule, to the knowledge of the Company after reasonable inquiry, none of the
Company or any Subsidiary has ever infringed (directly, contributorily, by
inducement, or otherwise), misappropriated or otherwise violated any
Intellectual Property of any other Person. Without limiting the generality of
the foregoing:
(i) To the knowledge of the Company, no product, information or
service ever manufactured, produced, distributed, published, provided or
sold by or on behalf of the Company or any Subsidiary, and no Intellectual
Property ever owned or developed by the Company or any Subsidiary, has ever
conflicted with, infringed, misappropriated or otherwise violated any
Intellectual Property of any other Person.
(ii) No infringement, misappropriation or similar claim or Action is
pending or, to the knowledge of the Company, has been threatened against
the Company or any Subsidiary or against any other Person who may be
entitled to be indemnified, defended, held harmless or reimbursed by the
Company or any Subsidiary with respect to such claim or Proceeding. To the
knowledge of the Company, since January 1, 2000, none of the Company or any
Subsidiary has received any notice or other communication (in writing or
otherwise) relating to any actual, alleged or suspected infringement,
misappropriation or violation of any Intellectual Property Right of another
Person.
(iii) None of the Company or any Subsidiary is bound by any Contract
to indemnify, defend, hold harmless or reimburse any other Person with
respect to any intellectual property infringement, misappropriation or
similar claim. To the knowledge of the Company, after such inquiry as the
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relevant officer of the Company has determined to be reasonably appropriate
under the circumstances, none of the Company or any Subsidiary has ever
assumed or agreed to discharge or otherwise take responsibility for, any
existing or potential liability of another Person for infringement,
misappropriation or violation of any Intellectual Property.
(iv) No claim or Proceeding involving any Intellectual Property
licensed to the Company or any Subsidiary is pending or, to the knowledge
of the Company, has been threatened, except for any such claim or
Proceeding that, if adversely determined, would not adversely affect (A)
the use or exploitation of such Intellectual Property by the Company or any
Subsidiary or (B) the manufacturing, distribution or sale of any product or
service currently being developed, offered, manufactured, distributed or
sold by the Company or any Subsidiary.
(v) To the knowledge of the Company, after such inquiry as the
relevant officer of the Company has determined to be reasonably appropriate
under the circumstances, with respect to each item of Intellectual Property
licensed to the Company or any Subsidiary ("Company Licensed Intellectual
Property"), the Company and/or each such Subsidiary has valid licenses or
other rights to use such Company Licensed Intellectual Property in the
continued operation of its respective business in accordance with the terms
of the license agreements governing such Company Licensed Intellectual
Property. A copy of each such license pertaining to the Company Licensed
Intellectual Property has been delivered to Parent.
(h) Except as disclosed to Parent, none of the Company Owned Software (A)
contains any bug, defect or error (including any bug, defect or error relating
to or resulting from the display, manipulation, processing, storage,
transmission or use of date data) that materially and adversely affects the use,
functionality or performance of such Company Owned Software or any product or
system containing or used in conjunction with such Company Owned Software or (B)
fails in any material respect to comply with any applicable warranty or other
contractual commitment relating to the use, functionality or performance of such
Company Owned Software or any product or system containing or used in
conjunction with such Company Owned Software, other than ordinary course
warranty compliance issues. The Company has made available to Parent a complete
and accurate list of all known material bugs, defects, and errors in each
version and component of the Company Owned Software.
(i) Except as described in Section 4.15(i) of the Company Disclosure
Schedule, the Company has not inserted into the Company Owned Software any "back
door," "drop dead device," "time bomb" or "Trojan horse," (as such terms are
commonly understood in the software industry) or any other code designed or
intended by the Company to have, or capable of performing, any of the following
functions: (A) disrupting, disabling, harming or otherwise impeding in any
manner the operation of, or providing unauthorized access to, a computer system
or network or other device on which such code is stored or installed or (B)
damaging or destroying any data or file without the user's consent. The Company
has not intentionally inserted into the Company Owned Software any "virus" or
"worm" (as such terms are commonly understood in the software industry).
(j) The Company has obtained all approvals necessary for exporting the
Company Owned Software outside the United States, and all such export approvals
in the United States are valid, current, outstanding and in full force and
effect. To the knowledge of the Company, the Company has obtained all approvals
necessary for importing the Company Owned Software into any country in which the
Company Owned Software is now sold or licensed for use, and all such import
approvals in the United States and throughout the world are valid, current,
outstanding and in full force and effect. The Company has no present knowledge
from which it would necessarily conclude that it does not have the right to use
all software development tools, library functions, compilers, and other third
party software that is material to the business of the Company, or that is
required to operate or modify the Company Owned Software.
(k) None of the Company Owned Software is subject to any "copyleft" or
other obligation or condition (including any obligation or condition under any
"open source" license such as the GNU Public License, Lesser GNU Public License
or Mozilla Public License) that (A) could require, or could condition the use or
distribution of such Company Owned Software on, the disclosure, licensing or
A-24
distribution of any source code for any portion of such Company Owned Software
or (B) could otherwise impose any limitation, restriction or condition on the
right or ability of the Company or any Subsidiary to use or distribute any
Company Owned Software.
(l) Except as set forth in Section 4.15(l) of the Company Disclosure
Schedule, (i) no source code for any Company Owned Software has been delivered,
licensed or made available to any escrow agent or other Person who is not, as of
the date of this Agreement, an employee of the Company or any Subsidiary, and
(ii) none of the Company or any Subsidiary has any duty or obligation (whether
present, contingent or otherwise) to deliver, license or make available the
source code for any Company Owned Software to any escrow agent or other Person
who is not, as of the date of this Agreement, an employee of the Company or any
Subsidiary. To the knowledge of the Company, no event has occurred, and no
circumstance or condition exists, that (with or without notice or lapse of time)
will, or could reasonably be expected to, result in the delivery, license or
disclosure of any source code for any Company Owned Software to any other Person
who is not, as of the date of this Agreement, an employee of the Company or any
Subsidiary. Without limiting the generality of the foregoing, no Person has made
any claim or delivered any notice that such Person is entitled to receive the
source code for any Company Owned Software pursuant to any source code escrow
agreement identified or required to be identified in Section 4.15(l) of the
Company Disclosure Schedule.
(m) Except as set forth in Section 4.15(m) of the Company Disclosure
Schedule, to the knowledge of the Company, no Person (i) has or had any
exclusive rights to any portion of the Company Owned Intellectual Property or
Company Owned Software, (ii) has or had any rights restricting the Company's use
of Company Owned Intellectual Property or Company Owned Software within any
field of use, (iii) has ever incorporated any source code for any Company Owned
Software into any of such Person's product, (iv) has ever redistributed any such
source code, or (v) has ever used any such source code to develop, market or
distribute any product.
(n) The Software manufactured by the Company and each Subsidiary and sold
to end user customers and, to the knowledge of the Company, the Software
manufactured by the Company and each Subsidiary and sold for use by original
equipment manufacturer customers and the Software sold by the Company or any
Subsidiary but manufactured by third parties, comply in all material respects
with all applicable Laws.
SECTION 4.16. Taxes. The Company and the Subsidiaries have filed all
United States federal, state, local and non-United States Tax returns and
reports required to be filed by them and have paid and discharged all Taxes
required to be paid or discharged (whether or not shown on such Tax returns)
other than such payments as are being contested in good faith by appropriate
proceedings. All such Tax returns were true, complete and correct in all
material respects and were filed on a timely basis. The Company and the
Subsidiaries have not requested any extension of time within which to file any
Tax return, which Tax return has not since been filed. Except as set forth in
Section 4.16 of the Company Disclosure Schedule, neither the IRS nor any other
United States or non-United States taxing authority or agency is now asserting
or, to the knowledge of the Company, threatening to assert against the Company
or any Subsidiary any deficiency or claim for any Taxes or interest thereon or
penalties in connection therewith. No audits or other administrative or court
proceedings are presently pending with regard to any Taxes or Tax returns of the
Company and its Subsidiaries. Neither the Company nor any Subsidiary has granted
any waiver of any statute of limitations with respect to, or any extension of a
period for the assessment of any Tax. The accruals and reserves for Taxes
reflected in the 2002 Balance Sheet are adequate to cover all Taxes accruable
through such date (including interest and penalties, if any, thereon) in
accordance with GAAP. Neither the Company nor any Subsidiary has made an
election under Section 341(f) of the Code. There are no Tax liens upon any
property or assets of the Company or any of the Subsidiaries except liens for
current Taxes not yet due. Except as described in Section 4.16 of the Company
Disclosure Schedule, neither the Company nor any of the Subsidiaries has been
required to include in income any adjustment pursuant to Section 481 of the Code
by reason of a voluntary change in accounting method initiated by the Company or
any of the Subsidiaries, and the IRS has not initiated or proposed any such
adjustment or change in accounting method, in either case which adjustment or
change would have a Company Material
A-25
Adverse Effect. Except as set forth in the financial statements described in
Section 4.08, neither the Company nor any of the Subsidiaries has entered into a
transaction which is being accounted for under the installment method of Section
453 of the Code, which would prevent or materially delay consummation of the
Merger or would have a Company Material Adverse Effect. Section 4.16 of the
Company Disclosure Schedule contains a list of all jurisdictions (whether
foreign or domestic) in which the Company or any of its Subsidiaries currently
files Tax returns. Neither the Company nor any Subsidiary is or has been a U.S.
real property holding company (as defined in Section 897(c)(2) of the Code)
during the applicable period specified in Section 897(c)(1)(ii). Section 4.16 of
the Company Disclosure Schedule lists for each Subsidiary (i) the amount of any
net operating losses, net capital losses, unused investment or other credits,
unused foreign Tax, or excess charitable contributions of such Subsidiary, and
any limitations thereon, and (ii) the amount of any deferred gain or loss
allocable to such Subsidiary arising out of any prior intercompany transaction.
SECTION 4.17. Environmental Matters. Except as specifically described in
Section 4.17 of the Company Disclosure Schedule or as would not, individually or
in the aggregate, have a Company Material Adverse Effect, (a) the Company and
each Subsidiary are in compliance with all applicable Environmental Laws; (b)
none of the properties currently or formerly owned, leased or operated by the
Company or any Subsidiary (including soils and surface and ground waters) are
contaminated with any Hazardous Substance; (c) the Company is not liable for any
off-site contamination by Hazardous Substances; (d) the Company is not liable
nor, to the knowledge of the Company, is it threatened to be made liable, under
any Environmental Law (including pending or threatened liens); (e) the Company
has all permits, licenses and other authorizations required under any
Environmental Law ("Environmental Permits"); (f) the Company is in compliance
with its Environmental Permits; and (g) neither the execution of this Agreement
nor the consummation of the Transactions will require any investigation,
remediation or other action with respect to Hazardous Substances, or any notice
to or consent of Governmental Authorities or third parties, pursuant to any
applicable Environmental Law or Environmental Permit.
SECTION 4.18. Material Contracts. (a) Subsections (i) through (xii) of
Section 4.18(a) of the Company Disclosure Schedule contain a list of the
following types of Contracts and agreements to which the Company or any
Subsidiary is a party (such Contracts, agreements and arrangements as are
required to be set forth in Section 4.18(a) of the Company Disclosure Schedule
being the "Material Contracts"):
(i) each maintenance Contract and each Contract and agreement which is
likely to involve payment or receipt of annual consideration of more than
$300,000, in the aggregate, over the remaining term of such Contract;
(ii) all broker, distributor, reseller, dealer, manufacturer's
representative, franchise, agency, sales promotion, market research,
marketing consulting and advertising Contracts and agreements to which the
Company or any Subsidiary is a party and which involve the payment or
receipt of more than $100,000 in any year;
(iii) all management Contracts (excluding Contracts for employment)
and Contracts with other consultants, including any Contracts involving the
payment of royalties or other amounts calculated based upon the revenues or
income of the Company or any Subsidiary or income or revenues related to
any product or service of the Company or any Subsidiary to which the
Company or any Subsidiary is a party; and which (A) is likely to involve
payment of consideration of more than $25,000, in the aggregate, during the
fiscal year ended June 30, 2004, (B) is likely to involve consideration of
more than $25,000, in the aggregate, over the remaining term of such
Contract, and which, in either case, cannot be cancelled by the Company or
any Subsidiary without penalty or further payment and without more than 30
days' notice;
(iv) all Contracts and agreements evidencing indebtedness for borrowed
money, if any;
(v) all Contracts with any Governmental Authority to which the Company
or any Subsidiary is a party;
A-26
(vi) all Contracts imposing any restriction on the right or ability of
the Company or any Subsidiary (A) to compete with any other Person or in
any geographical area, (B) to acquire any product or other asset or any
services from any other Person, or (C) to conduct its business as presently
conducted or materially and adversely affect or materially restrict, the
business, operations, assets, properties or condition (financial or other)
of the businesses of the Company and its Subsidiaries, taken as a whole, as
currently conducted;
(vii) all material Contracts or arrangements that result in any Person
holding a power of attorney from the Company or any Subsidiary that relates
to the Company, any Subsidiary or their respective businesses;
(viii) all Contracts for employment required to be listed in Section
4.11(a) of the Company Disclosure Schedule;
(ix) all Contracts that provide for indemnification of any officer,
director, employee or agent;
(x) all material Contracts incorporating or relating to any guaranty
or warranty, except for Contracts substantially identical to the standard
forms of end-user software license agreements previously made available by
the Company to Parent;
(xi) all Contracts which provide for termination, acceleration of
payment or other special rights upon the occurrence of a change in control,
by operation of Law or otherwise, of the Company or any Subsidiary;
(xii) all other Contracts and agreements, whether or not made in the
ordinary course of business, which are material to the Company, any
Subsidiary or the conduct of their respective businesses, or the absence of
which would, to the knowledge of the Company, prevent or materially delay
consummation of the Merger or would have a Company Material Adverse Effect.
(b) Except as would not, individually or in the aggregate, have a Company
Material Adverse Effect, each Contract that constitutes a Material Contract is
valid and in full force and effect, constitutes the legal, valid and binding
obligation of the Company, and to the knowledge of the Company, the other
parties thereto, in accordance with the terms of such agreement and is
enforceable in accordance with its terms. Except as would not have a Company
Material Adverse Effect, individually or in the aggregate, (i) neither the
Company nor any of the Subsidiaries is in default under any Material Contract
and none of the Material Contracts have been canceled by the other party; (ii)
to the Company's knowledge, no other party to any Material Contract is in breach
with respect to such Material Contract; (iii) the Company and the Subsidiaries
are not in receipt of any written claim of default under any such Material
Contract; (iv) neither the execution of this Agreement nor the consummation of
any Transaction shall constitute default, give rise to cancellation or third
party consent rights, or otherwise adversely affect any of the Company's rights
under any Material Contract. The Company has made available to Parent true and
complete copies of all Material Contracts, including any amendments or
modifications thereto.
(c) Except as set forth in Section 4.18(c) of the Company Disclosure
Schedule, no Material Contract which is currently in effect contains any "most
favored customer" or similar provision.
(d) Other than any such agreement with Parent or Merger Sub, the Company is
not a party to any standstill agreement pursuant to which the other party
thereto has agreed that neither it nor any of its Affiliates will (i) acquire or
seek to acquire ownership of any capital stock of the Company or any options or
rights to acquire such ownership, (ii) seek or propose to influence or control
the management of the policies of the Company or obtain representation on the
Board, or (iii) solicit or participate in the solicitation of any proxies or
consents with respect to the capital stock of the Company.
SECTION 4.19. Insurance. (a) Section 4.19(a) of the Company Disclosure
Schedule sets forth, with respect to each material insurance policy under which
the Company or any Subsidiary is insured, a named insured or otherwise the
principal beneficiary of coverage which is currently in effect, (i) the names of
the insurer, the principal insured and each named insured, (ii) the policy
number, (iii) the period, scope and amount of coverage and (iv) the premium
charged. To the knowledge of the Company, such
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insurance policies and the types and amounts of coverage provided therein are
adequate and usual and customary in the context of the businesses and operations
in which the Company and Subsidiaries are engaged.
(b) The Company has made available to Parent a copy of each such insurance
policy and all material self insurance programs and arrangements relating to the
business, assets and operations of the Company and each Subsidiary. Each such
insurance policy is in full force and effect. Neither the Company nor any
Subsidiary has received written notice of any material breach or default
(including any such breach or default with respect to the payment of premiums or
the giving of notice) with respect to any such insurance policy. To the
knowledge of the Company, no insurer on the policy has been declared insolvent
or placed in receivership, conservatorship or liquidation.
(c) Except as set forth in Section 4.19(c) of the Company Disclosure
Schedule, at no time subsequent to July 1, 2000 has the Company or any
Subsidiary (i) been denied any insurance or indemnity bond coverage which it has
requested, (ii) made any material reduction in the scope or amount of its
insurance coverage, or (iii) received notice from any of its insurance carriers
that any insurance premiums will be subject to increase in an amount materially
disproportionate to the amount of the increases with respect thereto (or with
respect to similar insurance) in prior years or that any insurance coverage
listed in Section 4.19(a) of the Company Disclosure Schedule will not be
available in the future substantially on the same terms as are now in effect.
(d) Section 4.19(d) of the Company Disclosure Schedule sets forth each of
the Actions that the Company or any Subsidiary has tendered to the appropriate
insurance carrier(s) and whether such carrier has issued a denial of coverage or
a reservation of rights with respect to any such Action, or informed the Company
of its intent to do so.
SECTION 4.20. Brokers and Fees. No broker, finder or investment banker
(other than Broadview International LLC ("Broadview")) is entitled to any
brokerage, finder's or other fee or commission in connection with the
Transactions based upon arrangements made by or on behalf of the Company. The
Company has furnished to Parent accurate and complete copies of all agreements
under which all fees (including legal fees), commissions and other amounts have
been paid or may become payable and all indemnification and other agreements
related to the engagement of Broadview or any other advisor.
SECTION 4.21. Customers. Section 4.21 of the Company Disclosure Schedule
accurately identifies, and provides an accurate and complete breakdown of
software license revenue from each customer of the Company during the fiscal
year ended June 30, 2003.
SECTION 4.22. Sale of Products; Performance of Services. Since January 1,
2002, no customer or other Person has asserted or, to the knowledge of the
Company, threatened to assert, any claim against the Company or any Subsidiary
based upon any services performed by the Company or any Subsidiary, other than
claims with respect to which the total cost to remedy does not exceed $300,000.
SECTION 4.23. Compliance with Law. Except as would not have a Company
Material Adverse Effect or as set forth in Section 4.23 of the Company
Disclosure Schedule, the Company and each Subsidiary is, and has at all times
since July 1, 2002 been, in compliance with all applicable Law. Since July 1,
2002, neither the Company nor any Subsidiary has received any written notice or
other communication from any Governmental Authority or other Person regarding
any actual or possible violation of, or failure to comply with, any Law.
SECTION 4.24. Certain Business Practices. To the knowledge of the
Company, since July 1, 2001, neither the Company nor any Subsidiary, and no
director, officer, agent or employee of the Company or any Subsidiary (i) has
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended; or (ii)
has made any illegal gift or illegal bribe to any Person, private or public,
regardless of form, whether in money, property or services,
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SECTION 4.25. Transactions with Affiliates. Except as set forth in
Section 4.25 of the Company Disclosure Schedule or in the SEC Reports filed
prior to the date of this Agreement, between the date of the Company's last
annual meeting proxy statement filed with the SEC and the date of this
Agreement, no event has occurred that would be required to be reported by the
Company pursuant to Item 404 of Regulation S-K promulgated by the SEC.
SECTION 4.26. Vote Required. The affirmative vote of the holders of a
majority of the Shares outstanding on the record date for the Company
Stockholders' Meeting is the only vote of the holders of any class or series of
the Company's capital stock necessary to adopt this Agreement, approve the
Merger or consummate any of the other Transactions.
SECTION 4.27. Fairness Opinion. The Board has received the opinion of
Broadview, financial advisor to the Company to the effect that, as of the date
of such opinion, the Merger Consideration is fair to the stockholders of the
Company from a financial point of view. The Company shall furnish a true and
correct copy of said opinion to Parent as promptly as practicable after the date
hereof.
SECTION 4.28. Company Rights Agreement. The Company has taken all actions
necessary to render the Company Rights Agreement inapplicable to the execution
and delivery of the Agreement and the Transactions.
SECTION 4.29. Silicon Valley Bank. As of the date of this Agreement, no
borrowings are currently outstanding and owed by the Company or any Subsidiary
to Silicon Valley Bank ("SVB") pursuant to the Loan and Security Agreement with
SVB dated as of September 24, 2002.
SECTION 4.30. Accounts Receivable. Except as set forth in Section 4.30 of
the Company Disclosure Schedule, the Company and each Subsidiary is the sole and
absolute owner of all accounts receivable that comprise the accounts receivable
line item (as reserved for doubtful accounts) in the unaudited consolidated
balance sheet of the Company and its consolidated Subsidiaries as at March 31,
2003. Each such account receivable is based on an actual sale and delivery of
goods and/or services rendered by the Company and each Subsidiary.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
As an inducement to the Company to enter into this Agreement, Parent and
Merger Sub hereby, jointly and severally, represent and warrant to the Company
that:
SECTION 5.01. Corporate Organization. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the Laws
of the jurisdiction of its incorporation and has the requisite corporate power
and authority and all necessary governmental approvals to own, lease and operate
its properties and to carry on its business as it is now being conducted. Parent
and Merger Sub have heretofore made available to the Company complete and
correct copies of their respective Certificates of Incorporation, By-laws or
equivalent organizational documents, and each such instrument is in full force
and effect.
SECTION 5.02. Authority Relative to This Agreement. Each of Parent and
Merger Sub has all necessary corporate power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and to consummate
the Transactions. The execution and delivery of this Agreement by Parent and
Merger Sub and the consummation by Parent and Merger Sub of the Transactions
have been duly and validly authorized by all necessary corporate action, and no
other corporate proceedings on the part of Parent or Merger Sub are necessary to
authorize this Agreement or to consummate the Transactions (other than, with
respect to the Merger, the filing and recordation of appropriate merger
documents as required by Delaware Law). This Agreement has been duly and validly
executed and delivered by Parent and Merger Sub and, assuming due authorization,
execution and delivery by the Company, constitutes a legal, valid and binding
obligation of each of Parent and Merger Sub enforceable against each of Parent
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and Merger Sub in accordance with its terms subject to applicable bankruptcy,
insolvency, moratorium or other similar Laws relating to creditors' rights and
general principles of equity.
SECTION 5.03. No Conflict; Required Filings and Consents. (a) The
execution and delivery of this Agreement by Parent and Merger Sub do not, and
the performance of this Agreement by Parent and Merger Sub will not, (i)
conflict with or violate the Certificate of Incorporation, By-laws or equivalent
organizational documents of either Parent or Merger Sub, (ii) assuming that all
consents, approvals, authorizations and other actions described in Section
5.03(b) have been obtained and all filings and obligations described in Section
5.03(b) have been made, conflict with or violate any Law applicable to Parent or
Merger Sub or by which any property or asset of either of them is bound or
affected, or (iii) result in any breach of, or constitute a default (or an event
which, with notice or lapse of time or both, would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other encumbrance on any
property or asset of Parent or Merger Sub pursuant to, any note, bond, mortgage,
indenture, Contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Parent or Merger Sub is a party or by which
Parent or Merger Sub or any property or asset of either of them is bound or
affected, except, with respect to clauses (ii) and (iii), for any such
conflicts, violations, breaches, defaults or other occurrences which would not,
individually or in the aggregate, prevent or materially delay consummation of
the Transactions or otherwise prevent Parent and Merger Sub from performing
their material obligations under this Agreement.
(b) The execution and delivery of this Agreement by Parent and Merger Sub
do not, and the performance of this Agreement by Parent and Merger Sub will not,
require any consent, approval, authorization or permit of, or filing with, or
notification to, any Governmental Authority, except (i) for applicable
requirements, if any, of the Securities Act, Exchange Act, Blue Sky Laws and
filing and recordation of appropriate merger documents as required by Delaware
Law, and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or materially delay consummation of the Transactions, or otherwise
prevent Parent or Merger Sub from performing their material obligations under
this Agreement.
SECTION 5.04. Financing. Parent has, and will have through the Effective
Time, sufficient funds or available borrowing capacity to permit Merger Sub to
consummate all the Transactions, including the Merger. The shares of Parent
Common Stock to be issued as part of the Merger Consideration have been duly
authorized and, when issued and delivered in accordance with the terms of this
Agreement, will have been validly issued and will be fully paid and
nonassessable and the issuance thereof is not subject to any preemptive or other
similar right.
SECTION 5.05. Form F-4; Proxy Statement. The information supplied by or
on behalf of Parent for inclusion in the Registration Statement will not, at the
time the Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact, or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not false or misleading. The information supplied by
or on behalf of Parent for inclusion in the Proxy Statement will not, at the
date the Proxy Statement (or any amendment or supplement thereto) is filed with
the SEC, at the date it is first mailed to stockholders of the Company, at the
time of the Stockholders' Meeting or at the Effective Time, contain any untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not false or misleading, or
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Stockholders' Meeting which will have become
false or misleading. Notwithstanding the foregoing, Parent and Merger Sub make
no representation or warranty with respect to any information supplied by the
Company or any of its representatives for inclusion in any of the foregoing
documents. The Registration Statement will comply in all material respects as to
form with the requirements of the Exchange Act and the rules and regulations
thereunder.
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SECTION 5.06. Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Transactions based upon arrangements made by or on behalf of Parent or Merger
Sub.
SECTION 5.07. Capitalization. (a) The authorized capital stock of Parent
consists of (i) 800,000,000 shares of Parent Common Stock and (ii) 5,000,000
shares of preferred stock, par value $0.001 per share ("Parent Preferred
Stock"). As of the date hereof, (i) 100,904,866 shares of Parent Common Stock
are issued and outstanding, all of which are validly issued, fully paid and
nonassessable, (ii) 1,569,207 shares of Parent Common Stock are held in the
treasury of Parent, (iii) 100,000 shares of Parent Common Stock are held by
subsidiaries of Parent and (iv) 8,866,543 shares of Parent Common Stock are
reserved for future issuance pursuant to stock options. As of the date hereof,
no shares of Parent Preferred Stock are issued and outstanding. Except as set
forth in this Section 5.07 and except for stock options granted pursuant to the
stock option plans of Parent, there are no options, warrants or other rights,
agreements arrangements, or commitments of any character relating to the issued
or unissued capital stock of Parent or Merger Sub or obligating Parent or Merger
Sub to issue or sell any shares of capital stock of, or other equity interests
in, Parent or Merger Sub. There are no outstanding contractual obligations of
Parent or Merger Sub to repurchase, redeem or otherwise acquire any shares of
Parent Common Stock or any capital stock of Merger Sub.
(b) The authorized capital stock of Merger Sub consists of 100 shares of
common stock, par value $0.001 per share, all of which are duly authorized,
validly issued, fully paid and nonassessable and free of any preemptive rights
in respect thereof and all of which are owned by Parent. Each outstanding share
of capital stock of Merger Sub is duly authorized, validly issued, fully paid
and non-assessable and each such share is owned by Parent or Merger Sub free and
clear of all security interests, liens, claims, pledges, options, rights of
first refusal, agreements, limitations on Parent's or Merger Sub's voting
rights, charges and other encumbrances of any nature whatsoever, except where
the failure to own such shares free and clear would not, individually or in the
aggregate, have a Parent Material Adverse Effect.
(c) The shares of Parent Common Stock to be issued pursuant to the Merger
in accordance with Article II have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, (i) will be validly
issued, fully paid and nonassessable and not subject to any preemptive or other
similar right; and (ii) will, when issued, be registered under the Securities
Act and the Exchange Act and registered or exempt from registration under
applicable Blue Sky Laws.
SECTION 5.08. SEC Filings; Financial Statements. (a) Parent has filed all
forms, reports and documents required to be filed by it with the SEC since July
1, 1999 and has heretofore delivered or made available to the Company, in the
form filed with the SEC, (i) its Annual Reports on Form 20-F for the fiscal
years ended December 31, 2000, 2001 and 2002, respectively, (ii) all proxy
statements relating to Parent's meetings of stockholders (whether annual or
special) held since January 1, 2000, (iii) all other forms including reports on
Form 6-K and other registration statements filed by Parent with the SEC since
January 1, 2002 and (iv) all other statements, reports, schedules, forms and
other documents filed by Parent with the SEC (each of the above referred to in
clauses (i), (ii) and (iii) above being, collectively, the "Parent SEC
Reports"). The Parent SEC Reports (i) were prepared in accordance with either
the requirements of the Securities Act of 1933 or the Exchange Act, as the case
may be, and the rules and regulations promulgated thereunder (to the extent
applicable), and (ii) did not, at the time they were filed, or, if amended, as
of the date of such amendment, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. No consolidated Subsidiary is
required to file any form, report or other document with the SEC.
(b) Each of the audited consolidated financial statements (including, in
each case, any notes thereto) contained in the Parent SEC Reports complied as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC applicable thereto and was prepared
in accordance with GAAP applied on a consistent basis throughout the periods
indicated (except as may be indicated in the notes thereto), and each are true
and correct in all respects and fairly present
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and disclose, in all material respects, a true and correct view of the state of
the affairs, financial position and assets and liabilities of Parent as at the
dates of such accounts and the income, expenses, cash flows and results of
operations of Parent and its consolidated Subsidiaries as at the respective
dates thereof and for the respective periods indicated therein.
(c) Neither Parent nor Merger Sub has any material accrued, contingent or
other liabilities of any nature, either matured or unmatured, except: (i) as set
forth on the consolidated balance sheet of Parent and its consolidated
subsidiaries as at December 31, 2002, including the notes thereto; (ii) normal
and recurring current liabilities that have been incurred by Parent or Merger
Sub since December 31, 2002 in the ordinary course of business and consistent
with past practice; and (iii) liabilities described in Section 5.08 of the
Parent Disclosure Schedule.
(d) Except as disclosed in the Parent SEC Reports filed prior to the date
of this Agreement, since January 1, 2003, (i) there has not been any Parent
Material Adverse Effect, and (ii) Parent has not been engaged in any
negotiations or discussions with any third party regarding any transaction where
consummation of such transaction would, to the knowledge of Parent, reasonably
be expected to result in a Parent Material Adverse Effect.
(e) Parent is a "foreign private issuer" within the meaning of Rule 3b-4 of
the Exchange Act.
SECTION 5.09. Compliance with Law. Except as would not have a Parent
Material Adverse Effect, each of Parent and Merger Sub is, and has at all times
since January 1, 2003 been, in compliance with all applicable Law. Since January
1, 2003, neither Parent nor Merger Sub has received any written notice or other
communication from any Governmental Authority or other Person regarding any
actual or possible violation of, or failure to comply with, any Law.
SECTION 5.10. Absence of Litigation. (a) Except as set forth in Section
5.10 of the Parent Disclosure Schedule, there is no Action and (to the knowledge
of Parent) no Person has threatened to commence any Action: (i) that
individually or in the aggregate has had a Parent Material Adverse Effect; or
(ii) that seeks to materially delay or prevent the consummation of the Merger.
SECTION 5.11. No Vote Required. No vote of the stockholders of Parent is
required by Law, Parent's Certificate of Incorporation or Bylaws or otherwise in
order for Parent and Merger Sub to consummate the Transactions.
SECTION 5.12. Operations of Merger Sub. Merger Sub is a direct, wholly
owned subsidiary of Parent, was formed solely for the purpose of engaging in the
Transactions, has engaged in no other business activities and has conducted its
operations only as contemplated by this Agreement.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.01. Conduct of Business by the Company Pending the Merger. The
Company agrees that, between the date of this Agreement and the earlier of the
termination of this Agreement pursuant to Section 9.01 hereof or the Effective
Time, unless Parent shall otherwise consent in writing, the businesses of the
Company and the Subsidiaries shall be conducted only in, and the Company and the
Subsidiaries shall not take any action except in, the ordinary course of
business and in a manner consistent with past practice; and the Company shall
use its reasonable best efforts to preserve substantially intact the business
organization of the Company and the Subsidiaries, to keep available the services
of the current officers, employees and consultants of the Company and the
Subsidiaries and to preserve the current relationships of the Company and the
Subsidiaries with customers, suppliers and other Persons with which the Company
or any Subsidiary has significant business relations. By way of amplification
and not limitation, except as expressly contemplated by this Agreement and
Section 6.01 of the Company Disclosure Schedule, neither the Company nor any
Subsidiary shall, between the date of this Agreement and the earlier of the
termination of this Agreement pursuant to Section 9.01 hereof or the Effective
Time, directly or indirectly, do, or propose to do, any of the following without
the prior written consent of Parent (which
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consent, in the case of paragraphs (f), (h), (i), (j), (k), (m), (n), (o), (s),
(t) and (v), shall not be unreasonably withheld or delayed):
(a) amend or otherwise change its Certificate of Incorporation or
By-laws or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant, encumber, or authorize the
issuance, sale, pledge, disposition, grant or encumbrance of, (i) any
shares of any class of capital stock of the Company or any Subsidiary, or
any options, warrants, convertible securities or other rights of any kind
to acquire any shares of such capital stock, or any other ownership
interest (including any phantom interest), of the Company or any Subsidiary
(except for the issuance of (x) up to 100,000 options under the Option
Plans pursuant to option grants made in the ordinary course of business and
consistent with past practice (which grants shall include an exercise price
equal to or greater than $19.00 per share and be subject to a vesting
schedule whereby 25% of such option shall vest on the first year
anniversary of such grant and the remaining 75% of such option shall vest
monthly over the three years following such first-year anniversary), Shares
issuable pursuant to the exercise of options issued under the Option Plans,
and 47,244 Shares issuable pursuant to the Warrants, (y) rights to purchase
Shares pursuant to the ESPP and Shares issuable pursuant to the exercise of
rights to purchase Shares under the ESPP or (z) issuances of the Company
Rights or the Company common stock in connection with conversion, exercise
or exchange of the Company Rights), or (ii) any assets of the Company or
any Subsidiary, except in the ordinary course of business and in a manner
consistent with past practice;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any of its capital stock, except for payment of dividends with respect
to the Preferred Shares in accordance with the terms of such Preferred
Shares;
(d) reclassify, combine, split, subdivide or redeem, or purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(e) (i) acquire (including by merger, consolidation, or acquisition of
stock or assets or any other business combination) any corporation,
partnership, other business organization or any division thereof or any
material amount of assets; or (ii) enter into or amend any Contract,
agreement, commitment or arrangement with respect to any matter set forth
in this Section 6.01(e);
(f) (i) incur any indebtedness for borrowed money other than
borrowings in the ordinary course of business under the Company's existing
line of credit with SVB in an amount not greater than $5,000,000) as
required in order to fund short term cash requirements or issue any debt
securities or assume, guarantee or endorse, or otherwise become responsible
for, the obligations of any Person, or make any loans or advances, or grant
any security interest in any of its assets; (ii) enter into any Contract or
agreement other than in the ordinary course of business and consistent with
past practice; (iii) authorize, or make any commitment with respect to, any
single capital expenditure which is in excess of $25,000 or capital
expenditures which are, in the aggregate, in excess of $150,000 for the
Company and the Subsidiaries taken as a whole; (iv) make or direct to be
made any capital investments or equity investments in any entity, other
than a wholly owned Subsidiary; or (v) enter into or amend any Contract,
agreement, commitment or arrangement with respect to any matter set forth
in this Section 6.01(f);
(g) revalue any of its assets, or except as required by GAAP, change
any accounting methods used by it;
(h) pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of
business and consistent with past practice, of liabilities reflected or
reserved against in the 2002 Balance Sheet or subsequently incurred in the
ordinary course of business and consistent with past practice;
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(i) pay or delay the payment of accounts payable or accelerate the
collection of accounts receivable, in either case other than in the
ordinary course of business and consistent with past practice;
(j) amend, modify or consent to the termination of any Material
Contract, or amend, waive, modify or consent to the termination of the
Company's or any Subsidiary's rights thereunder, other than in the ordinary
course of business and consistent with past practice;
(k) amend or modify any of the employment agreements entered into
between the Company and certain officers of the Company as set forth in
Schedule II hereto;
(l) other than as and to the extent expressly set forth in Section
4.03(b) of the Company Disclosure Schedule, amend or waive any of the
Company or any Subsidiary rights under, or accelerate the vesting under,
any provision of either of the Option Plans, any provision of any agreement
evidencing any outstanding stock option or any restricted stock purchase
agreement, or otherwise modify any of the terms of any outstanding option,
warrant or other security or any related Contract, in each case with
respect to the capital stock of the Company or any Subsidiary;
(m) (A) except as required to comply with applicable Law or to renew
Plans substantially on the same terms and at substantially the same costs,
establish, adopt or materially amend any employee benefit plan, pay, commit
to pay or accelerate the payment of any bonus or make, commit to make or
accelerate any profit-sharing or similar payment to, or increase or commit
to increase the amount of the wages, salary, commissions, fringe benefits,
severance, insurance or other compensation or remuneration payable to, any
of the Company or any Subsidiary directors, officers, employees or
consultants, except to the extent such payment is an obligation of the
Company or any Subsidiary as of the date of this Agreement, or (B) enter
into or materially amend any employment, consulting, severance or similar
agreement with any individual other than consulting agreements with up to
ten consultants entered into in the ordinary course of business involving
payments not in excess of $20,000 per individual consultant in any month
and not with a term in excess of 60 days. Notwithstanding the foregoing,
the Company will be permitted to grant raises in salary to employees in
connection with the Company's normal annual compensation review process,
provided that the amount of the raise given to any one employee does not
exceed 5% and the average for all employees does not exceed 3%;
(n) hire any employee with an annual base salary in excess of
$110,000, or with total potential annual compensation in excess of
$200,000;
(o) acquire, lease or license any right or other asset from any other
Person or sell or otherwise dispose of, or lease or license, any right or
other asset, including any Company Owned Intellectual Property, to any
other Person (except in each case for immaterial assets acquired, leased,
licensed or disposed of by the Company or any Subsidiary in the ordinary
course of business and consistent with past practices), or waive or
relinquish any material right; provided, however, that Parent acknowledges
that the current lease with respect to the Company's principal offices in
Atlanta, Georgia will expire in April, 2004 and that the Company will be
permitted to extend, renew, modify or replace such lease (for a lease term
not to exceed 5 years) at a rental rate not to exceed $19.00 per square
foot for the first year of the term of such lease and annual increases
thereafter not to exceed 4%, notwithstanding any provision of this
Agreement (including Section 4.14 and this Section 6.01) to the contrary;
(p) dispose of or permit to lapse any rights to the use of any Company
Owned Intellectual Property, or dispose of or disclose to any Person other
than representatives of Parent any trade secret, formula, process, know-how
or other Company Owned Intellectual Property not theretofore a matter of
public knowledge;
(q) change any personnel policy of the Company or any Subsidiary;
(r) make any change in any method of accounting or accounting practice
or policy (including any method, practice or policy relating to Taxes),
except as required by any changes in generally accepted accounting
principles or as otherwise required by Law;
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(s) (A) commence or settle any Action, including any Action relating
to this Agreement, the Merger or the Transactions, or (B) pay, discharge or
satisfy any claims, liabilities or obligations (absolute, accrued, asserted
or unasserted, contingent or otherwise), other than the payment, discharge
or satisfaction of claims, liabilities or obligations reflected or reserved
against in the consolidated financial statements (or the notes thereto) of
the Company and its Subsidiaries;
(t) permit any material insurance policy naming the Company or any
Subsidiary as a beneficiary or a loss payable payee to be cancelled or
terminated without notice to Parent;
(u) enter into any agreement, understanding or commitment that
restrains, limits or impedes the ability of the Company or any Subsidiary
to compete with or conduct any business or line of business, including
geographic limitations on the activities of the Company or any Subsidiary;
(v) enter into any licensing or other agreement with regards to the
acquisition, distribution or licensing of any material Intellectual
Property other than licenses, distribution or other similar agreements
entered into in the ordinary course of business consistent with past
practice;
(w) enter into any transaction between the Company or any Subsidiary,
on the one hand, and any Affiliate of the Company, on the other hand (other
than a Subsidiary of the Company) other than on an arm's length basis;
(x) take any action that would, or that would reasonably be expected
to, result in (i) any of the conditions to the Merger set forth in Article
VIII not being satisfied; or (ii) any material delay in the satisfaction of
any such conditions; or
(y) announce an intention, enter into any formal or informal agreement
or otherwise make a commitment, to do any of the foregoing.
SECTION 6.02. Conduct of Business by Parent and Merger Sub Pending the
Merger. Parent agrees that, except as expressly contemplated by Section 6.02 of
the Parent Disclosure Schedule, between the date of this Agreement and the
earlier of the termination of this Agreement pursuant to Section 9.01 hereof or
the Effective Time, it shall not, directly or indirectly, do, or propose to do,
any of the following without the prior written consent of the Company:
(a) amend or otherwise change its Certificate of Incorporation or
By-laws or equivalent organizational documents, except as would not (i)
prevent or materially delay consummation of the Merger or any of the
Transactions or (ii) adversely affect the economic benefits of the Merger
to the Company or the stockholders of the Company; or
(b) enter into any negotiation or Contract with respect to any
transaction (other than the Merger) that would, to the knowledge of Parent
acting reasonably, (i) materially delay or adversely affect the ability of
the parties to obtain any approvals or clearances from Governmental
Authorities required to permit consummation of the Merger, or (ii) delay
the date of mailing of the Proxy Statement (or require an amendment to the
Proxy Statement following such mailing) such that the Closing would be
delayed past January 15, 2004.
SECTION 6.03. Tax Matters. Neither the Company nor any Subsidiary shall
make or change any material Tax election, change any annual tax accounting
period, adopt or change any method of tax accounting, file any material amended
Tax returns or claims for material Tax refunds, enter into any material closing
agreement, surrender any material Tax claim, audit or assessment, surrender any
right to claim a material Tax refund, offset or other reduction in Tax liability
surrendered, consent to any extension or waiver of the limitations period
applicable to any Tax claim or assessment or take or omit to take any other
action, if any such action or omission would have the effect of increasing the
Tax liability or reducing any Tax asset of the Company or any Subsidiary.
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ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.01. Stockholders' Meeting. The Company, acting through the
Board, shall, in accordance with applicable Law and the Company's Certificate of
Incorporation and By-laws, (i) duly call, give notice of, convene and hold an
annual or special meeting of its stockholders (the "Stockholders' Meeting") as
promptly as practicable for the purpose of considering and taking action on this
Agreement and the Transactions (the "Company Stockholders' Approval") and (ii)
(A) except as provided in Section 7.05(b), include in the Proxy Statement, and
not subsequently withhold, withdraw, amend, change or modify in any manner
adverse to Merger Sub or Parent, the recommendation of the Board that the
stockholders of the Company approve and adopt this Agreement and the
Transactions and (B) use its reasonable best efforts to obtain such approval and
adoption. At the Stockholders' Meeting, Parent and Merger Sub shall cause all
Shares then owned by them and their subsidiaries to be voted in favor of the
approval and adoption of this Agreement and the Transactions.
SECTION 7.02. Proxy Statement. As promptly as practicable after the
execution of this Agreement, the Company shall prepare and file with the SEC a
proxy statement to be sent to the stockholders of the Company relating to the
Stockholders' Meeting (such proxy statement, as amended or supplemented, being
referred to herein as the "Proxy Statement"), and Parent and the Company shall
use their reasonable best efforts to have the Proxy Statement cleared by the SEC
promptly after such filing. Parent, Merger Sub and the Company shall cooperate
with each other in the preparation of the Proxy Statement, and the Company shall
notify Parent of the receipt of any comments of the SEC with respect to the
Proxy Statement and of any requests by the SEC for any amendment or supplement
thereto or for additional information and shall provide to Parent promptly
copies of all correspondence between the Company or any representative of the
Company and the SEC. The Company shall provide Parent and its counsel the
opportunity to review the Proxy Statement, including all amendments and
supplements thereto, prior to its being filed with the SEC and shall give Parent
and its counsel the opportunity to review all responses to requests for
additional information and replies to comments prior to their being filed with,
or sent to, the SEC. Each of the Company, Parent and Merger Sub agrees to use
its reasonable best efforts, after consultation with the other parties hereto,
to respond promptly to all such comments of and requests by the SEC and to cause
the Proxy Statement and all required amendments and supplements thereto to be
mailed to the holders of Shares entitled to vote at the Stockholders' Meeting at
the earliest practicable time. If, at any time prior to the Effective Time, (i)
the Company discovers any event or circumstance relating to the Company or any
Subsidiary, or their respective officers or directors, that is required to be
set forth in an amendment or supplement to the Proxy Statement, the Company
shall promptly inform Parent; and (ii) Parent discovers any event or
circumstance relating to Parent or Merger Sub, or their respective officers or
directors, that is required to be set forth in an amendment or supplement to the
Proxy Statement, Parent shall promptly inform the Company.
SECTION 7.03. Registration Statement. Parent shall promptly prepare and
file with the SEC a registration statement on Form F-4 (together with all
amendments thereto, the "Registration Statement") in connection with the
registration under the Securities Act of the shares of Parent Common Stock to be
issued to the stockholders of the Company pursuant to the Merger. Parent and the
Company shall each use their reasonable best efforts to cause the Registration
Statement to become effective as promptly as practicable, and, prior to the
effective date of the Registration Statement, Parent shall promptly take any
action required to be taken under foreign or state securities or Blue Sky Laws
in connection with the issuance of Parent Common Stock in the Merger. If, at any
time prior to the Effective Time, (i) the Company discovers any event or
circumstance relating to the Company or any Subsidiary, or their respective
officers or directors, that is required to be set forth in an amendment or
supplement to the Registration Statement, the Company shall promptly inform
Parent; and (ii) Parent discovers any event or circumstance relating to Parent
or Merger Sub, or their respective officers or directors, that is required to be
set forth in an amendment or supplement to the Registration Statement, Parent
shall promptly inform the Company.
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SECTION 7.04. Access to Information; Confidentiality. (a) From the date
hereof until the Effective Time, the Company shall, and shall cause the
Subsidiaries and the officers, directors, employees, auditors and agents of the
Company and the Subsidiaries to, afford the officers, employees and agents of
Parent and Merger Sub reasonable access at reasonable times and upon prior
notice to the officers, employees, agents, properties, offices, plants and other
facilities, books and records of the Company and each Subsidiary, and shall
furnish Parent and Merger Sub with such financial, operating and other data and
information as Parent or Merger Sub, through their officers, employees or
agents, may reasonably request.
(b) From the date hereof until the Effective Time, Parent shall, and shall
cause Merger Sub and the officers, directors, employees, auditors and agents of
Parent and Merger Sub to, afford the officers, employees and agents of the
Company reasonable access at reasonable times and upon prior notice to the
officers, employees, agents, properties, offices, plants and other facilities,
books and records of Parent and Merger Sub, and shall furnish the Company with
such financial, operating and other data and information as the Company, through
its officers, employees or agents, may reasonably request.
(c) All information obtained by the Company, Parent or Merger Sub pursuant
to this Section 7.04 shall be subject to the Confidentiality Agreement. Parent
and Merger Sub agree to be bound by the Confidentiality Agreement on the same
basis as the subsidiary of Parent that is a party to the Confidentiality
Agreement.
(d) No investigation pursuant to this Section 7.04 or otherwise shall
affect any representation or warranty in this Agreement of any party hereto or
any condition to the obligations of the parties hereto.
SECTION 7.05. No Solicitation of Transactions. (a) Prior to the
termination of this Agreement, neither the Company nor any Subsidiary shall,
directly or indirectly, through any officer, director, employee, representative,
agent or otherwise, (i) solicit, initiate or take any action intended to
encourage the submission of any Acquisition Proposal, or (ii) participate in any
discussions or negotiations regarding, or furnish to any Person any non-public
information with respect to, an Acquisition Proposal; provided, however, that
nothing contained in this Agreement shall prevent the Company or the Board from
furnishing non-public information to, or engaging in negotiations or discussions
with, any Person in connection with an unsolicited bona fide Acquisition
Proposal by such Person, if and to the extent that (A) the Board believes in
good faith (after consultation with its advisors) that such Acquisition Proposal
is a Superior Proposal, and the Board determines in good faith (after
consultation with its outside legal counsel), in the exercise of its fiduciary
duties, that to do otherwise would not be in the best interests of the
stockholders of the Company, and (B) prior to furnishing such non-public
information to, or engaging in negotiations or discussions with, such Person or
entity, the Board receives from such Person or entity an executed
confidentiality agreement with terms no more favorable to such party than those
set forth in the Confidentiality Agreement.
(b) Except as set forth in this Section 7.05(b), neither the Board nor any
committee thereof shall (i) withhold, withdraw, amend, change or modify, in each
case in a manner adverse to Parent or Merger Sub, the approval or recommendation
by the Board or any such committee of this Agreement, the Merger or any other
Transaction, (ii) approve or recommend any Acquisition Proposal or (iii) enter
into any agreement with respect to any Acquisition Proposal. Notwithstanding the
foregoing, in the event that, prior to the approval and adoption of this
Agreement and the Transactions by the Company's stockholders at the
Stockholders' Meeting, the Board determines in good faith (after consultation
with its advisors), in the exercise of its fiduciary duties, that (x) the
Acquisition Proposal constitutes, or may reasonably be expected to lead to, a
Superior Proposal, and (y) to do otherwise would not be in the best interests of
the stockholders of the Company, after giving prior written notice to Parent and
Merger Sub, the Board may withhold, withdraw, amend, change or modify its
approval or recommendation of this Agreement, the Merger and/or any other
Transaction and may terminate this Agreement in accordance with Section 9.01(d).
(c) The Company shall, and shall direct its directors, officers, employees,
agents or other representatives to, immediately cease and cause to be terminated
any discussions or negotiations with any parties that may be ongoing with
respect to any Acquisition Proposal as of the date hereof.
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(d) Nothing contained in this Agreement shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rules 14d-9
and 14e-2(a) promulgated under the Exchange Act or from making any disclosure to
the Company's stockholders, if the Board determines in good faith that it is
required to do so under applicable Law after consultation with outside legal
counsel; provided, however, that neither the Company nor the Board nor any
committee thereof shall, except as permitted by Section 7.05(b), withhold,
withdraw, amend, change or modify its position with respect to this Agreement,
the Merger or any other Transaction or approve or recommend an Acquisition
Proposal, including a Superior Proposal.
(e) The Company will promptly (but in no case later than 48 hours) notify
Parent in writing of the existence of any proposal, discussion or negotiation
received by the Company regarding any Acquisition Proposal, and the Company will
promptly communicate to Parent the material terms of any proposal, discussion or
negotiation which it may receive regarding any Acquisition Proposal (and will
promptly provide to Parent copies of any written materials received by the
Company or any of its officers, directors or other representatives describing
such Acquisition Proposal) and the identity of the party making such proposal or
engaging in such discussion or negotiation. The Company will promptly provide to
Parent any non-public information concerning the Company provided to any other
Person in connection with any Acquisition Proposal which was not previously
provided to Parent. The Company will keep Parent reasonably informed on a prompt
basis of the status and details of any such Acquisition Proposal and of any
amendments or proposed amendments to any of the material terms of any
Acquisition Proposal and of the status of any discussions or negotiations
relating to any Acquisition Proposal.
SECTION 7.06. Employee Benefits Matters. Parent shall cause the Surviving
Corporation to keep in place and to honor, in accordance with their terms, all
employee benefit plans, programs and policies of the Company and its
Subsidiaries in effect immediately prior to the Effective Time that are
applicable to any current or former employees of the Company or any Subsidiary
from the Effective Time until the earlier of (i) the first year anniversary of
the Effective Time, and (ii) in the case of employee benefit plans of the
Company and its Subsidiaries with renewal dates, the next renewal date with
respect to such employee benefit plans. Employees of the Company or any
Subsidiary shall receive credit for the purposes of eligibility to participate
and vesting (but not for benefit accruals) under any employee benefit plan or
program established or maintained by the Surviving Corporation for service
accrued or deemed accrued prior to the Effective Time with the Company or any
Subsidiary; provided, however, that such crediting of service shall not operate
to duplicate any benefit or the funding of any such benefit. Nothing in this
Section 7.06 shall be deemed to limit or otherwise affect the right of Parent or
the Surviving Corporation to terminate employment or change the place of work,
responsibilities, status or description of any employee or group of employees,
subject in any case to the terms of any applicable employment agreement. In
addition, Parent shall waive, or cause to be waived, any limitations on benefits
relating to any pre-existing conditions to the same extent such limitations are
waived under any comparable plan of Parent or its Subsidiaries and recognize,
for purposes of annual deductible and out-of-pocket limits under its medical and
dental plans, deductible and out-of-pocket expenses paid by employees of the
Company and its Subsidiaries in the calendar year in which the Effective Time
occurs.
SECTION 7.07. Directors' and Officers' Indemnification and
Insurance. (a) From and after the Effective Time, Parent shall cause the
Surviving Corporation to honor, in accordance with their respective terms, each
indemnification agreement in effect immediately prior to the Effective Time
between the Company and each officer and director of the Company. The By-laws of
the Surviving Corporation shall contain provisions no less favorable with
respect to indemnification than are set forth in the By-laws of the Company as
of the date hereof, which provisions shall not be amended, repealed or otherwise
modified for a period of five years from the Effective Time in any manner that
would affect adversely the rights thereunder of individuals who, at or prior to
the Effective Time, were directors or officers of the Company, unless such
modification shall be required by Law.
(b) Prior to the Effective Time, Parent shall purchase a directors' and
officers' liability insurance policy in form and substance reasonably
satisfactory to the Company and issued by a carrier satisfactory to the Company
(the "Tail Policy") providing "tail" coverage to the Company's officers and
directors with
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respect to matters occurring prior to the Effective Time. The Tail Policy shall
(i) have a term of five years from the Effective Time; and (ii) provide no
greater coverage and contain terms and conditions that are not materially more
favorable than those provided by the Company's directors' and officers'
liability insurance policy in effect immediately prior to the Effective Time. In
no event shall the price for the Tail Policy exceed $1,000,000.
SECTION 7.08. Notification of Certain Matters. Each of the Company and
Parent shall provide prompt notice to the other party of the occurrence, or
non-occurrence, of any event of which the Company or Parent, as applicable, has
knowledge and where such occurrence or non-occurrence results in any
representation or warranty contained in this Agreement being untrue or
inaccurate in any material respect; provided, however, that the delivery of any
notice pursuant to this Section 7.08 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
SECTION 7.09. Further Action; Reasonable Best Efforts. (a) Upon the terms
and subject to the conditions hereof, each of the parties hereto shall (i) make
promptly its respective filings, and thereafter promptly make any other required
submissions in any country where a merger filing or other notification is
necessary or desirable, with respect to the Transactions and (ii) use its
reasonable best efforts to take, or cause to be taken, all appropriate action,
and to do, or cause to be done, all things necessary, proper or advisable under
applicable Laws and regulations to consummate and make effective the
Transactions on or prior to December 31, 2003, including using its reasonable
best efforts to obtain all Permits, consents, approvals, authorizations,
qualifications and orders of Governmental Authorities and parties to Contracts
with the Company and the Subsidiaries as are necessary for the consummation of
such Transactions and to inform or consult with any trade unions, work councils,
employee representative or any other representative body as required and to
fulfill the conditions to the Merger; provided, however, that, in the event that
the Effective Time has not occurred on or prior to December 31, 2003 despite
each party's performance of its obligations pursuant to this Section 7.09(a),
each party shall use its reasonable best efforts to take, or cause to be taken,
all appropriate action, and to do, or cause to be done, all things necessary,
proper or advisable under applicable Laws and regulations to consummate and make
effective the Transactions as promptly as practicable after December 31, 2003,
including using its reasonable best efforts to obtain all Permits, consents,
approvals, authorizations, qualifications and orders of Governmental Authorities
and parties to Contracts with the Company and the Subsidiaries as are necessary
for the consummation of such Transactions and to inform or consult with any
trade unions, work councils, employee representative or any other representative
body as required and to fulfill the conditions to the Merger; and provided,
further, that neither Merger Sub nor Parent will be required by this Section
7.09 to take any action, including entering into any consent decree, hold
separate orders or other arrangements, that (A) requires the divestiture of any
assets of any of Merger Sub, Parent, the Company or any of their respective
subsidiaries or (B) limits Parent's freedom of action with respect to, or its
ability to retain, the Company and the Subsidiaries or any portion thereof or
any of Parent's or its affiliates' other assets or businesses. In case, at any
time after the Effective Time, any further action is necessary or desirable to
carry out the purposes of this Agreement, the proper officers and directors of
each party to this Agreement shall use their reasonable best efforts to take all
such action.
(b) Each of the parties hereto agrees to cooperate and use its reasonable
best efforts to vigorously contest and resist any Action, including
administrative or judicial Action, and to have vacated, lifted, reversed or
overturned any decree, judgment, injunction or other order (whether temporary,
preliminary or permanent) that is in effect and that restricts, prevents or
prohibits consummation of the Transactions, including by vigorously pursuing all
available avenues of administrative and judicial appeal.
(c) Prior to the Effective Time, the Company shall (i) make full provision
in its financial statements for the write-offs set forth in Section 7.09(c)(i)
of the Company Disclosure Schedule; and (ii) work in good faith with Parent and
Merger Sub on a development plan substantially on the terms set forth in Section
7.09(c)(ii) of the Company Disclosure Schedule.
SECTION 7.10. Regulatory Authorization. Parent and the Company shall,
within ten business days of the execution hereof, file with the United States
Federal Trade Commission ("FTC") and the United
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States Department of Justice ("DOJ") their respective notification and report
forms required for the Transactions in connection therewith pursuant to the HSR
Act and each agrees to file as promptly as practicable any supplemental
information requested by the FTC or DOJ. Any such notification and report forms
and supplemental information will be in substantial compliance with the
requirements of the HSR Act. Each party shall cooperate in all reasonable
respects with each other and the respective Governmental Authority, the FTC and
the DOJ.
SECTION 7.11. Public Announcements. Except as otherwise required by Law
or the rules of any applicable securities exchange or national market system, so
long as this Agreement is in effect, Parent and the Company will not, and will
not permit any of their respective Representatives to, issue or cause the
publication of any press release or make any other public announcement with
respect to the Transactions without the consent of the other party, which
consent shall not be unreasonably withheld. Parent and the Company will
cooperate with each other in the development and distribution of all press
releases and other public announcements with respect to this Agreement and the
Transactions, and will furnish the other with drafts of any such releases and
announcements as far in advance as practicable.
SECTION 7.12. Resignation of Officers and Directors. The Company shall
obtain and deliver to Parent on or prior to the Effective Time the resignation
of each officer and director of each of the Company and any Subsidiary as Parent
shall request.
SECTION 7.13. General Cooperation. From the date hereof through the
Effective Time, and without limiting the other provisions of this Agreement, the
Company and each Subsidiary shall use their good faith efforts to operate their
businesses in such a manner as to achieve a smooth transition consistent with
the mutual business interests of the Company and each Subsidiary and Parent, in
manner and scope as directed by Parent in its sole discretion. In this regard,
the Company and each Subsidiary and Parent agree that they will enter into good
faith discussions concerning the businesses of the Company and each Subsidiary,
including (i) personnel policies and procedures;(ii) operational matters; (iii)
pro forma financial projections; and (iv) potential transactions between the
Company and each Subsidiary and Parent.
SECTION 7.14. Conveyance Taxes. The Company and Parent shall cooperate in
the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any property transfer or gains, sales,
use, transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees, and any similar taxes which become
payable in connection with the Transactions that are required or permitted to be
filed on or before the Effective Time.
SECTION 7.15. Affiliates. Within 20 days following the date of this
Agreement, the Company shall cause to be delivered to Parent a letter
identifying all Persons who may be deemed at the Company's Stockholders' Meeting
to be "affiliates" of the Company for purposes of Rule 145 under the Securities
Act. The Company shall use its reasonable best efforts to cause each Person who
is identified as a possible "affiliate" to enter into prior to the Effective
Time an agreement in form and substance reasonably acceptable to Parent pursuant
to which each such Person acknowledges his responsibilities as such an
"affiliate".
SECTION 7.16. Plan of Reorganization. (a) From and after the date of this
Agreement and until the Effective Time, each party hereto shall use its
reasonable best efforts (i) to cause the Merger (taking into account the change
in structure described in Section 7.16(b)) to qualify, and will not knowingly
take any action, cause any action to be taken, fail to take any action or cause
any action to fail to be taken which action or failure to act would reasonably
be likely to prevent the Merger (taking into account the change in structure
described in Section 7.16(b)) from qualifying, as a reorganization within the
meaning of Section 368(a) of the Code; and (ii) to cause outside counsel to
Parent to deliver an opinion to the Company and its stockholders (in form and
substance reasonably satisfactory to the Company), as promptly as practicable
after the filing of the Registration Statement and prior to the Effective Time
and at the Effective Time, to the effect that, for federal income tax purposes,
the Merger (taking into account the change in structure described in Section
7.16(b)) will qualify as a reorganization within the meaning of Section 368(a)
of the Code (the "Tax Opinion"). In the event the Merger (taking into account
the
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change in structure described in Section 7.16(b)) so qualifies, following the
Effective Time, neither the Surviving Corporation, Parent nor any of their
Affiliates shall knowingly take any action, cause any action to be taken, fail
to take any action or cause any action to fail to be taken, which action or
failure to act would reasonably be likely to cause the Merger (taking into
account the change in structure described in Section 7.16(b)) to fail to qualify
as a reorganization within the meaning of Section 368(a) of the Code.
(b) In the event that, prior to the Effective Time, outside counsel to
Parent determines that it will be able to deliver the Tax Opinion as set forth
in Section 7.16(a)(ii), the parties agree that, notwithstanding anything in this
Agreement to the contrary, the Merger shall be effected by means of a merger of
the Company with and into Merger Sub, with the result that the separate
corporate existence of the Company shall cease and Merger Sub shall continue as
the Surviving Corporation; provided, however, that no such change in structure
shall be made (and no such Tax Opinion shall be delivered) in the event that
effecting the Merger as set forth in this Section 7.16(b) would reasonably be
likely to result in a Company Material Adverse Effect or a Parent Material
Adverse Effect.
SECTION 7.17. Nasdaq Quotation. Parent shall promptly prepare and submit
to the Nasdaq a listing application covering the shares of Parent Common Stock
to be issued in the Merger and shall use its reasonable best efforts to obtain,
prior to the Effective Time, approval for the quotation of such Parent Common
Stock, subject to official notice of issuance to Nasdaq, and the Company shall
cooperate with Parent with respect to such quotation.
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.01. Conditions to the Obligations of Each Party. The
obligations of the Company, Parent and Merger Sub to effect the Merger shall be
subject to the satisfaction, at or prior to the Effective Time, of the following
conditions:
(a) Under Delaware Law, this Agreement shall have been approved and
adopted by the requisite affirmative vote of the stockholders of the
Company.
(b) No Governmental Authority shall have enacted, issued, promulgated,
enforced or entered any Law (whether temporary, preliminary or permanent)
which is then in effect and has the effect of making the Merger illegal or
otherwise prohibiting consummation of the Merger.
(c) No Action shall have been commenced by any Governmental Authority
against any of the Company, Parent or Merger Sub, which Action seeks to
restrain or materially and adversely alter the Transactions and is
reasonably likely to render it impossible or unlawful to consummate such
Transactions.
(d) Any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.
(e) The Registration Statement shall have been declared effective and
no stop order suspending the effectiveness of the Registration Statement
shall be in effect and no proceeding for such purpose shall be pending
before or threatened by the SEC.
(f) The shares of Parent Common Stock to be issued in the Merger shall
have been approved for quotation on Nasdaq, subject to official notice of
issuance.
SECTION 8.02. Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to effect the Merger shall be subject to
the satisfaction, at or prior to the Effective Time, of the following
conditions:
(a) The representations and warranties of the Company contained in
this Agreement shall be true and correct (without giving effect to any
limitation as to materiality or Company Material Adverse Effect set forth
therein) as of the Effective Time, as though made on and as of the
Effective
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Time (except to the extent expressly made as of an earlier date, in which
case as of such earlier date), except where the failure of such
representations and warranties to be so true and correct (without giving
effect to any limitation as to materiality or Company Material Adverse
Effect set forth therein) would not, individually or in the aggregate, have
a Company Material Adverse Effect.
(b) The Company shall have performed or complied in all material
respects with all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Effective Time.
(c) The Company shall have delivered to Parent a certificate, dated
the Closing Date, signed by an officer of the Company and certifying as to
the satisfaction of the conditions specified in Sections 8.02(a) and
8.02(b).
(d) No Company Material Adverse Effect shall have occurred since the
date of this Agreement.
(e) The number of Dissenting Shares shall be less than 9% of the
issued and outstanding Shares (including Shares issuable upon conversion of
the Preferred Shares).
SECTION 8.03. Conditions to the Obligations of the Company. The
obligations of the Company to effect the Merger shall be subject to the
satisfaction, at or prior to the Effective Time, of the following conditions:
(a) The representations and warranties of Parent and Merger Sub
contained in this Agreement shall be true and correct in all material
respects as of the Effective Time, as though made on and as of the
Effective Time (except to the extent expressly made as of an earlier date,
in which case as of such earlier date), provided that any representation or
warranty that is qualified by materiality or Parent Material Adverse Effect
shall be true and correct in all respects as of the Effective Time, or as
of such particular earlier date, as the case may be.
(b) Parent and Merger Sub shall have performed or complied in all
material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the
Effective Time.
(c) Parent shall have delivered to the Company a certificate, dated
the Closing Date, signed by an officer of Parent, certifying as to the
satisfaction of the conditions specified in Sections 8.03(a) and 8.03(b).
(d) No Parent Material Adverse Effect shall have occurred since the
date of this Agreement.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.01. Termination. This Agreement may be terminated and the
Merger and the other Transactions may be abandoned at any time prior to the
Effective Time, notwithstanding any requisite approval and adoption of this
Agreement by the stockholders of the Company:
(a) by mutual written consent of each of Parent, Merger Sub and the
Company duly authorized by the Boards of Directors of Parent and Merger Sub
and the Board, respectively;
(b) by any of Parent, Merger Sub or the Company if (i) the Effective
Time shall not have occurred on or before March 1, 2004; provided, however,
that the right to terminate this Agreement under this Section 9.01(b) shall
not be available to any party whose failure to fulfill any obligation under
this Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date; (ii) any Governmental
Authority shall have enacted, issued, promulgated, enforced or entered any
injunction, order, decree or ruling (whether temporary, preliminary or
permanent) which has become final and nonappealable and has the effect of
making consummation of the Merger illegal or otherwise preventing or
prohibiting consummation of the Merger; or (iii) this
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Agreement shall not have been approved and adopted in accordance with
Delaware Law by the Company's stockholders at the Company Stockholders'
Meeting;
(c) by Parent if (i) the Board or any committee thereof shall have
withheld, withdrawn, amended, changed or modified, in a manner adverse to
Merger Sub or Parent, its approval or recommendation of this Agreement or
the Transactions, or (ii) the Board shall have recommended or approved any
Acquisition Proposal;
(d) by the Company if, prior to the approval and adoption of this
Agreement and the Transactions by the Company's stockholders at the
Stockholders' Meeting, the Board determines in good faith (after
consultation with its advisors), in the exercise of its fiduciary duties,
that, in order to enter into a definitive agreement with respect to a
Superior Proposal, such termination is in the best interests of the
stockholders of the Company, upon two Business Days' prior written notice
to Parent, setting forth in reasonable detail the identity of the Person
making, and the final terms and conditions of, the Superior Proposal and
after duly considering any proposals that may be made by Parent during such
two Business Day period; provided, however, that any termination of this
Agreement pursuant to this Section 9.01(d) shall not be effective until the
Company has made full payment of the Fee and Expenses; or
(e) by the Company, if the Parent Mean Price at the Effective Time
would be less than $8.50 per share; provided, however, that the right to
terminate this Agreement under this Section 9.01(e) shall not be available
if Parent agrees in writing that, in such event and notwithstanding
anything to the contrary in Section 2.04(a)(i), the Exchange Ratio shall be
determined by dividing $14.00 by the Parent Mean Price and rounding the
result to the nearest one thousandth of a share; and provided, further,
that any termination by the Company pursuant to this Section 9.01(e) shall
not be deemed to be a withholding, withdrawal, amendment, change or
modification, in a manner adverse to Merger Sub or Parent, of the Board's
approval or recommendation of this Agreement, the Merger or any other
Transaction.
SECTION 9.02. Effect of Termination. In the event of the termination of
this Agreement pursuant to Section 9.01, this Agreement shall forthwith become
void, and there shall be no liability on the part of any party hereto, except
(a) as set forth in Section 9.03 and (b) that nothing herein shall relieve any
party from liability for any breach hereof prior to the date of such
termination; provided, however, that the Confidentiality Agreement shall survive
any termination of this Agreement.
SECTION 9.03. Fees and Expenses. (a) In the event that
(i) this Agreement is terminated by Parent pursuant to Section
9.01(c), or
(ii) any Person shall have commenced, publicly proposed or
communicated to the Company an Acquisition Proposal that is publicly
disclosed and (A) this Agreement and the Merger shall not have been
approved and adopted at the Stockholders' Meeting in accordance with
Delaware Law by the Company's stockholders and (B) this Agreement shall
have been terminated by Parent, Merger Sub or the Company pursuant to
Section 9.01(b)(iii),
the Company shall pay to Parent all of the charges and expenses (including
fees and expenses of Parent's attorneys, accountants and advisors) incurred
by Parent and Merger Sub in connection with this Agreement and the
Transactions (the "Expenses"); provided, however, that in no event shall
the Expenses for purposes of this Section 9.03 be in excess of $750,000;
and provided, further, that such Expenses shall be paid, in immediately
available funds, no later than two Business Days after receipt by the
Company of reasonable documentation with respect to such Expenses.
(b) In the event that (i) this Agreement is terminated by Parent
pursuant to Section 9.01(c); and (ii) the Company enters into, or submits
to the stockholders of the Company for approval, an agreement with respect
to, an Acquisition Proposal, or an Acquisition Proposal is consummated, in
each case within 12 months after such termination of this Agreement, in
addition to the Expenses paid in accordance with Section 9.03(a), the
Company shall pay Parent promptly (but in no event
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later than two Business Days after receipt by the Company of a request for
payment from Parent following the first occurrence of an event described in
clause (ii) of this Section 9.03(b)), in immediately available funds, a fee
of $1,350,000 (the "Fee").
(c) In the event that this Agreement is terminated by the Company
pursuant to Section 9.01(d), the Company shall pay Parent (i) the Fee
(which Fee shall be paid concurrently with such termination), and (ii) the
Expenses (which Expenses shall be paid no later than two Business Days
after receipt by the Company of reasonable documentation thereof), in each
case in immediately available funds.
(d) Except as set forth in this Section 9.03, all costs and expenses
incurred in connection with this Agreement, the Stockholder Agreements and
the other Transactions shall be paid by the party incurring such expenses,
whether or not the Merger is consummated, except that the filing fee in
connection with the HSR Act and the expenses incurred in connection with
the Tax Opinion and the filing, printing and mailing of the Registration
Statement and the Proxy Statement shall be shared equally by the Company
and Parent.
(e) In the event that the Company shall fail to pay the Fee when due,
the term "Fee" shall be deemed to include the costs and expenses actually
incurred or accrued by Parent and Merger Sub (including fees and expenses
of counsel) in connection with the collection under and enforcement of this
Section 9.03, together with interest on such unpaid Fee, commencing on the
date that the Fee became due, at a rate equal to the rate of interest
publicly announced by Citibank, N.A., from time to time, in the City of New
York, as such bank's Base Rate plus 1%.
(f) The Company acknowledges that the agreements contained in this
Section 9.03 are an integral part of this Agreement and the Transactions,
and that, without these agreements, Parent and the Merger Sub would not
enter into this Agreement.
SECTION 9.04. Amendment. This Agreement may be amended by the parties
hereto by action taken by or on behalf of Parent and the respective Boards of
Directors of Merger Sub and the Company at any time prior to the Effective Time;
provided, however, that, after the approval and adoption of this Agreement, the
Merger and the other Transactions by the stockholders of the Company, no
amendment may be made that would reduce the amount or change the type of
consideration into which each Share shall be converted upon consummation of the
Merger. This Agreement may not be amended except by an instrument in writing
signed by each of the parties hereto.
SECTION 9.05. Waiver. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any obligation or other
act of any other party hereto, (b) waive any inaccuracy in the representations
and warranties of any other party contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any agreement of any other party
or any condition to its own obligations contained herein. Any such extension or
waiver shall be valid if set forth in an instrument in writing signed by the
party or parties to be bound thereby.
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ARTICLE X
GENERAL PROVISIONS
SECTION 10.01. Notices. All notices, requests and other communications
hereunder must be in writing and will be deemed to have been duly given upon
receipt by the receiving party at the address or facsimile number below for such
party:
if to Parent or Merger Sub:
chinadotcom corporation
34/F Citicorp Centre
18 Whitfield Road
Causeway Bay
Hong Kong
Telecopier No: 011-852-2237-7227
Attention: General Counsel
with a copy to:
Milbank, Tweed, Hadley & McCloy LLP
1 Chase Manhattan Plaza
New York, NY 10005
Telecopier No: (212) 530-5219
Attention: Mark L. Weissler
if to the Company:
Ross Systems, Inc.
Two Concourse Parkway
Suite 800
Atlanta, Georgia 30328
Telecopier No: (770) 351-9506
Attention: Robert B. Webster
with a copy to:
King & Spalding LLP
191 Peachtree Street
Atlanta, Georgia 30303-1763
Telecopier No: (404) 572-5100
Attention: William Roche, Esq.
SECTION 10.02. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of Law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the Transactions is not affected in any manner materially adverse
to any party. Upon such determination that any term or other provision is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the Transactions be consummated as originally contemplated to the
fullest extent possible.
SECTION 10.03. Entire Agreement; Assignment. This Agreement and the
Disclosure Schedules, and the Stockholder Agreements constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and undertakings, both written and oral, among
the parties, or any of them, with respect to the subject matter hereof. This
Agreement shall not be assigned (whether pursuant to a merger, by operation of
Law or otherwise), except that Parent and Merger Sub may assign all or any of
their rights and obligations hereunder to any affiliate of Parent, provided that
no such assignment shall relieve the assigning party of its obligations
hereunder if such assignee does not perform such obligations.
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SECTION 10.04. Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
Person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement, other than Section 7.07 (which is intended to be for the
benefit of the Persons covered thereby and may be enforced by such Persons).
SECTION 10.05. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement were
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at Law or equity.
SECTION 10.06. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the Laws of the State of Delaware applicable to
Contracts executed in and to be performed in that State.
SECTION 10.07. Waiver of Jury Trial. Each of the parties hereto hereby
waives to the fullest extent permitted by applicable Law any right it may have
to a trial by jury with respect to any litigation directly or indirectly arising
out of, under or in connection with this Agreement or the Transactions. Each of
the parties hereto (a) certifies that no representative, agent or attorney of
any other party has represented, expressly or otherwise, that such other party
would not, in the event of litigation, seek to enforce that foregoing waiver and
(b) acknowledges that it and the other hereto have been induced to enter into
this Agreement and the Transactions, as applicable, by, among other things, the
mutual waivers and certifications in this Section 10.07.
SECTION 10.08. Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 10.09. Counterparts. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
A-46
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
CHINADOTCOM CORPORATION
By: /s/ DANIEL WIDDICOMBE
------------------------------------
Name: Daniel Widdicombe
Title: Chief Financial Officer
CDC SOFTWARE HOLDINGS, INC.
By: /s/ DANIEL WIDDICOMBE
------------------------------------
Name: Daniel Widdicombe
Title: Director
ROSS SYSTEMS, INC.
By: /s/ J. PATRICK TINLEY
------------------------------------
Name: J. Patrick Tinley
Title: Chief Executive Officer
A-47
SCHEDULE I
PRINCIPAL STOCKHOLDERS
Benjamin W. Griffith III
J. Patrick Tinley
Robert B. Webster
Verome M. Johnston
A-48
SCHEDULE II
CERTAIN OFFICERS OF THE COMPANY
J. Patrick Tinley
Robert B. Webster
A-49
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT, dated as of October 3, 2003 (this "Amendment"), to the
Agreement and Plan of Merger, dated as of September 4, 2003 (the "Merger
Agreement"), by and among CHINADOTCOM CORPORATION, a company organized under the
laws of the Cayman Islands ("Parent"), CDC SOFTWARE HOLDINGS, INC., a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and ROSS
SYSTEMS, INC., a Delaware corporation (the "Company"). Capitalized terms used
but not defined herein have the meanings assigned to such terms in the Merger
Agreement.
Pursuant to the terms of the Merger Agreement and in accordance with
Section 9.04 thereof, the parties hereto agree to amend the Merger Agreement as
follows:
SECTION 1. Amendment to Section 1.02. Section 1.02 of the Merger
Agreement is amended by deleting the term "Tax Opinion" and the corresponding
section reference.
SECTION 2. Amendment to Article II.
(a) Section 2.01 of the Merger Agreement is amended by deleting the
phrase "and Section 7.16(b)".
(b) Section 2.03 of the Merger Agreement is amended by deleting the
first sentence of Section 2.03 in its entirety and replacing such sentence
with the following:
"At the Effective Time, the separate corporate existence of Merger Sub
shall cease, the Company shall continue as the surviving corporation in
the Merger (the "Surviving Corporation"), and the effect of the Merger
shall be as provided in the applicable provisions of Delaware Law."
SECTION 3. Amendment to Section 7.16. Section 7.16 of the Merger
Agreement is amended by deleting the section in its entirety and replacing such
section with the phrase "Intentionally Omitted."
SECTION 4. Full Force and Effect. Except as expressly amended hereby, the
Merger Agreement shall continue in full force and effect in accordance with the
provisions thereof on the date hereof.
SECTION 5. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the Laws of the State of Delaware applicable to
Contracts executed in and to be performed in that State.
SECTION 6. Counterparts. This Amendment may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same instrument.
A-50
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Amendment to be executed as of the date first written above by their respective
officers thereunto duly authorized.
CHINADOTCOM CORPORATION
By: /s/ DANIEL WIDDICOMBE
------------------------------------
Name: Daniel Widdicombe
Title: Chief Financial Officer
CDC SOFTWARE HOLDINGS, INC.
By: /s/ DANIEL WIDDICOMBE
------------------------------------
Name: Daniel Widdicombe
Title: Chief Financial Officer
ROSS SYSTEMS, INC.
By: /s/ ROBERT WEBSTER
------------------------------------
Name: Robert Webster
Title: Executive Vice President
A-51
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS SECOND AMENDMENT, dated as of January 7, 2004 (this "Amendment"), to
the Agreement and Plan of Merger, dated as of September 4, 2003 and amended as
of October 3, 2003 (the "Merger Agreement"), by and among CHINADOTCOM
CORPORATION, a company organized under the laws of the Cayman Islands
("Parent"), CDC SOFTWARE HOLDINGS, INC., a Delaware corporation and a wholly
owned subsidiary of Parent ("Merger Sub"), and ROSS SYSTEMS, INC., a Delaware
corporation (the "Company"). Capitalized terms used but not defined herein have
the meanings assigned to such terms in the Merger Agreement.
Pursuant to the terms of the Merger Agreement and in accordance with
Section 9.04 thereof, the parties hereto agree to amend the Merger Agreement as
follows:
SECTION 1. Amendment to Section 1.01. Section 1.01 of the Merger
Agreement is amended by deleting the definition of "Parent Price" in its
entirety and replacing such definition with the following:
" 'Parent Price' means the average of the per share closing prices of
Parent Common Stock on the Nasdaq during the ten consecutive trading days
ending on (and including) the trading day that is two trading days prior to
the date of the Effective Time."
SECTION 2. Amendment to Section 2.04. Section 2.04(a)(i) of the Merger
Agreement is amended by deleting the subsection in its entirety and replacing
such subsection with the following:
"(i) subject to the provisions of Section 2.05, each Share (together
with the associated Company Right) issued and outstanding immediately prior
to the Effective Time (other than any Shares to be canceled pursuant to
Section 2.04(a)(ii) and any Dissenting Shares (as hereinafter defined))
shall be canceled and converted automatically into the right to receive, at
the option of the holder of such Share, either (A) $17.00 in cash (the
"Cash Consideration") or (B) (1) the number of shares of Parent Common
Stock determined by dividing $14.00 by the Parent Price and rounding the
result to the nearest one thousandth of a share (the "Exchange Ratio"),
payable upon surrender, in the manner provided in Section 2.05, of the
certificate that formerly evidenced such Share; and (2) $5.00 in cash ((1)
and (2) together being the "Cash/Stock Consideration", and the Cash
Consideration or the Cash/Stock Consideration, as applicable, being the
"Merger Consideration"); provided, however, that, with respect to holders
of Shares who elect to receive the Cash/Stock Consideration, if the Parent
Price would be less than $8.50 per share, Parent may, at its option, pay a
portion of the Exchange Ratio in cash in lieu of Parent Common Stock so
that the Cash/Stock Consideration would instead consist of (X) the number
of shares of Parent Common Stock determined by dividing $14.00 by a number
(determined by Parent) that is in excess of the Parent Price but equal to
or below $8.50 and rounding the result to the nearest one thousandth of a
share (the "Adjusted Exchange Ratio"); (Y) cash in an amount equal to the
Parent Price multiplied by the excess of the Exchange Ratio over the
Adjusted Exchange Ratio; and (Z) $5.00 in cash (the aggregate amount of
cash in (Y) and (Z) being, the "Adjusted Cash Amount"); provided, further,
that, notwithstanding anything to the contrary contained herein, Parent
shall pay a portion of the Exchange Ratio in cash in lieu of Parent Common
Stock in accordance with the immediately preceding proviso to this Section
2.04(a)(i) as necessary to ensure that no approval of Parent's stockholders
shall be required under applicable Law or under the rules of any securities
exchange or the NASDAQ National Market System in connection with the
issuance of Parent Common Stock in the Merger; and provided, further, that
if Parent adjusts the Exchange Ratio and the Cash/Stock Consideration in
accordance with this Section 2.04(a)(i), Parent shall deliver written
notice to the Company prior to the Closing Date, setting forth the Adjusted
Exchange Ratio and the Adjusted Cash Amount."
SECTION 3. Amendment to Section 2.05. Section 2.05(b) of the Merger
Agreement is amended by inserting the following before the first sentence of
such subsection:
"(i) Each holder of record of Shares as of the record date for the
Company Stockholders' Meeting will be entitled to elect to receive (A) the
Cash Consideration per Share for all, but not less
A-52
than all, of such Shares (the "Cash Election"); or (B) the Cash/Stock
Consideration per Share for all, but not less than all, of such Shares (the
"Cash/Stock Election" and together with the Cash Election, the
"Elections"). All Elections shall be made by the close of business on the
tenth Business Day after the date of the Effective Time (the "Election
Deadline"), on a form designed for that purpose that is mutually acceptable
to the Company and Parent and mailed to the stockholders of the Company
with the Proxy Statement (a "Form of Election"), and pursuant to the
instructions for effecting the Elections contained in such Form of
Election. Each holder of Shares who was not a holder of record of Shares as
of the record date for the Company Stockholders' Meeting, and each holder
of Shares who does not make a valid Election prior to the Election
Deadline, shall be deemed to have made a Cash/Stock Election.
(ii)"
SECTION 4. Amendments to Section 3.03. (a) Section 3.03(b) of the Merger
Agreement is amended by deleting the subsection in its entirety and replacing
such subsection with the following:
"(b) For purposes of Section 3.03(a), the "Conversion Ratio" shall be
the sum of (i) the Exchange Ratio, plus (ii) the quotient obtained by
dividing $5.00 by the closing sales price of Parent Common Stock on the
Nasdaq for the last trading day prior to the date of the Effective Time;
provided, however, that if Parent pays a portion of the Exchange Ratio in
cash in accordance with the provisos to Section 2.04(a)(i), the Conversion
Ratio shall be the sum of (A) the Adjusted Exchange Ratio, plus (B) the
quotient obtained by dividing the Adjusted Cash Amount by the closing sales
price of Parent Common Stock on the Nasdaq for the last trading day prior
to the date of the Effective Time."
(b) The last sentence of Section 3.03(c) shall be amended by deleting the
sentence in its entirety and replacing such sentence with the following:
"Each Share acquired by such participant pursuant to the ESPP as of
the Effective Time shall, at the Effective Time, be converted into the
right to receive the Merger Consideration in accordance with Section
2.04(a)."
SECTION 5. Amendment to Section 3.04. The last sentence of Section
3.04(a) shall be amended by deleting the sentence in its entirety and replacing
such sentence with the following:
"Such stockholders shall be entitled to receive payment of the appraised
value of such Shares held by them, in accordance with the provisions of such
Section 262, except that each Dissenting Share held by stockholders who
shall have failed to perfect or who effectively shall have withdrawn or lost
their rights to appraisal with respect to such Share under such Section 262
shall thereupon be deemed to have been converted into, and to have become
exchangeable for, as of the Effective Time, the right to receive the Merger
Consideration, without any interest thereon, upon surrender, in the manner
provided in Section 2.05, of the certificate that formerly evidenced such
Share."
SECTION 6. Amendment to Section 4.27. Section 4.27 of the Merger
Agreement is amended by deleting the section in its entirety and replacing such
section with the following:
"SECTION 4.27. Fairness Opinion. The Board has received the opinion
of Broadview, financial advisor to the Company to the effect that, as of
the date of such opinion, the Cash/Stock Consideration is fair to the
stockholders of the Company from a financial point of view."
SECTION 7. Amendment to Section 5.07(b). Section 5.07(b) of the Merger
Agreement is amended by deleting the subsection in its entirety and replacing
such subsection with the following:
"(b) The authorized capital stock of Merger Sub consists of 100 shares
of common stock, par value $0.001 per share, all of which are duly
authorized, validly issued, fully paid and nonassessable and free of any
preemptive rights in respect thereof and all of which are owned by Parent
or a wholly owned subsidiary of Parent in accordance with this Agreement.
Each outstanding share of capital stock of Merger Sub is duly authorized,
validly issued, fully paid and non-assessable and each such
A-53
share is owned by Parent or, in accordance with this Agreement, a wholly
owned subsidiary of Parent, in either case free and clear of all security
interests, liens, claims, pledges, options, rights of first refusal,
agreements, limitations on voting rights, charges and other encumbrances of
any nature whatsoever, except where the failure to own such shares free and
clear would not, individually or in the aggregate, have a Parent Material
Adverse Effect."
SECTION 8. Amendment to Section 6.02. (a) Section 6.02(b) of the Merger
Agreement is amended by deleting the subsection in its entirety and replacing
such subsection with the following:
"(b) enter into any negotiation or Contract with respect to any
transaction (other than the Merger and an acquisition by Parent of Pivotal
Corporation, a company based in Vancouver, B.C.) that would, to the
knowledge of Parent acting reasonably, (i) materially delay or adversely
affect the ability of the parties to obtain any approvals or clearances
from Governmental Authorities required to permit consummation of the
Merger, or (ii) delay the date of mailing of the Proxy Statement (or
require an amendment to the Proxy Statement following such mailing) such
that the Closing would be delayed past May 6, 2004."
(b) Section 6.02 of the Parent Disclosure Schedule is amended by deleting
such section in its entirety and replacing such section with the revised Section
6.02 of the Parent Disclosure Schedule.
SECTION 9. Amendments to Article VII. (a) Section 7.13 of the Merger
Agreement is amended by deleting the section in its entirety and replacing such
section with the following:
"SECTION 7.13. General Cooperation. From the date hereof through the
Effective Time, and without limiting the other provisions of this
Agreement, the Company and each Subsidiary shall use their good faith
efforts to operate their businesses in such a manner as to achieve a smooth
transition consistent with the mutual business interests of the Company and
each Subsidiary and Parent, in manner and scope as directed by Parent in
its sole discretion. In this regard, the Company and each Subsidiary and
Parent agree that they will enter into good faith discussions concerning
the businesses of the Company and each Subsidiary, including (i) personnel
policies and procedures; (ii) operational matters; (iii) pro forma
financial projections; and (iv) potential transactions between the Company
and each Subsidiary and Parent. Parent and the Company acknowledge and
agree that during the period from the date hereof through the Effective
Time, Parent and the Company expect to derive significant financial
benefits from synergies and integration initiatives. Based on this
acknowledgement, the Company and Parent will cooperate with one another
following the date hereof and will use good faith efforts to achieve the
types of integration and synergies contemplated by the parties to the
Merger Agreement as set forth in Section 7.13 of the Company Disclosure
Schedule, a plan for which the Company and Parent agree to finalize in
February 2004."
(b) Article VII of the Merger Agreement is amended by inserting the
following Section 7.18:
"SECTION 7.18. Share Contribution. Prior to the Effective Time,
Parent shall cause to be incorporated a direct, wholly owned subsidiary of
Parent ("Intermediate Sub"). In the event that, immediately prior to the
Effective Time, the aggregate value of the shares of Parent Common Stock to
be issued in the Merger would comprise 80% or more of the aggregate value
of the sum of (a) the Merger Consideration to be issued and paid in the
Merger, and (b) any cash in lieu of fractional shares to be paid in the
Merger, Parent shall transfer or contribute all of the outstanding shares
of capital stock of Merger Sub to Intermediate Sub, so that, immediately
prior to the Effective Time, Merger Sub shall be a direct wholly owned
subsidiary of Intermediate Sub and an indirect wholly owned subsidiary of
Parent. Parent hereby agrees that Intermediate Sub shall be a direct,
wholly owned subsidiary of Parent, formed solely for the purpose of
engaging in the Transactions, and that, at the Effective Time:
(i) Intermediate Sub shall have engaged in no other business activities and
shall have conducted its operations only as contemplated by this Agreement;
A-54
(ii) Intermediate Sub shall be a corporation duly organized, validly
existing and in good standing under the Laws of the jurisdiction of its
incorporation and shall have the requisite corporate power and authority and all
necessary governmental approvals to own, lease and operate its properties and to
carry on its business;
(iii) Parent shall have made available to the Company complete and correct
copies of the Certificate of Incorporation, By-laws or equivalent organizational
documents of Intermediate Sub, and each such instrument shall be in full force
and effect;
(iv) the authorized capital stock of Intermediate Sub shall consist of 100
shares of common stock, par value $0.001 per share, all of which shall be duly
authorized, validly issued, fully paid and nonassessable and free of any
preemptive rights in respect thereof and all of which shall be owned by Parent
free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreements, limitations on voting rights, charges and
other encumbrances of any nature whatsoever;
(v) except as would not have a Parent Material Adverse Effect, Intermediate
Sub shall be, and shall have at all times been, in compliance with all
applicable Law; and
(vi) neither Parent nor Intermediate Sub shall have received any written
notice or other communication from any Governmental Authority or other Person
regarding any actual or possible violation of, or failure to comply with, any
Law."
SECTION 10. Amendment to Section 9.01. (a) Section 9.01(b) of the Merger
Agreement is amended by deleting the subsection in its entirety and replacing
such subsection with the following:
"(b) by any of Parent, Merger Sub or the Company if (i) the Effective
Time shall not have occurred on or before July 1, 2004; provided, however,
that the right to terminate this Agreement under this Section 9.01(b)(i)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure of
the Effective Time to occur on or before the applicable date; (ii) any
Governmental Authority shall have enacted, issued, promulgated, enforced or
entered any injunction, order, decree or ruling (whether temporary,
preliminary or permanent) which has become final and nonappealable and has
the effect of making consummation of the Merger illegal or otherwise
preventing or prohibiting consummation of the Merger; or (iii) this
Agreement shall not have been approved and adopted in accordance with
Delaware Law by the Company's stockholders at the Company Stockholders'
Meeting;"
(b) Section 9.01(e) of the Merger Agreement is amended by deleting the
subsection in its entirety.
SECTION 11. Confirmation. (a) As confirmation and not limitation of the
obligations set forth in Sections 7.03 and 7.09(a) of the Merger Agreement, each
of the parties to the Merger Agreement hereby reaffirms that it shall use its
reasonable best efforts to take, or cause to be taken, all appropriate action,
and to do, or cause to be done, all things necessary, proper or advisable under
applicable Laws and regulations to consummate and make effective the
Transactions, including, with respect to Parent and Merger Sub, the retention of
outside counsel in connection with the preparation and filing of the
Registration Statement.
(b) As confirmation and not limitation of the obligations set forth in
Section 9.03(d) of the Merger Agreement, each of the parties to the Merger
Agreement hereby reaffirms that the expenses incurred in connection with the
opinion proposed to be delivered by outside counsel to Parent to the effect
that, for federal income tax purposes, the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code (the "Tax
Opinion") shall be shared equally by the Company and Parent. The Company agrees
promptly to pay to Parent an amount equal to that set forth in Section 9.03(d)
of the Parent Disclosure Schedule. Parent represents and warrants that such
amount is equal to one half of the amount set forth in the bill received from
Paul, Hastings, Janofsky & Walker LLP for services rendered through October 21,
2003 in connection with analyses relating to the Tax Opinion.
SECTION 12. Full Force and Effect. Except as expressly amended hereby,
the Merger Agreement shall continue in full force and effect in accordance with
the provisions thereof on the date hereof.
A-55
SECTION 13. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the Laws of the State of Delaware applicable to
Contracts executed in and to be performed in that State.
SECTION 14. Counterparts. This Amendment may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same instrument.
A-56
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Amendment to be executed as of the date first written above by their respective
officers thereunto duly authorized.
CHINADOTCOM CORPORATION
By: /s/ STEVEN CHAN
------------------------------------
Name: Steven Chan
Title: General Counsel and Company
Secretary
CDC SOFTWARE HOLDINGS, INC.
By: /s/ STEVEN CHAN
------------------------------------
Name: Steven Chan
Title: Authorized Signatory
ROSS SYSTEMS, INC.
By: /s/ ROBERT B. WEBSTER
------------------------------------
Name: Robert B. Webster
Title: Executive Vice President
and Secretary
A-57
THIRD AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS THIRD AMENDMENT, dated as of April 29, 2004 (this "Amendment"), to the
Agreement and Plan of Merger, dated as of September 4, 2003 and amended as of
October 3, 2003 and January 7, 2004 (the "Merger Agreement"), by and among
CHINADOTCOM CORPORATION, a company organized under the laws of the Cayman
Islands ("Parent"), CDC SOFTWARE HOLDINGS, INC., a Delaware corporation and a
wholly owned subsidiary of Parent ("Merger Sub"), and ROSS SYSTEMS, INC., a
Delaware corporation (the "Company"). Capitalized terms used but not defined
herein have the meanings assigned to such terms in the Merger Agreement.
Pursuant to the terms of the Merger Agreement and in accordance with
Section 9.04 thereof, the parties hereto agree to amend the Merger Agreement as
follows:
SECTION 1 AMENDMENT TO SECTION 2.05. Section 2.05(b)(i) of the Merger
Agreement is amended by deleting the following sentence in such subsection in
its entirety:
"All Elections shall be made by the close of business on the tenth
Business Day after the date of the Effective Time (the "Election
Deadline"), on a form designed for that purpose that is mutually
acceptable to the Company and Parent and mailed to the stockholders of
the Company with the Proxy Statement (a "Form of Election"), and
pursuant to the instructions for effecting the Elections contained in
such Form of Election."
and replacing such sentence with the following:
"All Elections shall be made by the close of business on the Business
Day immediately preceding the Closing Date (the "Election Deadline"), by
indication of such Election on the form of proxy or on such other form
designed for that purpose that is mutually acceptable to the Company and
Parent and mailed to the stockholders of the Company with the Proxy
Statement (a "Form of Election"), and pursuant to the instructions for
effecting the Elections contained in such Form of Election."
SECTION 2 FULL FORCE AND EFFECT. Except as expressly amended hereby, the
Merger Agreement shall continue in full force and effect in accordance with the
provisions thereof on the date hereof.
SECTION 3 GOVERNING LAW. This Amendment shall be governed by, and construed
in accordance with, the Laws of the State of Delaware applicable to Contracts
executed in and to be performed in that State.
SECTION 4 COUNTERPARTS. This Amendment may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same instrument.
A-58
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Amendment to be executed as of the date first written above by their respective
officers thereunto duly authorized.
CHINADOTCOM CORPORATION
By: /s/ STEVEN CHAN
------------------------------------
Name: Steven Chan
Title: General Counsel and Company
Secretary
CDC SOFTWARE HOLDINGS, INC.
By: /s/ STEVEN CHAN
------------------------------------
Name: Steven Chan
Title: Authorized Signatory
ROSS SYSTEMS, INC.
By: /s/ JAMES P. TINCEY
------------------------------------
Name: James P. Tincey
Title: C.E.O.
A-59
FOURTH AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FOURTH AMENDMENT, dated as of May 12, 2004 (this "Amendment"), to the
Agreement and Plan of Merger, dated as of September 4, 2003 and amended as of
October 3, 2003, January 7, 2004 and April 29, 2004 (the "Merger Agreement"), by
and among CHINADOTCOM CORPORATION, a company organized under the laws of the
Cayman Islands ("Parent"), CDC SOFTWARE HOLDINGS, INC., a Delaware corporation
and a wholly owned subsidiary of Parent ("Merger Sub"), and ROSS SYSTEMS, INC.,
a Delaware corporation (the "Company"). Capitalized terms used but not defined
herein have the meanings assigned to such terms in the Merger Agreement.
Pursuant to the terms of the Merger Agreement and in accordance with
Section 9.04 thereof, the parties hereto agree to amend the Merger Agreement as
follows:
SECTION 1 AMENDMENT TO SECTION 6.02. Section 6.02(b) of the Merger
Agreement is amended by deleting the subsection in its entirety and replacing
such subsection with the following:
"(b) enter into any negotiation or Contract with respect to any
transaction (other than the Merger and an acquisition by Parent of Pivotal
Corporation, a company based in Vancouver, B.C.) that would, to the
knowledge of Parent acting reasonably, (i) materially delay or adversely
affect the ability of the parties to obtain any approvals or clearances
from Governmental Authorities required to permit consummation of the
Merger, or (ii) delay the date of mailing of the Proxy Statement (or
require an amendment to the Proxy Statement following such mailing) such
that the Closing would be delayed past September 1, 2004."
SECTION 2 AMENDMENT TO SECTION 9.01. Section 9.01(b) of the Merger
Agreement is amended by deleting the subsection in its entirety and replacing
such subsection with the following:
"(b) by any of Parent, Merger Sub or the Company if (i) the Effective
Time shall not have occurred on or before September 1, 2004; provided,
however, that the right to terminate this Agreement under this Section
9.01(b)(i) shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before the applicable date;
(ii) any Governmental Authority shall have enacted, issued, promulgated,
enforced or entered any injunction, order, decree or ruling (whether
temporary, preliminary or permanent) which has become final and
nonappealable and has the effect of making consummation of the Merger
illegal or otherwise preventing or prohibiting consummation of the Merger;
or (iii) this Agreement shall not have been approved and adopted in
accordance with Delaware Law by the Company's stockholders at the Company
Stockholders' Meeting;"
SECTION 3 FULL FORCE AND EFFECT. Except as expressly amended hereby, the
Merger Agreement shall continue in full force and effect in accordance with the
provisions thereof on the date hereof.
SECTION 4 GOVERNING LAW. This Amendment shall be governed by, and
construed in accordance with, the Laws of the State of Delaware applicable to
Contracts executed in and to be performed in that State.
SECTION 5 COUNTERPARTS. This Amendment may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same instrument.
A-60
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Amendment to be executed as of the date first written above by their respective
officers thereunto duly authorized.
CHINADOTCOM CORPORATION
By: /s/ STEVEN CHAN
------------------------------------
Name: Steven Chan
Title: General Counsel and Company
Secretary
CDC SOFTWARE HOLDINGS, INC.
By: /s/ STEVEN CHAN
------------------------------------
Name: Steven Chan
Title: Authorized Signatory
ROSS SYSTEMS, INC.
By: /s/ J. PATRICK TINLEY
------------------------------------
Name: J. Patrick Tinley
Title: Chief Executive Officer
A-61
ANNEX B
FORM OF ROSS COMMON STOCKHOLDERS AGREEMENT
STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT (this "Agreement"), dated as of September 3, 2003, by
and between chinadotcom corporation, a company organized under the laws of the
Cayman Islands ("Parent"), and [ ] ("Stockholder").
---------------------
RECITALS
Concurrently herewith, Parent, CDC Software Holdings, Inc., a Delaware
corporation and wholly owned subsidiary of Parent ("Merger Sub"), and Ross
Systems, Inc., a Delaware corporation (the "Company"), are entering into an
Agreement and Plan of Merger as of the date hereof (the "Merger Agreement";
capitalized terms used but not defined herein shall have the meanings set forth
in the Merger Agreement), pursuant to which (and subject to the terms and
conditions set forth therein) Merger Sub will merge with and into the Company
(the "Merger"), and each outstanding share of common stock, par value $.001 per
share, of the Company (the "Common Stock") will be converted into the right to
receive the Merger Consideration.
As of the date hereof, Stockholder beneficially owns [ ] Shares (the
"Owned Shares"), and stock options exercisable for [ ] Shares (the
"Options") (the Owned Shares, including any Shares acquired by Stockholder after
the date hereof and prior to the termination hereof, whether upon exercise of
the Options, conversion of other convertible securities or otherwise, are
collectively referred to herein as the "Covered Shares", and the Covered Shares
and the Options are collectively referred to herein as the "Securities").
As a condition to their willingness to enter into the Merger Agreement,
Parent and Merger Sub have required that Stockholder agree, and Stockholder has
agreed, to enter into this Agreement.
AGREEMENT
To implement the foregoing and in consideration of the mutual agreements
contained herein, the parties agree as follows:
1. Agreement to Vote; Proxy.
1.1 Agreement to Vote. Except as set forth in Section 8.2 hereof and
subject to Section 7 hereof, Stockholder hereby agrees that, prior to any
termination of this Agreement, at any meeting of the stockholders of the
Company, however called, Stockholder shall (a) vote the Covered Shares in favor
of the Merger and any other matter necessary for consummation of the
Transactions, and (b) vote the Covered Shares against any proposal for any
recapitalization, reorganization, liquidation, merger, sale of assets or other
business combination between the Company and any other Person (other than the
Merger).
1.2 Proxy. Stockholder hereby grants to Parent a proxy to vote the Covered
Shares as indicated in Section 1.1 above. Stockholder intends this proxy to be
irrevocable and coupled with an interest and will take such further action or
execute such other instruments as may be reasonably necessary to effectuate the
intent of this proxy and hereby revokes any proxy previously granted by him with
respect to the Covered Shares.
1.3 Except as set forth in Section 1.1 above, Stockholder shall not be
restricted from voting in favor of, against or abstaining with respect to any
matter presented to the stockholders of the Company. In addition, nothing in
this Agreement shall give Parent or Merger Sub the right to vote any Covered
Shares in connection with the election of directors.
B-1
2. Expiration. This Agreement shall terminate on the Expiration Date. As
used herein, the term "Expiration Date" means the first to occur of (a) the
Effective Time, (b) termination of the Merger Agreement in accordance with its
terms, (c) March 1, 2004, (d) written notice of termination of this Agreement by
Parent to Stockholder, or (e) the withdrawal or adverse modification by the
Board of its approval or recommendation of the Merger or the Merger Agreement.
3. Representations and Warranties.
3.1 Representations and Warranties of Parent. Parent hereby represents and
warrants to Stockholder as follows:
(a) Due Authorization. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
and validly authorized by the Board of Directors of Parent, and no other
corporate proceedings on the part of Parent are necessary to authorize its
Agreement or to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Parent and
constitutes a valid and binding agreement of Parent, enforceable against
Parent in accordance with its terms, except that such enforceability (i)
may be limited by bankruptcy, insolvency, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally and
(ii) is subject to general principles of equity.
(b) No Conflicts. Except for the applicable requirements of the
Exchange Act (i) no filing with, and no permit, authorization, consent or
approval of, any state, federal or foreign governmental authority is
necessary on the part of Parent for the execution and delivery of this
Agreement by Parent and the consummation by Parent of the transactions
contemplated hereby and (ii) neither the execution and delivery of this
Agreement by Parent nor the consummation by Parent of the transactions
contemplated hereby nor compliance by Parent with any of the provisions
hereof shall (A) conflict with or result in any breach of any provision of
the certificate of incorporation or by-laws (or similar documents) of
Parent, (B) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, agreement or other instrument
or obligation to which Parent is a party or by which it or any of its
properties or assets may be bound or (C) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Parent or any
of its properties or assets, except in the case of (B) or (C) for
violations, breaches or defaults which would not in the aggregate
materially impair the ability of Parent to perform its obligations
hereunder.
(c) Valid Existence. Parent is a corporation duly organized and
validly existing under the laws of the Cayman Islands and has all requisite
corporate power and authority to execute and deliver this Agreement.
3.2 Representations and Warranties of Stockholder. Stockholder hereby
represents and warrants to Parent and Merger Sub as follows:
(a) Ownership of Securities. As of the date hereof, (i) the Owned
Shares and the Options constitute all of the Securities owned of record or
beneficially by Stockholder, and (ii) Stockholder has sole voting power and
sole power of disposition with respect to all such Owned Shares and
Options, with no restrictions, subject to applicable federal securities
laws, on Stockholder's rights of disposition pertaining thereto (other than
as created by this Agreement, the Merger Agreement or, in the case of
Options, those restrictions under the related option plan).
(b) Power; Binding Agreement. This Agreement has been duly and validly
authorized, executed and delivered by Stockholder and constitutes a valid
and binding agreement of Stockholder, enforceable against Stockholder in
accordance with its terms, except that such enforceability (i) may be
limited by bankruptcy, insolvency, moratorium or other similar laws
affecting or relating to enforcement of creditor's rights generally and
(ii) is subject to general principles of equity.
B-2
(c) No Conflicts. To the knowledge of Stockholder, except for the
applicable requirements of the Exchange Act (i) no filing with, and no
permit, authorization, consent or approval of, any state, federal or
foreign governmental authority on the part of Stockholder is necessary for
the execution and delivery of this Agreement by Stockholder and the
consummation by Stockholder of the transactions contemplated hereby and
(ii) neither the execution and delivery of this Agreement by Stockholder
nor the consummation by Stockholder of the transactions contemplated hereby
nor compliance by Stockholder with any of the provisions hereof shall (A)
result in a violation or breach of, or constitute (with or without notice
or lapse of time or both) a default (or give rise to any third party right
of termination, cancellation, material modification or acceleration) under
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, contract, agreement or other instrument or obligation
to which Stockholder is a party or by which it or any of its properties or
assets may be bound or (B) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Stockholder or any of its
properties or assets, except in the case of (A) or (B) for violations,
breaches or defaults which would not in the aggregate materially impair the
ability of Stockholder to perform his obligations hereunder.
(d) Accredited Investor. Stockholder is an "accredited investor" (as
defined under the Securities Act) and a sophisticated investor, is capable
of evaluating the merits and risks of its investments and has the capacity
to protect its own interests.
4. Certain Covenants of Stockholder. Except in accordance with the terms of
this Agreement, Stockholder hereby covenants and agrees as follows:
4.1 No Solicitation. Prior to any termination of this Agreement, subject to
Sections 7 and 8.2 hereof, Stockholder shall not, directly or indirectly,
solicit (including by way of furnishing information) any inquiries or the making
of any proposal by any Person or entity (other than Parent or any affiliate of
Parent) which constitutes, or would lead to, any Acquisition Proposal. If
Stockholder receives an inquiry or proposal with respect to the sale of
Securities, then Stockholder shall promptly inform Parent of the terms and
conditions, if any, of such inquiry or proposal and the identity of the Person
making it. Stockholder will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
prior to the date of this Agreement with respect to any of the foregoing.
4.2 Restriction on Transfer, Proxies and Non-Interference. Except as set
forth in Section 8.2 hereof, Stockholder hereby agrees, while this Agreement is
in effect, and except as contemplated hereby, not to (a) sell, transfer, pledge,
encumber, assign or otherwise dispose of, or enter into any contract, option or
other arrangement or understanding with respect to the sale, transfer, pledge,
encumbrance, assignment or other disposition of, any of the Securities; (b)
grant any proxies, deposit any Securities into a voting trust or enter into a
voting agreement with respect to any Securities; or (c) knowingly take any
action that would make any representation or warranty of Stockholder contained
herein untrue or incorrect or have the effect of preventing or disabling
Stockholder from performing its obligations under this Agreement.
5. Further Assurances. From time to time, at the other party's request and
without further consideration, each party hereto shall execute and deliver such
additional documents and take all such further action as may be necessary or
desirable to consummate and make effective the transactions contemplated by this
Agreement.
6. Stop Transfer Order. In furtherance of this Agreement, concurrently
herewith, Stockholder shall and hereby does authorize the Company's counsel to
notify the Company's transfer agent that there is a stop transfer order with
respect to all of the Securities (and that this Agreement places limits on the
voting and transfer of such Securities).
7. Fiduciary Duties. Notwithstanding anything in this Agreement to the
contrary: (a) Stockholder makes no agreement or understanding herein in any
capacity other than in Stockholder's capacity as a record holder and beneficial
owner of Securities, (b) nothing herein shall be construed to limit or affect
any action or inaction by Stockholder acting in such person's capacity as a
director, officer or employee of
B-3
the Company, and (c) Stockholder shall have no liability to Parent or any of its
Affiliates under this Agreement or otherwise as a result of any action or
inaction by Stockholder in such person's capacity as a director, officer or
employee of the Company.
8. Miscellaneous.
8.1 Entire Agreement; Assignment. This Agreement (a) constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof and (b) shall not
be assigned by operation of law or otherwise, provided that Parent may assign
its rights and obligations hereunder to any direct or indirect wholly owned
subsidiary of Parent, but no such assignment shall relieve Parent of its
obligations hereunder if such assignee does not perform such obligations.
8.2 Permitted Transfers. Notwithstanding anything in this Agreement to the
contrary, Stockholder may transfer any or all of the Securities, in accordance
with provisions of applicable Law, to Stockholder's spouse, ancestors,
descendants or any trust for any of their benefits or to a charitable trust;
provided, however, that, prior to and as a condition to the effectiveness of
such transfer, each Person to which any of such Securities or any interest in
any of such Securities is or may be transferred shall have executed and
delivered to Parent and Merger Sub a counterpart of this Agreement pursuant to
which such Person shall be bound by all of the terms and provisions of this
Agreement, and shall have agreed in writing with Parent and Merger Sub to hold
such Securities or interest in such Securities subject to all of the terms and
provisions of this Agreement.
8.3 Amendments. This Agreement may not be modified, amended, altered or
supplemented, except upon the execution and delivery of a written agreement
executed by the parties hereto.
8.4 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by hand delivery, telecopy or
mail (registered or certified mail, postage prepaid, return receipt requested)
or by any courier service, such as United Parcel Service, providing proof of
delivery. All communications hereunder shall be delivered to the respective
parties at the following addresses:
If to Stockholder:
Copy to:
If to Parent:
chinadotcom corporation
34/F Citicorp Centre
18 Whitfield Road
Causeway Bay
Hong Kong
Telecopier No: 011-852-2237-7227
Attention: General Counsel
Copy to:
Milbank, Tweed, Hadley & McCoy LLP
1 Chase Manhattan Plaza
New York, NY 10005
Telecopier No: (212) 530-5219
Attention: Mark L. Weissler
or to such other address as the Person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
B-4
8.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
8.6 Specific Performance. Each of the parties hereto recognizes and
acknowledges that a breach by it of any covenants or agreements contained in
this Agreement will cause the other party to sustain damages for which it would
not have an adequate remedy at law for money damages, and therefore each of the
parties hereto agrees that in the event of any such breach the aggrieved party
shall be entitled to the remedy of specific performance of such covenants and
agreements and injunctive and other equitable relief in addition to any other
remedy to which it may be entitled, at law or in equity.
8.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same Agreement.
8.8 Descriptive Headings. The descriptive headings used herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
8.9 Severability. Whenever possible, each provision or portion of any
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
8.10 Non-survival of Representations and Warranties. The respective
representations and warranties of Stockholder and Parent contained herein shall
not survive the closing of the transactions contemplated hereby and by the
Merger Agreement.
8.11 No Control. Nothing contained in this Agreement shall give Parent or
Merger Sub the right to control or direct the Company or the Company's
operations.
IN WITNESS WHEREOF, Parent and Stockholder have caused this Agreement to be
duly executed as of the day and year first above written.
CHINADOTCOM CORPORATION
By:
--------------------------------------
Name:
Title:
------------------------------------
[STOCKHOLDER]
B-5
ANNEX C
ROSS PREFERRED STOCKHOLDER AGREEMENT
PREFERRED STOCKHOLDER AGREEMENT
PREFERRED STOCKHOLDER AGREEMENT (this "Agreement"), dated as of September
4, 2003, by and among chinadotcom corporation, a company organized under the
laws of the Cayman Islands ("Parent"), Ross Systems, Inc., a Delaware
corporation (the "Company"), and Benjamin W. Griffith, III ("Preferred
Stockholder").
---------------------
RECITALS
Concurrently herewith, Parent, CDC Software Holdings, Inc., a Delaware
corporation and wholly owned subsidiary of Parent ("Merger Sub"), and the
Company are entering into an Agreement and Plan of Merger as of the date hereof
(the "Merger Agreement"; capitalized terms used but not defined herein shall
have the meanings set forth in the Merger Agreement), pursuant to which (and
subject to the terms and conditions set forth therein) Merger Sub will merge
with and into the Company (the "Merger"), and each outstanding share of common
stock, par value $.001 per share, of the Company (the "Common Stock") will be
converted into the right to receive the Merger Consideration.
As of the date hereof, Preferred Stockholder beneficially owns 500,000
Preferred Shares (the "Owned Preferred Shares" and, together with any Preferred
Shares acquired by Preferred Stockholder prior to the termination of this
Agreement, the "Covered Preferred Shares"), and 127,500 shares of Common Stock
(the "Owned Common Shares"). An additional 25,000 shares of Common Stock (the
"Trust Shares") are held by the Griffith Family Charitable Foundation, Inc. The
Owned Preferred Shares are convertible into 500,000 shares of Common Stock (the
Common Stock into which the Owned Preferred Shares are convertible, together
with the Owned Common Shares, the Trust Shares and any shares of Common Stock
acquired by Preferred Stockholder after the date hereof and prior to the
termination hereof, whether upon conversion of other convertible securities or
otherwise, collectively, referred to herein as the "Covered Shares", and the
Covered Shares and the Covered Preferred Shares collectively referred to as the
"Securities").
As a condition to their willingness to enter into the Merger Agreement,
Parent and Merger Sub have required that Preferred Stockholder agree, and
Preferred Stockholder has agreed, to enter into this Agreement.
AGREEMENT
To implement the foregoing and in consideration of the mutual agreements
contained herein, the parties agree as follows:
1. Agreement to Convert and Vote; Proxy.
1.1 Delivery of Documents. Preferred Stockholder hereby agrees to deliver
to the Company, immediately prior to the Effective Time, (a) any and all stock
certificates representing the Covered Preferred Shares, and (b) a validly
executed notice of conversion, substantially in the form attached hereto as
Exhibit A, requesting the conversion of the Covered Preferred Shares into Common
Stock (the "Conversion").
1.2 Conversion. In accordance with Section 5 of the Certificate of
Designations, the Company shall cause the Conversion to be effective immediately
prior to the Effective Time; provided, however, that if the Merger Agreement is
terminated prior to the Effective Time in accordance with its terms, then, as
promptly as reasonably practicable after such termination, but in no event later
than five Business Days
C-1
following such termination, the Company shall issue to Preferred Stockholder a
certificate or certificates representing the Covered Preferred Shares without
giving effect to the Conversion.
1.3 Voting. Except as set forth in Section 7.2 hereof, Preferred
Stockholder hereby agrees that, prior to any termination of this Agreement, at
any meeting of the stockholders of the Company, however called, Preferred
Stockholder shall (a) vote (or cause to be voted) the Covered Preferred Shares
and any Covered Shares in favor of the Merger and any other matter necessary for
consummation of the Transactions, and (b) vote (or cause to be voted) the
Covered Preferred Shares and any Covered Shares against any proposal for any
recapitalization, reorganization, liquidation, merger, sale of assets or other
business combination between the Company and any other Person (other than the
Merger).
1.4 Proxy. Preferred Stockholder hereby grants to Parent a proxy to vote
the Covered Preferred Shares and any Covered Shares as indicated in Section 1.3
above. Preferred Stockholder intends this proxy to be irrevocable and coupled
with an interest and will take such further action or execute such other
instruments as may be reasonably necessary to effectuate the intent of this
proxy and hereby revokes any proxy previously granted by him with respect to the
Covered Preferred Shares or any Covered Shares.
1.5 Except as set forth in Section 1.3 hereof, Preferred Stockholder shall
not be restricted from voting in favor of, against or abstaining with respect to
any matter presented to the stockholders of the Company. In addition, nothing in
this Agreement shall give Parent or Merger Sub the right to vote any Covered
Preferred Shares or any Covered Shares in connection with the election of
directors.
2. Expiration. This Agreement shall terminate on the Expiration Date. As
used herein, the term "Expiration Date" means the first to occur of (a) the
Effective Time, (b) termination of the Merger Agreement in accordance with its
terms, (c) March 1, 2004, (d) written notice of termination of this Agreement by
Parent to Stockholder, or (e) the withdrawal or adverse modification by the
Board of its approval or recommendation of the Merger or the Merger Agreement.
3. Representations and Warranties.
3.1 Representations and Warranties of Parent. Parent hereby represents
and warrants to Preferred Stockholder as follows:
(a) Due Authorization. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
and validly authorized by the Board of Directors of Parent, and no other
corporate proceedings on the part of Parent are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Parent and
constitutes a valid and binding agreement of Parent, enforceable against
Parent in accordance with its terms, except that such enforceability (i)
may be limited by bankruptcy, insolvency, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally and
(ii) is subject to general principles of equity.
(b) No Conflicts. Except for the applicable requirements of the
Exchange Act (i) no filing with, and no permit, authorization, consent or
approval of, any state, federal or foreign governmental authority is
necessary on the part of Parent for the execution and delivery of this
Agreement by Parent and the consummation by Parent of the transactions
contemplated hereby and (ii) neither the execution and delivery of this
Agreement by Parent nor the consummation by Parent of the transactions
contemplated hereby nor compliance by Parent with any of the provisions
hereof shall (A) conflict with or result in any breach of any provision of
the certificate of incorporation or by-laws (or similar documents) of
Parent, (B) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, agreement or other instrument
or obligation to which Parent is a party or by which it or any of its
properties or assets may be bound or (C) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Parent or any
of its
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properties or assets, except in the case of (B) or (C) for violations,
breaches or defaults which would not in the aggregate materially impair the
ability of Parent to perform its obligations hereunder.
(c) Valid Existence. Parent is a corporation duly organized and
validly existing under the laws of the Cayman Islands and has all requisite
corporate power and authority to execute and deliver this Agreement.
3.2 Representations and Warranties of Preferred Stockholder. Preferred
Stockholder hereby represents and warrants to Parent and Merger Sub as follows:
(a) Ownership of Securities. As of the date hereof, (i) the Owned
Preferred Shares and the Owned Common Shares constitute all of the
Securities owned of record or beneficially by Preferred Stockholder, and
(ii) Preferred Stockholder has sole voting power and sole power of
disposition with respect to all such Owned Preferred Shares and Owned
Common Shares, with no restrictions, subject to applicable federal
securities laws, on Preferred Stockholder's rights of disposition
pertaining thereto (other than as created by this Agreement, the Merger
Agreement, or the Certificate of Designations).
(b) Power; Binding Agreement. This Agreement has been duly and
validly authorized, executed and delivered by Preferred Stockholder and
constitutes a valid and binding agreement of Preferred Stockholder,
enforceable against Preferred Stockholder in accordance with its terms,
except that such enforceability (i) may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to
enforcement of creditor's rights generally and (ii) is subject to general
principles of equity.
(c) No Conflicts. To the knowledge of Preferred Stockholder, except
for the applicable requirements of the Exchange Act, (i) no filing with,
and no permit, authorization, consent or approval of, any state, federal or
foreign governmental authority on the part of Preferred Stockholder is
necessary for the execution and delivery of this Agreement by Preferred
Stockholder and the consummation by Preferred Stockholder of the
transactions contemplated hereby and (ii) neither the execution and
delivery of this Agreement by Preferred Stockholder nor the consummation by
Preferred Stockholder of the transactions contemplated hereby nor
compliance by Preferred Stockholder with any of the provisions hereof shall
(A) result in a violation or breach of, or constitute (with or without
notice or lapse of time or both) a default (or give rise to any third party
right of termination, cancellation, material modification or acceleration)
under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, license, contract, agreement or other instrument or
obligation to which Preferred Stockholder is a party or by which it or any
of its properties or assets may be bound or (B) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Preferred
Stockholder or any of its properties or assets, except in the case of (A)
or (B) for violations, breaches or defaults which would not in the
aggregate materially impair the ability of Preferred Stockholder to perform
his obligations hereunder.
(d) Accredited Investor. Preferred Stockholder is an "accredited
investor" (as defined under the Securities Act) and a sophisticated
investor, is capable of evaluating the merits and risks of its investments
and has the capacity to protect its own interests.
4. Certain Covenants of Preferred Stockholder. Except in accordance with
the terms of this Agreement, Preferred Stockholder hereby covenants and agrees
as follows:
4.1 No Solicitation. Prior to any termination of this Agreement, subject
to Section 7.2 hereof, Preferred Stockholder shall not, directly or indirectly,
solicit (including by way of furnishing information) any inquiries or the making
of any proposal by any Person or entity (other than Parent or any affiliate of
Parent) which constitutes, or would lead to, any Acquisition Proposal. If
Preferred Stockholder receives an inquiry or proposal with respect to the sale
of Securities, then Preferred Stockholder shall promptly inform Parent of the
terms and conditions, if any, of such inquiry or proposal and the identity of
the Person making it. Preferred Stockholder will immediately cease and cause to
be terminated any existing activities, discussions or negotiations with any
parties conducted prior to the date of this Agreement with respect to any of the
foregoing.
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4.2 Restriction on Transfer, Proxies and Non-Interference. Except as set
forth in Section 7.2 hereof, Preferred Stockholder hereby agrees, while this
Agreement is in effect, and except as contemplated hereby, not to (a) sell,
transfer, pledge, encumber, assign or otherwise dispose of, or enter into any
contract, option or other arrangement or understanding with respect to the sale,
transfer, pledge, encumbrance, assignment or other disposition of, any of the
Securities; (b) grant any proxies, deposit any Securities into a voting trust or
enter into a voting agreement with respect to any Securities; or (c) knowingly
take any action that would make any representation or warranty of Preferred
Stockholder contained herein untrue or incorrect or have the effect of
preventing or disabling Preferred Stockholder from performing its obligations
under this Agreement.
5. Further Assurances. From time to time, at the other party's request
and without further consideration, each party hereto shall execute and deliver
such additional documents and take all such further action as may be necessary
or desirable to consummate and make effective the transactions contemplated by
this Agreement.
6. Stop Transfer Order. In furtherance of this Agreement, concurrently
herewith, Preferred Stockholder shall and hereby does authorize the Company's
counsel to notify the Company's transfer agent that there is a stop transfer
order with respect to all of the Securities (and that this Agreement places
limits on the voting and transfer of such Securities).
7. Miscellaneous.
7.1 Entire Agreement; Assignment. This Agreement (a) constitutes the
entire agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof, and (b) shall not
be assigned by operation of law or otherwise, provided that Parent may assign
its rights and obligations hereunder to any direct or indirect wholly owned
subsidiary of Parent, but no such assignment shall relieve Parent of its
obligations hereunder if such assignee does not perform such obligations.
7.2 Permitted Transfers. Notwithstanding anything in this Agreement to
the contrary, Preferred Stockholder may transfer any or all of the Securities,
in accordance with provisions of applicable Law, to Preferred Stockholder's
spouse, ancestors, descendants or any trust for any of their benefits or to a
charitable trust; provided, however, that, prior to and as a condition to the
effectiveness of such transfer, each Person to which any of such Securities or
any interest in any of such Securities is or may be transferred shall have
executed and delivered to Parent and Merger Sub a counterpart of this Agreement
pursuant to which such Person shall be bound by all of the terms and provisions
of this Agreement, and shall have agreed in writing with Parent and Merger Sub
to hold such Securities or interest in such Securities subject to all of the
terms and provisions of this Agreement.
7.3 Amendments. This Agreement may not be modified, amended, altered or
supplemented, except upon the execution and delivery of a written agreement
executed by the parties hereto.
7.4 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by hand delivery, telecopy or
mail (registered or certified mail, postage prepaid, return receipt requested)
or by any courier service, such as United Parcel Service, providing proof of
delivery. All communications hereunder shall be delivered to the respective
parties at the following addresses:
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If to Preferred Stockholder:
Copy to:
If to Parent:
chinadotcom corporation
34/F Citicorp Centre
18 Whitfield Road
Causeway Bay
Hong Kong
TELECOPIER No: 011-852-2237-7227
Attention: General Counsel
Copy to:
Milbank, Tweed, Hadley & McCloy LLP
1 Chase Manhattan Plaza
New York, NY 10005
Telecopier No: (212) 530-5219
Attention: Mark L. Weissler
If to the Company:
Ross Systems, Inc.
Two Concourse Parkway
Suite 800
Atlanta, Georgia 30328
Telecopier No: (770) 351-9506
Attention: Robert B. Webster
Copy to:
King & Spalding LLP
191 Peachtree Street
Atlanta, Georgia 30303
Telecopier No: (404) 572-5100
Attention: William Roche, Esq.
or to such other address as the Person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
7.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
7.6 Specific Performance. Each of the parties hereto recognizes and
acknowledges that a breach by it of any covenants or agreements contained in
this Agreement will cause the other party to sustain damages for which it would
not have an adequate remedy at law for money damages, and therefore each of the
parties hereto agrees that in the event of any such breach the aggrieved party
shall be entitled to the remedy of specific performance of such covenants and
agreements and injunctive and other equitable relief in addition to any other
remedy to which it may be entitled, at law or in equity.
7.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same Agreement.
7.8 Descriptive Headings. The descriptive headings used herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
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7.9 Severability. Whenever possible, each provision or portion of any
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
7.10 Non-survival of Representations and Warranties. The respective
representations and warranties of Preferred Stockholder and Parent contained
herein shall not survive the closing of the transactions contemplated hereby and
by the Merger Agreement.
7.11 No Control. Nothing contained in this Agreement shall give Parent or
Merger Sub the right to control or direct the Company or the Company's
operations.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Parent, the Company and Preferred Stockholder have
caused this Agreement to be duly executed as of the day and year first above
written.
CHINADOTCOM CORPORATION
By: /s/ DANIEL WIDDICOMBE
------------------------------------
Name: Daniel Widdicombe
Title: Chief Financial Officer
ROSS SYSTEMS, INC.
By: /s/ J. PATRICK TINLEY
------------------------------------
Name: J. Patrick Tinley
Title: Chief Executive Officer
/s/ BENJAMIN W. GRIFFITH, III
--------------------------------------
Benjamin W. Griffith, III
C-7
AMENDMENT TO
PREFERRED STOCKHOLDER AGREEMENT
THIS AMENDMENT (this "Amendment") to the Preferred Stockholder Agreement
dated as of September 4, 2003 (the "Preferred Stockholder Agreement"), by and
among chinadotcom corporation, a company organized under the laws of the Cayman
Islands ("Parent"), Ross Systems, Inc., a Delaware corporation (the "Company"),
and Benjamin W. Griffith, III ("Preferred Stockholder") is entered into by
Parent, the Company and Preferred Stockholder as of this 31st day of January,
2004.
Pursuant to the terms of the terms of the Preferred Stockholder Agreement
and in accordance with Section 7.3 thereof, the parties hereto agree to amend
the Preferred Stockholder Agreement as follows:
Section 1 Amendment to Section 2(c). Section 2(c) of the Preferred
Stockholder Agreement is amended by deleting the date "March 31, 2004" and
replacing such date with the date "July 1, 2004."
Section 2 Full Force and Effect. Except as expressly amended hereby, the
Preferred Stockholder Agreement shall continue in full force and effect in
accordance with the provisions thereof on the date hereof.
Section 3 Governing Law. This Amendment shall be governed by, and
construed in accordance with, the Laws of the State of Delaware applicable to
contracts executed in and to be performed in that State.
Section 4 Counterparts. This Amendment may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same instrument.
[Signatures begin on next page]
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IN WITNESS WHEREOF, Parent, the Company and Preferred Stockholder have
caused this Amendment to be duly executed as of the day and year first above
written.
CHINADOTCOM CORPORATION
By: /s/ STEVEN CHAN
------------------------------------
Name: Steven Chan
Title: General Counsel and
Secretary
ROSS SYSTEMS, INC.
By: /s/ ROBERT B. WEBSTER
------------------------------------
Name: Robert B. Webster
Title: EVP and Secretary
/s/ BENJAMIN W. GRIFFITH, III
--------------------------------------
Benjamin W. Griffith, III
C-9
SECOND AMENDMENT TO
PREFERRED STOCKHOLDER AGREEMENT
THIS SECOND AMENDMENT (this "Amendment") to the Preferred Stockholder
Agreement dated as of September 4, 2003 by and among chinadotcom corporation, a
company organized under the laws of the Cayman Islands ("Parent"), Ross Systems,
Inc., a Delaware corporation (the "Company") and Benjamin W. Griffith, III
("Preferred Stockholder"), as amended by that certain Amendment to the Preferred
Stockholder Agreement dated as of January 31, 2004 (such agreement, as amended,
the "Preferred Stockholder Agreement"), is entered into by Parent, the Company
and Preferred Stockholder as of this 14th day of June, 2004.
Pursuant to the terms of the terms of the Preferred Stockholder Agreement
and in accordance with Section 7.3 thereof, the parties hereto agree to amend
the Preferred Stockholder Agreement as follows:
Section 1 Amendment to Section 2(c). Section 2(c) of the Preferred
Stockholder Agreement is amended by deleting the date "July 1, 2004" and
replacing such date with the date "September 1, 2004."
Section 2 Full Force and Effect. Except as expressly amended hereby, the
Preferred Stockholder Agreement shall continue in full force and effect in
accordance with the provisions thereof on the date hereof.
Section 3 Governing Law. This Amendment shall be governed by, and
construed in accordance with, the Laws of the State of Delaware applicable to
contracts executed in and to be performed in that State.
Section 4 Counterparts. This Amendment may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same instrument.
[Signatures begin on next page]
C-10
IN WITNESS WHEREOF, Parent, the Company and Preferred Stockholder have
caused this Amendment to be duly executed as of the day and year first above
written.
CHINADOTCOM CORPORATION
By: /s/ DANIEL WIDDICOMBE
------------------------------------
Name: Daniel Widdicombe
Title: Chief Financial Officer
ROSS SYSTEMS, INC.
By: /s/ ROBERT B. WEBSTER
------------------------------------
Name: Robert B. Webster
Title: EVP and Secretary
/s/ BENJAMIN W. GRIFFITH, III
--------------------------------------
Benjamin W. Griffith, III
C-11
ANNEX D
FAIRNESS OPINION DELIVERED TO ROSS
D-1
BROADVIEW
NEW YORK - SILICON VALLEY - BOSTON - LONDON
September 4, 2003
CONFIDENTIAL
Board of Directors
Ross Systems, Inc.
2 Concourse Parkway
Suite 800
Atlanta, GA 30328
Dear Members of the Board:
We understand that Ross Systems, Inc. ("Ross Systems" or the "Company"),
chinadotcom corporation ("chinadotcom") and CDC Software Holdings, Inc., a
wholly-owned subsidiary of chinadotcom ("Merger Sub"), propose to enter into an
Agreement and Plan of Merger (the "Agreement") pursuant to which Ross Systems
will merge with and into Merger Sub or Merger Sub will merge with and into the
Company (in either case, the "Merger"). Pursuant to the Agreement, (i) each
issued and outstanding share of Ross Systems Common Stock (including associated
rights; excluding shares owned by chinadotcom or Merger Sub) will be converted
into the right to receive (a) the number (the "Exchange Ratio") of shares of
chinadotcom Common Stock determined by dividing $14.00 by the average closing
price for chinadotcom Common Stock during the ten trading-day period ending two
trading days prior to the effective time of the Merger (the "chinadotcom Mean
Price"); and (b) $5.00 in cash ((a) and (b) together being the "Merger
Consideration"). We understand that in the event the chinadotcom Mean Price (i)
is less than $8.50, the Exchange Ratio will equal $14.00 divided by $8.50, but
that in such event, the Company may terminate the Agreement unless chinadotcom
agrees that the Exchange Ratio will remain equal to $14.00 divided by the
chinadotcom Mean Price; and (ii) is greater than $10.50, the Exchange Ratio will
equal $14.00 divided by $10.50. The terms and conditions of the Merger are more
fully detailed in the Agreement.
You have requested our opinion as to whether the Merger Consideration is
fair, from a financial point of view, to holders of Ross Systems Common Stock.
Broadview International LLC ("Broadview") focuses on providing merger and
acquisition advisory services to information technology ("IT"), communications,
healthcare technology and media companies. In this capacity, we are continually
engaged in valuing such businesses, and we maintain an extensive database of IT,
communications and media mergers and acquisitions for comparative purposes. We
have been retained by Ross Systems' Board of Directors to determine the fairness
of the Merger Consideration to holders of Ross Systems Common Stock from a
financial point of view and will receive a fee from Ross Systems upon the
delivery of this fairness opinion.
In rendering our opinion, we have, among other things:
(1) reviewed the terms of the Agreement in the form of the draft dated
September 4, 2003 furnished to us by Ross Systems' legal counsel, which,
for the purposes of this opinion, we have assumed, with your permission, to
be identical in all material respects to the agreement to be executed;
(2) reviewed Ross Systems' annual report on Form 10-K for the fiscal
year ended June 30, 2002, including the audited financial statements
included therein, Ross Systems' quarterly report on Form 10-Q for the
period ended March 31, 2003, including the unaudited financial statements
included therein and the unaudited financial statements for the period
ending June 30, 2003, prepared and furnished to us by Ross Systems
management;
D-2
(3) reviewed certain internal financial and operating information for
Ross Systems, including quarterly financial projections through June 30,
2004 and annual financial projections through June 30, 2005, in each case,
prepared and furnished to us by Ross Systems management;
(4) participated in discussions with Ross Systems management
concerning the operations, business strategy, financial performance and
prospects for Ross Systems;
(5) discussed with Ross Systems management its view of the strategic
rationale for the Merger;
(6) reviewed the recent reported closing prices and trading activity
for Ross Systems Common Stock;
(7) compared certain aspects of the financial performance of Ross
Systems with public companies we deemed comparable;
(8) analyzed available information, both public and private,
concerning other mergers and acquisitions we believe to be comparable in
whole or in part to the Merger;
(9) reviewed recent equity research analyst reports covering Ross
Systems;
(10) reviewed chinadotcom's annual report on Form 20-F for the fiscal
year ended December 31, 2002, including the audited financial statements
included therein, and the financial press release dated August 6, 2003,
including unaudited financial statements for the period ending June 30,
2003;
(11) reviewed certain internal financial and operating information for
chinadotcom, including quarterly financial projections for chinadotcom
through December 31, 2004 prepared and provided to us by chinadotcom
management;
(12) reviewed the recent reported closing prices and trading activity
for chinadotcom Common Stock;
(13) discussed with chinadotcom management its view of the strategic
rationale for the Merger;
(14) compared certain aspects of the financial performance of
chinadotcom with public companies we deemed comparable;
(15) analyzed the anticipated effect of the Merger on the future
financial performance of the consolidated entity;
(16) participated in discussions with chinadotcom management
concerning the operations, business strategy, financial performance and
prospects for chinadotcom;
(17) reviewed certain equity research analyst reports covering
chinadotcom; and
(18) conducted other financial studies, analyses and investigations as
we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied, without independent verification,
on the accuracy and completeness of all the financial and other information
(including without limitation the representations and warranties contained in
the Agreement) that was publicly available or furnished to us by Ross Systems,
chinadotcom or their respective advisors. With respect to the financial
projections examined by us, we have assumed that they were reasonably prepared
and reflected the best available estimates and good faith judgments of the
management of Ross Systems and chinadotcom, as to the future performance of Ross
Systems and chinadotcom, respectively. We have not made or taken into account
any independent appraisal or valuation of any of Ross Systems' or chinadotcom's
assets.
With your permission, our opinion does not address the financial impact of
any potential transactions, which chinadotcom has confidentially disclosed to us
that it is considering; provided, however, that in our review, nothing has come
to our attention that affects any conclusion or opinion set forth herein. Our
opinion is necessarily based upon market, economic, financial and other
conditions as they exist and can be
D-3
evaluated as of the date of this opinion, and any change in such conditions
could require a reevaluation of this opinion, a reevaluation that we have no
obligation to undertake. We express no opinion as to the price at which shares
of chinadotcom Common Stock will trade at any time. We do not express any
opinion as to the tax consequences of the Merger to the Company or any of its
stockholders.
Based upon and subject to the foregoing, we are of the opinion that the
Merger Consideration is fair, from a financial point of view, to holders of Ross
Systems Common Stock (including holders of Ross Systems Common Stock as a result
of conversion of Ross Systems Preferred Stock, provided that the opinion does
not address the conversion of such shares of Preferred Stock into Ross Systems
Common Stock).
This opinion speaks only as of the date hereof. It is understood that this
opinion is for the information of the Board of Directors of Ross Systems in
connection with its consideration of the Merger and does not constitute a
recommendation to any holder of Ross Systems Common Stock as to how such holder
should vote on the Merger. This opinion may not be published or referred to, in
whole or part, without our prior written permission, which shall not be
unreasonably withheld. Broadview hereby consents to references to and inclusion
of this opinion in its entirety in the Registration Statement and Proxy
Statement to be distributed to holders of Ross Systems Common Stock in
connection with the Merger.
Sincerely,
/s/ BROADVIEW INTERNATIONAL LLC
--------------------------------------
Broadview International LLC
D-4
ANNEX E
DELAWARE GENERAL CORPORATION LAW, SECTION 262
SEC. 262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
E-1
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, then either a constituent corporation before the
effective date of the merger or consolidation, or the surviving or
resulting corporation within ten days thereafter shall notify each of the
holders of any class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section. Such notice may, and, if
given on or after the effective date of the merger or consolidation, shall,
also notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within 20
days after the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the
E-2
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by one or more publications at
least one week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
E-3
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
E-4
ANNEX F
FORM OF ROSS PROXY CARD
F-1
REVOCABLE PROXY
ROSS SYSTEMS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints J. Patrick Tinley and Robert B. Webster and
each of them, as proxies with full power of substitution and resubstitution, for
and in the name of the undersigned, to vote, as indicated herein, all the common
stock and preferred stock of Ross Systems, Inc. ("Ross") held of record by the
undersigned on July 13, 2004, at the Special Meeting of Stockholders to be held
on Wednesday, August 25, 2004 at 10:00 a.m., local time, or any adjournment
thereof, at Ross' executive offices located at Two Concourse Parkway, Suite 800,
Conference Room, Atlanta, Georgia 30328, with all the powers the undersigned
would possess if then and there personally present.
The proxies shall vote subject to the directions indicated on this proxy
card, and the proxies are authorized to vote in their discretion upon other
business as may properly come before the special meeting or any adjournment
thereof. If you wish to vote as the Board of Directors recommends, all you need
to do is sign and return this card. THE PROXIES WILL VOTE "FOR" THE PROPOSALS IN
ITEMS 1-2 WHERE A CHOICE HAS NOT BEEN SPECIFIED. THE PROXIES CANNOT VOTE YOUR
SHARES UNLESS YOU SIGN, DATE AND RETURN THIS PROXY CARD.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1-2.
1. To approve, authorize and adopt the agreement and plan of merger, dated
as of September 4, 2003, as amended, by and among chinadotcom
corporation ("chinadotcom"), a company organized under the laws of the
Cayman Islands, Ross and CDC Software Holdings, Inc., a Delaware
corporation and wholly owned subsidiary of chinadotcom, as amended,
pursuant to which CDC Software Holdings, Inc. will be merged with and
into Ross, which will survive as a wholly owned subsidiary of
chinadotcom.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To adjourn the special meeting, if necessary, to solicit additional
proxies from Ross stockholders.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed and dated on reverse side)
--------------------------------------------------------------------------------
(Continued from other side)
Receipt of Notice of Special Meeting of Stockholders and the related Proxy
Statement dated July 21, 2004, is hereby acknowledged.
Dated ---------------------------------------, 2004
------------------------------------------------------
------------------------------------------------------
SIGNATURE(S) OF STOCKHOLDER(S)
Please sign EXACTLY as your name appears hereon. If
shares are held jointly, each joint holder must sign.
When signing as attorney, executor, administrator,
trustee or guardian, please give your full title. If
the stockholder is a corporation or partnership, please
sign the full corporate or partnership name by a duly
authorized person.
F-2
This proxy, if properly executed and delivered, will revoke all prior proxies.
PLEASE SIGN, DATE AND MAIL THIS PROXY CARD
IN THE ACCOMPANYING ENVELOPE.
NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
F-3
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(MARK ONE)
[X] SECOND AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19092
------------------------
ROSS SYSTEMS, INC.
INCORPORATED IN DELAWARE IRS EMPLOYER IDENTIFICATION NO. 94-2170198
TWO CONCOURSE PARKWAY, SUITE 800
ATLANTA, GEORGIA 30328
(770) 351-9600
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
None.................................................. None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.001 par value; Preferred Shares Purchase Rights
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT, BASED UPON THE CLOSING SALE PRICE OF THE
COMMON STOCK ON DECEMBER 31, 2002 AS REPORTED BY THE NASDAQ NATIONAL MARKET, WAS
APPROXIMATELY $19,146,780. SHARES OF VOTING STOCK HELD BY EACH OFFICER AND
DIRECTOR AND BY EACH PERSON WHO OWNS 5% OR MORE OF THE OUTSTANDING COMMON STOCK
HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY BE DEEMED TO BE AFFILIATES. THIS
DETERMINATION OF AFFILIATE STATUS IS NOT NECESSARILY A CONCLUSIVE DETERMINATION
FOR OTHER PURPOSES.
As of September 2, 2003, the Registrant had outstanding 2,815,825 shares
of Common Stock, and 500,000 Series A 7.5% convertible preference shares,
("convertible preferred stock").
================================================================================
EXPLANATORY NOTE
This amended annual report on Form 10-K/A contains modifications to certain
disclosures in the annual report on Form 10-K/A filed on January 20, 2004. No
restatements have been made to the financial results of the Company for any of
the periods reported in this document.
ROSS SYSTEMS, INC AND SUBSIDIARIES
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K/A
YEAR ENDED JUNE 30, 2003
TABLE OF CONTENTS
PAGE NO.
--------
PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 4
Item 3. Legal Proceedings.............................................................................. 5
Item 4. Submission of Matters to a Vote of Security Holders............................................ 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 7
Item 6. Selected Financial Data........................................................................ 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 9
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk..................................... 21
Item 8. Financial Statements and Supplementary Data.................................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 21
Item 9A Controls and Procedures 21
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 22
Item 11. Executive Compensation......................................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 28
Item 13. Certain Relationships and Related Transactions................................................. 30
Item 14. Principal Account Fees and Services 31
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 32
SIGNATURES................................................................................................... 33
This Annual Report on Form 10-K/A including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I Item
2, contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or
prove incorrect, could cause the results of Ross Systems to differ
materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements, including any
projections of earnings, revenue, synergies, accretion, margins or other
financial items; any statements regarding the anticipated completion of
the proposed chinadotcom merger transaction described under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors;" any statements of the plans, strategies and
objectives of management for future operations, including the execution of
integration and restructuring plans; any statement concerning proposed new
products, services, developments or industry rankings; any statements
regarding future economic conditions or performance; any statements of
belief; any statements of anticipations; and any statements of assumptions
underlying any of the foregoing. The risks, uncertainties and assumptions
referred to above include quarterly fluctuations and unpredictability of
revenues; various closing conditions and other uncertainties that might
delay or prevent the completion of the proposed chinadotcom merger
transaction; the general economic slowdown and the risk of an extended
slowdown or an increase in its intensity, the competition that we face;
the performance of contracts by customers and partners; employee
management issues; the challenge of managing asset levels; the difficulty
of aligning expense levels with revenue changes; and other risks that are
described herein under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors" beginning on page 19
and that are otherwise described from time to time in Ross Systems'
reports filed with the Securities and Exchange Commission . Ross Systems
assumes no obligation and does not intend to update these forward-looking
statements.
2
ROSS SYSTEMS, INC AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
GENERAL
The following description of business is qualified in its entirety by, and
should be read in conjunction with the more detailed information and financial
data, including the financial statements and notes thereto, appearing elsewhere
in this Report. Unless otherwise stated in this document, references to (1)
"us," "our," "we" and similar terms, (2) the "Company" or (3) "Ross" shall mean
Ross Systems, Inc., a Delaware corporation, and its subsidiaries.
Ross Systems, Inc. (NASDAQ: ROSS) delivers innovative software solutions
that help manufacturers worldwide fulfill their business growth objectives
through increased operational efficiencies, improved profitability, strengthened
customer relationships and streamlined regulatory compliance. Focused on the
food and beverage, life sciences, chemicals, metals and natural products
industries and implemented by over 1,000 customer companies worldwide, our
family of Internet-architected solutions is a comprehensive, modular suite that
spans a customer's enterprise, from manufacturing, financials and supply chain
management to customer relationship management, performance management and
regulatory compliance.
Publicly traded on the NASDAQ since 1991, Ross' global headquarters are
based in the U.S. in Atlanta, Georgia, with sales and support operations around
the world.
Our internet address is www.rossinc.com. We make available free of charge
on or through our Internet website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act, in each case as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC.
We license our products to customers through a direct sales force in North
America and Western Europe as well as independent distributors in dozens of
other markets worldwide. We also provide professional consulting services for
implementation, related custom application development and education. We offer
ongoing maintenance and support services for our products via Internet and
telephone help desks.
MERGER PROPOSAL
In early September 2003, we announced that we had entered into a
definitive agreement whereby chinadotcom Software (CDC) will acquire Ross
Systems in a merger. Both companies are listed on NASDAQ. We have not yet
determined to what extent the proposed merger will affect our financial
performance. However, we believe that CDC's Asian operations offer greater
opportunities of doing business in that region, while at the same time our
operations in North America and Europe offer many new opportunities to CDC in
our markets. Pursuant to an agreement entered into in May 2003, chinadotcom is a
licensed master distributor of our products in Greater China. Both chinadotcom
and Ross believe that the merger represents a unique opportunity to rapidly
scale the introduction of our manufacturing products into Greater China and that
the merger would assist in the realization of this strategic vision by
transforming a limited distribution partnership into an integrated group with
common objectives. It is also anticipated that chinadotcom will work with us in
selecting and pursuing business combinations with strategic software and
services companies and, in connection with those opportunities, provide
necessary access to capital. We do not have any agreements in place with
chinadotcom concerning the selection of these strategic software and services
companies or the terms and conditions of any loans or grants from chinadotcom to
us, and no specific business combinations have yet been identified. We
anticipate that preparation of specific plans for capitalizing on and creating
opportunities as a combined organization will be commenced as soon as
practicable after the merger is completed. The proposed merger will be voted on
by our stockholders at our forthcoming Annual Meeting.
1
ROSS SYSTEMS, INC AND SUBSIDIARIES
PRODUCTS
Ross offers the award-winning iRENAISSANCE(TM) family of software
solutions which is an integrated suite of enterprise resource planning (ERP II),
financials, materials management, manufacturing and distribution, supply chain
management (SCM), advanced planning and scheduling, customer relationship
management (CRM), electronic commerce, business intelligence and analytics
applications.
iRenaissance applications are known for their deep and rich functional fit
to process industry requirements, as well as their short implementation times
and cost-effective returns on investment.
TECHNOLOGY
The Company leverages contemporary Internet technologies to enable
significant benefits for its customers. Many Ross customers have benefited from
technology obsolescence protection as they have moved from older computing
platforms to current platforms by upgrading to new releases. Built on a highly
flexible technology platform, iRenaissance applications cost-effectively support
not only mid-size companies but scale effectively to support large, global
organizations in a wide range of languages and with thousands of users
processing hundreds of thousands of transactions daily. Ross customers also
benefit from the low cost of deployment and centralized maintenance afforded by
browser-based PC clients that provide secure access from any PC with Internet
access, to the system infrastructure at central locations where the software
resides and the data is managed. End-user satisfaction is enhanced by highly
configurable and easily personalized applications that provide follow-me
profiles for each user, regardless of physical location. Utilizing contemporary
standards such as XML, SOAP, Microsoft .NET and others, iRenaissance
applications can be effectively connected to any other applications or devices
via the Internet. Robust security features that leverage Internet standards
protect applications and data with both user-based and application function
profiles. The security facilities further enable companies in their effort to
achieve regulatory compliance by providing detailed audit trails for every
action taken by every user.
Because the Company's iRenaissance applications were developed with the
GEMBASE fourth generation language , the Company believes they are easily
modified and expanded. GEMBASE is a programming environment that delivers a
central data dictionary, complete screen painting, editing and debugging
capabilities, and links to most popular database management systems. GEMBASE
itself is written in the C programming language to facilitate portability across
multiple hardware and database management system platforms. Because the
iRenaissance products were developed in GEMBASE, customers often find it easy to
customize their own applications.
Ongoing Development
To meet the increasingly sophisticated needs of its customers and broaden
its product offering for targeted vertical markets, the Company continually
strives to enhance its existing product functionality. The Company surveys the
needs of its customers through on-line, industry-specific discussion forums and
polling at its global user conferences, and incorporates many of their
recommendations into its products. The Company also conducts a variety of forms
of market research with industry analyst groups and targeted industry
associations to determine strategies for new features and entirely new products
for targeted vertical industries. As an example, iRENAISSANCE version 5.7
included new capabilities for streamlining the compliance and validation process
for companies regulated by the US FDA (United States Food and Drug
Administration). In fiscal 2002, the Company expanded its product suite for
targeted industries and introduced IRENAISSANCE SCM (Supply Chain Management)
and iRENAISSANCE CRM (Customer Relationship Management).
While maintaining focus on the requirements of targeted vertical markets,
the Company is expanding its potential geographic markets by developing new
product functionality to address the needs of additional prospective customers
in key international markets. These enhancements are related to local languages
and dialects, currency, accounting custom and procedures, and regulatory
requirements. As an example, through the partnership established with CDC
Software Corporation during the fourth quarter of fiscal 2003, the Company is
well advanced with its preparations for releasing additional local language
versions of its software for the Chinese markets. These
2
ROSS SYSTEMS, INC AND SUBSIDIARIES
enhancements enable the Company to leverage its iRENAISSANCE ERP products to
capitalize on the growing and largely untapped process manufacturing markets in
China.
The Company is also committed to achieving technology advances by
leveraging new Internet-based capabilities enabled by XML and Web Services.
During the 3rd quarter of fiscal 2003, the Company released the INTERNET
APPLICATION FRAMEWORK (TM) which enables the iRENAISSANCE ERP foundation with
full Internet deployment capabilities. Through the iNTERNET APPLICATION
FRAMEWORK, application users have full access to the iRENAISSANCE ERP
applications from any computer with an Internet connection and the Microsoft
Internet Explorer browser. Because no iRENAISSANCE ERP application software
needs to be deployed or maintained on user workstations, the Company's customers
have reported significant savings resulting from the use of the INTERNET
APPLICATION FRAMEWORK.
Third-Party Products
The Company resells software products licensed from third parties, which
are complementary to its product including applications for custom reporting of
information maintained by the Company's programs such as Business Objects for
executive information, and FRx for financial reporting and budgeting, as well as
certain middle-ware products. The Company resells other privately labeled
software products licensed from third parties including Prescient Systems
(rebranded as iRenaissance SCM) and Selligent (rebranded as iRenaissance CRM).
Additionally, the Company has entered into agreements which enable it to resell
database products and other products that are sublicensed to end users in
conjunction with certain of the Company's open systems products. License
revenues from the products described in this paragraph constitute approximately
26% of total software product license revenues in fiscal 2003.
Services
Our worldwide consulting services operation complements our enterprise
software and internet application offerings. We provide a broad range of
services to install and optimize each software product. These services fall into
two broad categories: Professional Services and Client Support. Income from
these activities consist of services and maintenance revenues which comprise
approximately 28% and 41% of total revenues respectively.
Professional Services
Our Professional Services organization provides business application
services, with deep and rich industry-specific experience, technical expertise
and product knowledge to complement our products and to provide solutions to
meet clients' business requirements. The major types of services provided
include the following:
Application Consulting involves in-depth analysis of the client's specific
needs and the preparation of detailed plans that list step-by-step actions and
procedures necessary to achieve a timely and successful implementation of our
software products. These services are generally offered on a time and expense
reimbursement basis.
Technical Consulting involves evaluating and managing the client's needs
by supplying custom application systems, custom interfaces, data conversions,
and system conversions. Consultants participate in a wide range of activities,
including requirements definition, and software design, development and
implementation. We also provide advanced technology services focused on
networking, database administration and tuning. These services are generally
offered on a time and expense reimbursement basis. We also provide remote
systems management, and remote applications management.
Education Services are offered to clients either at our education
facilities or at the client's location, as either standard or customized
classes.
Established relationships with third party consulting partners are
utilized around the world, to take advantage of local and specialized industry
expertise and to support our implementation demands in certain markets.
Client Support
Our Client Support functions include web-based support, telephone support,
technical publications and product support guides, which are provided under
maintenance agreements. The annual maintenance fee for these
3
ROSS SYSTEMS, INC AND SUBSIDIARIES
services is generally 20% of the price for the licensed software. The standard
maintenance agreement also entitles clients to certain new product releases and
product enhancements.
MARKETING AND SALES
We sell our products and services in the US and Western Europe primarily
through our direct sales force. At June 30, 2003, we had 44 sales and marketing
employees. In other areas of the world, we sell our products through
distributors. In support of our sales force and distributors, we conduct
comprehensive marketing programs which include telemarketing, direct mailings,
advertising, promotional material, seminars, trade shows, public relations and
on-going customer communication.
We are based in Atlanta, Georgia, with a regional direct sales force
covering all major US business locations. We have subsidiaries in Antwerp,
Belgium; Ottawa, Canada; Berlin, Germany; Utrecht, the Netherlands; Barcelona,
Spain; Northampton, United Kingdom as well as Hong Kong and Singapore.
We have business arrangements with distributors as well and language and
localization support in the following countries: Argentina, Australia, Brazil,
Chile, China, Colombia, Czech Republic, Denmark, Finland, Germany, Greece, Hong
Kong, Hungary, Indonesia, Ireland, Italy, Japan, Jordan, Lebanon, Malaysia,
Mexico, Morocco, New Zealand, Norway, Pakistan, Peru, Poland, Portugal, Rumania,
Russia, Saudi Arabia, Singapore, Slovak Republic, Sweden, Taiwan, Thailand,
Uruguay and Venezuela. These distributors pay us royalties on the sales of our
products and maintenance services.
International revenues (from foreign operations and export sales)
represented approximately 40%, 45%, and 33%, of our revenues in fiscal 2003,
2002, and 2001, respectively. International revenues include export sales to the
Asian region. However, Asian revenues are included as part of North American
revenues in the "Segment Information" in Notes to the Consolidated Financial
Statements. We intend to broaden our presence in international markets by
entering into additional distribution agreements.
PRODUCT DEVELOPMENT AND ACQUISITIONS
To meet the increasingly sophisticated needs of our customers and address
potential new markets, we continually strive to enhance our existing product
functionality. We survey the needs of our customers annually through ballots and
direct discussions at our annual user conferences, and incorporate many of their
recommendations into our products. We also conduct a variety of forms of market
research with industry analyst groups and targeted industries to determine
strategies for new features and functions. We are committed to achieving
advances in the use of computer systems technology and to expanding the breadth
of our product line. Development activity during fiscal 2003 covered a wide
range of evolving functionality enhancements to present releases of our
products. Projects in progress being carried into fiscal 2004 include several
functionality enhancements important to a broad base of our customers, and
ongoing improvements to the integration aspects of the third party applications,
which have been incorporated into our product suite.
COMPETITION
The business applications software market is intensely competitive. We
compete with a broad range of applications software companies. Our competitors
include general business application software providers, such as Peoplesoft,
Oracle Corporation, and SAP AG; as well as business applications software
providers in specific vertical markets that offer products that compete with our
process manufacturing products. The principal competitive factors in the market
for business application software include product reputation, product
functionality, performance, quality of customer support, size of installed base,
financial stability, hardware and software platforms supported, price, and
timeliness of installation. We believe that we compete effectively with respect
to these factors.
PROPRIETARY RIGHTS AND LICENSES
We provide our products to end users generally under nonexclusive,
nontransferable licenses, which generally have perpetual terms. Under the
general terms and conditions of our standard license agreements, the licensed
software may be used solely for internal operations on designated computers at
specific sites. We make source code available for certain portions of our
products.
We have registered "iRENAISSANCE", "RENAISSANCE", "RENAISSANCE CS", and
"ROSS SYSTEMS" as trademarks in the United States. We have applied for a
provisional patent with respect to systems
4
ROSS SYSTEMS, INC AND SUBSIDIARIES
and associated methods for determining availability and pricing of goods based
on attributes. We have secured registration of copyrights in the United States
for 17 of our products. Although we take steps to protect our intellectual
property, misappropriation may nevertheless occur and copyright and trade secret
protection may not be available in certain countries.
Except as noted above, we rely on a combination of trade secret, copyright
and trademark laws, and license agreements to protect our proprietary rights in
our products.
EMPLOYEES
As of June 30, 2003, we employed a total of 255 full time employees,
including 44 in sales and marketing, 48 in product development, 132 in
professional services and client support, and 31 in finance, administration and
operations. Our employees are not represented by a labor union, and we believe
that our employee relations are good.
ITEM 2. PROPERTIES
Our corporate headquarters, research and development, sales, marketing,
consulting and support facilities are located in Atlanta, Georgia, where we
occupy approximately 22,000 square feet. We also maintain a facility for product
development in San Marcos, California, which occupies 1,470 square feet.
International offices are maintained in Belgium (Antwerp); England
(Northampton); Germany (Berlin); Netherlands (Utrecht); and Spain (Barcelona).
At June 30, 2003, all facilities are leased with periods remaining to
renewal varying from nine months to twelve years. We believe our facilities are
adequate for our current needs and that we can obtain suitable additional space
as required.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may become involved in litigation
and administrative proceedings. Such matters can be time-consuming, divert
management's attention and resources and cause the accumulation of significant
expenses. Furthermore, there can be no assurance that the results of any of
these actions will not have a material adverse effect on our business, results
of operations or financial condition.
a) On June 30, 1998, we entered into a North American distribution
agreement with an existing Dutch systems integrator which entitled us to
distribute a certain project accounting product the integrator had developed.
The agreement contained certain minimum annual payments which would become due
to the distributor if we did not achieve certain minimum annual sales quotas.
The agreement also required that we use the distributor's personnel for certain
implementation and maintenance activities.
Over the next few years, the distributor, in our view, failed to
consistently successfully implement the project accounting product at multiple
sites. These failures cost us between $300,000 and $400,000 in legal fees,
uncollectible accounts receivable and settlement costs. In February 2001, we
cancelled the agreement with the distributor.
The parties were not able to reach mutual agreement regarding the terms of
a settlement, and the distributor invoked the arbitration clause of the
agreement in late 2001. The arbitration was commenced before the International
Court of Arbitration in Paris, France, with the distributor ultimately seeking
multiple damages aggregating more than $4,000,000. On November 17, 2003, the
Arbitrator announced an award in favor of the distributor of approximately
$2,000,000. We paid the award during the quarter ended December 31, 2003 out of
operating cash flows in the ordinary course of business.
b) Effective February 28, 2001, the Company completed the sale of certain
assets related to its Human Resource and Payroll product line to Now Solutions,
LLC, (NOW), a majority owned subsidiary of Vertical Computer Systems
Inc.(Vertical). Arglen Acquisitions (Arglen), was also a party to the
transaction as a minority member of NOW
5
ROSS SYSTEMS, INC AND SUBSIDIARIES
to complete the transaction. The gross asset sale price was $6,100,000. The
purchase price included cash of $5,100,000 and a note payable by NOW to Ross
of $1,000,000.
The note was non-interest bearing and was due in two installments;
$250,000 due on February 28, 2002 and $750,000 due on February 28, 2003. NOW
defaulted on the second installment of $750,000 which remains outstanding and is
accruing interest at the rate of 10%, per annum the default interest rate as
defined in the note.
On February 27, 2003, the day before the final note installment was due,
Vertical filed a derivative suit on behalf of NOW against Ross and others
alleging breach of contract, fraud, conspiracy and breach of fiduciary duty. In
summary the suit alleged that Ross failed to schedule approximately $3,600,000
of liabilities related to maintenance agreements assumed by NOW. The suit also
alleged that Ross failed to disclose to NOW a transaction brokerage fee of
$600,000 that Ross was to pay to Arglen, whose CEO signed the fee agreement and
who was also the CEO of NOW. The suit also alleges that Ross should be jointly
and severally liable for certain alleged frauds committed by other defendants in
which Ross allegedly conspired. The suit further called for a setoff against the
remaining note payment based on the above alleged damages, and the recovery of
its attorneys' fees and costs. Ross denied and contested each and every one of
Vertical's claims, and filed a motion for the Court to dismiss.
On November 18, 2003, the Supreme Court of the State of New York granted
Ross's motion to dismiss Vertical's action as against Ross based on
Vertical's failure to state claims, thereby dismissing all of Vertical's
claims against Ross. Vertical has appealed. The Company will continue to defend
this matter vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The following table sets forth the range of high and low bid prices for
our Common Stock on the NASDAQ National Market for each of the quarters of
fiscal 2003 and 2002. Our Common Stock trades under the NASDAQ symbol "ROSS."
FISCAL 2003 HIGH LOW
----------- ------ ------
First quarter (ended September 30, 2002)................................................... $ 8.35 $ 6.05
Second quarter (ended December 31, 2002) .................................................. $ 9.90 $ 4.51
Third quarter (ended March 31, 2003)....................................................... $14.95 $ 8.00
Fourth quarter (ended June 30, 2003)....................................................... $15.49 $11.10
FISCAL 2002 HIGH LOW
----------- ------ ------
First quarter (ended September 30, 2001)................................................... $ 4.08 $ 2.94
Second quarter (ended December 31, 2001)................................................... $ 6.31 $ 2.38
Third quarter (ended March 31, 2002)....................................................... $11.56 $ 5.82
Fourth quarter (ended June 30, 2002)....................................................... $11.65 $ 7.80
We have never declared or paid cash dividends on Common Stock, and we do
not plan to declare or pay dividends in the future. We intend to use earnings to
finance the expansion of our business. In addition, our line of credit agreement
with Silicon Valley Bank dated September 24, 2002, contains certain covenants
which affect our ability to pay cash dividends. This does not affect the
dividends payable on the Convertible Preferred Stock.
As of September 2, 2003, the approximate number of Common Stock,
stockholders of record was 469.
6
ROSS SYSTEMS, INC AND SUBSIDIARIES
On January 13, 2003 we issued 120,000 unregistered common shares to Oscar
Pierre Prats, pursuant to the acquisition of Ross Systems Iberica, a former
distributor. The shares were issued at $9, which was the market price of the
Company's stock on that day. As of the same date, the shares were repurchased
into treasury stock. Mr. Prats represented that he was an "accredited investor"
as defined in Rule 501 of Regulation D promulgated under the Securities Act of
1933, and that his intention was to acquire the common shares on his own account
for investment purposes only and not with a view towards resale of the common
shares in connection with any distribution of the common shares. Legends were
affixed to the certificates representing the common shares stating that the
shares have not been registered under the Securities Act of 1933 and cannot be
transferred unless registered under the Securities Act of 1933 or transferred
under an exemption from registration. Ross did not offer the common shares
purchased by Mr. Prats by any form of general solicitation or general
advertising. For these reasons, the issuance of securities in this transaction
was exempt from registration under the Securities Act of 1933 under Rule 505 of
Regulation D. See note 2 on page F-14 in the Notes to Consolidated Financial
Statements.
On June 29, 2001, we issued mandatorily convertible preferred stock to a
qualified investor in a private placement transaction. In summary, the investor
purchased 500,000 preferred shares at $4.00 per share yielding $2,000,000 for
Ross. This price represented a premium to the market for our common stock at the
time of issuance. The preferred shares cannot be converted for two years but
must be converted within five years from the issue date. The shares earn
dividends at the rate of 7.5%. At September 3, 2003, none of the preference
shares had been converted to common stock. The shares are convertible, one for
one, at a price of $4.00 per share. The investor represented that he was an
"accredited investor" as defined in Rule 501 of Regulation D promulgated under
the Securities Act of 1933, and that his intention was to acquire the preferred
shares on his own account for investment purposes only and not with a view
towards resale of the preferred shares in connection with any distribution of
the preferred shares. Legends were affixed to the certificates representing the
preferred shares stating that the shares have not been registered under the
Securities Act of 1933 and cannot be transferred unless registered under the
Securities Act of 1933 or transferred under an exemption from registration. Ross
did not offer the preferred shares by any form of general solicitation or
general advertising. For these reasons, the issuance of securities in this
transaction was exempt from registration under the Securities Act of 1933 under
Rule 505 of Regulation D.
7
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements of Ross
Systems, and Notes thereto, and other financial information included elsewhere
in this Annual Report on Form 10-K/A. Historical results are not necessarily
indicative of results that may be expected in future periods.
CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Total revenues (1)(2) ................. $ 48,100 $ 46,053 $ 50,805 $ 83,399 $ 106,024
Operating earnings (loss) (3)(4) ...... $ 4,791 $ (8,667) $ (2,024) $ (8,143) $ (3,936)
Net earnings (loss) ................... $ 4,206 $ (9,424) $ (842) $ (9,662) $ (5,626)
Net earnings (loss) available to common
stockholders ....................... $ 4,056 $ (9,574) $ (842) $ (9,662) $ (5,626)
Diluted net earnings (loss) per share . $ 1.28 $ (3.65) $ (0.33) $ (4.15) $ (2.53)
Shares used in computing diluted net
earnings (loss) per share ....... 3,296 2,625 2,566 2,330 2,223
BALANCE SHEET DATA:
Working capital (deficit) ............. $ (943) $ (4,536) $ (9,640) $ (15,340) $ (3,745)
Total assets .......................... $ 40,211 $ 37,618 $ 50,462 $ 64,295 $ 83,185
Long-term debt, less current portion .. - - - $ 2,627 3,705
Preferred stock, no par value 5,000,000
shares authorized;
500,000 shares issued and outstanding $ 2,000 $ 2,000 $ 2,000 - -
Total shareholders' equity ............ $ 17,029 $ 13,943 $ 23,104 $ 20,890 $ 29,257
(1) Revenues and operating costs have been increased in all years by the
reclassification of Reimbursable Expenses to comply with EITF 01-14. See
notes to the Consolidated Financial Statements on page F-10.
(2) Results shown for fiscal years 2000 and 1999 include revenues and
operating costs relating to activities derived from the HR/Payroll product
line which was sold in February of 2000. Results for these two fiscal
years are therefore not directly comparable with the results of fiscal
years 2001 through 2003. See commentary on this in "Results of Operations"
on page 10.
(3) In accordance with the adoption on SFAS No. 142, the Company ceased
amortization of Goodwill beginning July 1, 2001. See notes to the
Consolidated Financial Statements on page F-10.
(4) In accordance with SFAS No. 86, the Company recorded an impairment of
Capitalized Software Costs during the year ended June 30, 2002. See notes
to the Consolidated Financial Statements on page F-13.
8
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION
Our consolidated financial statements include the accounts of Ross and our
wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. Our fiscal year ends on June
30. "Fiscal 2001," "fiscal 2002," and "fiscal 2003" mean our fiscal years ended
June 30 of each such year.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. We recognize revenues from licenses of computer
software "up-front" provided that a non-cancelable license agreement has been
signed, the software and related documentation have been shipped, there are no
material uncertainties regarding customer acceptance, collection of the
resulting receivable is deemed probable, and no significant other vendor
obligations exist. The revenue associated with any license agreements containing
cancellation or refund provisions is deferred until such provisions lapse. Where
we have future obligations, if such obligations are insignificant, related costs
are accrued immediately. If the obligations are significant, the software
product license revenues are deferred. Future contractual obligations can
include software customization, requirements to provide additional products in
the future and porting products to new platforms. Contracts that require
significant software customization are accounted for on the
percentage-of-completion basis. Revenues related to significant obligations to
provide future products or to port existing products are deferred until the new
products or ports are completed.
Our revenue recognition policies are designed to comply with American
Institute of Certified Public Accountants Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," and with SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." Revenues recognized from
multiple-element software license contracts are allocated to each element of the
contracts based on the fair values of the elements, such as licenses for
software products, maintenance, or professional services. The determination of
fair value is based on objective evidence which is specific to the Company. We
limit our assessment of objective evidence for each element to either the price
charged when the same element is sold separately, or the price established by
management having the relevant authority to do so, for an element not yet sold
separately. If evidence of fair value of all undelivered elements exists but
evidence does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the
arrangement fee is recognized as revenue.
We utilize distributors primarily in those geographic areas where we do
not maintain a physical presence. Our revenue recognition policies with respect
to sales by distributors comply with SOP 97-2 and SAB 101 in that all the
revenue recognition criteria listed above are met. In addition, distributors do
not have rights of return, price protections, rotation rights, or other features
that would preclude revenue recognition. Generally, the value of software
license sales to distributors is based on list selling prices to their customer
less a discount at a predetermined rate. Similarly, we receive revenue from
distributors based on a predetermined percentage of the maintenance fees billed
by the distributor from the end customer. The distributor typically retains any
fees earned by them for implementation services. Distributorships may or may not
be geographically exclusive, and are generally subject to annual renewals by the
Company.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance revenues,
including revenues bundled with original software product license revenues, are
deferred and recognized over the related contract period, generally 12 months.
Accounts receivable comprise trade receivables that are credit based and
do not require collateral. Generally, our credit terms are 30 days but in some
instances we offer extended payment terms to customers purchasing software
licenses. We have a history of offering extended payment terms from time to time
for competitive reasons. These terms are not offered in connection with any
contingencies related to product acceptance, implementation, or any other
service or contingency post-transaction, and we have not offered concessions as
a result of these terms. Payment arrangements in these circumstances typically
require payment of a significant portion of the total contract amount within 30
days of the sale, with 2 or 3 subsequent installments making up the balance
payable within 6 months. We have not found collectibility to be compromised as a
result of these terms. In
9
ROSS SYSTEMS, INC AND SUBSIDIARIES
no case have payment terms extended beyond 12 months. Based on historical
results, we believe that all components of SOP 97-2 are met, including that the
arrangement is fixed and determinable.
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. On an
ongoing basis, we evaluate the collectibility of accounts receivable based upon
historical collections and assessment of the collectibility of specific
accounts. We specifically review the collectibility of accounts with outstanding
accounts receivable balances in excess of 90 days outstanding. We evaluate the
collectibility of specific accounts using a combination of factors, including
the age of the outstanding balance(s), evaluation of the account's financial
condition, recent payment history, and discussions with our account executive
responsible for the specific customer and with the customer directly. Based upon
this evaluation of the collectibility of accounts receivable, an increase or
decrease required in the allowance for doubtful accounts is reflected in the
period in which the evaluation indicates that a change is necessary. If actual
results differ, this could have an impact on our financial condition, results of
operation and cash flows.
COMPUTER SOFTWARE COSTS. We capitalize computer software product
development costs incurred in developing a product once technological
feasibility has been established and until the product is available for general
release to customers. Technological feasibility is established when we either
(1) complete a detail program design that encompasses product function, feature
and technical requirements and is ready for coding and confirms that the product
design is complete, that the necessary skills, hardware and software technology
are available to produce the product, that the completeness of the detail
program design is consistent with the product design by documenting and tracing
the detail program design to the product specifications, and that the detail
program design has been reviewed for high-risk development issues and any
related uncertainties have been resolved through coding and testing or (2)
complete a product design and working model of the software product, and the
completeness of the working model and its consistency with the product design
have been confirmed by testing.
Capitalized software development costs generally relate to development
projects spanning several months. Resources are committed to these projects on a
consistent and long-term basis resulting in a generally consistent impact on the
financial results. We evaluate the extent to which the capitalized amounts are
realizable based on expected revenues from the product over the remaining
product life. Where future revenue streams are not expected to cover remaining
amounts to be amortized, we either accelerate amortization or expense remaining
capitalized amounts.
Amortization of such costs is computed as the greater of (1) the ratio of
current revenues to expected revenues from the related product sales or (2) a
straight-line basis over the expected economic life of the product (not to
exceed five years). Software costs related to the development of new products
incurred prior to establishing technological feasibility or after general
release are expensed as incurred.
RESERVES AND ESTIMATES. In the ordinary conduct of our business, we
must often use judgment and estimates regarding the recording of certain
reserves. For example, we use judgment in order to determine the amount of our
reserves for uncollectible accounts receivable. Should our estimates prove to be
incorrect, our reserves may be inadequate.
FOREIGN CURRENCIES
The financial position and the results of operations of our foreign
subsidiaries are measured using local currencies as the functional currencies.
Assets and liabilities of these subsidiaries are translated into US dollars at
the exchange rate in effect at year end. Income and expense items are translated
at average exchange rates for the year. The resulting translation adjustments
are recorded in the foreign currency translation adjustment account. The effects
of changes in foreign currency exchange rates have had minimal effect on our
financial results reported herein.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 2003, 2002, AND 2001
The following table sets forth certain items reflected in our consolidated
statements of operations as a percentage of total revenues for the periods
indicated, and a comparison of such statements is shown as a percentage increase
or decrease from the prior year's results:
10
ROSS SYSTEMS, INC AND SUBSIDIARIES
PERCENTAGE OF REVENUE
FISCAL YEAR ENDED PERCENTAGE
JUNE 30, INCREASE (DECREASE)
-------------------------------- ----------------------
2003 2002 2001 2003/2002 2002/2001
------ ------ ------ --------- ---------
Revenues:
Software product licenses ......................... 30% 28% 19% 12% 35%
Consulting and other services ..................... 28 28 32 4 (21)
Maintenance ....................................... 42 44 49 0 (19)
------ ------ ------ --------- ---------
Total revenues ............................ 100% 100% 100% 4% (9)%
------ ------ ------ --------- ---------
Operating expenses:
Costs of software product licenses (inclusive of
amortization and impairment of capitalized
computer software costs) ....................... 15% 43% 16% (65%) 139%
Costs of consulting, maintenance and other services 36 37 35 1 (3)
Software product license sales and marketing ...... 23 20 30 20 (37)
Product development ............................... 5 7 8 (17) (26)
General and administrative ........................ 9 10 9 - (7)
Provision for uncollectible accounts .............. 2 3 3 (42) (5)
Amortization of goodwill .......................... - - 1 - (100)
Non-recurring (benefit) costs ..................... - (1) 2 (100) (182)
------ ------ ------ --------- ---------
Total operating expenses .................. 90 119 104 (21) 4
------ ------ ------ --------- ---------
Operating profit (loss) ................... 10 (19) (4) - (228)
Other expense, net ................................ - (1) (2) (71) (47)
Gain on sale of product line ...................... - - 5 - -
------ ------ ------ --------- ---------
Profit (loss) before income taxes ......... 10 (21) (2) - (1,019)
Income tax benefit (expense) ...................... (1) - - 207 1,367
------ ------ ------ --------- ---------
Net profit (loss) ......................... 9% (21)% (2)% - 1,037%
====== ====== ====== ========= =========
REVENUES. Revenues were affected by the sale of the Human Resource product
line in February 2001. Fiscal 2001 therefore reflects a mix of full and partial
years of product line activity. For comparison purposes, revenues for fiscal
2001 have been adjusted to exclude the Human Resource product line activity.
This revenue is referred to as "adjusted revenue". We believe this is a useful
way to consider the trend in our reported revenues since the disposal of the
HR/Payroll product line did not qualify as a discontinued operation.
Comparisons of both adjusted revenue and total revenue follow below (in
thousands):
ADJUSTMENT TO
EXCLUDE
ESTIMATED ESTIMATED ACTUAL
ADJUSTED (NON HR/PAYROLL REVENUES
ACTUAL REVENUES GAAP) REVENUES REVENUES FISCAL YEAR
FISCAL YEAR ENDED FISCAL YEAR FISCAL YEAR ENDED
JUNE 30, ENDED JUNE 30, ENDED JUNE JUNE 30,
REVENUE COMPARISON 2003 2002 2001 30, 2001 2001
------- ------- -------------- ------------- -----------
Revenues:
Software product licenses ......... $14,589 $13,026 $ 9,130 $ 477 $ 9,607
Consulting and other services ..... 13,489 13,013 14,922 1,598 16,520
Maintenance ....................... 20,022 20,014 21,717 2,961 24,678
------- ------- -------------- ------------- -----------
Total revenues ............ $48,100 $46,053 $ 45,769 $ 5,036 $ 50,805
------- ------- -------------- ------------- -----------
11
ROSS SYSTEMS, INC AND SUBSIDIARIES
Adjustments for the sale of the HR/Payroll product line were not required
for actual revenues in fiscal years 2003, and 2002. Adjusted revenues, as
defined above, were slightly increased by $284,000 at $46,053,000 in fiscal 2002
from $45,769,000 in fiscal 2001. Adjusted software product license revenues
increased by 43% from fiscal 2001 to fiscal 2002. Adjusted consulting revenues
decreased 12% from fiscal 2001 to fiscal 2002. Since consulting revenue activity
generally occurs during the six to nine months following the software license
sales, 2002 consulting revenues were adversely affected by the low software
license revenues reported in 2001. Adjusted maintenance revenues from first year
and renewed maintenance agreements, both of which are recognized ratably over
the maintenance period, decreased 8% from fiscal 2001 to fiscal 2002. This
decrease in maintenance revenues was due to the fact that the rate of
maintenance contract cancellations in fiscal 2002 exceeded the rate at which
maintenance contracts for new customers were added to the revenue stream. The
rate of cancellations in fiscal 2002 was not abnormally high but the addition of
new maintenance contracts in fiscal 2002 was adversely affected by the low
software license sales in 2001.
Total actual revenues increased 4% from $46,053,000 for fiscal 2002 to
$48,100,000 fiscal 2003. Actual revenues decreased 9% to $46,053,000, in fiscal
2002 from $50,805,000 in fiscal 2001. Software product license revenues
increased 12 % from fiscal 2002 to fiscal 2003, and increased 36% from fiscal
2001 to fiscal 2002. Consulting revenues increased 4% from fiscal 2002 to fiscal
2003, and decreased 20% from fiscal 2001 to fiscal 2002. Maintenance revenues
from first year maintenance contracts sold with new license agreements, and
renewed maintenance agreements, both of which are recognized ratably over the
maintenance period, were flat for fiscal 2003 when compared to fiscal 2002, and
decreased 19% from fiscal 2001 to fiscal 2002.
Software product license revenues in the North American market increased
by 78% in fiscal 2003 when compared to fiscal 2002. Software product license
revenues in the North American market decreased by 18% in fiscal 2002 over
fiscal 2001. We believe that the North American decrease in software license
sales in fiscal 2002 was due to an industry-wide slowdown in North America of
sales of enterprise resource planning (ERP) software during that period. In the
aftermath of the September 11, 2001 terrorist attack, prospective customers
became more cautious in general about spending on new projects and capital items
as an atmosphere of economic uncertainty prevailed. This cautious outlook
prevailed for some time until in fiscal 2003 when we experienced a turnaround in
the volume of software sales in North America due to both a slight improvement
in the economic trading conditions in the process manufacturing sector, and
increasing benefits arising from our consistently applied marketing efforts
during fiscal 2002 and 2003. While not yet significant, total sales of
approximately $427,000 of the recently introduced iRenaissance CRM (Customer
Relationship Management) product also began to contribute to revenues in both
Europe and North America in fiscal 2003. In the European market during fiscal
2003, our software license sales grew by 8%. This increase was experienced
primarily in the United Kingdom and Northern Europe. In the United Kingdom, a
new sales director was appointed at the beginning of calendar year 2003 to
replace the country manager and he led his sales team to an immediate
improvement in software license sales. In Northern Europe software license sales
were increased mainly by gaining increased visibility of our products by
increased attendance at trade shows in the region. In fiscal 2003, sales in
Spain were down 10% on the prior year, but this was after increasing software
license revenues in fiscal 2002 by 164% over fiscal 2001. This increase was due
to our Spanish subsidiary gaining market recognition through exposure in
industry publications and entering into strategic partnerships with other
software vendors. The software license revenue performance of the Spanish
subsidiary in fiscal 2002 was the dominant cause of the overall 74% increase in
software license revenues in Europe in fiscal 2002 when compared to fiscal 2001.
European revenues in fiscal 2003 were also enhanced by approximately $2,100,000
due to more favorable foreign exchange rates on average during the year, when
compared to fiscal 2002. Software license sales in the Asia/Pacific Rim region
decreased by 71% to $841,000 in fiscal 2003 after increasing by 148% to
$2,853,000 in fiscal 2002, from $1,150,000 in fiscal 2001. The software license
revenues in fiscal 2002, of approximately $2,853,000, comprised mainly of sales
to our distributor in Japan and provided them with software product for sales to
new customers in their region. orders for new licenses from our distributor in
Japan did not recur at similar levels in fiscal 2003, thus sales to this
distributor in fiscal 2003 were confined to royalties on revenues earned from
their existing customer base, and resulted in lower revenues of approximately
$841,000 in that region.
Revenues from consulting and other services (which are recognized as
performed) correlate with software product license revenues (which are
recognized upon delivery), so that when software product license revenues
increase or decrease, future period services revenues generally increase or
decrease respectively as a result. In fiscal 2003, consulting and other services
revenues increased by 4% over fiscal 2002 revenues. This increase was the net
12
ROSS SYSTEMS, INC AND SUBSIDIARIES
result of a 37% increase in North America and an 18% decrease internationally.
The North American services revenues benefited from the steady increase in North
American software license revenues over the fiscal year, while the international
services revenues were adversely affected by the timing of the increase in
software license revenues being predominantly in the last quarter of the fiscal
year. This meant that most of the services revenues associated with these fourth
quarter license revenues will be earned in fiscal 2004. In fiscal 2002,
consulting and other services revenues decreased 20%, from fiscal 2001 results.
Fiscal 2002 consulting revenues were adversely affected by the low software
license revenues reported in 2001.
Revenues from first year maintenance contracts and renewable maintenance
were unchanged in fiscal 2003 as compared to fiscal 2002. During fiscal years
2002 and 2001, declines in maintenance revenues were experienced due to an
excess of the value of maintenance revenue contracts cancelled over the value of
new renewable maintenance revenue contracts being added to the maintenance base.
During fiscal 2003, the retention of existing renewable maintenance contracts
improved. At the same time, maintenance revenue accruing from new customers
acquired during the prior year increased in proportion to the improvement in
software license revenues in the prior fiscal year. In addition, first year
maintenance revenues benefited from the increase in software license sales in
the current fiscal year. The effect of these trends was to keep maintenance
revenues constant in fiscal 2003 as compared to fiscal 2002.
Our international operations, as a percentage of total revenues for fiscal
2003, 2002 and 2001 was 40%, 45% and 33% respectively.
No single customer accounted for more than 10% of revenues during fiscal
2003, 2002 or 2001. Our customers are evenly spread among the industry verticals
within the process manufacturing market.
COSTS OF SOFTWARE PRODUCT LICENSES (INCLUSIVE OF AMORTIZATION AND
IMPAIRMENT OF CAPITALIZED COMPUTER SOFTWARE COSTS). Costs of software product
licenses include expenses related to royalties paid to third parties and product
documentation and packaging. Third party royalty expenses will vary from quarter
to quarter based on the mix of third-party products being sold. Costs of
software product licenses for fiscal 2003 decreased by 65% to $6,997,000 from
fiscal 2002, and in fiscal 2002 increased by 139% to $19,992,000 from fiscal
2001. The decrease in fiscal 2003 reflects a substantial reduction in impairment
charges taken during fiscal 2002 and discussed more fully below, partially
offset by the continued growth of third party content in software license sales.
This is an outcome of our strategy to provide a fully rounded suite of products
that meet all our customers' needs. The largest contributor to this was sales of
iRENAISSANCE CRM (Customer Relationship Management) which is a privately labeled
product licensed from a third party. As a percent of software revenue, third
party royalties comprised 16% in fiscal 2003, 14% in fiscal 2002, and 10% for
fiscal 2001.
After a substantial reduction in the value of capitalized software
development costs in fiscal 2002, amortization of previously capitalized
software development costs decreased by $2,482,000 to $4,702,000 in fiscal 2003
as compared to $71,84,000 fiscal 2002. Amortization of capitalized software
development costs in fiscal 2002 was almost flat compared to fiscal 2001.
In the year ended June 30, 2002, an impairment charge of $10,938,000 was
incurred. This was as a result of certain events occurring during fiscal 2002,
including a change in technology direction, and developments affecting the
potential realizability of revenues relating to certain capitalized software
assets. This action had no effect on our cash position or cash flows. The
impairment charge was made up of the following four items: (1) The change in
technology direction during the fourth quarter of fiscal 2002, when the internet
related functionality of the iRenaissance product was re-directed from the
"java" based initial development used in the Resynt product line to the
Microsoft ".net" technology. A new, formal development relationship with
Microsoft was launched to support the requirements of the new technology
direction. This strategic re-direction was based on our belief that the .net
technology will serve us and our customers better in the future, due to fuller
market penetration, better standards of compatibility, and superior technical
adaptability. The result of this change was that prior development in the former
java environment became obsolete. Effective April 1, 2002, the amount of
$5,488,000, representing all unamortized software-project balances relating to
this was written off. (2) On April 23, 2002, we announced the General
Availability of Gembase Version 6.0. This version of Gembase, the 4GL language
used for the development of the iRenaissance products, contained major
functionality differences compared to prior versions, rendering all prior
versions obsolete. As a result, development and maintenance for all versions
prior to 6.0 were discontinued and no further sales of these versions were
contemplated. In addition, customers using these versions were strongly
13
ROSS SYSTEMS, INC AND SUBSIDIARIES
encouraged to upgrade to version 6.0 because we no longer supported development
of any Gembase release lower than version 6.0. Upgrades to the 6.0 version were
strongly supported and to encourage and facilitate customers' upgrading, the
product was designed to make the transition straight-forward. Since Gembase
versions lower than 6.0 would not contribute any further revenue to the Company,
even in the short-term, the related unamortized software-project balances
amounting to $943,000 were expensed. (3) On May 22, 2002 we announced the
release of iRenaissance version 5.7. This version was significantly changed from
the prior versions. Previous to this release, upgrades from any version less
than 4.4 were technically challenging resulting in an environment not conducive
to customer upgrades. Version 5.7 offered a straight-forward upgrade capability
to customers on previous versions. In addition, version 5.7 contained a new
"engine" at its core, which significantly changed the way the software operated
internally and resulted in improved operating efficiencies. Since customers on
versions lower than 4.4 could now upgrade without difficulty, we were able to
discontinue the development and support of all versions prior to 4.4. No further
sales of these versions were contemplated. This had the effect of rendering all
releases of iRenaissance which were lower than 4.4 obsolete. Since iRenaissance
versions lower than 4.4 would not contribute any further license revenue, the
related unamortized software-project balances amounting to $3,333,000 were
written off. (4) During May 2002, we terminated further work on general
enhancements of the COBOL technology based Renaissance Classic product line and
a twofold decision was made; to continue working with specific customers on
custom product development, and to introduce a general sales program of free
software license upgrade from the Classic product to the latest release of the
iRenaissance product line for customers who remain on maintenance. We continue
to support those customers who remain active users until they schedule their
upgrade conversion to iRenaissance. Since no future revenues are expected from
the general enhancements capitalized to date, the aggregate, unamortized
software-project balances amounting to $1,174,000 were written off.
COSTS OF CONSULTING, MAINTENANCE AND OTHER SERVICES. Costs of consulting,
maintenance and other services include expenses related to consulting and
training personnel, personnel providing customer support pursuant to maintenance
agreements, and other costs of sales. From time to time we also use outside
consultants to supplement Company personnel in meeting peak customer consulting
demands. Costs of consulting, maintenance and other services, net of
reimbursable expenses, increased by 1% to $17,193,000 in fiscal 2003 from
$17,023,000 in fiscal 2002, and had decreased 3% in fiscal 2002 from $17,595,000
in fiscal 2001. Fiscal 2003 consulting revenues were relatively constant as
compared to fiscal 2002, and this resulted in the similar pattern exhibited in
the consulting, maintenance and other services costs. The lower levels of
expenditure in fiscal 2002 compared to fiscal 2001, reflects savings of
approximately $572,000 in employee related costs as a result of a headcount
reduction of approximately 127 consulting personnel early in fiscal 2001, net of
additions during fiscal 2002 of approximately 10 service personnel.
SOFTWARE PRODUCT LICENSE SALES AND MARKETING EXPENSES. Software product
license sales and marketing expenses increased by 20% to $11,384,000 in fiscal
2003, from $9,461,000 in fiscal 2002, and decreased by 37% to $9,461,000 in
fiscal 2002 from $15,026,000 in fiscal 2001. The increase in fiscal 2003 was due
to higher expenditures on sales and marketing of $531,000 in North America and
$434,000 in Europe, combined with an escalating effect attributable to a
stronger Euro Dollar and British Pound accounting for approximately $958,000 of
the increase in European expenditures. These increases were caused primarily by
increases in commissions and incentive compensation expenses. The decrease of
$5,565,000 for fiscal 2002 over fiscal 2001, was a result of lower expenditures
due primarily to reductions of sales and marketing personnel and related costs
totaling approximately 74 employees from fiscal year 2002 as compared to fiscal
2001.. Specifically, the decrease comprises approximately $3,600,000 relating to
employee base compensation and benefits costs, and other expense reductions
including approximately $514,000 in travel and entertainment, $300,000 in
incentives and commissions, $720,000 in facilities and communications, $190,000
in marketing expenses, and $241,000 in other costs.
PRODUCT DEVELOPMENT EXPENSES. Product development expenditures is a
commonly used measure in the software industry to describe the quantum of cost
relating to software development excluding the effects of any capitalization of
these costs and amortization of capitalized costs. This amount is derived by
adjusting the figures shown in the Consolidated Statements of Operations as
follows: (in thousands):
14
ROSS SYSTEMS, INC AND SUBSIDIARIES
FISCAL YEAR ENDED JUNE 30,
-------------------------------
2003 2002 2001
------- ------- -------
Product development, net of capitalized computer software costs 2,528 3,057 4,127
Software development costs capitalized during the year . 4,239 4,181 6,878
------- ------- -------
Total expenditures ............................................ $ 6,767 $ 7,238 $11,005
------- ------- -------
Total expenditures as a percent of total revenues ............. 14% 16% 22%
======= ======= =======
Product development expense declined by 17% to $2,528,000 in fiscal 2003
from $3,057,000 in fiscal 2002. During fiscal 2003, expenditure on outsourced
development was increased by approximately $300,000 while at the same time
headcount in the development department was reduced by six persons. This
strategy contributed to the overall reduction in development expense. Product
development expense was slightly down in fiscal 2002, as compared to fiscal
2001. Capitalized development costs incurred during fiscal 2003 were at a level
consistent with the prior year. In fiscal 2002, capitalized development costs
had decreased by 39% to $4,181,000 from $6,878,000 due mainly to the absence in
fiscal 2002 of development costs relating to the HR/Payroll product line which
was sold in fiscal 2001. As a percentage of total revenues, total development
expense decreased slightly to 14% in fiscal 2003 from 16% in fiscal 2002 and 22%
in fiscal 2001. Development expense is expected to continue in fiscal 2004 at a
level consistent with fiscal 2003.
During fiscal 2003, product development expenditures were focused on
expanding integrated Internet/ERP functionality and accelerating the complete
integration with the iRENAISSANCE product suite, of the privately labeled third
party products, now part of our offering. Product development expenditures
during fiscal 2002 and 2001 were primarily focused on new Internet-enabled
modules and continued enhancements to the underlying technology of released
products and developing new web enabled products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were relatively constant in the three fiscal years ending June 30, 2003, 2002
and 2001, at $4,376,000, $4,393,000 and $4,737,000 respectively. Various
cost-saving measures and controls, coupled with improved productivity through
the implementation of streamlined systems, have contributed to stability in
costs relating to our administrative infrastructure and personnel. Costs in this
area have been contained by avoiding increases in headcount, by strict control
of capital expenditures, and an overall cost consciousness promoted mainly
through management's focus on budgetary control over spending. During fiscal
2003, a decrease in property insurance of approximately $100,000, was offset by
a net increase after departmental allocations, of $121,000 in employee related
costs, in comparison to expenditures for the same expense items in fiscal 2002.
During fiscal 2002, savings of approximately $150,000 in legal costs, $114,000
in travel costs, $97,000 due to the closure of the French operation, and
$273,000 in other headcount related reductions in Europe were offset by an
increase in North American salaries and wages of approximately $208,000, when
compared to expenditures incurred for the same items in fiscal 2001. Capital
expenditures were reduced by strictly enforcing our authorization process, and
purchasing only essential items, and this helped to reduce depreciation by
approximately $70,000, and $47,000 for fiscal years 2002 and 2003 respectively
when compared to fiscal years 2001 and 2002 respectively.
PROVISION FOR DOUBTFUL ACCOUNTS. In fiscal years 2003, 2002, and 2001, we
recorded provisions for doubtful accounts of $831,000, $1,444,000, and
$1,514,000, respectively. These provisions represent management's best estimate
of the doubtful accounts for each period. The improving trend in the provision
for doubtful accounts over the three fiscal years represented, has been made
possible in part, by tighter and more effective processes over accounts
receivable collections. In general, a customer's ability to access certain of
our maintenance services is contingent on maintaining their account in good
standing, and this has encouraged customers to be current on their accounts and
resolve any outstanding issues promptly. In Europe, where the accounts
receivable collections performance has been somewhat weaker than that in North
America, we made changes to managers' compensation terms, providing incentives
on improvements in receivables collections performance. In addition, a
distributor policy
15
ROSS SYSTEMS, INC AND SUBSIDIARIES
change in Europe is slowly taking effect, whereby upon renewal of a
distributor's contract, we assume the billing of the distributor's customers,
and thereby are able to better control the receivable balances due by the
distributor and its customers.
AMORTIZATION OF OTHER ASSETS. Amortization of other assets was zero in
fiscal years 2003 and 2002 compared to $691,000 in fiscal 2001. This reflects
the change in accounting treatment due to compliance with the new accounting
pronouncement, SFAS No. 142, on Goodwill and Other Intangible Assets. See Note
(1) in the Notes to the Consolidated Financial Statements on page F-10.
Intangible assets are reviewed for impairment in value in accordance with
Statement of Financial Accounting Standards No. 142. Our recorded goodwill
relates to the acquisition of HiPoint Systems Inc. in fiscal 1999, the
acquisition of Bizware, Inc. in fiscal 1998, and the acquisition of our Spanish
distributor in fiscal 1997. After application of the principles of SFAS142, we
believe that the assets are not impaired and are properly stated at their
current carrying value.
NON-RECURRING ITEMS. The non-recurring gain reflected in fiscal 2002, was
a result of the gain of $650,000 arising from the reduction of the reserve
previously created in fiscal year 2001 for the closure of the French office.
At the end of the first quarter of fiscal 2001, we recorded an expense of
$790,000 being severance payments associated with 125 employees. Staffing levels
were scrutinized with a view towards eliminating overhead positions where
possible, and reducing the number of billable consultants in geographic regions
or areas of expertise where acceptable productivity levels were not being
regularly achieved. In North America, position eliminations comprised
approximately 21 in marketing and sales, 47 services consultants, 23 development
personnel, and 8 employees in administration and finance. In Europe, the
positions of approximately 26 employees from various functional areas were
eliminated.
16
ROSS SYSTEMS, INC AND SUBSIDIARIES
OTHER INCOME AND EXPENSE. Interest income has diminished over the fiscal
years 2001 through 2003 due to lower interest rates. Interest expense decreased
in fiscal 2003 as compared to fiscal 2002, and 2002 as compared to fiscal 2001,
due to improved cash flows from operations and the resultant lower utilization
of our revolving credit facilities. Foreign exchange benefit and expense arises
on converting foreign currency transactions or short-term balances to local
currency throughout the year. Foreign exchange losses in fiscal 2003 were
insignificant in comparison to $181,000 in fiscal 2002 which was due to net
adverse movements in currency exchange rates during that year.
INCOME TAXES. Income tax expense consists primarily of alternative minimum
tax for federal purposes, state taxes for which state operating losses do not
apply, and various foreign taxes which we incurred from time to time. As a
result we recorded net income tax expense of $405,000, $132,000, and $9,000
during 2003, 2002, and 2001 respectively. Note 11 to the Consolidated Financial
Statements details the differences between our effective income tax rate and the
statutory rate.
At June 30, 2003, we had net operating loss carryforwards of approximately
$34,370,000 $25,354,000 and $7,187,000 for federal, state and foreign tax
purposes, respectively, which expire between 2005 and 2020.
In all the years presented, we have reserved in full the deferred tax
assets which comprise primarily of net operating loss carryforwards. At which
time it is determined that it is more likely than not that they will be
utilized, the valuation reserve will be removed.
LIQUIDITY AND CAPITAL RESOURCES
Historically we have funded the operations of our business out of
operating activities. Changes in net cash provided by operating activities
generally reflect the changes in earnings plus the effect of changes in working
capital. Changes in working capital, especially trade accounts receivable, trade
accounts payable and accrued expenses, are generally the result of timing
differences between collection of fees billed and payment of operating expenses.
During fiscal 2003, net cash provided by operating activities increased by
$5,033,000 to $10,108,000 in fiscal 2003, from $5,075,000 in fiscal 2002. In
fiscal 2002, net cash provided by operating activities decreased by $8,983,000
from $14,058,000 in 2001 to $5,075,000 in 2002. After adjusting net income for
non-cash expense items only, cash provided by operating activities decreased by
$446,000 to $10,460,000 in fiscal 2003, from $11,126,000 in fiscal 2002. Cash
used due to charges in working capital only, decreased $5,479,000 in fiscal 2003
as compared with fiscal 2002 to $572,000, as compared to cash used for working
capital purposes of $6,051,000 in fiscal 2002.
Accounts receivable increased from 2002 to 2003 but to a lesser magnitude
than from 2001 to 2002. This was due to less cash being used by the increase in
accounts receivable in fiscal 2003, and resulted in a comparative increase in
cash provided by operating activities of $2,400,000 from receivables. This was
caused by continual improvements in cash collections in fiscal 2003 described
more fully above.
Increased cash flow from operations can also be attributed to the increase
in accounts payable from 2002 to 2003, which resulted in cash provided from
operations compared to cash used in operations in the previous year. This
resulted in an increase in cash provided by operating activities of $2,499,000.
The increase in accounts payable is mainly due to increased third party software
sales in the fourth quarter. During fiscal 2002, an aggregate net increase in
non-cash charges for depreciation, amortization, capitalized software cost
impairment, and provisions for uncollectible accounts of $9,384,000 was offset
by an increase in our net operating loss of $8,582,000. This
17
ROSS SYSTEMS, INC AND SUBSIDIARIES
reflected primarily the non-cash charge in fiscal 2002, of $10,938,000 for
software assets impaired which decreased our earnings but did not affect our
cash position. In fiscal 2002, an aggregate decrease in the changes in operating
assets and liabilities of $9,725,000 was due primarily to the decrease in cash
provided from accounts receivable and deferred revenues of $10,632,000, from
$6,920,000 in fiscal 2001, to ($3,712,000) in fiscal 2002.
The net cash used for investing purposes decreased in fiscal 2003 by
$792,000 to $4,111,000 from $4,903,000 in fiscal 2002, and decreased by $256,000
in fiscal 2002, from $5,159,000 in the prior year. This represents a stable
pattern of investment in capitalized software in fiscal years 2003 and 2002. In
fiscal 2001, investment in capitalized software was higher due to continued
investment in the HR/Payroll product line for eight months of the year until the
product line was sold in February 2001. In fiscal 2003 cash used in investing
was partially offset by cash of $850,000 arising from the repayment of a note
receivable from a former distributor who from whom we had acquired Ross Systems
Iberica, our Spanish subsidiary.
Cash flows used in financing activities increased $1,875,000 from net
repayments in the prior year of $604,000 to net repayment in fiscal 2003 of
$2,479,000. Of this increase, $1,345,000 represented purchases of Ross shares
into treasury stock. The repurchase of treasury stock comprised principally of a
one time purchase of $1,260,000 from a former distributor who had acquired the
shares pursuant to our purchase from him of Ross Systems Iberica, our Spanish
subsidiary. The balance of the increase in cash used in financing activities was
an increase in repayments under our credit lines of $612,000 in 2003 as compared
to $555,000 in fiscal 2002. We have reduced our use of our credit lines as
liquidity has improved. In fiscal 2002 there were no significant capital
receipts or repayments. In fiscal 2001, net repayments of capital leases and
long term debt were $1,723,000, and we received $2,000,000 in a preferred stock
issuance. We financed our continuing operations during fiscal 2003 through cash
generated from operations and available credit facilities. We expect to fund our
activities through fiscal 2004 with positive cashflows generated from continuing
operations.
At June 30, 2003, we had $8,628,000 of cash and cash equivalents. During
the first quarter of fiscal 2003, we secured a new revolving credit facility
from Silicon Valley Bank, which replaced the facility expiring in September
2002. This facility, with a maturity date of September 23, 2004, incorporates a
maximum credit line of $5,000,000, and an interest rate of prime plus 2%
(approximately 6.75% at September 2, 2003. Borrowings under the credit facility
are collateralized by substantially all assets of the Company. At June 30, 2003,
we had approximately $2,131,000 outstanding against the $5,000,000 revolving
credit facility, and based on the eligible accounts receivable at June 30, 2003,
our cash plus our remaining borrowing capacity under the revolving credit
facility totaled approximately $9,091,000. This represents an increase in total
availability of cash at June 30, 2003 of $3,558,000 from June 30, 2002.
On June 29, 2001, we issued convertible preferred stock to a qualified
investor in a private placement transaction. In summary, the investor purchased
500,000 preferred shares at $4.00 per share yielding $2,000,000 for Ross. The
shares are convertible, one for one at a price of $4.00 each, after June 29,
2002, and must be converted by June 29, 2006. The shares pay dividends at the
rate of 7.5%.
We have no off balance sheet financial arrangements.
We have certain fixed, monthly, payment commitments for leased facilities
and equipment. The facility leases and equipment operating leases expire at
various dates through fiscal 2016. Certain leases include renewal options and
rental escalation clauses to reflect changes in price indices, real estate
taxes, and maintenance costs.
18
ROSS SYSTEMS, INC AND SUBSIDIARIES
FUNDING OBLIGATIONS
As of June 30, 2003, our contractual commitments and obligations that
require funding from operations in fiscal 2004 and subsequent years were as
follows (in thousands):
TOTAL PAYMENTS LESS THAN MORE THAN 5
DUE 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
-------------- --------- --------- --------- -----------
Operating leases................... $ 5,256 $ 1,384 $ 1,450 $ 592 $ 1,830
Unconditional purchase obligations - - - - -
Debt repayment obligations ........ - - - - -
-------------- --------- --------- --------- -----------
Total future minimum cash payment
obligations .................... $ 5,256 $ 1,384 $ 1,450 $ 592 $ 1,830
============== --------- --------- --------- -----------
Operating lease payments included in the above table decline significantly
in fiscal 2005 since our real estate lease for our Atlanta office expires in
April 2004. We expect to reduce our rent, either by negotiation with our current
landlord, or by relocation within the Atlanta area. We anticipate that our new
lease will involve base rentals of $325,000 to $440,000 per year which are not
reflected in the table above since we have yet not entered into the new lease
agreement.
Certain executive employees have employment contracts containing terms
which upon termination would oblige us to make severance payments varying from
three months to three years of annual salary.
In addition to the amounts shown in the above table, we have various
agreements to purchase services, none of which are material.
RELATED PARTY TRANSACTIONS
In July 2002, we transferred the assets and liabilities of our subsidiary
Ross Systems Auckland Limited to Kauri Business Systems Limited (Kauri), a
startup company in which we retained a 20% interest. The balance of the
ownership of Kauri consists of former employees of Ross Systems Auckland
Limited. We wrote off all remaining net book value as well as the residual 20%
interest as we deemed its value to be minimal at the translation date. The new
company, based in New Zealand, provided product development and subcontracted
consulting services to us, while also managing and supporting Ross customers as
our Distributor for the Australian region. During the 11 months ended June 30,
2003, Kauri provided services to us to the value of approximately $405,000. For
the same period, we billed Kauri approximately $82,000 for royalties owed on
services and maintenance revenues earned.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
our financial position or result of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123 ("Statement 148"). This
amendment provides twO additional methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. Additionally, more prominent disclosures in both annual and
interim financial statements are required for stock-based employee compensation.
The transition guidance and annual disclosure provisions of Statement 148 are
effective for fiscal years ending after December 15, 2002. This Interim Report
complies with the requirements of Statement 148. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The adoption of Statement
148 did not have a material impact on our consolidated financial statements.
19
ROSS SYSTEMS, INC AND SUBSIDIARIES
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities which
possess certain characteristics. The Interpretation requires that if a business
enterprise has a controlling financial interest in a variable interest entity,
the assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those of
the business enterprise. This Interpretation applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. We do not
have any ownership in any variable interest entities as of June 30, 2003. We
will apply the consolidation requirement of FIN 46 in future periods if we
should own any interest in any variable interest entity.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities ("Statement 149"). This Statement amends Statement 133 for decisions
made (1) as part of the Derivatives Implementation Group process that
effectively required amendments to Statement 133, (2) in connection with other
Board projects dealing with financial instruments, and (3) in connection with
implementation issues raised in relation to the application of the definition of
a derivative, in particular, the meaning of an initial net investment that is
smaller than would be required for other types of contracts that would be
expected to have a similar response to changes in market factors, the meaning of
underlying, and the characteristics of a derivative that contains financing
components. We do not have any derivative instruments or hedging activities. The
application of Statement 149 did not have a material impact on our financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity ("Statement 150"). This Statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Statement 150 requires that certain mandatorily
redeemable financial instruments issued in the form of shares are to be
classified as liabilities rather than equity. We have no outstanding financial
instruments that fall into the definitions covered by this Statement. The
application of Statement 150 did not have a material impact on our financial
statements.
RISK FACTORS
OUR PROPOSED MERGER WITH CHINADOTCOM CORPORATION COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS BECAUSE PREPARATIONS FOR CLOSING WILL CONSUME OUR
MANAGEMENT'S TIME AND WILL RESULT IN MATERIAL COSTS AND EXPENSES.
On September 4, 2003, we entered into a merger agreement with chinadotcom
Corporation. Preparations for the merger will be a material expense, will
consume much of executive management's time and may result in potential
customers deferring purchasing decisions until they understand the form of and
reasons for the merger, any of which could have an adverse effect on our
business model and results of financial operations. These adverse effects will
be intensified if the merger is not completed.
OUR SOFTWARE LICENSE REVENUES CAN BE ALMOST IMMEDIATELY ADVERSELY AFFECTED
BY DECREASES IN CUSTOMER DEMAND AND EVEN RELATIVELY MINOR DELAYS IN
CUSTOMER PURCHASING DECISIONS.
Our software product license revenues can fluctuate depending upon such
factors as overall trends in the United States and International economies, new
product introductions, as well as customer buying patterns. Because we typically
ship software products within a short period after orders are received, and
therefore maintain a relatively small backlog, any weakening in customer demand
could have an almost immediate adverse impact on revenues and operating results.
Moreover, a substantial portion of the revenues for each quarter is attributable
to a limited number of sales and tends to be realized in the latter part of the
quarter. Thus, even short delays or deferrals of sales near the end of a quarter
can cause substantial fluctuations in quarterly revenues and operating results.
20
ROSS SYSTEMS, INC AND SUBSIDIARIES
BECAUSE OUR OPERATING EXPENSES ARE BASED IN LARGE PART ON ANTICIPATED
REVENUES, EVEN SMALL VARIATIONS IN THE TIME AT WHICH WE RECOGNIZE REVENUES
CAN CAUSE SIGNIFICANT VARIATION IN OUR OPERATING RESULTS FROM QUARTER TO
QUARTER.
Our operating expenses are based in large part on anticipated revenue
levels, including revenue from software sales agreements that we expect to sign.
We sometimes defer our recognition of revenue from software sales agreements
that we sign during a quarter to future periods, based on our revenue
recognition criteria. Because a high percentage of our expenses are relatively
fixed, a small variation in the timing of the recognition of specific revenues
can cause significant variation in operating results from quarter to quarter.
THE RECENT ECONOMIC SLOW-DOWN MAY CAUSE CUSTOMER DEMAND TO DECREASE AND
PRICE COMPETITION AMONG OUR COMPETITORS TO INTENSIFY, EITHER OF WHICH
WOULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Our business may be adversely impacted by the worldwide economic slowdown
and related uncertainties. Weak economic conditions worldwide have contributed
to the current technology industry slow-down. This may impact our business
resulting in reduced demand and increased price competition, which may result in
higher overhead costs, as a percentage of revenues. Additionally, this
uncertainty may make it difficult for our customers to forecast future business
activities. This could create challenges to our ability to profitably grow our
business. If the economic or market conditions further deteriorate, this could
have a material adverse impact on the results of operations and cash flow.
THE RAPID DEVELOPMENT AND MATURATION OF TECHNOLOGY IN OUR INDUSTRY AND THE
STRENGTHENING OUR COMPETITORS IN LIGHT OF INDUSTRY CONSOLIDATION MAY MAKE
IT DIFFICULT FOR US TO COMPETE EFFECTIVELY, WHICH WOULD HARM OUR OPERATING
RESULTS AND FINANCIAL CONDITION.
We may face increased competition and our financial performance and future
growth depend upon sustaining a leadership position in our product
functionality. Competitive challenges faced by Ross are likely to arise from a
number of factors, including: industry volatility resulting from rapid
development and maturation of technologies; industry consolidation and
increasing price competition in the face of worsening economic conditions.
Although there are fewer competitors in our target markets than previously,
failure to compete successfully against those remaining could harm our business
operating results and financial condition.
OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY DUE TO CHANGES IN
ECONOMIC CONDITIONS AND ANNOUNCEMENTS OF NEW PRODUCTS OR SIGNIFICANT
FLUCTUATIONS IN QUARTERLY RESULTS OF OUR COMPANY OR OUR COMPETITORS.
Our stock price, like that of other technology companies, is subject to
volatility because of factors such as announcement of new products, services or
technological innovations by us or by our competitors, quarterly variations in
our operating results, and speculation in the press or investment community. In
addition our stock price is affected by general economic and market conditions
and may be negatively affected by unfavorable global economic conditions.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AGAINST
UNAUTHORIZED THIRD PARTY COPYING OR USE, IN PART BECAUSE THE LAWS OF OTHER
COUNTRIES DO NOT OFFER THE SAME PROTECTION AS THE LAWS OF THE U.S., AND
ANY SUCH INABILITY COULD SIGNIFICANTLY REDUCE OUR REVENUES AND
PROFITABILITY.
Our business may suffer if we cannot protect our intellectual property. We
generally rely upon copyright, trademark and trade secret laws and contract
rights in the United States and in other countries to establish and maintain
proprietary rights in our technology and products. However, there can be no
assurance that any of our proprietary rights will not be challenged, invalidated
or circumvented. In addition, the laws of certain countries do not protect
proprietary rights to the same extent as do the laws of the United States.
Therefore, there can be no assurance that we will be able to adequately protect
our proprietary technology against unauthorized third-party copying or use,
which could adversely affect our competitive position and could significantly
reduce our revenues and profitability. Further, there can be no assurance that
we will be able to obtain licenses to any technology that may be required to
conduct our business or that, if obtainable, such technology could be licensed
at a reasonable cost.
21
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE: We have a worldwide presence and as such maintain
offices and derive revenues from sources overseas. For fiscal 2003,
international revenue as a percentage of total revenue was approximately 40%.
Our international business is subject to typical risks of an international
business, including, but not limited to: differing economic conditions, changes
in political climates, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors. The effect of foreign exchange rate fluctuations on Ross in fiscal 2003
was not material.
INTEREST RATES: Our exposure to interest rates relates primarily to our
cash equivalents and certain debt obligations. The Company invests in financial
instruments with original maturities of three months or less. Any interest
earned on these investments is recorded as interest income on our statement of
operations. Because of the short maturity of our investments, a near-term change
in interest rates would not materially affect our financial position, results of
operations, or cash flows. Certain of our debt obligations include a variable
rate of interest. We did not engage in any derivative/hedging transactions in
fiscal 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference herein
from Part IV Item 14(a) (1) and (2) of this Form 10-K/A Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported, in July 2002, the Company dismissed Arthur
Andersen, LLP and engaged BDO Seidman LLP as its independent public accountants.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Securities and Exchange Commission rules, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this annual report. This
evaluation was carried out under the supervision and with the participation of
our management, including our principal executive officer and principal
financial officer. Based on this evaluation, these officers have concluded that
the design and operation of our disclosure controls and procedures are
effective. There were no significant changes to our internal controls during the
period covered by this annual report that materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
Disclosure controls and procedures are controls and other procedures of
Ross designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act are accumulated and communicated to management, including the
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
22
ROSS SYSTEMS, INC AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following additional information pertains to executive officers of Ross.
There are no family relationships between any director or executive officer and
any other director or executive officer. Executive officers serve at the
discretion of the Board of Directors.
EXECUTIVE OFFICERS OF ROSS SYSTEMS
NAME AGE POSITION
---- --- --------
J. Patrick Tinley...................... 55 Chairman and CEO, and Director
Robert B. Webster...................... 56 Executive Vice President Operations and
Secretary
Verome M. Johnston..................... 38 Vice President and Chief Financial Officer
Eric W. Musser......................... 38 Vice President and Chief Technology Officer
Rick Marquardt......................... 50 Senior Vice President Marketing and Sales
Mr. Tinley was promoted to Chairman and CEO in December 2000. He served as
President and Chief Operating Officer from 1995 to June 2000 and President and
CEO from July through December 2000. He has been a director of Ross since 1993.
Mr. Tinley joined Ross in November 1988 as Executive Vice President, Business
Development and has served as Executive Vice President, Product Development and
Executive Vice President, Product Development and Client Services. Prior to
1988, Mr. Tinley held management positions with Management Science of America,
Inc. and Royal Crown Companies. Mr. Tinley received a Bachelors in Science from
Columbus University.
Mr. Goodhew joined Intelligent Systems Corporation, a publicly traded
technology product and services company, as Vice President in January 1997.
Prior to that, Mr. Goodhew was President of Peachtree Software, Inc., a
privately held software company, from 1984 to 1994. In 1994, Peachtree Software
was purchased by Automatic Data Processing, Inc., a publicly traded company
providing computerized services. Mr. Goodhew remained at Peachtree Software,
Inc. in a managerial capacity until joining Intelligent Systems Corporation.
Mr. Dickerson is the Chief Operating Officer of MWH Energy &
Infrastructure, Inc., a division of MWH Global, Inc., and a member of the Board
of MWH Global, Inc. The MWH group was formed out of a merger between Montgomery
Watson and Harza Engineering, a power engineering group. Mr. Dickerson was
Chairman of the Board of Harza Engineering International and has also served as
Chief Financial Officer and General Counsel of the Group. Prior to joining Harza
in 1992, Mr. Dickerson had been Executive Vice President and Chief Financial
Officer of Long Lake Energy Company, and Vice President and Chief Financial
Officer of Texas International Company. Mr. Dickerson received his Bachelor of
Arts in Economics from Washington Square College of New York University in 1970,
his Master of Arts in Economics from the University of Chicago in 1972 and his
Juris Doctor from the University of Georgia in 1975.
Mr. Ryan has served as Executive Vice President, Finance and
Administration of Global Knowledge Network, Inc., an independent information
technology education company, since February 1998. Mr. Ryan was Executive Vice
President and Chief Financial Officer of Amdahl Corporation, a computer
solutions company. Mr.
23
ROSS SYSTEMS, INC AND SUBSIDIARIES
Ryan holds a Bachelors of Arts in Business Administration from Boston College
and an Masters of Business Administration from Suffolk University.
Mr. Webster, Executive Vice President Operations is also Secretary and a
director of Ross. Mr. Webster joined Ross in June 1998 as its CFO and was
promoted to his current role in December 2000 and later elected director in
August 2001. Mr. Webster is responsible for the consulting services function as
well as the administrative, legal, human resource and financial operations of
Ross worldwide. Mr. Webster holds a Bachelors of Science degree in Accounting
and Computer Science, as well as a Masters of Business Administration
specialized in Information Systems from St. Peter's College. Mr. Webster is a
Certified Public Accountant in the State of Georgia and a member of the AICPA.
Mr. Webster, prior to joining Ross served in a progression of more senior
financial and general management positions with both Unisys Corporation and Wang
Laboratories, Inc. over a twenty year period.
Mr. Johnston, Vice President and Chief Financial Officer, joined the
Company in July 1998 as Corporate Controller. He was promoted to Vice President
in August 1999, and to Chief Financial Officer in December 2000. Immediately
prior to joining the Company, Mr. Johnston served as Vice President and Chief
Financial Officer of Market Area North America for Sunds Defibrator, where he
had been employed since June of 1991. Prior to that, Mr. Johnston was employed
with Deloitte & Touche. Mr. Johnston maintains a CPA certificate in Georgia and
earned Bachelor of Business Administration degrees in Accounting and Finance
from Valdosta State University.
Mr. Musser joined the Company in 1993 and was promoted to CTO in May of
2000. He has served in development for over 5 years and has held the position of
Vice President, Development for the past 2 years. Mr. Musser has also held
senior positions in Marketing and has been a critical influence in changing the
Company from client/server solutions to Internet based solutions. From 1989 to
1993 Mr. Musser held IT management positions in the steel industry.
Mr. Marquardt joined the company in October 2001 as Senior Vice President
of Worldwide Sales and Marketing. Prior to joining Ross Systems he was Vice
President and General Manager - Products at Eftia OSS Solutions, a provider of
operational support system (OSS) solutions. In 2000, Mr. Marquardt was a Vice
President at NSE Inc., an international distribution and investment firm. From
1997 to 2000 Mr. Marquardt served as COO of Distinction Software a provider of
enterprise-wide supply chain-planning solutions. From 1994 to 1997 he was Vice
President of Corporate Marketing and Business Development for Datalogix
International. From 1989 to 1994, Mr. Marquardt held various positions at Ross
Systems in Sales and Marketing including Vice President of Manufacturing
Systems. Prior to 1989, Mr. Marquardt held various management positions with
Management Science America, Inc. Mr. Marquardt has a Bachelor of Science Degree
from the University of Wisconsin - Stevens Point.
BOARD MEETINGS AND COMMITTEES
The board of directors of Ross held a total of fifteen meetings including
four regularly scheduled quarterly meetings and eleven special and committee
meetings during the fiscal year ended June 30, 2003. During fiscal 2003, each
director attended at least 93% of the aggregate of (1) the total number of
meetings of the board of directors and (2) the total number of meetings held by
all committees of the board of directors on which such person served. The board
of directors has an Audit Committee, a Compensation Committee, and a Nominating
Committee, each of which is composed of external directors.
During the year ended June 30, 2003, the Audit Committee of the board
consisted of three directors Ryan, Dickerson and Goodhew, none of whom are
employees of Ross. The Audit Committee held four meetings during the fiscal year
ended June 30, 2003. Following the annual meeting, the board intends to
re-appoint directors Dickerson, Ryan and Goodhew, with director Ryan as
Committee Chairman. The primary purpose of the Audit Committee is to assist the
board of directors in fulfilling its responsibility to oversee Ross' internal
and external financial reporting processes so as to ensure the objectivity of
Ross' financial statements and its system of internal accounting controls. The
Audit Committee recommends engagement of Ross' independent auditors and is
primarily responsible for approving the services performed by Ross' independent
auditors.
The Nominating Committee consisted of directors Dickerson, Ryan, and
Goodhew. Following the annual meeting, the board intends to re-appoint
directors, Dickerson, Goodhew, and, Ryan with director Dickerson as Committee
Chairman. The Nominating Committee is responsible for making recommendations for
the nomination
24
ROSS SYSTEMS, INC AND SUBSIDIARIES
of directors for replacement of resigning members and annual nominations for
re-election where appropriate. The committee also monitors the composition of
Ross' board of directors to ensure that it meets generally acceptable standards
of competence, skills and experience. The Nominating Committee met once during
the year ended June 30, 2003. The recommendation of the committee was to
nominate existing directors, Ryan, Goodhew, Dickerson, Tinley and Webster for
re-election.
The Compensation Committee of the board consisted of directors Goodhew,
Ryan and Dickerson and held seven meetings during the fiscal year ended June 30,
2003. Following the annual meeting, the board intends to re-appoint directors,
Goodhew, Ryan and, Dickerson with director Goodhew as Committee Chairman. The
Compensation Committee makes recommendations to the board regarding Ross'
executive compensation policy and grants stock options and administers the 1998
Stock Option Plan.
COMPENSATION OF DIRECTORS
For the fiscal year ended June 30, 2003, non-employee directors were
compensated $2,000 for each board of directors meeting attended and $1,000 for
participating in any telephonic board of directors meetings which were not
regularly scheduled. In addition, directors are reimbursed for travel expenses
incurred in connection with attending board of directors meetings. Annually,
each non-employee director is automatically granted 4,000 stock options to
purchase shares of Ross' common stock pursuant to the terms of the 1998 Stock
Option Plan, or the Option Plan. Options granted to non-employee directors under
the Option Plan are not intended by Ross to qualify as incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, or the Code. Pursuant to the Option Plan, on the annual meeting date,
each non-employee director who is elected or re-elected at the meeting is
granted options in accordance with the automatic grant. In addition, any
non-employee director newly elected to the Board of Directors receives an option
for 10,000 shares of Ross' common stock. The 10,000-share option vests 25% a
year over four years and the 4,000 share options are fully vested on the dates
of grant. The price of all options granted is equal to the closing price of
Ross' common stock, as quoted on the NASDAQ National Market, on the date of
grant. During fiscal 2003, outside directors were granted a total of 12,000
stock options at an exercise price of $13.16.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Exchange Act requires Ross' executive officers and
directors to file initial reports of share ownership and report changes in share
ownership with the Commission. Such persons are required by Commission
regulations to furnish Ross with copies of all Section 16(a) forms, which they
file. Based solely on Ross' review of such forms furnished to Ross and written
representations from certain reporting persons, Ross believes that for the
period July 1, 2002 to June 30, 2003, all Section 16(a) filings were made on a
timely basis, except that Mr. Oscar Pierre was late to file a Form 4 with the
Commission.
25
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 11. EXECUTIVE COMPENSATION
ROSS EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
earned during each of Ross' last three fiscal years by Ross' Chief Executive
Officer, and each of Ross' four other most highly compensated executive
officers, based on salary and bonus earned during fiscal 2003 (the "Named
Executive Officers").
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------- ----------------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL FISCAL COMPENSATION OPTIONS/ COMPENSATION
POSITION YEAR SALARY(4) BONUS(4) (1) SARs (#)(2) (3)
------------------------------- ------ --------- -------- ------------ ----------- -------------
J. Patrick Tinley.............. 2003 $ 315,000 $165,600(4) $ 12,000 100,000 $ 2,000
Chairman and Chief Executive 2002 307,500 114,000 10,400 15,000 2,000
Officer 2001 292,500 41,400 10,400 12,000 1,000
Robert B. Webster.............. 2003 $ 210,000 $110,400(4) $ 12,000 70,000 $ 2,000
Executive Vice President, 2002 205,000 100,000 12,000 10,000 2,000
and Secretary 2001 195,000 43,000 12,000 9,000 1,000
Gary Nowacki................... 2003 $ 179,800 $120,006(5) $ 10,000 5,000 $ 2,000
VP, North American Sales 2002 179,800 56,481 10,000 10,000 2,000
2001 142,000 67,500 10,000 6,500 1,000
Rick Marquardt................. 2003 $ 200,000 $ 62,540(6) $ 10,000 10,000 $ 2,000
Senior VP, World Wide Sales 2002 141,160 14,123 7,500 10,000 $ 2,000
and Marketing
Eric W. Musser................. 2003 $ 175,000 $ 44,275(4) $ 10,000 10,000 $ 2,000
VP, Development 2002 $ 178,875 50,000 10,000 10,000 $ 2,000
2001 151,125 19,000 10,000 9,000 1,000
(1) The amounts included in Other Annual Compensation include auto allowance.
(2) Ross has not granted any stock appreciation rights (SARs).
(3) Represents amounts contributed to Ross' 401(k) plan, on behalf of the
officer by Ross and premiums paid by Ross on behalf of the officer for
term life insurance.
(4) Represents a bonus earned in fiscal 2002 and paid in fiscal 2003.
(5) Includes a bonus in the amount of $22,997 earned in fiscal 2002 and paid
in fiscal 2003.
(6) Includes a bonus in the amount of $6,490 earned in fiscal 2002 and paid in
fiscal 2003.
26
ROSS SYSTEMS, INC AND SUBSIDIARIES
OPTION/SAR GRANTS IN FISCAL YEAR ENDED JUNE 30, 2003
The following table describes the grant of options to the Named Executive
Officers during fiscal 2003.
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
INDIVIDUAL GRANTS IN FISCAL 2003 TERM (4)
------------------------------------------ -----------------------------
NUMBER OF
SECURITIES
UNDERLYING PERCENT OF TOTAL
OPTIONS/ OPTIONS/SARS
SARs GRANTED TO EXERCISE
GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR (2) ($/sh) (3) DATE (2) 5% 10%
------- ---------- ---------------- ---------- ---------- ------- ---------
J. Patrick Tinley........ 50,000 19.8% 7.26 9/24/2012 591,289 941,529
J. Patrick Tinley........ 50,000 19.8% 7.95 12/5/2012 647,486 1,031,013
Robert B. Webster........ 50,000 19.8% 7.26 9/24/2012 591,289 941,529
Robert B. Webster........ 20,000 7.9% 7.95 12/5/2012 258,994 412,405
Rick Marquardt........... 10,000 4.0% 7.26 9/24/2012 118,258 188,306
Eric W. Musser........... 10,000 4.0% 7.26 9/24/2012 118,258 188,306
Gary Nowacki............. 5,000 2.0% 7.25 11/4/2012 59,047 94,023
(1) Ross has not granted any SARs.
(2) Based on an aggregate of 252,828 options granted to all employees during
the fiscal year. Options granted in fiscal year 2003 expire in 2012 or
2013 and typically vest annually over four years from the date of grant.
(3) All options were granted at an exercise price equal to the fair market
value based on the closing market value of Ross' common stock on the
Nasdaq National Market on the date of grant.
(4) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
terms assuming the specified compounded rates of appreciation on Ross'
common stock over the terms of the options. These numbers are calculated
based on the Commission's rules and do not reflect Ross' estimate of
future stock price appreciation. Actual gains, if any, are dependent on
the timing of option exercises and the future performance of Ross' common
stock. There can be no assurances that the rates of appreciation assumed
in this table can be achieved or that the individuals will realize the
amounts reflected.
27
ROSS SYSTEMS, INC AND SUBSIDIARIES
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table provides information related to options exercised by
the Named Executive Officers during fiscal 2002 and the number and value of
options held at June 30, 2003. Ross has not granted any SARs.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARs AT OPTIONS/SARs AT
JUNE 30, 2003 JUNE 30, 2003(2)
--------------------------- ---------------------------
SHARES
ACQUIRED VALUE
ON REALIZED
NAME EXERCISE(#) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------------- ----------- -------- ----------- ------------- ----------- -------------
J. Patrick Tinley......... - $ - 36,870 119,350 $ 58,005 $ 809,345
Robert B. Webster......... 3,750 18,900 5,300 83,200 1,760 580,490
Rick Marquardt............ - - 2,500 17,500 23,650 139,150
Eric W. Musser............ - - 11,300 23,700 51,797 164,352
Gary Nowacki.............. 1,250 14,725 5,125 16,375 26,697 144,247
(1) Based upon the fair market value of one share of Ross' common stock on the
date the option was exercised, less the exercise price per share
multiplied by the number of shares received upon exercise of the option.
(2) Value is based on the difference between the option exercise price and the
fair market value at June 30, 2003 ($14.08 per share) multiplied by the
number of shares underlying the option.
28
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Ross common
stock as of September 24, 2003 by (a) each director, (b) each of the executive
officers identified in the Summary Compensation Table, (c) all directors and
executive officers as a group and (d) each person known by Ross to beneficially
own more than 5% of any class of Ross' voting securities. Under the rules of the
Securities and Exchange Commission, or Commission, beneficial ownership includes
any shares as to which the individual has sole or shared voting power or
investment power and also any shares which the individual has the right to
acquire within 60 days of September 24, 2003 through the exercise of any stock
option.
COMMON STOCK SERIES A PREFERRED STOCK
----------------------------------- -------------------------
NUMBER OF NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE
NAME SHARES(1) OPTIONS(2) OF CLASS SHARES OF CLASS
----------------------------------------- --------- ---------- ---------- --------- ----------
Alvin Johns 51,754 6,476 1.9% - -
Robert B. Webster ** 52,401 133,500 6.0% - -
J. Patrick Tinley ** 31,041 210,215 7.7% - -
Oscar Pierre Prats 3,625 5,175 * - -
Gary Nowacki 14,684 9,875 * - -
Eric W. Musser 6,346 15,950 * - -
Verome M. Johnston 3,986 10,500 * - -
Bruce J. Ryan - 9,200 * - -
Frank M. Dickerson - 13,000 * - -
J. William Goodhew, III - 9,200 * - -
Rick Marquardt 123 7,500 * - -
Richard Thomas 1,448 2,375 * - -
All officers and directors as a group (12 165,408 432,966 19.2% - -
persons)
Benjamin W. Griffith III 152,500 - 20.5% (3) 500,000 (4) 100%
*Less than 1%.
** Number of options exercisable within 60 days includes accelerated vesting of
certain options due to a change of control pursuant to the proposed merger.
(1) The table is based upon information supplied by executive officers,
directors and principal stockholders. Unless otherwise indicated, each of
the stockholders named in the table has sole voting investment and/or
dispositive power with respect to all shares of common stock shown as
beneficially owned, subject to community property laws where applicable
and to the information contained in the footnotes to this table
(2) These are options which are exercisable for common stock within 60 days of
September 24, 2003.
(3) Mr. Griffith owns 4.9% of the total number of shares of outstanding common
stock.
(4) The 7.5% Series A Convertible Preferred Stock has one vote per share and
votes with the common stock on most matters. These shares may be converted
at the rate of one preferred share for one common stock share. These
shares must be converted by June 29, 2006.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of June 30, 2003 about the
common stock of Ross that may be issued upon the exercise of options, warrants
and rights under all of Ross' existing equity compensation plans, including the
Ross Systems Inc. 1988 Incentive Stock Plan, the 1998 Stock Option Plan and the
1991 Employee Stock Purchase Plan, each as amended.
29
ROSS SYSTEMS, INC AND SUBSIDIARIES
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE (1) EQUITY COMPENSATION PLANS
BE ISSUED UPON EXERCISE EXERCISE PRICE OF (EXCLUDING SECURITIES
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN THE FIRST
WARRANTS AND RIGHTS WARRANT AND RIGHTS COLUMN)
PLAN CATEGORY (#) ($)(1) (#)
--------------------- ----------------------- -------------------- -------------------------
Equity compensation
plans approved by
security holders
576,063 $9.62 266,960
Equity compensation - -
plans not approved by -
security holders
Total 576,063 $9.62 266,960
(1) Pursuant to a resolution passed by Ross stockholders at the annual meeting
held November 15, 2001, the number of shares available for issuance under
the 1991 Employee Stock Purchase Plan is automatically increased annually
by the lesser of 35,000 shares or 1.5% of the outstanding shares of Ross
common stock.
30
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Under the terms of indemnification agreements with each of Ross' officers
and directors, Ross is obligated to indemnify each officer and director against
certain claims and expenses for which the director might be held liable in
connection with past or future service on behalf of Ross. In addition, Ross'
Certificate of Incorporation provide that, to the extent permitted by Delaware
law, the officers and directors shall not be liable for monetary damages for
breach of fiduciary duty as an officer or director. In fiscal 2003, Ross renewed
and modified employment agreements with J. Patrick Tinley and Robert B. Webster.
The employment agreements provide the executives with severance payments and
accelerated vesting of stock options and other incentive awards if the
executive's employment is terminated without "cause" at any time. If Mr. Tinley
is terminated without "cause," he would be entitled to (1) a severance payment
of 300% of his base compensation plus 300% of his targeted bonus, (2) employee
benefit coverage applicable to the executive at the time of termination for
three years following the termination and (3) ninety days to exercise all vested
and unvested stock options and other incentive awards. If Mr. Webster is
terminated without "cause," he would be entitled to (A) a severance payment of
200% of his base compensation plus 200% of his targeted bonus, (B) employee
benefit coverage applicable to the executive at the time of termination for two
years following the termination and (C) ninety days to exercise all vested and
unvested stock options and other incentive awards. The employment agreements
also provide the executives with severance payments and accelerated vesting of
stock options and other incentive awards if the executive terminates his
employment with Ross for "good reason" or is terminated for any reason other
than "cause" or "disability" within nine months immediately following a "change
of control" of Ross. In such a case, Mr. Tinley would be entitled to a severance
payment of 300% of his base compensation plus 300% of his targeted bonus, each
at the time of termination, and ninety days to exercise all vested and unvested
stock options and other incentive awards, and Mr. Webster would be entitled to a
severance payment of 200% of his base compensation plus 200% of his targeted
bonus, each at the time of termination, and ninety days to exercise all vested
and unvested stock options and other incentive awards. The employment agreements
define "cause" to include a willful act by the executive which constitutes fraud
and which is injurious to Ross, conviction of, or a plea of "guilty" or "no
contest" to, a felony or the executive's continuing repeated willful failure or
refusal to perform his material duties required by the employment agreement
which is injurious to Ross. The employment agreements define "good reason" to
include a material reduction in the executive's powers or duties, one or more
reductions in the executive's base compensation in the cumulative amount of five
percent (5%) or more or notifying the executive that his principal place of work
will be relocated by a distance of 50 miles or more. The employment agreements
define "disability" as the executive's eligibility to receive immediate
long-term disability benefits under Ross' long-term disability insurance plan
or, if there is no such plan, under the federal Social Security program. The
employment agreements define "change of control" to mean the occurrence of any
of the following events: (a) any "person" (as such term in used in sections
13(d) and 14(d) of the Exchange Act) by the acquisition or aggregation of
securities is or becomes the beneficial owner (within the meaning of Rule 13d-3
of the Exchange Act), directly or indirectly, of securities of Ross representing
fifty percent (50%) or more of the combined voting power of Ross' then
outstanding securities ordinarily (and apart from rights accruing under special
circumstances) having the right to vote at elections of directors, referred to
as "Base Capital Stock"; except that any change in the relative beneficial
ownership of Ross' securities by any person resulting solely from a reduction in
the aggregate number of outstanding shares of Base Capital Stock, and any
decrease thereafter in such person's ownership of securities, shall be
disregarded until such person increases in any manner, directly or indirectly,
such person's beneficial ownership of any securities of Ross, or (b) the
stockholders of Ross approve a definitive agreement: - to merge or consolidate
Ross with or into another corporation in which the holders of the securities of
Ross before such merger or reorganization will not, immediately following such
merger or reorganization, hold as a group on a fully diluted basis both the
ability to elect at least a majority of the directors of the surviving
corporation and at least a majority in value of the surviving corporation's
outstanding equity securities; or - to sell or otherwise dispose of all or
substantially all of the assets of Ross or dissolve or liquidate Ross.
31
ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT AND RELATED FEES BILLED TO ROSS DURING FISCAL 2003 AUDIT FEES
BDO Seidman billed Ross an aggregate of $186,000 for expenses and
professional services rendered for the (1) audit of the annual consolidated
financial statements for fiscal year 2003 included in Ross' Annual Report on
Form 10-K/A and (2) the review of the consolidated financial statements included
in Ross' quarterly reports on Form 10-Q. FINANCIAL INFORMATION SYSTEMS DESIGN
AND IMPLEMENTATION FEES Ross did not engage BDO Seidman to provide advice to it
regarding financial information systems design and implementation during the
fiscal year ended June 30, 2002. ALL OTHER FEES BDO Seidman billed Ross an
aggregate of $92,000 for all other non-audit services rendered to it during
fiscal 2003. The following table summarizes the approximate aggregate accounting
fees billed to Ross for its 2003 fiscal year:
Audit fees $ 186,000
Financial information systems design and implementation fees $ -
All other fees:(1) $ 92,000
----------
Total fees $ 278,000
(1) Includes fees for assistance with Commission filings and various
accounting consultation ($11,000); various advisory services related
principally to tax preparation services and tax consultation services
associated with the development and implementation of international tax
strategies and sales taxes ($67,000); and executive compensation analysis
prepared at the request of independent board members ($14,000).
32
ROSS SYSTEMS, INC AND SUBSIDIARIES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements. The following Consolidated
Financial Statements of Ross Systems, Inc. are filed as part of this
report:
PAGE
----
Report of BDO Seidman , LLP, Independent Certified Public Accountants.......................................... F-1
Fiscal 2001, and 2000 Report of Arthur Andersen LLP, Independent Public Accountants............................ F-2
Consolidated Balance Sheets at June 30, 2003 and 2002.......................................................... F-3
Consolidated Statements of Operations--Years Ended June 30, 2003, 2002, and 2001................................ F-4
Consolidated Statements of Cash Flows--Years Ended June 30, 2003, 2002, and 2001................................ F-5
Consolidated Statements of Shareholders' Equity--Years Ended June 30, 2003, 2002, and 2001...................... F-6
Notes to Consolidated Financial Statements..................................................................... F-7
2. Financial Statement Schedule. The following financial statement
schedule of Ross Systems, Inc. for the Years Ended June 30, 2003,
2002, and 2001 is filed as part of this Report and should be read in
conjunction with the Consolidated Financial Statements of Ross
Systems, Inc.
SCHEDULE PAGE
-------- ----
II Valuation and Qualifying Accounts........................................................................ S-1
Schedules not listed above have been omitted because they are not
applicable or are not required, or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits. The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as
part of, or incorporated by reference into, this Report.
(b) Reports on Form 8-K.
None
33
ROSS SYSTEMS, INC AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on the 22nd day of September, 2003.
ROSS SYSTEMS, INC.
By: /s/ J. Patrick Tinley
--------------------------------------------
J. Patrick Tinley
Chairman and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints J. Patrick Tinley his attorney-in-fact, with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K/A, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that the said attorney-in-fact,
or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ J. Patrick Tinley Chairman and Chief Executive Officer September 22, 2003
-------------------------------- (Principal Executive Officer)
J. Patrick Tinley
/s/ Robert B. Webster Executive Vice President Operations, Company September 22, 2003
-------------------------------- Secretary and Director
Robert B. Webster
/s/ Verome M. Johnston Vice President and Chief Financial Officer September 22, 2003
-------------------------------- (Principal Financial and Accounting
Verome M. Johnston Officer)
/s/ J. William Goodhew III Director September 22, 2003
--------------------------------
J. William Goodhew III
/s/ Frank M. Dickerson Director September 22, 2003
--------------------------------
Frank M. Dickerson
/s/ Bruce J. Ryan Director September 22, 2003
--------------------------------
Bruce J. Ryan
34
ROSS SYSTEMS, INC AND SUBSIDIARIES
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K/A
YEAR ENDED JUNE 30, 2003
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Asset Sale Agreement between Registrant and Now Solutions LLC dated
March 5, 2001 (1)
3.1 Certificate of Incorporation of the Registrant, as amended (2)
3.2 Bylaws of the Registrant, as amended (2)
3.3 Amendment to the Certificate of Incorporation of the Registrant,
dated April 26, 2001, for the 1 for 10 Reverse Stock Split.(3)
4.1 Certificate of Designation of Rights, Preferences and Privileges of
Series B Preferred Stock of the Registrant (4)
4.2 Form of the subordinated debenture agreement due February 6, 2003
issued by the Registrant to each investor (6)
4.3 Registration Rights Agreement between the Registrant and each
Investor (6)
10.1 Preferred Share Rights Agreement, dated September 4, 1999 between
the Registrant and Registrar and Transfer Company (5)
10.2 Employment Agreement dated January 7, 1999, modified March 24, 2003,
between Mr. Patrick Tinley and the Registrant (8)
10.3 Employment Agreement dated September 13, 1999, modified March 24,
2003, between Mr. Robert B. Webster and the Registrant (8)
10.4 Convertible Preferred Stock Purchase Agreement dated June 29, 2001
between Registrant and Benjamin W. Griffith, III (7)
10.5 Loan and Security Agreement dated September 24, 2002 between
Registrant and Silicon Valley Bank (3)
21.1 Listing of Subsidiaries of Registrant
23.1 Consent of BDO Seidman, LLP
24.1 Power of Attorney (included on signature page)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 8-K/A filed May 15, 2001.
(2) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 8-K filed July 24, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 10K/A filed October 2, 2002
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q filed May 6, 1996.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(6) Incorporated by reference to the exhibit filed with the Registrant's
current report on Form 8-K filed February 12, 1998.
35
ROSS SYSTEMS, INC AND SUBSIDIARIES
(7) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10K filed September 27, 2001.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 filed
May 14, 2003.
36
ROSS SYSTEMS, INC AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Ross Systems, Inc.
We have audited the accompanying consolidated balance sheets of Ross Systems,
Inc. and subsidiaries as of June 30, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. We have also audited the financial statement schedule for the years ended
June 30, 2003 and 2002 listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. The Company's consolidated financial statements
and financial statement schedule as of and for the year ended June 30, 2001,
prior to the adjustments discussed in the summary of significant accounting
policies, were audited by auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements and
schedule in their report dated August 17, 2001.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ross Systems, Inc.
and subsidiaries as of June 30, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, the 2003 and 2002 schedules present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1, during the year ended June 30, 2002 the company changed
the manner in which it records reimbursement of out-of- pocket expenses upon the
adoption of the accounting standards in of Emerging Issues Task Force Issue
01-14.
As discussed in Note 1, the Company changed the manner in which it accounts for
goodwill and other intangible assets upon adoption of the accounting standards
in Statement of Financial Accounting Standards No. 142 on July 1, 2001,
As discussed above, the financial statements of Ross Systems Inc. and
subsidiaries as of June 30, 2001, and for each of the two years in the period
ended June 30, 2001, were audited by other auditors who have ceased operations.
As described in Note 1, these financial statements have been restated to reflect
the adoption of Emerging Issues Task Force Issue 01-14 and revised to include
the transitional disclosures required by SFAS No. 142. We audited the
adjustments described in Note 1 that were applied to restate the 2001 financial
statements to reflect the adoption of Emerging Issues Task Force Issue 01-14. We
also audited the adjustments reflected in the transitional disclosures required
by SFAS No. 142. In our opinion, such adjustments are appropriate and have been
properly applied. However, we were not engaged to audit, review or apply any
procedures to the 2001 financial statements of the company, other than with
respect to such adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 financial statements taken as a whole.
/s/ BDO Seidman, LLP
Atlanta, Georgia
August 20, 2003 (Except for Note 9 as to which the date is September 4, 2003)
F - 1
ROSS SYSTEMS, INC AND SUBSIDIARIES
THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR ANDERSEN
LLP AND IT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. ARTHUR ANDERSEN LLP HAS
NOT CONSENTED TO ITS INCORPORATION BY REFERENCE INTO ROSS SYSTEMS INC.'S
PREVIOUSLY FILED REGISTRATION STATEMENTS FILE NOS: 333-65660, 333-39348,
33-42036, 33-48226, 33-56584, 33-72168, 33-89128, 333-36745, 333-44665,
333-71005, 33-89504, 333-19619, 333-06053, 333-44363, 333-47877, 333-58639, AND
333-65065. THEREFORE, AN INVESTOR'S ABILITY TO RECOVER ANY POTENTIAL DAMAGE MAY
BE LIMITED.
REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS
To Ross Systems, Inc.:
We have audited the accompanying consolidated balance sheets of ROSS
SYSTEMS, INC. (a Delaware corporation) AND SUBSIDIARIES as of June 30,
2001 and 2000* and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years ended
June 30, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ross Systems, Inc. and
subsidiaries as of June 30, 2001 and 2000*, and the results of their
operations and their cash flows for each of the three years ended June 30,
2001 in conformity with accounting principles generally accepted in the
United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements included in Item 14 is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
August 17, 2001
* The 2000 and 2001 Consolidated Balance Sheet and the 1999 and 2000
Consolidated Statement of Operations, Shareholders Equity, and Cash Flows are
not required to be present in the 2003 Annual Report.
F - 2
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
---------------------------
2003 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ............................................................ $ 8,628 $ 5,438
Accounts receivable, less allowance for doubtful accounts
of $1,532 and $3,379, at 2003, and 2002 respectively ............................. 12,880 12,319
Prepaid and other current assets ..................................................... 731 532
Note receivable from related party ................................................... - 850
-------- --------
Total current assets .............................................................. 22,239 19,139
Property and equipment, net ............................................................ 1,406 1,450
Computer software costs, net ........................................................... 13,573 14,036
Other assets ........................................................................... 2,993 2,993
-------- --------
Total assets ...................................................................... $ 40,211 $ 37,618
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short term debt ...................................................................... $ 2,800 $ 3,967
Accounts payable ..................................................................... 2,978 2,682
Accrued expenses ..................................................................... 4,940 4,476
Income taxes payable ................................................................. 261 15
Deferred revenues .................................................................... 12,203 12,535
-------- --------
Total liabilities ................................................................. 23,182 23,675
-------- --------
Commitments and Contingencies
Shareholders' equity:
Convertible Preferred stock, no par value 5,000,000 shares authorized; 500,000 shares
issued and outstanding .............................................................. 2,000 2,000
Common stock, $0.001 par value; 15,000,000 shares authorized; 2,815,603 and
2,625,378 shares issued and outstanding ........................................... 28 26
Additional paid-in capital .......................................................... 87,189 86,983
Accumulated deficit ................................................................. (69,094) (73,300)
Accumulated other comprehensive deficit ............................................. (1,749) (1,766)
Treasury stock at cost, 158,977 shares .............................................. (1,345) -
-------- --------
Total shareholders' equity ........................................................ 17,029 13,943
-------- --------
Total liabilities and shareholders' equity ............................................. $ 40,211 $ 37,618
======== ========
See accompanying Notes to Consolidated Financial Statements
F - 3
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED JUNE 30,
--------------------------------
2003 2002 2001
-------- -------- --------
Revenues:
Software product licenses ................................................................ $ 14,589 $ 13,026 $ 9,607
Consulting and other services ............................................................ 13,489 13,013 16,520
Maintenance .............................................................................. 20,022 20,014 24,678
-------- -------- --------
Total revenues ......................................................................... 48,100 46,053 50,805
-------- -------- --------
Operating expenses:
Costs of software product licenses (inclusive of amortization and impairment of
capitalized software) .................................................................. 6,997 19,992 8,349
Costs of consulting, maintenance and other services (inclusive of reimbursable expenses of
$1,180, $834, and $1,307 for 2003, 2002, and 2001, respectively, and exclusive of non
recurring expense of $353 for 2001) .................................................... 17,193 17,023 17,595
Software product license sales and marketing (exclusive of non-recurring expense of $136
for 2001) .............................................................................. 11,384 9,461 15,026
Product development, net of capitalized computer software costs (exclusive of non
recurring expense of $301 for 2001) .................................................... 2,528 3,057 4,127
General and administrative ............................................................... 4,376 4,393 4,737
Provision for uncollectible accounts ..................................................... 831 1,444 1,514
Amortization of goodwill ................................................................. - - 691
Non-recurring costs (benefit) ............................................................ - (650) 790
-------- -------- --------
Total operating expenses ............................................................... 43,309 54,720 52,829
-------- -------- --------
Operating profit (loss) ................................................................ 4,791 (8,667) (2,024)
Other income (expense):
Gain on sale of product line ............................................................. - - 2,372
Other financial, net ..................................................................... (180) (625) (1,181)
-------- -------- --------
Net income (loss) before income taxes .................................................. 4,611 (9,292) (833)
Income tax expense ....................................................................... 405 132 9
-------- -------- --------
Net income (loss) .......................................................................... 4,206 (9,424) (842)
Preferred stock dividends (150) (150) -
-------- -------- --------
Net income (loss) available to common shareholders ..................................... $ 4,056 $ (9,574) $ (842)
======== ======== ========
Net income (loss) per common share--basic .................................................. $ 1.54 $ (3.65) $ (0.33)
======== ======== ========
Net income (loss) per common share--diluted ................................................ $ 1.28 $ (3.65) $ (0.33)
======== ======== ========
Shares used in per share computation--basic ................................................ 2,641 2,625 2,566
======== ======== ========
Shares used in per share computation--diluted .............................................. 3,296 2,625 2,566
======== ======== ========
See accompanying Notes to Consolidated Financial Statements
F - 4
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
----------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net income (loss) .......................................................... $ 4,206 $ (9,424) $ (842)
Adjustments to reconcile net loss to cash provided by operating activities:
Non cash financing costs ................................................ - - 60
Non-cash stock compensation costs ....................................... 175 - -
Impairment of capitalized software costs .............................. - 10,938 -
Depreciation and amortization of property and equipment ................. 766 984 1,592
Amortization of computer software costs ................................. 4,702 7,184 7,369
Amortization of goodwill ................................................ - - 691
Provision for uncollectible accounts .................................... 831 1,444 1,514
Changes in operating assets and liabilities, net of sale of product line:
Accounts receivable ................................................... (1,246) (3,646) 9,911
Prepaid and other current assets ...................................... (121) 575 (149)
Income taxes recoverable/payable ...................................... 271 185 92
Accounts payable ...................................................... 281 (2,218) (2,178)
Accrued expenses ...................................................... 489 (881) (1,011)
Deferred revenues ..................................................... (246) (66) (2,991)
-------- -------- --------
Cash provided by operating activities ............................. 10,108 5,075 14,058
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment, net ................................... (722) (740) (277)
Computer software costs capitalized ........................................ (4,239) (4,307) (6,878)
Note receivable from related party repaid .................................. 850 - -
Sale of product line, net of assets disposed ............................... - - 1,567
Other ...................................................................... - 144 429
-------- -------- --------
Cash used in investing activities ................................. (4,111) (4,903) (5,159)
-------- -------- --------
Cash flows from financing activities:
Net cash paid on line of credit activity ................................... (1,167) (555) (5,353)
Debt and capital lease payments ............................................ - - (1,723)
Repurchase of treasury stock ............................................... (1,345) - -
Proceeds from issuance of preferred stock .................................. - - 2,000
Proceeds from issuance of common stock ..................................... 183 101 17
Preference dividend paid ................................................... (150) (150) -
-------- -------- --------
Cash used in financing activities ................................ (2,479) (604) (5,059)
-------- -------- --------
Effect of exchange rate changes on cash ....................................... (328) 154 (134)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......................... 3,190 (278) 3,706
-------- -------- --------
Cash and cash equivalents at beginning of fiscal year ......................... 5,438 5,716 2,010
-------- -------- --------
Cash and cash equivalents at end of fiscal year ............................... $ 8,628 $ 5,438 $ 5,716
======== ======== ========
See accompanying Notes to Consolidated Financial Statements
F - 5
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Accum-
ulated
Other Total
Preferred Stock Common Stock Treasury Stock Accum- Compre- Share- Comprehen
--------------- -------------- --------------- Paid in ulated hensive holders' -sive
Shares Amount Shares Amount Shares Amount Capital Deficit Deficit Equity Loss
------ ------ ------ ------ ------ ------- ------- -------- ------- -------- ---------
Balances as of June 30, 2000 - $ - 2,380 $ 24 - $ - $85,780 $(63,034) $(1,880) $ 20,890
------ ------ ------ ------ ------ ------- ------- -------- ------- --------
Conversion of debentures ... 173 2 1,175 1,177
Issuance of stock pursuant
to employee stock
purchase plan............ 13 17 17
Effect of foreign currency
translation.............. (198) (198) $ (198)
Issuance of preference
shares 500 2,000 2,000
Issuance of warrants
pursuant to cost of
financing 60 60
Net loss.................... (842) (842) (842)
---------
Comprehensive Loss.......... (1,040)
=========
------ ------ ------ ------ ------ ------- ------- -------- ------- --------
Balances as of June 30, 2001 500 2,000 2,566 26 - - 87,032 (63,876) (2,078) 23,104
====== ====== ====== ====== ====== ======= ======= ======== ======= ========
Issuance of stock pursuant
to employee stock
purchase and option
plans.................... 59 101 101
Effect of foreign currency
translation.............. 312 312 312
Net loss.................... (9,424) (9,424) (9,424)
Dividends on preferred stock (150) (150)
---------
Comprehensive Loss.......... (9,112)
=========
------ ------ ------ ------ ------ ------- ------- -------- ------- --------
Balances as of June 30, 2002 500 2,000 2,625 26 - - 86,983 (73,300) (1,766) 13,943
====== ====== ====== ====== ====== ======= ======= ======== ======= ========
Issuance of stock pursuant
to employee stock
purchase and option
plans.................... 71 1 357 358
Issuance of stock in
fulfillment of 1996
acquisition of Spanish
subsidiary 120 1 (1)
Repurchase of treasury stock (159) (1,345) (1,345)
Effect of foreign currency
translation.............. 17 17 17
Net profit (loss)........... 4,206 4,206 4,206
Dividends on preferred stock (150) (150)
---------
Comprehensive Income........ $ 4,223
=========
------ ------ ------ ------ ------ ------- ------- -------- ------- --------
Balances as of June 30, 2003 500 $2,000 2,816 $ 28 (159) $(1,345) $87,189 $(69,094) $(1,749) $ 17,029
====== ====== ====== ====== ====== ======= ======= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements
F - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business of the Company
Ross Systems, Inc. (NASDAQ: ROSS) delivers innovative software
solutions that help manufacturers worldwide fulfill their business growth
objectives through increased operational efficiencies, improved
profitability, strengthened customer relationships and streamlined
regulatory compliance. Focused on the food and beverage, life sciences,
chemicals, metals and natural products industries and implemented by over
1,000 customer companies worldwide, the company's family of
Internet-architected solutions is a comprehensive, modular suite that
spans the enterprise, from manufacturing, financials and supply chain
management to customer relationship management, performance management and
regulatory compliance.
Publicly traded on the NASDAQ since 1991, Ross' global headquarters
are based in the U.S. in Atlanta, Georgia, with sales and support
operations around the world.
The Company operates in one business segment and no individual
customer accounts for more than 10% of total revenues. The Company does
not have a concentration of credit risk in any one industry. Approximately
60% of the Company's revenues are derived from the North American market.
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in
consolidation.
Stock Based Compensation.
The company measures compensation cost for its stock incentive and
option plans using the intrinsic value-based method of accounting.
Had the company used the fair value-based method of accounting to
measure compensation expense for its stock incentive and option plans and
charged compensation cost against income over the vesting periods, based
on the fair value of options at the date of grant, net income and the
related basic and diluted per common share amounts for the twelve months
ended June 30, 2003, 2002, and 2001, would have been reduced to the
following pro forma amounts:
(In thousands, except per share data)
FISCAL YEAR ENDED JUNE 30,
---------------------------------------
2003 2002 2001
--------- --------- ---------
Net income (loss) available to common shareholders:
As reported ..................................... $ 4,056 $ (9,574) $ (842)
Add: Stock-based compensation expense included in
reported net income , net of tax ............... 175 - -
Deduct: Total stock-based employee compensation
expense under fair value-based method, net of tax (699) (406) (460)
--------- --------- ---------
Pro forma net income (loss) available to common
shareholders .................................... $ 3,532 $ (9,980) $ (1,302)
--------- --------- ---------
Basic net earnings per share:
As reported ..................................... $ 1.54 $ (3.65) $ (0.33)
Pro forma ....................................... 1.34 (3.80) (0.51)
Diluted net earnings per share:
As reported ..................................... 1.28 (3.65) (0.33)
Pro forma ....................................... 1.07 (3.80) (0.51)
F - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following weighted average assumptions for the Company's Stock
Option Plan were used to determine the pro forma amounts noted above:
YEAR ENDED JUNE 30,
---------------------------------------
2003 2002 2001
--------- --------- ---------
Expected life...................................... 5 5 5
Expected volatility................................ 48.6% 80.4% 121.6%
Risk-free interest rate............................ 3.9% 5.0% 5.3%
Expected dividend yield............................ None None None
Revenue Recognition.
In accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements,"
the Company recognizes revenues from licenses of computer software
"up-front" provided that a non-cancelable license agreement has been
signed, the software and related documentation have been shipped, there
are no material uncertainties regarding customer acceptance, collection of
the resulting receivable is deemed probable, and no significant other
vendor obligations exist. The revenue associated with any license
agreements containing cancellation or refund provisions is deferred until
such provisions lapse. Where the Company has future obligations, if such
obligations are insignificant, related costs are accrued immediately. When
the obligations are significant, the software product license revenues are
deferred. Future contractual obligations can include software
customization, requirements to provide additional products in the future
and porting products to new platforms. Contracts which require significant
software customization are accounted for on the percentage-of-completion
basis. Revenues related to significant obligations to provide future
products or to port existing products are deferred until the new products
or ports are completed.
The Company's revenue recognition policies are designed to comply
with American Institute of Certified Public Accountants Statement of
Position ("SOP") 97-2, "Software Revenue Recognition," and with SEC Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." Revenues recognized from multiple-element software license
contracts are allocated to each element of the contracts based on the fair
values of the elements, such as licenses for software products,
maintenance, or professional services. The determination of fair value is
based on objective evidence which is specific to the Company. The Company
limits its assessment of objective evidence for each element to either the
price charged when the same element is sold separately, or the price
established by management having the relevant authority to do so, for an
element not yet sold separately. If evidence of fair value of all
undelivered elements exists but evidence does not exist for one or more
delivered elements, then revenue is recognized using the residual method.
Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as
revenue.
The Company utilizes distributors primarily in those geographic
areas where the Company does not maintain a physical presence. The
Company's revenue recognition policies with respect to sales by
distributors complies with SOP 97-2 and SAB 101 in that all the revenue
recognition criteria listed above are met. In addition, distributors do
not have rights of return, price protections, rotation rights, or other
features that would preclude revenue recognition. Generally, the value of
software license sales to distributors is based on list selling prices to
their customer less a discount at a predetermined rate. Similarly, the
Company receives revenue from distributors based on a predetermined
percentage of the maintenance fees billed by the distributor to the end
customer. The distributor typically retains any fees earned by them for
implementation services. Distributorships may or may not be geographically
exclusive, and are generally subject to annual renewals by the Company.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance
revenues, including revenues bundled with original software product
license revenues, are deferred and recognized over the related contract
period, generally 12 months.
Computer Software Costs.
The Company capitalizes computer software product development costs
incurred in developing a product once technological feasibility has been
established and until the product is available for general release to
customers. Technological feasibility is established when the Company
either (1) completes a detail program design that
F - 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
encompasses product function, feature and technical requirements and is
ready for coding and confirms that the product design is complete, that
the necessary skills, hardware and software technology are available to
produce the product, that the completeness of the detail program design is
consistent with the product design by documenting and tracing the detail
program design to the product specifications, and that the detail program
design has been reviewed for high-risk development issues and any related
uncertainties have been resolved through coding and testing or (2)
completes a product design and working model of the software product, and
the completeness of the working model and its consistency with the product
design have been confirmed by testing. The Company evaluates realizability
of the capitalized amounts based on expected revenues from the product
over the remaining product life. Where future revenue streams are not
expected to cover remaining amounts to be amortized, the Company either
accelerates amortization or expenses remaining capitalized amounts.
Amortization of such costs is computed as the greater of (1) the ratio of
current revenues to expected revenues from the related product sales or
(2) a straight-line basis over the expected economic life of the product
(not to exceed five years). Software costs related to the development of
new products incurred prior to establishing technological feasibility or
after general release are expensed as incurred.
As of June 30, 2003 and 2002, capitalized computer software costs
approximated $63,945,000 and $61,587,000 respectively, and related
accumulated amortization totaled $50,372,000 and $47,551,000 respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
an original maturity date of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable comprise trade receivables that are credit based
and do not require collateral. Generally, the Company's credit terms are
30 days but in some instances the Company offers extended payment terms to
customers purchasing software licenses. The Company has a history of
offering extended payment terms from time to time for competitive reasons.
These terms are not offered in connection with any contingencies related
to product acceptance, implementation, or any other service or contingency
post-transaction, and the Company has not offered concessions as a result
of these terms. Payment arrangements in these circumstances typically
require payment of a significant portion of the total contract amount
within 30 days of the sale, with 2 or 3 subsequent installments making up
the balance payable within 6 months. The Company has not found
collectibility to be compromised as a result of these terms. In no case
have payment terms extended beyond 12 months. Based on historical results,
the Company believes that all components of SOP 97-2 are met, including
that the arrangement is fixed and determinable.
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers to make
required payments. On an ongoing basis, the Company evaluates the
collectibility of accounts receivable based upon historical collections
and assessment of the collectibility of specific accounts. Ross
specifically reviews the collectibility of accounts with outstanding
accounts receivable balances in excess of 90 days outstanding. The Company
evaluates the collectibility of specific accounts using a combination of
factors, including the age of the outstanding balance(s), evaluation of
the account's financial condition, recent payment history, and discussions
with the account executive responsible for the specific customer and with
the customer directly. Based upon this evaluation of the collectibility of
accounts receivable, an increase or decrease required in the allowance for
doubtful accounts is reflected in the period in which the evaluation
indicates that a change is necessary. If actual results differ, this could
have an impact on the Company's financial condition, results of operation
and cash flows.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
accumulated using the straight-line method over the estimated useful lives
of the respective assets, generally three to seven years. Leasehold
improvements and equipment under capital leases are amortized using the
straight-line method over the shorter of the terms of the related leases
or the respective useful lives of the assets.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of the asset, a loss is recognized
for the difference between the fair value and the carrying value of the
asset.
Fair Value of Financial Instruments
The carrying amounts reported on the balance sheet for accounts
receivable, notes receivable, accounts payable and short term debt
approximate their fair values.
Net Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net
earnings or net loss by the weighted average number of common shares
outstanding during the period. Shares issued or reacquired during the year
are weighted for the portion of the year that they were outstanding.
Diluted earnings (loss) per common share is computed in a manner
consistent with that of basic earnings (loss) per share while giving
effect to all potentially dilutive common shares that were outstanding
during the period. Potentially dilutive common shares used in computing
diluted earnings per share are shown in the following table. As a result
of the net losses incurred in the years ended June 30, 2002, and 2001, the
potentially dilutive common shares for these fiscal years were not
considered in the calculation as their impact would be antidilutive.
Potentially dilutive common shares excluded in 2003, 2002 and 2001 were as
follows:
FISCAL YEAR ENDED JUNE 30,
--------------------------
2003 2002 2001
---- ---- ----
Stock options ........................ 347 41 39
Warrants ............................. 47
Convertible Preferred shares ......... 500 1
--- --- ---
Total ............................... 347 588 40
--- --- ---
The following is a reconciliation from basic earnings per share to
diluted earnings per share for fiscal 2003 (in thousands) :
EARNINGS
AVAILABLE TO
COMMON WEIGHTED AVERAGE EARNINGS
SHAREHOLDERS SHARES OUTSTANDING PER SHARE
------------ ------------------ ---------
Basic ............................. $4,056 2,641 $ 1.54
Stock options ..................... 108
Warrants .......................... 47
Convertible Preferred shares ...... 150 500
------ ------ --------
Diluted ........................... $4,206 3,296 $ 1.28
------ ------ --------
Goodwill
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets, effective
for fiscal years beginning after December 15, 2001. The Company elected
early adoption and applied the provisions of this statement, effective in
the first quarter of fiscal 2002. Under the new rules, goodwill is no
longer amortized but is subject to annual impairment tests. Other
intangible assets will continue to be amortized over their useful lives.
Goodwill attributable to each of the Company's reporting units was tested
in June 2003 for impairment by comparing the fair value of each of the
reporting units with its carrying value. The fair values of these
reporting units were determined using a combination of discounted cash
flow analysis and market multiples based on
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
historical and projected financial information. It was determined that
there was no impairment to goodwill in any period subsequent to the date
the Company adopted SFAS 142.
Net loss and loss per share for fiscal 2001, adding back goodwill
amortization of $691,000 ($0.27 per basic and diluted share) would have
been $(151,000), $(0.06) per basic and diluted share. Prior to July 1,
2001, goodwill was being amortized over periods ranging from 7 to 10
years.
Reimbursable Expenses
Prior to January 1, 2002, the Company recorded reimbursement by its
customers for out-of-pocket expenses as a decrease to cost of services.
The Company's results of operations for the fiscal years June 30, 2001,
have been reclassified for comparable purposes in accordance with the
Emerging Issues Task Force release 01-14, "Income Statement
Characterization of Reimbursements Received for Out of Pocket Expenses
Incurred." The effect of this reclassification was to increase both
services revenues and cost of services by, $1,307,000 for fiscal year
2001.
Income Taxes
In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("Statement 109"), the Company utilizes
the asset and liability method of accounting for income taxes. Under the
asset and liability method of Statement 109, deferred tax assets and
liabilities are established to recognize the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Foreign Operations and Currency Translation
The local currencies of the Company's foreign subsidiaries are the
functional currencies. Assets and liabilities of foreign subsidiaries are
translated into U.S. dollars at current exchange rates, and the resulting
translation gains and losses are included as an adjustment to
shareholders' equity as a component of comprehensive income. Transaction
gains and losses that relate to U.S. dollar denominated intercompany
short-term receivables recorded in the financial statements of the
Company's foreign subsidiaries and are reflected in income. Where related
intercompany balances have been designated as long-term, gains and losses
are included as an adjustment to shareholders' equity as a component of
comprehensive income.
Reclassifications
It is the Company's policy to reclassify prior year amounts to
conform with current year financial statement presentation when necessary.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these
estimates.
Advertising Costs
The Company generally expenses advertising costs at the time the
advertisement is published, or in the case of direct mail, when mailed.
Advertising costs for the fiscal years ended June 30, 2003, 2002, and 2001
were approximately $574,000, $437,000, and $607,000 respectively.
Segment Information
SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information" established standards for the way that public
business enterprises report information about operating segments in their
financial statements. The standard defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
how to allocate resources and in assessing performance. Based on these
standards the Company has determined that it operates in four geographical
segments: Northern Europe, Spain the United Kingdom and North America.
During fiscal 2001, the Company divested its French subsidiary and adopted
an indirect sales approach in the French market. See further discussion of
this matter under "Acquisitions and Divestitures" below.
The Company has no customers that represent ten percent or more of
annual revenues.
For management purposes, the results of the Asian operations are
included in the North American results since the costs associated with
managing the Asian marketplace are born by the North American entities
within the Group. Revenues in the Asian markets comprise less than 5% of
total revenues reported for the North American segment. Selected balance
sheet and income statement information pertaining to the various
significant geographic areas of operation are as follows:
As of and for the year ended June 30, 2003 (in thousands) :
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------ ------- ---------- ---------------- ------------
Northern Europe ......... $ 2,987 $ 5,000 $ 475 $ 60 $ 68
Spain ................... 6,220 6,902 615 306 259
United Kingdom .......... 2,569 5,545 387 54 39
North America ........... 28,435 30,653 2,729 346 356
------- ------- ------- ------- -------
Total ................... $40,211 $48,100 $ 4,206 $ 766 $ 722
======= ======= ======= ======= =======
As of and for the year ended June 30, 2002 (in thousands) :
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------ -------- ---------- ---------------- ------------
Northern Europe .... $ 2,518 $ 5,579 $ 676 $ 60 $ 159
Spain .............. 4,723 6,431 1,622 247 96
United Kingdom ..... 2,969 5,127 134 62 21
North America ...... 27,408 28,916 (11,856) 615 464
-------- -------- -------- -------- --------
Total .............. $ 37,618 $ 46,053 $ (9,424) $ 984 $ 740
======== ======== ======== ======== ========
As of and for the year ended June 30, 2001 (in thousands):
NET INCOME DEPRECIATION CAPITAL
GROSS ASSETS REVENUE (LOSS) AND AMORTIZATION EXPENDITURES
------------ ------- ---------- ---------------- -------------
Northern Europe .... $ 1,583 $ 4,947 $ (210) $ 80 $ 35
Spain .............. 2,248 4,218 (56) 182 38
United Kingdom ..... 2,985 5,162 (1,014) 126 4
North America ...... 43,646 36,478 438 1,895 200
------- ------- ------- ------- -------
Total .............. $50,462 $50,805 $ (842) $ 2,283 $ 277
======= ======= ======= ======= =======
New Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation ("FIN") No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", which clarifies
disclosure and recognition/measurement requirements related to certain
guarantees. The disclosure requirements are effective for financial
statements issued after December 15, 2002 and the recognition/measurement
requirements are effective on a prospective basis for guarantees issued or
modified after December 31, 2002. The application of the requirements of
FIN 45 did not have a significant impact on our financial position or
result of operations.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123 ("Statement 148"). This
amendment provides two additional methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. Additionally, more prominent disclosures in both
annual and interim financial statements are required for stock-based
employee compensation. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after
December 15, 2002. The Company adopted the disclosure provisions of SFAS
148 during fiscal 2003.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." This Interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
addresses consolidation by business enterprises of variable interest
entities which possess certain characteristics. The Interpretation
requires that if a business enterprise has a controlling financial
interest in a variable interest entity, the assets, liabilities, and
results of the activities of the variable interest entity must be included
in the consolidated financial statements with those of the business
enterprise. This Interpretation applied immediately to variable interest
entities created after January 31, 2003 and to variable interest entities
in which an enterprise obtains an interest after that date. The Company
does not have any ownership in any variable interest entities as of June
30, 2003.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities ("Statement 149"). This Statement amends Statement
133 for decisions made (1) as part of the Derivatives Implementation Group
process that effectively required amendments to Statement 133, (2) in
connection with other Board projects dealing with financial instruments,
and (3) in connection with implementation issues raised in relation to the
application of the definition of a derivative, in particular, the meaning
of an initial net investment that is smaller than would be required for
other types of contracts that would be expected to have a similar response
to changes in market factors, the meaning of underlying, and the
characteristics of a derivative that contains financing components. The
Company does not have any derivative instruments or hedging activities.
The application of Statement 149 did not have an impact on our financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("Statement 150"). This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many
of those instruments were previously classified as equity. Statement 150
requires that certain mandatorily redeemable financial instruments issued
in the form of shares are to be classified as liabilities rather than
equity. The Company has no outstanding financial instruments that fall
into the definitions covered by this Statement. The application of
Statement 150 did not have a significant impact on our financial
statements.
Non-recurring items
In October of 2000, the Company reorganized its European presence
and adopted an indirect sales model in France by terminating its ownership
and control of the French subsidiary due to the chronic and sustained
losses and negative cash flows suffered by the French subsidiary. At that
time, management recorded what they deemed to be adequate reserves related
to the possible future costs for the change of presence in France by
deferring the gain associated with divesting net liabilities in this
liquidating transaction. In the fourth quarter of fiscal 2002, the Company
experienced a favorable outcome relating to the French subsidiary
liquidation transaction which rendered most of the reserve unnecessary. As
a result the Company recorded a non-recurring gain of $650,000 in fiscal
year 2002, arising from the reduction of the reserve described above.
On September 12, 2000, the Company announced restructuring efforts
aimed at reducing costs and improving efficiencies. Under the
restructuring, the Company reduced 125 positions across the company as
well as accelerated efforts to eliminate unneeded office space, improve
productivity through the use of technology and focus on increased revenues
through the use of distributors. As a result of these actions, during the
first quarter of fiscal year 2001, the Company recorded a $790,000 expense
to cover the liability arising from associated employee separation costs.
The costs were accrued in accordance with EITF Issue 94-3, "Liability
Recognition for Certain
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Terminations, Benefits and Other Costs to Exit an Activity". By
March 31, 2001, all of the costs accrued in conjunction with both actions
had been paid.
Non-cash Impairment of Capitalized Software Cost
In the fourth quarter of fiscal 2002, the Company made a major
change in technology direction. The Internet-related functionality of the
iRenaissance product was re-directed from the "java" based initial
development used in the Resynt product line to the Microsoft ".net"
technology. A new, formal development relationship with Microsoft was
launched to support the requirements of the new technology direction. This
strategic re-direction was based on the Company's belief that the .net
technology will serve the Company and its customers better in the future,
due to fuller market penetration, better standards of compatibility, and
superior technical adaptability. The result of this change was that prior
development in the former java environment became obsolete. Effective
April 1, 2002, the amount of $5,488,000, representing all unamortized
software-project balances relating to this, was expensed.
On April 23, 2002, the Company announced the General Availability of
Gembase Version 6.0. This version of Gembase, the 4GL language used for
the development of the iRenaissance products, contained major
functionality differences to prior versions, rendering all prior versions
obsolete. As a result, development and maintenance of all versions prior
to 6.0 were discontinued and no further sales using these versions would
be contemplated. In addition, customers using these versions would be
strongly encouraged to upgrade to version 6.0 because the Company no
longer supports development of any Gembase release lower than version 6.0.
Upgrades to the 6.0 version would be strongly supported and to encourage
and facilitate customers' upgrading, the product was designed to make the
transition straight-forward. Since Gembase versions lower than 6.0 would
not contribute any further revenue to the Company, even in the short-term,
the related unamortized software-project balances amounting to $943,000
were expensed.
On May 22, 2002 the Company announced the release of iRenaissance
version 5.7. This version was significantly changed from the prior
versions. Previous to this release, upgrades from any version less than
4.4 to the latest version were technically challenging resulting in an
environment not conducive to customer upgrades. Version 5.7 offered a
straight-forward upgrade capability to customers on previous versions. In
addition, version 5.7 contained a new "engine" at its core, which
significantly changed the way the software operated internally, and
resulted in improved operating efficiencies. Since customers on versions
lower than 4.4 could now upgrade without difficulty, the Company was able
to discontinue the development and support of all versions prior to 4.4.
No further sales using these versions would be contemplated. This had the
effect of rendering all releases of iRenaissance which were lower than 4.4
obsolete. Since iRenaissance versions lower than 4.4 would not contribute
any further license revenue to the Company, and renewable maintenance
revenue would soon be in respect of the newly released version of the
product rather than an older version, the related unamortized
software-project balances amounting to $3,333,000 were expensed.
During May 2002, the Company terminated further work on general
enhancements of the COBOL technology based Renaissance Classic product
line. Following prolonged, unfruitful attempts to garner interest in the
proposed enhancements from the customer base, a twofold decision was made;
to continue working with specific customers on custom product development,
and to introduce a general sales program of free software license upgrade
from the Classic product to the latest release of the iRenaissance product
line for customers who remain on maintenance. The company will continue to
support those customers who remain active users until they schedule their
upgrade conversion to iRenaissance. Since no future revenue benefits are
expected from the general enhancements capitalized to date, the aggregate,
unamortized software-project balances amounting to $1,174,000 were
expensed.
The aggregate value of unamortized impaired software expensed in the
fourth quarter of fiscal 2002 was $10,938,000. This action will have the
effect of reducing software cost amortization in future years. If the
Company had not recorded this expense, additional amortization expense of
approximately $2,734,000 would be recorded during 2003.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITIONS AND NOTE RECEIVABLE FROM RELATED PARTY
On December 30, 1996, the Company acquired a 100% ownership interest
in Ross Systems Iberica, its distributor in Spain and Portugal for the
prior five years, in exchange for shares of the Company's common stock
valued at approximately $1,400,000. The acquisition was a non-cash stock
exchange which was accounted for under the purchase method of accounting.
Accordingly, the results of operations of the acquired business have been
included in the Company's results of operations since the date of
acquisition. The purchase agreement mandated that the purchase price be
guaranteed based on security prices as of a date which had been mutually
extended by the parties and coincided with the extension of the maturity
to July 8, 2003 of a non-interest bearing, recourse note receivable, owed
by the former majority shareholder of Ross Systems Iberica to the Company.
The former majority shareholder is currently an employee of the Company.
The Company, in its sole discretion, could make up any difference between
the value of the shares originally tendered and the guaranteed purchase
price of Ross Iberica either by issuing additional shares or by paying
cash. The note receivable described herein totaled $850,000 and was
satisfied in full during March 2003, in conjunction with the treasury
stock transaction discussed below.
At the time of acquisition, the seller was issued 10% of the
purchase price in unrestricted shares with the remainder of the shares
restricted. As of December 31, 2002, the former majority shareholder still
held 20,000 restricted shares which were all the restricted shares that
were issued to him at the time of acquisition. During January 2003, the
Company sought and received a unanimous written consent from its Board of
Directors to issue additional shares to the former majority shareholder to
satisfy the guaranteed purchase price agreement. On the date of the Board
consent, the share price was $9. Accordingly, the Company issued 120,000
additional shares to satisfy the purchase price agreement. Since the
guaranteed purchase price was based on security prices and was not based
on an earn out factor or any other performance measure, this share
issuance resulted only in a change in the number of common shares
outstanding.
On the same day as the issuance of these additional shares, the
Company entered into an agreement with the former majority shareholder
that allowed the Company to repurchase the former majority shareholder's
shares at $9 per share. During January, 2003, the Company purchased these
shares into treasury stock at the agreed upon $9 per share. The Company
anticipated that these treasury shares would be issued to satisfy
conversions of its outstanding mandatorily convertible preferred shares
which must occur prior to or on June 30, 2006.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands) :
JUNE 30,
-------------------------
(IN THOUSANDS)
2003 2002
------- -------
Computer equipment .................................... $ 5,747 $ 5,691
Furniture and fixtures ................................ 1,187 1,143
Leasehold improvements ................................ 838 1,508
------- -------
7,772 8,342
Less accumulated depreciation and amortization ........ (6,366) (6,892)
------- -------
$ 1,406 $ 1,450
======= =======
(4) OTHER ASSETS
A summary of other assets follows (in thousands):
JUNE 30,
-------------------------
(IN THOUSANDS)
2003 2002
------- -------
Goodwill........................... $ 4,414 $ 4,414
Note receivable ................... 750 750
Other ............................. 62 62
------- -------
5,226 5,226
Less accumulated amortization ..... (2,233) (2,233)
------- -------
$ 2,993 $ 2,993
======= =======
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
JUNE 30,
----------------------
(IN THOUSANDS)
2003 2002
------ ------
Accrued vacation, salary and related compensation costs ......... $1,583 $1,502
Sales, Use, VAT and GST taxes payable ........................... 1,334 1,159
Interest payable ................................................ 38 63
Professional fees ............................................... 244 281
Royalties ....................................................... 844 806
Other ........................................................... 897 665
------ ------
$4,940 $4,476
====== ======
(6) DEBT
The Company has a revolving credit facility with an asset-based
lender with a maximum credit line for up to $5,000,000, an expiration date
of September 23, 2004, and an interest rate equal to the Prime Rate plus
2% (6.25% at June 30, 2003). Borrowings under the credit facility are
collateralized by substantially all the assets of the Company. The
revolving credit facility may be withdrawn if, amongst other things (a)
the Company fails to pay any principal or interest amount due or (b) there
is a material impairment of the Company's business which would prevent
loan repayment and (c) any of these events are not remedied by the Company
within allowable periods. At June 30, 2003, the Company had $2,131,000
outstanding against the $5,000,000 revolving credit facility and at June
30, 2002, approximately $3,370,000 was outstanding under the Company's
revolving credit facility.
The Company maintains other credit facilities in Spain with various
expiration dates over a period of twelve months from June 30, 2003.
Interest on these facilities ranges from 6% to 8% and the facilities are
collateralized by various assets of the Spanish subsidiary. Balances
outstanding under these agreements were approximately $669,000 and
$597,000 at June 30, 2003 and 2002 respectively.
(7) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases facilities and certain equipment under operating
leases which expire at various dates through fiscal 2016. Certain leases
include renewal options and rental escalation clauses to reflect changes
in price indices, real estate taxes, and maintenance costs. As of June 30,
2003, future minimum lease payments under non-cancelable operating leases
were as follows (in thousands):
FISCAL YEAR
-----------
2004.................................................... 1,384
2005.................................................... 816
2006.................................................... 634
2007.................................................... 442
Thereafter.............................................. 1,980
------
Total future minimum lease payments..................... $5,256
======
Rent expense approximated $1,189,000, $1,236,000, and $2,267,000,
for fiscal 2003, 2002, and 2001, respectively.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation
a) On June 30, 1998, the Company entered into a distribution
agreement with an existing Dutch systems integrator which entitled Ross to
distribute a certain project accounting product the systems integrator was
developing. The agreement contained certain minimum annual payments
totaling $1,500,000 which, unless the agreement was properly canceled (as
defined in the agreement) by Ross, would become due to the systems
integrator if the Company did not achieve certain minimum annual sales
quotas. The agreement also required that the Company use the systems
integrator's personnel for certain implementation and maintenance
activities.
Over the next few years, the distributor, in Ross' view, failed to
consistently successfully implement the project accounting product at
multiple North American sites. These failures cost the Company between
$300,000 and $400,000 in legal fees, uncollectible accounts receivable and
settlement costs. In February 2001, the Company cancelled the agreement
with the systems integrator.
The parties were not able to reach mutual agreement regarding the
terms of a settlement, and the systems integrator invoked the arbitration
clause of the agreement in late 2001. The arbitration was commenced before
the International Court of Arbitration in Paris, France, with the systems
integrator ultimately seeking multiple damages aggregating more than
$4,000,000.
See note 14 for recent developments regarding the outcome of this
matter.
b) On February 28, 2001, the Company completed the sale of certain
assets related to its Human Resource and Payroll product line to Now
Solutions, LLC, (NOW), a majority owned subsidiary of Vertical Computer
Systems Inc.(Vertical). Arglen Acquisitions (Arglen), was also a party to
the transaction as a minority member of NOW. The gross asset sale price
was $6,100,000. The purchase price consisted of cash of $5,100,000 and a
note payable by NOW to Ross of $1,000,000.
The note was non-interest bearing and was due in two installments;
$250,000 due on February 28, 2002 and $750,000 due on February 28, 2003.
NOW defaulted on the second installment of $750,000 which remains
outstanding and is accruing interest at the rate of 10% per annum, the
default interest rate as defined in the note.
On February 27, 2003, the day before the final note installment was
due, Vertical filed a derivative suit on behalf of NOW against Ross and
others alleging breach of contract, fraud, conspiracy and breach of
fiduciary duty. The suit alleges that Ross failed to schedule
approximately $3,600,000 of liabilities related to maintenance agreements
assumed by NOW. The suit also alleges that Ross failed to disclose to NOW
a transaction brokerage fee of $600,000 that Ross was to pay to Arglen,
whose CEO signed the fee agreement and who was also the CEO of NOW. The
suit also alleges that Ross should be jointly and severally liable for
certain alleged frauds committed by other defendants in which Ross
allegedly conspired. The suit further seeks a setoff against the remaining
note payment based on the above alleged damages, and the recovery of its
attorneys' fees and costs. Ross denies and has contested each and every
one of Vertical's claims. The Company does not believe currently that the
outcome of range of outcomes is determinable, nor does it believe that
should the outcome be unfavorable that it would be materially detrimental
to the Company's liquidity.
See note 14 for recent developments regarding the outcome of this
matter.
(8) CAPITAL STOCK
Mandatorily Convertible Preferred Stock and Private Placement
In fiscal 1991, the Company authorized a new class of no par value
preferred stock consisting of 5,000,000 shares. The Board of Directors is
authorized to issue the preferred stock in one or more series and to fix
the rights, preferences, privileges and restrictions of such stock,
including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of
such series, without further vote or action by the shareholders. All
preferred stock was issued with a mandatory conversion feature.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 29, 2001, the Company issued mandatorily convertible
preferred stock to a qualified investor in a private placement
transaction. In summary, the investor purchased 500,000 preferred shares
at $4 per share yielding $2,000,000 for the Company. This price
represented a premium to the market for the Company's common stock at the
time of issuance. The average closing share price of the Company's common
stock for the 30 trading days prior to the private placement was
approximately $2.22. The preferred shares can be converted at $4.00 per
share after June 29, 2002 but before June 29, 2006, on a one for one
basis. The shares earn dividends at the rate of 7.5%. In conjunction with
this transaction, the Company issued warrants to the broker who assisted
in securing the investor. These warrants were fairly valued at $60,000 on
the date of issuance and the expense has been recorded in the statement of
operations as a component of other expense (net) in the quarter ended June
30, 2001.
On April 27, 2001 the Company executed a reverse stock split on the
basis of 1 share for 10 shares.
(9) SUBSEQUENT EVENTS
Announcement of Proposed Merger
In early September 2003, the Company announced that it signed a
definitive agreement whereby chinadotcom Software (CDC) will acquire Ross
Systems in a merger.
See note 14 for recent developments regarding the merger.
(10) EMPLOYEE STOCK PLANS
(a) Stock Option Plan
The Company has reserved 210,000 shares of common stock for issuance
under its 1988 Incentive Stock Plan and 810,000 shares of common stock for
issuance under its 1998 Incentive Stock Plan (collectively the "Plans").
The 1988 Incentive Stock Plan is closed and may not be used for further
issues of options. Under the Plans, the Company may issue options to
purchase shares of the Company's common stock to eligible employees,
officers, directors, independent contractors and consultants. The term of
the options issued under the Plans cannot exceed ten years from the date
of grant. Options granted to date generally become exercisable over four
to five years based on the grantees' continued service with the Company.
A summary of the status of the Company's Plan as of June 30, 2003,
2002 and 2001 and activity for the fiscal years then ended is presented
below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISABLE
---------- ----------------- -----------
Balance as of June 30, 2000 ................. 203,600 $ 28.70 102,800
Granted (at market value) ................... 165,219 $ 4.90
Cancelled/forfeited ......................... (77,148) $ 21.80
--------
Balance as of June 30, 2001 ................. 291,671 $ 16.91 112,255
Granted (at market value) ................... 137,333 $ 4.91
Exercised ................................... (10,243) $ 2.32
Cancelled/forfeited ......................... (91,966) $ 20.34
--------
Balance as of June 30, 2002 ................. 326,795 $ 10.78 113,494
Granted (at market value) ................... 252,828 $ 8.01
Exercised ................................... (31,048) $ 3.23
Cancelled /forfeited ........................ (19,756) $ 18.27
--------
Balance as of June 30, 2003 ................. 528,819 $ 9.62 154,615
========
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average estimated grant date fair value of options
granted during fiscal 2003, 2002, and 2001 was $4.44, $3.73, and $4.49,
respectively. The following table summarizes information about the stock
options outstanding at June 30, 2003:
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED AVERAGE OPTIONS EXERCISABLE
REMAINING -------------------------------
RANGE OF EXERCISE SHARES CONTRACTUAL WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------ ----------- ----------- ----------------- ----------- ----------------
$1.88-$1.88 ............. 50,613 7.5 years $ 1.88 16,041 $ 1.88
$3.25-$3.25 ............. 5,738 8.1 years 3.25 5,738 3.25
$3.50-$3.50 ............. 63,441 7.4 years 3.50 12,750 3.50
$3.75-$5.40 ............. 34,514 6.5 years 4.71 26,639 4.74
$7.25-$11.88 ............ 275,428 9.1 years 7.89 9,987 9.62
$12.99-$25.00 ........... 39,615 7.0 years 16.35 25,040 17.28
$25.94-$25.94 ........... 39,350 4.1 years 25.94 39,350 25.94
$26.56-$52.50 ........... 17,715 4.1 years 33.35 16,665 33.46
$65.00-$65.00 ........... 2,100 3.5 years 65.00 2,100 65.00
$67.50-$67.50 ........... 305 1.4 years 67.50 305 67.50
------- --------- --------- ------- ---------
Totals .................. 528,819 7.8 years $ 9.62 154,615 $ 16.06
======= ========= ========= ======= =========
(b) Employee Stock Purchase Plan
The Company initially reserved 80,000 shares of common stock for
issuance under its 1991 Employee Stock Purchase Plan ("ESPP"). In fiscal
1999, the stockholders approved an amendment to the plan whereby the
number of shares reserved for issuance was increased to 95,000. An
amendment in fiscal 2002 provided that beginning in fiscal 2001 and each
year thereafter, the amount reserved for issuance is increased by the
lesser of 20,000 shares or 1% of total outstanding common stock.
Under the ESPP, the Company's employees may purchase, through
payroll deductions of 1% to 10% of compensation, shares of common stock at
a price per share that is the lesser of 85% of its fair market value as of
the beginning or end of the offering period. Under the ESPP, the Company
sold 19,507 shares, 29,146 shares, and 11,409 shares, to employees in
fiscal 2003, 2002, and 2001 respectively. The weighted average fair value
of those purchase rights granted in fiscal 2003, and 2002, was $2.85 and
$0.83, respectively. As of June 30, 2003, 182,922 shares had been issued
under the ESPP.
(11) INCOME TAXES
Gains and losses before income taxes include foreign gains before
income taxes of $1,507,000, and foreign losses before income taxes of
$30,000 for fiscal 2003. Foreign gains before income taxes were $2,425,000
for fiscal 2002 and foreign losses before income taxes were $(1,280,000)
for fiscal year 2001. Income tax expense for the years ended June 30,
2003, 2002 and 2001 consists of the following (in thousands):
2003 2002 2001
----- ----- -----
Current:
Federal .................... $ 142 $ - $(140)
Foreign .................... - 112 123
State ...................... 263 20 26
----- ----- -----
405 132 9
----- ----- -----
Deferred:
Federal .................... -- -- --
Foreign .................... -- -- --
State ...................... -- -- --
----- ----- -----
-- -- --
----- ----- -----
$ 405 $ 132 $ 9
===== ===== =====
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 30, 2003, 2002, and 2001, the
reconciliation between the amounts computed by applying the United States
federal statutory tax rate of 34% to loss before income taxes and the
actual tax expense follows (in thousands):
2003 2002 2001
------- ------- -------
Income tax expense (benefit) at statutory rate ............................ $ 1,568 $(3,159) $ (283)
State income tax expense (benefit), net of federal income tax benefit ..... 170 (13) (37)
Change in beginning of year valuation allowance ........................... (1,195) 3,028 3,063
Losses for which no benefit is recognized (foreign loss and rate) ......... - - 435
Rate differential related to foreign income and foreign tax
withholdings ........................................................... - 843 485
Amortization of other assets and other permanent differences .............. (138) (567) (3,654)
------- ------- -------
$ 405 $ 132 $ 9
======= ======= =======
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax liabilities
at June 30, 2003 and 2002 were as follows (in thousands):
2003 2002
-------- --------
Accruals and reserves ................................. $ 428 $ 670
Net operating loss carryforward (federal) ............. 11,686 11,502
Net operating loss carryforward (state) ............... 1,521 2,386
Net operating loss carryforward (foreign) ............. 2,300 2,748
Tax credit carryforwards ............................. 3,802 3,802
Fixed assets depreciation differences ................. 407 399
-------- --------
Total gross deferred tax assets ................. 20,144 21,507
Less valuation allowance ........................ (14,698) (15,893)
-------- --------
Net deferred tax assets ......................... 5,446 5,614
-------- --------
Capitalized computer software costs ................... (5,446) (5,614)
-------- --------
Total gross deferred liabilities ................ (5,446) (5,614)
-------- --------
Net deferred taxes .................................... $ - $ -
======== ========
The net change in total valuation allowance for the year ended June
30, 2003, was a decrease of approximately $1,195,000. The valuation
allowance has been established to recognize the uncertainty of utilizing
loss and credit carryovers and certain deferred assets.
At June 30, 2003, the Company had net operating loss carry-forwards
of approximately $34,370,000, $25,354,000 and $7,187,000 for federal,
state and foreign tax purposes, respectively. At June 30, 2003, the
Company also had unused research and other credit carry-forwards of
approximately $3,368,000 and $208,000 for federal and California tax
purposes, respectively. The loss and research credit carry-forwards, if
not utilized, will expire between fiscal 2005 and 2020.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended June 30,
2003, 2002, and 2001 follows (in thousands):
2003 2002 2001
------ ------ ------
Cash payments:
Interest .......................................................................... $ 349 $ 642 $1,228
Income taxes ...................................................................... $ 121 $ 319 $ 75
Non-cash investing and financing activities:
Conversion of convertible debentures into stock (non-cash transaction) ............ $ - $ - $1,177
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) SELECTED UNAUDITED QUARTERLY INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED
JUNE 30 MARCH 31 DEC.31 SEPT. 30
FISCAL YEAR 2003 2003 2003 2003 2003
------- -------- ------- --------
Total net revenues $12,988 $11,513(a) $12,173 $11,426
Cost of software product licenses 979 449 521 346
Net income 1,306 719 1,430 601
Earnings per share - basic 0.49 0.27 0.54 0.23
Earnings per share - diluted 0.40 0.22 0.45 0.20
Number of shares used in per share computation - diluted 3,362 3,387 3,260 3,267
(a) As originally stated, third quarter revenues of $11,420,000
excluded $93,000 of revenue which was recorded originally as a reduction
of Costs of consulting, maintenance and other services.
QUARTER ENDED
JUNE 30 MARCH 31 DEC.31 SEPT. 30
FISCAL YEAR 2002 2002 2002 2001 2001
-------- -------- -------- --------
Total net revenues $ 11,173 $ 11,456 $ 11,425 $ 11,165
Cost of software product licenses 761 403 311 396
Net income (loss) (10,857) 381 488 414
Charge for impairment of capitalized software (10,288) - - -
Earnings (loss) per share - basic (4.14) 0.16 0.19 0.16
Earnings (loss) per share - diluted (4.14) 0.13 0.17 0.13
Number of shares used in per share computation - diluted 2,625 3,209 3,152 3,144
(14) RECENT DEVELOPMENTS (UNAUDITED)
On November 17, 2003, the Arbitrator in the systems integrator
matter described more fully in note 7, announced an award of approximately
$2,000,000 in favor of the systems integrator. The Company paid the award
before the end of calendar 2003 by funding the payment out of operating
cash flows in the ordinary course of business. As a result, the Company
recognized a charge of approximately $1,900,000 during the quarter ending
December 31, 2003 as $104,000 was previously recorded in accordance with
the contract in its normal course.
On November 18, 2003, the Supreme Court of the State of New York
dismissed all of Vertical Computer Systems (Vertical) claims against Ross
described more fully in note 7. Vertical has filed a Notice of Appeal. The
Company will continue to defend this matter vigorously.
On January 8, 2004, the Company filed a current report on Form 8-K
to announce changes to the terms of the previously announced merger with
chinadotcom. Under the terms of the merger agreement, as amended, for each
share of Ross common stock held, stockholders of Ross Systems may elect to
receive either (i) $17.00 in cash or (ii) $19.00 in a combination of cash
and CDC common shares for each share of the Company's common stock (the
"Common Shares"). CDC common shares will be valued at the average closing
price of such shares for the 10 trading days preceding the second trading
day before the closing date. Both companies are listed on NASDAQ.
F-21
SCHEDULE II
ROSS SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
----------- --------- -------- -------- ------------- -------------
Year ended June 30, 2003 allowance for
doubtful accounts and returns ............ $3,379 $ 831 $ - $2,676 $1,532
------ ------ --- ------ ------
Year ended June 30, 2002 allowance for
doubtful accounts and returns ............ $2,930 $1,444 $ - $ 995 $3,379
------ ------ --- ------ ------
Year ended June 30, 2001 allowance for
doubtful accounts and returns ............ $3,571 $1,514 $ - $2,155 $2,930
------ ------ --- ------ ------
-------------
(1) Represents net charge-off of specific receivables.
S-1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004,
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 May 14, 2004, the Registrant had outstanding 2,880,496 shares of
Common Stock, and 500,000 Series A 7.5% convertible preference shares,
("convertible preferred stock").
ROSS SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets - March 31, 2004 and June 30, 2003 3
Condensed Consolidated Statements of Operations - Three and nine months ended March 31, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows - Nine months ended March 31, 2004 and 2003 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 26
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURE 30
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
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,
2004 2003
--------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 8,751 $ 8,628
Accounts receivable, less allowance for doubtful accounts of $1,509
and $1,532, at March 31, 2004, and June 30, 2003 respectively 14,967 12,880
Prepaid and other current assets 805 731
-------- --------
Total current assets 24,523 22,239
Property and equipment, net 1,208 1,406
Computer software costs, net 12,617 13,573
Other assets 2,993 2,993
-------- --------
Total assets $ 41,341 $ 40,211
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term debt $ 5,049 $ 2,800
Accounts payable 1,436 2,978
Accrued expenses 5,055 4,940
Income taxes payable 177 261
Deferred revenues 11,944 12,203
-------- --------
Total current liabilities 23,661 23,182
-------- --------
Shareholders' equity:
Convertible Preferred stock, no par value 5,000,000 shares authorized;
500,000 shares issued and outstanding 2,000 2,000
Common stock, $0.001 par value; 15,000,000 shares authorized; 2,879,470 and
2,815,603 shares issued and outstanding 28 28
Additional paid-in capital 87,275 87,189
Accumulated deficit (68,669) (69,094)
Accumulated other comprehensive deficit (1,834) (1,749)
Treasury stock at cost, 133,977 and 158,973 shares (1,120) (1,345)
-------- --------
Total shareholders' equity 17,680 17,029
-------- --------
Total liabilities and shareholders' equity $ 41,341 $ 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
(UNAUDITED) (UNAUDITED)
----------------------- ------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues:
Software product licenses $ 4,244 $ 2,696 $ 11,594 $ 9,903
Consulting and other services 4,237 3,489 11,815 9,794
Maintenance 5,191 5,235 15,538 15,323
-------- -------- -------- --------
Total revenues 13,672 11,420 38,947 35,020
-------- -------- -------- --------
Operating expenses:
Costs of software product licenses (inclusive of amortization
of capitalized computer software costs) 1,764 1,660 5,090 4,786
Costs of consulting, maintenance and other services 5,313 4,229 15,491 12,784
Software product license sales and marketing 3,272 2,864 9,021 8,193
Product development net of capitalized computer software costs 778 605 2,417 1,893
General and administrative 812 1,016 2,807 3,420
Litigation settlement -- -- 1,896 --
Provision for uncollectible accounts 188 197 418 711
-------- -------- -------- --------
Total operating expenses 12,127 10,571 37,140 31,787
-------- -------- -------- --------
Operating profit 1,545 849 1,807 3,233
Other expenses, net (113) (29) (144) (152)
Proposed merger transaction costs (139) -- (1,133) --
Income tax expense (22) (63) (105) (217)
-------- -------- -------- --------
Net income 1,271 757 425 2,864
Preferred stock dividend (38) (38) (113) (113)
-------- -------- -------- --------
Net income available to common shareholders $ 1,233 $ 719 $ 312 $ 2,751
======== ======== ======== ========
Net income per common share - basic $ 0.45 $ 0.27 $ 0.12 $ 1.05
======== ======== ======== ========
Net income per common share - diluted $ 0.36 $ 0.22 $ 0.12 $ 0.87
======== ======== ======== ========
Shares used in per share computation - basic 2,728 2,638 2,707 2,616
======== ======== ======== ========
Shares used in per share computation - diluted 3,513 3,387 3,477 3,292
======== ======== ======== ========
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)
NINE MONTHS ENDED
MARCH 31,
(UNAUDITED)
--------------------------------
2004 2003
------- --------
Cash flows from operating activities:
Net income $ 425 $ 2,864
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization of property and equipment 559 556
Amortization of computer software costs 3,707 3,526
Provision for uncollectible accounts 418 711
Changes in operating assets and liabilities:
Accounts receivable (2,370) (1,723)
Prepaid and other current assets (63) 906
Income taxes recoverable/payable (84) 235
Accounts payable (1,510) (374)
Accrued expenses 267 504
Deferred revenues (226) (701)
------- -------
Cash provided by operating activities 1,123 6,504
------- -------
Purchases of property and equipment, net (302) (551)
Computer software costs capitalized (2,908) (3,317)
Other -- 44
------- -------
Cash used in investing activities (3,210) (3,824)
------- -------
Cash flows from financing activities:
Net cash received (paid) on line of credit activity 2,249 (169)
Repurchase of treasury stock -- (1,426)
Proceeds from issuance of common stock 310 262
Preference dividend paid (113) --
------- -------
Cash provided by (used in) financing activities 2,446 (1,333)
------- -------
Effect of exchange rate changes on cash (236) (198)
------- -------
Net increase in cash and cash equivalents 123 1,149
Cash and cash equivalents at beginning of fiscal year 8,628 5,438
------- -------
Cash and cash equivalents at end of fiscal quarter $ 8,751 $ 6,587
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest charges $ 67 $ 75
Cash paid for taxation charges $ 79 $ 104
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 (software) and no
individual customer accounted for more than 10% of total revenues in the quarter
ended March 31, 2004. The Company does not have a concentration of credit risk
in any one industry. Approximately 66% 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 March 31, 2004, 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 March 31, 2004 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 accounting principles generally accepted
in the United States of America 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, 2003 which was
filed with the Securities and Exchange Commission.
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 and nine months ended
March 31, 2004 and 2003 would have been as follows:
6
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income available to common shareholders:
As reported $ 1,233 $ 719 $ 312 $ 2,751
Deduct: Total stock-based employee compensation expense under
fair value-based method, net of tax (235) (56) (763) (341)
--------- --------- --------- ---------
Pro forma net income (loss) available to common shareholders $ 998 $ 663 $ (451) $ 2,410
--------- --------- --------- ---------
Basic net earnings (loss) per share:
As reported $ 0.45 $ 0.27 $ 0.12 $ 1.05
Pro forma 0.37 0.25 (0.17) 0.92
Diluted net earnings (loss) per share:
As reported 0.36 0.22 0.12 0.87
Pro forma 0.29 0.21 (0.17) 0.77
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- ----------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Expected life (years) 5 5 5 5
Expected volatility 30.0% 66.2% 30.0% 66.2%
Risk-free interest rate 5.0% 4.3% 5.0% 4.3%
Expected dividend yield None None None None
Revenue Recognition.
In accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements," the Company
recognizes revenues from licenses of computer software "up-front" provided that
a non-cancelable license agreement has been signed, the software and related
documentation have been shipped, there are no material uncertainties regarding
customer acceptance, collection of the resulting receivable is deemed probable,
and no significant other vendor obligations exist. The revenue associated with
any license agreements containing cancellation or refund provisions is deferred
until such provisions lapse. Where the Company has future obligations, if such
obligations are insignificant, related costs are accrued immediately. When the
obligations are significant, the software product license revenues are deferred.
Future contractual obligations can include software customization, requirements
to provide additional products in the future and porting products to new
platforms. Contracts which require significant software customization are
accounted for on the percentage-of-completion basis. Revenues related to
significant obligations to provide future products or to port existing products
are deferred until the new products or ports are completed.
The Company's revenue recognition policies are designed to comply with
American Institute of Certified Public Accountants Statement of Position ("SOP")
97-2, "Software Revenue Recognition," and with SEC Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements." Revenues
recognized from multiple-element software license contracts are allocated to
each element of the contracts based
7
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
on the fair values of the elements, such as licenses for software products,
maintenance, or professional services. The determination of fair value is based
on objective evidence which is specific to the Company. The Company limits its
assessment of objective evidence for each element to either the price charged
when the same element is sold separately, or the price established by management
having the relevant authority to do so, for an element not yet sold separately.
If evidence of fair value of all undelivered elements exists but evidence does
not exist for one or more delivered elements, then revenue is recognized using
the residual method. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue.
The Company utilizes distributors primarily in geographic areas where
the Company does not maintain a physical presence. The Company's revenue
recognition policies with respect to sales by distributors complies with SOP
97-2 and SAB 101 in that all the revenue recognition criteria listed above are
met. In addition, distributors do not have rights of return, price protection,
rotation rights, or other features that would preclude revenue recognition.
Generally, the value of software license sales to distributors is based on list
selling prices to their customer less a discount at a predetermined rate.
Similarly, the Company earns revenue from distributors based on a predetermined
percentage of the maintenance fees billed by the distributor to the end
customer. The distributor typically retains any fees earned by them for
implementation services they perform. Distributorships may or may not be
geographically exclusive, and are generally subject to annual renewals by the
Company.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance revenues,
including revenues bundled with original software product license revenues, are
deferred and recognized over the related contract period, generally 12 months.
Computer Software Costs.
The Company capitalizes computer software product development costs
incurred in developing a product once technological feasibility has been
established and until the product is available for general release to customers.
Technological feasibility is established when the Company either (1) completes a
detail program design that encompasses product function, features 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 the expected future realizability of
the capitalized amounts based on expected revenues from the product over the
remaining product life. Where future projected revenue streams are not expected
to cover remaining amounts to be amortized, the Company either accelerates
amortization or expenses the remaining capitalized amounts. Amortization of such
costs is computed as the greater of (1) the ratio of current revenues to
expected future revenues from the related future product sales or (2) a
straight-line basis over the estimated useful 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.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is comprised of trade receivables that are credit
based and do not require collateral. Generally, the Company's credit terms are
30 days but in some instances the Company offers extended payment terms to
customers purchasing software licenses. The Company has a history of offering
extended payment terms from time to time for competitive reasons. These terms
are not offered in connection with any contingencies related to product
acceptance, implementation, or any other service obligation or
8
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
contingencies post-transaction, and the Company has not offered concessions as a
result of these terms. Payment arrangements in these circumstances typically
require payment of a significant portion of the total contract amount within 30
days of the sale, with two to three subsequent installments typically within six
months. The Company has not found collectibility to be compromised as a result
of these terms. In no case have payment terms extended beyond 12 months. Based
on historical results, the Company believes that its revenue recognition
policies comply with all components of SOP 97-2, including that the product has
been shipped and that the arrangement is fixed and determinable.
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
On an ongoing basis, the Company evaluates the collectibility of accounts
receivable based upon historical collections and assessment of the
collectibility of specific accounts. Ross specifically reviews the
collectibility of accounts with outstanding balances in excess of 90 days. The
Company evaluates the collectibility of specific accounts using a combination of
factors, including the age of the outstanding balances, evaluation of the
underlying company's financial condition, recent payment history, and
discussions with the account executive responsible for the specific customer.
Based upon this evaluation, an increase or decrease required in the allowance
for doubtful accounts is reflected in the period in which the evaluation
indicates that a change is necessary. Any change in the allowance for doubtful
accounts could have an impact on the Company's financial condition, results of
operation and cash flows.
Property and Equipment
Property and equipment are stated at cost. Depreciation is recorded
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.
Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), the Company utilizes the asset and
liability method of accounting for income taxes. Under the asset and liability
method, 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 (typically Euros and Pounds Sterling) 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.
9
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
It is the Company's policy to reclassify prior year amounts to conform
with current year financial statement presentation when necessary.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 March 31, 2004 and 2003 were
approximately $228,000 and $125,000 respectively. Advertising costs for the nine
months ended March 31, 2004 and 2003 were approximately $547,000 and $415,000
respectively
Segment Information
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" established standards for the way that public business enterprises
report information about operating segments in their financial statements. The
standard defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and assess
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 market place 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 March 31, 2004 (in thousands):
NET INCOME
AVAILABLE TO
COMMON DEPRECIATION CAPITAL
TOTAL ASSETS REVENUE SHAREHOLDERS AND AMORTIZATION EXPENDITURES
------- ------- ------- ------- -------
Northern Europe $ 7,800 $ 1,517 $ 105 $ 15 $ 6
Spain 7,524 1,603 (152) 91 --
United Kingdom 2,673 1,560 81 14 1
North America 23,344 8,992 1,199 72 91
------- ------- ------- ------- -------
Total $41,341 $13,672 $ 1,233 $ 192 $ 98
======= ======= ======= ======= =======
10
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the quarter ended March 31, 2003, (in thousands):
NET INCOME
AVAILABLE TO
COMMON DEPRECIATION CAPITAL
TOTAL ASSETS REVENUE SHAREHOLDERS AND AMORTIZATION EXPENDITURES
--------------- --------------- --------------- ---------------- ---------------
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 69 114
--------------- --------------- --------------- --------------- ---------------
Total $ 38,633 $ 11,420 $ 719 $ 159 $ 116
=============== =============== =============== =============== ===============
As of and for the nine months ended March 31, 2004 (in thousands):
NET INCOME
AVAILABLE TO
COMMON DEPRECIATION CAPITAL
TOTAL ASSETS REVENUE SHAREHOLDERS AND AMORTIZATION EXPENDITURES
------------ ------------ ------------ ---------------- ------------
Northern Europe $ 7,800 $ 3,763 $ 231 $ 43 $ 21
Spain 7,524 4,944 43 254 79
United Kingdom 2,673 4,736 509 43 10
North America 23,344 25,504 (471) 219 192
------------ ------------ ------------ ------------ ------------
Total $ 41,341 $ 38,947 $ 312 $ 559 $ 302
============ ============ ============ ============ ============
As of and for the nine months ended March 31, 2003 (in thousands):
NET INCOME
AVAILABLE TO
COMMON DEPRECIATION CAPITAL
TOTAL ASSETS REVENUE SHAREHOLDERS AND AMORTIZATION EXPENDITURES
------------ ------------ ------------ ---------------- ------------
Northern Europe $ 2,622 $ 3,479 $ 278 $ 47 $ 25
Spain 6,399 4,667 635 208 148
United Kingdom 3,428 4,171 338 40 39
North America 26,184 22,703 1,500 261 339
------------ ------------ ------------ ------------ ------------
Total $ 38,633 $ 35,020 $ 2,751 $ 556 $ 551
============ ============ ============ ============ ============
New Accounting Pronouncements
The Financial Accounting Standards Board issued an Exposure Draft to
amend SFAS No. 123, which would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25. The proposed statement
provides guidance on accounting for transactions in which an enterprise receives
employee services in exchange for equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Under the Exposure Draft, SFAS No. 123 requires the cost resulting from all
share-based payment transactions to be recognized in the financial statements
and establishes a fair-value based method of accounting for the transactions.
The Company continues to apply the recognition and measurement principles of APB
Opinion No. 25, but has complied with the disclosure requirements of SFAS No.
148. Adoption of the requirements in the Exposure Draft may have an impact on
the financial results.
2) COMPREHENSIVE INCOME
Comprehensive income represents net income plus the results of certain
shareholders' equity changes not reflected in the consolidated statements of
operations. The items in comprehensive income relate principally to foreign
currency translation adjustments and were as follows for the three and nine
months ended March 31, 2004 and 2003 (in thousands):
11
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------- ---------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income $ 1,233 $ 719 $ 312 $ 2,751
Foreign currency translation adjustments 74 86 (85) (152)
------------ ------------ ------------ ------------
Total comprehensive income $ 1,307 $ 805 $ 227 $ 2,599
============ ============ ============ ============
3) NET INCOME PER COMMON SHARE BASIC AND DILUTED
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.
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,
-------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income available to common shareholders -- basic $ 1,233 $ 719 $ 312 $ 2,751
Dividend on convertible securities 38 38 113 113
------------ ------------ ------------ ------------
Net income - diluted $ 1,271 $ 757 $ 425 $ 2,864
============ ============ ============ =============
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,
------------------ ------------------
2004 2003 2004 2003
----- ----- ----- -----
Weighted average shares outstanding - basic 2,728 2,638 2,707 2,616
Conversion of preferred stock 500 500 500 500
"In the money" stock options, warrants and contingently issuable securities 285 249 270 176
----- ----- ----- -----
Weighted average shares outstanding - diluted 3,513 3,387 3,477 3,292
===== ===== ===== =====
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.
4) 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
12
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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. Related stock compensation of $9,000, and $27,000 for the three
months and nine months ended March 31, 2003 respectively, are reflected in the
statement of operations.
13
ROSS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5) 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. On January 8, 2004, the Company announced changes to the
terms of the pending merger. Under the terms of the merger agreement, as
amended, for each share of Ross common stock held, stockholders of Ross Systems
may elect to receive either (i) $17.00 in cash or (ii) $19.00 in a combination
of cash and CDC common shares for each share of the Company's common stock (the
"Common Shares"). CDC common shares will be valued at the average closing price
of such shares for the 10 trading days preceding the second trading day before
the closing date. Both companies are listed on NASDAQ stock exchange.
Proposed merger transaction costs consisting of legal and professional
services fees of approximately $139,000 and $1,133,000 were incurred during the
six and nine months ended March 31, 2004 respectively. These costs did not
constitute normal operating costs and have therefore been disclosed separately
in the consolidated condensed statement of operations.
6) RELATED PARTY TRANSACTION
In November 2003 in connection with the pending merger of the Company
and chinadotcom Software ("CDC"), management of Industri-Matematik International
("IMI"), a subsidiary of CDC, requested that the Company assist IMI in
performing certain administrative functions. The Company charged IMI, in an
arm's length manner, approximately $90,000 and $150,000 during the three and
nine months ended March 31, 2004, respectively. These fees have been recorded as
a reduction of general and administrative expenses.
7) LEGAL PROCEEDINGS
a) On November 17, 2003, an arbitrator awarded approximately
$2,000,000 against the Company in favor of a former Dutch distributor. The
Company paid the award before the end of calendar 2003 by funding the payment
out of operating cash flows in the ordinary course of business. As a result, the
Company recognized a charge of approximately $1,896,000 during the quarter
ending December 31, 2003 as $104,000 was previously recorded in accordance with
the contract in its normal course.
b) On February 28, 2001, the Company completed the sale of
certain assets related to its Human Resource and Payroll product line to Now
Solutions, LLC, (NOW), a majority owned subsidiary of Vertical Computer Systems
Inc. (Vertical). Raglan Acquisitions (Arglen), was also a party to the
transaction and was a holding company used by NOW to complete the transaction.
The gross asset sale price was $6,100,000. The purchase price consisted of cash
of $5,100,000 and a note payable by NOW to Ross of $1,000,000.
The note was non-interest bearing and was due in two installments;
$250,000 due on February 28, 2002 and $750,000 due on February 28, 2003. NOW
defaulted on the second installment of $750,000 which remains outstanding and is
accruing interest at the rate of 10% per annum, the default interest rate as
defined in the note.
On February 27, 2003, the day before the final note installment was
due, Vertical filed a derivative suit on behalf of NOW against Ross and others
alleging breach of contract, fraud, conspiracy and breach of fiduciary duty. The
suit alleges that Ross failed to schedule approximately $3,600,000 of
liabilities related to maintenance agreements assumed by NOW.
The suit also alleges that Ross failed to disclose to NOW a
transaction brokerage fee of $600,000 that Ross was to pay to Arglen, whose CEO
signed the fee agreement and who was also the CEO of NOW. The suit also alleges
that Ross should be jointly and severally liable for certain alleged frauds
committed by other defendants in which Ross allegedly conspired. The suit
further seeks a setoff against the remaining note payment based on the above
alleged damages, and the recovery of its attorneys' fees and costs. Ross denies
and has contested each and every one of Vertical's claims.
On November 18, 2003, the Supreme Court of the State of New York
dismissed all of Vertical Computer Systems (Vertical) claims against Ross
described above. Vertical has filed an appeal. The Company will continue to
defend this matter vigorously. The Company does not believe currently that the
outcome of range of outcomes is determinable, nor does it believe that should
the outcome be unfavorable that it would be materially detrimental to the
Company's liquidity.
14
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," and with SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." Revenues recognized from
multiple-element software license contracts are allocated to each element of the
contracts based on the fair values of the elements, such as licenses for
software products, maintenance, or professional services. The determination of
fair value is based on objective evidence which is specific to the Company. We
limit our assessment of objective evidence for each element to either the price
charged when the same element is sold separately, or the price established by
management having the relevant authority to do so, for an element not yet sold
separately. If evidence of fair value of all undelivered elements exists but
evidence does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the
arrangement fee is recognized as revenue.
We utilize distributors primarily in those geographic areas where we do
not maintain a physical presence. Our revenue recognition policies with respect
to sales by distributors comply with SOP 97-2 and SAB 101 in that all the
revenue recognition criteria listed above are met. In addition, distributors do
not have rights of return, price protections, rotation rights, or other features
that would preclude revenue recognition. Generally, the value of software
license sales to distributors is based on list selling prices to their customer
less a discount at a predetermined rate. Similarly, we receive revenue from
distributors based on a predetermined percentage of the maintenance fees billed
by the distributor from the end customer. The distributor typically retains any
fees earned by them for implementation services. Distributorships may or may not
be geographically exclusive, and are generally subject to annual renewals by the
Company.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance revenues,
including revenues bundled with original software product license revenues, are
deferred and recognized over the related contract period, generally 12 months.
Accounts receivable comprise trade receivables that are credit based
and do not require collateral. Generally, our credit terms are 30 days but in
some instances we offer extended payment terms to customers purchasing software
licenses. We have a history of offering extended payment terms from time to time
for competitive reasons. These terms are not offered in connection with any
contingencies related to product acceptance, implementation, or any other
service or contingency post-transaction, and we have not offered concessions as
a result of these terms. Payment arrangements in these circumstances typically
require payment of a significant portion of the total contract amount within 30
days of the sale, with two or three subsequent installments making up
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
the balance payable within six months. We have not found collectibility to be
compromised as a result of these terms. In no case have payment terms extended
beyond 12 months. Based on historical results, we believe that all components of
SOP 97-2 are met, including that the arrangement is fixed and determinable.
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. On an
ongoing basis, we evaluate the collectibility of accounts receivable based upon
historical collections and assessment of the collectibility of specific
accounts. We specifically review the collectibility of accounts with outstanding
balances in excess of 90 days. We evaluate the collectibility of specific
accounts using a combination of factors, including the age of the outstanding
balance, evaluation of the account's financial condition, recent payment
history, and discussions with our account executive responsible for the specific
customer and with the customer directly. Based upon this evaluation of the
collectibility of accounts receivable, an increase or decrease required in the
allowance for doubtful accounts is reflected in the period in which the
evaluation indicates that a change is necessary. If actual results differ, this
could have an impact on our financial condition, results of operation and cash
flows.
COMPUTER SOFTWARE COSTS. We capitalize computer software product
development costs incurred in developing a product once technological
feasibility has been established and until the product is available for general
release to customers. Technological feasibility is established when we either
(1) complete a detail program design that encompasses product function, feature
and technical requirements and is ready for coding and confirms that the product
design is complete, that the necessary skills, hardware and software technology
are available to produce the product, that the completeness of the detail
program design is consistent with the product design by documenting and tracing
the detail program design to the product specifications, that the detail program
design has been reviewed for high-risk development issues, and any related
uncertainties have been resolved through coding and testing or (2) complete a
product design and working model of the software product, and the completeness
of the working model and its consistency with the product design have been
confirmed by testing.
Capitalized software development costs generally relate to development
projects spanning several months. Resources are committed to these projects on a
consistent and long-term basis resulting in a generally consistent impact on the
financial results. We evaluate the extent to which the capitalized amounts are
realizable based on expected revenues from the product over the remaining
product life. Where future revenue streams are not expected to cover remaining
amounts to be amortized, we either accelerate amortization or expense remaining
capitalized amounts.
Amortization of such costs is computed as the greater of (1) the ratio
of current revenues to expected revenues from the related product sales or (2) a
straight-line basis over the expected economic life of the product (not to
exceed five years). Software costs related to the development of new products
incurred prior to establishing technological feasibility or after general
release are expensed as incurred.
RESERVES AND ESTIMATES. In the ordinary conduct of our business, we
must often use judgment and estimates regarding the recording of certain
reserves. For example, we use judgment in order to determine the amount of our
reserves for uncollectible accounts receivable. Should our estimates prove to be
incorrect, our reserves may be inadequate.
FOREIGN CURRENCIES
The financial position and the results of operations of our foreign
subsidiaries are measured using local currencies as the functional currencies.
Assets and liabilities of these subsidiaries are translated into US dollars at
the exchange rate in effect at 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
16
ROSS SYSTEMS, INC. AND SUBSIDIARIES
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 of the
quarter. 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.
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. On January 8, 2004, we announced changes to the terms of
the pending merger. Under the terms of the merger agreement, as amended, for
each share of Ross common stock held, stockholders of Ross Systems may elect to
receive either (i) $17.00 in cash or (ii) $19.00 in a combination of cash and
CDC common shares for each share of the Company's common stock (the "Common
Shares"). CDC common shares will be valued at the average closing price of such
shares for the 10 trading days preceding the second trading day before the
closing date. Both companies are listed on NASDAQ.
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 believes 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,
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
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 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.
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
18
ROSS SYSTEMS, INC. AND SUBSIDIARIES
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 17% of total software product license revenues in the
third 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 40% 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.
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.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
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 incorporate
many of their recommendations into our products. We also conduct a variety of
forms of market research with industry analyst groups and targeted industries to
determine strategies for new features and functions. We are committed to
achieving advances in the use of computer systems technology and to expanding
the breadth of our product line.
RESULTS OF OPERATIONS
REVENUES
Total revenues for the fiscal 2004 quarter ended March 31, 2004 of
$13,672,000 increased 20% from $11,420,000 in the same quarter of fiscal 2003.
Total international revenues as a percentage of total revenues for the
third quarter of fiscal 2004 were 34% for the third quarter of fiscal 2004
compared to 37% for the same quarter in fiscal 2003. Total international
revenues for the third quarter of fiscal 2004 increased by 10% over the same
quarter in the prior year; however in local currencies, revenues actually
decreased by approximately 6%, as a result of the strengthening of the Pound and
the Euro against the US dollar. Software sales and maintenance revenues are the
main contributors to the slight decrease in revenues when measured in local
currency terms.
For the quarter and the nine months ending March 31, 2004, North
American revenues comprised 66% and 66% respectively of total revenues, compared
to 63% and 65% respectively for the same periods of the prior year. North
American revenues increased 25% over the same quarter of the previous fiscal
year. This increase was due to mainly to improving software license revenues for
the quarter.
Software product license revenues were $4,244,000 during the quarter
ended March 31, 2004, an increase of $1,548,000 or 57%, from the same quarter in
fiscal 2003. North America experienced an increase of 88% while Internationally
the increase was 20%. For the nine month period ending March 31, 2004, software
product license revenues increased by 17% over the same period in the prior
fiscal year, which demonstrates that license revenues have been increasing
consistently during fiscal 2004 and not only in the third quarter. The increases
are the result of increasing demand arising from improving market awareness from
consistent sales and marketing activity, improving market confidence from
consistently strong financial results, and an improving trend in market
perception of the economic outlook for the future. Demand increase in Europe is
building at a slower pace to that of North America.
Consulting and other services revenues for the third quarter of fiscal
2004 increased 21% to $4,237,000 from $3,489,000 in the same quarter of fiscal
2003. For the nine months ended March 31, 2004, consulting and other services
revenues increased 21% over the same period in 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 March 31, 2004, North American services revenues increased 27% at
$2,678,000 compared to $2,112,000 over the same quarter in the prior fiscal
year. North American services revenue growth for both the third quarter and the
nine months ended March 31, 2004, continues to benefit from the recent strong
growth in software sales. International services revenues increased by $189,000,
or 18% over the same quarter in the prior year but this increase and the 21%
increase for the nine months ending March 31, 2004 is due mainly to the foreign
exchange effect of the stronger European currencies and the weaker US dollar in
comparison to the currency conversion rates for the same periods in fiscal 2003.
In local currencies, international services revenues are almost unchanged
between the nine month periods and third quarters of fiscal 2003 and fiscal 2004
respectively.
20
ROSS SYSTEMS, INC. AND SUBSIDIARIES
Maintenance revenues were almost unchanged in the third quarter of
fiscal 2004 versus the same quarter in the prior year, and had increased
slightly by 1% for the comparative nine month periods ended March 31, for fiscal
years 2003 and 2004. The increase is attributable mainly to new maintenance
contracts added during the prior year, partially offset by the normal incidence
of cancellations by existing customers. This is true for both North America and
international maintenance revenues. 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.
OPERATING EXPENSES
COSTS OF SOFTWARE PRODUCT LICENSES (INCLUSIVE OF AMORTIZATION OF
CAPITALIZED COMPUTER SOFTWARE COSTS). Costs of software product licenses include
expenses related to royalties paid to third parties, and the amortization of
previously capitalized software costs. Third party royalty expenses will vary
from quarter to quarter based on the number of third party products being sold.
Costs of software product licenses for the third quarter of fiscal 2004
increased by 6% to $1,764,000 from $1,660,000 in the third quarter of fiscal
2003. A similar increase of 6% is reflected in the comparison of the nine months
ended March 31, 2004 as compared to the same period in the prior fiscal year.
This increase is due to the third party content of the overall increase in sales
of software licenses. The capitalized software amortization amount in included
in costs of software product licenses was virtually unchanged at $1,228,000 in
the third quarter of fiscal 2004 as compared to $1,211,000 for the same quarter
in fiscal 2003. As a percentage of software product license revenue, the costs
of software product licenses decreased to 13% in the third quarter of fiscal
2004 compared to 17% in the same quarter of fiscal 2003. The decrease in costs
for software product licenses for the quarter was due to a decrease in the
proportional mix of third party products in total software sales sold in the
fiscal 2004 compared to the prior fiscal year. The third party content in
software license sales is subject to customers needs and is therefore not a
constant proportion.
COSTS OF CONSULTING, MAINTENANCE AND OTHER SERVICES. 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 26% to $5,313,000
in the third quarter of fiscal 2004, as compared to $4,229,000 in the third
quarter of fiscal 2003. Costs of consulting and other services increased by 21%
to $15,491,000 in the nine months ended March 31, 2004, as compared to
$12,784,000 in the same period in fiscal 2003. The increase in these costs for
the quarter and the nine months reflects higher levels of customer software
implementation activity. Our headcount at the end of the third quarter of fiscal
2004 is fifteen more than at the end of the same quarter in the prior year. This
increase has occurred gradually over the last 12 months in order to meet the
increasing demand for services. In addition, as is our normal practice, we have
used third party subcontracted resources to supplement our consulting capacity
when required. In North America the cost of third party consultants increased by
$162,000 to $390,000 in the third quarter of fiscal 2004, from $228,000 for the
comparable period in prior year.
SOFTWARE PRODUCT LICENSE SALES AND MARKETING EXPENSES. Sales and
marketing expenses of $3,272,000 for the quarter ended March 31, 2004 reflected
an increase of 14% when compared to $2,864,000 in the third quarter of fiscal
2003. For the nine months ended March 31, sales and marketing expenses had
increased by 10% in fiscal 2004 as compared to fiscal 2003. The increase is
primarily due to four additional headcount in our marketing department. Certain
positions which were open in the third quarter of fiscal 2003 were filled in
fiscal 2004. In addition the higher volume of software license sales in the
fiscal 2004 third quarter as compared to the prior year, generated sales
commissions of $561,000, 70% higher than the $331,000 in the prior year's same
quarter.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
PRODUCT DEVELOPMENT NET OF CAPITALIZED COMPUTER SOFTWARE COSTS. Product
development (research and development) expenses of $778,000 in the third quarter
of fiscal 2004 were up 29% from $605,000 in the same quarter of the prior year.
Product development expenditures is a commonly used measure in the software
industry to describe the quantum of cost relating to software development
excluding the effects of any capitalization of these costs and amortization of
capitalized costs. This amount is derived by adjusting the figures shown in the
Consolidated Statements of Operations as follows: (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
2004 2003 2004 2003
------- ------- ------- -------
Gross Expenditures for Product Development $ 1,863 $ 1,714 $ 5,325 $ 5,210
Less: Expenses capitalized (1,085) (1,109) (2,908) (3,317)
------- ------- ------- -------
Total Product Development Expenses $ 778 $ 605 $ 2,417 $ 1,893
------- ------- ------- -------
As a percentage of total revenues, product development expenses for the
three-month period ended March 31, 2004 was 6% compared to 5% for the same
period of the prior year. Product development expenditures increased by 9% to
$1,863,000 in the quarter ended March 31, 2004 from $1,714,000 in the same
quarter in the prior year. This increase was primarily due to a combination of
slightly higher expenses and slightly lower software capitalization as shown in
the above table. The nine month period ended March 31, 2004 reflected
expenditures which were almost flat when compared to the same period in fiscal
2003. We expect development of new products and enhancements to existing
products to continue at historical levels.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the quarter ended March 31, 2004 decreased by 20%, to $812,000 from
$1,016,000 in the same quarter of the prior year. The decrease arises from a
lower level of legal costs in the fiscal 2004 quarter compared to the fiscal
2003 quarter, and the aggregate of minor declines in several other cost items
which are not significant on their own. The decrease in legal costs reflects a
decline in customer and employee related litigation. These expenses for the nine
month period ended March 31, 2004 decreased by 18% over the prior fiscal year's
same period, benefiting mainly from reduced legal costs.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. In the quarter ended March 31,
2004, provision for doubtful accounts were almost unchanged at $188,000 as
compared to $197,000 recorded in the third quarter of fiscal 2003. The third
quarter 2004 and 2003 provisions consisted primarily of specific customer
accounts identified as being potentially uncollectible. These provisions
represent management's best estimate of the doubtful accounts for each period.
The improving trend in the provision for doubtful accounts has been made
possible by tighter and more effective processes over accounts receivable
collections. In general, a customer's ability to access certain of our
maintenance services is contingent on maintaining their account in good
standing, and this has encouraged customers to be current on their accounts and
resolve any outstanding issues promptly. In Europe, where the accounts
receivable collections performance has been somewhat weaker than that in North
America, we made changes to managers' compensation terms, providing incentives
on improvements in receivables collections performance. In addition, a
distributor policy change in Europe is slowly taking effect, whereby upon
renewal of a distributor's contract, we assume the billing of the distributor's
customers, and thereby are able to better control the receivable balances due by
the distributor and its customers.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
PROPOSED MERGER TRANSACTION COSTS
Pursuant to the proposed merger with chinadotcom, legal and other
professional costs amounting to $139,000 have been incurred in the three months
ended March 31, 2004, and $1,133,000 for the nine months ended March 31, 2004.
We expect to incur additional legal and professional fees of approximately
$100,000 during the fourth quarter of fiscal 2004.
OTHER INCOME (EXPENSE), NET
Other expenses for the quarter ended March 31, 2004 was $113,000
compared to $30,000 in the same quarter of fiscal 2003. In the fiscal 2004
quarter, this amount consists of approximately $30,000 in interest expense
related to borrowings under our existing line of credit facility, and
approximately $84,000 of foreign exchange losses on current period transactions.
For the prior year same quarter, this expense was interest.
INCOME TAX EXPENSE
During the third quarter of fiscal 2004, we recorded an income tax
expense of $22,000 compared to $63,000 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
carryforwards or had to pay treaty-based taxes.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of fiscal 2004, net cash provided by operating
activities decreased $5,381,000 compared to the increase of $4,306,000 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 $2,439,000 caused by the decrease in net income from $2,864,000
in the nine months ended March 31, 2003, to a net income of $425,000 for the
nine months ended March 31, 2004. During the first nine months of fiscal 2004,
compared to the same period in fiscal 2003, non cash changes for depreciation
and amortization were comparable, while provisions for doubtful accounts
decreased from $711,000 in the prior nine month period to $188,000 in the
current nine month period. Our provision for uncollectible accounts has
decreased in fiscal 2004 due to a smaller number of uncollectible receivables,
while in the prior fiscal year's first nine months this reserve was greater to
provide for receivables believed uncollectible at that time. In addition, there
was an aggregate increase of cash used of $1,217,000 in deferred revenues,
accrued expenses, accounts payable and income taxes payable. For the nine months
ended March 31, 2004, deferred revenues increased by $226,000, resulting in a
decrease in cash used. The prior year's trend for the comparable period was
similar. The net earnings in the nine months ended March 31, 2004 were adversely
affected in total by $3,029,000 made up of merger transaction costs of
$1,133,000 and the settlement of a legal dispute under arbitration of
$1,896,000. Accounts payable and accrued expenses increased the use of cash by
an aggregate $1,373,000 reflecting faster payment of vendors and accrued
liabilities in fiscal 2004 when compared to the same period in fiscal 2003.
In the first nine months of fiscal 2004, we utilized $3,210,000 for
investing activities versus $3,824,000 over the same period of the prior year, a
decrease of $614,000. Investment in property and equipment was down $249,000 to
$302,000 in the first nine months of fiscal 2004, from $551,000 in same period
in the prior year. Investments in capitalized computer software costs decreased
by $409,000 in the nine months ended March 31, 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 capitalized costs incurred in the
first nine months of fiscal 2004 as described in the comments on development
expenditures on page 22 above.
Net cash flows provided by financing activities increased by $3,779,000
for the nine months ended March 31, 2004, versus the same nine month period of
the prior fiscal year. Cash increased during the nine months ended March 31,
2004 by drawing an additional $2,249,000 on our lines of credit, a net
$2,156,000 increase compared to the net $93,000 paid on lines of credit in the
same period 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 $310,000 in the nine months ended March 31, 2004, an
increase of $48,000 over the same period in the prior year.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
At March 31, 2004 we had $8,751,000 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 March
31, 2004). Borrowings under the credit facility are collateralized by
substantially all assets of the Company. At March 31, 2004, we had approximately
$4,229,000 outstanding against the $5,000,000 revolving credit facility, and
based on the eligible accounts receivable at March 31, 2004, our cash plus our
remaining borrowing capacity of $771,000 totaled approximately $9,522,000. This
represents a increase in total availability of cash at March 31, 2004 of
$2,935,000 from March 31, 2003. The increase in total availability is mainly as
a result of the increase in cash generated through operations. At this time we
believe that our current cash reserves, credit lines, and cash generated from
operations are adequate to finance our activities.
RISK FACTORS
OUR PROPOSED MERGER WITH CHINADOTCOM CORPORATION COULD HAVE AN ADVERSE
EFFECT ON OUR BUSINESS BECAUSE PREPARATIONS FOR CLOSING WILL CONSUME
OUR MANAGEMENT'S TIME AND WILL RESULT IN MATERIAL COSTS AND EXPENSES.
On September 4, we 2003, we entered into a merger agreement with
chinadotcom Corporation. Preparations for the merger will be a material expense,
will consume much of executive management's time and may result in potential
customers deferring purchasing decisions until they understand the form of and
reasons for the merger, any of which could have an adverse effect on our
business model and results of financial operations. These adverse effects will
be intensified if the merger is not completed.
OUR SOFTWARE LICENSE REVENUES CAN BE ALMOST IMMEDIATELY ADVERSELY
AFFECTED BY DECREASES IN CUSTOMER DEMAND AND EVEN RELATIVELY MINOR DELAYS IN
CUSTOMER PURCHASING DECISIONS
Our software product license revenues can fluctuate depending upon such
factors as overall trends in the United States and International economies, new
product introductions, as well as customer buying patterns. Because we typically
ship software products within a short period after orders are received, and
therefore maintain a relatively small backlog, any weakening in customer demand
could have an almost immediate adverse impact on revenues and operating results.
Moreover, a substantial portion of the revenues for each quarter is attributable
to a limited number of sales and tends to be realized in the latter part of the
quarter. Thus, even short delays or deferrals of sales near the end of a quarter
can cause substantial fluctuations in quarterly revenues and operating results.
BECAUSE OUR OPERATING EXPENSES ARE BASED IN LARGE PART ON ANTICIPATED
REVENUES, EVEN SMALL VARIATIONS IN THE TIME AT WHICH WE RECOGNIZE
REVENUES CAN CAUSE SIGNIFICANT VARIATION IN OUR OPERATING RESULTS FROM
QUARTER TO QUARTER.
Our operating expenses are based in large part on anticipated revenue
levels, including revenue from software sales agreements that we expect to sign.
We sometimes defer our recognition of revenue from software sales agreements
that we sign during a quarter to future periods, based on our revenue
recognition criteria. Because a high percentage of our expenses are relatively
fixed, a small variation in the timing of the recognition of specific revenues
can cause significant variation in operating results from quarter to quarter.
THE RECENT ECONOMIC SLOW-DOWN MAY CAUSE CUSTOMER DEMAND TO DECREASE
AND PRICE COMPETITION AMONG OUR COMPETITORS TO INTENSIFY, EITHER OF
WHICH WOULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Our business may be adversely impacted by the worldwide economic
slowdown and related uncertainties. Weak economic conditions worldwide have
contributed to the current technology industry slow-down. This may impact our
business resulting in reduced demand and increased price competition, which may
result in higher overhead costs, as a percentage of revenues. Additionally, this
uncertainty may make it difficult for our customers to forecast future business
activities. This could create challenges to our ability to profitably grow our
business. If the economic or market conditions further deteriorate, this could
have a material adverse impact on the results of operations and cash flow.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
THE RAPID DEVELOPMENT AND MATURATION OF TECHNOLOGY IN OUR INDUSTRY AND
THE STRENGTHENING OUR COMPETITORS IN LIGHT OF INDUSTRY CONSOLIDATION
MAY MAKE IT DIFFICULT FOR US TO COMPETE EFFECTIVELY, WHICH WOULD HARM
OUR OPERATING RESULTS AND FINANCIAL CONDITION.
We may face increased competition and our financial performance and
future growth depend upon sustaining a leadership position in our product
functionality. Competitive challenges faced by Ross are likely to arise from a
number of factors, including: industry volatility resulting from rapid
development and maturation of technologies; industry consolidation and
increasing price competition in the face of worsening economic conditions.
Although there are fewer competitors in our target markets than previously,
failure to compete successfully against those remaining could harm our business
operating results and financial condition.
OUR STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY DUE TO CHANGES IN
ECONOMIC CONDITIONS AND ANNOUNCEMENTS OF NEW PRODUCTS OR SIGNIFICANT
FLUCTUATIONS IN QUARTERLY RESULTS OF OUR COMPANY OR OUR COMPETITORS.
Our stock price, like that of other technology companies, is subject to
volatility because of factors such as announcement of new products, services or
technological innovations by us or by our competitors, quarterly variations in
our operating results, and speculation in the press or investment community. In
addition our stock price is affected by general economic and market conditions
and may be negatively affected by unfavorable global economic conditions.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY
AGAINST UNAUTHORIZED THIRD PARTY COPYING OR USE, IN PART BECAUSE THE
LAWS OF OTHER COUNTRIES DO NOT OFFER THE SAME PROTECTION AS THE LAWS OF
THE U.S., AND ANY SUCH INABILITY COULD SIGNIFICANTLY REDUCE OUR
REVENUES AND PROFITABILITY.
Our business may suffer if we cannot protect our intellectual property.
We generally rely upon copyright, trademark and trade secret laws and contract
rights in the United States and in other countries to establish and maintain
proprietary rights in our technology and products. However, there can be no
assurance that any of our proprietary rights will not be challenged, invalidated
or circumvented. In addition, the laws of certain countries do not protect
proprietary rights to the same extent as do the laws of the United States.
Therefore, there can be no assurance that we will be able to adequately protect
our proprietary technology against unauthorized third-party copying or use,
which could adversely affect our competitive position and could significantly
reduce our revenues and profitability. Further, there can be no assurance that
we will be able to obtain licenses to any technology that may be required to
conduct our business or that, if obtainable, such technology could be licensed
at a reasonable cost.
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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 OPERATIONS: We have a world-wide presence and as such maintain
offices and derive revenues from sources overseas. For the third quarter of
fiscal 2004, international revenues as a percentage of total revenues were
approximately 34%. 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. During the third quarter of fiscal 2004, our European business
units contributed approximately $34,000 in net earnings. In this close to
breakeven position for European operations, the effect of the foreign currency
volatility on net income is insignificant.
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 third quarter of fiscal 2004.
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ROSS SYSTEMS, INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2004, 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.
(10) Incorporated by reference to the exhibit filed with the
Registrant's Current Report on Form 10-K/A filed May 7,
2004.
(b) Reports on Form 8-K
- On February 13, 2004 Ross Systems filed a Current Report on Form 8-K
reporting that the Company had issued a press release dated February
11, 2004 containing information about the Company's financial
condition or results of operations for the quarterly and six month
period ended December 31, 2003.
- On April 29, 2004 Ross Systems filed a Current Report on Form 8-K
reporting that on April 29, 2004, the Ross Systems and chinadotcom
executed a third amendment to the Merger Agreement whereby Ross made
the election to receive for every Ross share, $19 in a combination of
shares and cash or $17 in cash.
- On May 11, 2004 Ross Systems filed a Current Report on Form 8-K
reporting that the Company had issued a press release dated May 5,
2004 containing information about the Company's financial condition
or results of operations for the quarterly and nine month period
ended March 31, 2004.
29
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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.
May 14, 2004 Date: /s/ Verome M. Johnston
------------------------------------
Verome M. Johnston
Vice President, Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
30