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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-19092
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ROSS SYSTEMS, INC.
Incorporated in Delaware IRS Employer Identification No. 94-2170198
Two Concourse Parkway, Suite 800
Atlanta, Georgia 30328
(770) 351-9600
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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
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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 or any
amendment to this Form 10-K. |_|
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 September 24, 2002 as reported by the NASDAQ National Market,
was approximately $19,207,970. 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 August 31, 2002, the Registrant had outstanding 2,645,726 shares
of Common Stock, and 500,000 Series A 7.5%, convertible preference shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain items in Part III of this form 10-K Report are incorporated by
reference to the Registrant's Proxy Statement for the Registrant's 2002 Annual
Meeting of Stockholders to be held November 14, 2002
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ROSS SYSTEMS, INC AND SUBSIDIARIES
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 2002
TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 5
Item 3. Legal Proceedings............................................................................. 6
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.................................... 19
Item 8. Financial Statements and Supplementary Data................................................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 19
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 21
Item 11. Executive Compensation........................................................................ 22
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 22
Item 13. Certain Relationships and Related Transactions................................................ 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 23
SIGNATURES............................................................................................... 24
ROSS SYSTEMS, INC AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
THIS REPORT ON FORM 10-K (THE "REPORT") CONTAINS FORWARD LOOKING
STATEMENTS REGARDING FUTURE EVENTS WITH RESPECT TO ROSS SYSTEMS, INC. ACTUAL
EVENTS OR RESULTS COULD DIFFER MATERIALLY DUE TO A NUMBER OF FACTORS, INCLUDING
THOSE DESCRIBED HEREIN AND IN DOCUMENTS INCORPORATED HEREIN BY REFERENCE, AND
THOSE FACTORS DESCRIBED UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS".
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 (a) the "Company" or (b) "Ross" shall mean Ross Systems, Inc., a Delaware
corporation, and its subsidiaries.
Ross Systems Inc. (NASDAQ:ROSS) founded in 1972, supplies leading
enterprise solutions software designed for process manufacturing companies
primarily in the food and beverage, life sciences, chemicals, metals and natural
products industries. The Company offers the award-winning iRenaissance(TM)
family of software solutions which is an integrated suite of enterprise resource
planning (ERP II), financials, materials management, manufacturing and
distribution, supply chain management (SCM), advanced planning and scheduling,
customer relationship management (CRM), electronic commerce, business
intelligence and analytics applications.
iRenaissance applications are renowned for their deep and rich
functional fit to process industry requirements as well as their short
implementation times and cost-effective returns on investment.
More than 1,000 companies around the world use Ross Systems solutions
on a wide range of popular databases, including Oracle and Microsoft, as well as
operating systems including NT and UNIX. Ross Systems has more than 10 offices
globally, to serve its customers. Customers are primarily medium-sized companies
(with annual sales of $50 million to $1 billion) upgrading internal systems to
improve profitability through the availability of timely and accurate
information, ensure compliance with regulatory requirements such as those
imposed by the FDA and USDA, and collaborate effectively with customer and
suppliers.
The Company licenses its products to customers through a direct sales
force in North America and Western Europe as well as independent distributors in
dozens of other markets worldwide.
Products
The Company markets a broad range of sophisticated business
applications that address B2B electronic commerce including procurement,
collaborative planning, financial, manufacturing, distribution, supply chain
management, and human resource needs of process manufacturers. Specifically,
these applications are designed to address the unique requirements of
manufacturers in the food and beverage, life sciences, chemicals, metals and
natural products industries. In addition, the Company supports a large installed
base of companies, which utilize the Company's financial products exclusively.
The Company's software product license fees are based on the modules licensed
and the number of concurrent users supported by the hardware on which the
modules operate.
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 without reinstallation of the iRenaissance applications or
re-writes of custom-developed applications. Built on a highly flexible
technology platform, iRenaissance applications cost-effectively support mid-size
companies and scale effectively to support large, global organizations 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
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ROSS SYSTEMS, INC AND SUBSIDIARIES
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.
The Company offers its comprehensive Enterprise Resource Planning
("ERP") solution with functionality specifically tailored to the unique formula
and specifications-based requirements of process manufacturers, including the
food and beverage, life sciences, chemicals, metals and natural products
companies. The Company believes that this native functionality is superior to
the alternative offered by most of the Company's competitors. The product may be
deployed in a thin client mode and accessed directly through a web browser to
permit the greatest performance advantage and streamlined deployment for
companies using remote communications over the Internet.
The iRenaissance(TM) applications run on Microsoft's Windows NT; Compaq
Corporation's ("Compaq") Alpha, UNIX, and Open VMS operating systems;
International Business Machines Corporation's ("IBM") RS/6000; Hewlett-Packard
Company's ("HP") HP-UX; Sun's Solaris operating system, and Fujitsu's DS-90
UNIX. The company's products currently support multiple database management
systems, including: Oracle Systems Corporation's Oracle 8i, and Microsoft's SQL
Server 7.
The Company's Renaissance classic line of general business accounting
applications is feature rich and well integrated. The Company has continued to
enhance these applications to serve existing customers. The Company will
continue to support the Renaissance classic products to its installed base of
customers. To provide a long-term growth path for Renaissance classic customers,
the Company offers them the ability to upgrade to its new products at attractive
pricing.
Product Line Expansion
In fiscal 2002, the Company continued to expand its product line in the
collaborative business to business (B2B) applications. With connectivity to the
ERP backbone systems over the Internet to customers and suppliers, these
products enable customers to tightly link trading partner supply chains to
achieve sustainable competitive advantage. These applications enable companies
to leverage the Internet to automate business processes and effectively manage
business resources. This includes:
iRenaissance ERP - Designed specifically to address the needs of
process manufacturing companies, with applications for Manufacturing &
Distribution, Financials and Human Resources management. The Manufacturing
& Distribution application provides process-specific inventory, quality
management, regulatory compliance management and risk mitigation solutions.
It is tightly integrated with the Financials applications, providing the
benefit of comprehensive management of order-to-cash, manufacturing
planning and procure-to-pay processes.
The Financials applications are tightly integrated with the
Manufacturing & Distribution applications to enable the efficient
management and optimization of business operations. Deep functionality
provides the support necessary for multi-company, multi-language and
multi-currency requirements.
The Human Resources application is also integrated with the
applications, and enables management of employee resources including
payments, benefits administration, 401K and performance management.
iRenaissance SCM - Designed with many unique capabilities needed by
process manufacturing companies, this comprehensive solution provides
tightly integrated Supply Chain Management applications that help companies
maximize and strengthen collaborative commerce, planning and forecasting
activities across the supply chain.
Demand Management applications enable companies to accurately forecast
demand, down to the customer location level, and simultaneously improve
customer service while reducing inventory. It is especially suited to the
needs of process manufacturers whose ingredient demand patterns vary widely
based on seasonality, availability, and potency.
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ROSS SYSTEMS, INC AND SUBSIDIARIES
The Supply Management applications bring together the best,
unconstrained demand plan with available supply, allowing companies to
tightly link and track business plans and departmental operations. It
includes Replenishment Planning, Optimized Orders, Advanced Planning and
Advanced Scheduling modules.
The Sales and Operations Planning application combines information
from outside and inside the enterprise, and effectively applies it to the
decision support system for a company's supply chain. This application
dynamically extracts data and information from iRenaissance SCM
applications and other iRenaissance solutions in order to generate
sophisticated analyses and plans that provide a management tool to measure
performance and judge the impact of proposed corrective actions.
iRenaissance CRM - This sophisticated Customer Relationship Management
solution provides customers with Web-based selling, customer self-service,
specialized order entry, integrated sales and marketing programs, broker
and distributor portals, client tracking and performance management
applications.
In addition to providing robust support for sales force automation
requirements, this application also addresses the complex challenges of
multi-tier distribution and revenue channels often faced by companies in
the process manufacturing industries.
iRenaissance Commerce - enables companies to cost-effectively extend
internal applications to the web to improve collaboration and service
levels provided to customers and channel partners. Companies leverage
iRenaissance Commerce to offer their customers and prospects value before,
during and after the sale, and take full advantage of cross-selling
opportunities. Additionally, using iRenaissance Commerce, existing
iRenaissance applications can be leveraged to publish dynamic product
catalogs, support 24x7 customer self-service and order status inquiry, and
take orders via the web.
Third-Party Products
The Company resells complementary software products licensed from
third parties, 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 18% of total software product license revenue in fiscal 2002
Services
The Company's worldwide consulting services operation complements its
e-business and enterprise software sales organizations. The Company offers
a broad selection of services to install and optimize each available
software product. Services provided by the Company fall into two broad
categories, Professional Services and Client Support.
Professional Services
The Company's Professional Services organization provides business
application experience, technical expertise and product knowledge to
complement the Company's 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 the Company's 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
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ROSS SYSTEMS, INC AND SUBSIDIARIES
activities, including requirements definition, and software design,
development and implementation. The Company also provides advanced
technology services focused on networking, database administration and
tuning. These services are generally offered on a time and expense
reimbursement basis. The Company also provides remote systems management,
and remote applications management.
Education Services are offered to clients either at the Company's
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 the implementation demands of the Company and its
customers.
Client Support
The Company's Client Support functions include web-based support,
telephone support, technical publications and product support guides, which
are provided under the Company's standard maintenance agreements. The
annual maintenance fee for these services is 20% price for the licensed
software. The standard maintenance agreement also entitles clients to
certain new product releases and product enhancements.
Marketing and Sales
The Company sells its products and services in the US and Western
Europe primarily through its direct sales force. At June 30, 2002, the
Company had 46 sales and marketing employees. In other areas of the world,
the Company sells its products through distributors. In support of its
sales force and distributors, the Company conducts comprehensive marketing
programs which include telemarketing, direct mailings, advertising,
promotional material, seminars, trade shows, public relations and on-going
customer communication.
The Company is based in Atlanta, Georgia, with a regional direct sales
force covering all major US business locations. The Company has
subsidiaries in Antwerp, Belgium; Ottawa, Canada; Berlin, Germany; Utrecht,
the Netherlands; Barcelona, Spain; Northampton, United Kingdom as well as
Hong Kong and Singapore.
The Company has distribution arrangements with distributors 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 the Company royalties on the
sales of the Company's products and maintenance services.
International revenues (from foreign operations and export sales)
represented approximately 45%, 33%, and 32%, of the Company's revenues in
fiscal 2002, 2001, and 2000, respectively. The Company intends to broaden
its presence in international markets by entering into additional
distribution agreements.
Product Development and Acquisitions
To meet the increasingly sophisticated needs of its customers and
address potential new markets, the Company continually strives to enhance
its existing product functionality. The Company surveys the needs of its
customers annually through ballots and at its user conference 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 industries to determine strategies for new features and
functions. The Company is committed to achieving advances in the use of
computer systems technology and to expanding the breadth of its product
line.
The Company intends to expand its potential markets by developing new
products which address the needs of additional prospective customers,
including those in key international markets related to both language,
currency and local accounting custom and procedure. iRenaissance version
5.7 was released in the fourth quarter of fiscal 2002. During fiscal 2002,
the Company changed some aspects of its technology direction. The internet
related functionality of the iRenaissance product was re-directed from the
"java" based development to the Microsoft ".net" technology. 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 Company's internet based offerings are
currently being converted to the new technology and the first releases of
the changed products should occur before the end of the calendar year.
Development of version 6.0 of the product has commenced and the Company
plans to release this
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ROSS SYSTEMS, INC AND SUBSIDIARIES
version in the second quarter of fiscal 2004. The majority of the
capitalized software cost of $14,036,000 consists of previously completed
projects and is currently being amortized. In fiscal 2002 the Company
introduced iRenaissance SCM, iRenaissance CRM, and iRenaissance Commerce to
its product suite.
Competition
The business applications software market is intensely competitive.
The Company competes with a broad range of applications software companies.
The Company's competitors include the following: general business
application software providers, such as J.D. Edwards, Oracle Corporation,
and SAP AG; as well as business applications software providers in specific
vertical markets that offer products that compete with the Company's
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. The Company believes it
competes effectively with respect to these factors.
Proprietary Rights and Licenses
The Company provides its products to end users generally under
nonexclusive, nontransferable licenses, which generally have perpetual
terms. Under the general terms and conditions of the Company's standard
license agreements, the licensed software may be used solely for internal
operations on designated computers at specific sites. The Company makes
source code available for certain portions of its products.
The Company has registered "iRENAISSANCE", "RENAISSANCE", "RENAISSANCE
CS", "STRATEGIC APPLICATION MODELER (SAM) and "ROSS SYSTEMS" as trademarks
in the United States. The Company has applied for a provisional patent with
respect to systems and associated methods for determining availability and
pricing of goods based on attributes. The Company has secured registration
of its copyrights in the United States for 19 of its products. The Company
has service mark applications pending for, "THE BUSINESS OF E-COMMERCE".
Although the Company takes steps to protect its intellectual property,
misappropriation may nevertheless occur and copyright and trade secret
protection may not be available in certain countries.
Except as noted above, the Company relies on a combination of trade
secret, copyright and trademark laws, and license agreements to protect its
proprietary rights in its products. The Company believes its products,
trademarks, copyrights and other proprietary rights do not infringe the
rights of third parties. If it is determined that the Company infringes the
proprietary rights of third parties, such determination may harm the
Company's business and operating results.
Employees
As of June 30, 2002, the Company employed a total of 256 full time
employees, including 46 in sales and marketing, 42 in product development,
127 in professional services and client support, and 41 in finance,
administration and operations. The Company's employees are not represented
by a labor union, and the Company believes that its employee relations are
good.
ITEM 2. PROPERTIES
The Company's corporate headquarters, research and development, sales,
marketing, consulting and support facilities are located in Atlanta,
Georgia, where the Company occupies approximately 22,000 square feet. The
Company also maintains a facility for product development in Escondido,
California, which occupies 3,200 square feet.
International offices are maintained in Belgium (Antwerp); China (Hong
Kong); England (Northampton); Germany (Berlin); Netherlands (Utrecht); New
Zealand (Auckland); and Spain (Barcelona).
At June 30, 2002, all facilities are leased with periods remaining to
renewal varying from nine months to thirteen years. The Company believes
its facilities are adequate for its current needs and that the Company can
obtain suitable additional space as required.
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ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 3. LEGAL PROCEEDINGS
As of and for the fiscal year ended June 30, 2002, the Company is not
a party to any pending litigation other than ordinary routine litigation
that is incidental to the operations of the business and the Company is not
aware of any threatened litigation. The Company believes that routine
litigation currently in process is unlikely to have a material adverse
effect on its financial results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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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 the Company's Common Stock on the NASDAQ National Market for each of
the quarters of fiscal 2002 and 2001. The Company's Common Stock trades
under the NASDAQ symbol ROSS.
Fiscal 2002 High Low
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First quarter...................... $4.08 $2.94
Second quarter..................... $6.31 $2.38
Third quarter...................... $11.56 $5.82
Fourth quarter..................... $11.65 $7.80
Fiscal 2001 High Low
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First quarter...................... $15.62 $6.56
Second quarter..................... $6.87 $1.87
Third quarter...................... $7.81 $2.18
Fourth quarter..................... $4.45 $1.87
The Company has never declared or paid cash dividends on its Common
Stock, and the Company does not plan to declare or pay dividends in the
future. The Company intends to use earnings to finance the expansion of its
business. In addition, the Company's line of credit agreement with Silicon
Valley Bank dated September 24, 2002, contains certain covenants which
limit the Company's ability to pay cash dividends. This does not affect the
dividends payable on the Convertible Preference Shares in issue.
As of September 24, 2002, the number of Common Stock, stockholders in
street name and of record exceeded 6,500.
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
preferred shares cannot be converted for one year but must be converted
within five years from the issue date. The shares earn dividends at the
rate of 7.5%. At September 20, 2002 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.
On April 27, 2001 the Company executed a 1 for 10 reverse stock split.
All share data for the year ended June 30, 2002 contained in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the "Consolidated Financial Statements" reflects the split
and all comparative numbers of shares for prior periods have been restated
to conform.
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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 Form 10-K. Historical results are not
necessarily indicative of results that may be expected in for future
periods.
CONSOLIDATED FINANCIAL DATA
(In thousands, except earnings per share)
Years Ended June 30,
------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Statements of Operations Data:
Total revenues (1).................................................. $ 46,053 $ 50,805 $ 83,399 $ 106,024 $ 94,716
Operating earnings (loss) (2) (3)................................... $ (8,667) $ (2,024) $ (8,143) $ (3,936) $ 4,140
Net earnings (loss) ................................................ $ (9,424) $ (842) $ (9,662) $ (5,626) $ 2,595
Net earnings (loss) available to common stockholders
$ (9,574) $ (842) $ (9,662) $ (5,626) $ 2,595
Diluted net earnings (loss) per share .............................. $ (3.65) $ (0.33) $ (4.15) $ (2.53) $ 1.27
Shares used in computing diluted net earnings (loss) per share
2,625 2,566 2,330 2,223 2,039
Balance Sheet Data:
Working capital (deficits).......................................... $ (3,786) $ (9,640) $ (15,340) $ (3,745) $ 5,544
Total assets ....................................................... $ 37,618 $ 50,462 $ 64,295 $ 83,185 $ 78,189
Long-term debt, less current portion ............................... -- -- $ 2,627 3,705 8,918
Preferred stock, no par value 5,000,000 shares authorized;
500,000 shares issued and outstanding ............................. $ 2,000 $ 2,000 -- -- --
Total shareholders' equity ......................................... $ 13,943 $ 23,104 $ 20,890 $ 29,257 $ 30,774
(1) Revenues and operating costs have been increased in all years by the
reclassification of Reimbursable Expenses to comply with EITF 01-14. See
note 1(h) in the notes to the Consolidated Financial Statements on page
F-8.
(2) In accordance with the adoption on SFAS No. 142, the Company ceased
amortization of Goodwill beginning July 1, 2001. See note 1(p) to the
Consolidated Financial Statements on page F-10.
(3) In accordance with SFAS No. 86, the Company recorded an impairment of
Capitalized Software Costs during the year ended June 30, 2002. See note
1(r) to the Consolidated Financial Statements on page F-12
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ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WHICH EXPRESS THAT THE COMPANY
"BELIEVES", "ANTICIPATES", OR "PLANS TO" AS WELL AS OTHER STATEMENTS WHICH
ARE NOT HISTORICAL FACT, ARE FORWARD LOOKING STATEMENTS WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ACTUAL EVENTS OR
RESULTS MAY DIFFER MATERIALLY AS A RESULT OF THE RISKS AND UNCERTAINTIES
DESCRIBED HEREIN AND ELSEWHERE INCLUDING, IN PARTICULAR THOSE FACTORS
DESCRIBED UNDER "BUSINESS" SET FORTH IN PART I OF THIS REPORT AS WELL AS IN
OTHER RISKS AND UNCERTAINTIES IN THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE.
Critical Accounting Policies
Basis of Presentation. The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant inter-company balances and transactions have
been eliminated in consolidation.
Revenue Recognition In accordance with SEC Staff Accounting Bulletin
No. 101 "Revenue Recognition in Financial Statements", the Company
recognizes revenues from licenses of computer software "up-front" provided
that a non-cancelable license agreement has been signed, the software and
related documentation have been shipped, there are no material
uncertainties regarding customer acceptance, collection of the resulting
receivable is deemed probable, and no significant other vendor obligations
exist. The revenue associated with any license agreements containing
cancellation or refund provisions is deferred until such provisions lapse.
Where the Company has future obligations, if such obligations are
insignificant, related costs are accrued immediately. When the obligations
are significant, the software product license revenues are deferred. Future
contractual obligations can include software customization, requirements to
provide additional products in the future and porting products to new
platforms. Contracts which require significant software customization are
accounted for on the percentage-of-completion basis. Revenues related to
significant obligations to provide future products or to port existing
products are deferred until the new products or ports are completed.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance
revenues, including revenues bundled with original software product license
revenues, are deferred and recognized over the related contract period,
generally 12 months. The Company's revenue recognition policies are
designed to comply with American Institute of Certified Public Accountants
Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2).
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 (i) completes a detail program design
that encompasses product function, feature and technical requirements and
is ready for coding and confirms that the product design is complete, that
the necessary skills, hardware and software technology are available to
produce the product, that the completeness of the detail program design is
consistent with the product design by documenting and tracing the detail
program design to the product specifications, and that the detail program
design has been reviewed for high-risk development issues and any related
uncertainties have been resolved through coding and testing or (ii)
completes a product design and working model of the software product, and
the completeness of the working model and its consistency with the product
design have been confirmed by testing. The Company evaluates realizability
of the capitalized amounts based on expected revenues from the product over
the remaining product life. Where future revenue streams are not expected
to cover remaining amounts to be amortized, the Company either accelerates
amortization or expenses remaining capitalized amounts. Amortization of
such costs is computed as the greater of (1) the ratio of current revenues
to expected revenues from the related product sales or (2) a straight-line
basis over the expected economic life of the product (not to exceed five
years. Software costs related to the development of new products incurred
prior to establishing technological feasibility or after general release
are expensed as incurred.
9
ROSS SYSTEMS, INC AND SUBSIDIARIES
Results of Operations
Fiscal Years Ended June 30, 2002, 2001, and 2000
The following table sets forth certain items reflected in the
Company's 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:
Percentage of Revenue
Year Ended Percentage
June 30, Increase (Decrease)
--------------------------------- -----------------------
2002 2001 2000 2002/2001 2001/2000
---- ---- ---- --------- ---------
Revenues:
Software product licenses .............................................. 28% 19% 23% 35% (49%)
Consulting and other services .......................................... 26 29 40 (20) (54)
Maintenance ............................................................ 44 49 33 (19) (11)
Reimbursable expenses .................................................. 2 3 4 (36) (62)
---- ---- ---- ---- ----
Total revenues ........................................ 100% 100% 100% (9%) (38%)
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Operating expenses:
Costs of software product licenses ..................................... 4% 2% 3% 91% (54%)
Costs of consulting, maintenance and other services .................... 23 35 53 (40) (60)
Software product license sales and marketing ........................... 31 30 25 (5) (27)
Product development .................................................... 25 23 12 -- 15
General and administrative ............................................. 10 9 9 (1) (38)
Provision for uncollectible accounts ................................... 3 3 6 (5) (67)
Amortization of goodwill ............................................... -- 1 1 -- (31)
Non-recurring (benefit) costs .......................................... (1) 2 1 -- (31)
Non-cash charge for impairment of capitalized software costs ........... (24) -- -- -- --
---- ---- ---- ---- ----
Total operating expenses .............................. 119 104 110 (5) (42)
---- ---- ---- ---- ----
Operating profit (loss) ............................... (19) (4) (10) -- (75)
Other expense, net ..................................................... (1) (2) (1) (34) 1
Gain on sale of product line ........................................... 5 -- -- --
---- ---- ---- ---- ----
Loss before income taxes .............................. (21) (2) (11) 1033 (91)
Income tax benefit (expense) ........................................... (0) (0) (0) 1366 (97)
---- ---- ---- ---- ----
Net loss .............................................. (21%) (2%) (12)% 1037% (91%)
---- ---- ---- ---- ----
Revenues. Revenues were affected by the sale in February 2001, of the
Human Resource product line. Fiscal 2001 therefore reflects mix of full and
partial years of product line activity. For comparison purposes, revenues
for fiscal 2001, and 2000 have been adjusted to exclude the Human Resource
product line activity. This revenue is referred to as "adjusted revenue".
10
ROSS SYSTEMS, INC AND SUBSIDIARIES
Comparisons of both adjusted revenue and total revenue follow below (in
thousands):
Estimated Adjusted Revenues Actual Revenues
Year Ended Year Ended
Revenue comparison June 30, June 30,
------------------------------- -------------------------------------
2002 2001 2000 2001 2001 2000
---- ---- ---- ---- ---- ----
Revenues:
Software product licenses ................ $13,026 $ 9,130 $17,774 $13,026 $ 9,607 $18,943
Consulting and other services ............ 12,179 13,845 30,700 12,179 15,213 33,339
Maintenance .............................. 20,014 21,717 23,478 20,014 24,678 27,722
Reimbursable expenses .................... 834 1,307 3,395 834 1,307 3,395
Total revenues .......... $46,053 $45,769 $75,347 $46,053 $50,805 $83,399
------- ------- ------- ------- ------- -------
Adjusted revenues, as defined above, were slightly increased at
$46,053,000 in fiscal 2002 from $45,769,000 in fiscal 2001. Adjusted
revenues decreased 38% to $45,769,000 in fiscal 2001 from $75,347,000 in
2000. Adjusted software product license revenues increased by 43% from
fiscal 2001 to fiscal 2002, and decreased 49% from fiscal 2000 to 2001.
Adjusted consulting revenues decreased 12% from fiscal 2001 to fiscal 2002,
and decreased 55% from fiscal 2000 to 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, and 8% from fiscal 2000 to 2001.
Total actual revenues decreased 9% to $46,053,000, in fiscal 2002 from
$50,805,000 in 2001. Fiscal 2001 revenues represented a 39% decrease from
revenues of $83,399,000 in 2000. Software product license revenues
increased 36% from fiscal 2001 to fiscal 2002, and decreased 49% from
fiscal 2000 to 2001. Consulting revenues decreased 20% from fiscal 2001 to
fiscal 2002, and decreased 54% from fiscal 2000 to 2001. Maintenance
revenues from first year and renewed maintenance agreements, both of which
are recognized ratably over the maintenance period, decreased 19% from
fiscal 2001 to fiscal 2002 and decreased 11% from fiscal 2000 to 2001.
Maintenance agreements are renewed annually by most of the Company's
maintenance customers. This decrease primarily reflects the absence of the
maintenance revenue attributable the HR/Payroll product line in the current
fiscal year as compared to the prior year which includes nine months of
HR/Payroll maintenance. In addition, some maintenance contracts expired
without renewal. Reimbursable expenses decreased 36% to $834,000 in fiscal
2002, from $1,307,000 in fiscal 2001, and decreased 62% from fiscal 2000 to
2001.
Software product license revenues in the North American market
decreased by 18% in fiscal 2002. The Company believes that this decrease is
a continuation of the industry-wide slow-down in ERP software sales in
North America over the last two years. In the European market, the
Company's software license sales have grown by 74% over the prior year.
This was due to a combination of improved marketing of the Company's
products in some regions, and a perceived slight improvement in the
software sales environment in Europe when compared to the prior year.
Software license sales in the Asia/Pacific Rim region increased by 148% to
$2,853,000 in fiscal 2002, from $1,150,000 in fiscal 2001, which was due
primarily to an increase in sales through the Company's distributor in
Japan. Within Europe, most of the increases in software product license
revenues were experienced in Spain and the Benelux, while sales in the UK
were slightly down.
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
decrease, future period services revenues generally decrease as a result.
In fiscal 2002, consulting and other services revenues decreased 20%, from
fiscal 2001 results. Services revenues in North America were affected by
the absence of revenue associated with the HR/Payroll product line, and
hampered by fewer new customers, due to lower new license revenues. In the
European market, services revenues were flat in comparison to the prior
year, bolstered in part by some additional activity related to the Euro
conversion. Fiscal 2001 consulting and other services revenues decreased
54%, or $18,126,000, over fiscal 2000 results.
As a percentage of total revenues, the Company's international
operations grew to 45% in fiscal 2002 and remained relatively consistent at
33% and 32% in fiscal years 2001 and 2000 respectively. The revenue growth
in 2002 reflects the increases in the Company's share of the Spain and
Japanese markets.
11
ROSS SYSTEMS, INC AND SUBSIDIARIES
The Company's largest Pacific Rim contract represents a distributor
agreement with a Japanese distributor whereby the distributor has an
exclusive license to reproduce and sell certain Ross products in the
Pacific Rim. The Company negotiated agreements whereby annual minimum
royalties of $1.9 million, $755,000 and $1.9 million were earned during
fiscal 2002, 2001 and 2000, respectively. The changes in this source of
revenue reflect an improving market in fiscal 2002, and a weakening of
demand in fiscal year 2001.
Revenues have been derived from a relatively large number of
customers. No single customer accounted for more than 10% of revenues
during fiscal 2002, 2001 or 2000. The Company's customers are evenly spread
among the industry verticals within the process manufacturing market .
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, 2002, 2001, and 2000 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 revenues and cost of services by $834,000, $1,307,000 and
$3,395,000 for fiscal years 2002, 2001, and 2000 respectively.
Costs of software product licenses. 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 2002 increased by 91% to
$1,870,000 from fiscal 2001. This increase was due to increased third party
royalties associated with the larger volume of software license sales in
the 2002, and a higher third party content in software license sales. In
fiscal 2001, costs of software product licenses decreased by 54% to
$980,000 from $2,137,000 in the prior year. This decrease was due to the
overall reduced software volumes. As a percent of software revenue, third
party royalties comprised 14% in fiscal 2002, compared to 10% for fiscal
2001, and 11% for fiscal 2000.
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 the Company also uses outside consultants to supplement Company
personnel in meeting peak customer consulting demands. Costs of consulting,
maintenanceand other services, net of reimbursable expenses, decreased 40%
to $9,763,000 from $16,288,000, and decreased 60% in fiscal 2001 from
$41,016,000 in fiscal 2000. The lower levels of expenditure in fiscal 2002
reflect the savings in employee costs as a result of the significant
headcount reduction in 2001 affecting 2002, and the absence of services and
customer support costs relating to the HR/Payroll product line sold in the
prior year. The decline in fiscal 2001 is composed primarily of a
$4,183,000 decrease in third party service costs, and a decrease of $
8,502,000 in employee expenses. The fiscal 2002 levels of personnel in
services and customer support have produced improved productivity for the
year, resulting in improving margins.
Gross Profit Margins. The Company's gross profit margins resulting
from consulting, maintenance and other services revenues for fiscal 2002,
2001, and 2000 were 70%, 59%, and 33%, respectively. The improvement in
gross profit margins from fiscal 2001 to 2002, and fiscal 2000 to 2001 is
due primarily to the greater proportion of maintenance revenue. Maintenance
revenues comprised 61% of services revenues in fiscal 2002, compared to 60%
in fiscal 2001, and 43% in fiscal 2000. Maintenance revenues are less
affected by cyclical economic factors, whilst consulting revenues will vary
according to current market and economic conditions. Consulting,
maintenance and other service revenues represented 71% of total revenues in
fiscal 2002, 81% of total revenues in fiscal 2001, and 77% of total
revenues in fiscal 2000. This was due to the decrease in maintenance and
consulting revenues in 2002 associated with the sale of the HR/Payroll
product line in the third quarter of 2001, and an increase in license
revenues in fiscal 2002 over fiscal 2001.
Software Product License Sales and Marketing Expenses. Software
product license sales and marketing expenses decreased by 5% to $14,318,000
in fiscal 2002 from $15,026,000 in fiscal 2001, and decreased by $5,559,000
or 27% in fiscal 2001 as compared to fiscal 2000. The decreases for fiscal
2002, and 2001 are a result of the decreased headcount of approximately 50%
less marketing and sales personnel in fiscal years 2002 and 2001 over
fiscal 2000, and lower marketing expenditure. Marketing expenditure was
increased towards the end of fiscal 2002 as the Company's planned new
initiatives in this area started to take effect. However this increase did
not materially impact the year's overall expenditure.
12
ROSS SYSTEMS, INC AND SUBSIDIARIES
Product Development Expenses. Product development expenditures for the
past three years were as follows (in thousands):
Year Ended June 30,
--------------------------------------
2002 2001 2000
---- ---- ----
Product development ................................................................... 11,520 $ 11,496 $ 10,003
Amortization of previously capitalized software development costs ............. (7,184) (7,369) (6,875)
------ ------ ------
Expenses, excluding amortization ............................................. 4,336 4,127 3,128
Capitalized software development costs incurred during year ................... 4,181 6,878 12,127
------ ------ ------
Total expenditures ................................................................... $ 8,517 $ 11,005 $ 15,255
------ ------ ------
Total expenditures as a percent of total revenues ..................................... 19% 22% 19%
------ ------ ------
Capitalized software, net of amortization, as a percentage of total expenditures ...... (35%) (4%) 34%
------ ------ ------
Product development expense was virtually unchanged in fiscal 2002, as
compared to fiscal 2001. In fiscal 2001, product development expense
increased 15% from fiscal 2000. This increase in expense was primarily due
to a decrease in capitalized development costs in fiscal 2002 of 39% from
$6,878,000 in fiscal 2001, and a decrease in fiscal 2001 of 43% from
$12,127,000 in fiscal 2000. As a percentage of total revenues, fiscal 2002
total development expense decreased slightly to 19% in fiscal 2002 from 22%
in fiscal 2001 and 19% in fiscal 2000.
During fiscal 2002, product development expenditures were focused on
expanding integrated internet/ERP functionality while incorporating some of
the latest technologies available. Not included in the above expenditure
was a fourth quarter, non-cash charge of $10,938,000 for previously
capitalized software costs written off due to technology changes and
changes in product direction. (See Note 1(r) in the notes to the
Consolidated Financial Statements below). Product development expenditures
during fiscal 2001 and 2000 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 decreased 1% to $4,683,000 in fiscal 2002 over fiscal 2001, and
decreased 38% to $4,737,000 in fiscal 2001 over 2000. The savings in costs
achieved in 2002 and 2001 are primarily due to the closure or consolidation
of several regional offices, and a reduction in employee costs associated
with a lower headcount.
Provision for Doubtful Accounts. In fiscal 2002, 2001, and 2000, the
Company recorded provisions of $1,444,000, $1,514,000, and $4,645,000,
respectively. These provisions represent management's best estimate of the
doubtful accounts for each period. The significantly higher provision in
fiscal year 2000 reflects the higher accounts receivable balances in that
year, commensurate with revenues exceeding $80 million for fiscal 2000. The
lower provision in fiscal 2002 was made possible by tighter and better
controls over accounts receivable collections coupled with lower accounts
receivable balances in line with revenues exceeding $45 million for fiscal
2002.
Amortization of Other Assets. Amortization of other assets was zero in
fiscal 2002 compared to $691,000 in the prior fiscal year. 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)(f) in the Notes to the Consolidated Financial
Statements on page F-8.
Assets reviewed for diminution in value in accordance with Statement
of Financial Accounting Standards No. 142, include goodwill relating to the
acquisition of HiPoint Systems Inc. in fiscal 1999, the acquisition of
Bizware, Inc. in 1998, and the acquisition of the Company's Spanish
distributor in 1997. There was no impairment of these assets.
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
13
ROSS SYSTEMS, INC AND SUBSIDIARIES
quarter of fiscal 2002, it became clear that some of the risk relating to
the France office closure had been resolved. As a result the Company
recorded a non-recurring gain of $650,000 arising from the reduction of the
reserve described above.
At the end of the first quarter of fiscal 2001, the Company recorded
an expense of $790,000 to cover separation costs associated with 125
employees employed in sales, marketing, services, and product development
in North America and Europe.
During Q3 fiscal 2000 the Company recorded a $1,145,000 expense to
cover the liability arising from separation costs associated with 19
employees employed in sales, marketing, services and product development in
North America and Europe.
Non-cash Capitalized Software Impairment Charge. During 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, 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
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. The company will 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 expensed.
The aggregate value of unamortized software written down in the fourth
quarter of fiscal 2002 was $10,938,000. This action has no effect on the
Company's cash position or cashflows.
14
ROSS SYSTEMS, INC AND SUBSIDIARIES
Other Income and Expense. Interest income has diminished over the
fiscal years 2000 through 2002 due to lower invested cash. Interest expense
decreased in fiscal 2002 as compared to fiscal 2001, and 2001 as compared
to fiscal 2000, due to lower utilization of the Company's revolving credit
facilities. Foreign exchange benefit and expense arises on converting
foreign currency transactions or short-term balances to local currency
throughout the year. The foreign exchange loss in fiscal 2002 is due to net
adverse movements in currency exchange rates during the year and
particularly relating to the conversion of the Company's continental
subsidiaries to the Euro in the third quarter.
Income Taxes. The Company recorded net income tax expense of $132,000
during fiscal 2002. This expense is made up of foreign withholding taxes
and income tax expense totaling $432,000 offset by tax refunds totaling
$300,000. The Company recorded income tax expense of $9,000 during fiscal
2001. This amount consists of tax accruals and payments of $244,000 offset
by tax refunds totaling $235,000. The Company recorded income tax expense
of $349,000 during fiscal 2000. This expense relates to foreign withholding
taxes expensed during the period in certain foreign jurisdictions.
At June 30, 2002, 2001 and 2000, the Company had net income taxes
payable of $15,000, $75,000, and $248,000 respectively. These tax
liabilities primarily relate to various taxing jurisdictions in North
America. The Company anticipates recording future foreign withholding tax
expenses related to its Japanese distributorship, representing 10% of
future annual royalty payments from this distributor . At June 30, 2002,
the Company had net operating loss carryforwards of approximately
$33,829,000, $14,473,000 and $8,449,000 for federal, California and foreign
tax purposes, respectively.
Liquidity and Capital Resources
During fiscal 2002, net cash provided by operating activities
decreased by $8,983,000 from $14,058,000 in the prior year to $5,075,000 in
the current year. An aggregate net increase in non-cash charges for
depreciation, amortization, capitalized software cost impairment, and
provisions for uncollectible accounts of $9,384,,000 is offset by an
increase in the Company's loss of $8,582,000. This reflects primarily the
non-cash charge of $10,938,000 for software assets impaired which decreased
the Company's earnings but did not affect the Company's cash position.
Before inclusion of changes in operating assets and liabilities, the
Company's cash provided by operating activities increased by $742,000 from
$10,384,000 in fiscal 2001 to $11,126,000 in fiscal 2002. An aggregate
decrease in the changes in operating assets and liabilities, including
accounts receivable, deferred revenues, pre-paid expenses, accounts payable
and accrued expenses of $9,725,000 during fiscal 2002, 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. This change in accounts receivable and deferred revenues was
attributable mainly to the non-recurring effect of the disposition of the
HR/Payroll product line in fiscal 2001, which included certain accounts
receivable and deferred revenue balances. An accounts payable and accrued
expenses reduction of $3,099,000 in fiscal 2002, was in line with a similar
reduction of $3,189,000 in fiscal 2001.
The net cash used for investing purposes has decreased by $256,000
from $5,159,000 in fiscal 2001 to $4,903,000 in fiscal 2002. This
represents a decrease in net computer software costs capitalized in 2002 of
$2,571,000 and an increase in property and equipment purchases of $463,000.
The reduction in capitalized computer software costs reflects the absence
of development relating to the HR/Payroll product line which was sold in
fiscal 2001. In conjunction with the product line disposition the Company
transferred net assets and liabilities realizing from the transaction
$1,567,000 of net cash flow in fiscal 2001.
Cash flows from financing activities decreased $4,455,000 from net
repayments in the prior year of $5,059,000 to net repayments in the current
year of $604,000. In fiscal 2002, repayments under the credit line were
less by $4,798,000 than in fiscal 2001. This reflects the $555,000 repaid
in fiscal 2002 compared to the $5,353,000 repaid in fiscal 2001. 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 the Company received $2,000,000 in a preferred stock issuance. The
Company financed its continuing operations during fiscal 2002 through cash
generated from operations and available credit facilities.
At June 30, 2002, the Company had $5,438,000 of cash and cash
equivalents. The Company also had a revolving credit facility with an
asset-based lender with a maximum credit line of $5,000,000, a maturity
date of 30 September, 2002, and an interest rate equaling the Prime Rate
plus 2%. Subsequent to year end, the Company secured a new line of credit
replacing the former line. The new line of credit with an asset-based
lender has a
15
ROSS SYSTEMS, INC AND SUBSIDIARIES
maximum of $5,000,000, the same as the expiring line, and a maturity
date of September 23, 2004 Borrowings under the credit facility are
collateralized by substantially all assets of the Company and bears
interest at prime plus 2% (approximately 6.75% at September 24, 2002). At
June 30, 2002, the Company had $3,365,000 outstanding against the
$5,000,000 revolving credit facility, and based on the eligible accounts
receivable at June 30, 2002, the Company's cash and remaining borrowing
capacity under the revolving credit facility total approximately
$5,533,000. This represents a decrease in total availability of cash of
$461,000 from June 30, 2001. The Company expects to be cash positive for
the year ending June 30, 2003.
On February 6, 1998, the Company closed a private placement of up to
$10,000,000 of convertible subordinated debentures to certain institutional
investors (the "Investors") pursuant to Regulation D promulgated under the
Securities Act of 1933, as amended. The Investors invested $6,000,000 on
February 6, 1998 and $4,000,000 on June 11, 1998. The material agreements
between the Company and each Investor have been filed as exhibits to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission by the Company on February 12, 1998. $3,033,000 and $1,933,000
of these debentures remained outstanding at June 30, 1999 and June 30,
2000, respectively. With the exception of the redemption described below,
the difference between the original $10,000,000 borrowing and amounts
outstanding at the above mentioned dates represents conversion of the debt
into shares of the Company's Common Stock at various conversion prices as
determined in accordance with the convertible debenture agreement. The
Company notified the Investors that it would redeem $4,000,000 of the
convertible subordinated debentures on October 7, 1998 (the "Redemption
Date") at a redemption price of $4,320,000 (108 percent of the face value
of the redeemed debentures) plus interest accrued through the redemption
date. On the Redemption Date, the Company actually redeemed $2,667,000 of
the convertible subordinated debentures at a redemption price of
$2,880,000. The difference between the face amount of debentures redeemed
and the total redemption price paid represents the conversion premium which
has been reported as an extraordinary item during fiscal 1999. The Company
and the Investor holding the convertible subordinated debenture that was
not redeemed negotiated certain changes to the conversion features of the
debenture that, among other things, precludes conversion prior to October
7, 1999.
In December of 2000, it was determined that the investor's aggregate
conversions had reached the Nasdaq exchange imposed limit of 20% of the
total outstanding shares of the Company, calculated as of the date the
debentures were originally issued. Pursuant to the terms of the debenture
agreement, the Company requested the Nasdaq to waive the 20% dilution limit
to allow the remainder of the debentures to be converted. The Nasdaq denied
this request. Next, as required by the debenture agreement, the Company
placed the additional dilution request to a vote of the shareholders. The
shareholders denied the debenture holders' request for additional dilution.
Therefore, in accordance with the debenture agreement, the remaining
debentures were redeemed for cash on June 29, 2001. A contractual payment
of $120,000 for the conversion was paid and recorded as additional interest
expense during the quarter ended June 30, 2001. Per the terms of the
agreement, total payments to the debentures holders were approximately
$919,000, including the contractual payment of $114,000. As of June 30,
2001 no debentures remained outstanding.
On June 29, 2001, the Company issued 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. 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 earn interest at the rate of 7.5%.
The Company has 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
16
ROSS SYSTEMS, INC AND SUBSIDIARIES
As of June 30, 2002, future minimum lease payments under non-cancelable
operating leases were as follows (in thousands):
Fiscal Year
- ----------
2003 $944
2004 803
2005 304
2006 298
Thereafter................. 2,013
------
Total future minimum lease $4,362
Rent expense approximated $1,236,000, $2,267,000, and $3,612,000, for
fiscal 2002, 2001, and 2000, respectively.
New accounting pronouncements
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. Under the new rules,
goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets
will continue to be amortized over their useful lives. Goodwill
attributable to each of the Companies reporting units was tested 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 historical and projected financial information. The
initial phase of the impairment tests were performed within six months of
adoption of SFAS 142 or December 31, 2001, and are required at least
annually thereafter. On an ongoing basis (absent of any impairment
indicators), we expect to perform our impairment tests during the June
quarter, in connection with our annual planning process.
Accumulated amortization of goodwill was $2,233,000 and $7,706,000 at
June 30, 2001 and 2000, respectively. 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. Net loss and loss per share for fiscal 2000, adding back
goodwill amortization of $1,004,000 ($0.43 per basic and diluted share)
would have been $(8,658,000), $3.72 per basic and diluted share. Prior to
July 1, 2001, goodwill was being amortized over periods ranging from 7 to
10 years.
In June 2001, the Financial Accounting Standards Board approved the
issuance of Statements of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations." SFAS 143 establishes
accounting standards for the recognition and measurement of legal
obligations associated with the retirement of tangible long-lived assets
and requires recognition of a liability for an asset retirement obligation
in the period in which it is incurred. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after
June 15, 2002. The adoption of SFAS 143 will not have a current impact on
the Company's consolidated financial statements.
In October 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting
for the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The adoption of SFAS 144 will not have a
current impact on the Company's consolidated financial statements.
In April 2002, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 145, "Rescission of SFAS No. 4, 44,
64, Amendment of SFAS No. 13, and Technical Corrections." SFAS 4, which was
amended by SFAS 64, required all gains and losses from the extinguishment
of debt to be aggregated and, if
17
ROSS SYSTEMS, INC AND SUBSIDIARIES
material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Opinion 30 will now be used to
classify those gains and losses. SFAS 13 was amended to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
The adoption of SFAS 145 will not have a current impact on the Company's
consolidated financial statements.
In July 2002, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." Generally, SFAS 146 provides that
defined exit costs (including restructuring and employee termination costs)
are to be recorded on an incurred basis rather than on a commitment basis
as is presently required. SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS 145 will
not have a current impact on the Company's consolidated financial
statements.
Other Matters
Risk Factors
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 Annual
Report on Form 10-K and the other information, our financial statements and
the related notes incorporated by reference into this Annual Report on Form
10-K.
The Company's software product license revenues can fluctuate
depending upon such factors as overall trends in the United States and
International economies, new product introductions by the Company, hardware
vendors and other software vendors as well as customer buying patterns.
Because the Company typically ships software products within a short period
after orders are received, and therefore maintains a relatively small
backlog, any weakening in customer demand can have an almost immediate
adverse impact on revenues and operating results. Moreover, a substantial
portion of the revenues for each quarter is attributable to a limited
number of sales and tends to be realized in the latter part of the quarter.
Thus, even short delays or deferrals of sales near the end of a quarter can
cause substantial fluctuations in quarterly revenues and operating results.
Finally, certain agreements signed during a quarter may not meet the
Company's revenue recognition criteria resulting in deferral of such
revenue to future periods. Because the Company's operating expenses are
based on anticipated revenue levels and a high percentage of the Company's
expenses are relatively fixed, a small variation in the timing of the
recognition of specific revenues can cause significant variation in
operating results from quarter to quarter.
Our business maybe 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 grow our business profitably. If the economic or market
conditions further deteriorate, this could have a material adverse impact
on our results of operations and cash flow.
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, our failure to compete successfully against those remaining
could harm our business operating results and financial condition.
Our stock price is volatile. Our stock price, like that of other
technology companies, is subject to volatility because of factors such as
the announcement of new products, services or technological innovations by
us or 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.
18
ROSS SYSTEMS, INC AND SUBSIDIARIES
Our business may suffer if we cannot protect our intellectual
property. We generally rely upon patent, copyright, trademark and trade
secret laws and contract rights in the United States and in other countries
to establish and maintain our 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 our proprietary rights to the
same extent as do the laws of the United States. Therefore, there can be no
assurance that we will be able to adequately protect our proprietary
technology against unauthorized third-party copying or use, which could
adversely affect our competitive position. Further, there can be no
assurance that we will be able to obtain licenses to any technology that we
may require to conduct our business or that, if obtainable, such technology
can be licensed at a reasonable cost.
We may become involved in litigation that may materially adversely
affect us. 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 us to
incur 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.
Retaining key management and employees are critical to our success.
Our success depends upon retaining and recruiting highly qualified
employees and management personnel. However, we may face severe challenges
in attracting and retaining such employees. Although our turnover is
historically low, if our ability to maintain a stable workforce is
significantly handicapped, our ability to compete may be adversely
affected.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange: The Company has a worldwide presence and as such
maintains offices and derives revenues from sources overseas. For fiscal
2002, international revenue as a percentage of total revenue was
approximately 45%. The Company's international business is subject to
typical risks of an international business, including, but not limited to:
differing economic conditions, changes in political climates, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, the Company's future results could be materially
adversely impacted by changes in these or other factors. The effect of
foreign exchange rate fluctuations on the Company in fiscal 2002 was not
material.
Interest Rates: The Company's exposure to interest rates relates
primarily to the Company's cash equivalents and certain debt obligations.
The Company invests in financial instruments with original maturates of
three months or less. Any interest earned on these investments is recorded
as interest income on the Company's statement of operations. Because of the
short maturity of the Company's investments, a near-term change in interest
rates would not materially affect the Company's financial position, results
of operations, or cash flows. Certain of the Company's debt obligations
include a variable rate of interest. A significant, near-term change in
interest rates could materially affect the Company's financial position,
results of operations or cash flows.
The Company did not engage in any derivative/hedging transactions.
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 Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Previous independent accountants.
(i) On July 10, 2002, the Company dismissed Arthur Andersen LLP
("Andersen") as the Company's independent public accountants. The
Company also engaged BDO Seidman, LLP to serve as the Company's
independent public accountants for the year ended June 30, 2002. The
audit committee of our board of directors participated in and approved
the decision to change independent accountants.
(ii) Andersen's reports on the Company's financial statements for the year
ended June 30, 2000 did not contain an adverse opinion or disclaimer
of opinion, nor was it qualified or modified as to uncertainty, audit
scope or accounting
19
ROSS SYSTEMS, INC AND SUBSIDIARIES
principles, except for a going concern qualification. Andersen's report for
the fiscal year ended June 30, 2001 was not qualified or modified as to
uncertainty, audit scope or accounting principles.
(iii)In connection with its audits for the fiscal years ended June 30,
2000 and 2001, and through dismissal , there have been no
disagreements with Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to Andersen's satisfaction, would
have caused them to make reference to the subject matter in connection
with their report on the Company's financial statements. Also, there
were no reportable events, as defined in Item 304(a)(1)(v) of
Regulation S-K.
(iv) On July 10, 2002, the Company provided Andersen with a copy of the
foregoing disclosures.
(v) Subsequently, Andersen verbally informed the Company that, effective
June 30, 2002, Andersen has stopped responding to notices of changes
in certifying accountants due to lack of personnel. Therefore,
Andersen will not supply a letter which states whether or not they
agree with the Company's disclosures contained in this filing.
(b) New independent accountants.
(i) Effective July 11, 2002, the Company retained BDO Seidman, LLP, to
perform the annual audit of our financial statements for the fiscal
year ended June 30, 2002. During the two most recent fiscal years and
through July 10, 2002, we have not consulted with BDO Seidman, LLP
regarding the application of accounting principles to a specific
transaction, either completed or proposed; or the type of audit
opinion that might be rendered on our financial statements. Further,
the Company did not consult BDO Seidman, LLP on any matter that was
either the subject of a disagreement or reportable event with Arthur
Andersen LLP as described in Regulation S-K, item 304(a)(2).
20
ROSS SYSTEMS, INC AND SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K with respect to
identification of directors is incorporated by reference from the
information contained in the section captioned "Election of Directors" in
the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held November 14, 2002 (the Proxy Statement), a copy of
which will be filed with the Securities and Exchange Commission before the
meeting date.
The following additional information pertains to executive officers of
the Company. There are no family relationships between any director or
executive officer and any other director or executive officer of the
Company. Executive officers serve at the discretion of the Board of
Directors.
Executive Officers of Ross Systems
----------------------------------
Name Age Position
J. Patrick Tinley....................................... 54 Chairman and CEO, and Director
Robert B. Webster....................................... 54 Executive Vice President and Secretary
Verome M. Johnston...................................... 37 Vice President and Chief Financial Officer
Eric W. Musser.......................................... 37 Vice President and Chief Technology Officer
Rick Marquardt.......................................... 49 Senior Vice President Marketing and Sales
Mr. Tinley was promoted to Chairman & 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 the Company since 1993. Mr. Tinley joined the Company in November 1988
as Executive Vice President, Business Development and has served as
Executive Vice President, Product Development and Executive Vice President,
Product Development & 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. Webster, EVP Operations and Secretary is also a director of the
Company. Mr. Webster joined the Company in June 1998 as VP/CFO and
Secretary and was later promoted to EVP Operations in December 2000 and
elected director in August 2001. Mr. Webster is a Certified Public
Accountant in the State of Georgia. Mr. Webster received both BS in
Accounting and Computer Science, as well as an MBA in Information Systems
degrees from St. Peter's College.
Prior to joining the Company, Mr. Webster served, since February 1995,
as EVP/CFO of Americomm Holdings, Inc. and prior to that in a progression
of more senior financial management positions at both Wang Laboratories,
Inc. and Unisys Corporation 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
21
ROSS SYSTEMS, INC AND SUBSIDIARIES
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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
22
ROSS SYSTEMS, INC AND SUBSIDIARIES
PART IV
ITEM 14. 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
----
Fiscal 2002 Report of BDO Seidman , LLP, Independent Certified Public Accountants............... F-1
Fiscal 2001, 2000 and 1999 Report of Arthur Andersen LLP, Independent Public Accountants ...... F-2
Consolidated Balance Sheets at June 30, 2002 and 2001........................................... F-3
Consolidated Statements of Operations--Years Ended June 30, 2002, 2001, and 2000................ F-4
Consolidated Statements of Cash Flows--Years Ended June 30, 2002, 2001, and 2000................ F-5
Consolidated Statements of Shareholders' Equity--Years Ended June 30, 2002, 2001, and 2000...... 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, 2002,
2001, and 2000 is filed as part of this Report and should be read
in conjunction with the Consolidated Financial Statements of Ross
Systems, Inc.
Schedule
Page
----
Page Report of Independent Certified Public Accountants on Valuation and
Qualifying Accounts............................................................................. S-1
II Valuation and Qualifying
Accounts................................................................................... S-2
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
23
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 26 th day of September, 2002.
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, 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 26, 2002
---------------------------------------- (Principal Executive Officer)
J. Patrick Tinley
/s/ Robert B. Webster Executive Vice President and Company Secretary September 26, 2002
----------------------------------------
Robert B. Webster
/s/ Verome M. Johnston Vice President and Chief Financial Officer September 26, 2002
---------------------------------------- (Principal Financial and Accounting Officer)
Verome M. Johnston
/s/ J. William Goodhew III Director September 26, 2002
----------------------------------------
J. William Goodhew
/s/ Frank M. Dickerson Director September 26, 2002
----------------------------------------
Frank M. Dickerson
/s/ Bruce J. Ryan Director September 26, 2002
----------------------------------------
Bruce J. Ryan
24
ROSS SYSTEMS, INC AND SUBSIDIARIES
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 2002
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 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.
4.1 Certificate of Designation of Rights, Preferences and Privileges of
Series B Preferred Stock of the Registrant (3)
4.2 Form of the subordinated debenture agreement due February 6, 2003
issued by the Registrant to each investor (5)
4.3 Registration Rights Agreement between the Registrant and each Investor
(5)
10.1 Preferred Share Rights Agreement, dated September 4, 1999 between the
Registrant and Registrar and Transfer Company (4)
10.2 Extension Agreement and Amendment to Loan Documents dated March 21,
1997 between Registrant and Coast Business Credit, a division of
Southern Pacific Thrift and Loan Association (6)
10.3 Extension Agreement and Amendment to Loan Documents dated August 18,
1995 between Registrant and CoastFed Business Credit Corporation
("Coast") (6)
10.4 First Amendment to Loan and Security Agreement dated June 30, 1995
between Registrant and Coast (6)
10.5 Loan and Security Agreement dated October 11, 1994 between Registrant
and Coast (6)
10.6 Employment Agreement dated January 7, 1999, between Mr. Patrick Tinley
and the Registrant (7)
10.7 Employment Agreement dated September 13, 1999, between Mr. Robert B.
Webster and the Registrant (8)
10.8 Convertible Preferred Stock Purchase Agreement dated June 29, 2001
between Registrant and Benjamin W. Griffith, III (9)
10.9 Loan and Security Agreement dated September 24, 2002 between
Registrant and Silicon Valley Bank
21.1 Listing of Subsidiaries of Registrant
23.1 Consent of BDO Seidman, LLP
24.1 Power of Attorney (included on signature page)
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
---------------------
(1) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 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
Quarterly Report on Form 10-Q filed May 6, 1996.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(5) Incorporated by reference to the exhibit filed with the Registrant's
current report on Form 8-K filed February 12, 1998.
25
ROSS SYSTEMS, INC AND SUBSIDIARIES
(6) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 10-K/A filed April 30, 1998.
(7) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
filed May 17, 1999.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-K filed September 28, 1999.
(9) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10K filed September 27, 2001.
26
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders
of Ross Systems, Inc.
We have audited the accompanying consolidated balance sheet of Ross Systems,
Inc. and subsidiaries as of June 30, 2002 and the related consolidated
statements of operations, shareholders equity and cash flows for the year then
ended. We have also audited the financial statements schedule for the year ended
June 30, 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
audit. The Company's Consolidated financial statements and financial statement
schedule as of June 30, 2001, and for each of the two years in the period 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 audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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
audit provides 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, 2002 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
Also, in our opinion, the 2002 schedule presents 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 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(h), these financial statements have been restated to
reflect the adoption of Emerging Issues Task Force 01-14 and revised to include
the transitional disclosures required by SFAS No. 142. We audited the
adjustments described in Note 1(h) that were applied to restate the 2001 and
2000 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, all such adjustments are
appropriate and have been properly applied. However, we were not engaged to
audit, review or apply any procedures to the 2001 or 2000 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 or 2000
financial statements taken as a whole.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Atlanta, Georgia
September 13, 2002 (Except for Note 6
as to which the date is September 24, 2002)
F-1
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 2001 and 2000 financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
August 17, 2001
*The 2000 Consolidated Balance Sheet and 1999 Consolidated Statement of
Operations, Shareholder's Equity, and Cash Flows are not required to be
present in the 2002 Annual Report
F-2
ROSS SYSTEMS, INC AND SUBSIDIARIES
June 30,
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30,
-------------------------
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ 5,438 $ 5,716
Accounts receivable, less allowance for doubtful accounts
of $ 3,379, and $2,930, in 2002, and 2001 respectively .............................. 12,319 10,128
Prepaid and other current assets ......................................................... 1,282 1,124
Note receivable from related party ....................................................... 850 750
-------- --------
Total current assets ................................................................ 19,889 17,718
Property and equipment, net .................................................................... 1,450 1,694
Computer software costs, net ................................................................... 14,036 27,918
Other assets ................................................................................... 2,243 3,132
-------- --------
Total assets ........................................................................ $ 37,618 $ 50,462
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term debt .......................................................................... $ 3,967 $ 4,522
Accounts payable ......................................................................... 2,682 4,920
Accrued expenses ......................................................................... 4,476 5,130
Income taxes payable ..................................................................... 15 75
Deferred revenues ........................................................................ 12,535 12,711
-------- --------
Total liabilities ................................................................... 23,675 27,358
-------- --------
Commitments and Contingencies
Shareholders' equity:
Convertible Preferred stock, no par value 5,000,000 shares authorized; 500,000
shares issued and outstanding at June 30, 2002 and 2001 .................................... 2,000 2,000
Common stock, $0.001 par value; 35,000,000 shares authorized; 2,625,378 and
2,565,989 shares issued and outstanding ............................................. 26 26
Additional paid-in capital ............................................................... 87,133 87,032
Accumulated deficit ...................................................................... (73,450) (63,876)
Accumulated other comprehensive deficit .................................................. (1,766) (2,078)
-------- --------
Total shareholders' equity .......................................................... 13,943 23,104
-------- --------
Total liabilities and shareholders' equity ..................................................... $ 37,618 $ 50,462
======== ========
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,
--------------------------------------
2002 2001 2000
---- ---- ----
Revenues:
Software product licenses.............................................................$ 13,026 $ 9,607 $ 18,943
Consulting and other services ......................................................... 12,179 15,213 33,339
Maintenance ........................................................................... 20,014 24,678 27,722
Reimbursable expenses ................................................................. 834 1,307 3,395
-------- -------- --------
Total revenues ................................................................... 46,053 50,805 83,399
-------- -------- --------
Operating expenses:
Costs of software product licenses .................................................... 1,870 980 2,137
Costs of consulting, maintenance and other services (inclusive of reimbursable
expenses of $834, $1,307, and $3,395 for 2002, 2001, and 2000 respectively, and
exclusive of non recurring
expense of $353 and $208 for 2001 and 2000 respectively) ......................... 10,597 17,595 44,411
Software product license sales and marketing (exclusive of non recurring
expense of $136 and $687 for 2001 and 2000 respectively) ............................. 14,318 15,026 20,585
Product development, net of capitalized computer software costs and amortized
computer software costs (exclusive of non recurring expense of $301 and $250
for 2001 and 2000
respectively) .................................................................... 11,520 11,496 10,003
General and administrative ............................................................ 4,683 4,737 7,612
Provision for uncollectible accounts .................................................. 1,444 1,514 4,645
Amortization of goodwill .............................................................. -- 691 1,004
Non-recurring costs (benefit) ......................................................... (650) 790 1,145
Non-cash charge for impairment of capitalized software costs .......................... 10,938 -- --
-------- -------- --------
Total operating expenses ......................................................... 54,720 52,829 91,542
-------- -------- --------
Operating profit (loss) .......................................................... (8,667) (2,024) (8,143)
Other income (expense):
Gain on sale of product line .......................................................... -- 2,372 --
Other financial, net .................................................................. (625) (1,181) (1,170)
-------- -------- --------
Net loss before income taxes ..................................................... (9,292) (833) (9,313)
Income tax expense ...................................................................... 132 9 349
Net loss .................................................................................... $ (9,424) $ (842) $ (9,662)
Preferred stock dividend ............................................................... (150) -- --
-------- -------- --------
Net loss available to common shareholders........................................ $ (9,574) $ (842) $ (9,662)
========== ======== ========
Net loss per common share--basic ............................................................ $ (3.65) $ (0.33) $ (4.15)
========== ======== ========
Net loss per common share--diluted .......................................................... $ (3.65) $ (0.33) $ (4.15)
========== ======== ========
Shares used in per share computation--basic ................................................. 2,625 2,566 2,330
========== ======== ========
Shares used in per share computation--diluted ............................................... 2,625 2,566 2,330
========== ======== ========
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,
-------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net loss ........................................................................... $ (9,424) $ (842) $ (9,662)
Adjustments to reconcile net loss to net cash provided by operating activities:
Non cash financing costs ...................................................... -- 60 --
Non-cash stock compensation costs ............................................. -- -- 50
Impairment of capitalized software costs .................................... 10,938 -- --
Depreciation and amortization of property and equipment ....................... 984 1,592 2,272
Amortization of computer software costs ....................................... 7,184 7,369 6,875
Amortization of goodwill ...................................................... -- 691 1,004
Provision for uncollectible accounts .......................................... 1,444 1,514 4,645
Changes in operating assets and liabilities, net of sale of product line:
Accounts receivable ..................................................... (3,646) 9,911 10,961
Prepaid and other current assets ........................................ 575 (149) 1,074
Income taxes recoverable/payable ........................................ 185 92 104
Accounts payable ........................................................ (2,218) (2,178) (3,367)
Accrued expenses ........................................................ (881) (1,011) (3,113)
Deferred revenues ....................................................... (66) (2,991) (612)
-------- -------- --------
Net cash provided by operating activities .......................... 5,075 14,058 10,231
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment, net ........................................... (740) (277) (308)
Computer software costs capitalized ................................................ (4,307) (6,878) (12,121)
Sale of product line, net of assets disposed ....................................... -- 1,567 --
Other .............................................................................. 144 429 126
-------- -------- --------
Net cash used in investing activities .............................. (4,903) (5,159) (12,303)
-------- -------- --------
Cash flows from financing activities:
Net cash paid on line of credit activity ........................................... (555) (5,353) (2,090)
Debt and capital lease payments .................................................... -- (1,723) (276)
Proceeds from issuance of preferred stock .......................................... -- 2,000 --
Proceeds from issuance of common stock ............................................. 101 17 222
Preference dividend paid ........................................................... (150) -- --
-------- -------- --------
Net cash (used in) provided by financing activities ................ (604) (5,059) (2,144)
-------- -------- --------
Effect of exchange rate changes on cash .................................................. 154 (134) (68)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ..................................... (278) 3,706 (4,284)
-------- -------- --------
Cash and cash equivalents at beginning of fiscal year .................................... 5,716 2,010 6,294
-------- -------- --------
Cash and cash equivalents at end of fiscal year .......................................... $ 5,438 $ 5,716 $ 2,010
-------- -------- --------
See accompanying Notes to Consolidated Financial Statements
F-5
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Comparative numbers of shares have been restated to reflect the one for ten
reverse stock split. See accompanying Notes to the Consolidated Financial
Statements)
Accumulated
Preferred Stock Common Stock Other Total
---------------- -------------- Paid in Accumulated Comprehensive Shareholders' Comprehensive
Shares Amount Shares Amount Capital Deficit Deficit Equity Loss
------ ------ ------ ------ ------- ------- ------- ------ ----
Balances as of June 30, 1999 ........ -- -- 2,290 $ 23 $84,261 $(53,372) $(1,655) $29,257
Exercise of stock options ........... -- -- 1 -- --
Issuance of stock for hiring
bonus ............................. -- -- 2 50 50
Conversion of debentures ............ -- -- 73 1 1,247 1,248
Issuance of stock pursuant to
employee stock purchase plan ...... -- -- 14 222 222
Effect of foreign currency
translation ....................... (225) (225)
Net loss ............................ (9,662) (9,662)
-------
Comprehensive Loss .................. $(9,887)
=======
---- ----- ----- ---- ------- -------- ------- -------
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 $ 87,133 $(73,450) $(1,766) $13,943
==== ===== ===== ==== ======= ======== ======= =======
See accompanying Notes to Consolidated Financial Statements
F-6
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business and Summary of Significant Accounting Policies
(a) Business of the Company
Ross Systems Inc. (NASDAQ:ROSS) founded in 1972, supplies leading
enterprise solutions software designed for process manufacturing companies
primarily in the food and beverage, life sciences, chemicals, metals and
natural products industries. The Company offers the award-winning
iRenaissance(TM) family of software solutions which is an integrated suite
of enterprise resource planning (ERP II), financials, materials management,
manufacturing and distribution, supply chain management (SCM), advanced
planning and scheduling, customer relationship management (CRM), electronic
commerce, business intelligence and analytics applications. In addition to
the aforementioned software suites, the Company also provides professional
consulting services for implementation, custom application development and
education. It offers ongoing maintenance and support services via the
internet and telephone help desks.
The Company operates in one business segment and no individual
customer accounts for more than 10% of total revenues. The Company does not
have a concentration of credit risk in any one industry or geographic
region.
(b) 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.
(c) 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.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation is accumulated
using the straight-line and declining balance methods 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.
(e) Net Earnings (Loss) Per Common and Common Equivalent Share
Basic loss per common share are computed by dividing net earnings or
net loss by the weighted average number of common shares outstanding during
the period. Diluted loss per common and common equivalent share is computed
by dividing net earnings by the weighted average number of common and
common equivalent shares outstanding during the period. Common stock
equivalents are not considered in the calculation of net loss per share
when their effect would be antidilutive. As a result of the net losses
incurred in the years ended June 30, 2002, 2001, and 2000, the following
common share equivalents were antidilutive (in thousands) :
Year ended June 30,
-----------------------------
2002 2001 2000
---- ---- ----
Stock options ................................... 41 39 --
Warrants ........................................ 47 -- --
Convertible Debentures .......................... -- -- 11
Convertible Preferred shares .................... 500 1 --
----- ------ ------
Total .......................................... 588 40 11
----- ------ ------
When the Company is profitable, the only difference between the
denominator for basic and diluted net earnings per share is the effect of
common stock equivalents. In years of a loss, the denominator is the same
for basic and diluted loss per share.
F-7
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(f) Amortization of Other Assets
The other assets described in Note 4 are amortized using the
straight-line method over their estimated useful lives. Other assets have
generally resulted from business combinations accounted for as purchases
and are recorded at the lower of unamortized cost or fair value. The
Company annually reviews the carrying amounts of these assets for
indications of impairment, based on expected non-discounted cash flows
related to the acquired entities or products. Impairment of value, if any,
is recognized in the period it is determined. The Company reviews the
carrying value of goodwill in accordance with Financial Accounting
Standards No. 142, Goodwill and Other Tangible Assets. (See (p) below).
(g) Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements", the Company recognizes revenues from
licenses of computer software "up-front" provided that a non-cancelable
license agreement has been signed, the software and related documentation
have been shipped, there are no material uncertainties regarding customer
acceptance, collection of the resulting receivable is deemed probable, and
no significant other vendor obligations exist. The revenue associated with
any license agreements containing cancellation or refund provisions is
deferred until such provisions lapse. Where the Company has future
obligations, if such obligations are insignificant, related costs are
accrued immediately. When the obligations are significant, the software
product license revenues are deferred. Future contractual obligations can
include software customization, requirements to provide additional products
in the future and porting products to new platforms. Contracts which
require significant software customization are accounted for on the
percentage-of-completion basis. Revenues related to significant obligations
to provide future products or to port existing products are deferred until
the new products or ports are completed.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance
revenues, including revenues bundled with original software product license
revenues, and future unspecified enhancements to the Company's products,
are deferred and recognized over the related contract period, generally 12
months. The Company's revenue recognition policies are designed to comply
with American Institute of Certified Public Accountants Statement of
Position 97-2, "Software Revenue Recognition" (SOP 97-2).
(h) 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, 2002, 2001,
and 2000 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 $834,000, $1,307,000 and
$3,395,000 for fiscal years 2002, 2001, and 2000 respectively.
(i) 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
(i) completes a detail program design that encompasses product function,
feature and technical requirements and is ready for coding and confirms
that the product design is complete, that the necessary skills, hardware
and software technology are available to produce the product, that the
completeness of the detail program design is consistent with the product
design by documenting and tracing the detail program design to the product
specifications, and that the detail program design has been reviewed for
high-risk development issues and any related uncertainties have been
resolved through coding and testing or (ii) completes a product design and
working model of the software product, and the completeness of the working
model and its consistency with the product design have been confirmed by
testing. The Company evaluates realizability of the capitalized amounts
based on expected revenues from the product over the remaining product
life. Where future revenue streams are not expected to cover remaining
amounts to be amortized, the Company either accelerates amortization or
expenses remaining capitalized amounts. Amortization of such costs is
computed
F-8
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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). As of
June 30, 2002 and 2001, capitalized computer software costs approximated
$61,587,000 and $79,347,000 respectively, and related accumulated
amortization totaled $ 47,551,000 and $51,429,000 respectively. Software
costs related to the development of new products incurred prior to
establishing technological feasibility or after general release are
expensed as incurred
(j) 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.
(k) 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.
(l) Reclassifications
It is the Company's policy to reclassify prior year amounts to conform
with current year financial statement presentation when necessary.
(m) 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.
(n) 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, 2002, 2001, and 2000
were approximately $437,000, $607,000, and $1,517,000, respectively.
(o) Segment Information
The Company markets its products and related services primarily in
North America, Europe and Asia and primarily measures its business
performance based upon certain geographic results of operations. During
fiscal 2001, the Company divested its French subsidiary and adopted an
indirect sales approach in the French market. 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. Selected balance sheet and income statement information
pertaining to the various significant geographic areas of operation are as
follows:
F-9
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of and for the year ended June 30, 2002 (in thousands) :
Net Income Depreciation Capital
Gross Assets Revenue (Loss) and Amortization Expenditures
------------ -------- ---------- ---------------- ------------
Belgium ............................ $ 915 $ 1,233 $ 208 $ 13 $ 98
Netherlands ........................ 1,439 3,766 413 42 59
Germany ............................ 164 580 55 5 2
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
------------ -------- ---------- ---------------- ------------
Belgium ............................ $ 260 $ 1,113 $ 1 $ 22 $ --
Netherlands ........................ 1,174 2,511 184 43 35
France ............................. -- 362 (497) 13 --
Germany ............................ 149 961 102 2 --
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
------- ------- ------- ------- -------
As of and for the year ended June 30, 2000 (in thousands):
Net Income Depreciation Capital
Gross Assets Revenue (Loss) and Amortization Expenditures
------------ -------- ---------- ---------------- ------------
Belgium ............................ $ 416 $ 1,138 $ (620) $ 42 $ 13
Netherlands ........................ 658 2,963 (74) 68 29
France ............................. 2,261 3,782 (3,107) 63 8
Germany ............................ 360 1,626 179 2 --
Spain .............................. 4,185 5,411 (582) 177 45
United Kingdom ..................... 4,809 7,968 (785) 177 58
North America ...................... 51,606 60,511 (4,673) 2,747 155
------- ------- ------- ------- -------
Total .............................. $64,295 $83,399 $(9,662) $ 3,276 $ 308
------- ------- ------- ------- -------
(p) New Accounting Pronouncements
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. Under the new rules, goodwill will no longer
be amortized but will be subject to annual impairment tests in accordance with
the Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company applied the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of fiscal 2002. Goodwill
attributable to each of our reporting units was tested 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 historical and
projected financial information. The initial phase of the impairment tests were
performed within six months of adoption of SFAS 142 or December 31, 2001, and
are required at least annually thereafter. On an ongoing basis (absent of any
impairment indicators), we expect to perform our impairment tests during the
June quarter, in connection with our annual planning process.
Accumulated amortization of goodwill was $2,233,000 and $7,706,000 at
June 30, 2001 and 2000, respectively.
F-10
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. Net loss and loss per share for fiscal
2000, adding back goodwill amortization of $1,004,000 ($0.43 per basic and
diluted share) would have been $(8,658,000), $3.72 per basic and diluted share.
No tax effect has been provided in either year due to the valuation allowance on
deferred tax assets. Prior to July 1, 2001, goodwill was being amortized over
periods ranging from 7 to 10 years.
In June 2001, the Financial Accounting Standards Board approved the
issuance of Statements of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations." SFAS 143 establishes accounting standards for
the recognition and measurement of legal obligations associated with the
retirement of tangible long-lived assets and requires recognition of a liability
for an asset retirement obligation in the period in which it is incurred. The
provisions of this statement are effective for financial statements issued for
fiscal years beginning after June 15, 2002. The adoption of SFAS 143 will not
have a current impact on the Company's consolidated financial statements.
In October 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting for the impairment or disposal of long-lived assets. The provisions
of this statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The adoption of SFAS 144 will not have a
current impact on the Company's consolidated financial statements.
In April 2002, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 145, "Rescission of SFAS No. 4,
44, 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS 4, which was
amended by SFAS 64, required all gains and losses from the extinguishment of
debt to be aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in Opinion 30 will now
be used to classify those gains and losses. SFAS 13 was amended to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The adoption of SFAS
145 will not have a current impact on the Company's consolidated financial
statements.
In July 2002, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Generally, SFAS 146 provides that
defined exit costs (including restructuring and employee termination costs) are
to be recorded on an incurred basis rather than on a commitment basis as is
presently required. SFAS 146 is effective for exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS 145 will not have a
current impact on the Company's consolidated financial statements.
(q) 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
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 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.
F-11
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(r) 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, amortization expense of approximately $2,734,000 would be
recorded during 2003.
(2) Acquisitions, Divestitures and Note Receivable from Related Party
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
F-12
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
negative cash flows suffered by the French subsidiary. Management has also
effectively recorded what they deem 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. New
and existing customers in France receive maintenance services from French
speaking employees of the Company in Belgium or via the internet.
On December 30, 1996, the Company acquired a 100% ownership interest in
Ross Iberica, its distributor in Spain and Portugal for the previous five years,
in exchange for shares of the Company's common stock valued at approximately
$1,400,000. The acquisition was accounted for as a purchase, and 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 mandates a guaranteed purchase price at a measurement date which has
been mutually extended by the parties in conjunction with the extension of the
maturity to July 8, 2003 of a non interest bearing, recourse note payable, due
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, may 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 paying cash. The note receivable
described herein totaled $850,000 at June 30, 2002 and $750,000 at June 30,
2001.
(3) Property and Equipment
A summary of property and equipment follows (in thousands):
June 30,
---------------------------
(In thousands)
2002 2001
-------- --------
Computer equipment .............................. $ 5,691 $ 9,101
Furniture and fixtures .......................... 1,143 1,782
Leasehold improvements .......................... 1,508 1,546
-------- --------
8,342 12,429
Less accumulated depreciation and amortization .. (6,892) (10,735)
-------- --------
$ 1,450 $ 1,694
======== ========
(4) Other Assets
A summary of other assets follows (in thousands):
June 30,
---------------------------
(In thousands)
2002 2001
------- -------
Goodwill ........................................ $ 4,414 $ 4,414
Note receivable ................................. -- 750
Other ........................................... 62 201
------- -------
4,476 5,365
Less accumulated amortization ................... (2,233) (2,233)
------- -------
$ 2,243 $ 3,132
======= =======
F-13
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) Accrued Expenses
A summary of accrued expenses follows (in thousands):
June 30,
--------------------
(In thousands)
2002 2001
------ ------
Accrued vacation, salary and social costs ............... $1,502 $1,201
Sales, Use, VAT and GST taxes payable ................... 1,159 1,121
Interest payable ........................................ 63 32
Professional fees ....................................... 281 69
Royalties ............................................... 806 791
Other ................................................... 665 1,916
------ ------
$4,476 $5,130
------ ------
(6) Debt and Subsequent Event
As of June 30, 2002, the Company had a revolving credit facility with a
lender for up to $5,000,000 which was collateralized by substantially all assets
of the Company, The facility had an expiration date of September 30, 2002.
During the years ended June 30, 2002, 2001, and 2000, the interest rate remained
unchanged at 9%. At June 30, 2002, approximately $3,370,000 was outstanding
under the Company's revolving credit facility. At June 30, 2001, approximately
$4,013,000 was outstanding under the Company's then existing $5,000,000
revolving credit facility.
Subsequent to year end, the Company replaced its existing credit
arrangements, entering into a new revolving credit facility agreement with a
bank. This facility has a maturity date of September 23, 2004. The credit
facility bears interest at the prime rate plus 2% (approximately 6.75% at
September 13, 2002) and is collateralized by substantially all 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.
The Company maintains other credit facilities in Spain. 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 $597,000 and $244,000 at June 30, 2002 and 2001
respectively.
As of June 30, 2002 and 2001, the Company had outstanding capital lease
obligations aggregating $0 and $265,000 respectively. As of June 30, the
Company's future obligations under capital leases are as follows (in thousands):
2002 2001
---- ----
Fiscal Year:
2002............................................ $ -- $299
2003............................................ --
---- ----
Total future capital lease payments ............. -- 299
Less amounts representing interest .............. -- 34
---- ----
$ -- $265
---- ----
F-14
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) Commitments and Contingencies
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, 2002, future
minimum lease payments under non-cancelable operating leases were as follows (in
thousands):
Fiscal Year
- -----------
2003..................................... $944
2004..................................... 803
2005..................................... 304
2006..................................... 298
Thereafter............................... 2,013
------
Total future minimum lease payments...... $4,362
------
Rent expense approximated $1,236,000, $2,267,000, and $3,612,000, for
fiscal 2002, 2001, and 2000, respectively.
(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 factor.
On June 29, 2001, the Company issued mandatorily convertible preferred
stock to a qualified investor in a private placement transaction. In summary,
the investor purchased 500,000 preferred shares at $4 per share yielding
$2,000,000 for the Company. This price represented a premium to the market for
the Company's common stock at the time of issuance. The average closing share
price of the Company's common stock for the 30 trading days prior to the private
placement was approximately $2.22. The preferred shares can be converted at
$4.00 per share after June 29, 2002 but before June 29, 2006, on a one for one
basis. The shares earn dividends at the rate of 7.5%. 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) Employee Stock Plans
At June 30, 2002, the Company had three stock-based compensation plans,
which are described below. The Company applies Accounting Principles Board
Opinion No. 25 and Emerging Issues Task Force release 96-18, "Accounting for
Equity Instruments that are issued to Other Than Employees for Acquiring or in
Conjunction with Selling Goods or Services", and related Interpretations, as
applicable, in accounting for its plans. No compensation cost has been
recognized for its Stock Option Plan and its Stock Purchase Plan. Had
compensation cost for the Company's Stock Option and Stock Purchase Plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement 123, the Company's net loss and
net loss per share would have been the pro forma amounts indicated below (in
thousands, except per share data):
F-15
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Year ended June 30,
----------------------------------------------
2002 2001 2000
-------- -------- --------
Net loss available to common shareholders:
As reported ......................................... $ (9,574) $ (842) $ (9,662)
Pro forma ........................................... (9,980) (1,302) (10,657)
Net loss per share:
As reported basic ................................... $ (3.65) $ (0.33) $ (0.41)
As reported diluted ................................. (3.65) (0.33) (0.41)
Pro forma basic ..................................... (3.80) (0.52) (0.46)
Pro forma diluted ................................... (3.80) (0.52) (0.46)
The above numbers have been restated to reflect the Company's 1 for 10
stock split on April 27, 2001. For purposes of computing the pro forma amounts
above, the Black-Scholes option pricing model was used. The assumptions used in
this model are disclosed for the individual plans below.
(a) Stock Option Plan
The Company has reserved 210,000 shares of common stock for issuance
under its 1988 Incentive Stock Plan and 510,000 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, 2002, 2001
and 2000 and activity for the fiscal years then ended is presented below:
Number of Weighted Average
Shares Exercise Price Exercisable
---------- ---------------- ----------
Balance as of June 30, 1999 .................... 178,600 $ 29.70 86,000
Granted (at market value) ...................... 61,100 $ 25.80
Exercised ...................................... (1,000) $ 25.90
Canceled ....................................... (35,100) $ 28.80
--------
Balance as of June 30, 2000 .................... 203,600 $ 28.70 102,800
Granted (at market value) ...................... 165,219 $ 4.90
Canceled ....................................... (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
Canceled ....................................... (91,966) $ 20.34
--------
Balance as of June 30, 2002 .................... 326,795 $ 10.78 113,494
--------
F-16
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted average estimated grant date fair value of options granted
during fiscal 2002, 2001, and 2000 was $3.73, $4.49, and $25.80, respectively.
The following table summarizes information about the stock options
outstanding at June 30, 2002:
Options Outstanding
-----------------------------------------------------
Weighted Average Options Exercisable
Remaining ------------------------------
Shares Contractual Weighted Average Shares Weighted Average
Range of Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
------------------------ ----------- ---------------- ---------------- ----------- ----------------
$1.88-$1.88 ......................... 67,383 8.5 years $ 1.88 11,342 1.88
$3.25-$3.25 ......................... 6,394 9.1 years 3.25 0 0
$3.50-$3.50 ......................... 76,489 9.1 years 3.50 0 0
$3.75-$5.40 ......................... 40,831 9.0 years 4.62 29,450 4.65
$8.00-$11.88 ........................ 48,550 9.1 years 9.74 1,700 11.88
$13.75-$25.00 ....................... 23,500 7.4 years 21.32 11,800 21.99
$25.94-$25.94 ....................... 39,450 5.1 years 25.94 38,788 25.94
$26.56-$55.00 ....................... 21,080 5.1 years 34.00 17,296 34.67
$65.00-$65.00 ....................... 2,413 4.4 years 65.00 2,413 65.00
$67.50-$67.50 ....................... 705 3.5 years 67.50 705 67.50
Totals .............................. 326,795 8.1 years $ 10.78 113,494 $ 19.81
------- --------- --------- ------- ---------
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,
-------------------------------
2002 2001 2000
---- ---- ----
Expected life ..................... 5 5 5
Expected volatility ............... 80.4% 121.6% 104.76%
Risk-free interest rate ........... 5.0% 5.3% 6.5%
Expected dividend yield ........... * * *
* Not applicable
(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 29,146 shares,
11,409 shares, and 13,955 shares, to employees in fiscal 2002, 2001, and 2000
respectively. The weighted average fair value of those purchase rights granted
in fiscal 2002, and 2001, was $0.83 and $1.12, respectively. As of June 30,
2002, 128,314 shares had been issued under the ESPP.
F-17
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) Income Taxes
Gains and losses before income taxes include foreign gains before
income taxes of $2,425,000 for fiscal 2002 and foreign losses before income
taxes of $(1,280,000) and $(4,640,000) for fiscal years 2001, and 2000
respectively. Income tax expense for the years ended June 30, 2002, 2001 and
2000 consists of the following (in thousands):
2002 2001 2000
----- ----- -----
Current:
Federal ......................... $ -- $(140) $ --
Foreign ......................... 112 123 349
State ........................... 20 26 --
----- ----- -----
132 9 349
----- ----- -----
Deferred:
Federal ......................... -- -- --
Foreign ......................... -- -- --
State ........................... -- -- --
----- ----- -----
$ 132 $ 9 $ 349
===== ===== =====
For the years ended June 30, 2002, 2001, and 2000, 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):
2002 2001 2000
------- ------- -------
Income tax benefit at statutory rate ................................... (3,159) (283) (3,166)
State income tax benefit, net of federal income tax benefit ............ (13) (37) (422)
Change in beginning of year valuation allowance ........................ 3,028 3,063 1,526
Losses for which no benefit is recognized (foreign loss and rate) ...... -- 435 1,630
Rate differential related to foreign income and foreign tax withholdings 843 485 349
Amortization of other assets and other permanent differences ........... (567) (3,654) 432
------- ------- -------
$ 132 $ 9 $ 349
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at June 30, 2002
and 2001 were as follows (in thousands):
2002 2001
-------- --------
Accruals and reserves ....................... $ 670 $ 654
Net operating loss carryforward (federal) ... 11,502 13,728
Net operating loss carryforward (state) ..... 2,386 2,525
Net operating loss carryforward (foreign) ... 2,748 2,615
Foreign tax and research credit carryforwards 3,802 3,802
Fixed assets depreciation differences ....... 399 446
-------- --------
Total gross deferred tax assets .. 21,507 23,770
Less valuation allowance ......... (15,893) (12,865)
-------- --------
Net deferred tax assets .......... 5,614 10,905
-------- --------
Capitalized computer software costs ......... (8,616) (10,905)
-------- --------
Total gross deferred liabilities . (5,614) (10,905)
-------- --------
Net deferred taxes ...................... $ -- $ --
======== ========
F-18
ROSS SYSTEMS, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The net change in total valuation allowance for the year ended June 30,
2002, was an increase of $3,028,000. The valuation allowance has been
established to recognize the uncertainty of utilizing loss and credit carryovers
and certain deferred assets.
At June 30, 2002, the Company had net operating loss carry-forwards of
approximately $33,827,000, $14,473,000 and $8,449,000 for federal, California
and foreign tax purposes, respectively. At June 30, 2002, the Company also had
unused research and other credit carry-forwards of approximately $3,248,000 and
$554,000 for federal and California tax purposes, respectively. The loss and
research credit carry-forwards, if not utilized, will expire between fiscal 2003
and 2014.
(11) Supplemental Cash Flow Information
Supplemental cash flow information for the years ended June 30, 2002,
2001, and 2000 follows (in thousands):
2002 2001 2000
-------- -------- --------
Cash payments:
Interest...................................................................... $ 642 $ 1,228 $ 1,455
Income taxes.................................................................. $ 319 $ 75 $ 245
Non-cash investing and financing activities:
Conversion of convertible debentures into stock (non-cash transaction)........ $ - $ 1,177 $ 1,248
(12) Selected Unaudited Quarterly Information
(In thousands, except per share data)
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 sales 761 403 311 396
Net income (loss) (10,857) 381 488 414
Charge for impairment of capitalized software (10,288) -- -- --
Earnings (loss) per share (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
June 30 March 31 Dec. 31 Sept. 30
Fiscal year 2001 2001 2001 2000 2000
-------- -------- -------- --------
Total net revenues $ 11,254 $ 11,494 $ 12,598 $ 14,152
Cost of sales 433 352 325 483
Net income (loss) 399 2787 167 (4,195)
Non-recurring costs -- -- -- 790
Earnings (loss) per share 0.15 1.09 0.07 (1.74)
Number of shares used in per share computation-diluted 2,662 2,566 2,569 2,412
F-19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Ross Systems, Inc and subsidiaries.
The audit referred to in our report dated September 13, 2002, relating
to the consolidated financial statements of Ross Systems, Inc and subsidiaries,
which is contained in Item 8 of this Form 10-K, included the audit of the
financial statement schedule as of June 30, 2002 listed in the accompanying
index. The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audit.
In our opinion, such financial statement schedule as of June 30, 2002
presents fairly, in all material respects, the information set forth therein.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Atlanta, Georgia
September 13, 2002
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, 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
------ ------ --- ------ ------
Year ended June 30, 2000 allowance for
doubtful accounts and returns $2,884 $4,645 $-- $3,958 $3,571
------ ------ --- ------ ------
- -----------------
(1) Represents net charge-off of specific receivables.