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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, 2003
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT, BASED UPON THE CLOSING SALE PRICE OF THE
COMMON STOCK ON DECEMBER 31, 2002 AS REPORTED BY THE NASDAQ NATIONAL MARKET,
WAS APPROXIMATELY $19,146,780. SHARES OF VOTING STOCK HELD BY EACH OFFICER AND
DIRECTOR AND BY EACH PERSON WHO OWNS 5% OR MORE OF THE OUTSTANDING COMMON STOCK
HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY BE DEEMED TO BE AFFILIATES. THIS
DETERMINATION OF AFFILIATE STATUS IS NOT NECESSARILY A CONCLUSIVE DETERMINATION
FOR OTHER PURPOSES.
As of September 2, 2003, the Registrant had outstanding 2,815,825 shares of
Common Stock, and 500,000 Series A 7.5% convertible preference shares,
("convertible preferred stock").
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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 2003 Annual
Meeting of Stockholders.
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ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 2003
TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Business....................................................................................... 1
Item 2. Properties..................................................................................... 5
Item 3. Legal Proceedings.............................................................................. 5
Item 4. Submission of Matters to a Vote of Security Holders............................................ 5
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters...................... 6
Item 6. Selected Financial Data........................................................................ 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 8
Item 7.A. Quantitative and Qualitative Disclosures about Market Risk..................................... 17
Item 8. Financial Statements and Supplementary Data.................................................... 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 17
Item 9A Controls and Procedures
PART III
Item 10. Directors and Executive Officers of the Registrant............................................. 18
Item 11. Executive Compensation......................................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 19
Item 13. Certain Relationships and Related Transactions................................................. 19
Item 14. Principal Accountant Fees and Services......................................................... 19
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 20
SIGNATURES................................................................................................... 21
This Annual Report on Form 10-K including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part I Item
2, contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or
prove incorrect, could cause the results of Ross Systems to differ
materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements, including any
projections of earnings, revenue, synergies, accretion, margins or other
financial items; any statements regarding the anticipated completion of the
proposed chinadotcom merger transaction described under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors;" any statements of the plans, strategies and
objectives of management for future operations, including the execution of
integration and restructuring plans; any statement concerning proposed new
products, services, developments or industry rankings; any statements
regarding future economic conditions or performance; any statements of
belief; any statements of anticipations; and any statements of assumptions
underlying any of the foregoing. The risks, uncertainties and assumptions
referred to above include quarterly fluctuations and unpredictability of
revenues; various closing conditions and other uncertainties that might
delay or prevent the completion of the proposed chinadotcom merger
transaction; the general economic slowdown and the risk of an extended
slowdown or an increase in its intensity, the competition that we face; the
performance of contracts by customers and partners; employee management
issues; the challenge of managing asset levels; the difficulty of aligning
expense levels with revenue changes; and other risks that are described
herein under "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Risk Factors" beginning on page 17 and that are
otherwise described from time to time in Ross Systems' reports filed with
the Securities and Exchange Commission . Ross Systems assumes no obligation
and does not intend to update these forward-looking statements.
ROSS SYSTEMS, INC AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
GENERAL
The following description of business is qualified in its entirety by,
and should be read in conjunction with the more detailed information and
financial data, including the financial statements and notes thereto, appearing
elsewhere in this Report. Unless otherwise stated in this document, references
to (1) "us," "our," "we" and similar terms, (2) the "Company" or (3) "Ross"
shall mean Ross Systems, Inc., a Delaware corporation, and its subsidiaries.
Ross Systems, Inc. (NASDAQ: ROSS) delivers innovative software
solutions that help manufacturers worldwide fulfill their business growth
objectives through increased operational efficiencies, improved profitability,
strengthened customer relationships and streamlined regulatory compliance.
Focused on the food and beverage, life sciences, chemicals, metals and natural
products industries and implemented by over 1,000 customer companies worldwide,
our family of Internet-architected solutions is a comprehensive, modular suite
that spans a customer's enterprise, from manufacturing, financials and supply
chain management to customer relationship management, performance management and
regulatory compliance.
Publicly traded on the NASDAQ since 1991, Ross's global headquarters
are based in the U.S. in Atlanta, Georgia, with sales and support operations
around the world.
Our internet address is www.rossinc.com. We make available free of
charge on or through our Internet website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, in each case as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC.
We license our products to customers through a direct sales force in
North America and Western Europe as well as independent distributors in dozens
of other markets worldwide. We also provide professional consulting services for
implementation, related custom application development and education. We offer
ongoing maintenance and support services for our products via Internet and
telephone help desks.
MERGER PROPOSAL
In early September 2003, we announced that we had entered into a
definitive agreement whereby chinadotcom Software (CDC) will acquire Ross
Systems in a merger valued at approximately $67,892,000. It is anticipated that
the merger is to be completed early in December 2003, but in no event later than
March 1, 2004. Both companies are listed on NASDAQ. We have not yet determined
to what extent the proposed merger will affect our financial performance.
However we believe that CDC's Asian operations offer greater opportunities of
doing business in that region, while at the same time our operations in North
America and Europe offer many new opportunities to CDC in our markets. CDC is a
licensed master distributor of our products in Greater China and CDC and Ross
believe the combination represents a unique opportunity to rapidly scale the
introduction of our manufacturing products into Greater China. Both companies
will be able to participate in numerous cross-selling opportunities. In addition
we will have access to capital to pursue business combinations with selected,
strategic software and services companies. The proposed merger is to be the
subject of a shareholders' vote at our forthcoming Annual Meeting.
PRODUCTS
Ross offers the award-winning IRENAISSANCE(TM) family of software
solutions which is an integrated suite of enterprise resource planning (ERP II),
financials, materials management, manufacturing and distribution, supply chain
management (SCM), advanced planning and scheduling, customer relationship
management (CRM), electronic commerce, business intelligence and analytics
applications.
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ROSS SYSTEMS, INC AND SUBSIDIARIES
iRenaissance applications are known for their deep and rich functional
fit to process industry requirements, as well as their short implementation
times and cost-effective returns on investment.
TECHNOLOGY
The Company leverages contemporary Internet technologies to enable
significant benefits for its customers. Many Ross customers have benefited from
technology obsolescence protection as they have moved from older computing
platforms to current platforms by upgrading to new releases. Built on a highly
flexible technology platform, iRenaissance applications cost-effectively support
not only mid-size companies but scale effectively to support large, global
organizations in a wide range of languages and with thousands of users
processing hundreds of thousands of transactions daily. Ross customers also
benefit from the low cost of deployment and centralized maintenance afforded by
browser-based PC clients that provide secure access from any PC with Internet
access, to the system infrastructure at central locations where the software
resides and the data is managed. End-user satisfaction is enhanced by highly
configurable and easily personalized applications that provide follow-me
profiles for each user, regardless of physical location. Utilizing contemporary
standards such as XML, SOAP, Microsoft .NET and others, iRenaissance
applications can be effectively connected to any other applications or devices
via the Internet. Robust security features that leverage Internet standards
protect applications and data with both user-based and application function
profiles. The security facilities further enable companies in their effort to
achieve regulatory compliance by providing detailed audit trails for every
action taken by every user.
Because the Company's iRenaissance applications were developed with the
GEMBASE fourth generation language, the Company believes they are easily
modified and expanded. GEMBASE is a programming environment that delivers a
central data dictionary, complete screen painting, editing and debugging
capabilities, and links to most popular database management systems. GEMBASE
itself is written in the C programming language to facilitate portability across
multiple hardware and database management system platforms. Because the
iRenaissance products were developed in GEMBASE, customers often find it easy to
customize their own applications.
Ongoing Development
To meet the increasingly sophisticated needs of its customers and
broaden its product offering for targeted vertical markets, the Company
continually strives to enhance its existing product functionality. The Company
surveys the needs of its customers through on-line, industry-specific discussion
forums and polling at its global user conferences, and incorporates many of
their recommendations into its products. The Company also conducts a variety of
forms of market research with industry analyst groups and targeted industry
associations to determine strategies for new features and entirely new products
for targeted vertical industries. As an example, IRENAISSANCE version 5.7
included new capabilities for streamlining the compliance and validation process
for companies regulated by the US FDA (United States Food and Drug
Administration). In fiscal 2002, the Company expanded its product suite for
targeted industries and introduced IRENAISSANCE SCM (Supply Chain Management)
and IRENAISSANCE CRM (Customer Relationship Management).
While maintaining focus on the requirements of targeted vertical
markets, the Company is expanding its potential geographic markets by developing
new product functionality to address the needs of additional prospective
customers in key international markets. These enhancements are related to local
languages and dialects, currency, accounting custom and procedures, and
regulatory requirements. As an example, through the partnership established with
CDC Software Corporation during the fourth quarter of fiscal 2003, the Company
is well advanced with its preparations for releasing additional local language
versions of its software for the Chinese markets. These enhancements enable the
Company to leverage its IRENAISSANCE ERP products to capitalize on the growing
and largely untapped process manufacturing markets in China.
The Company is also committed to achieving technology advances by
leveraging new Internet-based capabilities enabled by XML and Web Services.
During the 3rd quarter of fiscal 2003, the Company released the INTERNET
APPLICATION FRAMEWORK (TM) which enables the IRENAISSANCE ERP foundation with
full Internet deployment capabilities. Through the INTERNET APPLICATION
FRAMEWORK, application users have full access to the IRENAISSANCE ERP
applications from any computer with an Internet connection and the Microsoft
Internet Explorer
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ROSS SYSTEMS, INC AND SUBSIDIARIES
browser. Because no IRENAISSANCE ERP application software needs to be deployed
or maintained on user workstations, The Company's customers have reported
significant savings resulting from the use of the INTERNET APPLICATION
FRAMEWORK.
Third-Party Products
The Company resells 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 26% of total software product license
revenues in fiscal 2003.
Services
Our worldwide consulting services operation complements our e-business
and enterprise software sales organizations. We offer a broad selection of
services to install and optimize each available software product. These services
fall into two broad categories: Professional Services and Client Support. Income
from these activities consist of services and maintenance revenues which
comprise approximately 28% and 41% of total revenues respectively.
Professional Services
Our Professional Services organization provides business application
experience, technical expertise and product knowledge to complement our products
and to provide solutions to clients' business requirements. The major types of
services provided include the following:
Application Consulting involves in-depth analysis of the client's
specific needs and the preparation of detailed plans that list step-by-step
actions and procedures necessary to achieve a timely and successful
implementation of our software products. These services are generally offered on
a time and expense reimbursement basis.
Technical Consulting involves evaluating and managing the client's
needs by supplying custom application systems, custom interfaces, data
conversions, and system conversions. Consultants participate in a wide range of
activities, including requirements definition, and software design, development
and implementation. We also provide advanced technology services focused on
networking, database administration and tuning. These services are generally
offered on a time and expense reimbursement basis. We also provide remote
systems management, and remote applications management.
Education Services are offered to clients either at our education
facilities or at the client's location, as either standard or customized
classes.
Established relationships with third party consulting partners are
utilized in specific instances, to take advantage of specialized industry
expertise and to support our implementation demands.
Client Support
Our Client Support functions include web-based support, telephone
support, technical publications and product support guides, which are provided
under maintenance agreements. The annual maintenance fee for these services is
generally 20% of the price for the licensed software. The standard maintenance
agreement also entitles clients to certain new product releases and product
enhancements.
MARKETING AND SALES
We sell our products and services in the US and Western Europe
primarily through our direct sales force. At June 30, 2003, we had 44 sales and
marketing employees. In other areas of the world, we sell our products through
distributors. In support of our sales force and distributors, we conduct
comprehensive marketing programs which include telemarketing, direct mailings,
advertising, promotional material, seminars, trade shows, public relations and
on-going customer communication.
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ROSS SYSTEMS, INC AND SUBSIDIARIES
We are based in Atlanta, Georgia, with a regional direct sales force
covering all major US business locations. We have subsidiaries in Antwerp,
Belgium; Ottawa, Canada; Berlin, Germany; Utrecht, the Netherlands; Barcelona,
Spain; Northampton, United Kingdom as well as Hong Kong and Singapore.
We have 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 us royalties on the sales of our products and maintenance
services.
International revenues (from foreign operations and export sales)
represented approximately 40%, 45%, and 33%, of our revenues in fiscal 2003,
2002, and 2001, respectively. International revenues include export sales to the
Asian region. However, Asian revenues are included as part of North American
revenues in the "Segment Information", in the Notes to Consolidated Financial
Statements. We intend to broaden our presence in international markets by
entering into additional distribution agreements.
PRODUCT DEVELOPMENT AND ACQUISITIONS
To meet the increasingly sophisticated needs of its customers and
address potential new markets, we continually strive to enhance our existing
product functionality. We survey the needs of our customers annually through
ballots and direct discussions at our annual user conferences, and incorporating
many of their recommendations into our products. We also conduct a variety of
forms of market research with industry analyst groups and targeted industries to
determine strategies for new features and functions. We are committed to
achieving advances in the use of computer systems technology and to expanding
the breadth of our product line. Development activity during fiscal 2003 covered
a wide range of evolving functionality enhancements to present releases of our
products. Projects in progress being carried into fiscal 2004 include several
functionality enhancements important to a broad base of our customers, and
ongoing improvements to the integration aspects of the third party applications
which have been incorporated into our product suite.
COMPETITION
The business applications software market is intensely competitive. We
compete with a broad range of applications software companies. Our competitors
include general business application software providers, such as 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 our
process manufacturing products. The principal competitive factors in the market
for business application software include product reputation, product
functionality, performance, quality of customer support, size of installed base,
financial stability, hardware and software platforms supported, price, and
timeliness of installation. We believe that we compete effectively with respect
to these factors.
PROPRIETARY RIGHTS AND LICENSES
We provide our products to end users generally under nonexclusive,
nontransferable licenses, which generally have perpetual terms. Under the
general terms and conditions of our standard license agreements, the licensed
software may be used solely for internal operations on designated computers at
specific sites. We make source code available for certain portions of our
products.
We have registered "iRENAISSANCE", "RENAISSANCE", "RENAISSANCE CS", and
"ROSS SYSTEMS" as trademarks in the United States. We have applied for a
provisional patent with respect to systems and associated methods for
determining availability and pricing of goods based on attributes. We have
secured registration of copyrights in the United States for 17 of our
products. Although we take steps to protect our intellectual property,
misappropriation may nevertheless occur and copyright and trade secret
protection may not be available in certain countries.
Except as noted above, we rely on a combination of trade secret,
copyright and trademark laws, and license agreements to protect our proprietary
rights in our products.
EMPLOYEES
As of June 30, 2003, we employed a total of 255 full time employees,
including 44 in sales and marketing, 48 in product development, 132 in
professional services and client support, and 31 in finance, administration and
operations. Our employees are not represented by a labor union, and we believe
that our employee relations are good.
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ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 2. PROPERTIES
Our corporate headquarters, research and development, sales, marketing,
consulting and support facilities are located in Atlanta, Georgia, where we
occupy approximately 22,000 square feet. We also maintain a facility for product
development in San Marcos, California, which occupies 1,470 square feet.
International offices are maintained in Belgium (Antwerp); England
(Northampton); Germany (Berlin); Netherlands (Utrecht); and Spain (Barcelona).
At June 30, 2003, all facilities are leased with periods remaining to
renewal varying from nine months to twelve years. We believe our facilities are
adequate for our current needs and that we can obtain suitable additional space
as required. Our Atlanta headquarters lease expires in April 2004. At that time,
we expect to reduce our rent expense by lowering the cost of our existing
facility or relocating to a more competitively priced accommodation in the
Atlanta area.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may become involved in
litigation and administrative proceedings. Such matters can be time-consuming,
divert management's attention and resources and cause the accumulation of
significant expenses. Furthermore, there can be no assurance that the results of
any of these actions will not have a material adverse effect on our business,
results of operations or financial condition.
We are involved in an arbitration proceeding with a former distributor.
The arbitration relates to a dispute over minimum royalties due under a
distribution agreement. We cannot estimate the possible range of loss, if any,
that may occur from the proceeding.
On February 27, 2003, Vertical Computer Systems (Vertical) filed suit
against us and other parties in the New York State Supreme Court (Index
No:600644/03) alleging undisclosed liabilities in the purchase of our HR/Payroll
product line by their subsidiary, NOW Solutions, LLC during 2001. Vertical seeks
to offset their claim against a note payment due to Ross and also seeks other
monetary damages. Ross has filed a motion to dismiss Vertical's claims and will
otherwise defend the action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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ROSS SYSTEMS, INC AND SUBSIDIARIES
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The following table sets forth the range of high and low bid prices for
our Common Stock on the NASDAQ National Market for each of the quarters of
fiscal 2003 and 2002. Our Common Stock trades under the NASDAQ symbol "ROSS."
FISCAL 2003 HIGH LOW
- -------------------------------------------------- ------------ ------------
First quarter (ended September 30, 2002) $ 8.35 $ 6.05
Second quarter (ended December 31, 2002) $ 9.90 $ 4.51
Third quarter (ended March 31, 2003) $14.95 $ 8.00
Fourth quarter (ended June 30, 2003) $15.49 $11.10
FISCAL 2002 HIGH LOW
- -------------------------------------------------- ------------ ------------
First quarter (ended September 30, 2001) $ 4.08 $2.94
Second quarter (ended December 31, 2001) $ 6.31 $2.38
Third quarter (ended March 31, 2002) $11.56 $5.82
Fourth quarter (ended June 30, 2002) $11.65 $7.80
We have never declared or paid cash dividends on Common Stock, and we
do not plan to declare or pay dividends in the future. We intend to use earnings
to finance the expansion of our business. In addition, our line of credit
agreement with Silicon Valley Bank dated September 24, 2002, contains certain
covenants which affect our ability to pay cash dividends. This does not affect
the dividends payable on the Convertible Preferred Stock.
As of September 2, 2003, the approximate number of Common Stock
stockholders of record was 469.
On January 13, 2003 we issued 120,000 unregistered common shares to
Oscar Pierre Prats, pursuant to the acquisition of Ross Systems Iberica, a
former distributor. The shares were issued at $9, which was the market price of
the Company's stock on that day. As of the same date, the shares were
repurchased into treasury stock. The shares were issued in a private placement
and were therefore exempt from registration under the securities act. See note 2
on page F-14 in the Notes to Consolidated Financial Statements.
On June 29, 2001, we issued mandatorily convertible preferred stock to
a qualified investor in a private placement transaction. In summary, the
investor purchased 500,000 preferred shares at $4.00 per share yielding
$2,000,000 for Ross. This price represented a premium to the market for our
common stock at the time of issuance. The preferred shares cannot be converted
for two years but must be converted within five years from the issue date. The
shares earn dividends at the rate of 7.5%. At September 3, 2003, none of the
preference shares had been converted to common stock. The shares are
convertible, one for one, at a price of $4.00 per share.
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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 Annual Report on Form 10-K. Historical results are not necessarily
indicative of results that may be expected in future periods.
CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Total revenues (1)(2).................... $ 48,100 $ 46,053 $ 50,805 $ 83,399 $ 106,024
Operating earnings (loss) (3)(4)......... $ 4,791 $ (8,667) $ (2,024) $ (8,143) $ (3,936)
Net earnings (loss)...................... $ 4,206 $ (9,424) $ (842) $ (9,662) $ (5,626)
Net earnings (loss) available to common
stockholders.......................... $ 4,056 $ (9,574) $ (842) $ (9,662) $ (5,626)
Diluted net earnings (loss) per share.... $ 1.28 $ (3.65) $ (0.33) $ (4.15) $ (2.53)
Shares used in computing diluted net
earnings (loss) per share............. 3,296 2,625 2,566 2,330 2,223
BALANCE SHEET DATA:
Working capital (deficit)................ $ (943) $ (4,536) $ (9,640) $ (15,340) $ (3,745)
Total assets............................. $ 40,211 $ 37,618 $ 50,462 $ 64,295 $ 83,185
Long-term debt, less current portion..... -- -- -- $ 2,627 3,705
Preferred stock, no par value 5,000,000
shares authorized;
500,000 shares issued and outstanding.... $ 2,000 $ 2,000 $ 2,000 -- --
Total shareholders' equity............... $ 17,029 $ 13,943 $ 23,104 $ 20,890 $ 29,257
(1) Revenues and operating costs have been increased in all years by the
reclassification of Reimbursable Expenses to comply with EITF 01-14.
See notes to the Consolidated Financial Statements on page F-10.
(2) Results shown for fiscal years 2000 and 1999 include revenues and
operating costs relating to activities derived from the HR/Payroll
product line which was sold in February of 2000. Results for these two
fiscal years are therefore not directly comparable with the results of
fiscal years 2001 through 2003. See commentary on this in "Results of
Operations" on page 9.
(3) In accordance with the adoption on SFAS No. 142, the Company ceased
amortization of Goodwill beginning July 1, 2001. See notes to the
Consolidated Financial Statements on page F-10.
(4) In accordance with SFAS No. 86, the Company recorded an impairment of
Capitalized Software Costs during the year ended June 30, 2002. See
notes to the Consolidated Financial Statements on page F-13.
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ROSS SYSTEMS, INC AND SUBSIDIARIES
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BASIS OF PRESENTATION
Our consolidated financial statements include the accounts of Ross and
our wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. Our fiscal year ends on June
30. "Fiscal 2001," "fiscal 2002," and "fiscal 2003" mean our fiscal years ended
June 30 of each such year.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. We recognize revenues from licenses of computer
software "up-front" provided that a non-cancelable license agreement has been
signed, the software and related documentation have been shipped, there are no
material uncertainties regarding customer acceptance, collection of the
resulting receivable is deemed probable, and no significant other vendor
obligations exist. The revenue associated with any license agreements containing
cancellation or refund provisions is deferred until such provisions lapse. Where
we have future obligations, if such obligations are insignificant, related costs
are accrued immediately. If the obligations are significant, the software
product license revenues are deferred. Future contractual obligations can
include software customization, requirements to provide additional products in
the future and porting products to new platforms. Contracts that require
significant software customization are accounted for on the
percentage-of-completion basis. Revenues related to significant obligations to
provide future products or to port existing products are deferred until the new
products or ports are completed.
Our revenue recognition policies are designed to comply with American
Institute of Certified Public Accountants Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," and with SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." Revenues recognized from
multiple-element software license contracts are allocated to each element of the
contracts based on the fair values of the elements, such as licenses for
software products, maintenance, or professional services. The determination of
fair value is based on objective evidence which is specific to the Company. We
limit our assessment of objective evidence for each element to either the price
charged when the same element is sold separately, or the price established by
management having the relevant authority to do so, for an element not yet sold
separately. If evidence of fair value of all undelivered elements exists but
evidence does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred and the remaining portion of the
arrangement fee is recognized as revenue.
Service revenues generated from professional consulting and training
services are recognized as the services are performed. Maintenance revenues,
including revenues bundled with original software product license revenues, are
deferred and recognized over the related contract period, generally 12 months.
COMPUTER SOFTWARE COSTS. We capitalize computer software product
development costs incurred in developing a product once technological
feasibility has been established and until the product is available for general
release to customers. Technological feasibility is established when we either
(1) complete a detail program design that encompasses product function, feature
and technical requirements and is ready for coding and confirms that the product
design is complete, that the necessary skills, hardware and software technology
are available to produce the product, that the completeness of the detail
program design is consistent with the product design by documenting and tracing
the detail program design to the product specifications, and that the detail
program design has been reviewed for high-risk development issues and any
related uncertainties have been resolved through coding and testing or (2)
complete a product design and working model of the software product, and the
completeness of the working model and its consistency with the product design
have been confirmed by testing.
Capitalized software development costs generally relate to development
projects spanning several months. Resources are committed to these projects on a
consistent and long-term basis resulting in a generally consistent impact on the
financial results. We evaluate the extent to which the capitalized amounts are
realizable based on expected revenues from the product over the remaining
product life. Where future revenue streams are not expected to cover remaining
amounts to be amortized, we either accelerate amortization or expense remaining
capitalized amounts.
Amortization of such costs is computed as the greater of (1) the ratio
of current revenues to expected revenues from the related product sales or (2) a
straight-line basis over the expected economic life of the product
8
ROSS SYSTEMS, INC AND SUBSIDIARIES
(not to exceed five years). Software costs related to the development of new
products incurred prior to establishing technological feasibility or after
general release are expensed as incurred.
RESERVES AND ESTIMATES. In the ordinary conduct of our business, we must often
use judgement and estimates regarding the recording of certain reserves. For
example, we use judgement in order to determine the amount of our reserves for
uncollectable accounts receivable. Should our estimates prove to be incorrect,
our reserves may be inadequate.
FOREIGN CURRENCIES
The financial position and results of operations of our foreign
subsidiaries are measured using local currencies as the functional currencies.
Assets and liabilities of these subsidiaries are translated into US dollars at
the exchange rate in effect at year end. Income and expense items are translated
at average exchange rates for the year. The resulting translation adjustments
are recorded in the foreign currency translation adjustment account. The effects
of changes in foreign currency exchange rates have had minimal effect on our
financial results reported herein.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED JUNE 30, 2003, 2002, AND 2001
The following table sets forth certain items reflected in our
consolidated statements of operations as a percentage of total revenues for the
periods indicated, and a comparison of such statements is shown as a percentage
increase or decrease from the prior year's results:
PERCENTAGE OF REVENUE
FISCAL YEAR ENDED PERCENTAGE
JUNE 30, INCREASE (DECREASE)
------------------------------ -------------------------
2003 2002 2001 2003/2002 2002/2001
------ ------ ------ --------- ---------
Revenues:
Software product licenses ............................ 30% 28% 19% 12% 35%
Consulting and other services ........................ 28 28 32 4 (21)
Maintenance .......................................... 42 44 49 0 (19)
------ ------ ------ ---------- ----------
Total revenues ............................... 100% 100% 100% 4% (9)%
====== ====== ====== ========== ==========
Operating expenses:
Costs of software product licenses ................... 5% 4% 2% 23% 91%
Costs of consulting, maintenance and other services .. 36 37 35 1 (3)
Software product license sales and marketing ......... 23 20 30 20 (37)
Product development .................................. 15 22 23 (29) (11)
General and administrative ........................... 9 10 9 -- (7)
Provision for uncollectible accounts ................. 2 3 3 (42) (5)
Amortization of goodwill ............................. -- -- 1 -- (100)
Non-recurring (benefit) costs ........................ -- (1) 2 (100) (182)
Non-cash charge for impairment of capitalized software
costs ............................................. -- 24 -- (100) 100
------ ------ ------ ---------- ----------
Total operating expenses ..................... 90 119 104 (21) 4
------ ------ ------ ---------- ----------
Operating profit (loss) ...................... 10 (19) (4) -- (228)
Other expense, net ................................... -- (1) (2) (71) (47)
Gain on sale of product line ......................... 5 -- --
------ ------ ------ ---------- ----------
Profit (loss) before income taxes ............ 10 (21) (2) -- (1,019)
Income tax benefit (expense) ......................... (1) (0) (0) 207 1,367
------ ------ ------ ---------- ----------
Net profit (loss) ............................ 9% (21)% (2)% -- 1,037%
------ ------ ------ ---------- ----------
REVENUES. Revenues were affected by the sale of the Human Resource
product line in February 2001. Fiscal 2001 therefore reflects a mix of full and
partial years of product line activity. For comparison purposes, revenues for
fiscal 2001 have been adjusted to exclude the Human Resource product line
activity. This revenue is referred to as "adjusted revenue". We believe this is
a useful way to consider the trend in our reported revenues since the disposal
of the HR/Payroll product line did not qualify as a discontinued operation.
9
ROSS SYSTEMS, INC AND SUBSIDIARIES
Comparisons of both adjusted revenue and total revenue follow
below (in thousands):
ADJUSTMENT TO
EXCLUDE
ESTIMATED ESTIMATED ACTUAL
ADJUSTED (NON HR/PAYROLL REVENUES
ACTUAL REVENUES GAAP) REVENUES REVENUES FISCAL YEAR
FISCAL YEAR ENDED FISCAL YEAR FISCAL YEAR ENDED
REVENUE COMPARISON JUNE 30, ENDED JUNE 30, YEAR ENDED JUNE 30,
2003 2002 2001 JUNE 30, 2001 2001
------------ ------------ -------------- ------------- -----------
Revenues:
Software product licenses ............. $ 14,589 $ 13,026 $ 9,130 $ 477 $ 9,607
Consulting and other services ......... 13,489 13,013 14,922 1,598 16,520
Maintenance ........................... 20,022 20,014 21,717 2,961 24,678
------------ ------------ ------------- ------------ ------------
Total revenues ................ $ 48,100 $ 46,053 $ 45,769 $ 5,036 $ 50,805
------------ ------------ ------------- ------------ ------------
Adjustments for the sale of the HR/Payroll product line were not
required for actual revenues in fiscal years 2003, and 2002. Adjusted revenues,
as defined above, were slightly increased at $46,053,000 in fiscal 2002 from
$45,769,000 in fiscal 2001. Adjusted software product license revenues increased
by 43% from fiscal 2001 to fiscal 2002. Adjusted consulting revenues decreased
12% from fiscal 2001 to fiscal 2002. 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.
Total actual revenues increased 4% from $46,053,000 for fiscal 2002 to
$48,100,000 fiscal 2003. Actual revenues decreased 9% to $46,053,000, in fiscal
2002 from $50,805,000 in fiscal 2001. Software product license revenues
increased 12 % from fiscal 2002 to fiscal 2003, and increased 36% from fiscal
2001 to fiscal 2002. Consulting revenues increased 4% from fiscal 2002 to fiscal
2003, and decreased 20% from fiscal 2001 to fiscal 2002. Maintenance revenues
from first year maintenance contracts sold with new license agreements, and
renewed maintenance agreements, both of which are recognized ratably over the
maintenance period, were flat for fiscal 2003 when compared to fiscal 2002, and
decreased 19% from fiscal 2001 to fiscal 2002.
Software product license revenues in the North American market
increased by 78% in fiscal 2003 when compared to fiscal 2002. Software product
license revenues in the North American market decreased by 18% in fiscal 2002
over fiscal 2001. We believe that the turnaround in the volume of software sales
in North America in fiscal 2003 is due to both a slight improvement in the
economic trading conditions in the process manufacturing sector, and increasing
benefits arising from our consistently applied marketing efforts during fiscal
2002 and 2003. While not yet significant, sales of the recently introduced
iRenaissance CRM (Customer Relationship Management) product also began to
contribute to revenues in both Europe and North America. In the European market,
our software license sales have grown by 8% in fiscal 2003, over the 74%
increase in fiscal 2002 when compared to fiscal 2001. This continued improvement
was a result of continuing sales momentum built up in fiscal 2002 and an
improvement in software revenues in the United Kingdom brought about as a
result of staff changes in that region. In addition, new marketing efforts in
Northern Europe resulted in improved sales in that region. European revenues in
fiscal 2003 were also enhanced slightly by more favorable foreign exchange rates
on average during the year, when compared to fiscal 2002. Software license sales
in the Asia/Pacific Rim region decreased by 71% to $841,000 in fiscal 2003 after
increasing by 148% to $2,853,000 in fiscal 2002, from $1,150,000 in fiscal 2001.
This variability reflects a change in the timing of certain sales through our
distributor in Japan. The distributor in Japan continues to perform
satisfactorily according to our goals set for them.
Revenues from consulting and other services (which are recognized as
performed) correlate with software product license revenues (which are
recognized upon delivery), so that when software product license revenues
increase or decrease, future period services revenues generally increase or
decrease respectively as a result. In fiscal 2003, consulting and other services
revenues increased by 4% over fiscal 2002 revenues. This increase was the net
result of a 37% increase in North America and an 18% decrease internationally.
The North American services revenues benefited from the steady increase in North
American software license revenues over the fiscal year, while the international
services revenues were adversely affected by the timing of the increase in
software license revenues being predominantly in the last quarter of the fiscal
year. This meant that most of the services revenues associated
10
ROSS SYSTEMS, INC AND SUBSIDIARIES
with these fourth quarter license revenues will be earned in fiscal 2004. In
fiscal 2002, consulting and other services revenues decreased 20%, from fiscal
2001 results.
Revenues from first year maintenance contracts and renewable
maintenance were unchanged in fiscal 2003 as compared to fiscal 2002. During
fiscal years 2002 and 2001, declines in maintenance revenues were experienced
due to an excess of the value of maintenance revenue contracts cancelled over
the value of new renewable maintenance revenue contracts being added to the
maintenance base. During fiscal 2003, the retention of existing renewable
maintenance contracts improved. At the same time maintenance revenue accruing
from new customers acquired during the prior year increased in proportion to
the improvement in software license revenues in the prior fiscal year. In
addition, first year maintenance revenues benefited from the increase in
software license sales in the current fiscal year. The effect of these trends
was to keep maintenance revenues constant in fiscal 2003 as compared to fiscal
2002.
Our international operations as a percentage of total revenue for
fiscal years 2003, 2002 and 2001 was 40%, 45% and 33%, respectively.
No single customer accounted for more than 10% of revenues during
fiscal 2003, 2002 or 2001. Our customers are evenly spread among the industry
verticals within the process manufacturing market.
COSTS OF SOFTWARE PRODUCT LICENSES. Costs of software product licenses
include expenses related to royalties paid to third parties and product
documentation and packaging. Third party royalty expenses will vary from quarter
to quarter based on the mix of third-party products being sold. Costs of
software product licenses for fiscal 2003 increased by 23% to $2,295,000 over
fiscal 2002, and in fiscal 2002 increased by 91% to $1,870,000 from fiscal 2001.
The increase in fiscal 2003 reflects the continued growth of third party content
in software license sales. This is an outcome of our strategy to provide a fully
rounded suite of products that meet all our customers' needs. The largest
contributor to this was sales of IRENAISSANCE CRM (Customer Relationship
Management) which is a privately labeled product licensed from a third party. As
a percent of software revenue, third party royalties comprised 16% in fiscal
2003, 14% in fiscal 2002, and 10% for fiscal 2001.
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 Ross also
uses outside consultants to supplement Company personnel in meeting peak
customer consulting demands. Costs of consulting, maintenance and other
services, net of reimbursable expenses, increased by 1% to $17,193,000 in fiscal
2003 from $17,023,000 in fiscal 2002, and had decreased 3% in fiscal 2002 from
$17,595,000 in fiscal 2001. Fiscal 2003 consulting revenues were relatively
constant as compared to fiscal 2002, and this resulted in the similar pattern
exhibited in the consulting, maintenance and other services costs. The lower
levels of expenditure in fiscal 2002 compared to fiscal 2001, reflects 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.
SOFTWARE PRODUCT LICENSE SALES AND MARKETING EXPENSES. Software product
license sales and marketing expenses increased by 20% to $11,384,000 in fiscal
2003, from $9,461,000 in fiscal 2002, and decreased by 37% to $9,461,000 in
fiscal 2002 from $15,026,000 in fiscal 2001. The increase in fiscal 2003 was due
to higher expenditures on sales and marketing in both North America and Europe,
combined with the escalating effect on the European expenditures of the stronger
Euro Dollar. The decrease for fiscal 2002 over fiscal 2001, was a result of
lower expenditures due to a lower headcount and lower marketing expenditures
than in the prior year.
11
ROSS SYSTEMS, INC AND SUBSIDIARIES
PRODUCT DEVELOPMENT EXPENSES. Product development expenditures is a
commonly used measure in the software industry to describe the quantum of cost
relating to software development excluding the effects of any capitalization of
these costs and amortization of capitalized costs. This amount is derived by
adjusting the figures shown in the Consolidated Statements of Operations as
follows: (in thousands):
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------
2003 2002 2001
------------ ------------ -----------
Product development, net of capitalized computer software costs and
amortized computer software costs .............................. $ 7,230 $ 10,241 $ 11,496
Amortization of previously capitalized software development
costs ................................................... (4,702) (7,184) (7,369)
------------ ------------ ------------
Expenses, excluding amortization ......................... 2,528 3,057 4,127
Software development costs capitalized during the year .... 4,239 4,181 6,878
------------ ------------ ------------
Total expenditures ............................................... $ 6,767 $ 7,238 $ 11,005
------------ ------------ ------------
Total expenditures as a percent of total revenues ................. 14% 16% 22%
============ ============ ============
Product development expense declined by 29% to $7,230,000 in fiscal
2003, from $10,241,000 in fiscal 2002. After a substantial reduction in the
value of capitalized software development costs in fiscal 2002, amortization of
previously capitalized software development costs decreased by $2,482,000 in
fiscal 2003 as compared to fiscal 2002. This decrease accounted for most of the
product development expense decline in fiscal 2003. Product development expense
was slightly down in fiscal 2002, as compared to fiscal 2001. Capitalized
development costs incurred during fiscal 2003 were at a level consistent with
the prior year. In fiscal 2002, capitalized development costs had decreased by
39% to $4,181,000 from $6,878,000 due mainly to the absence in fiscal 2002 of
development costs relating to the HR/Payroll product line which was sold in
fiscal 2001. As a percentage of total revenues, total development expense
decreased slightly to 14% in fiscal 2003 from 16% in fiscal 2002 and 22% in
fiscal 2001. Development expense is expected to continue in fiscal 2004 at a
level consistent with fiscal 2003.
During fiscal 2003, product development expenditures were focused on
expanding integrated Internet/ERP functionality and accelerating the complete
integration with the IRENAISSANCE product suite, of the privately labeled third
party products, now part of our offering. Product development expenditures
during fiscal 2002 and 2001 were primarily focused on new Internet-enabled
modules and continued enhancements to the underlying technology of released
products and developing new web enabled products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were relatively constant in the three fiscal years ending June 30,
2003, 2002 and 2001, at $4,376,000, $4,393,000 and $4,737,000 respectively.
Various cost-saving measures and controls, coupled with improved productivity
through the implementation of streamlined systems, have contributed to stability
in costs relating to our administrative infrastructure and personnel.
PROVISION FOR DOUBTFUL ACCOUNTS. In fiscal years 2003, 2002, and 2001,
we recorded provisions for doubtful accounts of $831,000, $1,444,000, and
$1,514,000, respectively. These provisions represent management's best estimate
of the doubtful accounts for each period. The improving trend in the provision
for doubtful accounts over the three fiscal years represented, has been made
possible by tighter and better controls over accounts receivable collections
coupled with better quality sales processes which management believes result in
higher quality receivables generally.
AMORTIZATION OF OTHER ASSETS. Amortization of other assets was zero in
fiscal years 2003 and 2002 compared to $691,000 in fiscal 2001. This reflects
the change in accounting treatment due to compliance with the new accounting
pronouncement, SFAS No. 142, on Goodwill and Other Intangible Assets. See Note
(1) in the Notes to the Consolidated Financial Statements on page F-10.
Intangible assets are reviewed for impairment in value in accordance
with Statement of Financial Accounting Standards No. 142. Our recorded goodwill
relates to the acquisition of HiPoint Systems Inc. in fiscal 1999, the
acquisition of Bizware, Inc. in fiscal 1998, and the acquisition of our Spanish
distributor in fiscal 1997. After application of the principles of FAS142, we
believe that the assets are not impaired and are properly stated at their
current carrying value.
12
ROSS SYSTEMS, INC AND SUBSIDIARIES
NON-RECURRING ITEMS. The non-recurring gain reflected in fiscal 2002,
was a result of the gain of $650,000 arising from the reduction of the reserve
previously created in fiscal year 2001 for the closure of the French office.
At the end of the first quarter of fiscal 2001, we recorded an expense
of $790,000 to cover separation costs associated with 125 employees employed in
sales, marketing, services, and product development in North America and Europe.
NON-CASH CAPITALIZED SOFTWARE IMPAIRMENT CHARGE. In the year ended June
30, 2002, an impairment charge of $10,938,000 was incurred. This was as a result
of certain events occurring during fiscal 2002, including a change in technology
direction, and developments affecting the potential realizability of revenues
relating to certain capitalized software assets. This action had no effect on
our cash position or cash flows.
OTHER INCOME AND EXPENSE. Interest income has diminished over the
fiscal years 2001 through 2003 due to lower interest rates. Interest expense
decreased in fiscal 2003 as compared to fiscal 2002, and 2002 as compared to
fiscal 2001, due to improved cash flows from operations and the resultant lower
utilization of our revolving credit facilities. Foreign exchange benefit and
expense arises on converting foreign currency transactions or short-term
balances to local currency throughout the year. Foreign exchange losses in
fiscal 2003 were insignificant in fiscal 2003, in comparison to $181,000 in
fiscal 2002 which was due to net adverse movements in currency exchange rates
during that year.
INCOME TAXES. Income tax expense consists primarily of alternative
minimum tax for federal purposes, state taxes for which state operating losses
do not apply, and various foreign taxes which we incurred from time to time. As
a result we recorded net income tax expense of $405,000, $132,000, and $9,000
during 2003, 2002, and 2001 respectively. Note 11 to the Consolidated Financial
Statements details the differences between our effective income tax rate and
the statutory rate.
At June 30, 2003, we had net operating loss carryforwards of
approximately $34,370,000, $25,354,000 and $7,187,000 for federal, state and
foreign tax purposes, respectively, which expire between 2005 and 2020.
In all the years presented, we have reserved in full the deferred tax
assets which comprise primarily of net operating loss carryforwards. At which
time it is determined that it is more likely than not that they will be
utilized, the valuation reserve will be removed.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2003, net cash provided by operating activities
increased by $5,033,000 to $10,108,000 in fiscal 2003, from $5,075,000 in fiscal
2002. In fiscal 2002, net cash provided by operating activities decreased by
$8,983,000 from $14,058,000 in 2001 to $5,075,000 in 2002. The increase in cash
provided by operating activities is mainly due to higher 2003 net income
compared to 2002. Accounts receivable increased from 2002 to 2003 but to a
lesser magnitude then from 2001 to 2002. This resulted in an increase in cash
provided by operating activities of $2,400,000. This increase in accounts
receivable is due to increased sales revenue resulting in higher accounts
receivable, partially offset by better cash collections. Management attributes
the improved collections to better controls over accounts receivable collections
and customer quality. Increased cash flow from operations can also be attributed
to the increase in accounts payable from 2002 to 2003, which resulted in cash
provided from operations compared to cash used in operations in the previous
year. This resulted in an increase in cash provided by operating activities of
$2,499,000. The increase in accounts payable is mainly due to increased third
party software sales in the fourth quarter. During fiscal 2002, an aggregate net
increase in non-cash charges for depreciation, amortization, capitalized
software cost impairment, and provisions for uncollectible accounts of
$9,384,000 was offset by an increase in our net operating loss of $8,582,000.
This reflected primarily the non-cash charge in fiscal 2002, of $10,938,000 for
software assets impaired which decreased our earnings but did not affect our
cash position. In fiscal 2002, an aggregate decrease in the changes in operating
assets and liabilities of $9,725,000 was due primarily to the decrease in cash
provided from accounts receivable and deferred revenues of $10,632,000, from
$6,920,000 in fiscal 2001, to ($3,712,000) in fiscal 2002.
The net cash used in investing purposes decreased in fiscal 2003 by
$792,000 to $4,111,000 from $4,903,000 in fiscal 2002, and decreased by $256,000
in fiscal 2002, from $5,159,000 in the prior year. This represents a stable
pattern of investment in capitalized software in fiscal years 2003 and 2002. In
fiscal 2001, investment in capitalized software was higher due to continued
investment in the HR/Payroll product line for eight months of the year until the
product line was sold in February 2001. In fiscal 2003 cash used in investing
was partially offset by cash of $850,000 arising from the repayment of a note
receivable from a related party.
Cash flows used in financing activities increased $1,875,000 from net
repayments in the prior year of $604,000 to net repayment in fiscal 2003 of
$2,479,000. Of this increase, $1,345,000 represented purchases of Ross shares
into treasury stock. The repurchase of treasury stock comprised principally of a
one time purchase from a former distributor who had acquired the shares pursuant
to our purchase from him of Ross Systems Iberica, our
13
ROSS SYSTEMS, INC AND SUBSIDIARIES
Spanish subsidiary. The balance of the increase in cash used in financing
activities was an increase in repayments under our credit lines of $612,000 in
2003 as compared to $555,000 in fiscal 2002. We have reduced our use of our
credit lines as liquidity has improved. In fiscal 2002 there were no significant
capital receipts or repayments. In fiscal 2001, net repayments of capital leases
and long term debt were $1,723,000, and we received $2,000,000 in a preferred
stock issuance. We financed our continuing operations during fiscal 2003 through
cash generated from operations and available credit facilities. We expect to
fund our activities through fiscal 2004 with positive cashflows generated from
continuing operations.
At June 30, 2003, we had $8,628,000 of cash and cash equivalents.
During the first quarter of fiscal 2003, we secured a new revolving credit
facility with an asset-based lender which replaced the facility expiring in
September 2002. This facility, with a maturity date of September 23, 2004,
incorporates a maximum credit line of $5,000,000, and an interest rate of prime
plus 2% (approximately 6.75% at September 2, 2003). Borrowings under the credit
facility are collateralized by substantially all assets of the Company. At June
30, 2003, we had approximately $2,131,000 outstanding against the $5,000,000
revolving credit facility, and based on the eligible accounts receivable at June
30, 2003, our cash plus our remaining borrowing capacity under the revolving
credit facility totaled approximately $9,091,000. This represents an increase in
total availability of cash at June 30, 2003 of $3,558,000 from June 30, 2002.
On June 29, 2001, we issued convertible preferred stock to a qualified
investor in a private placement transaction. In summary, the investor purchased
500,000 preferred shares at $4.00 per share yielding $2,000,000 for Ross. The
shares are convertible, one for one at a price of $4.00 each, after June 29,
2002, and must be converted by June 29, 2006. The shares pay dividends at the
rate of 7.5%.
We have no off balance sheet financial arrangements.
We have certain fixed, monthly, payment commitments for leased
facilities and equipment. The facility leases and equipment operating leases
expire at various dates through fiscal 2016. Certain leases include renewal
options and rental escalation clauses to reflect changes in price indices, real
estate taxes, and maintenance costs.
FUNDING OBLIGATIONS
As of June 30, 2003, our contractual commitments and obligations that
require funding from operations in fiscal 2004 and subsequent years were as
follows (in thousands):
TOTAL PAYMENTS LESS THAN MORE THAN 5
DUE 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
-------------- --------- --------- --------- -----------
Operating leases ....................... $5,256 $1,384 $1,450 $592 $1,830
Unconditional purchase obligations ..... -- -- -- -- --
Debt repayment obligations ............. -- -- -- -- --
------ ------ ------ ---- ------
Total future minimum cash payment
obligations ......................... $5,256 $1,384 $1,450 $592 $1,830
====== ------ ------ ---- ------
Operating lease payments included in the above table decline
significantly in fiscal 2005 since our real estate lease for our Atlanta office
expires in April 2004. We expect to reduce our rent, either by negotiation with
our current landlord, or by relocation within the Atlanta area. We anticipate
that our new lease will involve base rentals of $325,000 to $440,000 per year
which are not reflected in the above table above since we have yet not entered
into the new lease agreement.
Certain executive employees have employment contracts containing terms
which upon termination would oblige us to make severance payments varying from
three months to three years of annual salary.
In addition to the amounts shown in the above table, we have various
agreements to purchase services, none of which are material.
14
ROSS SYSTEMS, INC AND SUBSIDIARIES
RELATED PARTY TRANSACTIONS
In July 2002, we transferred the assets and liabilities of our
subsidiary Ross Systems Auckland Limited to Kauri Business Systems Limited
(Kauri), a startup company in which we retained a 20% interest. The balance of
the ownership of Kauri consists of former employees of Ross Systems Auckland
Limited. We wrote off all remaining net book value as well as the residual 20%
interest as we deemed its value to be minimal at the translation date. The new
company, based in New Zealand, provided product development and subcontracted
consulting services to us, while also managing and supporting Ross customers as
our Distributor for the Australian region. During the 11 months ended June 30,
2003, Kauri provided services to us to the value of approximately $405,000. For
the same period, we billed Kauri approximately $82,000 for royalties owed on
services and maintenance revenues earned.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
our financial position or result of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123 ("Statement 148"). This
amendment provides two additional methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. Additionally, more prominent disclosures in both annual and
interim financial statements are required for stock-based employee compensation.
The transition guidance and annual disclosure provisions of Statement 148 are
effective for fiscal years ending after December 15, 2002. This Interim Report
complies with the requirements of Statement 148. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002. The adoption of Statement
148 did not have a material impact on our consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
"Consolidation of Variable Interest Entities." This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities which
possess certain characteristics. The Interpretation requires that if a business
enterprise has a controlling financial interest in a variable interest entity,
the assets, liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with those of
the business enterprise. This Interpretation applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. We do not
have any ownership in any variable interest entities as of June 30, 2003. We
will apply the consolidation requirement of FIN 46 in future periods if we
should own any interest in any variable interest entity.
In April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities ("Statement 149"). This Statement amends Statement 133 for
decisions made (1) as part of the Derivatives Implementation Group process that
effectively required amendments to Statement 133, (2) in connection with other
Board projects dealing with financial instruments, and (3) in connection with
implementation issues raised in relation to the application of the definition of
a derivative, in particular, the meaning of an initial net investment that is
smaller than would be required for other types of contracts that would be
expected to have a similar response to changes in market factors, the meaning of
underlying, and the characteristics of a derivative that contains financing
components. We do not have any derivative instruments or hedging activities. The
application of Statement 149 did not have a material impact on our financial
statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("Statement 150"). This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Statement 150 requires that certain
mandatorily redeemable financial instruments issued in the form of shares are to
be classified as liabilities rather than equity. We have no outstanding
financial instruments that fall into the
15
ROSS SYSTEMS, INC AND SUBSIDIARIES
definitions covered by this Statement. The application of Statement 150 did not
have a material impact on our financial statements.
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 included or
incorporated by reference into this annual report on Form 10-K.
PROPOSED MERGER: We have announced plans to enter into a merger as
discussed within the subsequent event footnote of the financial statements
attached to this annual report on Form 10-K. On September 4, we announced our
recommendation to our shareholders that they vote in favor of a plan of merger
between Ross and the Software division of chinadotcom Corporation. Preparations
for the merger will be a material expense, will consume much of executive
management's time and may result in potential customers deferring purchasing
decisions until they understand the form of and reasons for the merger. The
combined effect of these actions could have an adverse effect on our business
model and results of financial operations if the merger is not consummated.
LICENSE REVENUES: Our software product license revenues can fluctuate
depending upon such factors as overall trends in the United States and
International economies, new product introductions, as well as customer buying
patterns. Because we typically ship software products within a short period
after orders are received, and therefore maintain a relatively small backlog,
any weakening in customer demand could have an almost immediate adverse impact
on revenues and operating results. Moreover, a substantial portion of the
revenues for each quarter is attributable to a limited number of sales and tends
to be realized in the latter part of the quarter. Thus, even short delays or
deferrals of sales near the end of a quarter can cause substantial fluctuations
in quarterly revenues and operating results. Finally, certain agreements signed
during a quarter may not meet our revenue recognition criteria resulting in
deferral of such revenue to future periods. Because our operating expenses are
based on anticipated revenue levels and a high percentage of our expenses are
relatively fixed, a small variation in the timing of the recognition of specific
revenues can cause significant variation in operating results from quarter to
quarter.
ECONOMIC SLOWDOWN: Our business may be adversely impacted by the
worldwide economic slowdown and related uncertainties. Weak economic conditions
worldwide have contributed to the current technology industry slow-down. This
may impact our business resulting in reduced demand and increased price
competition, which may result in higher overhead costs, as a percentage of
revenues. Additionally, this uncertainty may make it difficult for our customers
to forecast future business activities. This could create challenges to our
ability to profitably grow our business. If the economic or market conditions
further deteriorate, this could have a material adverse impact on the results of
operations and cash flow.
COMPETITION: We may face increased competition and our financial
performance and future growth depend upon sustaining a leadership position in
our product functionality. Competitive challenges faced by Ross are likely to
arise from a number of factors, including: industry volatility resulting from
rapid development and maturation of technologies; industry consolidation and
increasing price competition in the face of worsening economic conditions.
Although there are fewer competitors in our target markets than previously,
failure to compete successfully against those remaining could harm our business
operating results and financial condition.
STOCK PRICE: Our stock price, like that of other technology companies,
is subject to volatility because of factors such as announcement of new
products, services or technological innovations by us or by our competitors,
quarterly variations in our operating results, and speculation in the press or
investment community. In addition our stock price is affected by general
economic and market conditions and may be negatively affected by unfavorable
global economic conditions.
INTELLECTUAL PROPERTY: Our business may suffer if it cannot protect our
intellectual property. We generally rely upon copyright, trademark and trade
secret laws and contract rights in the United States and in other countries to
establish and maintain proprietary rights in our technology and products.
However, there can be no assurance that any of our proprietary rights will not
be challenged, invalidated or circumvented. In addition, the laws of certain
countries do not protect proprietary rights to the same extent as do the laws of
the United States. Therefore, there can be no assurance that we will be able to
adequately protect our proprietary technology against unauthorized third-
16
ROSS SYSTEMS, INC AND SUBSIDIARIES
party copying or use, which could adversely affect our competitive position.
Further, there can be no assurance that we will be able to obtain licenses to
any technology that may be required to conduct our business or that, if
obtainable, such technology could be licensed at a reasonable cost.
KEY PERSONNEL: Our success depends upon retaining and recruiting highly
qualified employees and management personnel. However, severe challenges may be
faced in attracting and retaining such employees. Although staff 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: We have a worldwide presence and as such maintain
offices and derive revenues from sources overseas. For fiscal 2003,
international revenue as a percentage of total revenue was approximately 40%.
Our international business is subject to typical risks of an international
business, including, but not limited to: differing economic conditions, changes
in political climates, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors. The effect of foreign exchange rate fluctuations on Ross in fiscal 2003
was not material.
INTEREST RATES: Our exposure to interest rates relates primarily to our
cash equivalents and certain debt obligations. The Company invests in financial
instruments with original maturities of three months or less. Any interest
earned on these investments is recorded as interest income on our statement of
operations. Because of the short maturity of our investments, a near-term change
in interest rates would not materially affect our financial position, results of
operations, or cash flows. Certain of our debt obligations include a variable
rate of interest. We did not engage in any derivative/hedging transactions in
fiscal 2003.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference
herein from Part IV Item 14(a) (1) and (2) of this Form 10-K Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported, in July 2002, the Company dismissed Arthur
Andersen, LLP and engaged BDO Seidman LLP as its independent public accountants.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Securities and Exchange Commission rules, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this annual
report. This evaluation was carried out under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer. Based on this evaluation, these officers have
concluded that the design and operation of our disclosure controls and
procedures are effective. There were no significant changes to our internal
controls during the period covered by this annual report that materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
Disclosure controls and procedures are controls and other procedures of
Ross designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act are accumulated and communicated to management, including the
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
17
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 our definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in 2003 (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 Ross.
There are no family relationships between any director or executive officer and
any other director or executive officer. Executive officers serve at the
discretion of the Board of Directors.
EXECUTIVE OFFICERS OF ROSS SYSTEMS
NAME AGE POSITION
---- --- --------
J. Patrick Tinley...................... 55 Chairman and CEO, and Director
Robert B. Webster...................... 55 Executive Vice President Operations and
Secretary
Verome M. Johnston..................... 38 Vice President and Chief Financial Officer
Eric W. Musser......................... 38 Vice President and Chief Technology Officer
Rick Marquardt......................... 50 Senior Vice President Marketing and Sales
Mr. Tinley was promoted to Chairman & 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, Executive Vice President Operations is also Secretary and
a director of the Company. Mr. Webster joined the Company in June 1998 as its
CFO and was promoted to his current role in December 2000 and later elected
director in August 2001. Mr. Webster is responsible for the consulting services
function as well as the administrative, legal, human resource and financial
operations of the company worldwide. Mr. Webster holds a BS degree in Accounting
and Computer Science, as well as an MBA specialized in Information Systems from
St. Peter's College. Mr. Webster is a Certified Public Accountant in the State
of Georgia and a member of the AICPA. Mr. Webster, prior to joining the Company
served in a progression of more senior financial and general management
positions with both Unisys Corporation and Wang Laboratories, Inc. over a twenty
year period.
Mr. Johnston, Vice President and Chief Financial Officer, joined the
Company in July 1998 as Corporate Controller. He was promoted to Vice President
in August 1999, and to Chief Financial Officer in December 2000. Immediately
prior to joining the Company, Mr. Johnston served as Vice President and Chief
Financial Officer of Market Area North America for Sunds Defibrator, where he
had been employed since June of 1991. Prior to that, Mr. Johnston was employed
with Deloitte & Touche. Mr. Johnston maintains a CPA certificate in Georgia and
earned Bachelor of Business Administration degrees in Accounting and Finance
from Valdosta State University.
Mr. Musser joined the Company in 1993 and was promoted to CTO in May of
2000. He has served in development for over 5 years and has held the position of
Vice President, Development for the past 2 years. Mr.
18
ROSS SYSTEMS, INC AND SUBSIDIARIES
Musser has also held senior positions in Marketing and has been a critical
influence in changing the Company from client/server solutions to Internet based
solutions. From 1989 to 1993 Mr. Musser held IT management positions in the
steel industry.
Mr. Marquardt joined the company in October 2001 as Senior Vice
President of Worldwide Sales and Marketing. Prior to joining Ross Systems he was
Vice President and General Manager - Products at Eftia OSS Solutions, a provider
of operational support system (OSS) solutions. In 2000, Mr. Marquardt was a Vice
President at NSE Inc., an international distribution and investment firm. From
1997 to 2000 Mr. Marquardt served as COO of Distinction Software a provider of
enterprise-wide supply chain-planning solutions. From 1994 to 1997 he was Vice
President of Corporate Marketing and Business Development for Datalogix
International. From 1989 to 1994, Mr. Marquardt held various positions at Ross
Systems in Sales and Marketing including Vice President of Manufacturing
Systems. Prior to 1989, Mr. Marquardt held various management positions with
Management Science America, Inc. Mr. Marquardt has a Bachelor of Science Degree
from the University of Wisconsin - Stevens Point.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to
the Proxy Statement.
19
ROSS SYSTEMS, INC AND SUBSIDIARIES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements. The following Consolidated
Financial Statements of Ross Systems, Inc. are filed as part
of this report:
PAGE
----
Report of BDO Seidman , LLP, Independent Certified Public Accountants.......................................... F-1
Fiscal 2001, and 2000 Report of Arthur Andersen LLP, Independent Public Accountants............................ F-2
Consolidated Balance Sheets at June 30, 2003 and 2002.......................................................... F-3
Consolidated Statements of Operations--Years Ended June 30, 2003, 2002, and 2001............................... F-4
Consolidated Statements of Cash Flows--Years Ended June 30, 2003, 2002, and 2001............................... F-5
Consolidated Statements of Shareholders' Equity--Years Ended June 30, 2003, 2002, and 2001..................... F-6
Notes to Consolidated Financial Statements..................................................................... F-7
2. Financial Statement Schedule. The following financial
statement schedule of Ross Systems, Inc. for the Years Ended
June 30, 2003, 2002, and 2001 is filed as part of this Report
and should be read in conjunction with the Consolidated
Financial Statements of Ross Systems, Inc.
SCHEDULE PAGE
- -------- ----
II Valuation and Qualifying Accounts........................................................................ S-1
Schedules not listed above have been omitted because they are not
applicable or are not required, or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits. The Exhibits listed on the accompanying Index to
Exhibits immediately following the financial statement
schedules are filed as part of, or incorporated by reference
into, this Report.
(b) Reports on Form 8-K.
None
20
ROSS SYSTEMS, INC AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on the 22nd day of September, 2003.
ROSS SYSTEMS, INC.
By: /s/ J. Patrick Tinley
----------------------------------------------
J. Patrick Tinley
Chairman and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints J. Patrick Tinley his attorney-in-fact,
with the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that the said
attorney-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ J. Patrick Tinley Chairman and Chief Executive Officer September 22, 2003
- ------------------------------------ (Principal Executive Officer)
J. Patrick Tinley
/s/ Robert B. Webster Executive Vice President Operations, Company September 22, 2003
- ------------------------------------ Secretary and Director
Robert B. Webster
/s/ Verome M. Johnston Vice President and Chief Financial Officer September 22, 2003
- ------------------------------------ (Principal Financial and Accounting
Verome M. Johnston Officer)
/s/ J. William Goodhew III Director September 22, 2003
- ------------------------------------
J. William Goodhew III
/s/ Frank M. Dickerson Director September 22, 2003
- ------------------------------------
Frank M. Dickerson
/s/ Bruce J. Ryan Director September 22, 2003
- ------------------------------------
Bruce J. Ryan
21
ROSS SYSTEMS, INC AND SUBSIDIARIES
ROSS SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 2003
ROSS SYSTEMS, INC.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Asset Sale Agreement between Registrant and Now Solutions LLC
dated March 5, 2001 (1)
3.1 Certificate of Incorporation of the Registrant, as amended (2)
3.2 Bylaws of the Registrant, as amended (2)
3.3 Amendment to the Certificate of Incorporation of the
Registrant, dated April 26, 2001, for the 1 for 10 Reverse
Stock Split.(3)
4.1 Certificate of Designation of Rights, Preferences and
Privileges of Series B Preferred Stock of the Registrant (4)
4.2 Form of the subordinated debenture agreement due February 6,
2003 issued by the Registrant to each investor (6)
4.3 Registration Rights Agreement between the Registrant and each
Investor (6)
10.1 Preferred Share Rights Agreement, dated September 4, 1999
between the Registrant and Registrar and Transfer Company (5)
10.2 Employment Agreement dated January 7, 1999, modified March 24,
2003, between Mr. Patrick Tinley and the Registrant (8)
10.3 Employment Agreement dated September 13, 1999, modified March
24, 2003, between Mr. Robert B. Webster and the Registrant (8)
10.4 Convertible Preferred Stock Purchase Agreement dated June 29,
2001 between Registrant and Benjamin W. Griffith, III (7)
10.5 Loan and Security Agreement dated September 24, 2002 between
Registrant and Silicon Valley Bank (3)
21.1 Listing of Subsidiaries of Registrant
23.1 Consent of BDO Seidman, LLP
24.1 Power of Attorney (included on signature page)
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
---------------
(1) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 8-K/A filed May 15, 2001.
(2) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 8-K filed July 24, 1998.
(3) Incorporated by reference to the exhibit filed with the Registrant's
current Report on Form 10K/A filed October 2, 2002.
(4) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q filed May 6, 1996.
(5) Incorporated by reference to the exhibit filed with the Registrant's
Registration Statement on Form 8-A filed September 4, 1998.
(6) Incorporated by reference to the exhibit filed with the Registrant's
current report on Form 8-K filed February 12, 1998.
(7) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10K filed September 27, 2001.
(8) Incorporated by reference to the exhibit filed with the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003
filed May 14, 2003.
22
ROSS SYSTEMS, INC AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Ross Systems, Inc.
We have audited the accompanying consolidated balance sheets of Ross Systems,
Inc. and subsidiaries as of June 30, 2003 and 2002, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended. We have also audited the financial statement schedule for the years
ended June 30, 2003 and 2002, listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. The Company's consolidated financial statements
and financial statement schedule as of and for the year ended June 30, 2001,
prior to the adjustments discussed in the summary of significant accounting
policies, were audited by auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements and
schedule in their report dated August 17, 2001.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and schedules are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ross Systems, Inc.
and subsidiaries as of June 30, 2003 and 2002 and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, the 2003 and 2002 schedules present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1, during the year ended June 30, 2002 the company changed
the manner in which it records reimbursement of out-of-pocket expenses upon the
adoption of the accounting standards in of Emerging Issues Task Force Issue
01-14.
As discussed in Note 1, the Company changed the manner in which it accounts for
goodwill and other intangible assets upon adoption of the accounting standards
in Statement of Financial Accounting Standards No. 142 on July 1, 2001.
As discussed above, the financial statements of Ross Systems Inc. and
subsidiaries as of June 30, 2001, and for the year then ended, were audited by
other auditors who have ceased operations. As described in Note 1, these
financial statements have been restated to reflect the adoption of Emerging
Issues Task Force Issue 01-14 and revised to include the transitional
disclosures required by SFAS No. 142. We audited the adjustments described in
Note 1 that were applied to restate the 2001 financial statements to reflect the
adoption of Emerging Issues Task Force Issue 01-14. We also audited the
adjustments reflected in the transitional disclosures required by SFAS No. 142.
In our opinion, such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review or apply any procedures to the
2001 financial statements of the company, other than with respect to such
adjustments and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 financial statements taken as a whole.
/s/ BDO Seidman, LLP
Atlanta, Georgia
August 20, 2003 (Except for Note 9 as to which the date is September 4, 2003)
F-1
ROSS SYSTEMS, INC AND SUBSIDIARIES
THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY ISSUED REPORT BY ARTHUR ANDERSEN
LLP AND IT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. ARTHUR ANDERSEN LLP HAS
NOT CONSENTED TO ITS INCORPORATION BY REFERENCE INTO ROSS SYSTEMS INC.'S
PREVIOUSLY FILED REGISTRATION STATEMENTS FILE NOS: 333-65660, 333-39348,
33-42036, 33-48226, 33-56584, 33-72168, 33-89128, 333-36745, 333-44665,
333-71005, 33-89504, 333-19619, 333-06053, 333-44363, 333-47877, 333-58639, AND
333-65065. THEREFORE, AN INVESTOR'S ABILITY TO RECOVER ANY POTENTIAL DAMAGE MAY
BE LIMITED.
REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS
To Ross Systems, Inc.:
We have audited the accompanying consolidated balance sheets of ROSS
SYSTEMS, INC. (a Delaware corporation) AND SUBSIDIARIES as of June 30,
2001 and 2000* and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years ended
June 30, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Ross
Systems, Inc. and subsidiaries as of June 30, 2001 and 2000*, and the
results of their operations and their cash flows for each of the three
years ended June 30, 2001 in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index
of financial statements included in Item 14 is presented for purposes
of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
August 17, 2001
* The 2000 and 2001 Consolidated Balance Sheet and the 1999 and 2000
Consolidated Statement of Operations, Shareholders Equity, and Cash Flows are
not required to be present in the 2003 Annual Report.
F-2
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
-------------------------
2003 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents .................................................................. $ 8,628 $ 5,438
Accounts receivable, less allowance for doubtful accounts
of $1,532 and $3,379, at 2003, and 2002 respectively ................................... 12,880 12,319
Prepaid and other current assets ........................................................... 731 532
Note receivable from related party ......................................................... -- 850
-------- --------
Total current assets .................................................................... 22,239 19,139
Property and equipment, net ................................................................... 1,406 1,450
Computer software costs, net .................................................................. 13,573 14,036
Other assets .................................................................................. 2,993 2,993
-------- --------
Total assets ............................................................................ $ 40,211 $ 37,618
======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Short term debt ............................................................................ $ 2,800 $ 3,967
Accounts payable ........................................................................... 2,978 2,682
Accrued expenses ........................................................................... 4,940 4,476
Income taxes payable ....................................................................... 261 15
Deferred revenues .......................................................................... 12,203 12,535
-------- --------
Total liabilities ....................................................................... 23,182 23,675
-------- --------
Commitments and Contingencies
Shareholders' equity:
Convertible Preferred stock, no par value 5,000,000 shares authorized; 500,000 shares
issued and outstanding .................................................................. 2,000 2,000
Common stock, $0.001 par value; 15,000,000 shares authorized; 2,815,603 and
2,625,378 shares issued and outstanding ................................................. 28 26
Additional paid-in capital ................................................................. 87,189 86,983
Accumulated deficit ........................................................................ (69,094) (73,300)
Accumulated other comprehensive deficit .................................................... (1,749) (1,766)
Treasury stock at cost, 158,977 shares ..................................................... (1,345) --
-------- --------
Total shareholders' equity .............................................................. 17,029 13,943
-------- --------
Total liabilities and shareholders' equity .................................................... $ 40,211 $ 37,618
======== ========
See accompanying Notes to Consolidated Financial Statements
F-3
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED JUNE 30,
--------------------------------
2003 2002 2001
-------- -------- --------
Revenues:
Software product licenses .................................................................. $ 14,589 $ 13,026 $ 9,607
Consulting and other services .............................................................. 13,489 13,013 16,520
Maintenance ................................................................................ 20,022 20,014 24,678
-------- -------- --------
Total revenues .......................................................................... 48,100 46,053 50,805
-------- -------- --------
Operating expenses:
Costs of software product licenses ......................................................... 2,295 1,870 980
Costs of consulting, maintenance and other services (inclusive of reimbursable expenses of
$1,180, $834, and $1,307 for 2003, 2002, and 2001, respectively, and exclusive of non
recurring expense of $353 for 2001) ..................................................... 17,193 17,023 17,595
Software product license sales and marketing (exclusive of non recurring expense of $136
for 2001) ............................................................................... 11,384 9,461 15,026
Product development, net of capitalized computer software costs and amortized computer
software costs (exclusive of non recurring expense of $301 for 2001) .................... 7,230 10,241 11,496
General and administrative ................................................................. 4,376 4,393 4,737
Provision for uncollectible accounts ....................................................... 831 1,444 1,514
Amortization of goodwill ................................................................... -- -- 691
Non-recurring costs (benefit) .............................................................. -- (650) 790
Non-cash charge for impairment of capitalized software costs ............................... -- 10,938 --
-------- -------- --------
Total operating expenses ................................................................ 43,309 54,720 52,829
-------- -------- --------
Operating profit (loss) ................................................................. 4,791 (8,667) (2,024)
Other income (expense):
Gain on sale of product line ............................................................... -- -- 2,372
Other financial, net ....................................................................... (180) (625) (1,181)
-------- -------- --------
Net income (loss) before income taxes ................................................... 4,611 (9,292) (833)
Income tax expense ......................................................................... 405 132 9
-------- -------- --------
Net income (loss) ............................................................................. 4,206 (9,424) (842)
Preferred stock dividends .................................................................. (150) (150) --
-------- -------- --------
Net income (loss) available to common shareholders ...................................... $ 4,056 $ (9,574) $ (842)
======== ======== ========
Net income (loss) per common share--basic ..................................................... $ 1.54 $ (3.65) $ (0.33)
======== ======== ========
Net income (loss) per common share--diluted ................................................... $ 1.28 $ (3.65) $ (0.33)
======== ======== ========
Shares used in per share computation--basic ................................................... 2,641 2,625 2,566
======== ======== ========
Shares used in per share computation--diluted ................................................. 3,296 2,625 2,566
======== ======== ========
See accompanying Notes to Consolidated Financial Statements
F-4
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
--------------------------------
2003 2002 2001
-------- -------- --------
Cash flows from operating activities:
Net income (loss) .................................................................. $ 4,206 $ (9,424) $ (842)
Adjustments to reconcile net loss to cash provided by operating activities:
Non cash financing costs ........................................................ -- -- 60
Non-cash stock compensation costs ............................................... 175 -- --
Impairment of capitalized software costs ........................................ -- 10,938 --
Depreciation and amortization of property and equipment ......................... 766 984 1,592
Amortization of computer software costs ......................................... 4,702 7,184 7,369
Amortization of goodwill ........................................................ -- -- 691
Provision for uncollectible accounts ............................................ 831 1,444 1,514
Changes in operating assets and liabilities, net of sale of product line:
Accounts receivable ........................................................... (1,246) (3,646) 9,911
Prepaid and other current assets .............................................. (121) 575 (149)
Income taxes recoverable/payable .............................................. 271 185 92
Accounts payable .............................................................. 281 (2,218) (2,178)
Accrued expenses .............................................................. 489 (881) (1,011)
Deferred revenues ............................................................. (246) (66) (2,991)
-------- -------- --------
Cash provided by operating activities ...................................... 10,108 5,075 14,058
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment, net ........................................... (722) (740) (277)
Computer software costs capitalized ................................................ (4,239) (4,307) (6,878)
Note receivable from related party ................................................. 850 -- --
Sale of product line, net of assets disposed ....................................... -- -- 1,567
Other .............................................................................. -- 144 429
-------- -------- --------
Cash used in investing activities .......................................... (4,111) (4,903) (5,159)
-------- -------- --------
Cash flows from financing activities:
Net cash paid on line of credit activity ........................................... (1,167) (555) (5,353)
Debt and capital lease payments .................................................... -- -- (1,723)
Repurchase of treasury stock ....................................................... (1,345) -- --
Proceeds from issuance of preferred stock .......................................... -- -- 2,000
Proceeds from issuance of common stock ............................................. 183 101 17
Preference dividend paid ........................................................... (150) (150) --
-------- -------- --------
Cash used in financing activities .......................................... (2,479) (604) (5,059)
-------- -------- --------
Effect of exchange rate changes on cash ............................................... (328) 154 (134)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .................................. 3,190 (278) 3,706
-------- -------- --------
Cash and cash equivalents at beginning of fiscal year ................................. 5,438 5,716 2,010
-------- -------- --------
Cash and cash equivalents at end of fiscal year ....................................... $ 8,628 $ 5,438 $ 5,716
======== ======== ========
See accompanying Notes to Consolidated Financial Statements
F-5
ROSS SYSTEMS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Accum-
ulated
Preferred Other Total
Stock Common Stock Treasury Stock Accum- Compre- Share- Comprehen-
-------------- ------------- --------------- Paid in ulated hensive holders' sive
Shares Amount Shares Amount Shares Amount Capital Deficit Deficit Equity Loss
------ ------ ------ ------ ------ ------- -------- -------- ------- -------- ----------
Balances as of June 30, 2000... -- $ -- 2,380 $ 24 -- $ -- $ 85,780 $(63,034) $(1,880) $ 20,890
------ ------ ------ ------ ------ ------- -------- -------- ------- -------- ----------
Conversion of debentures....... 173 2 1,175 1,177
Issuance of stock pursuant
to employee stock
purchase plan............... 13 17 17
Effect of foreign currency
translation................. (198) (198) $ (198)
Issuance of preference
shares...................... 500 2,000 2,000
Issuance of warrants
pursuant to cost of
financing................... 60 60
Net loss....................... (842) (842) (842)
----------
Comprehensive Loss............. (1,040)
==========
------ ------ ------ ------ ------ ------- -------- -------- ------- --------
Balances as of June 30, 2001... 500 2,000 2,566 26 -- -- 87,032 (63,876) (2,078) 23,104
====== ====== ====== ====== ====== ======= ======== ======== ======= ========
Issuance of stock pursuant
to employee stock purchase
and option plans............ 59 101 101
Effect of foreign currency
translation................. 312 312 312
Net loss....................... (9,424) (9,424) (9,424)
Dividends on preferred stock (150) (150)
----------
Comprehensive Loss............. (9,112)
==========
------ ------ ------ ------ ------ ------- ------- -------- ------- --------
Balances as of June 30, 2002... 500 2,000 2,625 26 -- -- 86,983 (73,300) (1,766) 13,943
====== ====== ====== ====== ====== ======= ======= ======== ======= ========
Issuance of stock pursuant
to employee stock purchase
and option plans............ 71 1 357 358
Issuance of stock in
fulfillment of 1996
acquisition of Spanish
subsidiary.................. 120 1 (1)
Repurchase of treasury stock... (159) (1,345) (1,345)
Effect of foreign currency
translation................. 17 17 17
Net profit (loss).............. 4,206 4,206 4,206
Dividends on preferred stock (150) (150)
----------
Comprehensive Income........... $ 4,223
==========
------ ------ ------ ------ ------ ------- ------- -------- ------- --------
Balances as of June 30, 2003... 500 $2,000 2,816 $ 28 (159) $(1,345) $87,189 $(69,094) $(1,749) $ 17,029
====== ====== ====== ====== ====== ======= ======= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business of the Company
Ross Systems, Inc. (NASDAQ: ROSS) delivers innovative software
solutions that help manufacturers worldwide fulfill their business
growth objectives through increased operational efficiencies, improved
profitability, strengthened customer relationships and streamlined
regulatory compliance. Focused on the food and beverage, life sciences,
chemicals, metals and natural products industries and implemented by
over 1,000 customer companies worldwide, the company's family of
Internet-architected solutions is a comprehensive, modular suite that
spans the enterprise, from manufacturing, financials and supply chain
management to customer relationship management, performance management
and regulatory compliance.
Publicly traded on the NASDAQ since 1991, Ross's global
headquarters are based in the U.S. in Atlanta, Georgia, with sales and
support operations around the world.
The Company operates in one business segment and no individual
customer accounts for more than 10% of total revenues. The Company does
not have a concentration of credit risk in any one industry.
Approximately 60% of the Company's revenues are derived from the North
American market.
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant inter-company balances and transactions have been
eliminated in consolidation.
Stock Based Compensation.
The company measures compensation cost for its stock incentive
and option plans using the intrinsic value-based method of accounting.
Had the company used the fair value-based method of accounting
to measure compensation expense for its stock incentive and option
plans and charged compensation cost against income over the vesting
periods, based on the fair value of options at the date of grant, net
income and the related basic and diluted per common share amounts for
the twelve months ended June 30, 2003, 2002, and 2001, would have been
reduced to the following pro forma amounts:
(In thousands, except per share data)
FISCAL YEAR ENDED JUNE 30,
---------------------------------------
2003 2002 2001
--------- --------- ---------
Net income (loss) available to common shareholders:
As reported ............................................ $ 4,056 $ (9,574) $ (842)
Add: Stock-based compensation expense included in
reported net income, net of tax ...................... 175 -- --
Deduct: Total stock-based employee compensation
expense under fair value-based method, net of tax ..... (699) (406) (460)
--------- --------- ---------
Pro forma net income (loss) available to common
shareholders .......................................... $ 3,532 $ (9,980) $ (1,302)
--------- --------- ---------
Basic net earnings per share:
As reported ............................................ $ 1.54 $ (3.65) $ (0.33)
Pro forma .............................................. 1.34 (3.80) (0.51)
Diluted net earnings per share:
As reported ............................................ 1.28 (3.65) (0.33)
Pro forma .............................................. 1.07 (3.80) (0.51)
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following weighted average assumptions for the Company's
Stock Option Plan were used to determine the pro forma amounts noted
above:
YEAR ENDED JUNE 30,
------------------------------
2003 2002 2001
------- ------- -------
Expected life.................................................... 5 5 5
Expected volatility.............................................. 48.6% 80.4% 121.6%
Risk-free interest rate.......................................... 3.9% 5.0% 5.3%
Expected dividend yield.......................................... None None None
Revenue Recognition.
In accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements," the Company recognizes revenues from licenses of computer
software "up-front" provided that a non-cancelable license agreement
has been signed, the software and related documentation have been
shipped, there are no material uncertainties regarding customer
acceptance, collection of the resulting receivable is deemed probable,
and no significant other vendor obligations exist. The revenue
associated with any license agreements containing cancellation or
refund provisions is deferred until such provisions lapse. Where the
Company has future obligations, if such obligations are insignificant,
related costs are accrued immediately. When the obligations are
significant, the software product license revenues are deferred. Future
contractual obligations can include software customization,
requirements to provide additional products in the future and porting
products to new platforms. Contracts which require significant software
customization are accounted for on the percentage-of-completion basis.
Revenues related to significant obligations to provide future products
or to port existing products are deferred until the new products or
ports are completed.
The Company's revenue recognition policies are designed to
comply with American Institute of Certified Public Accountants
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," and
with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements." Revenues recognized from multiple-element
software license contracts are allocated to each element of the
contracts based on the fair values of the elements, such as licenses
for software products, maintenance, or professional services. The
determination of fair value is based on objective evidence which is
specific to the Company. The Company limits its assessment of objective
evidence for each element to either the price charged when the same
element is sold separately, or the price established by management
having the relevant authority to do so, for an element not yet sold
separately. If evidence of fair value of all undelivered elements
exists but evidence does not exist for one or more delivered elements,
then revenue is recognized using the residual method. Under the
residual method, the fair value of the undelivered elements is deferred
and the remaining portion of the arrangement fee is recognized as
revenue.
Service revenues generated from professional consulting and
training services are recognized as the services are performed.
Maintenance revenues, including revenues bundled with original software
product license revenues, are deferred and recognized over the related
contract period, generally 12 months.
Computer Software Costs.
The Company capitalizes computer software product development
costs incurred in developing a product once technological feasibility
has been established and until the product is available for general
release to customers. Technological feasibility is established when the
Company either (1) completes a detail program design that encompasses
product function, feature and technical requirements and is ready for
coding and confirms that the product design is complete, that the
necessary skills, hardware and software technology are available to
produce the product, that the completeness of the detail program design
is consistent with the product design by documenting and tracing the
detail program design to the product specifications, and that the
detail program design has been reviewed for high-risk development
issues and any related uncertainties have been resolved through coding
and testing or (2) completes a product design and working model of the
software product, and the completeness of the working model and its
consistency with the product design have been confirmed by testing. The
Company evaluates realizability of the capitalized amounts based on
expected revenues from the product over the remaining product life.
Where future revenue streams are not expected to cover remaining
amounts to be amortized, the Company either accelerates amortization or
expenses remaining capitalized amounts. Amortization of such costs is
computed as the greater of (1) the ratio of current revenues to
expected revenues from the related product sales or (2) a straight-line
basis over the expected economic life of the product (not to exceed
five years). Software costs related to the development of new products
incurred prior to establishing technological feasibility or after
general release are expensed as incurred.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2003 and 2002, capitalized computer software costs
approximated $63,945,000 and $61,587,000 respectively, and related
accumulated amortization totaled $50,372,000 and $47,551,000
respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with an original maturity date of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
accumulated using the straight-line method over the estimated useful
lives of the respective assets, generally three to seven years.
Leasehold improvements and equipment under capital leases are amortized
using the straight-line method over the shorter of the terms of the
related leases or the respective useful lives of the assets.
Long-lived Assets
Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset,
a loss is recognized for the difference between the fair value and the
carrying value of the asset.
Fair Value of Financial Instruments
The carrying amounts reported on the balance sheet for
accounts receivable, notes receivable, accounts payable and short term
debt approximate their fair values.
Net Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing
net earnings or net loss by the weighted average number of common
shares outstanding during the period. Shares issued or reacquired
during the year are weighted for the portion of the year that they were
outstanding. Diluted earnings (loss) per common share is computed in a
manner consistent with that of basic earnings (loss) per share while
giving effect to all potentially dilutive common shares that were
outstanding during the period. Potentially dilutive common shares used
in computing diluted earnings per share are shown in the following
table. As a result of the net losses incurred in the years ended June
30, 2002, and 2001, the potentially dilutive common shares for these
fiscal years were not considered in the calculation as their impact
would be antidilutive. Potentially dilutive common shares excluded in
2003, 2002 and 2001 were as follows:
FISCAL YEAR
ENDED JUNE 30,
---------------------
2003 2002 2001
---- ---- -----
Stock options................................................. 347 41 39
Warrants...................................................... -- 47 --
Convertible Preferred shares.................................. -- 500 1
---- ---- -----
Total........................................................ 347 588 40
---- ---- -----
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation from basic earnings per
share to diluted earnings per share for fiscal 2003 (in thousands):
EARNINGS
AVAILABLE TO
COMMON WEIGHTED AVERAGE EARNINGS
SHAREHOLDERS SHARES OUTSTANDING PER SHARE
------------ ------------------ ---------
Basic................................................... $ 4,056 2,641 $1.54
Stock options........................................... 108
Warrants................................................ 47
Convertible Preferred shares............................ 150 500
------- ----- -----
Diluted................................................. $ 4,206 3,296 $1.28
------- ----- -----
Goodwill
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. The
Company elected early adoption and applied the provisions of this
statement, effective in the first quarter of fiscal 2002. Under the new
rules, goodwill is no longer amortized but is subject to annual
impairment tests. Other intangible assets will continue to be amortized
over their useful lives. Goodwill attributable to each of the Company's
reporting units was tested in June 2003 for impairment by comparing
the fair value of each of the reporting units with its carrying value.
The fair values of these reporting units were determined using a
combination of discounted cash flow analysis and market multiples based
on historical and projected financial information. It was determined
that there was no impairment to goodwill in any period subsequent to
the date the Company adopted SFAS 142.
Net loss and loss per share for fiscal 2001, adding back
goodwill amortization of $691,000 ($0.27 per basic and diluted share)
would have been $(151,000), $(0.06) per basic and diluted share. Prior
to July 1, 2001, goodwill was being amortized over periods ranging from
7 to 10 years.
Reimbursable Expenses
Prior to January 1, 2002, the Company recorded reimbursement
by its customers for out-of-pocket expenses as a decrease to cost of
services. The Company's results of operations for the fiscal years June
30, 2001, have been reclassified for comparable purposes in accordance
with the Emerging Issues Task Force release 01-14, "Income Statement
Characterization of Reimbursements Received for Out of Pocket Expenses
Incurred." The effect of this reclassification was to increase both
services revenues and cost of services by, $1,307,000 for fiscal year
2001.
Income Taxes
In accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("Statement 109"), the Company
utilizes the asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are established to recognize the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Foreign Operations and Currency Translation
The local currencies of the Company's foreign subsidiaries are
the functional currencies. Assets and liabilities of foreign
subsidiaries are translated into U.S. dollars at current exchange
rates, and the resulting translation gains and losses are included as
an adjustment to shareholders' equity as a component of comprehensive
income. Transaction gains and losses that relate to U.S. dollar
denominated intercompany short-term receivables recorded in the
financial statements of the Company's foreign subsidiaries and are
reflected in income. Where related intercompany balances have been
designated as long-term, gains and losses are included as an adjustment
to shareholders' equity as a component of comprehensive income.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications
It is the Company's policy to reclassify prior year amounts to
conform with current year financial statement presentation when
necessary.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from these estimates.
Advertising Costs
The Company generally expenses advertising costs at the time
the advertisement is published, or in the case of direct mail, when
mailed. Advertising costs for the fiscal years ended June 30, 2003,
2002, and 2001 were approximately $574,000, $437,000, and $607,000
respectively.
Segment Information
SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information" established standards for the way that public
business enterprises report information about operating segments in
their financial statements. The standard defines operating segments as
components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Based on these standards the Company has determined that
it operates in four geographical segments: Northern Europe, Spain the
United Kingdom and North America. During fiscal 2001, the Company
divested its French subsidiary and adopted an indirect sales approach
in the French market. See further discussion of this matter under
"Acquisitions and Divestitures" below.
The Company has no customers that represent ten percent or
more of annual revenues.
For management purposes, the results of the Asian operations
are included in the North American results since the costs associated
with managing the Asian marketplace are born by the North American
entities within the Group. Revenues in the Asian markets comprise less
than 5% of total revenues reported for the North American segment.
Selected balance sheet and income statement information pertaining to
the various significant geographic areas of operation are as follows:
As of and for the year ended June 30, 2003 (in thousands):
DEPRECIATION
NET INCOME AND CAPITAL
GROSS ASSETS REVENUE (LOSS) AMORTIZATION EXPENDITURES
------------ ------------ ------------ ------------ ------------
Northern Europe .... $ 2,987 $ 5,000 $ 475 $ 60 $ 68
Spain .............. 6,220 6,902 615 306 259
United Kingdom ..... 2,569 5,545 387 54 39
North America ...... 28,435 30,653 2,729 346 356
------------ ------------ ------------ ------------ ------------
Total .............. $ 40,211 $ 48,100 $ 4,206 $ 766 $ 722
============ ============ ============ ============ ============
As of and for the year ended June 30, 2002 (in thousands):
DEPRECIATION
NET INCOME AND CAPITAL
GROSS ASSETS REVENUE (LOSS) AMORTIZATION EXPENDITURES
------------ ------------ ------------ ------------ ------------
Northern Europe .... $ 2,518 $ 5,579 $ 676 $ 60 $ 159
Spain .............. 4,723 6,431 1,622 247 96
United Kingdom ..... 2,969 5,127 134 62 21
North America ...... 27,408 28,916 (11,856) 615 464
------------ ------------ ------------ ------------ ------------
Total .............. $ 37,618 $ 46,053 $ (9,424) $ 984 $ 740
============ ============ ============ ============ ============
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the year ended June 30, 2001 (in thousands):
DEPRECIATION
NET INCOME AND CAPITAL
GROSS ASSETS REVENUE (LOSS) AMORTIZATION EXPENDITURES
------------ ------------ ------------ ------------ ------------
Northern Europe .... $ 1,583 $ 4,947 $ (210) $ 80 $ 35
Spain .............. 2,248 4,218 (56) 182 38
United Kingdom ..... 2,985 5,162 (1,014) 126 4
North America ...... 43,646 36,478 438 1,895 200
------------ ------------ ------------ ------------ ------------
Total .............. $ 50,462 $ 50,805 $ (842) $ 2,283 $ 277
============ ============ ============ ============ ============
New Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation ("FIN")
No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
which clarifies disclosure and recognition/measurement requirements
related to certain guarantees. The disclosure requirements are
effective for financial statements issued after December 15, 2002 and
the recognition/measurement requirements are effective on a prospective
basis for guarantees issued or modified after December 31, 2002. The
application of the requirements of FIN 45 did not have a significant
impact on our financial position or result of operations.
In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement
No. 123 ("Statement 148"). This amendment provides two additional
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation.
Additionally, more prominent disclosures in both annual and interim
financial statements are required for stock-based employee
compensation. The transition guidance and annual disclosure provisions
of Statement 148 are effective for fiscal years ending after December
15, 2002. The Company adopted the disclosure provisions of SFAS 148
during fiscal 2003.
In January 2003, the FASB issued FASB Interpretation No. (FIN)
46, "Consolidation of Variable Interest Entities." This Interpretation
of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," addresses consolidation by business enterprises of
variable interest entities which possess certain characteristics. The
Interpretation requires that if a business enterprise has a controlling
financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest
entity must be included in the consolidated financial statements with
those of the business enterprise. This Interpretation applied
immediately to variable interest entities created after January 31,
2003 and to variable interest entities in which an enterprise obtains
an interest after that date. The Company does not have any ownership in
any variable interest entities as of June 30, 2003.
In April 2003, the FASB issued Statement of Financial
Accounting Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities ("Statement 149"). This Statement
amends Statement 133 for decisions made (1) as part of the Derivatives
Implementation Group process that effectively required amendments to
Statement 133, (2) in connection with other Board projects dealing with
financial instruments, and (3) in connection with implementation issues
raised in relation to the application of the definition of a
derivative, in particular, the meaning of an initial net investment
that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in market
factors, the meaning of underlying, and the characteristics of a
derivative that contains financing components. The Company does not
have any derivative instruments or hedging activities. The application
of Statement 149 did not have an impact on our financial statements.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("Statement 150"). This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. Statement 150 requires that certain mandatorily redeemable
financial instruments issued in the form of shares are to be classified
as liabilities rather than equity. The Company has no outstanding
financial instruments that fall into the definitions covered by this
Statement. The application of Statement 150 did not have a significant
impact on our financial statements.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-recurring items
In October of 2000, the Company reorganized its European
presence and adopted an indirect sales model in France by terminating
its ownership and control of the French subsidiary due to the chronic
and sustained losses and negative cash flows suffered by the French
subsidiary. At that time, management recorded what they deemed to be
adequate reserves related to the possible future costs for the change
of presence in France by deferring the gain associated with divesting
net liabilities in this liquidating transaction. In the fourth quarter
of fiscal 2002, the Company experienced a favorable outcome relating to
the French subsidiary liquidation transaction which rendered most of
the reserve unnecessary. As a result the Company recorded a
non-recurring gain of $650,000 in fiscal year 2002, arising from the
reduction of the reserve described above.
On September 12, 2000, the Company announced restructuring
efforts aimed at reducing costs and improving efficiencies. Under the
restructuring, the Company reduced 125 positions across the company as
well as accelerated efforts to eliminate unneeded office space, improve
productivity through the use of technology and focus on increased
revenues through the use of distributors. As a result of these actions,
during the first quarter of fiscal year 2001, the Company recorded a
$790,000 expense to cover the liability arising from associated
employee separation costs. The costs were accrued in accordance with
EITF Issue 94-3, "Liability Recognition for Certain Employee
Terminations, Benefits and Other Costs to Exit an Activity". By March
31, 2001, all of the costs accrued in conjunction with both actions had
been paid.
Non-cash Impairment of Capitalized Software Cost
In the fourth quarter of fiscal 2002, the Company made a major
change in technology direction. The Internet-related functionality of
the iRenaissance product was re-directed from the "java" based initial
development used in the Resynt product line to the Microsoft ".net"
technology. A new, formal development relationship with Microsoft was
launched to support the requirements of the new technology direction.
This strategic re-direction was based on the Company's belief that the
.net technology will serve the Company and its customers better in the
future, due to fuller market penetration, better standards of
compatibility, and superior technical adaptability. The result of this
change was that prior development in the former java environment became
obsolete. Effective April 1, 2002, the amount of $5,488,000,
representing all unamortized software-project balances relating to
this, was expensed.
On April 23, 2002, the Company announced the General
Availability of Gembase Version 6.0. This version of Gembase, the 4GL
language used for the development of the iRenaissance products,
contained major functionality differences to prior versions, rendering
all prior versions obsolete. As a result, development and maintenance
of all versions prior to 6.0 were discontinued and no further sales
using these versions would be contemplated. In addition, customers
using these versions would be strongly encouraged to upgrade to version
6.0 because the Company no longer supports development of any Gembase
release lower than version 6.0. Upgrades to the 6.0 version would be
strongly supported and to encourage and facilitate customers'
upgrading, the product was designed to make the transition
straight-forward. Since Gembase versions lower than 6.0 would not
contribute any further revenue to the Company, even in the short-term,
the related unamortized software-project balances amounting to $943,000
were expensed.
On May 22, 2002 the Company announced the release of
iRenaissance version 5.7. This version was significantly changed from
the prior versions. Previous to this release, upgrades from any version
less than 4.4 to the latest version were technically challenging
resulting in an environment not conducive to customer upgrades. Version
5.7 offered a straight-forward upgrade capability to customers on
previous versions. In addition, version 5.7 contained a new "engine" at
its core, which significantly changed the way the software operated
internally, and resulted in improved operating efficiencies. Since
customers on versions lower than 4.4 could now upgrade without
difficulty, the Company was able to discontinue the development and
support of all versions prior to 4.4. No further sales using these
versions would be contemplated. This had the effect of rendering all
releases of iRenaissance which were lower than 4.4 obsolete. Since
iRenaissance versions lower than 4.4 would not contribute any further
license revenue to the Company, and renewable maintenance revenue would
soon be in respect of the newly released version of the product rather
than an older version, the related unamortized software-project
balances amounting to $3,333,000 were expensed.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During May 2002, the Company terminated further work on
general enhancements of the COBOL technology based Renaissance Classic
product line. Following prolonged, unfruitful attempts to garner
interest in the proposed enhancements from the customer base, a twofold
decision was made; to continue working with specific customers on
custom product development, and to introduce a general sales program of
free software license upgrade from the Classic product to the latest
release of the iRenaissance product line for customers who remain on
maintenance. The company will continue to support those customers who
remain active users until they schedule their upgrade conversion to
iRenaissance. Since no future revenue benefits are expected from the
general enhancements capitalized to date, the aggregate, unamortized
software-project balances amounting to $1,174,000 were expensed.
The aggregate value of unamortized impaired software expensed
in the fourth quarter of fiscal 2002 was $10,938,000. This action will
have the effect of reducing software cost amortization in future years.
If the Company had not recorded this expense, additional amortization
expense of approximately $2,734,000 would be recorded during 2003.
(2) ACQUISITIONS AND NOTE RECEIVABLE FROM RELATED PARTY
On December 30, 1996, the Company acquired a 100% ownership
interest in Ross Systems Iberica, its distributor in Spain and Portugal
for the prior five years, in exchange for shares of the Company's
common stock valued at approximately $1,400,000. The acquisition was a
non-cash stock exchange which was accounted for under the purchase
method of accounting. Accordingly, the results of operations of the
acquired business have been included in the Company's results of
operations since the date of acquisition. The purchase agreement
mandated that the purchase price be guaranteed based on security prices
as of a date which had been mutually extended by the parties and
coincided with the extension of the maturity to July 8, 2003 of a
non-interest bearing, recourse note receivable, owed by the former
majority shareholder of Ross Systems Iberica to the Company. The former
majority shareholder is currently an employee of the Company. The
Company, in its sole discretion, could make up any difference between
the value of the shares originally tendered and the guaranteed purchase
price of Ross Iberica either by issuing additional shares or by paying
cash. The note receivable described herein totaled $850,000 and was
satisfied in full during March 2003, in conjunction with the treasury
stock transaction discussed below.
At the time of acquisition, the seller was issued 10% of the
purchase price in unrestricted shares with the remainder of the shares
restricted. As of December 31, 2002, the former majority shareholder
still held 20,000 restricted shares which were all the restricted
shares that were issued to him at the time of acquisition. During
January 2003, the Company sought and received a unanimous written
consent from its Board of Directors to issue additional shares to the
former majority shareholder to satisfy the guaranteed purchase price
agreement. On the date of the Board consent, the share price was $9.
Accordingly, the Company issued 120,000 additional shares to satisfy
the purchase price agreement. Since the guaranteed purchase price was
based on security prices and was not based on an earn out factor or any
other performance measure, this share issuance resulted only in a
change in the number of common shares outstanding.
On the same day as the issuance of these additional shares,
the Company entered into an agreement with the former majority
shareholder that allowed the Company to repurchase the former majority
shareholder's shares at $9 per share. During January, 2003, the Company
purchased these shares into treasury stock at the agreed upon $9 per
share. The Company anticipated that these treasury shares would be
issued to satisfy conversions of its outstanding mandatorily
convertible preferred shares which must occur prior to or on June 30,
2006. F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows (in thousands):
JUNE 30,
----------------------
(IN THOUSANDS)
2003 2002
-------- --------
Computer equipment ............................... $ 5,747 $ 5,691
Furniture and fixtures ........................... 1,187 1,143
Leasehold improvements ........................... 838 1,508
-------- --------
7,772 8,342
Less accumulated depreciation and amortization.... (6,366) (6,892)
-------- --------
$ 1,406 $ 1,450
======== ========
(4) OTHER ASSETS
A summary of other assets follows (in thousands):
JUNE 30,
-----------------------
(IN THOUSANDS)
2003 2002
-------- --------
Goodwill .......................................... $ 4,414 $ 4,414
Note receivable ................................... 750 750
Other ............................................. 62 62
-------- --------
5,226 5,226
Less accumulated amortization ..................... (2,233) (2,233)
-------- --------
$ 2,993 $ 2,993
======== ========
(5) ACCRUED EXPENSES
A summary of accrued expenses follows (in thousands):
JUNE 30,
---------------------
(IN THOUSANDS)
2003 2002
-------- --------
Accrued vacation, salary and related compensation
costs ............................................... $ 1,583 $ 1,502
Sales, Use, VAT and GST taxes payable ................. 1,334 1,159
Interest payable ...................................... 38 63
Professional fees ..................................... 244 281
Royalties ............................................. 844 806
Other ................................................. 897 665
-------- --------
$ 4,940 $ 4,476
======== ========
(6) DEBT
The Company has a revolving credit facility with an
asset-based lender with a maximum credit line for up to $5,000,000, an
expiration date of September 23, 2004, and an interest rate equal to
the Prime Rate plus 2% (6.25% at June 30, 2003). Borrowings under the
credit facility are collateralized by substantially all the assets of
the Company. The revolving credit facility may be withdrawn if, amongst
other things (a) the Company fails to pay any principal or interest
amount due or (b) there is a material impairment of the Company's
business which would prevent loan repayment and (c) any of these events
are not remedied by the Company within allowable periods. At June 30,
2003, the Company had $2,131,000 outstanding against the $5,000,000
revolving credit facility and at June 30, 2002, approximately
$3,370,000 was outstanding under the Company's revolving credit
facility.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company maintains other credit facilities in Spain with
various expiration dates over a period of twelve months from June 30,
2003. Interest on these facilities ranges from 6% to 8% and the
facilities are collateralized by various assets of the Spanish
subsidiary. Balances outstanding under these agreements were
approximately $669,000 and $597,000 at June 30, 2003 and 2002
respectively.
(7) COMMITMENTS AND CONTINGENCIES
The Company leases facilities and certain equipment under
operating leases which expire at various dates through fiscal 2016.
Certain leases include renewal options and rental escalation clauses to
reflect changes in price indices, real estate taxes, and maintenance
costs. As of June 30, 2003, future minimum lease payments under
non-cancelable operating leases were as follows (in thousands):
FISCAL YEAR
----------
2004..................................................... 1,384
2005..................................................... 816
2006..................................................... 634
2007..................................................... 442
Thereafter............................................... 1,980
------
Total future minimum lease payments...................... $5,256
======
Rent expense approximated $1,189,000, $1,236,000, and
$2,267,000, for fiscal 2003, 2002, and 2001, respectively.
The Company is involved in an arbitration proceeding with a
former distributor. The arbitration relates to a dispute over minimum
royalties due under a distribution agreement. The Company cannot
estimate the possible range of loss, if any, that may occur from the
proceeding, however the Company does not believe any unfavorable
outcome would be materially detrimental to the Company's liquidity.
On February 27, 2003, Vertical Computer Systems (Vertical)
filed suit against us and other parties in the New York State Supreme
Court (Index No: 600644/03) alleging undisclosed liabilities in the
purchase of our HR / Payroll product line by their subsidiary, NOW
Solutions, LLC during 2001. Vertical seeks to offset their claim
against a note payment due to Ross and also seeks other monetary
damages. Ross has filed a motion to dismiss Vertical's claims and will
otherwise defend the action vigorously.
From time to time the Company is involved in legal proceedings
incidental to the conduct of its business. The outcomes of these claims
cannot be predicted with any certainty. The Company does not believe
that the legal matters to which it is party are likely to have a
material adverse effect on our results of operation or financial
condition.
(8) CAPITAL STOCK
Mandatorily Convertible Preferred Stock and Private Placement
In fiscal 1991, the Company authorized a new class of no par
value preferred stock consisting of 5,000,000 shares. The Board of
Directors is authorized to issue the preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions
of such stock, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or
action by the shareholders. All preferred stock was issued with a
mandatory conversion feature.
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.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) SUBSEQUENT EVENT
In early September 2003, the Company announced that it signed
a definitive agreement whereby chinadotcom Software (CDC) will acquire
Ross Systems in a merger valued at approximately $67,892,000. Under the
terms of the merger agreement, stockholders of Ross Systems will
receive $5.00 in cash and $14.00 in CDC stock based on the average
value of CDC's shares for the 10 trading days preceding the closing
date. For determination of the share conversion ratio, the maximum
average value is $10.50 per share and the minimum average value is
$8.50 per share. The merger is anticipated to be completed as early
December 2003, but in no event later than March 1, 2004. Both companies
are listed on NASDAQ.
(10) EMPLOYEE STOCK PLANS
(a) Stock Option Plan
The Company has reserved 210,000 shares of common stock for
issuance under its 1988 Incentive Stock Plan and 810,000 shares of
common stock for issuance under its 1998 Incentive Stock Plan
(collectively the "Plans"). The 1988 Incentive Stock Plan is closed and
may not be used for further issues of options. Under the Plans, the
Company may issue options to purchase shares of the Company's common
stock to eligible employees, officers, directors, independent
contractors and consultants. The term of the options issued under the
Plans cannot exceed ten years from the date of grant. Options granted
to date generally become exercisable over four to five years based on
the grantees' continued service with the Company.
A summary of the status of the Company's Plan as of June 30,
2003, 2002 and 2001 and activity for the fiscal years then ended is
presented below:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE EXERCISABLE
--------- ---------------- -----------
Balance as of June 30, 2000.................. 203,600 $28.70 102,800
Granted (at market value).................... 165,219 $ 4.90
Cancelled/forfeited.......................... (77,148) $21.80
-------
Balance as of June 30, 2001.................. 291,671 $16.91 112,255
Granted (at market value).................... 137,333 $ 4.91
Exercised ................................... (10,243) $ 2.32
Cancelled/forfeited.......................... (91,966) $20.34
-------
Balance as of June 30, 2002.................. 326,795 $10.78 113,494
Granted (at market value).................... 252,828 $ 8.01
Exercised ................................... (31,048) $ 3.23
Cancelled /forfeited......................... (19,756) $18.27
-------
Balance as of June 30, 2003.................. 528,819 $ 9.62 154,615
=======
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average estimated grant date fair value of
options granted during fiscal 2003, 2002, and 2001 was $4.44, $3.73,
and $4.49, respectively. The following table summarizes information
about the stock options outstanding at June 30, 2003:
OPTIONS OUTSTANDING
------------------------------------------------------
OPTIONS EXERCISABLE
--------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF EXERCISE SHARES CONTRACTUAL WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------------- ----------- ---------------- ---------------- ----------- ----------------
$1.88-$1.88....... 50,613 7.5 years $ 1.88 16,041 1.88
$3.25-$3.25....... 5,738 8.1 years 3.25 5,738 3.25
$3.50-$3.50....... 63,441 7.4 years 3.50 12,750 3.50
$3.75-$5.40....... 34,514 6.5 years 4.71 26,639 4.74
$7.25-$11.88...... 275,428 9.1 years 7.89 9,987 9.62
$12.99-$25.00..... 39,615 7.0 years 16.35 25,040 17.28
$25.94-$25.94..... 39,350 4.1 years 25.94 39,350 25.94
$26.56-$52.50..... 17,715 4.1 years 33.35 16,665 33.46
$65.00-$65.00..... 2,100 3.5 years 65.00 2,100 65.00
$67.50-$67.50..... 305 1.4 years 67.50 305 67.50
------------------ ---------- --------- ------ ------- ------
Totals............ 528,819 7.8 years $ 9.62 154,615 $16.06
---------- --------- ------ ------- ------
(b) Employee Stock Purchase Plan
The Company initially reserved 80,000 shares of common stock
for issuance under its 1991 Employee Stock Purchase Plan ("ESPP"). In
fiscal 1999, the stockholders approved an amendment to the plan whereby
the number of shares reserved for issuance was increased to 95,000. An
amendment in fiscal 2002 provided that beginning in fiscal 2001 and
each year thereafter, the amount reserved for issuance is increased by
the lesser of 20,000 shares or 1% of total outstanding common stock.
Under the ESPP, the Company's employees may purchase, through
payroll deductions of 1% to 10% of compensation, shares of common stock
at a price per share that is the lesser of 85% of its fair market value
as of the beginning or end of the offering period. Under the ESPP, the
Company sold 19,507 shares, 29,146 shares, and 11,409 shares, to
employees in fiscal 2003, 2002, and 2001 respectively. The weighted
average fair value of those purchase rights granted in fiscal 2003, and
2002, was $2.85 and $0.83, respectively. As of June 30, 2003, 182,922
shares had been issued under the ESPP.
(11) INCOME TAXES
Gains and losses before income taxes include foreign gains
before income taxes of $1,507,000, and foreign losses before income
taxes of $30,000 for fiscal 2003. Foreign gains before income taxes
were $2,425,000 for fiscal 2002 and foreign losses before income taxes
were $(1,280,000) for fiscal year 2001. Income tax expense for the
years ended June 30, 2003, 2002 and 2001 consists of the following (in
thousands):
2003 2002 2001
-------- -------- --------
Current:
Federal ................................................ $ 142 $ -- $ (140)
Foreign ................................................ -- 112 123
State .................................................. 263 20 26
-------- -------- --------
405 132 9
-------- -------- --------
Deferred:
Federal ................................................ -- -- --
Foreign ................................................ -- -- --
State .................................................. -- -- --
-------- -------- --------
-- -- --
-------- -------- --------
$ 405 $ 132 $ 9
======== ======== ========
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended June 30, 2003, 2002, and 2001, the
reconciliation between the amounts computed by applying the United
States federal statutory tax rate of 34% to loss before income taxes
and the actual tax expense follows (in thousands):
2003 2002 2001
-------- -------- --------
Income tax expense (benefit) at statutory rate ........................ 1,568 (3,159) (283)
State income tax benefit, net of federal income tax benefit ........... 170 (13) (37)
Change in beginning of year valuation allowance ....................... (1195) 3,028 3,063
Losses for which no benefit is recognized (foreign loss and rate) .... -- -- 435
Rate differential related to foreign income and foreign tax ........... --
withholdings ....................................................... -- 843 485
Amortization of other assets and other permanent differences .......... (138) (567) (3,654)
-------- -------- --------
$ 405 $ 132 $ 9
======== ======== ========
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and deferred tax
liabilities at June 30, 2003 and 2002 were as follows (in thousands):
2003 2002
-------- --------
Accruals and reserves ....................................... $ 428 $ 670
Net operating loss carryforward (federal) ................... 11,686 11,502
Net operating loss carryforward (state) ..................... 1,521 2,386
Net operating loss carryforward (foreign) ................... 2,300 2,748
Tax credit carryforwards .................................... 3,802 3,802
Fixed assets depreciation differences ....................... 407 399
-------- --------
Total gross deferred tax assets ....................... 20,144 21,507
Less valuation allowance .............................. (14,698) (15,893)
-------- --------
Net deferred tax assets ............................... 5,446 5,614
-------- --------
Capitalized computer software costs ......................... (5,446) (5,614)
-------- --------
Total gross deferred liabilities ...................... (5,446) (5,614)
-------- --------
Net deferred taxes .......................................... $ -- $ --
-------- --------
The net change in total valuation allowance for the year ended
June 30, 2003, was a decrease of approximately $1,195,000. The
valuation allowance has been established to recognize the uncertainty
of utilizing loss and credit carryovers and certain deferred assets.
At June 30, 2003, the Company had net operating loss
carry-forwards of approximately $34,370,000, $25,354,000 and $7,187,000
for federal, state and foreign tax purposes, respectively. At June
30, 2003, the Company also had unused research and other credit
carry-forwards of approximately $3,368,000 and $208,000 for federal and
California tax purposes, respectively. The loss and research credit
carry-forwards, if not utilized, will expire between fiscal 2005 and
2020.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended June
30, 2003, 2002, and 2001 follows (in thousands):
2003 2002 2001
-------- -------- --------
Cash payments:
Interest .................................................................... $ 349 $ 642 $ 1,228
Income taxes ................................................................ $ 121 $ 319 $ 75
Non-cash investing and financing activities:
Conversion of convertible debentures into stock (non-cash transaction) ...... $ -- $ -- $ 1,177
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) SELECTED UNAUDITED QUARTERLY INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED
-----------------------------------------------
JUNE 30 MARCH 31 DEC. 31 SEPT. 30
FISCAL YEAR 2003 2003 2003 2003 2003
-------- -------- -------- --------
Total net revenues ..................................... $ 12,988 $ 11,513(a) $ 12,173 $ 11,426
Cost of software product licenses ...................... 979 449 521 346
Net income ............................................. 1,306 719 1,430 601
Earnings per share - basic ............................. 0.49 0.27 0.54 0.23
Earnings per share - diluted ........................... 0.40 0.22 0.45 0.20
Number of shares used in per share computation - diluted 3,362 3,387 3,260 3,267
(a) As originally stated, third quarter revenues of $11,420,000
excluded $93,000 of revenue which was recorded originally as a
reduction in Costs of consulting, maintenance and other services.
QUARTER ENDED
------------------------------------------------
JUNE 30 MARCH 31 DEC. 31 SEPT. 30
FISCAL YEAR 2002 2002 2002 2001 2001
-------- -------- -------- --------
Total net revenues $ 11,173 $ 11,456 $ 11,425 $ 11,165
Cost of software product licenses 761 403 311 396
Net income (loss) (10,857) 381 488 414
Charge for impairment of capitalized software (10,288) -- -- --
Earnings (loss) per share - basic (4.14) 0.16 0.19 0.16
Earnings (loss) per share - diluted (4.14) 0.13 0.17 0.13
Number of shares used in per share computation - diluted 2,625 3,209 3,152 3,144
F-20
SCHEDULE II
ROSS SYSTEMS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
---------- ------------ ------------ ------------ ------------ -------------
Year ended June 30, 2003 allowance for
doubtful accounts and returns ....... $ 3,379 $ 831 $ -- $ 2,676 $ 1,532
------------ ------------ ------------ ------------ ------------
Year ended June 30, 2002 allowance for
doubtful accounts and returns ....... $ 2,930 $ 1,444 $ -- $ 995 $ 3,379
------------ ------------ ------------ ------------ ------------
Year ended June 30, 2001 allowance for
doubtful accounts and returns ....... $ 3,571 $ 1,514 $ -- $ 2,155 $ 2,930
------------ ------------ ------------ ------------ ------------
------------
(1) Represents net charge-off of specific receivables.
S-1