<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NO. 0-20740
--------------------------------------
EPICOR SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0277592
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
195 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618-2402
(Address of principal executive offices, zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 585-4000
--------------------------------------
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 [ ]
As of November 5, 1999, there were 40,829,780 shares of common stock
outstanding.
<PAGE> 2
FORM 10-Q INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months and Nine Months Ended September 30, 1999
and 1998 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Nine Months Ended September 30, 1999
and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 21
</TABLE>
2
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PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,390 $ 22,175
Short-term investments 20,163 30,511
Accounts receivable, net 80,934 84,789
Inventories 1,124 971
Prepaid expenses and other 11,631 13,826
--------- ---------
Total current assets 128,242 152,272
Property and equipment, net 17,684 13,388
Software development costs, net 9,269 5,572
Intangible assets, net 32,613 32,056
Other assets 5,551 8,989
--------- ---------
Total assets $ 193,359 $ 212,277
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,620 $ 16,490
Accrued expenses 18,098 24,741
Accrued merger and restructuring costs 6,119 15,090
Deferred revenue 36,066 36,845
--------- ---------
Total current liabilities 74,903 93,166
Long-term liabilities 1,079 1,116
Stockholders' equity:
Preferred stock 7,501 7,501
Common stock 41 40
Additional paid-in capital 237,546 232,042
Less: notes receivable from officers for issuance of restricted stock (11,377) (11,563)
Accumulated other comprehensive income (loss) 674 (245)
Accumulated deficit (117,008) (109,780)
--------- ---------
Total stockholders' equity 117,377 117,995
--------- ---------
Total liabilities and stockholders' equity $ 193,359 $ 212,277
========= =========
</TABLE>
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
3
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EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 22,024 $ 16,177 $ 71,468 $ 52,007
Services 40,210 14,039 119,230 36,472
Other 971 113 4,768 423
--------- --------- --------- ---------
Total revenues 63,205 30,329 195,466 88,902
Cost of revenues 30,134 10,066 88,184 26,780
--------- --------- --------- ---------
Gross profit 33,071 20,263 107,282 62,122
Operating expenses:
Sales and marketing 22,599 10,953 62,812 34,131
Software development 8,348 2,797 20,466 8,446
General and administrative 11,869 1,936 31,789 5,675
--------- --------- --------- ---------
Total operating expenses 42,816 15,686 115,067 48,252
--------- --------- --------- ---------
Income (loss) from operations (9,745) 4,577 (7,785) 13,870
Other income, net 47 298 993 1,025
--------- --------- --------- ---------
Income (loss) before income taxes (9,698) 4,875 (6,792) 14,895
Provision for income taxes -- 180 436 180
--------- --------- --------- ---------
Net income (loss) $ (9,698) $ 4,695 $ (7,228) $ 14,715
========= ========= ========= =========
Net income (loss) per share - basic $ (0.24) $ 0.17 $ (0.18) $ 0.56
Net income (loss) per share - diluted $ (0.24) $ 0.16 $ (0.18) $ 0.49
Common shares outstanding - basic 40,703 28,330 40,510 26,234
Common shares outstanding - diluted 40,703 30,009 40,510 30,194
</TABLE>
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
4
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EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (7,228) $ 14,715
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 13,602 4,401
Provision for doubtful accounts 4,966 1,794
Changes in operating assets and liabilities:
Accounts receivable 1,927 (14,025)
Inventories (153) --
Prepaid expenses and other (1,367) (3,168)
Other assets 681 (900)
Accounts payable (2,940) 494
Deferred revenue (1,592) 3,894
Accrued merger and restructuring costs (7,318) (834)
Other accrued liabilities and income taxes payable (6,849) 468
-------- --------
Net cash provided by (used in) operating activities (6,271) 6,839
INVESTING ACTIVITIES
Purchases of property and equipment (9,895) (5,211)
Purchases of short-term investments (24,803) (13,525)
Proceeds from notes receivable from related party 186 --
Proceeds from sale or maturity of short-term investments 35,151 9,033
Additions to capitalized software costs (4,871) (2,134)
-------- --------
Net cash used in investing activities (4,232) (11,837)
FINANCING ACTIVITIES
Exercise of common stock options 1,336 7,737
Common stock issued under the Employee Stock Purchase Plan 1,745 694
Payments of long-term liabilities (1,111) --
-------- --------
Net cash provided by financing activities 1,970 8,431
Effect of exchange rate on cash 748 (1,259)
-------- --------
Net increase (decrease) in cash and cash equivalents (7,785) 2,174
Cash and cash equivalents at beginning of period 22,175 4,466
-------- --------
Cash and cash equivalents at end of period $ 14,390 $ 6,640
======== ========
</TABLE>
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
5
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EPICOR SOFTWARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements included
herein have been prepared by Epicor Software Corporation (the "Company") in
accordance with generally accepted accounting principles and pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading. The unaudited
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Transition Report on Form 10-K for the transition period of July 1,
1998 to December 31, 1998.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position, results of operations and cash flows.
Current and future financial statements may not be directly comparable to the
Company's historical financial statements. The results of operations for the
three and nine months ended September 30, 1999, are not necessarily indicative
of the results of operations which may be reported for any other interim period
or for the entire year ending December 31, 1999.
COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three and nine months
ended September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ (9,698) $ 4,695 $ (7,228) $ 14,715
Unrealized gains (losses) on foreign
currency translation adjustments 1,258 (1,018) 919 (1,157)
-------- -------- -------- --------
Total comprehensive income (loss) $ (8,440) $ 3,677 $ (6,309) $ 13,558
======== ======== ======== ========
</TABLE>
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic net income per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted net income (loss) per share is computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the period. For the three and nine months ended September 30,
1999, employee stock options and preferred stock were not considered in
calculating basic and diluted net loss per common share since their effect would
be anti-dilutive. As a result, during those periods the Company's basic and
diluted net loss per common share are the same.
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The following table computes basic and diluted net income (loss) per share (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) - numerator for basic
and diluted net income (loss) per share $ (9,698) $ 4,695 $ (7,228) $ 14,715
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 40,703 28,330 40,510 26,234
Effect of dilutive securities:
Employee stock options -- 726 -- 1,595
Preferred stock -- 953 -- 2,365
-------- -------- -------- --------
Dilutive potential common shares -- 1,679 -- 3,960
-------- -------- -------- --------
Denominator for diluted net income (loss)
per share 40,703 30,009 40,510 30,194
======== ======== ======== ========
Net income (loss) per share - basic $ (0.24) $ 0.17 $ (0.18) $ 0.56
Net income (loss) per share - diluted $ (0.24) $ 0.16 $ (0.18) $ 0.49
</TABLE>
In July 1998, the remaining outstanding Series B Preferred Stock automatically
converted to common stock.
SOFTWARE REVENUE RECOGNITION
In December 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions." The SOP addresses software revenue recognition
as it applies to certain multiple-element arrangements. SOP 98-9 also amends SOP
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2," to extend the
deferral of application of certain passages of SOP 97-2 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. The Company will comply with the requirements of this SOP as they
become effective, which is not expected to have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Board issued SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." The SOP
requires the capitalization of certain costs incurred after the date of adoption
in connection with developing or obtaining software for internal use. The
Company adopted the SOP on January 1, 1999. The adoption of the SOP did not have
a material effect on the Company's consolidated financial position, results of
operations or cash flows.
ACQUISITIONS
On December 31, 1998, the Company acquired DataWorks Corporation, ("DataWorks")
a publicly traded provider of enterprise resource planning software based in San
Diego, California. As consideration for the acquisition, the Company issued
11,739,459 shares of common stock in exchange for all of the outstanding shares
of common stock of DataWorks. In addition, options and warrants to acquire
DataWorks common stock were converted as a result of the acquisition into
equivalent options and warrants for the Company's common stock. The acquisition
was
7
<PAGE> 8
accounted for as a purchase for financial reporting purposes, and the results of
operations of DataWorks are included with the results of the Company's
operations beginning January 1, 1999.
In connection with the acquisition of DataWorks, Impresa for MRO, a division of
DataWorks, was initially accounted for as an asset held for sale. On April 1,
1999 the Company discontinued attempts to actively sell the Impresa for MRO
division and, accordingly, the results of operations of the division are
included in the results of the Company's operations beginning April 1, 1999.
On April 1, 1999, the Company acquired the remaining 80.1% interest in evosoft
DataWorks Software GmbH ("evosoft") for approximately $0.7 million in cash. The
original 19.9% investment was made in January 1998. Evosoft, located in
Nuremberg, Germany, primarily markets, distributes and supports the Avante and
Platinum ERA product lines in Germany. The excess costs over fair market value
of the net assets purchased has been allocated to developed technology and
assembled workforce and is being amortized over five years. The acquisition was
accounted for as a purchase for financial reporting purposes, and the results of
operations of evosoft, which are not material, are included in the results of
the Company's operations subsequent to April 1, 1999.
CONTINGENCIES
DataWorks, and certain of its former officers and directors, have been named as
defendants in two lawsuits alleging violations of the federal securities laws.
The complaints were filed in the United States District Court for the Southern
District of California. They purport to be brought on behalf of classes of
stockholders who purchased DataWorks stock, and allege that between October 30,
1997 and July 16, 1998, the defendants issued misleading statements concerning
DataWorks' acquisition of the Interactive Group, Inc. and sales of certain
products. The complaints do not specify the dollar amount of damages alleged or
relief requested. The Company is also named as a defendant in the lawsuit as a
successor of DataWorks.
The Company is subject to miscellaneous legal proceedings in the normal course
of business and other legal proceedings. The Company is currently defending
these proceedings and claims, and anticipates that it will be able to resolve
these matters in a manner that will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
8
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
OVERVIEW
Acquisition
On December 31, 1998, the Company acquired DataWorks Corporation ("DataWorks") a
publicly traded provider of enterprise resource planning software based in San
Diego, California. The acquisition was accounted for as a purchase for financial
reporting purposes, and the results of operations of DataWorks are included in
the results of the Company's operations beginning January 1, 1999. This
acquisition resulted in a material increase in the Company's revenues and
expenses for the three and nine months ended September 30, 1999. Accordingly,
current and future financial statements are not directly comparable to the
Company's historical financial statements.
RESULTS OF OPERATIONS
The following table summarizes certain aspects of Epicor's results of operations
for the three and nine months ended September 30, 1999 compared to September 30,
1998 (in millions):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 Change % 1999 1998 Change %
------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees $ 22.0 $ 16.2 36% $ 71.5 $ 52.0 38%
Services 40.2 14.0 187% 119.2 36.5 227%
Other 1.0 0.1 900% 4.8 0.4 1,100%
------ ------ ---- ------ ------ ------
Total revenues 63.2 30.3 109% 195.5 88.9 120%
As a percentage of revenues:
License fees 35% 54% 37% 58%
Services 64% 46% 61% 42%
Other 1% 0% 2% 0%
------ ------ ------ ------
Total revenues 100% 100% 100% 100%
Gross profit 33.1 20.3 63% 107.3 62.1 73%
As a percentage of
revenues 52% 67% 55% 70%
Sales and marketing 22.6 11.0 106% 62.8 34.1 84%
As a percentage of
revenues 36% 36% 32% 38%
Software development 8.3 2.8 196% 20.5 8.4 144%
As a percentage of
revenues 13% 9% 10% 10%
General and administrative 11.9 1.9 526% 31.8 5.7 458%
As a percentage of
revenues 19% 6% 16% 6%
</TABLE>
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Revenues
The growth in license fee revenue for both the three and nine months ended
September 30, 1999 was attributable to the DataWorks suite of software products
licensed, which consisted primarily of the Avante, Vantage, and Vista products.
An increase in license fee revenue from the Company's Clientele product also
contributed to the growth. Although license fee revenue increased in absolute
dollars, as a percentage of total revenues, license fee revenue decreased. The
following factors impacted this change in revenue mix:
o The acquisition of DataWorks, which historically reported less license fees
as a percentage of total revenues than the Company's previous results
o Reduced Avante license fees as a result of attrition in the Avante sales
force following the acquisition and uncertainty in the market over the
future of the Avante product
o Decreased Platinum ERA license fees attributable to increased competition
and uncertainty in the marketplace over the integration of applications
following the DataWorks acquisition as well as sales force attrition
o Continued weak demand for enterprise resource planning software
particularly attributable to uncertainty in the software market related to
the Year 2000 problem
Services revenue consists of fees from software maintenance, consulting, custom
programming and education services. The increase in services revenue both in
absolute dollars and as a percentage of sales, for the three and nine month
periods ended September 30, 1999 as compared with the same periods in 1998, was
primarily due to the DataWorks acquisition. Services revenue from DataWorks'
customer base approximated $21.8 million and $66.6 million for the three and
nine months ended September 30, 1999, respectively. The remaining increase was
generated primarily from the Company's Platinum ERA customer base and
attributable to an overall increase in the installed base of end users and an
increase in the number of revenue-generating professional service personnel.
Other revenue consists primarily of third-party hardware sales. The increase in
other revenue for both the three and the nine month periods ended September 30,
1999 was attributable to the DataWorks acquisition.
International revenues were $17.6 million and $8.2 million in the third quarter
of 1999 and 1998, representing 28% and 27% of total revenue, respectively.
International revenues were $55.5 million and $23.5 million in the first nine
months of 1999 and 1998, representing 28% and 26% of total revenue,
respectively. The increase for both the three and nine months ended September
30, 1999 as compared to the same 1998 periods was primarily attributable to the
DataWorks acquisition as DataWorks had a larger European sales force and
marketing presence than the Company prior to the acquisition. With sales offices
located in the United States, Europe, Australasia, and South America, the
Company expects international revenues to remain a significant portion of total
revenues. See "Certain Factors That May Affect Future Results - Forward Looking
Statements" and "Risks Associated with International Sales."
Gross Profit
The reduction in gross profit percentage for both the three and nine months
ended September 30, 1999 as compared to the same 1998 periods was due to the
following:
o A higher proportion of overall revenues from services which bear a lower
gross margin percentage than license fee revenue
o A higher cost structure underlying services revenue generated from the
Avante, Vantage and Vista customer base
o An acceleration of the amortization of certain capitalized software
development costs to more accurately reflect the anticipated life of the
associated product
o Professional services personnel performed non-billable activities including
Year 2000 testing and quality assurance testing of future product releases
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Operating Expenses
The operating expense increase in absolute dollars was primarily a result of the
DataWorks acquisition. In connection with the acquisition, the Company broadened
its qualified pool of general and administrative costs in order to report
results of operations more consistent with the Company's actual operating
infrastructure. Although this had little impact on total operating expenses as a
percentage of total revenue, it did impact the relative percentage of each
operating expense component to total operating expenses.
The sales and marketing ("S&M") expense increase, in absolute dollars, for the
three and nine months ended September 30, 1999 was a result of the DataWorks
acquisition. During both the three and nine months ended September 30, 1999, S&M
expense as a percentage of revenue decreased due to a refinement in cost
alignments as discussed above. During the three months ended September 30, 1999
as compared to the prior quarter the Company increased its S&M spending as
follows:
o Higher compensation expense as a result of a modification in the sales
commission plan to retain the direct sales force
o Increased marketing expenses associated with the recent name change from
Platinum Software Corporation to Epicor Software Corporation
o Increased marketing expenses associated with improvements to the Company's
customer prospect generation process
The Company believes S&M expenses will remain at the current level during the
remainder of 1999, as the Company continues to promote its new name and invest
in customer prospect generation. See "Certain Factors That May Affect Future
Results - Forward Looking Statements."
Gross software development expenditures were $10.4 million and $3.9 million or
17% and 13% of total revenues for the three months ended September 30, 1999 and
1998, respectively, before capitalization of software costs of $2.1 million and
$1.1 million. For the nine months ended September 30, 1999 and 1998, gross
software development expenditures were $25.3 million and $10.6 million or 13%
and 12% of total revenues, respectively, before capitalization of software costs
of $4.9 million and $2.1 million. The following factors contributed to the
increase in software development expenses:
o Refinement in cost alignments as discussed above
o Year 2000 remediation costs of $1.1 million and $1.5 million incurred
during the three and nine month periods ended September 30, 1999,
respectively
o New product development including web-enablement and integration of
existing back and front office products
o Outside consulting costs related to enhancing software development
methodologies and procedures
The Company believes software development expenditures will decrease during the
remainder of 1999 as the outside consulting costs were specific to the quarter
ended September 30, 1999 and the Year 2000 remediation costs were accelerated
during the third quarter of 1999. See "Certain Factors That May Affect Future
Results - Forward Looking Statements."
General and administrative ("G&A") expenses increased in both absolute dollars
and as a percentage of revenue due to the acquisition of DataWorks, which
included a higher G&A cost infrastructure and by the recent refinement in cost
alignments as discussed above. In addition, for the three months ended September
30, 1999 G&A included a $1.0 million incremental increase to the provision for
doubtful accounts related to various customer issues.
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Liquidity and Capital Resources
The following table summarizes Epicor's cash flows for the nine months ended
September 30, 1999 compared to December 31, 1998 (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 14.4 $ 22.2
Short-term investments 20.2 30.5
Net cash provided by (used in) operating activities (6.3) 6.8
Net cash provided by (used in) investing activities (4.2) (11.8)
Net cash provided by financing activities 2.0 8.4
</TABLE>
As of September 30, 1999, the Company's principal sources of liquidity included
cash and cash equivalents and short-term investments of $34.6 million. The
Company used $6.3 million in cash for operating activities during the nine month
period ended September 30, 1999 primarily to fund the net loss in the third
quarter and to pay accrued restructuring and merger costs, 1998 bonuses, sales
commissions and accounts payable. This was offset in part by the collection of
accounts receivable. During the nine months ended September 30, 1999, the
Company paid $7.3 million for severance, lease termination and other costs
related to the 1998 restructuring. At September 30, 1999, the Company has $6.1
million in cash obligations related to severance payments, lease terminations
and other costs of the 1996, 1997 and 1998 restructurings. The Company believes
that these obligations will be funded from existing cash reserves, working
capital and operations.
During the first nine months of 1999, the Company's principal investing
activities included net sales of short-term investments and capital expenditures
to accommodate facility reorganizations and the Company's expanding information
technology infrastructure. In addition, cash used in investing activities
included capitalized software costs primarily related to the localization and
translation into different languages of the Platinum ERA product and certain
applications of the Platinum ERA 7.0a release.
Financing activities for the nine months ended September 30, 1999 included
proceeds from the exercise of common stock options by employees and issuance of
stock under the employee stock purchase program.
The Company experienced negative cash flows from operations in the quarter
ending September 30, 1999 and expects this to continue in the fourth quarter of
1999. See "Certain Factors That May Affect Future Results - Forward Looking
Statements." Epicor is dependent upon its ability to generate cash flows from
license fees and other operating revenues, as well as the collection of its
outstanding accounts receivable to maintain current liquidity levels. Although
the Company expects operating and investing activities to use cash during the
remainder of fiscal year 1999, it believes that current cash reserves, together
with existing sources of liquidity, will satisfy the Company's projected
short-term liquidity and other cash requirements. The Company has based its
expense levels, in significant part, on expectations of future revenue. If the
Company is not successful in achieving targeted revenues, the Company may be
required to align its operating expenses with its reduced revenues through cost
cutting measures.
Year 2000 Issues
Overview. The Year 2000 Problem generally involves whether a computer system,
software product or business system, when working alone or in conjunction with
other software or hardware systems, accepts input of, stores, manipulates and
outputs dates in the Year 2000 or thereafter without error or interruption (the
"Year 2000 Problem"). The Year 2000 Problem potentially impacts the Company in
the following principal areas: (i) The Company's software products, including
products manufactured by third parties that are resold by the Company; (ii) the
Company's internal technology systems; (iii) the Company's non-internal
technology systems which contain embedded computer devices; and (iv) the
business systems of the Company's distributors, resellers and customers. The
Company's Year 2000 efforts are being managed by a team of internal staff and
third party consultants specializing in Year 2000 issues.
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<PAGE> 13
Company Products. As a leading supplier of client/server enterprise resource
planning software for the middle market, the Company is aware of the Year 2000
Problem and is committed to offering software products that are Year 2000 ready.
The Company presently believes that the current releases of its Platinum ERA and
Platinum for Windows software products are Year 2000 ready. The Company's
Platinum for DOS product, which was initially released in the mid-1980s was not
Year 2000 ready until the release of version 4.6 in August 1998. The version 4.6
release is being offered for free to all existing Platinum for DOS users on
maintenance. The Company believes that the current releases of the products
acquired in the DataWorks merger are also Year 2000 ready. While the Company's
products are the subject of a continuing testing program, there can be no
assurance that these products do not contain undetected errors associated with
the year 2000 date functions that may result in material costs to the Company.
See "Certain Factors that May Affect Future Results - Risks Associated with Year
2000 Readiness."
The Company resells certain products that are manufactured by third parties,
both on an OEM and reseller basis. In addition, certain of the Company's
products include third party technology. The Company has received assurances
from such third parties regarding the Year 2000 readiness of the third party
products. Despite these assurances, there can be no guaranty that the third
party products do not contain undetected errors associated with Year 2000 date
functions.
Internal Technology Systems. The Company's internal technology systems include
telecommunications (phones, voice mail and network connections), computer
hardware (personal computers and network servers) and software. The Company has
assessed the Year 2000 Problem with respect to telecommunications for all
offices. The Company has identified fixes that need to be made to its
telecommunications systems to make them Year 2000 ready. These fixes relate
primarily to upgrades to voice mail and phone systems at some of the Company's
international offices and sales offices and such fixes have been substantially
completed and tested. In addition, the Company has assessed approximately 98% of
its hardware used for Year 2000 readiness and has not uncovered any material
non-compliance. The Company's principal software systems include accounting,
customer support, order entry and desktop productivity (e-mail, word processing,
spreadsheets, etc.). The Company uses Microsoft Corporation products for desktop
productivity which have been certified by Microsoft as Year 2000 ready with
minor issues. The Company, for the most part, uses its own products for its
accounting, order entry and customer support software needs. Certain former
DataWorks offices use third party accounting software and the Company is in the
process of converting to its own accounting software for internal use.
Noninternal Technology Systems. Noninternal technology systems include security
systems, elevators and other systems which contain an embedded computer or
computer like device which is used to control the operation of plant, machinery
and equipment. Most embedded systems on which the Company relies in its daily
operations are owned and managed by the lessors of the facilities in which the
Company's operations are located. The Company has assessed 75% of its operations
for Year 2000 Problems with its noninternal technology systems and anticipates
that the full assessment will be completed by November 30, 1999.
The Company has begun contingency planning for its internal and noninternal
technology systems and facilities to protect against potential interruptions
from the Year 2000 Problem. The Company expects to complete the contingency
plans by November 30, 1999 and the anticipated costs are included below.
Third Party Relationships. The Company has over 350 resellers of its software
products, including distributors and VARs. No one of the resellers is
responsible for a material amount of the Company's license fees. The Company,
from time to time, queries its resellers as to their progress in identifying and
addressing Year 2000 Problems. Although the Company feels confident that its
internal technology will be Year 2000 ready, the Company does recognize that it
is vulnerable, as are most organizations, to the inability of significant
suppliers and utility organizations to become Year 2000 ready. For example, the
failure or interruption of electrical services would disrupt the Company's
ability to communicate with its customers, suppliers, business partners and
others and would adversely affect the Company's operations.
To date the Company has incurred approximately $1.6 million in Year 2000
remediation costs which was funded from working capital. The Company has engaged
a third party consulting firm to assist with Year 2000 readiness efforts. These
efforts include continued product testing and contingency planning. The Company
anticipates spending approximately $0.3 million for this effort as well as
employee compensation related to year-end staffing requirements over the
remainder of 1999. These fees will be expensed as incurred. It is possible that
the Company will incur additional costs in fiscal 2000 addressing unforeseen
events, such as employee costs for fixing undetected software errors in the
Company's products related to Year 2000 data functions and costs to address
unanticipated
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<PAGE> 14
Year 2000 Problems with the Company's internal technology and non-internal
technology systems. Such amounts cannot be quantified at the present time.
Forward Looking Statements. The Company has made forward looking statements
regarding its Year 2000 readiness, anticipated dates for completion of
assessment, testing, and implementation of fixes and anticipated costs to be
incurred. The Company has described many of the risks associated with these
forward looking statements. See "Certain Factors that May Affect Future Results
- - Risks Associated with Year 2000 Readiness." The Company wishes to caution the
reader that there are many factors that could cause its actual results to differ
materially from those stated in the forward looking statements. This is
especially the case because many aspects of Year 2000 readiness are outside the
control of the Company, such as the performance of third party suppliers. All of
these factors make it impossible for the Company to ensure that it will be able
to resolve all Year 2000 problems in a timely manner to avoid materially
adversely affecting its operations or business.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Forward Looking Statements. Certain statements in this Quarterly Report,
including statements regarding the anticipated dates of product releases and
commercial shipments, and the anticipated dates of completion of Year 2000
assessments, testing and implementation of fixes are forward looking statements
within the meaning of Section 27A of the Securities and Exchange Act of 1993, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
that involve risks and uncertainties. Any statements contained herein (including
without limitation statements to the effect that the Company or Management
"estimates," "expects," "anticipates," "plans," "believes," "projects,"
"continues," "may," or "will" or statements concerning "potential" or
"opportunity" or variations thereof or comparable terminology or the negative
thereof,) that are not statements of historical fact should be construed as
forward looking statements. Actual results could differ materially and adversely
from those anticipated in such forward looking statements as a result of certain
factors including the factors listed at pages 13-19. Because of these and other
factors that may affect the Company's operating results, past performance should
not be considered an indicator of future performance and investors should not
use historical results to anticipate results or trends in future periods.
Fluctuations in Quarterly Operating Results. The Company's quarterly operating
results have fluctuated in the past. The Company's operating results may
fluctuate in the future as a result of many factors that may include:
o The demand for the Company's products
o The size and timing of orders for the Company's products
o The number, timing and significance of new product announcements by the
Company and its competitors
o The Company's ability to introduce and market new and enhanced versions of
its products on a timely basis
o The level of product and price competition
o Changes in operating expenses of the Company
o Changes in average selling prices
In addition, the Company will most likely record a significant portion of its
revenues in the final month of a quarter with a concentration of such revenues
recorded in the final 10 business days of that month.
Due to the above factors, among others, the Company's revenues will be difficult
to forecast. The Company, however, will base its expense levels, in significant
part, on its expectations of future revenue. As a result, the Company expects
its expense levels to be relatively fixed in the short run. The Company's
failure to meet revenue expectations could adversely affect operating results.
Further, an unanticipated decline in revenue for a particular quarter may
disproportionately affect the Company's net income because a relatively small
amount of the Company's expenses will vary with its revenues in the short run.
As a result, the Company believes that period-to-period comparisons of the
Company's results of operations are not and will not necessarily be meaningful,
and you should not rely upon them as an indication of future performance. Due to
the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. Such an event would likely have a material adverse effect upon the
price of the Company's Common Stock.
Integration of DataWorks. On December 31, 1998, the Company acquired DataWorks.
The Company is still in the process of integrating the operations of the two
companies. During the first and second quarter of 1999, a significant number of
Avante sales representatives and certain sales management employees resigned
from the
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<PAGE> 15
Company. The Company expects that these departures will materially adversely
effect the Company's revenues from the Avante product in the near term, as well
as the Company's financial results. There can be no assurance that other
employees will not resign from the Company. There may be substantial
difficulties, costs and delays involved in integrating the operations of
DataWorks. These difficulties, costs and delays may include:
o Distracting management from the business of the Company
o Potential incompatibility of business cultures
o Perceived and potential adverse change in client service standards,
business focus, billing practices or service offerings available to clients
o Potential inability to successfully coordinate the research and development
and sales and marketing efforts
o Costs and delays in implementing common systems and procedures, including
financial accounting systems
o Costs and inefficiencies in delivering services to the clients of the
Company
o Inability to retain and integrate key management, technical sales and
customer support personnel
o Potential conflicts in direct sales channels and VARs
Further, there is no assurance that the Company will retain and successfully
integrate its key management, technical, sales and customer support personnel,
or that it will realize any of the anticipated benefits of the DataWorks merger.
Any one or all of the factors identified above may cause increased operating
costs, lower than anticipated financial performance or the loss of customers and
employees. The failure to integrate the Company and DataWorks will have a
material adverse effect on the business, financial condition and results of
operations of the Company.
Horizontal Product Strategy. As part of its business strategy, the Company
intends to expand its product offerings to include application software products
that are complementary to its existing client/server enterprise resource
planning applications, such as human resources and payroll products. This
strategy may involve acquisitions, investments in other businesses that offer
complementary products, joint development agreements or licensing of technology
agreements. The risks commonly encountered in the acquisitions of businesses
would accompany any future acquisitions or investments by the Company. Such
risks may include, the following:
o The difficulty of integrating previously distinct businesses into one
business unit
o The substantial management time devoted to such activities
o The potential disruption of the Company's ongoing business
o Undisclosed liabilities
o Failure to realize unanticipated benefits (such as synergies and cost
savings)
o Issues related to product transition (such as development, distribution and
customer support)
The Company expects that the consideration it would pay in such future
acquisitions would consist of stock, rights to purchase stock, cash or some
combination. If the Company issues stock or rights to purchase stock in
connection with these future acquisitions, earnings per share and then-existing
holders of the Company's Common Stock may experience dilution.
Dependence on Distribution Channels. The Company distributes its Platinum for
Windows product exclusively through third-party distributors and VARs, and
distributes its Platinum ERA product, including Clientele, through a direct
sales force as well as through VARs and distributors. The Company's distribution
channel includes distributors, VARs and authorized consultants, which consist
primarily of professional firms. The Company's agreements with its VARs and
authorized consultants do not require such VARs and consultants to offer
exclusively or recommend the Company's products, and either party can terminate
such agreements with or without cause. If the Company's VARs or authorized
consultants cease distributing or recommending the Company's products or
emphasize competing products, the Company's results of operations could be
materially and adversely affected. In addition, Platinum ERA, a client/server
ERP application, requires additional skill and training for successful
implementation. Although the Company is actively seeking additional VARs to sell
Platinum ERA, delays in training or recruiting VARs could adversely impact the
Company's ability to generate license revenue from its Platinum ERA line of
products.
The Company sells certain products directly and through VARs. There can be no
assurance that the direct sales force will not lead to conflicts with the
Company's VAR channel.
Dependence on Principal Products. The Company derives a substantial portion of
its revenue from the sale of enterprise resource planning application software
and related support services. Accordingly, any event that adversely
15
<PAGE> 16
affects fees derived from the sale of such systems would materially and
adversely affect the Company's business, results of operations and performance.
These events may include:
o Competition from other products
o Significant flaws in the Company's products
o Incompatibility with third-party hardware or software products
o Negative publicity or evaluation of the Company or its products
o Obsolescence of the hardware platforms or software environments in which
the Company's systems run
Risks of Product Defects. Software products as complex as those ERP products
offered by the Company may contain undetected errors or failures when first
introduced or as new versions are released. Despite testing by the Company, and
by current and potential customers, any of the Company's products may contain
errors after their commercial shipment. Such errors may cause loss of or delay
in market acceptance of the Company's products. The Company has been informed by
customers of certain errors with respect to its Avante and Platinum ERA
products, which the Company is addressing. The inability of the Company to
correct such errors in a timely manner could have a material adverse effect on
the Company's results of operations. In addition, technical problems with the
current release of the database platforms on which the Company's products
operate could impact sales of these products, which could have a material
adverse effect on the Company's results of operations.
Reliance on Third-Party Suppliers. The Company's products incorporate and use
software products developed by other entities. The Company cannot assure you
that such third parties will:
o Remain in business
o Support the Company's product line
o Maintain viable product lines
o Make their product lines available to the Company on commercially
acceptable terms
Any significant interruption in the supply of such third-party technology could
have a material adverse effect on the Company's business, results of operation
and financial condition.
Risks Associated with Rapid Technological Change and Product Development. The
market for the Company's software products is subject to ongoing technological
developments, evolving industry standards and rapid changes in customer
requirements. As companies introduce products that embody new technologies or as
new industry standards emerge such as web-based application software, existing
products may become obsolete and unmarketable. The Company's future business,
operating results and financial condition will depend on its ability to:
o Enhance its existing products, including web enabling such products
o Develop new products that address the increasingly sophisticated needs of
its customers
o Develop products for additional platforms
Further, if the Company fails to respond to technological advances, emerging
industry standards and end-user requirements, or experiences any significant
delays in product development or introduction, the Company's competitive
position and revenues could be adversely affected. The Company's success will
depend on its ability to develop and successfully introduce new products and
services. The Company cannot assure you that it will successfully develop and
market new products on a timely basis, if at all. Any such delay or failure
could have a material adverse effect on the Company's business, results of
operations and financial condition. From time to time, the Company or its
competitors may announce new products, capabilities or technologies that have
the potential to replace or shorten the life cycles of the Company's existing
products. The Company cannot assure you that such announcements will not cause
customers to delay or alter their purchasing decisions, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Change From Client/Server to Web-Based Environment. The Company's development
tools, application products and consulting and education services help
organizations build, customize or deploy solutions that operate in a
client/server computing environment. The Company cannot assure you that these
markets will continue to grow or that the Company will be able to respond
effectively to the evolving requirements of these markets. The Company believes
that the environment for application software is changing from a client/server
environment to a web-based
16
<PAGE> 17
environment. If the Company fails to respond effectively to evolving
requirements of this changing environment, the Company's business, financial
condition and results of operations will be materially and adversely affected.
Highly Competitive Industry. The business information systems industry in
general and the ERP computer software industry in particular are very
competitive and subject to rapid technological change. Many of the Company's
current and potential competitors have (1) longer operating histories, (2)
significantly greater financial, technical and marketing resources, (3) greater
name recognition, (4) larger technical staffs, and (5) a larger installed
customer base than the Company has. A number of companies offer products that
are similar to the Company's products and that target the same markets. In
addition, any of these competitors may be able to respond more quickly to new or
emerging technologies (such as web-based application software) and changes in
customer requirements, and to devote greater resources to the development,
promotion and sale of their products than the Company. Furthermore, because
there are relatively low barriers to entry in the software industry, the Company
expects to experience additional competition from other established and emerging
companies. Such competitors may develop products and services that compete with
those offered by the Company or may acquire companies, businesses and product
lines that compete with the Company. It also is possible that competitors may
create alliances and rapidly acquire significant market share. Accordingly, the
Company cannot assure you that the Company's current or potential competitors
will not develop or acquire products or services comparable or superior to those
that the Company develops, combine or merge to form significant competitors, or
adapt more quickly than will the Company to new technologies, evolving industry
trends and changing customer requirements. Competition could cause price
reductions, reduced margins or loss of market share for the Company's products
and services, any of which could materially and adversely affect the Company's
business, operating results and financial condition. The Company cannot assure
you that the Company will be able to compete successfully against current and
future competitors or that the competitive pressures that the Company may face
will not materially adversely affect its business, operating results and
financial condition.
Dependence on Manufacturing Industry. The Company's business depends, in large
part, upon the capital expenditures of mid-range discrete manufacturers, which
in part depend upon the demand for such manufacturers' products. A recession or
other adverse event that affects the manufacturing industry in the United States
or in other markets that the Company serves could affect such demand. Decreased
demand could force manufacturers in the Company's target markets to curtail or
postpone capital expenditures on business information systems. Any such change
in the amount or timing of capital expenditures in its target markets could
materially and adversely affect the Company's business and operations.
Risks Associated With Year 2000 Readiness. Significant uncertainty exists in the
software industry concerning the potential effects of the "Year 2000" issue. The
"Year 2000" issue exists because the date codes used in some computer software
and hardware systems use only two digits so that many computer systems cannot
distinguish between the years 1900 and 2000. The Company believes that the
current versions of its products are Year 2000 ready. However, despite its
belief and although the Company has conducted or is conducting its own quality
testing procedures, we cannot assure you that the Company's software products
contain all necessary date code changes or do not contain errors related to the
Year 2000. If any of the Company's software products fail to perform, including
failures due to the onset of calendar year 2000 there would likely be a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company is currently evaluating its information technology infrastructure
for Year 2000 readiness, including reviewing what actions are required to make
all software systems used internally Year 2000 ready as well as actions
necessary to make the Company less vulnerable to Year 2000 readiness problems
associated with third parties' systems. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000 Issues."
We cannot assure you that such measures will alleviate all Year 2000 problems
which could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company believes that as the Year 2000 approaches, potential purchasers of
ERP software systems may curtail or delay their purchases of ERP software until
the Year 2000 passes and the potential purchaser is comfortable that its
business operations are not negatively impacted by the Year 2000. As a result,
it is possible that in the remainder of calendar 1999 and into the first six
months of 2000 the Company may experience a reduction in revenues from ERP
software sales and such reduction may materially and adversely affect the
Company's financial results.
Dependence on Retention and Integration of Key Personnel. The Company's success
depends on the continued service of key management personnel not subject to an
employment agreement for a specified time duration with the
17
<PAGE> 18
Company. In addition, the competition to attract, retain and motivate qualified
technical, sales and operations personnel is intense. During the first and
second quarters of 1999, a significant number of Avante sales representatives
and certain sales management employees resigned from the Company. The Company
expects that these departures will materially adversely affect the Company's
revenues from the Avante product in the near term as well as the Company's
financial results. The Company is actively seeking qualified replacements. The
Company has at times experienced, and continues to experience, difficulty in
recruiting qualified personnel, particularly in software development, sales and
customer support. There is no assurance that the Company can replace the
departed employees in a timely manner or retain its key personnel or attract
other qualified personnel in the future. The failure to attract or retain such
persons could have a material adverse effect on the Company's business,
operating results, cash flows and financial condition.
Risks Associated with International Sales. The Company believes that any future
growth of the Company will be dependent, in part, upon its ability to increase
revenues in international markets. The Company intends to expand its operations
outside of the United States. The expansion will require significant management
attention and financial resources and could adversely affect the Company's
margins. To increase international sales in subsequent periods, the Company must
establish additional foreign operations, hire additional personnel and recruit
international resellers. The Company cannot assure you that the Company will
maintain or expand its international sales. If the revenues that the Company
generates from foreign activities are inadequate to offset the expense of
maintaining foreign offices and activities, the Company's business, financial
condition and results of operations could be materially and adversely affected.
International sales are subject to inherent risks, including:
o Unexpected changes in regulatory requirements
o Tariffs and other barriers
o Unfavorable intellectual property laws
o Fluctuating exchange rates
o Difficulties in staffing and managing foreign sales and support
operations
o Longer accounts receivable payment cycles
o Difficulties in collecting payment
o Potentially adverse tax consequences, including repatriation of earnings
o Lack of acceptance of localized products in foreign countries
o Burdens of complying with a wide variety of foreign laws
o Effects of high local wage scales and other expenses
Any one of these factors could materially and adversely affect the Company's
future international sales and, consequently, the Company's business, operating
results, cash flows and financial condition. A portion of the Company's revenues
from sales to foreign entities, including foreign governments, has been in the
form of foreign currencies. The Company does not have any hedging or similar
foreign currency contracts. Fluctuations in the value of foreign currencies
could adversely impact the profitability of the Company's foreign operations.
Risks Associated with Intellectual Property and Proprietary Rights Protection.
The Company relies on a combination of copyright, trademark and trade secret
laws, employee and third-party nondisclosure agreements and other industry
standard methods for protecting ownership of its proprietary software. However,
the Company cannot assure you that in spite of these precautions, an
unauthorized third party will not copy or reverse-engineer certain portions of
the Company's products or obtain and use information that the Company regards as
proprietary. The Company cannot assure you that the mechanisms that the Company
uses to protect its intellectual property will be adequate or that the Company's
competitors will not independently develop products that are substantially
equivalent or superior to the Company's products.
The Company may from time to time receive notices from third parties claiming
that its products infringe upon third-party intellectual property rights. The
Company expects that as the number of software products in the country increases
and the functionality of these products further overlaps, the number of these
types of claims will increase. Any such claim, with or without merit, could
result in costly litigation and require the Company to enter into royalty or
licensing arrangements. The terms of such royalty or license arrangements, if
required, may not be acceptable to the Company.
In addition, in certain cases, the Company provides the source code for its
application software under licenses to its customers to enable them to customize
the software to meet particular requirements. Although the source code
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<PAGE> 19
licenses contain confidentiality and nondisclosure provisions, we cannot assure
you that such customers will take adequate precautions to protect the Company's
source code or other confidential information.
Shares Eligible for Future Sale. As of November 5, 1999, the Company had
40,829,780 shares of common stock outstanding. There are presently 95,305 shares
of Series C Preferred Stock outstanding. Each share of Series C Preferred Stock
is convertible into ten shares of common stock, as adjusted for stock dividends,
combinations or splits at the option of the holder. As a result, the Series C
Preferred Stock is convertible into 953,050 shares of common stock. The holders
of the Series C Preferred Stock have the right to cause the Company to register
the sale of the shares of common stock issuable upon conversion of the Series C
Preferred Stock. Also, the Company has a substantial number of options or shares
issuable to employees under employee option or stock grant plans. As a result, a
substantial number of shares of common stock will be eligible for sale in the
public market at various times in the future. Sales of substantial amounts of
such shares could adversely affect the market price of the Company's Common
Stock.
Possible Volatility of Stock Prices. The market prices for securities of
technology companies, including the Company, have been volatile. Quarter to
quarter variations in operating results, changes in earnings estimates by
analysts, announcements of technological innovations or new products by the
Company or its competitors, announcements of major contract awards and other
events or factors may have a significant impact on the market price of the
Company's Common Stock. In addition, the securities of many technology companies
have experienced extreme price and volume fluctuations, which have often been
unrelated to the companies' operating performance. These conditions may
adversely affect the market price of the Company's Common Stock.
Because of these and other factors affecting the Company's operating results,
past financial performance should not be considered an indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Interest Risk. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's investment portfolio. The Company does
not use derivative financial instruments in its investment portfolio. The
Company places its investments with high credit quality issuers and, by policy,
limits the amount of credit exposure to any one issuer. The Company is averse to
principal loss and ensures the safety and preservation of its invested funds by
limiting default risk, market risk, and reinvestment risk. The Company mitigates
default risk by investing in only the safest and highest credit quality
securities and by constantly positioning its portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer or
guarantor. The portfolio includes only corporate debt securities and municipal
bonds.
Foreign Currency Risk. The Company transacts business in various foreign
currencies, primarily in certain European countries, Canada and Australia. The
Company does not have any hedging or similar foreign currency contracts.
Although international revenues approximated 28% of the Company's total revenues
for the nine months ended September 30, 1999, approximately 24% of the revenues
are denominated in foreign currencies. Significant currency fluctuations could
adversely impact foreign revenues; however the Company does not foresee or
expect any significant changes in foreign currency exposure in the near future.
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PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
DataWorks, and certain of its officers, directors and former officers have been
named as defendants in two lawsuits alleging violations of the federal
securities laws. The complaints were filed in the United States District Court
for the Southern District of California. They purport to be brought on behalf of
classes of stockholders who purchased DataWorks stock, and allege that between
October 30, 1997 and July 16, 1998, the defendants issued misleading statements
concerning DataWorks' acquisition of the Interactive Group, Inc. and sales of
certain products. The complaints do not specify the dollar amount of damages
alleged or relief requested. The Company is also named in the lawsuit as a
defendant as a successor of DataWorks.
The Company is subject to miscellaneous legal proceedings in the normal course
of business. The Company is currently defending these proceedings and claims,
and anticipates that it will be able to resolve these matters in a manner that
will not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated July 29,
1999 to report under Item 5 its results for the fiscal quarter
ended June 30, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPICOR SOFTWARE CORPORATION
----------------------------------
(Registrant)
Date: November 15, 1999 /s/ Lee Kim
----------------------------------
Lee Kim
Principal Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,390
<SECURITIES> 20,163
<RECEIVABLES> 93,094
<ALLOWANCES> 12,160
<INVENTORY> 1,124
<CURRENT-ASSETS> 128,242
<PP&E> 46,280
<DEPRECIATION> 28,596
<TOTAL-ASSETS> 193,359
<CURRENT-LIABILITIES> 74,903
<BONDS> 1,079
0
7,501
<COMMON> 41
<OTHER-SE> 109,835
<TOTAL-LIABILITY-AND-EQUITY> 193,359
<SALES> 76,236
<TOTAL-REVENUES> 195,466
<CGS> 15,079
<TOTAL-COSTS> 88,184
<OTHER-EXPENSES> 115,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 269
<INCOME-PRETAX> (6,792)
<INCOME-TAX> 436
<INCOME-CONTINUING> (7,228)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,228)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
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