<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-Q/A
Amendment 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
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
(FORMERLY NAMED PLATINUM 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 August 7, 2000 there were 41,448,724 shares of common stock outstanding.
<PAGE> 2
FORM 10-Q/A INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
(restated, unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months and Six Months Ended June 30, 2000
(restated) and 1999 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Six Months Ended June 30, 2000
(restated) and 1999 5
Notes to Unaudited Condensed Consolidated Financial Statements
(restated) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 24
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(Restated)
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,587 $ 18,221
Short-term investments 2,443 12,154
Accounts receivable, net 72,345 75,263
Prepaid expenses and other 8,560 8,984
--------- ---------
Total current assets 89,935 114,622
Property and equipment, net 14,423 16,650
Software development costs, net 11,629 9,083
Intangible assets, net 22,540 25,668
Other assets 3,615 4,154
--------- ---------
Total assets $ 142,142 $ 170,177
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,668 $ 14,591
Accrued expenses 28,199 32,801
Accrued merger and restructuring costs 4,372 11,562
Deferred revenue 44,235 39,017
--------- ---------
Total current liabilities 89,474 97,971
Long-term liabilities 295 400
Stockholders' equity:
Preferred stock 7,501 7,501
Common stock 42 41
Additional paid-in capital 240,805 237,536
Less: notes receivable from officers for issuance of restricted
stock (9,969) (11,269)
Accumulated other comprehensive loss (2,516) (1,590)
Accumulated deficit (183,490) (160,413)
--------- ---------
Total stockholders' equity 52,373 71,806
--------- ---------
Total liabilities and stockholders'equity $ 142,142 $ 170,177
========= =========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
3
<PAGE> 4
EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2000 1999 2000 1999
-------- -------- --------- --------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenues:
License fees $ 20,360 $ 23,806 $ 41,005 $ 49,444
Services 36,244 40,318 71,110 79,020
Other 881 2,032 1,981 3,797
-------- -------- --------- --------
Total revenues 57,485 66,156 114,096 132,261
Cost of revenues 26,546 30,046 54,033 58,050
-------- -------- --------- --------
Gross profit 30,939 36,110 60,063 74,211
Operating expenses:
Sales and marketing 19,113 19,568 39,798 40,213
Software development 7,327 6,559 13,073 12,118
General and administrative 14,305 9,381 31,634 19,920
Special charges (700) -- (700) --
-------- -------- --------- --------
Total operating expenses 40,045 35,508 83,805 72,251
-------- -------- --------- --------
Income (loss) from operations (9,106) 602 (23,742) 1,960
Other income (expense), net 265 (137) 665 946
-------- -------- --------- --------
Income (loss) before income taxes (8,841) 465 (23,077) 2,906
Provision for income taxes -- 70 -- 436
-------- -------- --------- --------
Net income (loss) $ (8,841) $ 395 $ (23,077) $ 2,470
======== ======== ========= ========
Net income (loss) per share - basic $ (0.21) $ 0.01 $ (0.56) $ 0.06
Net income (loss) per share - diluted $ (0.21) $ 0.01 $ (0.56) $ 0.06
Common shares outstanding - basic 41,468 40,449 41,365 40,441
Common shares outstanding - diluted 41,468 41,731 41,365 41,833
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
4
<PAGE> 5
EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
-------- --------
(Restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(23,077) $ 2,470
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 8,726 8,103
Provision for doubtful accounts 12,636 2,686
Special charges (700) --
Changes in operating assets and liabilities:
Accounts receivable (9,448) 3,079
Prepaid expenses and other current assets 424 (355)
Accounts payable (1,923) (6,085)
Accrued expenses (4,790) (7,637)
Accrued merger and restructuring costs (5,055) (6,136)
Deferred revenue 5,218 103
-------- --------
Net cash used in operating activities (17,989) (3,772)
INVESTING ACTIVITIES
Purchases of property and equipment (3,620) (4,126)
Purchases of short-term investments -- (21,275)
Proceeds from sale or maturity of short-term investments 9,711 21,785
Additions to capitalized software costs (3,984) (2,804)
Other 271 (112)
-------- --------
Net cash provided by (used in) investing activities 2,378 (6,532)
FINANCING ACTIVITIES
Exercise of common stock options 2,224 1,761
Common stock issued under the Employee Stock Purchase Plan 1,165 --
Proceeds from notes receivable from officers 1,181 --
Payments of long-term liabilities (105) (594)
-------- --------
Net cash provided by financing activities 4,465 1,167
Effect of exchange rate on cash (488) (81)
-------- --------
Net decrease in cash and cash equivalents (11,634) (9,218)
Cash and cash equivalents at beginning of period 18,221 22,175
-------- --------
Cash and cash equivalents at end of period $ 6,587 $ 12,957
======== ========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
5
<PAGE> 6
EPICOR SOFTWARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)
JUNE 30, 2000
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").
Management and its auditors Ernst & Young decided to analyze additional
information with respect to the aging of accounts receivable over 90 days,
although the Company believed that it had adequately reserved for uncollectible
accounts. Accordingly, the auditors' interim review of this quarterly report as
required by Rule 10-01(d) of Regulation S-X was complete except with respect to
this further analysis. Upon completion of this further analysis and consultation
with the Company's auditors, the Company determined that a new methodology was
required for determining its allowance for doubtful accounts. It was also
determined that the Company's Quarterly Reports on Forms 10-Q for the periods
ended March 31 and June 30, 2000 needed to be amended to reflect retroactive
application of the new allowance methodology, as explained below. Consequently,
Ernst & Young has now completed its procedures for this quarterly report as
required by Rule 10-01(d) of Regulation S-X. 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. These unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
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 six months ended June 30, 2000, 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, 2000. The balance sheet at December 31, 1999
has been derived from the audited financial statements at that date, but does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
RESTATEMENT OF FINANCIAL RESULTS
On October 31, 2000, the Company announced that it was restating its results of
operations for the first and second quarters of 2000 to reflect an increase in
the Company's allowance for doubtful accounts. Following the end of the second
quarter of 2000, the Company and its independent auditors initiated a review of
the Company's methodology for the calculation of its allowance for doubtful
accounts. Upon completion of this review and consultation with the Company's
auditors, the Company determined that a new methodology was required for
determining the level of allowance required. The Company's previous methodology
was based primarily on estimates of collectibility for specific accounts with
significant past due balances. While this method did not automatically consider
an account to be uncollectible based on its age, age was a factor considered.
Under the new methodology, age of an account is the key determinant of the level
of allowance required. It was also determined that the new methodology should be
applied to all quarters of 2000 based on the increasing percentage of aged
accounts during the course of the year.
This restatement results in an increase in the Company's provision for doubtful
accounts for the three and six months ended June 30, 2000 of $3,861,000 and
$9,216,000, respectively. The following reflects the effect of this restatement
on the Company's results of operations for the three and six month periods
ended June 30, 2000 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------------------------------- --------------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total operating expenses $36,184 $40,045 $ 74,589 $ 83,805
Net loss $(4,980) $(8,841) $(13,861) $(23,077)
Net loss per share-basic $ (0.12) $ (0.21) $ (0.34) $ (0.56)
Net loss per share-diluted $ (0.12) $ (0.21) $ (0.34) $ (0.56)
</TABLE>
COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three and six months ended
June 30, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ----------------------
2000 1999 2000 1999
------- ----- -------- -------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net income (loss) $(8,841) $ 395 $(23,077) $ 2,470
Unrealized gains (losses) on foreign
currency translation adjustments (436) (762) (926) (339)
------- ----- -------- -------
Total comprehensive income (loss) $(9,277) $(367) $(24,003) $ 2,131
======= ===== ======== =======
</TABLE>
BASIC AND DILUTED NET INCOME PER SHARE
Basic net income (loss) 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
(loss) by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. For the three months and six months
ended June 30, 2000, employee stock options and preferred stock were not
considered in calculating diluted net loss per common share because their effect
would be anti-dilutive.
6
<PAGE> 7
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- ------- -------- -------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) - numerator for basic
and diluted net income (loss) per share $ (8,841) $ 395 $(23,077) $ 2,470
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 41,468 40,449 41,365 40,441
Effect of dilutive securities:
Employee stock options -- 329 -- 439
Preferred stock -- 953 -- 953
-------- ------- -------- -------
Dilutive potential common shares -- 1,282 -- 1,392
Denominator for diluted net income (loss)
per share 41,468 41,731 41,365 41,833
======== ======= ======== =======
Net income (loss) per share - basic $ (0.21) $ 0.01 $ (0.56) $ 0.06
Net income (loss) per share - diluted $ (0.21) $ 0.01 $ (0.56) $ 0.06
</TABLE>
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 complied with the requirements of this SOP as they became
effective.
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 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, 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, which are not material,
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 which it did
not already own 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
7
<PAGE> 8
of Evosoft, which are not material, are included in the results of the Company's
operations subsequent to April 1, 1999.
1999 RESTRUCTURING AND REORGANIZATION
In December 1999, the Company underwent a restructuring as a result of
reorganizing certain aspects of its business. Elements of the restructuring plan
included refocusing development activities related to certain product lines on
sales to current users of these products as opposed to new customers;
termination of plans to market certain products in selected international
markets; organizing certain product lines into divisions with profit and loss
responsibilities; reducing the workforce; and closing or significantly reducing
the size of various offices worldwide.
The following table summarizes the 2000 activity in the Company's reserves
associated with all acquisitions and restructurings (in thousands):
<TABLE>
<CAPTION>
Balance at Write off Reversal of Balance at
December of Fixed Facility Cash June 30,
31, 1999 Assets Accrual Payments 2000
--------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Separation costs for terminated
employees and contractors $ 2,005 $ -- $ -- $(2,001) $ 4
Facilities closing and downsizing 4,712 (1,435) (700) (1,856) 721
Remaining restructuring accrual
from prior periods - 1998, 1997
and 1996 1,185 -- -- (104) 1,081
------- ------- ----- ------- ------
Accrued restructuring costs 7,902 (1,435) (700) (3,961) 1,806
Accrued merger costs 3,660 -- -- (1,094) 2,566
------- ------- ----- ------- ------
Total accrued merger and
restructuring costs $11,562 $(1,435) $(700) $(5,055) $4,372
======= ======= ===== ======= ======
</TABLE>
During the quarter ended June 30, 2000, the Company determined that $0.7 million
of the restructuring reserves recorded as part of the Company's December 1999
restructuring were not needed. This was the result of the Company's ability to
close certain of its facilities for less than the originally estimated amount.
This amount has been recorded against special charges for the three and six
months periods ended June 30, 2000 in the accompanying Condensed Consolidated
Statements of Operations.
As of June 30, 2000, all employee terminations as a result of the Company's 1999
restructuring have taken place and substantially all related payments have been
made.
CREDIT FACILITY
On July 26, 2000, the Company entered into a $30 million senior credit facility
with a financial institution. The facility is secured by substantially all of
the Company's assets. The credit facility is comprised of a $10.0 million term
loan and $20.0 million revolving loan. Borrowings under the revolving loan are
limited to 80% of eligible accounts receivable. The term loan is to be repaid in
36 equal monthly principal payments, plus interest at 3% above the bank prime
rate. The Company will also be required to comply with certain financial
covenants.
The revolving credit facility matures on August 1, 2003, and bears interest at a
variable rate equal to either the prime rate or the LIBOR rate, at the Company's
option, plus a margin which ranges from 0.25% to 1.25% on the prime rate loans
or 2.5% to 3.75% on LIBOR rate loans, depending on the Company's financial
performance.
On August 8, 2000 the company received the $10.0 million proceeds from the term
loan.
CONTINGENCIES
On December 24, 1998, Alyn Corporation ("Alyn") filed a lawsuit against
DataWorks Corporation in Superior Court for the State of California, County of
San Diego, Alyn Corporation v. DataWorks, David Roper, Daniel Horter and Mike
White. The lawsuit arose out of the licensing and sale of software by DataWorks
to Alyn in December 1996. On March 22, 2000, the Company agreed to pay Alyn $1.8
million to settle the lawsuit. The Company accrued $1.8 million for the
liability arising out of the settlement which was reflected in its 1999
financial statements. The Company paid one-half of the settlement amount on
March 23, 2000 and the other half on April 3,
8
<PAGE> 9
2000. The Company is in discussions with its insurance carrier regarding
coverage for this matter, but the amount of insurance coverage, if any, has not
been determined at the present time.
In November 1998, a securities class action was filed in the United States
District Court for the Southern District of California against DataWorks,
certain of its current and former officers and directors, and the Company. The
consolidated complaint is purportedly brought on behalf of purchasers of
DataWorks stock between October 30, 1997 and July 16, 1998. The complaint
alleges that defendants made material misrepresentations and omissions
concerning DataWorks' acquisition of Interactive Group, Inc. and demand for
DataWorks' products. The Company is named as a defendant solely as DataWorks'
successor, and is not alleged to have taken part in the alleged misconduct. No
damage amount is specified in the complaint. The action is in the early stages
of litigation, no trial date is set, and the judge's ruling on defendants'
motion to dismiss the second amended consolidated complaint is pending. The
Company believes there is no merit to this lawsuit and intends to continue to
defend against it vigorously.
The Company is subject to miscellaneous other legal proceedings and claims 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 consolidated financial position, results of operations or cash flows.
9
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
OVERVIEW
The Company designs, develops, markets and supports integrated enterprise
customer relationship management and electronic business software solutions for
use by mid-sized companies as well as divisions and subsidiaries of larger
corporations worldwide. The Company's business solutions are focused on the
mid-market, which generally includes companies between $10 million and $500
million in annual revenues. Its product and services are sold worldwide by the
Company's direct sales force, international subsidiaries and an authorized
network of VARs, distributors and software consultants.
Restatement of Financial Results
On October 31, 2000, the Company announced that it was restating its results of
operations for the first and second quarters of 2000 to reflect an increase in
the Company's allowance for doubtful accounts. Following the end of the second
quarter of 2000, the Company and its independent auditors initiated a review of
the Company's methodology for the calculation of its allowance for doubtful
accounts. Upon completion of this review and consultation with the Company's
auditors, the Company determined that a new methodology was required for
determining the level of allowance required. The Company's previous methodology
was based primarily on estimates of collectibility for specific accounts with
significant past due balances. While this method did not automatically consider
an account to be uncollectible based on its age, age was a factor considered.
Under the new methodology, age of an account is the key determinant of the level
of allowance required. It was also determined that the new methodology should be
applied to all quarters of 2000 based on the increasing percentage of aged
accounts during the course of the year.
This restatement results in an increase in the Company's provision for doubtful
accounts for the three and six months ended June 30, 2000 of $3,861,000 and
$9,216,000, respectively. The following reflects the effect of this restatement
on the Company's results of operations for the three and six month periods
ended June 30, 2000 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------------------- -------------------------
As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total operating expenses $ 36,184 $ 40,045 $ 74,589 $ 83,805
Net loss $ (4,980) $ (8,841) $(13,861) $(23,077)
Net loss per share - basic $ (0.12) $ (0.21) $ (0.34) $ (0.56)
Net loss per share - diluted $ (0.12) $ (0.21) $ (0.34) $ (0.56)
</TABLE>
1999 Restructuring and Reorganization
In December 1999, the Company underwent a restructuring as a result of
reorganizing certain aspects of its business. Elements of the restructuring plan
included refocusing development activities related to certain product lines on
sales to current users of these products as opposed to new customers;
termination of plans to market certain products in selected international
markets; organizing certain product lines into divisions with profit and loss
responsibilities; reducing the workforce; and closing or significantly reducing
the size of various offices worldwide.
The following table summarizes the 2000 activity in the Company's reserves
associated with all acquisitions and restructurings (in thousands):
<TABLE>
<CAPTION>
Balance at Write off Reversal of Balance at
December 31, of Fixed Facility Cash June 30,
1999 Assets Accrual Payments 2000
------------ --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
Separation costs for terminated
employees and contractors $ 2,005 $ -- $ -- $(2,001) $ 4
Facilities closing and downsizing 4,712 (1,435) (700) (1,856) 721
Remaining restructuring accrual
from prior periods - 1998, 1997
and 1996 1,185 -- -- (104) 1,081
------- ------- ----- ------- ------
Accrued restructuring costs 7,902 (1,435) (700) (3,961) 1,806
Accrued merger costs 3,660 -- -- (1,094) 2,566
------- ------- ----- ------- ------
Total accrued merger and
restructuring costs $11,562 $(1,435) $(700) $(5,055) $4,372
======= ======= ===== ======= ======
</TABLE>
During the quarter ended June 30, 2000, the Company determined that $0.7 million
of the restructuring reserves recorded as part of the Company's December 1999
restructuring were not needed. This was the result of the Company's ability to
close certain of its facilities for less than the originally estimated amount.
This amount has been recorded against special charges for the three and six
months periods ended June 30, 2000 in the accompanying Condensed Consolidated
Statements of Operations.
As of June 30, 2000, all employee terminations as a result of the Company's 1999
restructuring have taken place and substantially all related payments have been
made.
Although the Company believes the restructuring activities were necessary, no
assurance can be given that the anticipated benefits of the restructuring will
be achieved or that similar action will not be required in the future. The
Company experienced a significant reduction in operating expenses for the
quarter ended June 30, 2000 compared to the quarter ended December 31, 1999
largely due to the aforementioned restructuring.
10
<PAGE> 11
RESULTS OF OPERATIONS
The following table summarizes certain aspects of Epicor's results of operations
for the three and six months ended June 30, 2000 compared to the three and six
months ended June 30, 1999 (in millions except percentages):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------- ------------------------------------------
2000 1999 Change $ Change % 2000 1999 Change $ Change %
---------- ----- -------- -------- ---------- ----- -------- --------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License fees $20.4 $23.8 $(3.4) (14.5)% $41.0 $49.4 $(8.4) (17.1)%
Services 36.2 40.3 (4.1) (10.1)% 71.1 79.0 (7.9) (10.0)%
Other 0.9 2.1 (1.2) (56.6)% 2.0 3.9 (1.9) (47.8)%
----- ----- ----- ----- ----- ----- ----- -----
Total revenues 57.5 66.2 (8.7) (13.1)% 114.1 132.3 (18.2) (13.7)%
As a percentage of
revenues:
License fees 35.4% 36.0% 35.9% 37.4%
Services 63.0% 60.9% 62.3% 59.7%
Other 1.6% 3.1% 1.8% 2.9%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit $30.9 $36.1 $(5.2) (14.3)% $60.1 $74.2 $(14.1) (19.1)%
As a percentage of
revenues 53.8% 54.6% 52.6% 56.1%
Sales and marketing $19.1 $19.6 $(0.5) (2.3)% $39.8 $40.2 $(0.4) (1.0)%
As a percentage
of revenues 33.2% 29.6% 34.9% 30.4%
Software development $7.3 $6.6 $0.8 11.7% $13.1 $12.1 $1.0 7.9%
As a percentage of
revenues 12.7% 9.9% 11.5% 9.2%
General and administrative $14.3 $9.4 $4.9 52.5% $31.6 $19.9 $11.7 58.8%
As a percentage of
revenues 24.9% 14.2% 27.7% 15.1%
</TABLE>
Revenues
The overall decrease in license fee revenues in absolute dollars for both the
three and six month periods ended June 30, 2000 as compared to the same periods
in 1999 is primarily due to a delay in the recovery of demand for enterprise
applications. The decrease is also attributable to reduced sales volumes in the
Company's Avante product line as a result of the Company's decision to focus
development of such on sales to current customers as opposed to sales to new
customers. The mix of product license fee revenues amongst the Company's
products remained fairly constant for the three and six months ended June 30,
2000 compared with the same periods in 1999 except for the decrease in the
revenue from the Avante product.
Services revenues consist of fees from software maintenance, consulting, custom
programming and education services. The decrease in services revenues in
absolute dollars for the three and six month periods ended June 30, 2000 as
compared with the same periods in 1999 is primarily due to lower consulting
revenues which was caused by a decrease in the number of new implementation
projects for the Avante product as a result of the aforementioned decrease in
license revenues from the Avante product line. Although services revenues
decreased in absolute dollars, as a percentage of total revenues, services
revenues increased. This is the result of an increase in maintenance services
revenues due to growth of the Company's installed base of customers.
Other revenues consist primarily of third-party hardware and forms sales. The
decrease in other revenues in absolute dollars for the three and six months
ended June 30, 2000 as compared with the same periods in 1999 is directly
related to the decrease in the license fee revenues for the Company's Avante
product, because all hardware sales are directly attributable to this product
line. Going forward, the Company does not anticipate an increase in
11
<PAGE> 12
hardware sales as the focus of the Avante product is on sales to existing
customers as opposed to sales to new customers.
International revenues were $15.4 million and $17.7 million in the second
quarter of 2000 and 1999, respectively, representing 26.8% of total revenues
both quarters. International revenues were $29.2 million and $37.9 million for
the six months ended June 30, 2000 and 1999, respectively, representing 25.6%
and 28.6% of total revenues, respectively. The decrease in absolute dollars of
total international revenues for the three and six months ended June 30, 2000 as
compared to the same 1999 periods is primarily attributable to decreased
international sales of the Company's Avante product. The Company expects this
trend to continue going forward. The decrease, however, in international
revenues for the quarter ended June 30, 2000 as compared to the same 1999 period
is offset by an increase in the license fees of the Company's e by Epicor
product in Asia and Australia. International revenues as a percentage of total
revenues for the three months ended June 30, 2000 as compared to the same 1999
period remained unchanged. For the six month period ended June 30, 2000 compared
with the same 1999 period, international revenues as a percentage of total
revenues decreased due to the previously mentioned decrease in Avante product
sales. With sales offices located in the Europe, Australia, Asia and South
America, the Company expects international revenues to remain a significant
portion of total revenues.
Gross Profit
The absolute dollar decrease in gross profit for the three months and six months
ended June 30, 2000 as compared to the same 1999 periods is attributable to the
decrease in license fee and services revenues. The decrease in gross profit as a
percentage of revenues for the quarter ended June 30, 2000 as compared to the
same quarter of 1999 is due to an increase in sales of OEM products resulting in
higher royalty expense. This decrease, however, is offset by an increase in the
services gross profit percentage due to an increase in utilization of
professional services personnel during the second quarter of 2000. The decrease
in gross profit as a percentage of revenue for the six months ended June 30,
2000 as compared to the same period of 1999 is due to the previously mentioned
increase in sales of OEM products and a decreased gross profit on services due
to significantly lower utilization of professional services personnel during the
first quarter of 2000.
Operating Expenses
Sales and marketing expenses consist primarily of salaries, commissions, travel,
advertising and promotional expenses. The decrease in absolute dollars for the
three and six months ended June 30, 2000 compared to the same periods of 1999 is
primarily due to the reduction in sales personnel as a result of the previously
mentioned 1999 restructuring as well as employee attrition especially in the
Company's Avante sales personnel. This decrease, however, is offset by an
increase in marketing costs associated with the renaming and release of the
Company's e by Epicor product and to increased expenditures on demand generation
activities. The increase in sales and marketing expenses as a percentage of
revenues for the three and six months ended June 30, 2000 as compared to the
same periods in 1999 is due to the overall decrease in total revenues. The
Company does not believe that sales and marketing expenses will increase
significantly, if at all, for the remainder of 2000.
Software development expenses consist primarily of compensation of development
personnel and related overhead incurred to develop the Company's products as
well as fees paid to outside consultants. Software development costs are
accounted for in accordance with Statement of Financial Accounting Standards No.
86 "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," under which the Company is required to capitalize software
development costs after technological feasibility is established. Costs that do
not qualify for capitalization are charged to software development expense when
incurred. During the three months ended June 30, 2000 and 1999, the Company
capitalized $1.4 million and $1.2 million, respectively, of software development
costs. For the six months ended June 30, 2000, the Company capitalized $4.0
million of software development costs compared with $2.8 million for the same
period of 1999. Capitalized software development costs include both internally
generated development costs for development of the company's future product
releases and third party development costs related to the localization and
translation into different languages of the Platinum ERA product and certain
applications of the Platinum ERA 7.0b release. The increase in gross software
development expenses for the three and six months ended June 30, 2000 as
compared to the same period of 1999 is largely due to less internal costs being
eligible for capitalization due to timing of the Company's product releases.
The increase in software development expenses as a percentage of revenues for
the three and six months ended June 30, 2000 as compared to the same periods in
1999 is due to the overall decrease in total revenues. The Company does not
believe that software development expenses will increase significantly, if at
all, for the remainder of 2000.
General and administrative expenses consist primarily of cost associated with
the Company's executive, financial, human resources and information services
functions. The increase in absolute dollars for the three and six months ended
June 30, 2000 compared to the same periods of 1999 is due to an increase in the
Company's provision for doubtful accounts, including the previously discussed
$3.9 million and $9.2 million adjustment made for the three and six months ended
June 30, 2000, respectively, as a result of the Company's change in methodology
for calculating its allowance for doubtful accounts and costs related to ongoing
customer disputes as a result of changes in product direction and certain
product quality and customer service issues. While this methodology change will
not impact ongoing collection efforts, the Company does expect an increase in
its provision for doubtful accounts for the remainder of the year due to this
new methodology. The increase in general and administrative expenses as a
percentage of revenues for the three and six months ended June 30, 2000 as
compared to the same periods in 1999 is due to both the increase in the
provision for doubtful accounts and the decrease in the Company's total
revenues.
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<PAGE> 13
Liquidity and Capital Resources
The following table summarizes Epicor's cash and cash equivalents, short-term
investments, working capital and cash flows for the six months ended June 30,
2000:
<TABLE>
<CAPTION>
June 30,
2000
--------
<S> <C>
Cash and cash equivalents $ 6.6
Short-term investments 2.4
Working Capital 0.5
Net cash used in operating activities (18.0)
Net cash provided by investing activities 2.4
Net cash provided by financing activities 4.5
</TABLE>
As of June 30, 2000, the Company's principal sources of liquidity included cash
and cash equivalents and short-term investments of $9.0 million. The Company
used $18.0 million in cash for operating activities during the six month period
ended June 30, 2000 primarily to fund its net loss. As part of the $18.0 million
in operating cash outlays in the six months ended June 30, 2000 the Company paid
$1.8 million in settlement of the previously discussed Alyn lawsuit, $1.9
million to fund certain strategic alliances, and $5.1 million for severance
costs, lease terminations and other costs related to the 1999, 1998, 1997 and
1996 restructurings, and costs related to the 1998 DataWorks merger. At June 30,
2000 the Company has $4.4 million in cash obligations related to lease
terminations and other costs related to the restructuring plans and the 1998
DataWorks merger. The Company believes these obligations will be funded from
existing cash reserves, working capital, operations and the new credit facility.
A significant portion of the cash used by operating activities was due to an
increase in accounts receivable. The Company's gross accounts receivable have
increased from $92.4 million at December 31, 1999 to $97.0 million at June 30,
2000. In addition, the proportion of such receivables over 90 days old has also
increased. The increases in gross and aged receivables are partially
attributable to delays in the Company's collections activities related to the
Company's consolidation of its previously separate accounting systems and
financial processes arising from the Company's 1998 acquisition of DataWorks.
This consolidation was completed during the second quarter of 2000 and the
Company believes all issues arising from this integration have been resolved.
There are also ongoing collection issues caused by customer uncertainty over the
Company's change in product strategy and quality issues from certain legacy
product releases. Although the Company believed that it had adequately reserved
for uncollectible accounts and that it would reduce its aged receivables during
the remainder of the year, management and its auditors, Ernst & Young, decided
to analyze additional information with respect to the aging of accounts
receivable over 90 days. Accordingly, the auditors interim review of this
quarterly report as required by Rule 10-01(d) of Regulation S-X was complete
except with respect to this further analysis. Upon completion of this further
analysis and consultation with the Company's auditors, the Company determined
that a new methodology was required for determining its allowance for doubtful
accounts. It was also determined that the Company's Quarterly Reports on Forms
10-Q for the periods ended March 31 and June 30, 2000 needed to be amended to
reflect retroactive application of the new allowance methodology, as previously
explained. Consequently, Ernst & Young has now completed its procedures for this
quarterly report as required by Rule 10-01(d) of Regulation S-X. The level of
total future receivables is not estimable as it is dependent upon the level and
timing of future revenues. There can be no assurance that the Company has
resolved all issues arising from the aforementioned integration or that aged
receivables will be reduced during the remainder of the year.
The Company's principal investing activities for the quarter ended June 30, 2000
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 of the Platinum ERA product and certain applications of the Platinum
ERA 7.0b release for foreign markets.
Financing activities for quarter ended June 30, 2000 included proceeds from the
exercise of common stock options by employees, issuance of stock under the
employee stock purchase program of $3.4 million and payments received on
restricted stock grants from officers of $1.2 million.
On July 26, 2000, the Company entered into a $30 million senior credit facility
with a financial institution. The facility is secured by substantially all of
the Company's assets. The credit facility is comprised of a $10.0 million
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<PAGE> 14
term loan and $20.0 million revolving loan. The term loan is to be repaid in 36
equal monthly principal payments, plus interest at 3% above the bank prime rate.
The revolving credit facility matures on August 1, 2003, and bears interest at a
variable rate equal to either the prime rate or the LIBOR rate, at the Company's
option, plus a margin which ranges from 0.25% to 1.25% on the prime rate loans
or 2.5% to 3.75% on LIBOR rate loans, depending on the Company's financial
performance.
On August 8, 2000 the company received the $10.0 million proceeds from the term
loan.
The Company has taken steps to significantly reduce its operating expenses as
part of its 1999 restructuring, including a reduction in work force and
facilities consolidation and closure. If the Company is not successful in
achieving targeted revenues, targeted expenses or positive cash flow, the
Company may be required to take further actions to align its operating expenses
such as reductions in work force or other cost cutting measures.
The Company experienced negative cash flow from operations for the six months
ended June 30, 2000 but expects to generate positive cash flow from operations
during the remainder of 2000. Epicor is dependent upon its ability to generate
cash flow from license fees and other operating revenues and through the
collection of its outstanding accounts receivable to maintain current liquidity
levels. However, the Company believes that its current cash reserves, together
with existing sources of liquidity, including the previously discussed $30
million credit facility, will satisfy the Company's projected short-term
liquidity and other cash requirements for the next twelve months.
Year 2000 Issues
In late 1999, the Company completed its remediation and testing of its products,
internal technology systems and non-internal technology systems. Following the
transition to the Year 2000, the Company has not encountered any material
problems relating to Year 2000 issues, either with its products, internal
systems or products of third parties. Despite the Company's prior testing and
remediation efforts, the Company can provide no assurance that its software
products contain all necessary date code changes or that errors will not be
discovered in the future. If errors are discovered in the future regarding Year
2000 problems, it is possible that such errors could have a material adverse
effect on the Company's business, financial condition and results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD LOOKING STATEMENTS - SAFE HARBOR.
Certain statements in this Quarterly Report on Form 10-Q/A, including statements
regarding market trends, future revenue and expense levels and cash flows are
forward looking statements within the meaning of Section 27A of the Securities
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. These statements include the Company's expectation
that (i) it will generate positive cash flow from operations during the second
half of the year, (ii) there will not be an increase in hardware sales, and
(iii) international revenue will remain a significant portion of total revenue.
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 14 - 21. 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. The
Company undertakes no obligation to revise or publicly release the results of
any revision to these forward-looking statements. Readers should carefully
review the risk factors described in other documents the Company files from time
to time with the Securities and Exchange Commission, including its subsequent
Quarterly Reports on Form 10-Q to be filed by the Company in fiscal year 2000.
OUR CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS HAVE BEEN DECLINING AND
OUR GROSS ACCOUNTS RECEIVABLES SINCE DECEMBER 31, 1999 HAVE BEEN INCREASING,
INCLUDING AN INCREASE IN THE PROPORTION OF ACCOUNTS RECEIVABLE OVER 90 DAYS OLD,
AND AS A RESULT OUR DOUBTFUL ACCOUNTS RESERVE MAY NOT BE SUFFICIENT, WE MAY NOT
BE ABLE TO COLLECT THE AGED ACCOUNTS AND WE MAY NEED TO RAISE ADDITIONAL CASH.
The Company's cash and cash equivalents and short-term investments decreased
from $30.4 million at December 31, 1999 to $9.0 million at June 30, 2000,
principally due to the net loss incurred during the six months ended June
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<PAGE> 15
30, 2000 and cash outlays related to the 1999 restructuring. There will be
additional cash outlays in connection with facilities reductions and closures
arising out of the 1999 restructuring. In addition, there will be further cash
outlays in connection with prior restructurings and in connection with the 1998
DataWorks' merger. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Liquidity and Capital Resources." The
Company believes it has reduced operating expenses sufficiently in order to
achieve positive quarterly operating cash flow sometime during the second half
of fiscal year 2000. If the Company is not successful in achieving targeted
revenues, targeted expenses or a positive cash flow, the Company may be required
to take further actions to align its operating expenses such as reductions in
work force or other expense cutting measures. In addition, although the Company
has obtained a bank line of credit, if the Company is unable to achieve a
positive cash flow, there can be no assurance that the Company will be able to
secure additional funding or, if secured, on favorable terms. The Company has
also experienced an increase in its gross accounts receivables since December
31, 1999, including an increase in the proportion of accounts receivable over 90
days old. The increases in gross and aged receivables are partially attributable
to delays in the Company's collections activities related to the Company's
consolidation of its previously separate accounting systems and financial
processes arising from the Company's 1998 acquisition of DataWorks. This
consolidation was completed during the second quarter of 2000 and the Company
believes all issues arising from this integration have been resolved. There are
also ongoing collection issues caused by customer uncertainty over the Company's
change in product strategy and quality issues from certain legacy product
releases. Although the Company believed that it had adequately reserved for
uncollectible accounts and that it would reduce its aged receivables during the
remainder of the year, management and its auditors, Ernst & Young, decided to
analyze additional information with respect to the aging of accounts receivable
over 90 days. Accordingly, the auditors interim review of this quarterly report
as required by Rule 10-01(d) of Regulation S-X was complete except with respect
to this further analysis. Upon completion of this further analysis and
consultation with the Company's auditors, the Company determined that a new
methodology was required for determining its allowance for doubtful accounts. It
was also determined that the Company's Quarterly Reports on Forms 10-Q for the
periods ended March 31 and June 30, 2000 needed to be amended to reflect
retroactive application of the new allowance methodology, as previously
explained. Consequently, Ernst & Young has now completed its procedures for this
quarterly report as required by Rule 10-01(d) of Regulation S-X. If the Company
is not successful in collecting a significant portion of its net accounts
receivable, the Company may be required to seek alternative financing sources in
addition to the bank credit facility it secured in July 2000. In addition,
should the Company not reduce its aged receivables, its ability to borrow
against the revolving portion of the credit facility may be severely restricted
due to the fact that borrowings are limited to 80% of eligible accounts
receivables, which excludes receivables over ninety days old. The Company's
ability to borrow under the credit facility could be impacted by its compliance
with certain financial covenants. Such compliance could be impacted by
collectibility of the Company's accounts receivable.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND IF WE FAIL TO
MEET EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS OUR SHARE PRICE MAY
DECREASE.
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, including reduced demand related to
changes in marketing focus for certain 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 any quarter with a concentration of such revenues
recorded in the final ten 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 term. 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.
IF WE FAIL TO DEVELOP AND INTRODUCE NEW PRODUCTS AND SERVICES RAPIDLY AND
SUCCESSFULLY, WE WILL NOT BE ABLE TO COMPETE EFFECTIVELY AND OUR ABILITY TO
GENERATE REVENUES WILL SUFFER.
The market for the Company's software products is subject to ongoing
technological developments, evolving industry standards and rapid changes in
customer requirements. The Company believes the Internet is transforming the way
businesses operate and the software requirements of customers. Specifically, the
Company believes that customers desire eBusiness software applications, or
applications that enable a customer to engage in commerce or service over the
Internet. As companies introduce products that embody new technologies or as new
industry standards emerge, such as web-based applications or applications that
support eBusiness, existing products may become obsolete and unmarketable. The
Company's future business, operating results and financial condition will depend
on its ability to:
15
<PAGE> 16
o Deliver and achieve successful market acceptance of eBusiness application
software to facilitate eBusiness, including web enablement
o Enhance its existing products
o Develop new products that address the increasingly sophisticated needs of its
customers, particularly in the areas of eBusiness and eCommerce
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, including the eBusiness arena. The Company cannot assure you that it
will successfully develop and market new products on a timely basis, if at all.
In developing new products, the Company may encounter software errors or
failures which force the delay in the commercial release of the new products.
Any such delay or failure to develop 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.
OUR NEW OPERATING STRUCTURE, AS DIVISIONS, IS UNPROVEN AND IT MAY HAVE A
NEGATIVE IMPACT ON THE COMPANY'S BUSINESS.
As part of the fiscal 1999 restructuring, the Company reorganized its operations
by placing the Avante, Platinum for Windows and Impresa products in their own
separate divisions with profit and loss responsibility. In May 2000, the Company
also created a division for its Vista product. Each division has its own general
manager and a dedicated staff of developers, consultants and support
representatives. Although the creation of divisions was intended to improve the
value proposition for customers through focused development efforts, it is
possible that such divisionalization will be perceived as a negative by the
Company's current and potential Avante, Platinum for Windows, Impresa and Vista
customers. There can be no assurance that this operating structure will not have
a material adverse affect on the sales, maintenance renewals, results of
operations and cash flows, including collectibility of accounts receivable, for
the above referenced product lines.
OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS, WHICH COULD RESULT IN THE
REJECTION OF OUR PRODUCTS AND DAMAGE OUR REPUTATION AS WELL AS CAUSE LOST
REVENUE, DIVERTED DEVELOPMENT RESOURCES AND INCREASED SERVICE COSTS AND WARRANTY
CLAIMS.
Software products as complex as the 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, damage to the Company's reputation, and increased
service and warranty costs. The Company has been notified by some of its
customers of errors in its Platinum ERA and Avante product lines. The
possibility of the Company being unable to correct such errors in a timely
manner could have a material adverse effect on the Company's results of
operations and its cash flows. 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.
WE INTEND TO PURSUE STRATEGIC ACQUISITIONS, INVESTMENTS, AND RELATIONSHIPS AND
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR OPERATIONS IF WE FAIL TO
SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES AND TECHNOLOGIES.
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 ERP applications, particularly in the areas of eBusiness
and eCommerce. This strategy may involve acquisitions, investments in other
businesses that offer complementary products, joint development agreements or
technology licensing 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:
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<PAGE> 17
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 anticipated 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.
The risks that the Company may encounter in licensing technology from third
parties include the following:
o The difficulty in integrating the third party product with the Company's
products
o Undiscovered software errors in the third party product
o Difficulties in selling the third party product
o Difficulties in providing satisfactory support for the third party product
o Potential infringement claims from the use of the third party product
WE RELY ON DISTRIBUTORS AND VARS TO SELL OUR PRODUCTS AND DISRUPTIONS TO THESE
CHANNELS WOULD ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUES FROM THE SALE
OF OUR PRODUCTS.
The Company distributes its Platinum for Windows product exclusively through
third-party distributors and VARs, and distributes its e by Epicor product line
(formerly named Platinum ERA) 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 presently 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 May 2000, the Company announced that effective September 1, 2000 in
the United States it would only allow its e by Epicor product line to be resold
by VARs who offer such product line exclusively. The Company cannot predict
whether all of its current VARs of e by Epicor will continue to resell such
products on an exclusive basis or if such VARs will pay their receivables on a
timely basis if they elect to not sell the e by Epicor product on an exclusive
basis. If such VARs refuse to sell e by Epicor on an exclusive basis, the
Company's ability to generate license revenue from its e by Epicor products
could be adversely impacted, which would negatively effect the Company's
financial results.
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 channels.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM THE SALE OF ERP APPLICATION
SOFTWARE AND RELATED SUPPORT SERVICES AND IF THOSE SALES SUFFER, OUR BUSINESS
WILL BE NEGATIVELY IMPACTED.
The Company derives a substantial portion of its revenue from the sale of ERP
application software and related support services. Accordingly, any event that
adversely 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
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<PAGE> 18
OUR PRODUCTS RELY ON THIRD PARTY SOFTWARE PRODUCTS AND OUR REPUTATION AND
RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY OUR INABILITY TO CONTROL
THEIR OPERATIONS.
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.
THE MARKET FOR WEB-BASED DEVELOPMENT TOOLS, APPLICATION PRODUCTS AND CONSULTING
AND EDUCATION SERVICES IS EMERGING AND IT COULD NEGATIVELY AFFECT OUR
CLIENT/SERVER BASED PRODUCTS.
The Company's development tools, application products and consulting and
education services generally help organizations build, customize or deploy
solutions that operate in a client/server computing environment. There can be no
assurance 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
client/server to a web-based environment to facilitate eBusiness. If the Company
fails to respond effectively to evolving requirements of this market, the
Company's business, financial condition and results of operations will be
materially and adversely affected.
THE IMPACT ON THE COMPANY OF EMERGING AREAS SUCH AS THE INTERNET, ON-LINE
SERVICES, EBUSINESS APPLICATIONS AND ELECTRONIC COMMERCE IS UNCERTAIN AND COULD
NEGATIVELY IMPACT OUR BUSINESS.
There can be no assurance that the Company will be able to provide a product
offering that will satisfy new customer demands in these areas. In addition,
standards for web-enabled and eBusiness applications, as well as other industry
adopted and de facto standards for the Internet, are evolving rapidly. There can
be no assurance that standards chosen by the Company will position its products
to compete effectively for business opportunities as they arise on the Internet
and other emerging areas. The success of the Company's product offerings
depends, in part, on its ability to continue developing products which are
compatible with the Internet. The increased commercial use of the Internet will
require substantial modification and customization of the Company's products and
the introduction of new products. The Company may not be able to effectively
compete in the Internet-related products and services market.
Critical issues concerning the commercial use of the Internet, including
security, demand, reliability, cost, ease of use, accessibility, quality of
service and potential tax or other government regulation, remain unresolved and
may affect the use of the Internet as a medium to support the functionality of
our products and distribution of our software. If these critical issues are not
favorably resolved, the Company's business, operating results and financial
condition could be materially and adversely affected.
THE MARKET FOR OUR PRODUCTS IS HIGHLY COMPETITIVE AND IF WE ARE UNABLE TO
COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS OUR BUSINESS COULD BE
NEGATIVELY IMPACTED.
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 quicker to new or emerging technologies and changes in customer
requirements (such as eBusiness and Web-based application software), 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 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, there can
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be no assurance 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
quicker 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. There can be no assurance 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.
WE MAY NOT BE ABLE TO MAINTAIN AND EXPAND OUR BUSINESS IF WE ARE NOT ABLE TO
RETAIN, HIRE AND INTEGRATE SUFFICIENTLY QUALIFIED PERSONNEL.
The Company's success depends on the continued service of key management
personnel that are not subject to an employment agreement. In addition, the
competition to attract, retain and motivate qualified technical, sales and
operations personnel is intense. The Company has at times experienced, and
continues to experience, difficulty in recruiting qualified personnel,
particularly in software development and customer support. There is no assurance
that the Company can 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.
OUR FUTURE RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS.
The Company believes that any future growth of the Company will be dependent, in
part, upon its ability to increase revenues in international markets. To
increase international sales in subsequent periods, the Company must hire
additional personnel and recruit international resellers. There is no assurance
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 Development of localized products
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
o Shortage of skilled personnel required for the local operation
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.
IF THIRD PARTIES INFRINGE OUR INTELLECTUAL PROPERTY, WE MAY EXPEND SIGNIFICANT
RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY.
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
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Company regards as proprietary. There is no assurance 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 favorable to the Company.
In addition, in certain cases, the Company provides the source code for some of
its application software under licenses to its customers to enable them to
customize the software to meet their particular requirements. Although the
source code licenses contain confidentiality and nondisclosure provisions, the
Company cannot be certain that such customers will take adequate precautions to
protect the Company's source code or other confidential information.
SUBSTANTIAL SALES OF OUR STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
As of August 7, 2000, the Company had 41,448,724 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.
THE MARKET FOR OUR STOCK IS VOLATILE AND FLUCTUATIONS IN OPERATING RESULTS,
CHANGES IN EARNINGS ESTIMATES BY ANALYSTS AND OTHER FACTORS COULD NEGATIVELY
AFFECT OUR STOCK'S PRICE.
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.
OUR INTEGRATION OF DATAWORKS CORPORATION IS STILL ONGOING AND THERE ARE
SUBSTANTIAL DIFFICULTIES, COSTS AND DELAYS ASSOCIATED WITH THE INTEGRATION WHICH
HAVE HAD A NEGATIVE IMPACT ON THE COMPANY'S BUSINESS.
On December 31, 1998, the Company acquired DataWorks Corporation. The Company is
still in the process of integrating certain operations of the two companies,
particularly in the areas of business processes and products. Following the
acquisition, a significant number of sales representatives and certain sales
management employees resigned from the Company and there can be no assurance
that other employees will not resign from the Company as the integration of the
two companies continues. 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 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 inefficiencies in delivering services to the clients of the Company
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o Inability to retain and integrate key management, technical sales and
customer support personnel
o Potential conflicts in direct sales and reseller channels
Further, there is no assurance that the Company will retain and successfully
integrate its key management, technical, sales and customer support personnel.
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. Any difficulties encountered completing the integration of DataWorks
could have a material adverse effect on the business, financial condition and
results of operations of the Company.
POTENTIAL "YEAR 2000" PROBLEMS ASSOCIATED WITH OUR PRODUCTS COULD HARM OUR
REPUTATION OR CAUSE US TO MAKE EXPENDITURES TO FIX THE PROBLEMS.
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 compliant and following the
transition to the Year 2000 the Company has not encountered any material
problems relating to Year 2000 issues, either with its products, internal
systems or products and services of third parties. However, despite the
Company's belief and prior testing and remediation efforts, there can be no
assurance that the Company's software products contain all necessary date code
changes or that errors will not be discovered in the future. If errors are
discovered in the future regarding Year 2000 issues, it is possible that such
errors could have a material adverse effect on the Company's business, financial
condition and results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. At June 30, 2000 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 adverse 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.
International revenues approximated 25.6% of the Company's total revenues for
the six months ended June 30, 2000 and approximately 22.1% of the revenues are
denominated in foreign currencies. Significant currency fluctuations may
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
On December 24, 1998, Alyn Corporation ("Alyn") filed a lawsuit against
DataWorks Corporation in Superior Court for the State of California, County of
San Diego, Alyn Corporation v. DataWorks, David Roper, Daniel Horter and Mike
White. The lawsuit arose out of the licensing and sale of software by DataWorks
to Alyn in December 1996. On March 22, 2000, the Company agreed to pay Alyn $1.8
million to settle the lawsuit. The Company accrued $1.8 million for the
liability arising out of the settlement which was reflected in its 1999
financial statements. The Company paid one-half of the settlement amount on
March 23, 2000 and the other half on April 3, 2000. The Company is in
discussions with its insurance carrier regarding coverage for this matter, but
the amount of insurance coverage, if any, has not been determined at the present
time.
In November 1998, a securities class action was filed in the United States
District Court for the Southern District of California against DataWorks,
certain of its current and former officers and directors, and the Company. The
consolidated complaint is purportedly brought on behalf of purchasers of
DataWorks stock between October 30, 1997 and July 16, 1998. The complaint
alleges that defendants made material misrepresentations and omissions
concerning DataWorks' acquisition of Interactive Group, Inc. and demand for
DataWorks' products. The Company is named as a defendant solely as DataWorks'
successor, and is not alleged to have taken part in the alleged misconduct. No
damage amount is specified in the complaint. The action is in the early stages
of litigation, no trial date is set, and the judge's ruling on defendants'
motion to dismiss the second amended consolidated complaint is pending. The
Company believes there is no merit to this lawsuit and intends to continue to
defend against it vigorously.
The Company is subject to miscellaneous other legal proceedings and claims 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 consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On April 27, 2000 the Company held its annual meeting of stockholders. At this
meeting 35,987,948 shares of Common Stock were available for voting and 953,050
shares of Series C Preferred Stock (on an as-converted basis) were available for
voting. Each share of Series C Preferred Stock is convertible into ten (10)
shares of Common Stock and is entitled to vote with the holders of Common Stock
on an as-converted basis on all matters presented for stockholder approval.
At the meeting, L. George Klaus, Donald R. Dixon, Arthur J. Marks and Thomas F.
Kelly were elected as directors of the Company by the Common and Series C
stockholders. All shares of Series C Preferred Stock voted in favor of all of
the nominated directors. With respect to the election of directors, the
following nominees received the votes by common stockholders as noted below:
NAME VOTES FOR WITHHELD AUTHORITY
L. George Klaus 35,597,921 390,027
Arthur J. Marks 35,648,971 338,977
Donald R. Dixon 35,649,664 338,284
Thomas F. Kelly 35,640,457 347,491
With respect to the proposal to ratify the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ended December 31, 2000, 35,757,688
shares of Common Stock and 953,050 shares of Series C Preferred Stock (on an
as-converted basis) voted in favor of the proposal, 103,461 shares of Common
Stock voted against, and 126,799 shares of Common Stock abstained from voting.
There were no broker non-votes on this proposal.
With respect to the proposal to approve the Company's 2000 Employee Stock
Purchase Plan, 34,360,325 shares of Common Stock and 953,050 shares of Series C
Preferred Stock (on an as converted basis) voted in favor of the
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proposal, 1,059,120 shares of Common Stock voted against, and 568,503 shares of
Common Stock abstained from voting. There were no broker non-votes on this
proposal.
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 May 5, 2000
to report under Item 5 its results for the fiscal quarter ended
March 31, 2000.
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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 14, 2000 /s/ Lee Kim
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Lee Kim
Vice President and Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Description
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27 Financial Data Schedule
