<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, 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
(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 7, 2000, there were 41,453,642 shares of common stock
outstanding.
<PAGE> 2
FORM 10-Q INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months and Nine Months Ended September 30,
2000 and 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 30, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,350 $ 18,221
Short-term investments 40 12,154
Accounts receivable, net 61,584 75,263
Prepaid expenses and other current assets 8,053 8,984
--------- ---------
Total current assets 89,027 114,622
Property and equipment, net 13,275 16,650
Software development costs, net 5,759 9,083
Intangible assets, net 20,771 25,668
Other assets 3,588 4,154
--------- ---------
Total assets $ 132,420 $ 170,177
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,388 $ 14,591
Accrued expenses 27,894 32,801
Current portion of long-term debt 9,444 --
Accrued merger and restructuring costs 3,263 11,562
Deferred revenue 44,044 39,017
--------- ---------
Total current liabilities 93,033 97,971
Long-term debt 253 400
Stockholders' equity:
Preferred stock 7,501 7,501
Common stock 42 41
Additional paid-in capital 240,822 237,536
Less: notes receivable from officers for
issuance of restricted stock (9,969) (11,269)
Accumulated other comprehensive loss (3,475) (1,590)
Accumulated deficit (195,787) (160,413)
--------- ---------
Total stockholders' equity 39,134 71,806
--------- ---------
Total liabilities and stockholders' equity $ 132,420 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 16,356 $ 22,024 $ 57,361 $ 71,468
Services 34,528 40,210 105,638 119,230
Other 1,043 971 3,024 4,768
-------- -------- --------- ---------
Total revenues 51,927 63,205 166,023 195,466
Cost of revenues 28,316 30,134 82,349 88,184
-------- -------- --------- ---------
Gross profit 23,611 33,071 83,674 107,282
Operating expenses:
Sales and marketing 17,558 22,599 57,356 62,812
Software development 6,565 8,348 19,638 20,466
General and administrative 11,944 11,869 43,578 31,789
Special charges -- -- (700) --
-------- -------- --------- ---------
Total operating expenses 36,067 42,816 119,872 115,067
-------- -------- --------- ---------
Loss from operations (12,456) (9,745) (36,198) (7,785)
Other income, net 159 47 824 993
-------- -------- --------- ---------
Loss before income taxes (12,297) (9,698) (35,374) (6,792)
Provision for income taxes -- -- -- 436
-------- -------- --------- ---------
Net loss $(12,297) $ (9,698) $ (35,374) $ (7,228)
======== ======== ========= =========
Net loss per share - basic and diluted $ (0.30) $ (0.24) $ (0.85) $ (0.18)
Common shares outstanding - basic and diluted 41,450 40,703 41,394 40,510
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(35,374) $ (7,228)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 12,866 13,602
Write-off capitalized software costs 5,337 --
Provision for doubtful accounts 17,065 4,966
Special charges (700) --
Changes in operating assets and liabilities:
Accounts receivable (2,946) 1,927
Inventories -- (153)
Prepaid expenses and other current assets 931 (1,367)
Accounts payable (4,971) (2,940)
Accrued expenses (5,227) (6,849)
Accrued merger and restructuring costs (6,164) (7,318)
Deferred revenue 4,989 (1,592)
-------- --------
Net cash used in operating activities (14,194) (6,952)
INVESTING ACTIVITIES
Purchases of property and equipment (4,615) (9,895)
Purchases of short-term investments -- (24,803)
Proceeds from sale or maturity of short-term investments 12,114 35,151
Additions to capitalized software costs (5,486) (4,871)
Other 403 681
-------- --------
Net cash provided by (used in) investing activities 2,416 (3,737)
FINANCING ACTIVITIES
Exercise of common stock options 2,240 1,336
Common stock issued under the Employee Stock Purchase Plan 1,165 1,745
Proceeds from notes receivable from officers 1,181 186
Proceeds from term loan 10,000 --
Payments on term loan (556) --
Payments on other long-term liabilities (146) (1,111)
-------- --------
Net cash provided by financing activities 13,884 2,156
Effect of exchange rate changes on cash (977) 748
-------- --------
Net increase (decrease) in cash and cash equivalents 1,129 (7,785)
Cash and cash equivalents at beginning of period 18,221 22,175
-------- --------
Cash and cash equivalents at end of period $ 19,350 $ 14,390
======== ========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
5
<PAGE> 6
EPICOR SOFTWARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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").
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 of normal recurring adjustments
except for the write-down of capitalized software development cost as discussed
below - Write-Down of Capitalized Software Development Costs) 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, 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, as permitted
by SEC rules and regulations.
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 resulted in a
cumulative increase in the Company's provision for doubtful accounts for the six
months ended June 30, 2000 of $9,216,000.
COMPREHENSIVE LOSS
The components of comprehensive loss for the three and nine months ended
September 30, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net loss $(12,297) $(9,698) $(35,374) $(7,228)
Unrealized gains (losses) on foreign
currency translation adjustments (959) 1,258 (1,885) 919
-------- ------- -------- -------
Total comprehensive loss $(13,256) $(8,440) $(37,259) $(6,309)
======== ======= ======== =======
</TABLE>
BASIC AND DILUTED NET INCOME PER SHARE
Basic and diluted net loss per share for the three and nine months ended
September 30, 2000 and 1999 are computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Diluted
net loss per share does not consider the impact of employee stock options and
preferred stock because their effect would be anti-dilutive.
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,
6
<PAGE> 7
"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 e by Epicor 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.
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 its acquisitions and restructurings (in thousands):
<TABLE>
<CAPTION>
Balance at Write off Reversal of Balance at
December 31, of Fixed Facility Cash September 30,
1999 Assets Accrual Payments 2000
------------ --------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Separation costs for terminated
employees and contractors $ 2,005 $ -- $ -- $(2,005) $ --
Facilities closing and downsizing 4,712 (1,435) (700) (2,259) 318
Remaining restructuring accrual
from prior periods - 1998,
1997 and 1996 1,185 -- -- (758) 427
------- ------- ----- ------- ------
Accrued restructuring costs 7,902 (1,435) (700) (5,022) 745
Accrued merger costs 3,660 -- -- (1,142) 2,518
------- ------- ----- ------- ------
Total accrued merger and
restructuring costs $11,562 $(1,435) $(700) $(6,164) $3,263
======= ======= ===== ======= ======
</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 facilities for less than the amount originally estimated. This
amount has been recorded against special charges in the accompanying Condensed
Consolidated Statements of Operations.
7
<PAGE> 8
As of September 30, 2000, all employee terminations as a result of the Company's
1999 restructuring have taken place and 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 85% 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 is also required to comply with certain financial covenants,
including minimum levels of earnings before interest, taxes, depreciation and
amortization (EBITDA) and tangible net worth.
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. As of September 30, 2000 the balance on this loan is $9.4 million. To
date, no amounts have been borrowed against the revolving loan. As of September
30, 2000, the Company had violated the EBITDA and the tangible net worth
covenants included in the terms of the credit agreement. The Company received
waivers from its lender for these violations on November 13, 2000 and is
negotiating to amend the credit agreement to reduce the thresholds required by
the EBITDA and the tangible net worth financial covenants.
WRITE-DOWN OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS
During the quarter ended September 30, 2000, the Company determined that the
carrying value of its capitalized software development costs related to
localized products marketed in Latin America and continental Europe exceeded its
net realizable value. Accordingly, a charge of $5.3 million is included in cost
of revenues for the three and nine months ended September 30, 2000 for the
write-down of these capitalized costs to their estimated net realizable value.
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, 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.
8
<PAGE> 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
OVERVIEW
The Company designs, develops, markets and supports integrated enterprise
business software solutions for use by mid-sized companies as well as divisions
and subsidiaries of larger corporations worldwide. These integrated solutions
address customers' requirements in the areas of customer relationship
management, financials, distribution, manufacturing and e-business. 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 resulted in a
cumulative increase in the Company's provision for doubtful accounts for the six
months ended June 30, 2000 of $9,216,000.
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 its acquisitions and restructurings (in thousands):
<TABLE>
<CAPTION>
Balance at Write off Reversal of Balance at
December 31, of Fixed Facility Cash September 30,
1999 Assets Accrual Payments 2000
------------ --------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Separation costs for terminated
employees and contractors $ 2,005 $ -- $ -- $(2,005) $ --
Facilities closing and downsizing 4,712 (1,435) (700) (2,259) 318
Remaining restructuring accrual
from prior periods - 1998,
1997 and 1996 1,185 -- -- (758) 427
------- ------- ----- ------- ------
Accrued restructuring costs 7,902 (1,435) (700) (5,022) 745
Accrued merger costs 3,660 -- -- (1,142) 2,518
------- ------- ----- ------- ------
Total accrued merger and
restructuring costs $11,562 $(1,435) $(700) $(6,164) $3,263
======= ======= ===== ======= ======
</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 facilities for less than the amount originally estimated. This
amount has been recorded against special charges in the accompanying Condensed
Consolidated Statements of Operations.
As of September 30, 2000, all employee terminations as a result of the Company's
1999 restructuring have taken place and 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 September 30, 2000 compared to the quarter ended December 31, 1999
largely due to the aforementioned restructuring.
9
<PAGE> 10
RESULTS OF OPERATIONS
The following table summarizes certain aspects of Epicor's results of operations
for the three and nine months ended September 30, 2000 compared to the three and
nine months ended September 30, 1999 (in millions except percentages):
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------- ----------------------------------------
2000 1999 Change $ Change % 2000 1999 Change $ Change %
----- ----- -------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License fees $16.4 $22.0 $(5.6) (25.5)% $ 57.4 $ 71.5 $(14.1) (19.7)%
Services 34.5 40.2 (5.7) (14.2)% 105.6 119.2 (13.6) (11.4)%
Other 1.0 1.0 -- -- % 3.0 4.8 (1.8) (37.5)%
----- ----- ----- ----- ------ ------ ------ -------
Total revenues 51.9 63.2 (11.3) (17.9)% 166.0 195.5 (29.5) (15.1)%
As a percentage of
revenues:
License fees 31.6% 34.8% 34.6% 36.6%
Services 66.5% 63.6% 63.6% 61.0%
Other 1.9% 1.6% 1.8% 2.4%
----- ----- ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit $23.6 $33.1 $(9.5) (28.7)% $83.7 $107.3 $(23.6) (22.0)%
As a percentage
of revenues 45.5% 52.4% 50.4% 54.9%
Sales and marketing $17.6 $22.6 $(5.0) (22.1)% $57.4 $62.8 $(5.4) (8.6)%
As a percentage
of revenues 33.9% 35.8% 34.5% 32.1%
Software development $6.6 $8.3 $(1.7) (20.5)% $19.6 $20.5 $(0.9) (4.4)%
As a percentage
of revenues 12.7% 13.1% 11.8% 10.5%
General and administrative $11.9 $11.9 $ -- -- % $43.6 $31.8 $11.8 37.1%
As a percentage
of revenues 22.9% 18.8% 26.2% 16.3%
</TABLE>
Revenues
The Company experienced an overall decrease in license fee revenues for both the
three and nine month periods ended September 30, 2000 as compared to the same
periods in 1999. This decline is due to several factors including (i) an
extended sales cycle as customers continue to transition to the purchase of
integrated and comprehensive eBusiness suites and overall softness in the
enterprise software market, (ii) the transitioning of the Company's sales force
to the Company's new suite-based sales strategy, and (iii) decreased sales
volumes in the Company's manufacturing application products as a result of the
Company's decision to focus sales of certain of these products on current
customers as opposed to new customers. Additionally, the Company's license
revenues were negatively impacted by the Company's transition to an exclusive
reseller channel during the third quarter of 2000. The Company expects that
these conditions could continue to affect demand for eBusiness and enterprise
applications for the remainder of the year.
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 nine month periods ended September 30, 2000
as compared with the same periods in 1999 is attributable to lower consulting
revenues due to fewer implementation projects as a result of decreased license
fee revenues as previously discussed. 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. The Company
anticipates that consulting revenues will continue to be negatively impacted by
a decrease in the related license revenues for the remainder of 2000. However,
as the Company's installed base continues to grow, some of this decrease in
consulting revenues is expected to be offset by an increase in maintenance
revenues.
10
<PAGE> 11
Other revenues consist primarily of third-party hardware and forms sales. The
decrease in other revenues in absolute dollars for the nine months ended
September 30, 2000 as compared with the same period in 1999 is due to a decrease
in third-party hardware sales as hardware sales are directly attributable to
license fees from the manufacturing applications product line.
International revenues were $13.4 million and $17.6 million in the third quarter
of 2000 and 1999, respectively, representing 25.8% and 27.9%, respectively, of
total revenues. International revenues were $42.6 million and $55.5 million for
the nine months ended September 30, 2000 and 1999, respectively, representing
25.7% and 28.4% of total revenues, respectively. The decreases in absolute
dollars and as a percentage of total revenues for the three and nine months
ended September 30, 2000 as compared to the same 1999 periods are primarily
attributable to decreased international sales of the Company's manufacturing
application products. The Company expects this trend to continue going forward.
However, 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
Cost of revenues consist primarily of royalties paid for licensed software
incorporated into the Company's products; costs associated with product
packaging, documentation and software duplication; costs of consulting, custom
programming, education and support; and the amortization and write-down of
capitalized software development costs. A charge of $5.3 million is included in
cost of revenues for the quarter ended September 30, 2000 to write-down to
estimated realizable value capitalized software development costs related to
localized products marketed in Latin America and continental Europe.
The decline in gross profit in absolute dollars and as a percentage of revenues
for the three and nine month periods ended September 30, 2000 as compared to the
same periods in 1999 was due to several factors, including (i) the previously
discussed write-down of capitalized software development costs of $5.3 million,
(ii) an increase in sales of third party products incorporated into the
Company's products resulting in an increase in royalty expense, and (iii) the
aforementioned decrease in license fee revenues. The decrease in gross profit
percentage for the quarter ended September 30, 2000 as compared to the same
quarter in 1999, was due to the above factors, partially offset by a decrease in
the professional services cost base and an increase in the utilization rate of
professional services personnel during the third quarter of 2000.
The Company expects gross profit to continue to be negatively impacted during
the remainder of 2000 by the decline in the Company's revenue base.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, commissions, travel,
advertising and promotional expenses. The decrease in absolute dollars for the
three and nine months ended September 30, 2000 compared to the same periods of
1999 is primarily due to a decrease in the cost of salaries, benefits and other
headcount related expenses as a result of a reduction in sales personnel from
the previously mentioned 1999 restructuring as well as reductions related to a
reorganization of the Company's sales force from a product line orientation to a
geographic orientation. Additionally, during the three and nine month periods
ended September 30, 2000, the Company decreased its advertising and related
costs as compared to the same periods in 1999. This decrease was due to initial
costs incurred in 1999 related to the renaming of the Company and release of the
Company's e by Epicor product, both of which required additional advertising and
related expenditures. Such initial efforts and additional expenditures were
substantially completed by 2000. However, the Company expects to incur
additional rebranding costs beginning in the fourth quarter of 2000.
For the quarter ended September 30, 2000, sales and marketing expense as a
percentage of revenues decreased as compared to the same period in prior year
due to the Company's effort to control marketing costs. However, for the nine
months ended September 30, 2000 sales and marketing expense as a percentage of
revenues increased as compared to the same period in prior year due to the
decrease in the Company's revenue base for the same period.
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Software Development
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 September 30, 2000 and 1999, the Company
capitalized $1.5 million and $2.1 million, respectively, of software development
costs. For the nine months ended September 30, 2000, the Company capitalized
$5.5 million of software development costs compared with $4.9 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 of certain of the Company's products for foreign markets.
The decrease in gross software development expenses for the three and nine
months ended September 30, 2000 as compared to the same period of 1999 is
largely due to a decrease in the cost of salaries, benefits and other headcount
related expenses as a result of a reduction in software development personnel
from the previously mentioned 1999 restructuring as well as employee attrition.
Additionally, the decrease in software development expenses is attributable to
spending in 1999 for Year 2000 remediation costs in the amount $1.1 million and
$1.5 million during the three and nine month periods ended September 30, 1999,
respectively. These costs were not incurred in 2000. The decrease in software
development costs as a percentage of revenues for the three months ended
September 30, 2000 as compared to the same period in the prior year is due to a
higher percentage of internally generated development costs capitalized in the
three months ended September 30, 2000 compared to the same period of 1999, 17.5%
and 12.6%, respectively. However, for the nine months ended September 30, 2000
software development expense as a percentage of revenues increased as compared
to the same period in prior year due to the decrease in the Company's revenue
base for the same period. The Company expects software development expenses to
increase from third quarter levels in absolute dollars over the fourth quarter
of 2000.
General and Administrative
General and administrative expenses consist primarily of costs associated with
the Company's executive, financial, human resources and information services
functions. The increase in absolute dollars in general and administrative
expenses for the nine months ended September 30, 2000 as compared to the same
period in 1999 is due to an increase in the Company's provision for doubtful
accounts. In 2000, the Company changed its methodology for the calculation of
its allowance for doubtful accounts. 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 age, age was a factor considered. Under
the new methodology, age of an account is now the key determinant of the level
of allowance required. The Company had a similar increase in its provision for
doubtful accounts for the three months ended September 30, 2000 as compared to
the three months ended September 30, 1999, however, this increase was offset by
a decrease in the costs of salaries, benefits and other headcount related
expenses as a result of a reduction in general and administrative personnel from
the previously mentioned 1999 restructuring, employee attrition and the
reduction of the general and administrative cost structure. While the
methodology change for the calculation of the allowance for doubtful accounts
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.
As a percentage of revenue, general and administrative expenses increased for
both the three and nine month periods ended September 30, 2000 as compared to
the same periods in 1999. This decrease is due to both the increase in the
provision for doubtful accounts and the decline in the Company's revenue base.
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Liquidity and Capital Resources
The following table summarizes Epicor's cash and cash equivalents, working
capital and cash flows as of and for the nine months ended September 30, 2000:
September 30,
2000
-------------
Cash and cash equivalents $ 19.4
Working capital (4.0)
Net cash used in operating activities (14.2)
Net cash provided by investing activities 2.4
Net cash provided by financing activities 13.9
As of September 30, 2000, the Company's principal sources of liquidity included
cash and cash equivalents of $19.4 million. The Company used $14.2 million in
cash for operating activities during the nine month period ended September 30,
2000 primarily to fund its net loss. As part of the $14.2 million in operating
cash outlays in the nine months ended September 30, 2000, the Company paid $1.8
million in settlement of the previously discussed Alyn lawsuit, $2.4 million to
fund certain strategic alliances, and $6.2 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 September 30,
2000, the Company has $3.3 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.
The Company's principal investing activities for the nine month period ended
September 30, 2000 included net sales of short-term investments of $12.1 million
and capital expenditures of $4.6 million to accommodate facility reorganizations
and the Company's expanding information technology infrastructure. In addition,
cash used in investing activities included capitalized software development
costs of $5.5 million primarily related to the localization and translation of
certain of the Company's products for foreign markets. See discussion regarding
write-down of capitalized software development costs under Gross Profit.
Financing activities for the nine months ended September 30, 2000 included
proceeds of $10.0 million from a term loan and payments made of $0.6 million
against such loan. In addition, cash provided by financing activities included
proceeds from the exercise of common stock options by employees and issuance of
stock under the employee stock purchase program of $3.4 million as well as
payments received against loans related to 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 term
loan and $20.0 million revolving loan. Borrowings under the revolving loan are
limited to 85% 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 is also required to comply with certain financial covenants,
including minimum levels of earnings before interest, taxes, depreciation and
amortization (EBITDA) and tangible net worth.
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. As of September 30, 2000 the balance on this loan is $9.4 million. To
date, no amounts have been borrowed against the revolving loan. As of September
30, 2000, the Company had violated the EBITDA and the tangible net worth
covenants included in the terms of the credit agreement. The Company received
waivers from its lender for these violations on November 13, 2000 and is
negotiating to amend the credit agreement to reduce the thresholds required by
the EBITDA and the tangible net worth financial covenants.
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The Company has experienced negative cash flows from operations of $14.2 million
for the nine months ended September 30, 2000. The Company has taken steps to
reduce its operating expenses as part of its 1999 restructuring, including a
reduction in workforce and facilities consolidation and closure. As a result of
these actions and the Company's enhanced receivable collection activities, the
Company generated positive cash flows from operating activities of $3.8 million
during the quarter ended September 30, 2000 and expects to generate positive
cash flows from operations during the remainder of 2000. The Company is
dependent upon its ability to generate cash flows from license fees and other
operating revenues and through collection of its accounts receivable to maintain
current liquidity levels. If the Company is not successful in achieving targeted
revenues and expenses or in maintaining positive cash flows from operations, the
Company may be required to take further actions to align its operating expenses
such as further reductions in work force or other cost cutting measures.
Although management's goal is to reduce losses and, ultimately, return the
Company to profitability, there can be no assurance that these actions will
enable the Company to achieve profitability. Considering the Company's current
cash reserves, together with other existing sources of liquidity, including its
$30 million credit facility, management believes that the Company will have
sufficient sources of financing to continue its operations throughout at least
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, 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 for the remainder
of the year, (ii) there will not be an increase in hardware sales, (iii) sales
and marketing expense will not increase significantly in the fourth quarter,
(iv) research, development, general and administrative costs will increase in
the fourth quarter, and (v) 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 15-22. 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
Annual Report on Form 10-K to be filed by the Company for the year ending
December 31, 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 $19.4 million at September 30, 2000,
principally due to the net loss incurred during the nine months ended September
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.
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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 during the second half of fiscal year 2000. The Company in
fact achieved positive operating cash flow for the third quarter of 2000.
However, if the Company is not successful in achieving targeted revenues and
expenses or maintaining a positive cash flow for the remainder of the year, 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, as of September 30,
2000, the Company had violated the EBITDA and the tangible net worth covenants
included in the terms of the credit agreement. The Company received waivers from
its lender for these violations on November 13, 2000 and is negotiating to amend
the credit agreement to reduce the thresholds required by the EBITDA and the
tangible net worth financial covenants. If the Company is unable to maintain a
positive cash flow or successfully amend the financial covenants in its current
credit agreements, 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 since December 31, 1999 an increase in the proportion of
accounts receivable over 90 days old. The increase in aged receivables is
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. 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 85% of
eligible receivables, which excludes receivables over ninety days old. The
Company's ability to borrow under the credit facility could be impacted by its
ability to maintain compliance with certain financial covenants. Such compliance
could be impacted by collectibility of the Company's accounts receivable.
Further, due to uncertainties related to the Company's ability to generate
eligible collateral and meet the revised financial covenants under the credit
facility during the next twelve months there is no assurance that the Company
will have sufficient sources of financing to support planned levels of
operations. Ultimately, the Company's long-term success is dependent upon its
ability to successfully execute its strategic plan and achieve sustained
profitable operations.
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
Additionally, the company has noted a trend during the last two quarters of an
extending sales cycles for some of its products as existing and prospective
customers transition to the purchase of the Company's integrated and
comprehensive eBusiness suite of products. The company is unable to determine at
this point in time whether this trend will continue or diminish in the future.
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
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<PAGE> 16
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:
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
o Effectively train its sales force to sell an integrated suite of eBusiness
products
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 that 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.
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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, DELAYS IN COLLECTING ACCOUNTS RECEIVABLE, 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:
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 previously did
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 immediate result of this
change was that as of September 1, 2000 the number of Company VAR's selling the
e by Epicor product line domestically was approximately cut in half from 102 to
45. VAR sales for the period ended September 30, 2000 decreased from the quarter
ended June 30, 2000. However, the Company is unable to determine how much of
this drop in sales revenue, if any, was attributable to the change in the VAR
program as opposed to other independent factors.
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Additionally, the Company cannot predict whether all of its former VARs of e by
Epicor will pay their remaining receivables on a timely basis now that they have
elected not to sell the e by Epicor product on an exclusive basis. The long term
impact of this change in the VAR channel to the company's performance is as of
yet undetermined as is whether the Company's ability to generate license revenue
from its e by Epicor products will be adversely or favorably impacted, which
would effect the Company's financial results.
The Company sells some of its 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
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.
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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 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
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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 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 November 7, 2000, the Company had 41,453,642 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
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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
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 September 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.
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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 25.7% of the Company's total revenues for
the nine months ended September 30, 2000 and approximately 22.2% 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.
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 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.72 Loan and Security Agreement by and among Epicor Software
Corporation as borrower and Foothill Capital Corporation
as lender dated as of July 26, 2000
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated August 3,
2000 to report under Item 5 its results for the fiscal quarter
ended June 30, 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
--------------------------------------
Lee Kim
Vice President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.72 Loan and Security Agreement by and among Epicor Software
Corporation as borrower and Foothill Capital Corporation
as lender dated as of July 26, 2000
27.1 Financial Data Schedule
