<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-Q/A
AMENDMENT NO. 1
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 8, 2000, there were 41,486,399 shares of common stock outstanding.
<PAGE> 2
FORM 10-Q/A INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000
(restated, unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations (unaudited) for the Three
Months Ended March 31, 2000 (restated) and 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the Three
Months Ended March 31, 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 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 21
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(Restated)
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,255 $ 18,221
Short-term investments 3,447 12,154
Accounts receivable, net 72,516 75,263
Prepaid expenses and other 11,042 8,984
--------- ---------
Total current assets 100,260 114,622
Property and equipment, net 15,992 16,650
Software development costs, net 10,983 9,083
Intangible assets, net 24,046 25,668
Other assets 3,753 4,154
--------- ---------
Total assets $ 155,034 $ 170,177
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,416 $ 14,591
Accrued expenses 29,946 32,801
Accrued merger and restructuring costs 8,281 11,562
Deferred revenue 42,409 39,017
--------- ---------
Total current liabilities 93,052 97,971
Long-term liabilities 362 400
Stockholders' equity:
Preferred stock 7,501 7,501
Common stock 42 41
Additional paid-in capital 240,920 237,536
Less: notes receivable related to issuance of restricted stock (10,114) (11,269)
Accumulated other comprehensive loss (2,080) (1,590)
Accumulated deficit (174,649) (160,413)
--------- ---------
Total stockholders' equity 61,620 71,806
--------- ---------
Total liabilities and stockholders'equity $ 155,034 $ 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
MARCH 31,
------------------------------
2000 1999
------- --------
(Restated)
<S> <C> <C>
Revenues:
License fees $ 20,645 $ 25,638
Services 34,866 38,702
Other 1,100 1,765
-------- --------
Total revenues 56,611 66,105
Cost of revenues 27,487 28,004
-------- --------
Gross profit 29,124 38,101
Operating expenses:
Sales and marketing 20,685 20,645
Software development 5,746 5,559
General and administrative 17,329 10,539
-------- --------
Total operating expenses 43,760 36,743
-------- --------
Income (loss) from operations (14,636) 1,358
Other income, net 400 1,083
-------- --------
Income (loss) before income taxes (14,236) 2,441
Provision for income taxes - 366
-------- --------
Net income (loss) $(14,236) $ 2,075
======== ========
Net income (loss) per share - basic $ (0.35) $ 0.05
Net income (loss) per share - diluted $ (0.35) $ 0.05
Common shares outstanding - basic 41,262 40,433
Common shares outstanding - diluted 41,262 41,935
</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>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
-------- --------
(Restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(14,236) $ 2,075
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 4,389 4,072
Provision for doubtful accounts 7,408 -
Changes in operating assets and liabilities:
Accounts receivable (4,583) 5,726
Prepaid expenses and other current assets (2,058) 1,466
Accounts payable (2,175) (3,449)
Accrued expenses (2,851) (4,364)
Accrued merger and restructuring costs (3,281) (5,176)
Deferred revenue 3,392 (3,523)
-------- --------
Net cash used in operating activities (13,995) (3,173)
INVESTING ACTIVITIES
Purchases of property and equipment (1,624) (2,444)
Purchases of short-term investments - (15,000)
Proceeds from sale or maturity of short-term investments 8,707 15,639
Additions to capitalized software costs (2,619) (1,598)
Proceeds from notes receivable from related party 1,155 -
Other 285 (198)
-------- --------
Net cash provided by (used in) investing activities 5,904 (3,601)
FINANCING ACTIVITIES
Exercise of common stock options 2,220 1,280
Common stock issued under the Employee Stock Purchase Plan 1,165 423
Payments of long-term liabilities (38) (231)
-------- --------
Net cash provided by financing activities 3,347 1,472
Effect of exchange rate on cash (222) 559
-------- --------
Net decrease in cash and cash equivalents (4,966) (4,743)
Cash and cash equivalents at beginning of period 18,221 22,175
-------- --------
Cash and cash equivalents at end of period $ 13,255 $ 17,432
======== ========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
5
<PAGE> 6
EPICOR SOFTWARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Restated)
MARCH 31, 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. The 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 consolidated
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 months ended March 31, 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 quarter ended March 31, 2000 of $5,355,000. The following
reflects the effect of this restatement on the Company's results of operations
for the three months ended March 31, 2000 (in thousands, except per share
amounts):
Three Months Ended
March 31,2000
----------------------------
As Reported As Restated
----------- -----------
Total operating expenses $38,405 $ 43,760
Net loss $(8,881) $(14,236)
Net loss per share - basic $ (0.22) $ (0.35)
Net loss per share - diluted $ (0.22) $ (0.35)
COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three months ended March
31, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
---------- -------
(Restated)
<S> <C> <C>
Net income (loss) $(14,236) $ 2,075
Unrealized gains (losses) on foreign
currency translation adjustments (490) 423
-------- -------
Total comprehensive income (loss) $(14,736) $ 2,498
======== =======
</TABLE>
BASIC AND DILUTED NET INCOME (LOSS) 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 ended March 31,
2000, employee stock options and preferred stock were not considered in
calculating basic and diluted net loss per common share since their effect would
be anti-dilutive.
6
<PAGE> 7
The following table computes basic and diluted net income (loss) per share (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
-------- --------
(Restated)
<S> <C> <C>
Numerator:
Net income (loss) - numerator for basic
and diluted net income (loss) per share $(14,236) $ 2,075
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 41,262 40,433
Effect of dilutive securities:
Employee stock options - 549
Preferred stock - 953
-------- --------
Dilutive potential common shares - 1,502
-------- --------
Denominator for diluted net income (loss)
per share 41,262 41,935
======== ========
Net income (loss) per share - basic $ (0.35) $ 0.05
Net income (loss) per share - diluted $ (0.35) $ 0.05
</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 of DataWorks, Impresa for MRO, a division of
DataWorks, was initially accounted for as an asset held for sale. On April 1,
1999, the Company discontinued attempts to actively sell the Impresa for MRO
division and, accordingly, the results of operations of the division, 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 Balance at
December 31, Cash March 31,
1999 Payments 2000
---- -------- ----
<S> <C> <C> <C>
Separation costs for terminated
employees and contractors $ 2,005 $(1,647) $ 358
Facilities closing and downsizing 4,712 (692) 4,020
Remaining restructuring accrual
from prior periods - 1998, 1997 and 1996 1,185 (104) 1,081
------- ------- ------
Accrued restructuring costs 7,902 (2,443) 5,459
Accrued merger costs 3,660 (838) 2,822
------- ------- ------
Total accrued merger and restructuring costs $11,562 $(3,281) $8,281
======= ======= ======
</TABLE>
As of March 31, 2000, substantially all employee terminations as a result of the
Company's 1999 restructuring have taken place. The Company expects all related
severance payments to be made by December 31, 2000.
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 arises 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
$1,800,000 to settle the lawsuit. The Company accrued $1,800,000 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 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 enterprise 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 quarter ended March 31, 2000 of $5,355,000. The following
reflects the effect of this restatement on the Company's results of operations
for the three months ended March 31, 2000 (in thousands, except per share
amounts):
Three Months Ended
March 31,2000
----------------------------
As Reported As Restated
----------- -----------
Total operating expenses $38,405 $ 43,760
Net loss $(8,881) $(14,236)
Net loss per share - basic $ (0.22) $ (0.35)
Net loss per share - diluted $ (0.22) $ (0.35)
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 Balance at
December 31, Cash March 31,
1999 Payments 2000
------------ -------- ----------
<S> <C> <C> <C>
Separation costs for terminated
employees and contractors $ 2,005 $(1,647) $ 358
Facilities closing and downsizing 4,712 (692) 4,020
Remaining restructuring accrual
from prior periods - 1998, 1997 and 1996 1,185 (104) 1,081
------- ------- ------
Accrued restructuring costs 7,902 (2,443) 5,459
Accrued merger costs 3,660 (838) 2,822
------- ------- ------
Total accrued merger and restructuring costs $11,562 $(3,281) $8,281
======= ======= ======
</TABLE>
As of March 31, 2000, substantially all employee terminations as a result of the
Company's 1999 restructuring have taken place. The Company expects all related
severance payments to be made by December 31, 2000.
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 March 31, 2000 compared to the quarter ended December 31, 1999
largely due to the aforementioned restructuring. See "Results of Operations -
Operating Expenses."
9
<PAGE> 10
RESULTS OF OPERATIONS
The following table summarizes certain aspects of Epicor's results of operations
for the three months ended March 31, 2000 compared to the three months ended
March 31, 1999 (in millions except percentages):
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
2000 1999 Change $ Change %
---------- ---------- ----------- ------------
(Restated)
<S> <C> <C> <C> <C>
Revenues:
License fees $ 20.6 $ 25.6 $ (5.0) (19.5%)
Services 34.9 38.7 (3.8) (9.9%)
Other 1.1 1.8 (0.7) (37.7%)
---------- ---------- ----------- ------------
Total revenues $ 56.6 $ 66.1 $ (9.5) (14.4%)
As a percentage of total revenues:
License fees 36.5% 38.8%
Services 61.6% 58.5%
Other 1.9% 2.7%
----------- -----------
Total revenues 100.0% 100.0%
Gross profit $ 29.1 $ 38.1 $ (9.0) (23.6%)
As a percentage of total revenues 51.4% 57.6%
Sales and marketing expense $ 20.7 $ 20.6 $ 0.1 1.5%
As a percentage of total revenues 36.5% 31.2%
Software development expense $ 5.7 $ 5.6 $ 0.1 3.4%
As a percentage of total revenues 10.1% 8.4%
General and administrative expense $ 17.3 $ 10.5 $ 6.8 64.4%
As a percentage of total revenues 30.6% 15.9%
</TABLE>
Revenues
The overall decrease in license fee revenues in absolute dollars for the period
ended March 31, 2000 as compared to the same period in 1999 is primarily due to
a delay in the recovery of the enterprise software market following the
transition to the Year 2000 as customers continue to postpone expenditures for
enterprise systems, particularly in the manufacturing sector. The Company
expects that this trend will continue at least through the second quarter of
fiscal 2000. See "Certain Factors That May Impact Future Results - Forward
Looking Statements." The decrease is also attributable to reduced volumes in its
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 quarter ended March 31, 2000 compared with the same
period in 1999.
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 month period ended March 31, 2000 as compared
with the same period in 1999 is primarily due to lower consulting revenues
which was caused by a decrease in the number of new implementation projects as a
result of lower license revenues. 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 form sales. The
decrease in other revenues in absolute dollars for the three months ended March
31, 2000 as compared with the same period in 1999 is directly related to the
decrease in the license fee revenues for the Company's Avante product, since all
hardware sales are directly attributable to this product line. Going forward,
the Company does not anticipate an increase in hardware sales as the focus of
the Avante product is on sales to existing customers as opposed to sales to new
customers. See "Certain Factors That May Impact Future Results - Forward Looking
Statements."
10
<PAGE> 11
International revenues were $13.8 million and $20.1 million in the first quarter
of 2000 and 1999, respectively, representing 24.4% and 30.4% of total revenues,
respectively. The decrease in absolute dollars and as a percentage of total
revenues for the three months ended March 31, 2000 as compared to the same 1999
period is primarily attributable to decreased sales of the Company's Avante
product. This product line was impacted by the decision to focus on sales to
current users of the product as opposed to sales to new customers and the
Company expects this trend to continue going forward. International revenues
were also negatively impacted by the effect of the transition to the Year 2000
as described above. 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. See "Certain Factors That May Affect
Future Results - Forward Looking Statements" and "Risks Associated with
International Sales."
Gross Profit
The absolute dollar decrease in gross profit for the three months ended March
31, 2000 as compared to the same 1999 period is attributable to the decrease in
license fee and services revenues. The reduction in gross profit as a percentage
of revenues resulted from:
- The aforementioned decrease in the dollar amount of services revenue and the
short term, fixed nature of the underlying service costs
- A higher proportion of total revenues from services which bear a lower gross
margin than license fee revenues
Operating Expenses
Sales and marketing expenses consist primarily of salaries, commissions, travel,
advertising and promotional expenses. The increase in absolute dollars is due to
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. This increase, however, is offset by the reduction in sales
personnel as a result of the previously mentioned 1999 restructuring as well as
employee attrition. The increase in sales and marketing expenses as a percentage
of revenues for the quarter ended March 31, 2000 as compared to the quarter
ended March 31, 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. These expenses remained fairly
constant quarter over quarter in absolute dollars. 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 quarter ended March 31, 2000, the Company capitalized $2.6
million of software development costs compared with $1.6 million during the same
period of 1999. The increase is due largely to increased costs related to the
localization and translation into different languages of the Platinum ERA
product and certain applications of the Platinum ERA 7.0a release. The increase
in software development expenses as a percentage of revenues for the quarter
ended March 31, 2000 as compared to the quarter ended March 31, 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 costs associated with
the Company's executive, financial, human resources and information services
functions. The increase in absolute dollars for the three months ended March 31,
2000 compared to the same quarter of 1999 is due to an increase in the Company's
provision for doubtful accounts, including the previously discussed $5.4 million
adjustment made as a result of the Company's change in its 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 the 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 quarter ended March 31, 2000 as compared to the
quarter ended March 31, 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> 12
Liquidity and Capital Resources
The following table summarizes Epicor's cash and cash equivalents, short-term
investments, working capital and cash flows for the three months ended March 31,
2000 compared to year ended December 31, 1999 (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Cash and cash equivalents $ 13.3 $ 18.2
Short-term investments 3.4 12.2
Working Capital 7.2 16.7
Net cash used in operating activities (14.0) (9.7)
Net cash provided by investing activities 5.9 4.1
Net cash provided by financing activities 3.3 2.4
</TABLE>
As of March 31, 2000, the Company's principal sources of liquidity included cash
and cash equivalents and short-term investments of $16.7 million. The Company
used $14.0 million in cash for operating activities during the quarter ended
March 31, 2000 primarily to fund its net loss. As part of the $14.0 million in
cash outlays in the quarter ended March 31, 2000 the Company paid $0.9 million
in settlement of the previously discussed Alyn lawsuit, $1.0 million to fund
certain strategic alliances entered into at the end of 1999 and the first
quarter of 2000, and $3.3 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 March 31, 2000 the Company has $8.3
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 and operations.
The Company's principal investing activities for the quarter ended March 31,
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 7.0a release for foreign markets.
Financing activities for quarter ended March 31, 2000 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.
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 in the quarter ended
March 31, 2000 and expects this to continue through at least the second quarter
of 2000. See "Certain Factors That May Impact Future Results - Forward Looking
Statements." Epicor is dependent upon its ability to generate cash flow from
license fees and other operating revenues, 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, will satisfy the Company's projected short-term liquidity
and other cash requirements for the next twelve months. In order to ensure an
additional source for working capital requirements for the next twelve months,
the Company is pursuing alternative sources of funding, such as a bank line of
credit. There can be no assurance that additional financing will be available on
terms favorable to the Company, or at all.
Year 2000 Issues
In late 1999, the Company completed its remediation and testing of its products,
internal technology systems and noninternal 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 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 problems, it is possible that such errors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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<PAGE> 13
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Forward Looking Statements. 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. Actual
results could differ materially and adversely from those anticipated in such
forward looking statements as a result of certain factors including the factors
listed at pages 13 - 18. 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.
Liquidity. The Company's cash and cash equivalents and short-term investments
decreased from $30.4 million at December 31, 1999 to $16.7 million at March 31,
2000, principally due to the net loss incurred during the three months ended
March 31, 2000 and cash outlays for severance related to the 1999 restructuring.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." 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 fiscal year 2000. See "Certain
Factors that May Affect Future Results - Forward Looking Statements." 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, the Company is presently pursuing alternatives to raise
additional cash, such as a bank line of credit and there can be no assurance
that the Company will be able to secure additional funding or, if secured, on
terms favorable to the Company.
Fluctuations in Quarterly Operating Results. The Company's quarterly operating
results have fluctuated in the past. The Company's operating results may
fluctuate in the future as a result of many factors that may include:
- The demand for the Company's products, including reduced demand related to
changes in marketing focus for certain products
- The size and timing of orders for the Company's products
- The number, timing and significance of new product announcements by the
Company and its competitors
- The Company's ability to introduce and market new and enhanced versions of
its products on a timely basis
- The level of product and price competition
- Changes in operating expenses of the Company
- 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
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<PAGE> 14
some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. Such an event would likely
have a material adverse effect upon the price of the Company's Common Stock.
Integration of DataWorks. On December 31, 1998, the Company acquired DataWorks
Corporation. The Company is still in the process of integrating certain
operations of the two companies, particularly in the areas of operating and
financial systems, 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:
- Distracting management from the business of the Company
- Potential incompatibility of business cultures
- Perceived and potential adverse change in client service standards,
business focus, billing practices or service offerings available to clients
- Potential inability to successfully coordinate the research and development
and sales and marketing efforts
- Costs and delays in implementing common systems and procedures, including
financial accounting systems
- Costs and inefficiencies in delivering services to the clients of the
Company
- Inability to retain and integrate key management, technical sales and
customer support personnel
- 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. Difficulties in completing the integration of DataWorks will have a
material adverse effect on the business, financial condition and results of
operations of the Company.
Risks Associated with Rapid Technological Change and Product Development. The
market for the Company's software products is subject to ongoing technological
developments, evolving industry standards and rapid changes in customer
requirements. 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:
- Deliver eBusiness application software to facilitate eBusiness, including
web enablement
- Enhance its existing products
- Develop new products that address the increasingly sophisticated needs of
its customers, particularly in the areas of eBusiness and eCommerce
- 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.
Fiscal 1999 Restructuring. 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
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<PAGE> 15
responsibility. In May 2000, the Company also divisionalized its Vista product.
Each division has its own general manager and a dedicated staff of developers,
consultants and support representatives. Although the divisionalization into
business units 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 and results of operations for the above referenced
product lines.
Risks of Product Defects. 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 inability of the Company to correct such errors in a timely
manner could have a material adverse effect on the Company's results of
operations. In addition, technical problems with the current release of the
database platforms on which the Company's products operate could impact sales of
these products, which could have a material adverse effect on the Company's
results of operations.
Horizontal Product Strategy. As part of its business strategy, the Company
intends to expand its product offerings to include application software products
that are complementary to its existing client/server 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:
- The difficulty of integrating previously distinct businesses into one
business unit
- The substantial management time devoted to such activities
- The potential disruption of the Company's ongoing business
- Undisclosed liabilities
- Failure to realize anticipated benefits (such as synergies and cost
savings)
- 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:
- The difficulty in integrating the third party product with the Company's
products
- Undiscovered software errors in the third party product
- Difficulties in selling the third party product
- Difficulties in providing satisfactory support for the third party product
- Potential infringement claims from the use of the third party product
Dependence on Distribution Channels. 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 its current VARs of e by Epicor
will continue to resell such products on an exclusive basis or pay their
receivables on a timely basis if they elect to not sell the e by Epicor
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<PAGE> 16
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.
Dependence on Principal Products. 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:
- Competition from other products
- Significant flaws in the Company's products
- Incompatibility with third-party hardware or software products
- Negative publicity or evaluation of the Company or its products
- Obsolescence of the hardware platforms or software environments in which
the Company's systems run
Reliance on Third-Party Suppliers. The Company's products incorporate and use
software products developed by other entities. The Company cannot assure you
that such third parties will:
- Remain in business
- Support the Company's product line
- Maintain viable product lines
- 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.
Change from Client/Server to Web-Based Environment. 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.
Uncertainty of Emerging Areas. The impact on the Company of emerging areas such
as the Internet, on-line services, eBusiness applications and electronic
commerce is uncertain. 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.
Highly Competitive Industry. The business information systems industry in
general and the ERP computer software industry in particular are very
competitive and subject to rapid technological change. Many of the Company's
current and potential competitors have (1) longer operating histories, (2)
significantly greater financial, technical and marketing resources, (3) greater
name recognition, (4) larger technical staffs, and (5) a larger installed
customer base
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<PAGE> 17
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.
Risks Associated With Year 2000 Compliance. 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.
Dependence on Retention and Recruitment of Key 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.
Risks Associated with International Sales. The Company believes that any future
growth of the Company will be dependent, in part, upon its ability to increase
revenues in international markets. 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:
- Unexpected changes in regulatory requirements
- Tariffs and other barriers
- Unfavorable intellectual property laws
- Fluctuating exchange rates
- Difficulties in staffing and managing foreign sales and support operations
- Longer accounts receivable payment cycles
- Difficulties in collecting payment
- Potentially adverse tax consequences, including repatriation of earnings
- Lack of acceptance of localized products in foreign countries
- Burdens of complying with a wide variety of foreign laws
- Effects of high local wage scales and other expenses
- 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
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<PAGE> 18
Company's revenues from sales to foreign entities, including foreign
governments, has been in the form of foreign currencies. The Company does not
have any hedging or similar foreign currency contracts. Fluctuations in the
value of foreign currencies could adversely impact the profitability of the
Company's foreign operations.
Risks Associated with Intellectual Property and Proprietary Rights Protection.
The Company relies on a combination of copyright, trademark and trade secret
laws, employee and third-party nondisclosure agreements and other industry
standard methods for protecting ownership of its proprietary software. However,
the Company cannot assure you that in spite of these precautions, an
unauthorized third party will not copy or reverse-engineer certain portions of
the Company's products or obtain and use information that the Company regards as
proprietary. 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 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.
Shares Eligible for Future Sale. As of May 8, 2000, the Company had 41,486,399
shares of common stock outstanding. There are presently 95,305 shares of Series
C Preferred Stock outstanding. Each share of Series C Preferred Stock is
convertible into ten shares of common stock, as adjusted for stock dividends,
combinations or splits at the option of the holder. As a result, the Series C
Preferred Stock is convertible into 953,050 shares of common stock. The holders
of the Series C Preferred Stock have the right to cause the Company to register
the sale of the shares of common stock issuable upon conversion of the Series C
Preferred Stock. Also, the Company has a substantial number of options or shares
issuable to employees under employee option or stock grant plans. As a result, a
substantial number of shares of common stock will be eligible for sale in the
public market at various times in the future. Sales of substantial amounts of
such shares could adversely affect the market price of the Company's Common
Stock.
Possible Volatility of Stock Prices. The market prices for securities of
technology companies, including the Company, have been volatile. Quarter to
quarter variations in operating results, changes in earnings estimates by
analysts, announcements of technological innovations or new products by the
Company or its competitors, announcements of major contract awards and other
events or factors may have a significant impact on the market price of the
Company's Common Stock. In addition, the securities of many technology companies
have experienced extreme price and volume fluctuations, which have often been
unrelated to the companies' operating performance. These conditions may
adversely affect the market price of the Company's Common Stock.
Because of these and other factors affecting the Company's operating results,
past financial performance should not be considered an indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments with high credit quality issuers
and, by policy, limits the amount of credit exposure to any one issuer. The
Company is 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 24.4% of the Company's total revenues for
the three months ended March 31, 2000 and approximately 21.0% 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 arises 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
$1,800,000 to settle the lawsuit. The Company accrued $1,800,000 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 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
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated February 2,
2000 to report under Item 5 its results for the fiscal quarter and
fiscal year ended December 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
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(Registrant)
Date: November 14, 2000 /s/ Lee Kim
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Lee Kim
Vice President and Chief Financial Officer
21
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EXHIBIT INDEX
27 Financial Data Schedule
