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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO __________________
COMMISSION FILE NUMBER 0-20740
EPICOR SOFTWARE CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0277592
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
195 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618-2402
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(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (949) 585-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.001 per
share
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $327,927,215 (computed using
the closing sales price of $8.72 per share of Common Stock on March 13, 2000 as
reported by the Nasdaq National Market). Shares of Common Stock held by each
officer and director and each person who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed affiliates.
The determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares of Common Stock outstanding as of
March 13, 2000 was 41,455,036.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on April 27, 2000, which Proxy Statement will be
filed no later than 120 days after the close of the registrant's fiscal year
ended December 31, 1999, are incorporated by reference in Part III of this
Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
Epicor Software Corporation ("Epicor" or 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. Epicor's solutions are designed to help the Company's customers focus
on their customers. This customer-centric focus differentiates the Company from
conventional enterprise resource planning ("ERP") vendors, whose primary focus
is improving business processes and efficiencies. The Company's products and
services are designed to focus on customer satisfaction, retention and referrals
and are intended to facilitate enterprise-wide management of resources and
information which allows mid-market companies to compete more effectively in an
increasingly global economy.
The Company's products integrate Back Office applications for manufacturing,
distribution and accounting with Front Office applications for sales, marketing
and customer support. Leveraging the power of the Internet, these applications
allow an organization to extend beyond the traditional "four walls" of their
enterprise to integrate their operations with their customers, suppliers and
partners.
The Company has three primary areas of focus for its software products:
1. Front Office applications, which include its Clientele(R) and
Platinum(R) ERA (Enterprise Ready Applications) Front Office sales
force automation and customer service and support applications, which
provide growing and mid-sized companies with comprehensive customer
relationship management ("CRM") functionality;
2. General Services applications, which include Platinum ERA Financials,
Platinum ERA Distribution and Platinum(R) for Windows, designed to
support the requirements of distributors and service organizations; and
3. Manufacturing applications, which include Platinum ERA Manufacturing -
an ERP suite designed for assemble-to-order ("ATO") and light
manufacturers, Avante - an ERP suite designed to meet the needs of
rapidly growing manufacturers of discrete, highly engineered products,
Vantage - an ERP suite designed for make-to-order ("MTO") and job shop
manufacturers, Vista -an integrated business management application
targeted at small job shop manufacturers, and Impresa - an integrated
solution designed for the specialized needs of remanufacturers and
maintenance, repair and overhaul ("MRO") businesses
The Company's software products incorporate a significant number of
internationalized features to address global market opportunities, including
support for national languages, multiple currencies and accounting for
value-added taxation.
The Company offers consulting, training and support services to supplement the
use of its software products by its customers. Mid-market companies require cost
effective systems that have broad functionality, yet are rapidly implemented,
easily adapted and highly configurable to their unique business requirements. To
enable rapid implementation and return on investment, Epicor provides a fixed
fee implementation program, the Up-Front Guarantee program.
The Company was incorporated in Delaware in November 1987 under the name
"Platinum Holdings Corporation." In September 1992, the Company changed its name
to Platinum Software Corporation. In April 1999, the Company changed its name to
Epicor Software Corporation. The Company has twelve operating subsidiaries
worldwide.
BACKGROUND
Epicor designs its products and services exclusively for mid-market companies,
which generally consist of companies with annual revenues between $10 million
and $500 million. These rapidly growing organizations number in the hundreds of
thousands worldwide. In the past, mid-market companies were underserved by
traditional
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financial and ERP systems that had originally been designed for larger
corporations. These enterprise systems were dominated by mainframes and
minicomputers, which were expensive to purchase, install and maintain. Though
highly functional, the centralized nature of these generally proprietary systems
meant that access to critical data was typically limited to an organization's
management information services ("MIS") department and not readily available to
decision makers, managers and key employees. Moreover, these systems provided
little flexibility or adaptability to the constantly evolving requirements of
mid-market companies.
The explosion of enterprise business applications began as an extension of the
corporate reengineering efforts of the early 1990s and the emergence of new
technology paradigms including client/server computing. The dramatic
scalability, supportability and performance improvements made possible by
client/server and other open systems technologies based on Unix, Microsoft NT
and Microsoft SQL server, allowed many organizations to leverage this technology
and implement enterprise business applications for the first time. As Fortune
1000 companies aggressively invested in information technology to help them
streamline and integrate disparate business processes, they created a tremendous
demand in the mid to small enterprise markets for enterprise-wide software
applications that integrated business processes and information. At first, only
larger organizations had the technological expertise, budget and ability to
support the lengthy implementations typified by the early solutions.
This demand helped make the enterprise applications market one of the largest
and fastest growing segments of the software industry. AMR Research, Inc., an
industry analyst organization, projects that the enterprise applications market
will grow 32 percent annually for the next several years, reaching more than
$66.6 billion by 2003, up from just $16.6 billion in 1998.
While smaller companies understood the business value of enterprise
applications, they lacked the extensive resources required to implement and
support such first-generation solutions. In their own quest to boost
productivity, profits and gain a competitive advantage, mid-sized companies
increasingly turned to integrated application software to automate and link
their business processes. Due to the mid-market's unique business constraints of
limited budgets and limited implementation timeframes, "best-of-breed" solutions
and after-market application integrations were far too cumbersome and costly to
be an effective enterprise solution. Mid-market companies required a software
application that leveraged the new advances in client/server software technology
to deliver a truly integrated and enterprise wide solution.
Enterprise applications employed by mid-sized companies are required to satisfy
business and technology requirements that are significantly different from those
found in Fortune 1000 organizations. As a group, mid-sized companies face
tremendous global competitive pressures as they compete for business against
larger corporations, other mid-sized competitors and smaller start-ups. They
understand the need to remain close to their customers and to make the most
effective use of relatively limited resources. Mid-sized companies demand a
quick return on technology investments and require that solutions be affordable
not only to acquire and implement, but also to support throughout its entire
operational life span.
With respect to technology, mid-sized companies are practical consumers.
Mid-sized companies generally do not take risks on cutting-edge technology, but
instead typically select affordable, proven solutions. The decade's dramatic
decrease in information technology costs, coupled with a simultaneous increase
in computing power, have made key new technologies accessible to this
cost-conscious market. Microsoft Corporation took advantage of increased
computing capabilities to develop Microsoft BackOffice(R), a robust network
operating system and scaleable relational database that provides smaller
businesses with a sophisticated technology infrastructure previously accessible
only to Fortune 1000 corporations. Microsoft Windows NT(R) and SQL Server have
quickly become the fastest growing technology platforms, attracting mid-market
companies with their features, familiarity and ease-of-use.
The development of cost-effective infrastructures has increased the mid-sized
company's investment in enterprise applications. Spurred by outside issues, such
as Year 2000 readiness and pending Euro currency mandates, mid-sized companies
realized they could not afford to be without enterprise business solutions. The
Company's product offerings, product development efforts and services are
focused on meeting the enterprise business application needs of these growing
mid-sized businesses.
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TECHNOLOGY STRATEGY
The Company's technology strategy is to develop leading line of enterprise
business software applications using industry-standard tools where possible, and
to take advantage of leading third-party, industry-standard technologies for
database management systems, operating systems, user interfaces and connectivity
(including Internet, Intranet and Extranet access). The Company developed its
own proprietary application development tools to create its first generation of
client/server products, as well as acquired several proprietary application
development tools through acquisitions. These technologies and tools were
developed to meet the unique needs of the current marketplace. However, as
industry-standard tools mature, the Company intends to increasingly exploit
these leading tools as they become generally available. The Company's core
product architecture incorporates many of the foundation technologies of
client/server computing, including:
Open Database Technology
The Company utilizes open database technology to provide extremely flexible, yet
integrated enterprise business applications. This open database orientation is
based on widely accepted database management systems. The Company's Platinum ERA
product line (formerly Platinum SQL) uses the Microsoft SQL Server relational
database management system ("RDBMS"). The Company has focused the development of
its Platinum ERA product line using Microsoft's industry-standard SQL language
as the fundamental database access methodology. The Company's Platinum for
Windows financial accounting application is optimized for Pervasive, Inc.'s
Pervasive.SQL database. The Company's Clientele Front Office suite leverages
both the Microsoft Access and Microsoft SQL Server databases. The Company has
designed some of its manufacturing products to run on databases that are best
suited for the particular applications required by customers, including Informix
(formerly Ardent), Progress, and Microsoft FoxPro. The Company has chosen these
open databases in order to maximize the throughput of its customers'
transactions, to provide realistic models of business data and to maximize price
and performance under the budget constraints of its customer base. The Company's
Avante product leverages open database technology from Informix Inc., its
Vantage product is designed for Progress Software Corporation's Progress
database, its Vista product is built on Microsoft's FoxPro database, and its
Impresa product incorporates database tools and technology from Oracle
Corporation.
Advanced Networking/Connectivity
The Company's products are designed to operate on local area networks ("LAN"),
wide area networks ("WAN"), the Internet (including Intranets and Extranets) as
well as through mobile and remote dial-up connections. The Company supports
popular industry-standard networking protocols such as TCP/IP, Novell IPX/SPX
and Microsoft NETBEUI/Named Pipes. The Company's connectivity and networking
support offers advanced features such as: (i) concurrent access to data and
critical functions for all network users; (ii) a high degree of fault tolerance;
(iii) high levels of security; (iv) a wide range of options for configuring
different users on the network; (v) remote access and data processing; and (vi)
mobile computing.
Industry Standard User Interfaces
The Company has incorporated numerous features into its user interfaces to
simplify the operation of and access to its products. All of the Company's
product lines incorporate the popular Microsoft Windows graphical user interface
("GUI"). The Company's GUI tools include industry-standard field controls,
pull-down menus, tool bars and tab menus that facilitate the use of the
software. In addition, the Company's products incorporate the latest and most
advanced GUI features such as process wizards, cue cards, advanced on-line help
and on-line documentation.
Powerful Application Development Tools
The Company provides comprehensive, ground-up application development and
customization capabilities for its Platinum ERA, Avante, Vantage, Vista,
Clientele, Impresa and Platinum for Windows product lines. To accomplish this,
the Company provides extensive, integrated application development environments
for these product lines. These customization tools deliver a complete
development environment, enabling a user to make changes ranging from a simple
field name change to building an integrated custom application.
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The Platinum ERA Customization Workbench is a software development kit for
Platinum ERA that enables customers and authorized resellers to build
comprehensive software solutions that augment the standard product. The
intuitive Windows interface of the visual forms designer provides a powerful
tool to modify and extend the functionality of standard applications. In
addition, industry-standard Visual Basic macro language and ActiveX Automation
support enables all Platinum ERA product suites to exchange and integrate with
external COM-enabled Microsoft Windows applications. The Customization Workbench
includes technical reference guides and diagrams, an OLE integration kit and
certain report script source code. The Company has licensed Visual Basic for
Applications and has incorporated it in Platinum ERA.
The Platinum ERA Distribution and Platinum ERA Manufacturing suites employ
PowerBuilder from Sybase, Inc. to provide its user interface. Due to the
complexity and wide variations of the changes needed for many end users of the
manufacturing and distribution products, the Company offers complete
customization services through its professional services group. In addition to
its Windows-based client, the Company provides a Java-based user interface and
middle-tier application server to provide electronic commerce functionality on
top of the same database platform. Users are provided with complete capabilities
to change the user interface, validation rules and business processing of
business-to-business transactions using a complete application extension
environment.
The Platinum ERA Front Office and Clientele Front Office suites use a
proprietary forms package to build and modify the user interface. These suites
also include Clientele Basic to enable users and consultants to tailor the look,
feel, behavior and processing of the both the Platinum ERA Front Office and
Clientele Front Office application suites to meet their specific business needs.
Both front office suites offer additional applications designed to extend the
suite's functionality, including Conductor, Connector and Smart Delivery.
Conductor provides workflow routing and rules capabilities that allow any user,
no matter where they are, to receive messages and tasks from the front office
system. Connector enables remote sites and traveling sales and support
representatives to connect to their master front office database and synchronize
customer information, ensuring timely information whether the user is at
headquarters, a remote site or on the road. Smart Delivery is a marketing
encyclopedia system that enables current marketing information to be
automatically distributed to the field. Additionally, the Company offers
Internet-enabled solutions, including Platinum ERA.net Front Office,
Clientele.Net and Vantage.Net, which enables internal remote users as well as
customers to interact with the system via an Internet browser.
Platinum for Windows was developed using industry standard development tools
such as Visual Basic and utilizes the industry standard Pervasive.SQL database
engine. As a result, a series of reusable objects have been created. By exposing
certain aspects of the objects, users have the ability to modify and extend the
system without losing a consistent user interface. Platinum for Windows also
includes template definition for easier document entry and wizards which make it
easier for a user to set up the software or define users or groups.
To minimize cost and support issues for its manufacturing customers, the Company
has tightly integrated its database and development environments. Avante was
developed using an object-based development tool, Avante Tools, that utilizes a
graphical development tool set. Through Avante Tools, the Company is able to
support products across multiple operating systems from a single object code
library. Vantage is written in the Progress 4GL and database, which provides a
powerful, graphical development tool set. Vista provides VB Forms, a powerful
form designer tool that supports user-definable screen generation. Impresa
incorporates Oracle's Developer rapid application development (RAD) tool to
provide sophisticated, highly interactive forms, reports and charts.
Technical Architecture Strategy and Common Components
A key element of the Company's technology strategy is the development of common
components that can be used by all product families. These common components are
developed by focused development teams according to common standards to leverage
advanced functionality and technology across all the Company's solutions. The
Company's technology direction embraces the Microsoft Windows Distributed
interNetwork Architecture ("DNA") for building distributed application
components. This strategy enables the Company's development teams to leverage
COM+ and advanced services and components of the Windows 2000 operating system
and Office 2000 productivity suite, while allowing each product family to
continue to utilize the individual databases and development tools appropriate
to the requirements of each product's target market.
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This standardized application integration infrastructure is intended to enable
all the Company's product families to enjoy the benefits of certain common
components required in most markets. These common components include Front
Office, Enterprise Business Intelligence, Advanced Planning and Scheduling and
Electronic Commerce. The Front Office application suite, which has already been
integrated with Platinum ERA and Avante, is scheduled to be integrated with
other application suites, such as Vantage and Platinum for Windows to provide
integrated customer service, sales and marketing functionality. See "Certain
Considerations - Forward Looking Statements." Enterprise Business Intelligence
components provide a common suite of applications for data navigation, ad-hoc
analysis, strategic planning and on-line analytical processing ("OLAP") which
all products can use to gain strategic insights into their business. Common
components for electronic commerce will enable both business-to-business and
business-to-consumer eCommerce applications for all products, whether through
the Internet or other private networks.
PRODUCTS
The Company designs, develops, markets and supports enterprise software
applications that provide organizations with technically advanced business
solutions. The Company has seven primary software solutions, including Platinum
ERA, Avante, Vantage, Vista, Clientele, Impresa and Platinum for Windows. The
Platinum ERA product suite includes sales force automation, customer service and
support, financial accounting, budgeting, distribution and light manufacturing
functionality. Avante is an easy-to-use ERP solution for mid-sized manufacturers
of discrete and highly engineered products. Vantage is a comprehensive,
integrated software system specifically designed for MTO and mixed-mode
manufacturers. Vista is a Windows-based desktop business management system
specifically designed for the needs of small job shops and the MTO departments
of larger companies. Clientele is an integrated customer relationship management
("CRM") solution that enables growing companies to easily track and share
customer information to boost revenues and increase customer satisfaction.
Impresa is an object-oriented, client-server software solution designed for the
unique requirements of remanufacturers and MRO organizations. Platinum for
Windows is a robust accounting solution designed for small- to medium-sized
businesses operating in the LAN environment.
In addition, the Company continues to provide support for the installed base of
the Platinum for DOS financial accounting software product, which the Company
discontinued marketing in 1998 after providing a Year 2000 compliant version,
and certain other legacy products.
Platinum ERA
Platinum ERA (formerly named Platinum SQL), an integrated, customer-centric
suite of client/server ERP software applications, is designed to meet the unique
business needs of mid-sized companies worldwide (including divisions and
subsidiaries of larger corporations). Platinum ERA is typically targeted to
either a non-manufacturing or service-based business with revenues between $50
million and $500 million or a distributor/light manufacturer with the same
revenues. These organizations require the functional depth and sophistication of
traditional high-end enterprise business applications, but desire a rapid and
cost-effective product implementation. The product is optimized for use with the
Microsoft Windows NT operating system and the Microsoft SQL Server relational
database. Platinum ERA minimizes the complexities of client/server installation
by providing the user with installation wizards that help configure the
Microsoft SQL Server database based upon information provided by the installer.
As previously indicated, Platinum ERA was designed for the Microsoft Windows NT
server platform and runs on Windows NT and Windows 95/98 client platforms.
Platinum ERA supports various industry standard technologies including,
Microsoft's Message Queue Server, Transaction Server and COM architecture along
with eXtensible Markup Language ("XML") documents to improve componentization
and support reliable integration between applications and distributed servers.
Microsoft's Visual Basic for Applications ("VBA") is also included to enhance
customization and allow easy integration with third party applications. In
addition, Platinum ERA is a 32-bit client and server application that takes full
advantage of the Microsoft SQL server for Windows NT.
In order to fully exploit the capabilities of the client/server model of
computing, the Company has optimized its Platinum ERA product line for the
Microsoft SQL Server database. All major data manipulation functions are
implemented in the native language of the database server, Transact SQL, and
thereby are executed as "stored procedures" and/or "triggers" that are processed
solely on the server. This implementation results in a substantial reduction in
network traffic as compared to other client/server approaches, provides
scaleable high performance,
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and provides inherent portability of the RDBMS to a large number of server,
hardware and operating system platforms without code change or conversion.
Platinum ERA includes both front and back office applications. The front office
applications include Customer Support, Sales and Marketing, Conductor,
Connector, Help Desk, Smart Delivery Server and ERA.net Front Office. The back
office includes financial, distribution and manufacturing suites of
applications. The following back office financial applications are presently
generally available in version 7.0: System Manager, General Ledger with FRx,
Accounts Receivable, Accounts Payable, Cash Management, Multi-Currency Manager,
Asset Management, Import Manager, Credit and Collections, Allocations, Budget
Manager, Advanced Purchasing, Advanced Distribution, Manufacturing and
Customization Workbench. Platinum ERA Distribution includes Purchasing and
Distribution. Platinum ERA also includes a variety of Internet-enabled products
to extend its functionality via the Internet, including an information access
tool, ERA.net Decision Support, and a business-to-business electronic commerce
solution, ERA.net Order. Version 7.0b of Platinum ERA is scheduled for release
in March 2000, and is expected to include features such as: (i) a customization
workbench based on PowerBuilder that will enable consultants, resellers and
customers to customize the Platinum ERA Manufacturing and Distribution suites,
(ii) enhanced integration between the front and back office components of
Platinum ERA, (iii) comprehensive enterprise reporting enhancements, data
warehousing, OLAP and advanced analytic solutions to support business decision
making, and (iv) a new desktop that provides a common user interface and
navigation tool for all Platinum ERA applications. See "Certain Considerations -
Forward Looking Statements."
The Platinum ERA Front Office suite enables small to mid-sized businesses to
organize, maintain and share customer information to improve customer service
and improve support and sales personnel productivity. Platinum ERA Front Office
is also used for managing customer service and support operations, including
internal help desks that support an organization's internal workforce
(traditionally, the MIS department) as well as external customer support centers
that support the businesses' customers, vendors, and suppliers. The Platinum ERA
front office suite also includes a sales and marketing automation application
which, when combined with the customer service and support application, enables
organizations to share customer information from the initial contact throughout
the duration of the customer life cycle. The sales and marketing application
includes contact management, opportunity management, account management,
territory management, a marketing encyclopedia, scheduling and calendaring
functionality.
The Platinum ERA Distribution and Platinum ERA Manufacturing suites are
comprehensive, client/server applications designed to improve the efficiency and
responsiveness of manufacturing and distribution operations. The manufacturing
and distribution suites are fully integrated with the Platinum ERA Financial and
Platinum ERA Front Office suites to ensure that repetitive, assemble-to-order or
configure-to-order manufacturing operations are in sync with sales,
distribution, purchasing and financial departments. This customer-centric focus
of the Platinum ERA enables companies to respond quickly to customer demands and
improve customer service.
License fees for Platinum ERA vary depending upon the number of modules, servers
and concurrent users. The following table shows revenues attributable to
licenses of Platinum ERA including the predecessor of Platinum ERA, Platinum SQL
and Clientele (in millions):
Percentage of
Revenue Total Revenue
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Year ended June 30, 1997 $24.7 41%
Year ended June 30, 1998 48.8 50%
Six month ended December 31, 1998 28.7 45%
Year ended December 31, 1999 44.8 17%
e by Epicor
In February, the Company announced "e by Epicor," the Company's next generation
of eBusiness applications for the midmarket. e by Epicor represents the
Company's strategy to empower and enable mid-market companies to take full
advantage of the Internet to integrate their enterprise processes with the
online operations of their customers, suppliers and partners. e by Epicor will
incorporate Epicor's Platinum ERA suite, as well as the next generation of its
Vantage solution, which combined, will evolve into a suite of six applications:
Epicor eCommerce, Epicor eFrontOffice, Epicor eBackOffice, Epicor ePortals,
Epicor eIntelligence and Epicor eIndustry. See "Certain
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Considerations - Forward Looking Statements." The entire solution will be based
on proven Microsoft technologies and platforms to provide an enterprise
application framework. e by Epicor will incorporate financials, budgeting,
distribution, manufacturing, sales and marketing and customer service solutions,
into a common integrated suite of applications. The front office CRM
application, combined with back office financial, distribution and manufacturing
applications leverages advanced integration technologies that transform line of
business applications into a complete enterprise solution.
e by Epicor will leverage the Internet through advanced architecture, easy to
use portals and eBusiness applications and is scalable as a business grows. In
addition to advanced enterprise functionality, e by Epicor will support various
industry standard technologies including, Microsoft's Message Queue Server,
Commerce Server, Transaction Server and architecture along with XML documents to
improve componentization and support reliable integration between applications
on different servers at different sites. See "Certain Considerations - Forward
Looking Statements." Microsoft VBA is provided to enhance customization and
allow easy integration with third party applications.
Manufacturing Applications
The Company's dedicated manufacturing applications include Vista, Vantage,
Avante, and Impresa,. All of these products were acquired as part of the merger
with DataWorks in December 1998.
Vista
Vista is a Windows-based desktop business management system specifically
designed for needs of small job shops and the MTO departments of larger
businesses that have less developed infrastructures, lower MIS budgets, require
a shorter deployment period and seek established, user-friendly products. Vista
fully integrates 15 core business modules and features WebTracker, a
business-to-business eCommerce application which allows companies to link their
Vista database to the Internet to provide customers with online access to
real-time account information, including all open orders, shipments, invoices,
and payments. Vista incorporates the DesignWare feature which permits users to,
among other things, define their own screens, add fields, change colors, hide
fields, change grid sizes and drag choices from menus to the desktop. Vista is
comprised of groups of modules that can be configured to support a customer's
business processes.
Vantage
Vantage is an integrated, Windows-based ERP solution for MTO and job shop
manufacturers that meets the dynamic product requirements of custom
manufacturing operations. Vantage provides powerful tools for quoting, visual
scheduling, job tracking and costing, as well as shop floor data collection.
Vantage supports a mix of custom and standard part orders and multilevel
assemblies and is comprised of 26 fully integrated business modules. Vantage is
optimized for the rapid deployment, minimal support and price/performance
requirements of custom and mixed-mode manufacturers in the $10 to $250 million
revenue range.
Vantage is comprised of groups of modules that can be differently configured to
comprehensively support a customer's business processes. The following
applications are presently generally available in Vantage version 4.0: Quote
Management, Order Management, Product Configuration, Job Management, MRP,
Advanced Bill of Materials, Visual Scheduling, Advanced Planning and Scheduling,
VantagePoint Data Collection, Quality Assurance, Multi-Site Management, Field
Service, Document Management, Inventory Management, Shipping\Receiving,
Purchasing RFQ Management, Purchasing Management, Accounts Receivable, Accounts
Payable, General Ledger, Currency Management, Payroll, ShopVision Executive
Query, Enterprise Business Intelligence, Vantage.net, Vantage EDI, and Vantage
Tools. Vantage also includes front office applications through its integration
with Clientele.
Avante
Avante is a fully integrated ERP solution for mid-sized businesses with complex
manufacturing requirements in eight principal industries: industrial equipment,
computer/office equipment, consumer electronics, instrumentation and controls,
medical/dental products, transportation/aerospace products, capital equipment
and contract
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manufacturers. Avante combines ease-of-use with advanced functionality and
technology to provide manufacturers of discrete, complex products with an
affordable and comprehensive business performance solution. Avante has the
flexibility that discrete manufacturers in make-to-stock and mixed-mode
environments require. Built on proven technologies, Avante is a cost-effective
and rapidly deployable solution that has the built-in flexibility mid-market
manufacturers need to meet the challenges of constant production process
improvements, global sourcing and mass customization.
Avante is comprised of groups of modules that comprehensively support a
manufacturing company's business process. These modules provide and integrate
feature-rich applications for front and back office, are built upon a common set
of design and development standards and tools, and share a common database
architecture. The following applications are presently generally available in
Avante version 9.1.7: Accounts Payable , General Ledger, Accounts Receivable,
Inventory Management, Asset Management, Job Order Tracking, Barcode Document
Manager, Master Production Scheduling, Bills of Material, Material Requirements
Planning, Capacity Requirements Planning, Multi-Plant Planning, Cost Accounting,
Product Costing, Cash Management, Purchasing, Distribution Requirements
Planning, Quality Management, Equipment Maintenance & Repair, Return Material
Tracking, Estimating & Quotations, Sales Order Processing, Executive Information
System, Shop Floor Control, Focus Factory Management, Work Centers & Routings,
Expert Product Configurator, Service Suite, Front Office, Decision Support,
Material Real Time Tracking , Barcode Shipping, Shop Floor Control/Time &
Attendance, Advanced Planning and Scheduling, Human Resources, Payroll, Sales
Analysis DataMart, and Operational Data Store. Avante is highly modular in
nature and can be scaled from small to large configurations on a variety of
platforms supporting the Microsoft NT and UNIX operating systems. This
enterprise-wide system can be implemented in a variety of multi-currency,
multi-company and multi-plant environments networked through client and
host-based configurations.
Impresa
Impresa is an enterprise, client-server software solution designed for the
unique business requirements of remanufacturers, maintenance, repair, and
overhaul organizations and contract/project manufacturers. Impresa's fully
integrated suite of software automates all areas of the enterprise, including
MRO activities, product design, inventory control, procurement, quality control,
manufacturing and finance.
Impresa offers specialized information and tools to handle the project
orientation, cyclical nature and variable workload of the MRO process. Impresa
supports the three major disciplines of back office MRO management: Complex
Assemblies, Structures and Components. In the aerospace and defense sector,
Impresa is well-suited to the requirements of in-house and third-party
remanufacturers of airframes, engines, components, landing gear and defense
systems. It is also an excellent solution for enterprises remanufacturing other
complex, engineered systems such as ships, power plants, and motor vehicles.
Impresa incorporates Oracle's relational database and Developer/2000 development
environment to provide a software solution suitable for single sites or
global-scale enterprises.
Impresa includes integrated manufacturing, MRO and financial applications. The
current release includes the following modules: Average Costing, Labor, Bill of
Material, Models and Options, Capacity Planning, Physical Inventory/Cycle Count,
Customer Order Processing, Planning & Scheduling, Engineering Change Control,
Product Costing, Inspection / MRB, Project Control, Inventory, Purchasing,
Routings / Work Centers, Job Costing, Work in process Applications, Work Order
Management, Accounts Payable, Financial Statement Generator, Accounts
Receivable, Fixed Assets, General Ledger, Actual Costing, Lot Control / Serial
Tracking, End Item Effectivity, Rough Cut Capacity Planning, Bar Code Printing,
Multi-Currency, EDI API Interface, EDI Customer, EDI Vendor, Quality Assurance,
Multi-Plant Applications, Time and Attendance, Finite Scheduling, Tool
Management, Forecasting, Travel & Expense, IMPRESA Development Environment,
IMPRESA Toolbox and System Control.
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Clientele
Clientele is an integrated customer relationship management solution designed to
meet the needs of rapidly growing, mid-sized organizations. Clientele allows
organizations to support and manage their most important asset - their
customers. Clientele enables businesses to easily gather, track, organize and
share customer information to boost revenues and increase customer service
levels. Clientele combines employee applications such as opportunity management
with customer applications, such as web-based order entry/inquiry to give
companies and customers a true, up-to-the-minute picture of their relationship.
Clientele spans the barriers between traditional Front Office and Back Office
operations to provide customer service, support, help desk and sales force
automation information.
Clientele for Sales and Marketing empowers organizations to focus on the right
opportunities while providing access to timely information. Clientele provides
contact, lead, opportunity and account management in one package. Clientele for
Customer Support manages the support needs of an organizations external
customers and provides call management, product tracking, RMA tracking, call
queuing/follow-up and problem resolution. Clientele for Help Desks provides
detailed call tracking, asset/knowledge management, service requests,
maintenance and user profile tracking and management.
Clientele is designed to easily connect remote sites and laptop users to
centralized information. Data can be synchronized and exchanged between sites,
as well as between individual sites and a central database. ClienteleNet
provides access for customers, partners and field representatives over the
Internet via secure, web application.
Platinum for Windows
Platinum for Windows is a Windows-based client/server financial accounting
software package for smaller businesses whose corporate computing environment
consists of LANs comprised of personal computers. Platinum for Windows is the
next generation of the Company's Platinum for DOS and Platinum Premier financial
accounting applications. First introduced in June 1995, Platinum for Windows
includes a Windows-based client that was designed around the interface standards
of Microsoft Windows 95 to handle all user interaction and data maintenance. The
Windows-based client interacts with an application server that runs postings,
reports and utilities. Both the client and the server communicate with the
LAN-based Pervasive SQL database. No database conversions are required to
upgrade from the Platinum for DOS product to Platinum for Windows, ensuring a
smooth upgrade path for Platinum for DOS users.
The following modules of Platinum for Windows are presently generally available:
Premier Ledger with FRx, Premier Consolidations, Premier Currency Translation,
Premier Inter-Company Processing, Premier Budgeting, Foreign Currency Manager,
System Manager, General Ledger, Bank Book, Accounts Receivable, Accounts
Payable, Purchase Order, Sales Order, Inventory, Project Costing, Bank Book,
Advanced Allocations, Budget Manager, and PFWeb Decision Support. The following
table shows revenues attributable to licenses of the Platinum for Windows and
Platinum for DOS applications (in millions):
Percentage of
Revenue Total Revenue
------- -------------
Year ended June 30, 1997 $7.4 12%
Year ended June 30, 1998 8.8 9%
Six months ended December 31, 1998 4.3 7%
Year ended December 31, 1999 6.9 3%
Other Products
The Company also offers a line of integration kits and database products that
support its Platinum for Windows and Platinum for DOS lines of software products
and licenses these products to its Value Added Resellers ("VARs"), distributors,
Authorized Consultants and end-users. The Company also serves as an original
equipment manufacturer vendor or reseller for certain third-party software
applications and pays royalties to various organizations in connection with the
distribution of third-party software and the sale of products that incorporate
third-party technologies. In addition, in certain cases, as part of turnkey
solutions requested by a customer of
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Avante, the Company resells complete third party computer hardware systems and
related peripherals. The Company does not typically carry inventory of computer
hardware.
PROFESSIONAL SERVICES, TECHNICAL SUPPORT AND SOFTWARE MAINTENANCE
The Company's professional services division provides consulting services to
customers in the implementation of the Company's software products, as well as
custom software development, education, training and other consulting and
programming services. The professional services division functions in domestic
and international markets. Professional services are generally provided on a
time and materials basis, although it does occasionally enter into fixed fee
arrangements or arrangements in which customer payments are tied to achievement
of specific milestones. The Company believes its professional services, in
conjunction with its current and planned product offerings, facilitates the
licensing of technology to customers, stimulates demand for the Company's
products and provides a key market differentiator over its competition.
In 1999, the Company introduced the Up-Front Guarantee program, an
implementation program in which the Company guarantees that the implementation
costs will not exceed the price of the software. The program also guarantees a
specific implementation timeframe and includes such services as planning,
installation, project management, data migration, training and customization.
The program is subject to specific terms and conditions and customer
qualifications.
The Company is committed to providing timely, high-quality technical support,
which the Company believes is critical to maintaining customer satisfaction. The
Company provides technical support by offering telephone support, e-mail
support, facsimile support and communications through its World Wide Web site,
http://www.epicor.com. Telephone support is available five days a week during
normal business hours on a nearly worldwide basis. The Company also believes
customer satisfaction can be maintained by ensuring that its VARs, Distributors
and Authorized Consultants are able to effectively provide front-line technical
support and assistance to end-users. The Company offers comprehensive training,
telephone consultation and product support for its VARs, Distributors and
Authorized Consultants. Training courses are held regularly in major cities
worldwide.
The Company offers its customers several software maintenance options, at
varying annual fees. The Company's software maintenance programs are the
customer's sole avenue for product updates and technical support. The annual
maintenance fee is a percentage of the then current list price of the software
purchased. Customers who subscribe for maintenance receive telephone and
technical support, timely information on product enhancements and features and
product updates and upgrades. Revenue from these software maintenance agreements
is recognized ratably over the maintenance period. The Company provides a
three-month warranty for the media on which its products are licensed and also
provides a performance warranty on certain products ranging from three months to
one year. The following table shows services revenues, which include consulting,
education, training, maintenance and support services (in millions):
Percentage of
Revenue Total Revenue
------- -------------
Year ended June 30, 1997 $27.4 45%
Year ended June 30, 1998 40.4 41%
Six months ended December 31, 1998 30.4 48%
Year ended December 31, 1999 157.8 61%
MARKETING, SALES AND DISTRIBUTION
The Company sells and markets its products and services worldwide, directly and
through a network of VARs, distributors and software consultants who generally
market the Company's products on a nonexclusive basis. The Company's products
are sold to and used by a broad customer base, including manufacturing,
distribution, hospitality, service organizations, computer/internet software,
healthcare, government bodies, educational institutions and other users. The
Company sells its Platinum for Windows product exclusively through VARs or
distributors. The Company sells its Platinum ERA product through a hybrid
channel that includes a direct sales force as well as a network of VARs. The
Company sells its Clientele product through an internal telesales organization,
a direct sales force and through a network of VARs. The Avante, Impresa and
Vantage products are presently sold by a direct sales force in the United States
and the Vista product is sold through a dedicated telesales
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organization. The domestic sales organization includes sales representatives,
pre-sale consultants, telemarketers and sales management personnel. The
Company's field sales organization is organized by product group, either general
services (covering Platinum ERA, Clientele and Platinum for Windows) or
manufacturing products (covering Avante, Impresa, Vantage and Vista).
The Company's network of VARs and Authorized Consultants are required to undergo
extensive training and certification procedures provided by the Company on the
use, installation and implementation of the Company's products as a condition of
being authorized by the Company to sell its products. The Company's VARs include
consulting groups and resellers, the majority of which provide computer
installations, systems integration and consulting services to organizations. The
Company's Authorized Consultants generally are not resellers of the Company's
products, but professional firms who offer implementation services and product
support to end-users. The Company believes that its Authorized Consultants are
product influencers and are a valuable part of the Company's marketing, sales
and distribution efforts.
To support the Company's network of VARs and Authorized Consultants, the Company
provides experienced personnel who are specifically tasked with their growth and
support. These individuals are responsible for educating and training the
distribution channel, disseminating information, implementing marketing programs
and developing regional markets.
In recognition of international opportunities for its software products, the
Company has committed resources to an international sales and marketing effort.
The Company has established subsidiaries in the United Kingdom, Ireland,
Germany, France, Sweden, the Netherlands, Australia, New Zealand, Canada, Hong
Kong, Singapore, and Argentina to further such sales and marketing efforts. The
Company also has sale offices in these countries. The Company sells its products
in Europe, including Russia, Latin and South America, Africa, Asia and the
Middle East through third-party distributors and dealers. For further
discussion, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Note 10 of Notes to Consolidated Financial
Statements."
The Company currently has sales offices located in the following metropolitan
areas:
o Atlanta o Boston o Chicago
o Dallas o Detroit o Louisville
o Irvine o San Jose o San Diego
o Minneapolis o New York o Portland
o San Francisco o St. Louis o Seattle
o Tampa o Washington, D.C. o Buenos Aires, Argentina
o Calgary and Toronto, Canada o Auckland, New Zealand o London, England
o Paris, France o Munich, Germany o Leidschendam, Netherlands
o Stockholm, Sweden o Sydney and Melbourne, o Taikoo Shing, Hong Kong
o Singapore Australia
Products are generally shipped as orders are received or within 30 days thereof
and, accordingly, the Company has historically operated with little or no
backlog. Because of the generally short cycle between order and shipment, the
Company does not believe that its backlog as of any particular date is
meaningful.
PRODUCT DEVELOPMENT AND QUALITY ASSURANCE
The Company plans to continue addressing the needs of mid-market users of
client/server enterprise software by continuing to develop high quality software
products that feature advanced technologies. See "Certain Considerations Forward
Looking Statements." The Company's technology strategy is to develop leading
business application software using its own technologies combined with leading
third-party, industry-standard technologies in database management systems,
application development tools, operating systems, user interfaces and networks.
The Company plans to use technologies from Microsoft Corporation whenever
possible and plans to build technologies based on Microsoft Corporation's
recommended technical architecture. In particular, the Company believes that it
has been an industry leader in designing and developing products for operation
on LANs/WANs and Microsoft's SQL Server database. The Company has also been a
pioneer in the use of GUIs with integrated business application software.
Currently, the Company pursues object-oriented methodologies that simplify the
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development, maintenance and customization of its products. Accordingly, the
Company's tools offer a high degree of customization for its products.
The following table shows software development expenses before capitalization
(in millions):
Software
Development Percentage of
Expenses Total Revenues
-------- --------------
Fiscal Year ended June 30, 1997 $11.9 20%
Fiscal Year ended June 30, 1998 13.0 13%
Six Months ended December 31, 1998 9.1 14%
Fiscal Year ended December 31, 1999 35.8 14%
The Company intends to continue to invest in product development. In particular,
the Company plans to continue to (i) develop enhancements, including additional
functions and features, for its Platinum ERA, Avante, Vantage, Vista, Clientele,
Impresa and Platinum for Windows product lines, (ii) develop additional
eBusiness and web-based applications supporting both business-to-business and
business-to-consumer solutions, (iii) develop integration to vertical market
trading exchanges, business communities or other eBusiness market places, (iv)
continue to develop common application components such as eCommerce, supply
chain management, advanced planning and scheduling, data warehousing and on-line
analytical processing that can be integrated with all of the Company's solutions
to extend their functionality and (V) develop and/or acquire new applications or
modules that build upon the Company's business application strategy. See
"Certain Considerations - Forward Looking Statements."
In the first quarter of 2000, the Company released its technical strategy
centered on the Microsoft DNA architecture to provide enhanced scalablility,
flexibility and interoperability of its e by Epicor suite of applications. The
Microsoft Windows DNA architecture consists of a multi-tiered, distributed
application model and a comprehensive set of infrastructure and application
services. This architecture provides tools, technologies and services to develop
highly adaptive applications that support multiple client deployments including
thin-client, browser-based and mobile clients. More importantly, this
architecture provides the infrastructure to take business to the Internet by
leveraging key Microsoft technologies such Microsoft Site Server Commerce
Edition (Commerce Server), Microsoft COM ("Component Object Model") and expanded
use of XML. Future versions of this architecture will support Microsoft BizTalk,
an XML framework for application integration, electronic commerce and business
interoperability. See "Certain Considerations - Forward Looking Statements."
The Company translates and localizes certain of its products in Dublin, Ireland
for sale in Europe. In addition, the Company has contracted with a third party
to develop the necessary changes to translate and localize certain of its
products for sale in Latin and South America.
The computer software industry is characterized by rapid technological advances
and changes in customer requirements. The Company's future success will depend
upon its ability to enhance its current products and develop and introduce new
products that keep pace with technological developments, respond to evolving
customer requirements and continue to achieve market acceptance. In particular,
the Company believes it must continue to respond quickly to users' needs for
broad functionality and multi-platform support and to advances in hardware and
operating systems, particularly in the areas of eBusiness and eCommerce. In the
past, the Company has occasionally experienced delays in the introduction of new
products and product enhancements. There can be no assurance that the Company
will not experience significant delays in the introduction of new products or
product enhancements in the future, which could have a material adverse effect
on the Company's results of operations.
The Company's future business is dependent on the execution of the strategy that
is in place to target the client/server and eBusiness ERP software needs of
mid-sized businesses. Any significant delay in shipping new modules or
enhancements could have a material adverse effect on the Company's results of
operations. In addition, there can be no assurance that new modules or product
enhancements developed by the Company will adequately achieve market acceptance.
COMPETITION
The client/server enterprise business applications software industry is
intensely competitive, rapidly changing and significantly affected by new
product offerings and other market activities. A number of companies offer
enterprise
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application suites similar to the Company's product offerings that are targeted
at the same markets. In addition, a number of companies offer a "best-of-breed,"
or point solution, similar or competitive to one product in the Company's
enterprise business application suite. Some of the Company's existing
competitors, as well as a number of new potential competitors, have larger
technical staffs, more established and larger marketing and sales organizations
and significantly greater financial resources than the Company. There can be no
assurance that competitors will not develop products that are superior to the
Company's products or that achieve greater market acceptance. The Company's
future success will depend significantly upon its ability to increase its share
of its target markets and to license additional products and product
enhancements to existing customers. There can be no assurance that the Company
will be able to compete successfully or that competition will not have a
material adverse effect on the Company's results of operations. In addition,
potential customers may increasingly demand that certain of the Company's ERP
systems incorporate certain RDBMS software offered by competing products, but
not currently supported by the Company products.
The Company believes that it competes in two distinct enterprise business
applications markets: emerging enterprises and mid-market enterprises. The
Company defines emerging enterprises as rapidly growing businesses between $10
and $100 million in annual revenues. Businesses in this market require solutions
that provide a more sophisticated level of functionality to effectively manage
their business than can be found in "off-the-shelf" applications. These
businesses require applications that are easy to implement, customize, manage
and use as well as being affordable. Emerging enterprises generally lack
dedicated information technology management resources and require solutions that
do not require a high level of ongoing maintenance and support for their
continued operation. Products in this market are principally sold through VARs
and solution-oriented computer retail stores with the purchasing decision often
influenced by professionals providing consulting services. The Company believes
that purchases in this market are primarily influenced by functionality,
performance, availability of a Windows-based solution, price and quality. The
Company believes it competes favorably with respect to all of these factors.
The Company competes primarily in the mid-market, which the Company defines as
growing enterprises with revenues between $10 million and $500 million. Although
the Company does not actively target larger, Fortune 1000 corporations with its
enterprise business applications, it encounters competitors from this market
segment who are increasingly targeting mid-sized enterprises. Businesses in this
market require solutions that provide a more sophisticated level of
functionality to effectively manage their business than can be found in
"off-the-shelf" applications. These businesses require applications that are
easy to implement, customize, manage and use as well as being affordable.
Mid-sized enterprises also often lack dedicated information technology
management resources and need solutions that do not require a high level of
ongoing maintenance and support for their continued operation. The Company
believes that purchases in this market are primarily influenced by
functionality, performance, availability of a Windows-based solution, price,
quality and customer service. The Company believes it competes favorably with
respect to all of these factors. Increasingly, customers in this market segment
are looking for Microsoft SQL Server based solutions and the Platinum ERA
product line is well positioned to address this requirement. The Company
believes it is one of only a few vendors in this market space that is
exclusively dedicated to providing mid-market companies with comprehensive,
integrated enterprise business applications. However, there are competitors from
both the high-end and low-end who are attracted to the business opportunity
represented by the mid-market and are beginning to offer complete or partial
enterprise business applications to this market. In order to compete in the
future, the Company must respond effectively to customer needs in the area of
eBusiness and eCommerce and incorporate those technologies and application
functionality that will meet the challenges posed by competitors' innovations.
To accomplish this objective, the Company will be required to continue to invest
in enhancing its current products and, when necessary, introduce new products to
remain competitive. There can be no assurance that the Company will be able to
continue to invest in such enhancements or new products, or introduce such
enhancements or new products in a timely fashion or at all.
The Company has a number of competitors that vary is size, target markets and
overall product scope. The Company's primary competition comes from independent
software vendors in three distinct groups, including (i) large, multinational
ERP vendors that are increasingly targeting mid-sized businesses as their
traditional market becomes saturated, including J.D. Edwards, Baan Co. NV,
Oracle Corporation, PeopleSoft, Inc. and SAP AG, (ii) mid-range ERP vendors,
including Lawson Corporation and Navision, and (iii) established "best-of-breed"
or point solution providers that compete with only one portion of the Company's
overall ERP suite, including Sage Software, Ltd., Great Plains Software, Inc.,
Scala, Inc., Systems Union, Ltd., Solomon Software, and Geac for financial
accounting; MAPICS, Inc, Fourth Shift Corporation, QAD, Inc., Symix Systems,
Inc. Lilly Software and
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Macola Software, Inc. for manufacturing and distribution; and Onyx Software
Corporation, Siebel Systems Inc., Pivotal Software, Inc. and Sales Logix
Corporation for sales force automation and customer service and support. While
these competitors offer dedicated applications, the Company believes that its
broader product offerings and level of product integration provide a significant
competitive advantage.
INTELLECTUAL PROPERTY
The Company regards its software as proprietary, in that title to and ownership
of the software generally exclusively resides with the Company, and the Company
attempts to protect it with 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.
Despite these precautions, there can be no assurance unauthorized third-parties
will not copy certain portions of the Company's products or reverse engineer or
obtain and use information the Company regards as proprietary. Like many
software firms, the Company presently does not rely on patent protection for its
software products. While the Company's competitive position may be affected by
its ability to protect its proprietary information, the Company believes that
trademark and copyright protections are less significant to the Company's
success than other factors such as the knowledge, ability and experience of the
Company's personnel, name recognition and ongoing product development and
support. There can be no assurance that the mechanisms used by the Company to
protect its software will be adequate or that the Company's competitors will not
independently develop software products that are substantially equivalent or
superior to the Company's software products.
The Company's software products are generally licensed to end-users on a "right
to use" basis pursuant to a perpetual, non-exclusive license that generally
restricts use of the software to the organization's internal business purposes
and the end user is generally not permitted to sublicense or transfer the
products. The Company licenses its Platinum for Windows, Clientele, Vista and
Platinum ERA (when sold through VARs and distributors) product lines pursuant to
"shrink wrap" licenses that are not signed by licensees and therefore may be
unenforceable under the laws of certain jurisdictions. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. Certain components of the
Company's products are licensed from third parties.
The source code for the Avante, Impresa and, in certain cases, Vantage products
historically has been licensed to customers to enable them to customize the
software to meet particular requirements. The standard customer license contains
a confidentiality clause protecting the products. In the event of termination of
the license agreement, the customer remains responsible for the confidentiality
obligation and for any accrued and unpaid license fees. However, there can be no
assurance that such customers will take adequate precautions to protect the
source code or other confidential information.
As the number of software products in the industry increases and the
functionality of these products further overlap, the Company believes that
software programs will increasingly become subject to infringement claims. There
can be no assurance that third-parties will not assert infringement claims
against the Company in the future with respect to current or future products or
that any such assertion may not require the Company to enter into royalty
arrangements or will result in costly litigation. The Company is not aware of
any material infringement actions or claims.
PRODUCTION
The principal materials and components used in the Company's software products
include computer media, including disks and CD-ROMs, and user manuals. For each
product, the Company prepares a master software disk or CD-ROM, user manuals,
which may be in printed form or distributed on a CD-ROM, and packaging.
Substantially all of the Company's disk and CD-ROM duplication is performed by
third-party vendors, using disks and blank CD-ROMs acquired from various
sources. Outside sources print the Company's packaging and related materials to
the Company's specifications. Portions of the completed packages are assembled
by third-party vendors. To date, the Company has not experienced any material
difficulties or delays in the manufacture and assembly of its products, or
material returns due to product defects.
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EMPLOYEES
As of December 31, 1999, prior to the reduction in force of 130 employees
associated with the 1999 restructuring, the Company had 1,623 full-time
employees, including 283 in product development, 237 in support services, 473 in
professional services, 284 in sales, 116 in marketing and 230 in administration.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations - Restructuring. The Company's employees are not represented by any
collective bargaining organization, and the Company has never experienced a work
stoppage.
CERTAIN CONSIDERATIONS
Forward Looking Statements. Certain statements in this Annual Report, including
statements regarding the anticipated dates of new product releases and
commercial shipments are forward looking statements within the meaning of
Section 27A of the Securities and Exchange Act of 1993, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended, that involve risks
and uncertainties. Any statements contained herein (including without limitation
statements to the effect that the Company or Management "estimates," "expects,"
"anticipates," "plans," "believes," "projects," "continues," "may," or "will" or
statements concerning "potential" or "opportunity" or variations thereof or
comparable terminology or the negative thereof,) that are not statements of
historical fact should be construed as forward looking statements. Actual
results could differ materially and adversely from those anticipated in such
forward looking statements as a result of certain factors including the factors
listed at pages 16 - 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 Quarterly Reports on Form 10-Q
to be filed by the Company in fiscal year 2000.
Liquidity. The Company's cash and cash equivalents decreased from $52.7 million
at December 31, 1998 to $30.4 million at December 31, 1999, principally due to
the net loss incurred during the twelve months ended December 31, 1999. 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 severance payouts and 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 cash flow during fiscal year 2000. See "Certain
Considerations - 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:
o The demand for the Company's products
o The size and timing of orders for the Company's products
o The number, timing and significance of new product announcements by the
Company and its competitors
o The Company's ability to introduce and market new and enhanced versions
of its products on a timely basis
o The level of product and price competition
o Changes in operating expenses of the Company
o Changes in average selling prices
In addition, the Company will most likely record a significant portion of its
revenues in the final month of any quarter with a concentration of such revenues
recorded in the final 10 business days of that month.
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Due to the above factors, among others, the Company's revenues will be difficult
to forecast. The Company, however, will base its expense levels, in significant
part, on its expectations of future revenue. As a result, the Company expects
its expense levels to be relatively fixed in the short run. The Company's
failure to meet revenue expectations could adversely affect operating results.
Further, an unanticipated decline in revenue for a particular quarter may
disproportionately affect the Company's net income because a relatively small
amount of the Company's expenses will vary with its revenues in the short run.
As a result, the Company believes that period-to-period comparisons of the
Company's results of operations are not and will not necessarily be meaningful,
and you should not rely upon them as an indication of future performance. Due to
the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. Such an event would likely have a material adverse effect upon the
price of the Company's Common Stock.
Integration of DataWorks. On December 31, 1998, the Company acquired DataWorks
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:
o Distracting management from the business of the Company
o Potential incompatibility of business cultures
o Perceived and potential adverse change in client service standards,
business focus, billing practices or service offerings available to
clients
o Potential inability to successfully coordinate the research and
development and sales and marketing efforts
o Costs and delays in implementing common systems and procedures,
including financial accounting systems
o Costs and inefficiencies in delivering services to the clients of the
Company
o Inability to retain and integrate key management, technical sales and
customer support personnel
o Potential conflicts in direct sales 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 the Company and
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:
o Deliver eBusiness application software to facilitate eBusiness,
including web enablement
o Enhance its existing products
o Develop new products that address the increasingly sophisticated needs
of its customers, particularly in the areas of eBusiness and eCommerce
o Develop products for additional platforms
Further, if the Company fails to respond to technological advances, emerging
industry standards and end-user requirements, or experiences any significant
delays in product development or introduction, the Company's competitive
position and revenues could be adversely affected. The Company's success will
depend on its ability to develop and successfully introduce new products and
services, including the eBusiness arena. The Company cannot assure you that it
will successfully develop and market new products on a timely basis, if at all.
In developing new
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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
responsibility. 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 and Impresa 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 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 licensing of technology agreements. The risks
commonly encountered in the acquisitions of businesses would accompany any
future acquisitions or investments by the Company. Such risks may include the
following:
o The difficulty of integrating previously distinct businesses into one
business unit
o The substantial management time devoted to such activities
o The potential disruption of the Company's ongoing business
o Undisclosed liabilities
o Failure to realize 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 includes
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
Dependence on Distribution Channels. The Company distributes its Platinum for
Windows product exclusively through third-party distributors and VARs, and
distributes its Platinum ERA product, including Clientele, through a direct
sales force as well as through VARs and distributors. The Company's distribution
channel includes
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distributors, VARs and authorized consultants, which consist primarily of
professional firms. The Company's agreements with its VARs and authorized
consultants do not require such VARs and consultants to offer exclusively or
recommend the Company's products, and either party can terminate such agreements
with or without cause. If the Company's VARs or authorized consultants cease
distributing or recommending the Company's products or emphasize competing
products, the Company's results of operations could be materially and adversely
affected. In addition, Platinum ERA, a client/server ERP application, requires
additional skill and training for successful implementation. Although the
Company is actively seeking additional VARs to sell Platinum ERA, delays in
training or recruiting VARs could adversely impact the Company's ability to
generate license revenue from its Platinum ERA line of products.
The Company sells certain products directly and through VARs. There can be no
assurance that the direct sales force will not lead to conflicts with the
Company's VAR 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:
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
Reliance on Third-Party Suppliers. The Company's products incorporate and use
software products developed by other entities. The Company cannot assure you
that such third parties will:
o Remain in business
o Support the Company's product line
o Maintain viable product lines
o Make their product lines available to the Company on commercially
acceptable terms
Any significant interruption in the supply of such third-party technology could
have a material adverse effect on the Company's business, results of operation
and financial condition.
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
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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 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 following table shows
international sales of the Company for the periods indicated (in millions):
Percentage of
Revenues Total Revenues
-------- --------------
Fiscal Year ended June 30, 1997 $17.4 29%
Fiscal Year ended June 30, 1998 27.5 28%
Six Months ended December 31, 1998 17.1 27%
Fiscal Year ended December 31, 1999 72.1 28%
The Company believes that any future growth of the Company will be dependent, in
part, upon its ability to increase revenues in international markets. The
Company intends to continue expansion of its international operations. The
expansion will require significant management attention and financial resources
and could adversely affect the
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Company's margins. To increase international sales in subsequent periods, the
Company must establish additional foreign operations, hire additional personnel
and recruit international resellers. There is no assurance that the Company will
maintain or expand its international sales. If the revenues that the Company
generates from foreign activities are inadequate to offset the expense of
maintaining foreign offices and activities, the Company's business, financial
condition and results of operations could be materially and adversely affected.
International sales are subject to inherent risks, including:
o Unexpected changes in regulatory requirements
o Tariffs and other barriers
o Unfavorable intellectual property laws
o Fluctuating exchange rates
o Difficulties in staffing and managing foreign sales and support
operations
o Longer accounts receivable payment cycles
o Difficulties in collecting payment
o Potentially adverse tax consequences, including repatriation of
earnings
o 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.
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 March 13, 2000, the Company had
41,455,036 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
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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 2. PROPERTIES
The Company leases approximately 175,000 square feet of office space in Irvine,
California located in six buildings. The majority of the leases expire in April
2004. The principal activities in Irvine, California are corporate headquarters,
sales, marketing, development and customer support. In addition, the Company
leases approximately 173,000 square feet of office space in San Diego,
California. The lease expires in August 2009. Approximately 63,000 of the San
Diego facility is currently sublet to two third parties. The Company also leases
approximately 47,000 square feet of office space in Minneapolis, Minnesota. The
lease expires in March 2002. The principal activities of San Diego and
Minneapolis are sales, development, consulting and customer support.
In addition to the locations listed above the Company leases other offices for
sales, service, and administration in various locations worldwide. The Company
plans to close non-strategic offices worldwide as well as consolidate and
downsize other offices as deemed necessary as part of the 1999 restructuring.
The closure and consolidation is expected to be substantially completed by the
end of fiscal year 2000. After the facilities closures, the Company believes its
facilities will be suitable for their respective uses and adequate for the
Company's needs.
ITEM 3. LEGAL PROCEEDINGS
On December 24, 1998, Alyn Corporation 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 has accrued $1,800,000 for the liability arising
out of the settlement. The Company will pay one-half of the settlement amount on
March 24, 2000 and the other half on or before April 3, 2000. The Company is in
discussions with its insurance carrier regarding coverage for this matter, but
it has not been determined at the present time the amount of insurance coverage.
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 a 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 proceeding in the normal
course of business. The Company is currently defending these proceedings and
claims and anticipates that it will be able to resolve these matters in a manner
that will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET VALUE OF THE REGISTRANT'S COMMON STOCK
The Company's Common Stock was traded on the over-the-counter market (The Nasdaq
National Market System) under the symbol PSQL until May 3, 1999 and under the
symbol EPIC subsequent to that date. The following table sets forth the range of
high and low closing sale prices for the Company's Common Stock for the periods
indicated.
Fiscal Year ended June 30, 1997: High Low
- -------------------------------- ---- ---
1st Quarter $11.13 $ 6.25
2nd Quarter 13.00 10.63
3rd Quarter 13.38 8.69
4th Quarter 11.00 7.00
Fiscal Year ended June 30, 1998:
1st Quarter 12.94 10.38
2nd Quarter 11.75 7.75
3rd Quarter 24.00 10.25
4th Quarter 24.38 17.50
Six Months ended December 31, 1998:
Quarter ended September 30, 1998 27.00 8.00
Quarter ended December 31, 1998 12.81 5.75
Fiscal Year ended December 31, 1999:
1st Quarter 13.69 5.88
2nd Quarter 8.13 6.06
3rd Quarter 7.28 3.56
4th Quarter 6.78 4.09
There were approximately 1,500 security holders of record as of March 13, 2000.
The Company has not paid dividends to date and intends to retain any earnings
for use in the business for the foreseeable future.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements of the Company and related
notes included elsewhere in this Annual Report on Form 10-K. All amounts were
derived from the Company's audited financial statements.
AS OF OR AS OF OR
FOR THE FOR THE SIX
FISCAL MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, AS OF OR FOR THE FISCAL YEAR ENDED JUNE 30,
----------- ------------ ----------------------------------------------
1999(1) 1998(1) 1998 1997 1996 1995
----------- ------------ ---------- ---------- ----------- -------
Net revenues $ 258,176 $ 63,716 $98,488 $ 60,751 $ 45,670 $ 58,867
Income (loss) from operations(2) $ (51,094) $ (2,297) $11,481 $ (5,281) $(33,075) $ (5,828)
Net income (loss) per share -
diluted $ (1.25) $ (0.07) $ 0.45 $ (0.20) $ (1.83) $ (0.35)
Diluted shares 40,605 28,373 29,716 21,758 18,128 16,196
Total assets $ 170,177 $ 212,277 $67,988 $ 43,156 $ 41,640 $ 66,691
Long-term obligations, less
current portion $ 400 $ 1,116 $ 35 $ 277 $ 288 $ 16,035
Total stockholders' equity $ 71,806 $ 117,995 $34,910 $ 15,587 $ 16,199 $ 30,212
- ---------------
(1) Effective December 31, 1998, the Company acquired DataWorks Corporation. The
Company's Consolidated Balance Sheet data includes DataWorks' consolidated
balance sheet as of December 31, 1998. The Company's Consolidated Statements
of Operations do not include the revenues and expenses of the acquired
business until the fiscal year ended December 31, 1999. See Note 3 of Notes
to Consolidated Financial Statements.
(2) For the year ended December 31, 1999, loss from operations included
$9,975,000 in special charges related to the 1999 restructuring, $7,713,000
to write-down receivables, capitalized software costs and prepaid software
licenses to their fair value, and a $1,800,000 litigation charge. For the
years ended June 30, 1997 and June 30, 1996, loss from operations included
$1,600,000 and $5,568,000 of charges for restructuring, respectively. See
Notes 3 and 12 of Notes to Consolidated Financial Statements.
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ITEM 7. 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.
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. In connection with this reorganization,
the Company incurred various charges totaling $9,975,000 during the year ended
December 31, 1999. These charges are comprised of the following:
o $3,325,000 - To write-down impaired intangible assets from businesses
acquired prior to 1999 to their estimated fair values based on
projected future cash flows as a result of the shift in development and
marketing focus of certain product lines.
o $2,072,000 - To terminate 130 employees, or 11% of the workforce.
Headcount reductions were made in all functional areas of the Company.
o $4,756,000 - To close non-strategic offices or consolidate and downsize
other office locations. Although the closure and consolidation efforts
are expected to be substantially complete by the end of fiscal 2000,
lease payments on vacated buildings will continue to be made until the
respective leases expire.
o $(178,000) - To reverse a portion of the December 31, 1998 DataWorks
merger-related accrual as a result of lower than anticipated severance
and facilities closing costs in the Sweden and Netherlands offices.
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 expects the reorganization will provide approximately $5.0 million per
quarter in cost savings in fiscal 2000. See "Business - Certain Considerations -
Forward Looking Statements."
The Company's accounting policies with respect to its restructuring are in
accordance with the guidance provided in the consensus of the Emerging Issues
Task Force (EITF) in connection with EITF Issues No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit and Activity
("EITF 94-3") and No. 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination, as well as SFAS No 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of
("SFAS 121"). EITF 94-3 and EITF 95-3 generally require with respect to
recognition of severance expenses, management approval of the restructuring
plan, communication of benefit arrangements to employees, and the determination
of the employees to be terminated. SFAS No. 121 generally requires that assets
to be disposed of be reported at the lower of carrying amount or fair value less
cost to sell.
In addition to the $9,975,000 special charge, the Company's reorganization
resulted in or contributed to the recording of additional reserves and
write-downs of certain other assets totaling $7.7 million.
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The table below summarizes where these charges have been recognized on the
statement of operations for the year ended December 31, 1999 (in thousands):
GENERAL AND
ADMINISTRATIVE
COST OF SALES EXPENSE TOTAL
------------- -------------- -----
Write-down of prepaid software licenses,
capitalized software development costs, and
other assets due to change in product focus
and reorganization $2,713 $5,000 $7,713
The following table summarizes the 1999 activity in the Company's reserves
associated with all acquisitions and restructurings (in thousands):
Balance at Write-Down Additional Balance at
December 31, 1999 Special of Intangible Paid in Cash December 31,
1998 Charges Assets Capital Payments 1999
------------ ------------ ------------- ---------- -------- ------------
Asset impairment $ -- $ 3,325 $(3,325) $ -- $ -- $ --
Separation costs for terminated
employees and contractors 2,072 (67) 2,005
Facilities closing and downsizing 4,756 (44) 4,712
Remaining restructuring accrual
from prior periods - 1998, 1997
and 1996 7,957 (6,772) 1,185
------ ------- ------- ------- ------- ------
Accrued restructuring costs $7,957 $10,153 $(3,325) $ -- $(6,883) $7,902
====== ======= ======= ======= ======= ======
Accrued severance and merger costs $7,133 $ (178) $ -- $(2,385) $ (910) $3,660
====== ======= ======= ======= ======= ======
1999 special charges $ 9,975
=======
The Company expects the 1999 separation costs for terminated employees to be
paid out during the first quarter of fiscal 2000 and a substantial amount of the
1999 facilities restructuring costs to be paid out by the end of fiscal 2000.
The Company believes that these obligations will be funded from existing cash
reserves, working capital and operations. The remaining restructuring accrual
from prior years - 1998, 1997 and 1996 is primarily due to lease commitments
which the Company will continue to make payments until the respective leases
expire.
1998 Acquisition of DataWorks
On December 31, 1998, the Company acquired DataWorks Corporation, a
publicly-held developer of manufacturing ERP solutions. As consideration for the
acquisition, the Company issued 11,739,459 shares of common stock to former
stockholders of DataWorks. The acquisition was accounted for as a purchase and,
accordingly, the operating results and financial position of DataWorks are
included in the Company's consolidated financial statements beginning on the
effective date of the acquisition. See Note 3 of Notes to the Consolidated
Financial Statements.
1998 and 1997 Restructurings
In December 1998, the Company underwent a restructuring as a result of the
DataWorks merger. This resulted in a restructuring charge of $6.0 million, which
was recorded in the three months ended December 31, 1998. Such amount included
approximately $5.5 million for severance and other extended benefit costs
related to a reduction in force of approximately 25 people, and approximately
$0.5 million in lease terminations and buyout costs related to the closure of
duplicate facilities.
In June 1997, the Company underwent a restructuring as a result of the
acquisition of Clientele Software, Inc ("Clientele") which resulted in a
restructuring charge of $1.6 million, which was recorded in the quarter ended
June 30, 1997. Such amount included approximately $1.1 million for excess
facility costs, as well as approximately $0.5 million for severance and other
extended benefit costs.
At December 31, 1999, $1,185,000 of restructuring accruals from prior periods
remain and relate primarily to lease commitments on which the Company will
continue to make payments until the respective leases expire.
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1997 Acquisitions
On June 30, 1997, the Company acquired Clientele, a privately held provider of
help desk automation software based in Portland, Oregon. As consideration for
the acquisition, the Company issued 887,636 shares of common stock in exchange
for all of the outstanding shares of common stock of Clientele. In addition, the
Company assumed all of the outstanding employee stock options of Clientele,
which translated into stock options to acquire 212,356 shares of common stock of
the Company. The transaction was accounted for as a pooling of interests, and
accordingly, the accompanying consolidated financial statements have been
restated to incorporate the financial position, results of operations and cash
flows of Clientele for all periods presented.
On November 14, 1997, the Company acquired FocusSoft, Inc. ("FocusSoft"), a
privately held provider of enterprise resource planning and distribution
software based in Louisville, Kentucky. As consideration for the acquisition,
the Company issued 2,474,794 shares of common stock in exchange for all of the
outstanding shares of common stock of FocusSoft. In addition, the Company
assumed all of the employee stock options of FocusSoft, which translated into
stock options to acquire 225,206 shares of common stock of the Company. The
transaction was accounted for as a pooling of interests, and accordingly, the
accompanying consolidated financial statements have been restated to incorporate
the financial position, results of operations and cash flows of FocusSoft for
all periods presented.
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RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
1998
The following table summarizes certain aspects of Epicor's results of operations
for the year ended December 31, 1999 compared to the year ended December 31,
1998 (in millions):
DECEMBER 31,
---------------------
1999 1998 $ CHANGE % CHANGE
------ ------ -------- --------
(unaudited)
Revenues:
License fees $ 94.3 $ 68.9 $ 25.4 36.9%
Services 157.8 52.9 104.9 198.3%
Other 6.1 0.6 5.5 916.7%
------ ------ ------ -----
Total revenues 258.2 122.4 135.8 111.1%
Percentage of total revenues:
License fees 36.5% 56.3%
Services 61.1% 43.3%
Other 2.4% 0.4%
------ ------
Total revenues 100.0% 100.0%
Gross profit 135.6 85.0 50.6 59.5%
Percentage of total revenues 52.5% 69.5%
Sales and marketing 89.6 46.2 43.4 93.9%
Percentage of total revenues 34.7% 37.8%
Software development 29.7 11.9 17.8 149.6%
Percentage of total revenues 11.5% 9.7%
General and administrative 55.6 7.6 48.0 631.6%
Percentage of total revenues 21.5% 6.2%
Litigation charge 1.8 0.0 1.8 NA
Percentage of total revenues 0.7%
Special charges 10.0 6.0 4.0 66.7%
Percentage of total revenues 3.9% 4.9%
Provision for income taxes 0.8 0.2 0.6 300.0%
Percentage of total revenues 0.3% 0.2%
Revenues
The growth in license fee revenue for 1999 compared to 1998 was attributable to
the acquisition of the DataWorks suite of software products, which consisted
primarily of the Avante, Vantage, and Vista products. License fee revenue from
DataWorks' products approximated $34.1 million for the twelve months ended
December 31, 1999. An increase in license fee revenue from the Company's
Clientele product also contributed to the growth. Although license fee revenue
increased in absolute dollars, as a percentage of total revenues, license fee
revenue decreased. The following factors impacted this change in revenue mix:
o The acquisition of DataWorks, which historically reported lower license
fees as a percentage of total revenues than the Company's previous revenue
mix
o Decreased Platinum ERA license fees attributable to increased competition
and uncertainty in the marketplace over the integration of applications
following the DataWorks acquisition as well as sales force attrition
o Continued weak demand for enterprise resource planning software
particularly attributable to uncertainty in the software market related to
the Year 2000 problem
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29
Services revenue consists of fees from software maintenance, consulting, custom
programming and education services. The increase in services revenue both in
absolute dollars and as a percentage of sales, for 1999 as compared with 1998,
was primarily due to the DataWorks acquisition. Services revenue from DataWorks'
customer base approximated $89.0 million for 1999. The remaining increase was
generated primarily from the Company's Platinum ERA customer base and
attributable to an overall increase in the installed base of end users and an
increase in the number of revenue-generating professional service personnel.
Other revenue consists primarily of third-party hardware sales. The increase in
other revenue was attributable to the DataWorks acquisition which contributed
$5.2 million to the increase for the year ended December 31, 1999.
International revenues were $72.1 million and $32.2 million in the years ended
December 31, 1999 and 1998, representing 28% and 26% of total revenue,
respectively. The increase was primarily attributable to the DataWorks
acquisition as DataWorks had a larger European sales force and marketing
presence than the Company prior to the acquisition. With sales offices located
in Europe, Australasia, and South America, the Company expects international
revenues to remain a significant portion of total revenues. See "Business -
Certain Considerations -Forward Looking Statements" and "Business - Certain
Considerations - Risks Associated with International Sales."
Gross Profit
The absolute dollar increase in gross profit was attributable to the DataWorks
acquisition. The reduction in gross profit percentage for 1999 as compared to
1998 was attributable to following:
o A higher proportion of overall revenues from services which bear a
lower gross margin than license fees
o A charge totaling $1.8 million to write-down capitalized software costs
and prepaid licenses
o Customer concessions granted for product-related issues totaling $1.0
million
o A higher cost structure underlying services revenue generated from the
Avante customer base
o Non-billable one-time activities including Year 2000 testing and
quality assurance testing of future product releases
Operating Expenses
The operating expense increase in absolute dollars was primarily a result of the
DataWorks acquisition. In connection with the acquisition, the Company broadened
its qualified pool of general and administrative costs in order to report
results of operations more consistent with the Company's actual operating
infrastructure. Although this had little impact on total operating expenses as a
percentage of total revenue, it did impact the relative percentage of each
operating expense component to total operating expenses.
Sales and Marketing - Sales and marketing ("S&M") expenses as a percentage of
revenue decreased due to the refinement in cost alignments as discussed above.
In addition to the acquisition of DataWorks, the following factors contributed
to the increase in S&M expenses:
o Higher compensation expense as a result of a modification in the sales
commission plan designed to retain the direct sales force
o Increased marketing expenses associated with the name change from
Platinum Software Corporation to Epicor Software Corporation
o Increased marketing expenses associated with improvements to the
Company's customer prospect generation process
Software development - Epicor continues to invest in the future by funding
research and development projects particularly in the area of eBusiness
applications. Research and development costs are expensed as incurred. However,
certain costs are capitalized pursuant to Statement of Financial Accounting
Standards No. 86, The Cost of Computer Software to be Sold, Leased, or otherwise
Marketed. During 1999, costs were capitalized related to the localization and
translation into different languages of the Platinum ERA product and certain
applications of the
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30
Platinum ERA 7.0a release. During 1998, costs were capitalized for the creation
of translations into different languages and localizations for the Platinum SQL
product, the serial lot tracking feature for the Platinum for Windows product,
Year 2000 enhancements for the Platinum for DOS product and certain applications
of the Platinum ERA 7.0a release. Amortization of these costs is included in
cost of revenues and begins when the product is released for general
availability. Amortization of capitalized software development costs commences
when the products are available for general release to customers over the
expected useful life of the respective products, which is generally three to
five years.
Gross software development expenditures were $35.8 million and $15.8 million or
14% and 13% of total revenues for 1999 and 1998, respectively, before
capitalization of software costs of $6.0 million and $3.9 million. In addition
to the acquisition of DataWorks, the following factors contributed to the
increase in software development expenses:
o Year 2000 remediation costs of $2.0 million
o New product development including web-enablement and integration of
existing back and front office products
o Outside consulting costs related to enhancing software development
methodologies and procedures
General and administrative - General and administrative ("G&A") expenses
increased in both absolute dollars and as a percentage of revenue due to the
following:
o The acquisition of DataWorks, which included a higher G&A cost
infrastructure
o The recent refinement in cost alignments as discussed above
o An increased provision for doubtful accounts as a result of continued
difficulty in collecting receivables assumed in the DataWorks merger,
the change in product direction and certain product quality and
customer service issues
Litigation charge - On December 24, 1998, Alyn Corporation 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 $1.8 million to settle the lawsuit. The Company has accrued $1.8 million
for the liability arising out of the settlement. The Company will pay one-half
of the settlement amount on March 24, 2000 and the other half on or before April
3, 2000. The Company is in discussions with its insurance carrier regarding
coverage for this matter, but it has not been determined at the present time the
amount of insurance coverage.
Provision for Income Taxes
The Company recorded a provision of $0.8 million and $0.2 million during 1999
and 1998, respectively. The effective tax rate during these periods was 1.5
percent and 0 percent, respectively. During 1999, the effective tax rate was
lower than the statutory federal income tax rate of 34 percent, primarily due to
the inability to record benefits from current net operating losses. As of
December 31, 1999, the Company had provided a valuation allowance of
approximately $71.1 million because realization of the Company's net deferred
tax asset is not more likely than not due to the historical losses incurred by
the Company prior to 1999, and the uncertainty as to profits in the future. Any
realization of the Company's net deferred tax asset will reduce the Company's
effective tax rate in future periods.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1998 TO THE SIX MONTHS ENDED
DECEMBER 31, 1997
Revenues
Revenues were approximately $39,915,000 and $63,716,000 in the six months ended
December 31, 1997 and 1998, respectively, representing an increase of
approximately 60 percent in the six months ended December 31, 1998.
License fee revenues were approximately $21,747,000 and $33,047,000 for the six
months ended December 31, 1997 and 1998, respectively, representing an increase
of 52 percent in the six months ended December 31, 1998. License fee revenues
for the Company's Platinum ERA product, formerly Platinum SQL (including
Clientele) were approximately $18,076,000 and $28,720,000 for the six months
ended December 31, 1997 and 1998, respectively,
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31
representing an increase of 59 percent in the six months ended December 31,
1998. The increase in revenues was primarily attributable to an overall increase
in personnel in the direct sales force for the Platinum ERA product; the
Company's broader product offering following the FocusSoft acquisition; the
release of the Clientele 3.0 product in February 1998, which included sales
force functionality; the release of FocusSoft's version 5.0 product (now named
Platinum ERA Advanced Distribution and Manufacturing) with enhanced distribution
and manufacturing functionality; additional lead generation, telesales and
marketing efforts and an increased effort to sell Platinum ERA internationally.
License fee revenues for the Company's Platinum for Windows and Platinum for DOS
products were approximately $3,671,000 and $4,327,000 for the six months ended
December 31, 1997 and 1998, respectively, representing an increase of 18 percent
in the six months ended December 31, 1998. The increase in revenues was
primarily due to increased domestic demand created by the commercial
availability of a complete suite of the Platinum for Windows modules.
International license fee revenues increased from $5,924,000 in the six months
ended December 31, 1997 to $10,530,000 in the six months ended December 31,
1998. The increase was due to an increased effort to sell Platinum ERA
internationally.
Services revenues, which include consulting, education, training, and
maintenance and support services, increased 69 percent from $17,973,000 in the
six months ended December 31, 1997 to $30,428,000 in the six months ended
December 31, 1998. The increase was primarily attributable to the increase in
installations. Also, the increase was attributable to an overall rise in the
installed base of end-users of Platinum ERA and the increased effort to renew
customers on maintenance contracts.
The number of days sales outstanding was 76 days at June 30, 1998 as compared to
164 days at December 31, 1998. The increase in days sales outstanding was
primarily attributable to the effect of purchase accounting treatment of the
DataWorks Merger which provides for the inclusion of the accounts receivable of
DataWorks, but not the revenue for DataWorks in the Company's financial
statements. Excluding the receivables acquired from DataWorks, the number of
days sales outstanding was 89 days at December 31, 1998. This increase was
primarily due to giving longer payment terms on receivables due to competitive
pressures.
Gross Profit
Gross profit increased 62 percent from $26,668,000 in the six months ended
December 31, 1997 to $43,177,000 in the six months ended December 31, 1998 and
increased as a percentage of revenues from 67 percent to 68 percent,
respectively. The increase in gross profit was due to higher license revenues
which have higher margins than services revenues.
Operating Expenses
Total operating expenses increased from $24,480,000 for the six months ended
December 31, 1997 to $33,140,000 for the six months ended December 31, 1998,
excluding the charge for the 1998 restructuring and the charge for in-process
research and development costs associated with the DataWorks Merger. Total
operating expenses as a percentage of revenues were 62 percent and 53 percent
for the six months ended December 31, 1997 and December 31, 1998, respectively,
excluding the charge for the 1998 restructuring and the charge for in-process
research and development costs associated with the DataWorks merger. Included in
operating expenses for the six months ended December 31, 1997 were approximately
$800,000 in charges for the FocusSoft acquisition. The increase in dollar amount
was primarily attributable to an overall increase in direct sales personnel as
well as additional commissions for the sales personnel as their quota was
exceeded because additional commissions were paid as if the six months ended
December 31, 1998 was the last six months of the commission plan year.
Sales and marketing costs were approximately $14,999,000 and $23,030,000 in the
six months ended December 31, 1997 and 1998, respectively, or approximately 38
percent and 36 percent of total revenues. The increase in the dollar amount of
sales and marketing expenses was primarily due to the increase in the direct
sales force for the Platinum ERA product.
Software development costs were approximately $6,326,000 and $9,125,000 in the
six months ended December 31, 1997 and 1998, respectively, or approximately 16
percent and 14 percent of total revenues, before capitalization of software
costs of approximately $251,000 and $2,912,000. Upon the release for general
availability of the Company's software products, the Company amortizes
capitalized software development costs over a 5-year period.
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32
Such amortization is included in cost of revenues. The percentage of capitalized
software development costs to total software development costs increased from 4
percent in the six months ended December 31, 1997 to 32 percent in the six
months ended December 31, 1998. During the six months ended December 31, 1997,
costs were capitalized for the creation of translation into different languages
for the Platinum SQL and Platinum for Windows products and for the Job Cost
module for Platinum for Windows and Job Shop and Engineer to Order for the
Platinum SQL Advanced Distribution and Advanced Manufacturing applications.
During the six months ended December 31, 1998, costs were capitalized for the
creation of translations into different languages and localizations for the
Platinum SQL product, the serial lot tracking feature for the Platinum for
Windows product, Year 2000 enhancements for the Platinum for DOS product and
certain applications of the Platinum ERA 7.0 release.
General and administrative expenses were approximately $3,406,000 and $3,897,000
in the six months ended December 31, 1997 and 1998, respectively, or
approximately 9 percent and 6 percent of total revenues. The increase in dollar
amount was primarily attributable to management bonuses and employee profit
sharing accrued during the six months ended December 31, 1998 due to the
Company's improved operating results as compared to no bonuses or profit sharing
accrued during the six months ended December 31, 1997 due to historical
operating losses.
Other Income
Other income was approximately $1,139,000 and $421,000 in the six months ended
December 31, 1997 and 1998, respectively. Other income for the six months ended
December 31, 1998 primarily represented interest earned on the Company's cash
and cash equivalents and short-term investments net of foreign currency losses
realized. Other income for the six months ended December 31, 1997 primarily
represented interest earned on the Company's cash and cash equivalents and
short-term investments as well as an increase of $298,000 in the fair value of
an investment.
Provision for Income Taxes
The Company recorded no provision for income taxes in the six months ended
December 31, 1997 and a provision of $180,000 during the six months ended
December 31, 1998. The effective tax rate during these periods was 0 percent for
both periods. During 1998, the effective tax rate was lower than the statutory
federal income tax rate of 35 percent, primarily due to the inability to record
benefits from current net operating losses. During 1997, the Company's tax
expense was offset by the reduction of valuation allowances recorded in prior
years as a result of the Company's profitability in the current year. As of
December 31, 1998, the Company had provided a valuation allowance of
approximately $51,334,000 because realization of the Company's net deferred tax
asset is not more likely than not due to the historical losses incurred by the
Company prior to fiscal 1998, and the uncertainty as to profits in the future.
Any realization of the Company's net deferred tax asset will reduce the
Company's effective tax rate in future periods.
COMPARISON OF THE YEAR ENDED JUNE 30, 1997 TO THE YEAR ENDED JUNE 30, 1998
Revenues
Revenues were approximately $60,751,000 and $98,488,000 in fiscal years 1997 and
1998, respectively, representing an increase of approximately 62 percent in
fiscal 1998.
License fee revenues were approximately $32,123,000 and $57,577,000 for the
years ended June 30, 1997 and 1998, respectively, representing an increase of 79
percent in fiscal 1998. License fee revenues for the Company's Platinum SQL
product (including Clientele) were approximately $24,687,000 and $48,825,000 for
the years ended June 30, 1997 and 1998, respectively, representing an increase
of 98 percent in fiscal 1998. The increase in revenues was primarily
attributable to an overall increase in personnel in the direct sales force for
the Platinum SQL product; the Company's broader product offering following the
FocusSoft acquisition; the release of the Clientele 3.0 product in February
1998, which included sales force functionality; the release of FocusSoft's
version 5.0 product (now named Platinum SQL Advanced Distribution and
Manufacturing) with enhanced distribution and manufacturing functionality;
additional lead generation, telesales and marketing efforts and an increased
effort to sell Platinum SQL internationally. License fee revenues for the
Company's Platinum for Windows and Platinum for DOS products were approximately
$7,436,000 and $8,752,000 for the years ended June 30, 1997 and 1998,
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33
respectively, representing an increase of 18 percent in fiscal 1998. The
increase in revenues was primarily due to increased domestic demand created by
the commercial availability of a complete suite of the Platinum for Windows
modules. International license fee revenues increased from $8,969,000 in fiscal
1997 to $18,713,000 in fiscal 1998. The increase was due to an increased effort
to sell Platinum SQL internationally.
Services revenues, which include consulting, education, training, and
maintenance and support services, increased 47 percent from $27,420,000 in
fiscal year 1997 to $40,406,000 in fiscal year 1998. The increase was primarily
attributable to the increase in installations. Also, the increase was
attributable to an overall rise in the installed base of end-users of Platinum
SQL and the increased effort to renew customers on maintenance contracts.
The number of days sales outstanding was 62 days at June 30, 1997 as compared to
76 at June 30, 1998. The increase in days sales outstanding was primarily
attributable to increased international revenues, which generally have longer
payment terms than domestic revenues.
Gross Profit
Gross profit increased 77 percent from $38,771,000 in fiscal year 1997 to
$68,527,000 in fiscal year 1998 and increased as a percentage of revenues from
64 percent to 70 percent, respectively. The increases in gross profit and the
gross profit percentage were due to higher license revenues as a percentage of
total revenues, which have higher margins than services revenues.
Operating Expenses
Total operating expenses increased from $42,452,000 for fiscal year 1997 to
$57,046,000 for fiscal year 1998, excluding the one time charge for the fiscal
1997 restructuring. Total operating expenses as a percentage of revenues were 70
percent and 58 percent for the years ended June 30, 1997 and 1998, respectively,
excluding the one time charge for the fiscal 1997 restructuring. Included in
operating expenses for the fiscal year ended June 30, 1998 were approximately
$800,000 in one time charges for the FocusSoft acquisition. The increase in
dollar amount was primarily attributable to an overall increase in direct sales
personnel as well as additional commissions for the sales personnel as their
quota was exceeded.
Sales and marketing costs were approximately $26,024,000 and $38,177,000 in
fiscal years 1997 and 1998, respectively, or approximately 43 percent and 39
percent of total revenues. The increase in the dollar amount of sales and
marketing expenses was primarily due to the increase in the direct sales force
for the Platinum SQL product.
Software development costs were approximately $11,855,000 and $12,971,000 in
fiscal years 1997 and 1998, respectively, or approximately 20 percent and 13
percent of total revenues, before capitalization of software costs of
approximately $1,457,000 and $1,247,000. Upon the release for general
availability of the Company's software products, the Company amortizes
capitalized software development costs over a 5-year period. Such amortization
is included in cost of revenues. The percentage of capitalized software
development costs to total software development costs decreased from 12 percent
in fiscal year 1997 to 10 percent in fiscal year 1998. During fiscal year 1997,
costs were capitalized for Platinum SQL multi-currency functionality, as well as
certain Platinum for Windows development costs for the Inventory and Order Entry
modules and development of Platinum SQL Customization Workbench. During fiscal
year 1998, costs were capitalized for the creation of translations into
different languages and localizations for the Platinum SQL product, the Job Cost
module for the Platinum for Windows product, Year 2000 enhancements for the
Platinum for DOS product, Job Shop and Engineer to Order for the Platinum SQL
Advanced Distribution and Manufacturing applications, Clientele 3.0 sales force
automation functionality and certain applications of the Platinum SQL 4.2
release.
General and administrative expenses were approximately $6,030,000 and $7,145,000
in fiscal years 1997 and 1998, respectively, or approximately 10 percent and 7
percent of total revenues. The increase was primarily attributable to management
bonuses and employee profit sharing earned in fiscal 1998 due to the Company's
improved operating results.
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34
Other Income
Other income was approximately $873,000 and $1,866,000 in fiscal years 1997 and
1998, respectively. Other income primarily represented interest earned on the
Company's cash and cash equivalents and short-term investments as well as
foreign currency gains realized in fiscal 1998.
Provision for Income Taxes
The Company recorded no provision for income taxes in fiscal years 1997 and
1998. The effective tax rate during these periods was 0 percent for both years.
During 1997, the effective tax rate was lower than the statutory federal income
tax rate of 35 percent, primarily due to the inability to record benefits from
current net operating losses. During 1998, the Company's tax expense was offset
by the reduction of valuation allowances recorded in prior years as a result of
the Company's profitability in the current year. As of June 30, 1998, the
Company had provided a valuation allowance of approximately $46,495,000 because
realization of the Company's net deferred tax asset is not more likely than not
due to the historical losses incurred by the Company prior to fiscal 1998, and
the uncertainty as to profits in the future.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes Epicor's liquidity position and cash flows as of
and for the year ended December 31, 1999 (in millions):
AS OF AND FOR
THE YEAR ENDED
DECEMBER 31, 1999
------------------
Cash and cash equivalents $18.2
Short-term investments 12.2
Working Capital 16.7
Net cash used in operating activities (9.7)
Net cash provided by investing activities 4.1
Net cash provided by financing activities 2.4
As of December 31 1999, the Company's principal sources of liquidity included
cash and cash equivalents and short-term investments of $30.4 million. The
Company used $9.7 million in cash for operating activities during the year ended
December 31, 1999 primarily to fund its net loss. During the year ended December
31, 1999, the Company paid $6.8 million for severance costs, lease terminations
and other costs related to the 1998, 1997 and 1996 restructurings, and paid $1.0
million for costs related to the 1998 DataWorks merger. At December 31, 1999,
the Company has $7.9 million in cash obligations related to severance payments,
lease terminations and other costs related to the restructuring plans and $3.7
million related to 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 year ended December 31,
1999 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 fiscal 1999 included proceeds from the exercise of
common stock options by employees and issuance of stock under the employee stock
purchase program.
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.
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35
The Company experienced negative cash flow from operations in the year ended
December 31, 1999 and expects this to continue through at least the first
quarter of 2000. See "Business - Certain Considerations - 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 12 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
Overview. The Year 2000 Problem generally involves whether a computer system,
software product or business system, when working alone or in conjunction with
other software or hardware systems, accepts input of, stores, manipulates and
outputs dates in the Year 2000 or thereafter without error or interruption (the
"Year 2000 Problem"). The Year 2000 Problem potentially impacts the Company in
the following principal areas: (i) The Company's software products, including
products manufactured by third parties that are resold by the Company; (ii) the
Company's internal technology systems; (iii) the Company's non-internal
technology systems which contain embedded computer devices; and (iv) the
business systems of the Company's distributors, resellers and customers.
In prior periods, the Company discussed the nature and progress of its plans to
become Year 2000 ready. 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. The Company expensed
approximately $2.0 million during 1999 in connection with Year 2000 remediation
costs, including costs of third party consultants and employee compensation
related to year-end staffing requirements. The Company will continue to monitor
the performance of its products, its mission critical computer applications and
those of its suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly. Despite the
Company's prior testing and remediation efforts, we cannot assure you 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.
ITEM 7A. 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.
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 28% of the Company's total revenues for the
twelve months ended December 31, 1999 and approximately 24% 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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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
----
Financial Statements:
Report of Independent Auditors.................................................................... 37
Consolidated Balance Sheets as of December 31, 1999, December 31, 1998 and June 30, 1998.......... 38
Consolidated Statements of Operations for the year ended December 31, 1999, the six
months ended December 31, 1998 and the years ended June 30, 1998 and 1997......................... 39
Consolidated Statements of Stockholders' Equity for the year ended December 31, 1999,
the six months ended December 31, 1998 and the years ended June 30, 1998 and 1997.................. 40
Consolidated Statements of Cash Flows for the year ended December 31, 1999, the six
months ended December 31, 1998, and the years ended June 30, 1998 and 1997........................ 41
Notes to Consolidated Financial Statements........................................................ 42
Financial Statement Schedules:
Report of Independent Auditors.................................................................... 62
Schedule II - Valuation and Qualifying Accounts................................................... 63
All other schedules are omitted because they are not required or the
required information is included in the consolidated financial
statements or notes thereto.
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REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Epicor Software Corporation
We have audited the accompanying consolidated balance sheets of Epicor Software
Corporation as of December 31, 1999 and 1998 and June 30, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1999, the six months ended December 31, 1998, and
each of the two years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Epicor Software
Corporation as of December 31, 1999 and 1998 and June 30, 1998, and the
consolidated results of its operations and its cash flows for the year ended
December 31, 1999, the six months ended December 31, 1998 and each of the two
years in the period ended June 30, 1998 in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Orange County, California
February 2, 2000,
except for Note 11, as to which
the date is March 22, 2000
37
38
EPICOR SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
DECEMBER 31,
------------------------- JUNE 30,
1999 1998 1998
--------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 18,221 $ 22,175 $ 11,251
Short-term investments 12,154 30,511 11,528
Accounts receivable, net of allowance
for doubtful accounts of $17,100, $11,795
and $5,159, respectively 75,263 84,789 28,929
Prepaid expenses and other 8,984 14,797 3,654
--------- --------- ---------
Total current assets 114,622 152,272 55,362
Property and equipment, net 16,650 13,388 8,688
Software development costs, net of accumulated
amortization of $6,903, $5,073 and $4,620,
respectively 9,083 5,750 3,057
Intangible assets, net 25,668 32,878 --
Other assets 4,154 7,989 881
--------- --------- ---------
$ 170,177 $ 212,277 $ 67,988
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,591 $ 16,490 $ 3,571
Accrued compensation and payroll taxes 15,986 15,932 7,244
Accrued restructuring costs 7,902 7,957 1,280
Accrued severance and merger costs 3,660 7,133 --
Accrued litigation charge 1,800 -- --
Other accrued expenses 15,015 8,809 4,922
Deferred revenue 39,017 36,845 16,026
--------- --------- ---------
Total current liabilities 97,971 93,166 33,043
--------- --------- ---------
Long-term liabilities 400 1,116 35
Commitments and Contingencies (Note 4)
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized:
Series B preferred stock, 0, 0 and 1,439,750, respectively -- -- 7,962
Series C preferred stock, 95,305, 95,305 and 162,020,
respectively 7,501 7,501 12,751
Common stock, $.001 par value: 60,000,000 shares authorized,
40,848,162, 40,196,832 and 26,142,715, respectively 41 40 26
Additional paid-in capital 237,536 232,042 134,550
Less: notes receivable from officers for issuance of restricted
stock (11,269) (11,563) (11,563)
Accumulated other comprehensive loss (1,590) (245) (1,092)
Accumulated deficit (160,413) (109,780) (107,724)
--------- --------- ---------
Total stockholders' equity 71,806 117,995 34,910
--------- --------- ---------
$ 170,177 $ 212,277 $ 67,988
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
38
39
EPICOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, YEAR ENDED JUNE 30,
------------ ------------ -----------------------
1999 1998 1998 1997
------------ ------------ -------- --------
Revenues:
License fees $ 94,344 $ 33,047 $ 57,577 $ 32,123
Services 157,770 30,428 40,406 27,420
Other 6,062 241 505 1,208
--------- -------- -------- --------
Total revenues 258,176 63,716 98,488 60,751
Cost of revenues:
Cost of license fees 18,015 4,808 5,990 5,159
Cost of services 101,349 15,731 23,971 16,821
Cost of other 3,238 -- -- --
--------- -------- -------- --------
Total cost of revenues 122,602 20,539 29,961 21,980
--------- -------- -------- --------
Gross profit 135,574 43,177 68,527 38,771
Operating expenses:
Sales and marketing 89,592 23,030 38,177 26,024
Software development 29,722 6,213 11,724 10,398
General and administrative 55,579 3,897 7,145 6,030
Litigation 1,800 -- -- --
Special charges 9,975 5,950 -- 1,600
Charge for in-process research
and development -- 6,384 -- --
Total operating expenses --------- -------- -------- --------
186,668 45,474 57,046 44,052
--------- -------- -------- --------
Income (loss) from operations (51,094) (2,297) 11,481 (5,281)
Other income (expense):
Interest income 2,031 474 940 835
Interest expense (534) (90) (39) (71)
Other (286) 37 965 109
--------- -------- -------- --------
Total other income (expense) 1,211 421 1,866 873
--------- -------- -------- --------
Income (loss) before income taxes (49,883) (1,876) 13,347 (4,408)
Provision for income taxes 750 180 -- --
--------- -------- -------- --------
Net income (loss) $ (50,633) $ (2,056) $ 13,347 $ (4,408)
========= ======== ======== ========
Net income (loss) per share - basic $ (1.25) $ (0.07) $ 0.56 $ (0.20)
Net income (loss) per share - diluted $ (1.25) $ (0.07) $ 0.45 $ (0.20)
Common shares outstanding - basic 40,605 28,373 23,956 21,758
Common shares outstanding - diluted 40,605 28,373 29,716 21,758
The accompanying notes are an integral part of these
consolidated financial statements.
39
40
EPICOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Series B Series C
Preferred Stock Preferred Stock Common Stock Additional
-------------------------- --------------------- ------------------------ Paid-in
Shares Amount Shares Amount Shares Amount Capital
------------ -------- ------ ------- ---------- ------- -----------
Balance, June 30, 1996 2,490,000 $13,770 231,598 $18,226 21,471,872 $21 $111,231
Net loss -- -- -- -- -- -- --
Foreign currency translation
adjustments -- -- -- -- -- -- --
Subchapter S distributions
to FocusSoft shareholders -- -- -- -- -- -- --
Conversion of Series B
Preferred Stock (55,000) (304) -- -- 55,000 -- 304
Conversion of Series C
Preferred Stock -- -- (17,795) (1,400) 177,950 -- 1,400
Issuance of Common Stock -- -- -- -- 6,600 -- --
Exercise of warrants -- -- -- -- 55,000 -- 399
Employee stock purchases -- -- -- -- 41,540 -- 237
Exercise of stock options -- -- -- -- 776,648 1 3,174
---------- ------- -------- ------- ----------- ----- ---------
Balance, June 30, 1997 2,435,000 13,466 213,803 16,826 22,584,610 22 116,745
Net income -- -- -- -- -- -- --
Foreign currency translation
adjustments -- -- -- -- -- -- --
Subchapter S distributions
to FocusSoft shareholders -- -- -- -- -- -- --
Conversion of Series B
Preferred Stock (995,250) (5,504) -- -- 995,250 1 5,503
Conversion of Series C
Preferred Stock -- -- (51,783) (4,075) 517,830 1 4,074
Employee stock purchases -- -- -- -- 45,968 -- 435
Exercise of stock options -- -- -- -- 1,999,057 2 7,793
---------- ------- -------- ------- ----------- ----- ---------
Balance, June 30, 1998 1,439,750 7,962 162,020 12,751 26,142,715 26 134,550
Net loss -- -- -- -- -- -- --
Common stock issued in
connection with the
DataWorks Merger -- -- -- -- 11,739,459 12 83,194
Foreign currency translation
adjustments -- -- -- -- -- -- --
Conversion of Series B
Preferred Stock (1,439,750) (7,962) -- -- 1,439,750 1 7,961
Conversion of Series C
Preferred Stock -- -- (66,715) (5,250) 667,150 1 5,249
Employee stock purchases -- -- -- -- 52,731 -- 490
Exercise of stock options -- -- -- -- 155,027 -- 598
---------- ------- -------- ------- ----------- ---- ---------
Balance, December 31, 1998 -- -- 95,305 7,501 40,196,832 40 232,042
Net loss
Foreign currency translation
adjustments
Proceeds from notes receivable
from officer
Acceleration of options
in connection with severance
agreements 2,385
Employee stock purchases 369,396 1 1,745
Exercise of stock options 281,934 1,364
---------- ------- -------- ------- ----------- ----- ---------
Balance, December 31, 1999 $ -- $ -- 95,305 $ 7,501 40,848,162 $ 41 $ 237,536
========== ======== ======== ======= =========== ===== =========
Accumulated
Notes Other
Receivable Comprehensive Total Comprehensive
from Income Accumulated Stockholders' Income
Officers (Loss) Deficit Equity (Loss)
------------ ------------- ----------- ------------- -------------
Balance, June 30, 1996 $(11,563) $ 349 $(115,835) $16,199 $(33,262)
========
Net loss -- -- (4,408) (4,408) (4,408)
Foreign currency translation
adjustments -- 44 -- 44 44
Subchapter S distributions
to FocusSoft shareholders -- -- (59) (59)
Conversion of Series B
Preferred Stock -- -- -- --
Conversion of Series C
Preferred Stock -- -- -- --
Issuance of Common Stock -- -- -- --
Exercise of warrants -- -- -- 399
Employee stock purchases -- -- -- 237
Exercise of stock options -- -- -- 3,175
-------- -------- --------- -------- --------
Balance, June 30, 1997 (11,563) 393 (120,302) 15,587 $ (4,364)
========
Net income -- -- 13,347 13,347 13,347
Foreign currency translation
adjustments -- (1,485) -- (1,485) (1,485)
Subchapter S distributions
to FocusSoft shareholders -- -- (769) (769)
Conversion of Series B
Preferred Stock -- -- -- --
Conversion of Series C
Preferred Stock -- -- -- --
Employee stock purchases -- -- -- 435
Exercise of stock options -- -- -- 7,795
-------- -------- --------- -------- -------
Balance, June 30, 1998 (11,563) (1,092) (107,724) 34,910 $ 11,862
========
Net loss -- -- (2,056) (2,056) (2,056)
Common stock issued in
connection with the
DataWorks Merger -- -- -- 83,206
Foreign currency translation
adjustments -- 847 -- 847 847
Conversion of Series B
Preferred Stock -- -- -- --
Conversion of Series C
Preferred Stock -- -- -- --
Employee stock purchases -- -- -- 490
Exercise of stock options -- -- -- 598
-------- ------ --------- -------- --------
Balance, December 31, 1998 (11,563) (245) (109,780) 117,995 $ (1,209)
========
Net loss (50,633) (50,633) (50,633)
Foreign currency translation
adjustments (1,345) (1,345) (1,345)
Proceeds from notes receivable
from officer 294 294
Acceleration of options
in connection with severance
agreements 2,385
Employee stock purchases 1,746
Exercise of stock options 1,364
-------- -------- --------- -------- --------
Balance, December 31, 1999 $(11,269) $(1,590) $(160,413) $ 71,806 $(51,978)
======== ======== ========= ======== ========
The accompanying notes are an integral part of these consolidated statements.
40
41
EPICOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, YEAR ENDED JUNE 30,
------------ ------------ ------------------------
1999 1998 1998 1997
------------ ------------ -------- ---------
OPERATING ACTIVITIES
Net income (loss) $(50,633) $ (2,056) $ 13,347 $ (4,408)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Depreciation and amortization 18,277 3,496 5,126 5,822
Provision for doubtful accounts receivable 14,412 1,263 1,561 2,095
Impairment of assets 4,291 -- -- --
Special charges 9,975 5,950 -- 1,600
Accrued litigation 1,800 -- -- --
Charge for in-process research and development -- 6,384 -- --
Changes in operating assets and liabilities:
Accounts receivable (2,638) (4,909) (18,514) (6,197)
Prepaid expenses and other current assets 3,113 (6,596) (1,146) 93
Accounts payable (3,561) 1,065 (1,181) 693
Accrued merger and restructuring (11,118) (727) (1,329) (912)
Other accrued expenses 4,948 (29) 3,873 400
Deferred revenue 1,414 3,137 4,388 359
-------- -------- -------- --------
Net cash (used in) provided by operating
activities (9,720) 6,978 6,125 (455)
INVESTING ACTIVITIES
Cash acquired in the DataWorks Merger -- 13,018 -- --
Capital expenditures (11,392) (3,670) (4,099) (3,035)
Capitalized software development costs (6,032) (2,912) (1,247) (1,457)
Purchase of short-term investments (20,970) (4,086) (13,500) (10,500)
Sale of short-term investments 39,327 -- 11,514 11,056
Purchase of subsidiary (560) -- -- --
Other 3,735 (17) (242) 540
-------- -------- -------- --------
Net cash provided by (used in) investing activities 4,108 2,333 (7,574) (3,396)
FINANCING ACTIVITIES
Subchapter S distributions to FocusSoft shareholders -- -- (769) (59)
Payments of long-term liabilities (716) -- -- --
Exercise of stock options and warrants 1,364 598 7,795 3,574
Employee stock purchases 1,746 490 435 237
Decrease in restricted cash -- -- -- 1,006
-------- -------- -------- --------
Net cash provided by financing activities 2,394 1,088 7,461 4,758
Effect of exchange rates on cash (736) 525 (1,485) 44
-------- -------- -------- --------
Net (decrease) increase in cash and cash equivalents (3,954) 10,924 4,527 951
Cash and cash equivalents at beginning of year 22,175 11,251 6,724 5,773
-------- -------- -------- --------
Cash and cash equivalents at end of year $ 18,221 $ 22,175 $ 11,251 $ 6,724
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 534 $ 90 $ 39 $ 71
======== ======== ======== ========
Income tax refund $ 1,012 $ -- $ -- $ --
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
41
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY OPERATIONS AND BASIS OF PRESENTATION
Epicor Software Corporation, a Delaware corporation, and its subsidiaries
design, develop, market and support a broad range of client/server enterprise
resource planning software for use by businesses of all sizes worldwide. The
Company also offers support, consulting and education in support of its
customers' use of its software products. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual amounts could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities that the Company has both the positive intent and ability to
hold to maturity are carried at amortized cost. Debt securities that the Company
does not have the positive intent and ability to hold to maturity are classified
as available-for-sale and are carried at cost which approximates fair value.
The Company classifies its short-term investments as available-for-sale
securities and carries them at cost, which approximates fair market value. At
December 31, 1999, short-term investments consisted of corporate debt securities
and money market funds with interest rates ranging from 5.84 percent to 8.24
percent. Realized and unrealized holding gains and losses on securities
classified as available-for-sale are not material.
REVENUE RECOGNITION
Provided that the Company believes collectibility of an amount to be recognized
as a revenue is probable, revenue is recognized from licenses of software upon
completion of contract execution, shipment of products, and performance by the
Company of all of its significant contractual obligations. The Company also
provides for the estimated cost of insignificant performance obligations at the
time revenue is recognized. When a software license agreement obligates the
Company to provide more than one software module, all license revenue under the
agreement is deferred until all modules achieve general availability and are
delivered, except when the license agreement contains a specific financial
remedy in the event the unavailable module is not delivered. In such instance,
revenue is deferred in the amount attributable to the specific financial remedy.
When the arrangement with the customer includes multiple elements, revenues are
allocated to the various elements based on their vendor specific objective
evidence of fair value.
The Company's customers may enter into maintenance agreements with the Company
and such revenue is recognized ratably over the term of the agreement.
Revenue from consulting services is recognized based on the terms of the
specific agreement. Generally, revenue from time and material contracts is
recognized as services are performed. Revenue from fixed fee contracts are
recognized over the period of each engagement using primarily the
percentage-of-completion
42
43
method using cost as incurred as the measure of progress towards completion.
Provisions for contract adjustments and losses are recorded in the period such
items are identified. Deferred revenue represents amounts billed in advance of
services being performed.
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, Software
Revenue Recognition " to extend the deferral of application of certain passages
of SOP 97-2 through fiscal years beginning on or before March 15, 1999. All
other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. The Company will comply with the
requirements of this SOP as they become effective; such requirements are not
expected to have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
PROPERTY AND EQUIPMENT
Equipment, furniture and fixtures are recorded at cost. The Company depreciates
equipment, furniture and fixtures using the straight-line method over the
estimated useful lives of the assets, generally three to seven years. Leasehold
improvements are amortized over the lesser of their estimated useful life or
term of the lease.
LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In 1999,
the Company recorded an impairment charge of $3,325,000 (see Note 3) to
write-down assets deemed impaired to their estimated fair value primarily based
upon projected future cash flows.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred subsequent to the determination of
technological feasibility and marketability of a software product are
capitalized. Amortization of capitalized software development costs commences
when the products are available for general release. Amortization is determined
on a product by product basis using the greater of a ratio of current product
revenues to projected current and future product revenues or an amount
calculated using the straight-line method over the estimated economic life of
the product, generally three to five years. In addition to in-house software
development costs, the Company purchases certain software from third-party
software providers and capitalizes such costs in software development costs.
Amortization of software development costs is included in cost of license fees
and totaled $1,964,000 for the year ended December 31, 1999, $453,000 for the
six months ended December 31, 1998, and $1,128,000 and $2,131,000 for the years
ended June 30, 1998 and 1997, respectively.
INTANGIBLE ASSETS
Intangible assets are amortized over the estimated economic life of the asset.
Amortization of intangible assets is primarily included in cost of license fees
and totaled $7,374,000 for the year ended December 31, 1999, and zero for the
six months ended December 31, 1998, and the years ended June 30, 1998 and 1997,
respectively.
ADVERTISING COSTS
The Company expenses production costs of advertising upon the first showing.
Other advertising costs are expensed as incurred. Advertising expense totaled
$3,936,000 for the year ended December 31, 1999, $771,000 for the six months
ended December 31, 1998, and $1,034,000 and $1,490,000 for the years ended June
30, 1998 and 1997, respectively.
43
44
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign operations is the respective
local country's currency. Assets and liabilities of the foreign operations are
translated into U.S. dollars at the exchange rate at the balance sheet date,
whereas revenues and expenses are translated into U.S. dollars at average
exchange rates. Translation adjustments are included in accumulated other
comprehensive loss.
CONCENTRATION OF CREDIT RISKS
The Company sells its products to VARs and other software distributors generally
under credit terms ranging from 30 to 90 days. The Company also sells its
products directly to end-users generally requiring a significant up-front
payment and remaining credit terms of 30 to 90 days. The Company believes no
significant concentrations of credit risk existed at December 31, 1999.
Receivables from customers are generally unsecured.
NET INCOME (LOSS) PER SHARE
Basic net income per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. For the year ended December 31, 1999,
the six months ended December 31, 1998 and the year ended June 30, 1997,
employee stock options and preferred stock were not considered in calculating
diluted net loss per common share as their effect would be anti-dilutive. As a
result, during those periods the Company's basic and diluted net loss per common
share are the same.
The following table computes basic and diluted net income (loss) per share (in
thousands, except per share amounts):
Six Months
Year Ended Ended
December 31, December 31, Year Ended June 30,
------------ ------------ ------------------------
1999 1998 1998 1997
------------ ------------ --------- --------
Numerator:
Net income (loss) - numerator for
basic and diluted net income (loss)
per share $(50,633) $ (2,056) $ 13,347 $ (4,408)
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 40,605 28,373 23,956 21,758
Effect of dilutive securities:
Employee stock options -- -- 1,942 --
Preferred stock -- -- 3,818 --
-------- -------- -------- --------
Dilutive potential common shares -- -- 5,760 --
-------- -------- -------- --------
Denominator for diluted net income
(loss) per share 40,605 28,373 29,716 21,758
======== ======== ======== ========
Net income (loss) per share - basic $ (1.25) $ (0.07) $ (0.56) $ (0.20)
Net income (loss) per share - diluted $ (1.25) $ (0.07) $ (0.45) $ (0.20)
RECLASSIFICATIONS
Certain reclassifications have been made to December 31, 1998, and June 30, 1998
and 1997 amounts to conform with the current period presentation.
44
45
NOTE 2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
The following summarizes the components of short-term investments as of December
31, 1999 and 1998 and June 30, 1998 (in thousands):
DECEMBER 31,
-------------------- JUNE 30,
1999 1998 1998
------- ------- --------
Corporate debt securities $12,154 $15,614 $11,528
Municipal bonds -- 14,897 --
------- ------- -------
$12,154 $30,511 $11,528
======= ======= =======
The following summarizes the components of property and equipment as of December
31, 1999 and 1998 and June 30, 1998, (in thousands):
DECEMBER 31,
----------------------- JUNE 30,
1999 1998 1998
-------- -------- --------
Computer equipment $ 26,405 $ 27,612 $ 22,222
Office furniture, fixtures and
equipment and other 9,847 4,873 3,653
Leasehold improvements 7,491 3,852 2,719
-------- -------- --------
43,743 36,337 28,594
Less accumulated depreciation
and amortization (27,093) (22,949) (19,906)
-------- -------- --------
$ 16,650 $ 13,388 $ 8,688
======== ======== ========
The following summarizes the components of intangible assets as of December 31,
1999 and 1998 and June 30, 1998 (in thousands):
DECEMBER 31,
----------------------- JUNE 30,
1999 1998 1998
------------ --------- --------
Acquired technology $ 19,710 $19,055 $ --
Customer base 8,730 8,710 --
Assembled workforce 1,570 4,113 --
Covenant not to compete 1,000 1,000 --
-------- ------- ----
31,010 32,878 --
Accumulated amortization (5,342) -- --
-------- ------- ----
$ 25,668 $32,878 $ --
======== ======= ====
NOTE 3. ACQUISITIONS AND RESTRUCTURINGS
ACQUISITIONS
On December 31, 1998, the Company acquired DataWorks Corporation, a publicly
held developer and marketer of manufacturing enterprise resource planning
software. As consideration for the acquisition, the Company issued 11,739,459
shares of common stock in exchange for all of the outstanding shares of
DataWorks. In addition, each outstanding option or right to purchase DataWorks
common stock under the DataWorks 1995 Equity Incentive Plan, the DataWorks 1995
Non-employee Directors Stock Option Plan, the Interactive Group, Inc. 1997
Nonstatutory Stock Option Plan, the Interactive 1995 Stock Option Plan and each
other outstanding option or right to purchase DataWorks common stock was assumed
by the Company.
45
46
The Merger was a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended, and was accounted for as a purchase for
financial reporting purposes. The total purchase price and allocation among the
tangible and intangible assets and liabilities acquired (including purchased
in-process technology) is summarized as follows (in thousands):
Total purchase price:
Value of stock issued $ 83,522
Value of options assumed 376
Transaction costs 2,102
--------
$ 86,000
========
Amortization
period (years)
--------------
Purchase price allocation:
Tangible assets $ 97,091
Intangible assets:
Developed and core technology 19,055 5
Customer base 8,710 7
Assembled workforce 4,113 4
In-process research and
development 6,384 expensed
Tangible liabilities (49,353)
--------
$ 86,000
========
The Company recorded a charge of $6,384,000 during the six months ended December
31, 1998 for purchased in-process research and development related to
development projects that had not reached technological feasibility, had no
alternative future use, and for which successful development was uncertain. The
conclusion that each in-process development effort, or any material
sub-component, had no alternative future use was reached in consultation with
engineering personnel from both the Company and DataWorks.
The operating results of DataWorks have not been included in the consolidated
statement of operations until January 1, 1999 because the acquisition became
effective on December 31, 1998. Had the acquisition taken place at the beginning
of fiscal 1998, the unaudited pro forma results of operation for the year ended
June 30, 1998 and the six months ended December 31, 1998 would have been as
follows (in thousands, except per share data):
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1998 JUNE 30, 1998
----------------- -------------
Net revenues $150,337 $264,616
Net income (loss) $(24,352) $ 10,732
Basic net income (loss) per share $ (0.61) $ 0.30
Diluted net income (loss) per share $ (0.61) $ 0.26
The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles.
In connection with the acquisition of DataWorks, Impresa, a division of
DataWorks, was accounted for as an asset held for sale. On April 1, 1999, the
Company discontinued attempts to actively sell the Impresa division and,
accordingly, the results of operations of the division are included in the
results of the Company's operations beginning April 1, 1999.
On November 14, 1997, the Company acquired FocusSoft, Inc. ("FocusSoft"), a
privately held provider of enterprise resource planning and distribution
software based in Louisville, Kentucky. As consideration for the acquisition,
the Company issued 2,474,794 shares of common stock in exchange for all of the
outstanding shares of common stock of FocusSoft. In addition, the Company
assumed all of the employee stock options of FocusSoft, which translated into
stock options to acquire 225,206 shares of common stock of the Company. The
transaction was accounted for as a pooling of interests, and accordingly, the
accompanying consolidated financial statements have been restated to incorporate
the financial position, results of operations and cash flows of FocusSoft for
all periods presented.
On June 30, 1997, the Company acquired Clientele Software, Inc. ("Clientele"), a
privately held provider of help desk automation software based in Portland,
Oregon. As consideration for the acquisition, the Company issued 887,636 shares
of common stock in exchange for all of the outstanding shares of common stock of
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Clientele. In addition, the Company assumed all of the outstanding employee
stock options of Clientele, which translated into stock options to acquire
212,356 shares of common stock of the Company. The transaction was accounted for
as a pooling of interests, and accordingly, the accompanying consolidated
financial statements have been restated to incorporate the financial position,
results of operations and cash flows of Clientele for all periods presented.
RESTRUCTURINGS
The Company's accounting policies with respect to its restructuring are in
accordance with the guidance provided in the consensus of the Emerging Issues
Task Force (EITF) in connection with EITF Issues No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit and Activity
("EITF 94-3") and No. 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination, as well as SFAS No 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of
("SFAS 121"). EITF 94-3 and EITF 95-3 generally require with respect to
recognition of severance expenses, management approval of the restructuring
plan, communication of benefit arrangements to employees, and the determination
of the employees to be terminated. SFAS No. 121 generally requires that assets
to be disposed of be reported at the lower of carrying amount or fair value less
cost to sell.
In December 1999, the Company underwent a restructuring as a result of
reorganization of 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. In connection with this reorganization,
the Company incurred various charges totaling $9,975,000 during the fourth
quarter of fiscal year 1999. The Company expects the 1999 separation costs for
terminated employees to be paid out during the first quarter of fiscal 2000 and
a substantial amount of the 1999 facilities restructuring costs to be paid out
by the end of fiscal 2000.
In December 1998, the Company underwent a restructuring as a result of the
DataWorks Merger. This resulted in a restructuring charge of $5,950,000, which
was recorded during the three months ended December 31, 1998. Such amounts
included approximately $5,500,000 for severance and extended benefit costs
related to a reduction in force of approximately 25 people and approximately
$450,000 in lease termination and buyout costs related to the closure of
duplicate facilities. All severance amounts were paid in 1999.
As part of the purchase accounting related to the DataWorks acquisition,
$7,133,000 of severance and merger costs were accrued. Such amounts included
approximately $3,500,000 for severance and extended benefit costs related to a
reduction in force of approximately 150 people, approximately $2,100,000 in
lease termination and buyout costs related to the closure of duplicate
facilities, and $1,533,000 related to the settlement of certain third-party
reseller agreements and other miscellaneous accruals.
In June 1997, the Company underwent a restructuring as a result of the Clientele
acquisition. This resulted in a restructuring charge of $1,600,000 recorded in
the fourth quarter of fiscal year 1997. Such amount included approximately
$1,100,000 for excess facility costs, as well as approximately $500,000 for
severance and other extended benefit costs.
At December 31, 1999, $1,185,000 of restructuring accruals from prior periods
remain and relate primarily to lease commitments on which the Company will
continue to make payments until the respective leases expire.
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The following table summarizes the 1999 activity in the Company's reserves
associated with all acquisitions and restructurings (in thousands):
BALANCE AT 1999 WRITE-DOWN ADDITIONAL BALANCE AT
DECEMBER 31, SPECIAL OF INTANGIBLE PAID IN CASH DECEMBER 31,
1999 CHARGES ASSETS CAPITAL PAYMENTS 1999
----------- ------- ------------- ---------- -------- ------------
Asset impairment $ -- $ 3,325 $(3,325) $ -- $ -- $ --
Separation costs for terminated
employees and contractors 2,072 (67) 2,005
Facilities closing and downsizing 4,756 (44) 4,712
Remaining restructuring accrual
from prior periods - 1998, 1997
and 1996 7,957 (6,772) 1,185
------ ------- ------- ------- ------- ------
Accrued restructuring costs $7,957 $10,153 $(3,325) $ -- $(6,883) $7,902
====== ======= ======= ======= ======== ======
Accrued severance and merger costs $7,133 $ (178) $ -- $(2,385) $ (910) $3,660
====== ======= ======= ======= ======= ======
1999 special charges $ 9,975
========
NOTE 4. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain of its operating facilities and equipment under
operating leases with terms ranging up to 30 years. The following is a schedule
by years of future minimum lease payments under operating leases and future
noncancellable sublease income (in thousands):
FUTURE
NONCANCELLABLE NET FUTURE
FUTURE MINIMUM SUBLEASE MINIMUM LEASE
YEARS ENDED DECEMBER 31, LEASE PAYMENTS INCOME PAYMENTS
- ------------------------ -------------- -------------- -------------
2000 $10,070 $ 1,645 $ 8,425
2001 8,938 1,619 7,319
2002 7,591 1,440 6,151
2003 6,402 1,476 4,926
2004 and thereafter 32,008 1,358 30,650
------- ------- -------
$65,009 $ 7,538 $57,471
======= ======= =======
Rental expense under operating leases, net of sublease income, was $8,478,000
for the year ended December 31, 1999, $1,915,000 for the six month ended
December 31, 1998, and $2,432,000 and $2,067,000 for the years ended June 30,
1998 and 1997, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into agreements that provide certain executive officers
with compensation totaling six to 12 months base salary and bonus in the event
the Company terminates the executive without cause. Those agreements also call
for the acceleration of vesting of certain stock options and restricted stock.
LITIGATION
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 a 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
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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 legal proceedings in the normal course
of business and other legal proceedings (see Note 11). The Company is currently
defending these proceedings and claims, and anticipates that it will be able to
resolve these matters in a manner that will not have a material adverse effect
on the Company's financial position, results of operations or cash flows.
NOTE 5. INCOME TAXES
The provision for income taxes for the year ended December 31, 1999, the six
months ended December 31, 1998, and the years ended June 30, 1998 and 1999 is
comprised of the following (in thousands):
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------
1999 1998 1998 1997
------------ ------------ -------- ------
Current:
Federal $ -- $ -- --
Foreign 750 180 -- --
State -- -- -- --
---- ---- ---- ---
750 180 -- --
Deferred:
Federal -- -- -- --
Foreign -- -- -- --
State -- -- -- --
---- ---- ---- ---
Total $750 $180 -- --
==== ==== ==== ===
The income (loss) before income taxes between Federal and foreign jurisdictions
for the year ended December 31, 1999, the six months ended December 31, 1998,
and the years ended June 30, 1998 and 1997 are as follows (in thousands):
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, YEAR ENDED JUNE 30,
------------ ------------ ---------------------------
1999 1998 1998 1997
------------ ------------ ------- --------
Federal $(27,673) $(1,772) $10,676 $(4,375)
Foreign (22,210) (104) 2,671 (33)
-------- ------- ------- -------
Total $(49,883) $(1,876) $13,347 $(4,408)
======== ======= ======= =======
The reported provision (benefit) for income taxes for the year ended December
31, 1999, the six months ended December 31, 1998 and for the years ended June
30, 1998 and 1997 differ from the amount computed by applying the statutory
federal income tax rate of 34 percent to the consolidated income (loss) before
income taxes as follows (in thousands):
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------
1999 1998 1998 1997
-------- ------------ ------- -------
Provision (benefit) computed at
statutory rates $(16,960) $ (657) $ 4,708 $(1,659)
Increase (reduction) resulting from:
Effect of foreign operations 8,301 215 (908) 11
State taxes, net of federal benefit -- (185) 574 (414)
In-process research and development
write off -- 2,234 -- --
Valuation allowance 8,757 (1,453) (4,464) 2,674
Other 652 26 90 (612)
-------- ------- ------- -------
Total $ 750 $ 180 $ -- $ --
======== ======= ======= =======
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The components of the Company's net deferred income tax asset (liability) as of
December 31, 1999, December 31, 1998 and June 30, 1998 are as follows (in
thousands):
DECEMBER 31,
------------------------- JUNE 30,
1999 1998 1998
-------- -------- --------
Net operating loss carry forwards $ 58,488 $ 45,350 $ 37,750
Allowance for doubtful accounts 4,349 3,917 1,330
Merger and acquisition costs, net -- 4,726 3,380
Research and development credits 4,855 4,715 2,720
Other accruals and reserves 6,082 4,660 1,820
Purchased research and development -- 1,013 --
Accrued restructuring costs 6,164 169 685
Depreciation 891 771 (410)
Software capitalization, net (2,264) (779) (780)
Purchased intangibles (7,506) (13,208) --
Valuation allowance (71,059) (51,334) (46,495)
-------- -------- --------
Total $ -- $ -- $ --
======== ======== ========
As of December 31, 1999, the Company had provided a valuation allowance of
approximately $71,059,000 because due to the historical losses incurred by the
Company during and prior to fiscal 1999, and the uncertainty as to profits in
the future, management cannot conclude that realization of the Company's net
deferred tax asset is more likely than not.
The Company has federal, state and foreign net operating loss carry forwards as
of December 31, 1999 of approximately $117,000,000, $62,000,000 and $41,000,000,
respectively. The federal losses expire in the years 1999 through 2019.
Included in the Company's net operating loss carry forwards are tax deductions
relating to the exercise of non-qualified stock options totaling approximately
$48,700,000. These losses are fully offset by the valuation allowance. Upon
future realization of net operating losses, the Company's effective income tax
rates will be reduced except to the extent the utilized losses reflect a
deduction for the exercise of nonqualified stock options. The tax benefit from
utilization of this portion of the total loss carry forward will be charged to
stockholders' equity. In addition, the Company has approximately $3,500,000 of
federal research and development credit carry forwards that expire in the years
2001 through 2012.
Utilization of the federal and state net operating loss and research and
development credit carry forwards could be limited in future years if the
Company were to experience a greater than 50 percent change in ownership within
a 3-year period as defined in section 382 of the United States Internal Revenue
Code of 1986.
NOTE 6. STOCK OPTION PLAN AND OTHER EMPLOYEE BENEFITS
As of December 31, 1998, the Company had reserved a total of 9,125,000 shares of
its Common Stock for issuances pursuant to incentive and nonqualified stock
option and stock purchase rights that may be granted to officers, key employees,
directors, consultants, and others with important business relationships with
the Company under six stock plans. Additionally, as of December 31, 1998, the
Company had assumed stock options to acquire 1,683,682 shares, 225,206 shares
and 212,356 shares of the Company's common stock as a result of business
combinations with DataWorks, FocusSoft and Clientele, respectively.
The Company adopted a seventh stock plan effective February 4, 1999, whereby
nonqualified stock options may be granted to employees, directors and
consultants. The total number of shares that may be granted under this plan is
2,000,000.
The Company adopted the 1999 merger transition nonstatutory stock option plan on
February 4, 2000 under which nonstatutory stock options may be granted to
employees and directors. The total shares that may be granted under this plan is
900,000.
Additionally, effective July 1990, the Company adopted a profit sharing plan
pursuant to Section 401 of the Internal Revenue Code. The Company has not made
any contributions to the profit sharing plan as of
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December 31, 1999. The Company also adopted an Employee Stock Purchase Plan in
August 1992 authorizing the issuance of up to an aggregate of 450,000 shares of
common stock to participating employees which permits employees to purchase
common stock at a price equal to 85 percent of the fair market value at the
beginning or end of a 6-month plan period. In April 1999, the authorized number
of shares under the Employee Stock Purchase Plan was increased to 1,000,000. As
of December 31, 1999, 682,445 shares have been sold under this plan.
The following is a summary of common stock option activity for the respective
periods:
Year Ended Six Months Ended
December 31, December 31, Year Ended June 30,
---------------------- ------------------------ --------------------------------------------------
1999 1998 1998 1997
---------------------- ------------------------ ---------------------- ------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
---------- -------- ----------- -------- ---------- ---------- ---------- --------
Outstanding,
Beginning of period 7,133,089 $10.3917 3,337,562 $10.0597 3,765,837 $ 5.2839 $ 3,763,658 $5.8039
Granted 5,084,900 6.7296 5,114,960 15.5539 1,991,378 14.0630 3,771,877 5.4211
Exercised (281,934) 4.9691 (155,027) 3.8569 (1,999,057) 3.9693 (776,648) 3.8445
Expired or Canceled (2,079,219) 10.3466 (2,848,088) 20.4212 (420,596) 9.4058 (2,993,050) 6.4843
Options Assumed
from DataWorks
merger -- -- 1,683,682 11.9519 -- -- -- --
---------- -------- ---------- -------- ---------- -------- ----------- -------
Outstanding,
End of Period 9,856,836 $ 8.6607 7,133,089 $10.3917 3,337,562 $10.0597 $ 3,765,837 $5.2839
========== ======== ========== ======== ========== ======== =========== =======
Options Exercisable 2,694,750 $ 9.7285 2,140,935 $ 9.6226 718,858 $ 5.7045 $ 2,008,293 $4.1165
========== ======== ========== ======== ========== ======== =========== =======
The following table summarizes information about stock options
outstanding at December 31, 1999:
OUTSTANDING EXERCISABLE
---------------------------------------------- -------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------- -------------- ----------- --------------
$ 0.11 to 3.60 436,094 5.06 $ 3.0472 419,712 $ 0.6013
3.69 to 3.78 1,041,500 9.68 3.6893 -- --
4.06 to 6.63 2,149,627 9.68 5.5534 155,627 6.0925
7.00 to 8.88 1,461,840 8.43 7.6333 501,731 7.9963
9.19 to 10.81 460,836 7.65 10.0683 232,927 9.9367
11.44 to 11.63 3,598,919 8.14 11.5251 1,061,435 11.5000
12.13 to 27.39 708,020 8.35 15.5814 323,318 16.7264
--------------- --------- ---- -------- --------- --------
$ 0.11 to 27.39 9,856,836 8.53 $ 8.6607 2,694,750 $ 9.7285
=============== ========= ==== ======== ========= ========
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The Company complies with Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" in accounting for options issued to employees.
Accordingly, no compensation expense has been recognized for options issued to
employees and stock issued under the stock purchase plan. Had compensation costs
for the Company's stock option plans and stock purchase plan been determined
based upon fair value at the grant date under these plans consistent with
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation," the Company's net income (loss) and income (loss)
per share would have been as follows (in thousands, except per share amounts):
Six Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, June 30, June 30,
1999 1998 1998 1997
--------- ------------ ---------- ----------
Net income (loss) as reported $(50,633) $ (2,056) $13,347 $ (4,408)
======== ========= ======= ========
Net income (loss) - pro forma $(78,066) $(10,895) $ 6,753 $(11,426)
======== ========= ======= ========
Income (loss) per share as reported $ (1.25) $ (0.07) $ 0.45 $ (0.20)
======== ========= ======= ========
Income (loss) per share - pro forma $ (1.92) $ (0.38) $ 0.23 $ (0.53)
======== ========= ======= ========
The fair value of shares had been estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
STOCK PURCHASE
OPTION PLANS PLAN
------------ --------
Expected life (years) 4.0 0.5
Risk-free interest rate 6.3% 4.65%
Volatility 0.911 0.911
Dividend rate 0% 0%
For options granted during the year ended December 31, 1999, the six months
ended December 31, 1998, and the years ended June 30, 1998 and 1997, the
weighted average fair value at date of grant was $4.5678, $13.5639, $10.5921 and
$4.0667 per option, respectively. The weighted average fair value at date of
grant for stock purchase shares during the year ended December 31, 1999, the six
months ended December 31, 1998, and the years ended June 30, 1998 and June 30,
1997 was $3.3353, $6.0867, $5.798 and $3.007 per share, respectively.
NOTE 7. COMMON STOCK
As of December 31, 1999, the total number of shares of common stock reserved for
future issuance under existing stock option plans and Series C Preferred Stock
(see Note 8) is approximately 10,809,886.
On March 9, 1994, the Board of Directors adopted a Shareholder Rights Plan (the
Plan) which is intended to protect stockholders from unfair takeover practices.
Under the Plan, each share of common stock carries a right to obtain additional
stock according to terms provided in the Plan. The rights will not be
exercisable or separable from the common stock until a third-party acquires at
least 20 percent of the Company's then outstanding common stock or commences a
tender offer for at least 20 percent of the Company's then outstanding common
stock. In the event the Company is acquired in a merger or other business
combination transaction which the Company is not the surviving corporation or 50
percent or more of its consolidated assets or earning power are sold or
transferred, each right will entitle its holder to receive, at the then current
exercise price, common stock of the acquiring company, having a market value
equal to two times the exercise price of the right. If a person or entity were
to acquire 20 percent or more of the outstanding shares of the Company's common
stock, or if the Company is the surviving corporation in a merger and its common
stock is not changed or exchanged, each right will entitle the holder to receive
at the then current exercise price common stock having a market value equal to
two times the exercise price of the right. Until a right is exercised, the
holder of a right, as such, will have no rights as a stockholder of the Company,
including,
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without limitation, the rights to vote as a stockholder or receive dividends.
The rights, which expire on March 9, 2004, may be redeemed by the Company at a
price of $0.01 per right.
RESTRICTED STOCK
In February 1996, the Chief Executive Officer and Chairman of the Board
purchased 2,000,000 shares of restricted stock at a purchase price of $3.50, the
then fair market value of the Company's common stock. In payment of one-half of
the purchase price, the Company executed a secured five-year promissory note in
the principal amount of $3,500,000. The note bears simple interest at 6 percent
per annum and is a full recourse promissory note. The Company retained a
repurchase right with respect to the restricted stock. At December 31, 1999, the
repurchase right lapsed with respect to all 2,000,000 shares. The Company also
has loaned to the Chief Executive Officer and Chairman of the Board $3,500,000
pursuant to an unsecured 5-year full recourse promissory note, which bears
interest at the rate of 6 percent per annum. This loan was used to fund the
restricted stock purchase along with the secured note referenced above.
In February 1996, one of the Company's former senior executive officers
purchased 500,000 shares of restricted stock at a purchase price of $3.50, the
then fair market value of the Company's common stock. In payment of one-half of
the purchase price, the Company executed a secured 5-year promissory note in the
principal amount of $875,000. The note bears simple interest at 6 percent per
annum and is a full recourse promissory note. During the year ended December 31,
1999, approximately $294,000 was repaid on the promissory note. The Company
retained a repurchase right with respect to the restricted stock. At December
31, 1999, the repurchase right lapsed with respect to 475,000 of the 500,000
shares. The Company also has loaned to this senior executive officer $875,000
pursuant to an unsecured 5-year full recourse promissory note, which bears
interest at the rate of 6 percent per annum. This loan was used to fund the
restricted stock purchase along with the secured note referenced above.
In April 1996, one of the Company's senior executive officers purchased 450,000
shares of restricted stock at a purchase price of $6.25, the then fair market
value of the Company's common stock. In payment of one-half of the purchase
price, the Company executed a secured 5-year promissory note in the principal
amount of $1,406,250. The note bears simple interest at 6 percent per annum and
is a full recourse promissory note. At December 31, 1999, the repurchase right
lapsed with respect to 445,000 of the 450,000 shares. The Company also has
loaned to this senior executive officer $1,406,250 pursuant to an unsecured
5-year full recourse promissory note, which bears interest at 6 percent per
annum. This loan was used to fund the restricted stock purchase along with the
secured note referenced above.
In April 1998, the Board of Directors forgave any and all interest on such
notes.
NOTE 8. PREFERRED STOCK
The Company's Series C Preferred Stock is convertible into common shares of the
Company on a ten-for-one basis at any time at the option of the holders. Such
shares automatically convert into common stock of the Company 10 days after
formal notification by the Company that the average consecutive 20-trading day
closing stock price of the common stock has exceeded $25.00 per share. The
holders of preferred stock are entitled to vote with holders of common stock on
an as converted basis and have the right to cause the Company to register the
sale of shares of common stock issuable upon conversion of the Series C
Preferred Stock.
NOTE 9. EMPLOYEE BENEFIT PLAN
The Company has a 401(K) salary deferral plan ("Plan"), which is funded based on
employee contributions. Terms of the Plan provide for the Company to make
contributions to the Plan on behalf of each eligible employee (as defined) in an
amount equal to 50% on the first four percent of the eligible employee's
deferred compensation contribution (as defined). The Company's contributions to
the Plan were approximately $820,000 for the year ended December 31, 1999 and $0
for the six months ended December 31, 1998 and for the years ended June 30, 1998
and 1997. Prior to January 1, 1999, the employer match was optional and at the
Company's discretion.
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NOTE 10. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment: the design, development, marketing
and support of client/server enterprise resource planning applications software
products.
A summary of the Company's operations by geographic area is as follows (in
thousands):
UNITED LATIN
STATES AUSTRALASIA EUROPE CANADA AMERICA CONSOLIDATED
--------- ----------- ------- -------- ------- ------------
Year Ended June 30, 1997:
Net revenues $ 43,383 $ 7,993 $ 4,426 $ 3,957 $ 992 $ 60,751
========= ======== ======== ======== ====== =========
Operating income (loss) (5,422) 388 (1,429) 190 992 (5,281)
========= ======== ======== ======== ====== =========
Identifiable assets 34,882 3,565 2,488 2,281 -- 43,156
========= ======== ======== ======== ====== =========
Year Ended June 30, 1998:
Net revenues $ 71,008 $ 9,560 $ 8,169 $ 7,232 $2,519 $ 98,488
========= ======== ======== ======== ====== =========
Operating income (loss) 9,721 (1,818) 1,109 (50) 2,519 11,481
========= ======== ======== ======== ====== =========
Identifiable assets 51,956 5,809 4,974 5,249 -- 67,988
========= ======== ======== ======== ====== =========
Six Months Ended
December 31, 1998:
Net revenues $ 46,555 $ 5,528 $ 5,256 $ 4,864 $1,513 $ 63,716
========= ======== ======== ======== ====== =========
Operating income (loss) (2,407) (1,366) (200) 163 1,513 (2,297)
========= ======== ======== ======== ====== =========
Identifiable assets 169,925 7,892 28,929 5,531 -- 212,277
========= ======== ======== ======== ====== =========
Year Ended
December 31, 1999:
Net revenues $ 186,086 $ 11,661 $ 42,308 $ 12,545 $5,576 $ 258,176
========= ======== ======== ======== ====== =========
Operating income (loss) (45,054) 236 (13,334) 6,192 866 (51,094)
========= ======== ======== ======== ====== =========
Identifiable assets 123,426 8,126 31,666 6,959 -- 170,177
========= ======== ======== ======== ====== =========
NOTE 11. SUBSEQUENT EVENT
On December 24, 1998, Alyn Corporation filed a lawsuit against DataWorks
Corporation in Superior Court for the State of California, County of San Diego.
The lawsuit arose out of the licensing and sale of software by DataWorks to Alyn
Corporation in December 1996. On March 22, 2000, the Company agreed to pay Alyn
$1,800,000 to settle the lawsuit. The Company will pay one-half of this amount
by March 24, 2000 and the other half by April 3, 2000.
The Company is seeking to recover the settlement amount from its insurance
carrier. Because the Company cannot reasonably predict the recoverability from
its insurance carrier, the Company has accrued in its December 31, 1999
financial statements $1,800,000 representing management's best estimate of its
exposure for the settlement.
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NOTE 12. SELECTED QUARTERLY INFORMATION (UNAUDITED)
The following table sets forth selected unaudited quarterly information for the
Company's last four fiscal quarters. The Company believes that all necessary
adjustments (which, except as discussed below, consisted only of normal
recurring adjustment) have been included in the amounts stated below to present
fairly the results of such periods when read in conjunction with the annual
financial statements and related notes (in thousands, except per share data):
FISCAL 1999 QUARTER ENDED
--------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
----------- ------------- -------- ---------
Total revenues $ 62,710 $ 63,205 $66,156 $66,105
======== ======== ======= =======
Operating income (loss) $(43,300) $ (9,754) $ 602 $ 1,358
======== ======== ======= =======
Net income (loss) $(43,405) $ (9,698) $ 395 $ 2,075
======== ======== ======= =======
Earnings per share - diluted $ (1.07) $ (0.24) $ 0.01 $ 0.05
======== ======== ======= =======
Shares outstanding - diluted 41,935 40,703 41,731 41,935
In addition to the $9,975,000 special charge (see Note 3), significant to the
results of operations are reserves and write-downs totaling $7,713,000 incurred
during the fourth quarter of 1999. The table below summarizes where these
charges have been recognized on the statement of operations for the year ended
December 31, 1999 (in thousands):
GENERAL AND
ADMINISTRATIVE
COST OF SALES EXPENSE TOTAL
------------- -------------- ------
Write-down of prepaid software licenses,
capitalized software development costs, and
other assets due to change in product focus
and reorganization $2,713 $5,000 $7,713
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required hereunder is incorporated by reference from
the sections of the Company's Proxy Statement filed in connection with its April
27, 2000 Annual Meeting of Stockholders entitled "Nominees" and "Other Executive
Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required hereunder is incorporated by reference from
the sections of the Company's Proxy Statement filed in connection with its April
27, 2000 Annual Meeting of Stockholders entitled "Executive Compensation."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required hereunder is incorporated by reference from
the sections of the Company's Proxy Statement filed in connection with its April
27, 2000 Annual Meeting of Stockholders entitled "Executive Compensation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on 10-K:
1. Financial Statements
See Index to Consolidated Financial Statements at Item 8 on
page 27 of this Report.
2. Financial Statements
See Index to Consolidated Financial Statements at Item 8 on
page 27 of this Report.
3. Exhibits
INDEX TO EXHIBITS
Exhibit
Number Description LOCATION
- -------- ----------- --------
2.1 Agreement and Plan of Reorganization and Merger dated as of June 27, (9)
1997 among the Company, CSI Acquisition Corp., Clientele Software,
Inc., Dale E. Yocum, Pamela Yocum, William L. Mulert (Schedules not
included pursuant to Rule 601(b)(2) of Reg. S-K)
2.2 Agreement and Plan of Reorganization dated as of November 4, 1997 by (11)
and among the Company, FS Acquisition Corp., FocusSoft, Inc., John
Lococo, Michael Zimmerman and Joseph Brumleve. (Schedules not included
pursuant to Rule 601(b)(2) of Reg. S-K)
2.3 Agreement and Plan of Reorganization by and among the Company, Zoo (14)
Acquisition Corp. and DataWorks Corporation, dated as of October 13,
1998, as amended as of October 30, 1998. (Schedules not included
pursuant to Rule 601(b)(2) of Reg. S-K)
3.1 Second Restated Certificate of Incorporation of the Company. (1)
3.2 Certificate of Amendment to Second Restated Certificate of (10)
Incorporation of the Company
3.3 Certificate of Amendment to Second Restated Certificate of (8)
Incorporation
3.4 Amended and Restated Bylaws of the Company, as currently in effect. (8)
3.6 Specimen Certificate of Common Stock. (2)
4.1 Certificate of Designation of Rights, Preferences and Privileges of (4)
Series A Junior Participating Preferred Stock
4.2 Certificate of Designation of Preferences of Series B Preferred Stock (5)
4.3 Certificate of Designation of Preferences of Series C Preferred Stock (6)
10.1* Platinum Software Corporation Incentive Stock Option, Nonqualified (2)
Stock Option and Restricted Stock Purchase Plan - 1990 (the "1990
Plan").
10.2* Form of Incentive Option Agreement pertaining to the 1990 Plan. (2)
56
57
Exhibit
Number Description LOCATION
- -------- ----------- --------
10.3* Form of Nonqualified Stock Option Agreement pertaining to the 1990 (2)
Plan.
10.4* Form of Restricted Share Agreement pertaining to the 1990 Plan. (2)
10.5 Form of Indemnification Agreement for Officers and Directors of the (2)
Company.
10.6 Platinum Software Corporation Employee Stock Purchase Plan, as (2)
amended.
10.10* 1993 Nonqualified Stock Option Plan (3)
10.11* Form of Nonqualified Stock Option Agreement pertaining to the 1993 (3)
Nonqualified Stock Option Plan.
10.12* 1994 Incentive Stock Option, Non-qualified Stock Option and Restricted (5)
Stock Purchase Plan.
10.13* Form of Non-qualified Stock Option Agreement pertaining to the 1994 (5)
Plan.
10.28 Stock Purchase Agreement dated September 22, 1994 between the Company (6)
and the Series B Preferred Stock Investors
10.29 Registration Rights Agreement dated September 22, 1994 between the (6)
Company and the Series B Preferred Stock Investors
10.30 Amendment to Stock Purchase Agreement dated May 26, 1995 between the (6)
Company and the Series C Preferred Stock Investors
10.31 Amendment to Registration Rights Agreement dated May 26, 1995 between (6)
the Company and the Series C Preferred Stock Investors
10.33* Employment Offer letter with L. George Klaus dated February 7, 1996. (7)
10.34* Restricted Stock Purchase Agreement between the Company and L. George (7)
Klaus dated as of February 7, 1996.
10.35* Employment Offer letter with William L. Pieser dated February 7, 1996. (7)
10.36* Restricted Stock Purchase Agreement between the Company and William L. (7)
Pieser dated as of February 7, 1996.
10.42* Employment Offer letter with Ken Lally dated as of April 1, 1996. (7)
10.43* Restricted Stock Purchase Agreement between the Company and Ken Lally (7)
dated as of April 10, 1996.
10.44* 1996 Nonqualified Stock Plan and Form of Nonqualified Option (12)
Agreement.
10.45 Platinum Software Corporation Clientele Incentive Stock Plan. (12)
10.47* 1997 Nonqualified Stock Option Plan (13)
10.48* Amended and Restated 1998 Nonqualified Stock Option Plan (15)
10.49 Software Distribution License Agreement with FRx Software Corporation, (15)
as amended to date
10.50* Executive Employment Agreement, effective as of October 13, 1998
between the Company and Stuart W. Clifton, as amended
10.51* Noncompetition Agreement, effective as of October 13, 1998 between the (16)
Company and Stuart W. Clifton
10.52* DataWorks 1995 Equity Incentive Plan, as amended ("Equity Plan") (17)
10.53* Forms of Incentive Stock Option and Nonstatutory Stock Option under (17)
the Equity Plan
10.54* DataWorks 1995 Non-Employee Directors Stock Option Plan, as amended (18)
10.55* Sublease Agreement dated November 22, 1991 between DataWorks and Titan (17)
Corporation ("Sublease")
10.56 First Amendment to Sublease dated December 1, 1994 (17)
10.57 Lease Agreement dated January 16, 1997 between DataWorks and Whiop (19)
Real Estate Limited Partnership
10.58* 1995 Stock Option Plan, as amended of Interactive (the "Interactive (20)
Option Plan")
57
58
Exhibit
Number Description LOCATION
- -------- ----------- --------
10.59 Form of Incentive Stock Option Plan under the Interactive Option Plan (21)
10.60 Warrant to purchase common stock by DataWorks to Cruttenden Roth (21)
Incorporated
10.61 Lease between James S. Hekiman and William Finard, as Trustees of the (21)
Burlington Woods Office Trust No. 11 under a declaration of trust
dated September 10, 1980 and Interactive dated September 23, 1991
10.62* 1997 Nonstatutory Stock Plan of Interactive (22)
10.63 Single Tenant lease between ADI Research Partners, LP and DataWorks, (23)
dated as of August 14, 1998
10.64 1999 Merger Transition Stock Option Plan and Form of Nonstatutory (24)
Stock Option Agreement
10.65 Trademark License Agreement between the Company and Platinum (24)
Technology, Inc. dated as of January 14, 1999
10.66 Value Added Reseller Agreement with Ardent Software (24)
10.67* 1999 Nonstatutory Stock Option Plan (25)
10.68 Bracknell Lease Agreement dated May 19, 1999 (26)
10.69* Employment Offer Letter with Richard L. Roll dated November 16, 1999
10.70* Nonstatutory Stock Option Agreement with Richard L. Roll dated
November 16, 1999
10.71* Nonstatutory Stock Option Agreement with Richard L. Roll dated
November 16, 1999
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on the signature page of this Annual
Report on Form 10-K)
27.1 Financial Data Schedule
- ------------
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form S-1, Reg. No. 33-57294.
(2) Incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form S-1, Reg. No. 33-51566.
(3) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1993.
(4) Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form 8-A, dated April 14, 1994.
(5) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994.
(6) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995.
(7) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(8) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996.
(9) Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated June 30, 1997.
(10) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1996.
(11) Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated November 14, 1997.
(12) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997.
58
59
(13) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8, Reg. No. 333-41321.
(14) Incorporated by reference to the referenced exhibit to the Company's
Schedule 13D filed with the SEC on October 23, 1998, as amended.
(15) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998.
(16) Incorporated by reference to Company's Registration Statement on Form S-4,
Reg. No. 333-67577.
(17) Incorporated by reference to the DataWorks Registration Statement on Form
S B-2 (No. 33-97022LA) or amendments thereto.
(18) Incorporated by reference to the referenced exhibit to the DataWorks
Annual Report on Form 10-K for its fiscal year ended December 31, 1997.
(19) Incorporated by reference to the referenced exhibit to the DataWorks
Annual Report on Form 10-K for its fiscal year ended December 31, 1996.
(20) Incorporated by reference to the referenced exhibit to the Interactive
Group, Inc. Annual Report on Form 10-K for its fiscal year ended December
31, 1996.
(21) Incorporated by reference to the Interactive Group, Inc. Registration
Statement on Form S-1 (Reg. No. 33-90816).
(22) Incorporated by reference to the referenced exhibit to the Interactive
Group, Inc. Registration Statement on Form S-8 (Reg. No. 333-30259).
(23) Incorporated by reference to the referenced exhibit to the Company's
Transition Report on Form 10-K for the six months ended December 31, 1998.
(24) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(25) Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-8, Registration No. 333-85105.
(26) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(b) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated April 26, 1999
to report under Item 5, "Other Events", the Company's results for the
quarter ended March 31, 1999. In addition, the Company filed a
current report on Form 8-K dated July 7, 1999 to report under Item 5,
"Other Events" the Company's preliminary financial results for the
quarter ended June 30, 1999. The Company also filed a current report
on Form 8-K, dated July 29, 1999 to report under Item 5 "Other
Events" the Company's financial results for the quarter ended June
30, 1999. The Company also filed a current report on Form 8-K dated
October 21, 1999 to report under Item 5, "Other Events" the Company's
financial results for the quarter ended September 30, 1999. In
addition, the Company filed a current report on Form 8-K dated
December 31, 1999 to report under Item 5, "Other Events" the
Company's preliminary financial results for the quarter and year
ended December 31, 1999 as well as a workforce reduction.
59
60
(c) Exhibits.
The exhibits required by this Item are listed under Item 14(a).
(d) Financial Statement Schedules
The financial statement schedules required by this Item are listed
under Item 14(a).
The following trademarks may be mentioned in the foregoing Annual Report on Form
10-K: Platinum, Clientele, and SeQueL to Platinum. Clientele is a registered
trademark of the Company. Platinum and SeQueL to Platinum are registered
trademarks of PLATINUM technology International, inc. All other product names
are trademarks or registered trademarks of their respective companies.
60
61
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Epicor Software Corporation
We have audited the consolidated financial statements of Epicor Software
Corporation as of December 31, 1999 and 1998 and June 30, 1998 and for the year
ended December 31, 1999, the six months ended December 31, 1998, and for each of
the two years in the period ended June 30, 1998, and have issued our report
thereon dated February 2, 2000, except for Note 11, as to which the date is
March 22, 2000. Our audits also included the financial statement schedule listed
in Item 14(a) of this Annual Report on Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
February 2, 2000, except for Note 11,
as to which the date is March 22, 2000
61
62
EPICOR SOFTWARE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE AT BALANCE
BEGINNING OF PROVISION FOR AMOUNTS AT END
YEAR BAD DEBT WRITTEN OFF OTHER OF YEAR
------------ ------------- ----------- ------- --------
For the Year Ended June 30, 1997 $ 9,123 $ 2,095 $(4,955) $ -- $ 6,263
======= ======= ======= ======== =======
For the Year Ended June 30, 1998 $ 6,263 $ 1,561 $(2,665) $ -- $ 5,159
======= ======= ======= ======== =======
For the Six Months Ended December 31, 1998 $ 5,159 $ 1,263 $(2,573) $ 7,946(A) $11,795
======= ======= ======= ======== =======
For the Year Ended December 31, 1999 $11,795 $14,412 $(9,107) $ -- $17,100
======= ======= ======= ======== =======
- ---------------
(A) Amounts acquired from the DataWorks Merger.
62
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of Irvine,
State of California, on March 24, 2000.
EPICOR SOFTWARE CORPORATION
By: /s/ L. George Klaus
-------------------------------
L. George Klaus
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Epicor Software
Corporation, do hereby constitute and appoint L. George Klaus our true and
lawful attorney and agent, with full power of substitution to do any and all
acts and things in our name and behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorney and agent may deem necessary or
advisable to enable said corporation to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically but without limitation, power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments (including post-effective amendments) hereto; and we do hereby
ratify and confirm all that said attorney and agent, shall do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ L. George Klaus Chairman of the Board and Chief Executive March 24, 2000
- ------------------------------ Officer (Principal Executive Officer)
L. George Klaus
/s/ Lee Kim Vice President and Chief Financial Officer March 24, 2000
- ------------------------------ (Principal Financial and Accounting Officer)
Lee Kim
/s/ L. John Doerr Director March 24, 2000
- ------------------------------
L. John Doerr
/s/ Arthur J. Marks Director March 24, 2000
- ------------------------------
Arthur J. Marks
/s/ Donald R. Dixon Director March 24, 2000
- ------------------------------
Donald R. Dixon
/s/ Thomas F. Kelly Director March 24, 2000
- ------------------------------
Thomas F. Kelly
63
64
EXHIBIT INDEX
Exhibit
Number Description Location
- -------- ----------- --------
2.1 Agreement and Plan of Reorganization and Merger dated as of June 27, (9)
1997 among the Company, CSI Acquisition Corp., Clientele Software,
Inc., Dale E. Yocum, Pamela Yocum, William L. Mulert (Schedules not
included pursuant to Rule 601(b)(2) of Reg. S-K)
2.2 Agreement and Plan of Reorganization dated as of November 4, 1997 by (11)
and among the Company, FS Acquisition Corp., FocusSoft, Inc., John
Lococo, Michael Zimmerman and Joseph Brumleve. (Schedules not included
pursuant to Rule 601(b)(2) of Reg. S-K)
2.3 Agreement and Plan of Reorganization by and among the Company, Zoo (14)
Acquisition Corp. and DataWorks Corporation, dated as of October 13,
1998, as amended as of October 30, 1998. (Schedules not included
pursuant to Rule 601(b)(2) of Reg. S-K)
3.1 Second Restated Certificate of Incorporation of the Company. (1)
3.2 Certificate of Amendment to Second Restated Certificate of (10)
Incorporation of the Company
3.3 Certificate of Amendment to Second Restated Certificate of (8)
Incorporation
3.4 Amended and Restated Bylaws of the Company, as currently in effect. (8)
3.6 Specimen Certificate of Common Stock. (2)
4.1 Certificate of Designation of Rights, Preferences and Privileges of (4)
Series A Junior Participating Preferred Stock
4.2 Certificate of Designation of Preferences of Series B Preferred Stock (5)
4.3 Certificate of Designation of Preferences of Series C Preferred Stock (6)
10.1* Platinum Software Corporation Incentive Stock Option, Nonqualified (2)
Stock Option and Restricted Stock Purchase Plan - 1990 (the "1990
Plan").
10.2* Form of Incentive Option Agreement pertaining to the 1990 Plan. (2)
10.3* Form of Nonqualified Stock Option Agreement pertaining to the 1990 (2)
Plan.
10.4* Form of Restricted Share Agreement pertaining to the 1990 Plan. (2)
10.5 Form of Indemnification Agreement for Officers and Directors of the (2)
Company.
10.6 Platinum Software Corporation Employee Stock Purchase Plan, as (2)
amended.
10.10* 1993 Nonqualified Stock Option Plan (3)
65
Exhibit
Number Description Location
- -------- ----------- --------
10.11* Form of Nonqualified Stock Option Agreement pertaining to the 1993 (3)
Nonqualified Stock Option Plan.
10.12* 1994 Incentive Stock Option, Non-qualified Stock Option and Restricted (5)
Stock Purchase Plan.
10.13* Form of Non-qualified Stock Option Agreement pertaining to the 1994 (5)
Plan.
10.28 Stock Purchase Agreement dated September 22, 1994 between the Company (6)
and the Series B Preferred Stock Investors
10.29 Registration Rights Agreement dated September 22, 1994 between the (6)
Company and the Series B Preferred Stock Investors
10.30 Amendment to Stock Purchase Agreement dated May 26, 1995 between the (6)
Company and the Series C Preferred Stock Investors
10.31 Amendment to Registration Rights Agreement dated May 26, 1995 between (6)
the Company and the Series C Preferred Stock Investors
10.33* Employment Offer letter with L. George Klaus dated February 7, 1996. (7)
10.34* Restricted Stock Purchase Agreement between the Company and L. George (7)
Klaus dated as of February 7, 1996.
10.35* Employment Offer letter with William L. Pieser dated February 7, 1996. (7)
10.36* Restricted Stock Purchase Agreement between the Company and William L. (7)
Pieser dated as of February 7, 1996.
10.42* Employment Offer letter with Ken Lally dated as of April 1, 1996. (7)
10.43* Restricted Stock Purchase Agreement between the Company and Ken Lally (7)
dated as of April 10, 1996.
10.44* 1996 Nonqualified Stock Plan and Form of Nonqualified Option (12)
Agreement.
10.45 Platinum Software Corporation Clientele Incentive Stock Plan. (12)
10.47* 1997 Nonqualified Stock Option Plan (13)
10.48* Amended and Restated 1998 Nonqualified Stock Option Plan (15)
10.49 Software Distribution License Agreement with FRx Software Corporation, (15)
as amended to date
10.50* Executive Employment Agreement, effective as of October 13, 1998
between the Company and Stuart W. Clifton, as amended
10.51* Noncompetition Agreement, effective as of October 13, 1998 between the (16)
Company and Stuart W. Clifton
66
Exhibit
Number Description LOCATION
- -------- ----------- --------
10.52* DataWorks 1995 Equity Incentive Plan, as amended ("Equity Plan") (17)
10.53* Forms of Incentive Stock Option and Nonstatutory Stock Option under (17)
the Equity Plan
10.54* DataWorks 1995 Non-Employee Directors Stock Option Plan, as amended (18)
10.55* Sublease Agreement dated November 22, 1991 between DataWorks and Titan (17)
Corporation ("Sublease")
10.56 First Amendment to Sublease dated December 1, 1994 (17)
10.57 Lease Agreement dated January 16, 1997 between DataWorks and Whiop (19)
Real Estate Limited Partnership
10.58* 1995 Stock Option Plan, as amended of Interactive (the "Interactive (20)
Option Plan")
10.59 Form of Incentive Stock Option Plan under the Interactive Option Plan (21)
10.60 Warrant to purchase common stock by DataWorks to Cruttenden Roth (21)
Incorporated
10.61 Lease between James S. Hekiman and William Finard, as Trustees of the (21)
Burlington Woods Office Trust No. 11 under a declaration of trust
dated September 10, 1980 and Interactive dated September 23, 1991
10.62* 1997 Nonstatutory Stock Plan of Interactive (22)
10.63 Single Tenant lease between ADI Research Partners, LP and DataWorks, (23)
dated as of August 14, 1998
10.64 1999 Merger Transition Stock Option Plan and Form of Nonstatutory (24)
Stock Option Agreement
10.65 Trademark License Agreement between the Company and Platinum (24)
Technology, Inc. dated as of January 14, 1999
10.66 Value Added Reseller Agreement with Ardent Software (24)
10.67* 1999 Nonstatutory Stock Option Plan (25)
10.68 Bracknell Lease Agreement dated May 19, 1999 (26)
10.69* Employment Offer Letter with Richard L. Roll dated November 16, 1999
10.70* Nonstatutory Stock Option Agreement with Richard L. Roll dated
November 16, 1999
10.71* Nonstatutory Stock Option Agreement with Richard L. Roll dated
November 16, 1999
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on the signature page of this Annual
Report on Form 10-K)
27.1 Financial Data Schedule
67
- ------------
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form S-1, Reg. No. 33-57294.
(2) Incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form S-1, Reg. No. 33-51566.
(3) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1993.
(4) Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form 8-A, dated April 14, 1994.
(5) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1994.
(6) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995.
(7) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(8) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1996.
(9) Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated June 30, 1997.
(10) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1996.
(11) Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated November 14, 1997.
(12) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1997.
(13) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8, Reg. No. 333-41321.
(14) Incorporated by reference to the referenced exhibit to the Company's
Schedule 13D filed with the SEC on October 23, 1998, as amended.
(15) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended June 30, 1998.
(16) Incorporated by reference to Company's Registration Statement on Form S-4,
Reg. No. 333-67577.
(17) Incorporated by reference to the DataWorks Registration Statement on Form
S B-2 (No. 33-97022LA) or amendments thereto.
(18) Incorporated by reference to the referenced exhibit to the DataWorks
Annual Report on Form 10-K for its fiscal year ended December 31, 1997.
(19) Incorporated by reference to the referenced exhibit to the DataWorks
Annual Report on Form 10-K for its fiscal year ended December 31, 1996.
(20) Incorporated by reference to the referenced exhibit to the Interactive
Group, Inc. Annual Report on Form 10-K for its fiscal year ended December
31, 1996.
(21) Incorporated by reference to the Interactive Group, Inc. Registration
Statement on Form S-1 (Reg. No. 33-90816).
(22) Incorporated by reference to the referenced exhibit to the Interactive
Group, Inc. Registration Statement on Form S-8 (Reg. No. 333-30259).
(23) Incorporated by reference to the referenced exhibit to the Company's
Transition Report on Form 10-K for the six months ended December 31, 1998.
(24) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(25) Incorporated by reference to the referenced exhibit to the Company's
Registration Statement on Form S-8, Registration No. 333-85105.
(26) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.