Back to GetFilings.com
1
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 YEAR ENDED DECEMBER 31, 2000
[ ] 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
(Exact name of registrant as specified in its charter)
DELAWARE 33-0277592
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
195 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618-2402
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (949) 585-4000
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 [ ]
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 $55,273,635 (computed using
the closing sales price of $1.63 per share of Common Stock on March 13, 2001 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, 2001 was
41,786,497.
---------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 8, 2001, which Proxy Statement will be filed
no later than 120 days after the close of the registrant's fiscal year ended
December 31, 2000, are incorporated by reference in Part III of this Annual
Report on Form 10-K.
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Epicor Software Corporation ("Epicor" or the "Company") designs, develops,
markets and supports enterprise and e-business software solutions for use by
mid-sized companies as well as divisions and subsidiaries of larger corporations
worldwide. The Company's business solutions are focused on the mid-market, which
generally includes companies between $10 million and $500 million in annual
revenues. Epicor's solutions are designed to assist 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. Specifically, 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. Epicor also provides e-commerce capabilities. 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 offers "e by Epicor", a fully integrated, end-to-end, e-business
solution comprised of the following:
- eFrontOffice (Powered by Clientele(R) ), consisting of Marketing, Sales
Force Automation, Opportunity Management, Forecasting, Customer Support and
Service applications, which provides growing and mid-sized companies with a
comprehensive customer relationship management ("CRM") solution.
- eBackOffice includes financial, distribution, warehousing, human resources,
manufacturing and advance planning and scheduling capabilities designed to
integrate new e-business practices into traditional enterprise operations.
- ePortal is an easy-to-use, self-service Web navigation tool that provide
users with appropriate, secured role-based access to aggregated information
at anytime from sources both inside and external to the organization.
ePortal extends the reach of the e by Epicor suite of applications to
anyone with a browser, including customers, suppliers, partners and
employees.
- eCommerce is a suite of applications that leverages the Internet to link
electronically a company's operations with its customers, suppliers and
partners. The eCommerce Suite provides a complete and integrated electronic
Storefront enabling companies to sell products over the Web. It also helps
companies connect to the Internet to procure supplies, link up to
electronic marketplaces and process electronic transactions through the
eProcurement application.
- eIntelligence unlocks the data available throughout all e by Epicor
applications, enabling more effective and predictive decision making
throughout an enterprise. eIntelligence helps streamline operations and
improve business performance through the automated delivery of key business
metrics from pre-defined, content specific data warehousing and OLAP
solutions. eIntelligence also offers advanced budgeting and financial
reporting capabilities.
- eIndustry provides focused application extensions combined with industry
best practices to meet the unique needs of key target markets. Epicor's
Professional Services Automation (PSA) solution, eProject is designed to
automate the time and expense, billing, and resource and project planning
operations of services organizations. Epicor eIndustry for Software and
Services provides extensions to the core product for deferred revenue
accounting and maintenance renewal.
The Company's software products incorporate a significant number of features
localized to address international market opportunities, including support for
national languages, multiple currencies and accounting for value-added taxation
(VAT) and goods and services taxation (GST).
2
3
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, to qualified
customers.
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 thirteen 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 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.
Overall, the demand for enterprise applications continues to be very strong. AMR
Research, Inc., an industry research organization, projects that the enterprise
applications market will grow 24% annually for the next several years, reaching
more than $78 billion by 2004, up from just $27 billion in 1999.
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 software
applications 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 last decade's
dramatic decrease in information technology costs, coupled with a simultaneous
increase in computing power, has 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
3
4
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
companies 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.
TECHNOLOGY STRATEGY
The Company's technology strategy is to develop leading enterprise and
e-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 the
Company continues to deliver e-business and enterprise application solutions it
is increasingly looking to exploit new tools and standards for the Web to meet
the needs of today's distributed Web Services world, which increasingly melds
computing and communication paradigms as one across multiple devices.
Additionally, the Company is seeking to provide lower overall cost of ownership
and anytime, anywhere access to information for the Company's customers. Today,
the Company's core product architecture incorporates the following:
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 eBackOffice
Distribution and Financials applications (formerly Platinum ERA) uses the
Microsoft SQL Server.NET Enterprise Server relational database management system
("RDBMS"). The Company has focused the development of its eBackOffice product
line using Microsoft's industry-standard SQL language as the fundamental
database access methodology. Epicor eBackOffice Manufacturing (eManufacturing),
powered by Vantage, is designed for Progress Software Corporation's Progress
RDBMS, but it is also available on the Microsoft SQL Server.NET Enterprise
Server platform. The Company's eFrontOffice suite, powered by Clientele,
leverages both the Microsoft Access and Microsoft SQL Server.NET Enterprise
Server databases. The Company's Platinum for Windows financial accounting
application is optimized for Pervasive, Inc.'s Pervasive.SQL database. 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) 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 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
4
5
most advanced GUI features such as process wizards, cue cards, advanced on-line
help and on-line documentation. The Company delivers user interfaces based upon
today's single document interface (SDI) standards.
Powerful Application Development Tools
The Company provides comprehensive, ground-up application development and
customization capabilities for its e by Epicor, Avante, Vista, 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.
The eBackOffice Financials Customization Workbench is a software development kit
for eBackOffice Financials and Distribution 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 eBackOffice product suites to exchange
and integrate with external COM-enabled Microsoft Windows applications. The
Customization Workbench includes technical reference guides and entity
relationship diagrams, an OLE integration kit and certain report script source
code. The Company has licensed Microsoft's Visual Basic for Applications (VBA)
and has incorporated it in the Customization Workbench. More recently, the
Company has entered into Microsoft's Visual Studio for Applications (VSA)
initiative, part of the overall .NET initiative in order to provide server side
Web customization.
The eBackOffice Distribution Customization Workbench also employs PowerBuilder
from Sybase, Inc. to enable customers and authorized resellers to extend the
standard product. In environments that require complex extensions, integrations
or significant product variations, the Company offers complete customization
services through its professional services group. In addition to its
Windows-based client, the Company provides the eCommerce Storefront, a Web-based
application built using Microsoft technologies to provide electronic commerce
functionality on top of the same Microsoft database platform and also leveraging
Microsoft Site Server and Commerce Server 2000.Net Enterprise Server.
The eFrontOffice suite uses a proprietary forms package to build and modify the
user interface for both rich client and Web browser interfaces. This suite also
includes Clientele Basic to enable users and consultants to tailor the behavior
and processing of the eFrontOffice application suite to meet their specific
business needs. The eFrontOffice suite offers additional applications designed
to extend the suite's functionality, including Conductor, Connector and
ClienteleNet. 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. ClienteleNet provides customer
self-service functionality and uses Microsoft's Active Server Pages to allow
users to customize the pages they present to their customers. The eFrontOffice
suite is available completely web-enabled as well as in a traditional client
server environment. Additionally, the Company offers Internet-based solutions,
including ePortal, a powerful role based personalization and content aggregation
tool that currently consolidates information from the Company's eBackOffice,
eManufacturing, and eFrontOffice customer data, and enables internal and remote
users as well as customers to interact with the system via a 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. Epicor eManufacturing is written in the Progress 4GL, which provides a
powerful, graphical development tool set. Epicor eManufacturing supports two
database options: Progress RDBMS and Microsoft SQL Server. 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.
5
6
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 currently embraces the Microsoft Windows
Distributed interNetwork Architecture ("DNA") for building distributed
application components built upon Microsoft's .NET Enterprise Servers. 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. Increasingly, the development of common
components is being carried out in line with the rest of e by Epicor -
subscribing to Microsoft's .NET framework, Servers and tools for Web
development.
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
eFrontOffice, eIntelligence (Data warehousing and OLAP, Budgeting, Planning and
Forecasting capabilities), eScheduling (Advanced Planning and Scheduling) and
eCommerce Suite (eCommerce Storefront and eProcurement). The eFrontOffice
application suite has already been integrated with eBackOffice, eManufacturing,
and Platinum for Windows to provide integrated customer service, sales and
marketing functionality. Epicor eIntelligence components provide a common suite
of applications for data navigation, ad-hoc analysis, strategic planning and
on-line analytical processing ("OLAP") which certain products can use to help
users gain strategic insights into their business. Common components for
electronic commerce will enable both business-to-business and
business-to-consumer e-commerce applications for certain products, whether
through the Internet or private networks.
PRODUCTS
The Company designs, develops, markets and supports enterprise software
applications that provide organizations with technically advanced business
solutions. The Company has one primary product suite for the mid-market, "e by
Epicor". The e by Epicor product suite includes e-commerce, sales force
automation, customer service and support, financial accounting, human resources,
budgeting, distribution and manufacturing functionality.
The Company develops, sells and supports other software products through
separate product divisions. These products include Avante, Vista, Impresa and
Platinum for Windows. Avante is an integrated ERP solution for mid-sized
manufacturers of discrete and highly engineered products. 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. 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.
e by Epicor
e by Epicor (incorporates products formerly named Platinum ERA, Clientele, and
Vantage), 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). e by Epicor includes the following components: eFrontOffice,
eBackOffice Financials and Distribution (eBackOffice), eBackOffice Manufacturing
(eManufacturing), eCommerce Suite, ePortal, eIntelligence, and eIndustry.
6
7
eFrontOffice, Powered by Clientele
eFrontOffice (formerly Clientele) is an integrated, web-based customer
relationship management solution designed to meet the needs of rapidly growing,
mid-sized organizations. eFrontOffice allows organizations to support and manage
their most important asset - their customers. eFrontOffice enables businesses to
easily gather, track, organize and share customer information to boost revenues
and increase customer service levels. eFrontOffice 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. eFrontOffice spans the barriers
between traditional Front Office and Back Office operations to provide customer
service, support, help desk and sales force automation information.
eFrontOffice eSales and eMarketing empower organizations to focus on the right
opportunities while providing access to timely information. eFrontOffice eSales
and eMarketing provide contact, lead, opportunity and account management in one
package. eFrontOffice eSupport manages the support needs of an organizations
external customers and provides call management, product tracking, RMA tracking,
call queuing/follow-up and problem resolution. eFrontOffice eHelpDesk provides
detailed call tracking, asset/knowledge management, service requests,
maintenance and user profile tracking and management.
eFrontOffice 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 and self-service for customers over the Internet via secure, web
application.
eBackOffice Distribution and Financials
eBackOffice is typically targeted to either a non-manufacturing or service-based
business with revenues between $10 million and $500 million or a distributor
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. eBackOffice 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, eBackOffice was designed for
the Microsoft Windows NT server platform and runs on Windows NT and Windows
95/98 client platforms. eBackOffice 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, eBackOffice is a 32-bit client and server
application that takes full advantage of 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 eBackOffice 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, and provides inherent portability of the RDBMS to a large number of
server, hardware and operating system platforms without code change or
conversion.
eBackOffice includes financial, distribution and manufacturing suites of
applications. The following back office financial and distribution applications
are presently generally available in version 7.1: 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, sales order processing, eCommerce StoreFront, Purchasing,
Distribution, Assembly and Customization Workbench.
eBackOffice Distribution is a comprehensive, client/server application designed
to improve the efficiency and responsiveness of distribution operations. The
distribution suite is fully integrated with the eBackOffice Financial and
eFrontOffice suites to ensure that a company's entire operation is synchronized
from the customer to the warehouse to the supplier. The customer-centric focus
of the eBackOffice enables companies to respond quickly to customer demands and
improve customer service.
7
8
License fees for eBackOffice vary depending upon the number of modules, servers
and concurrent users. The following table shows revenues attributable to
licenses of eBackOffice including its predecessor products, Platinum ERA,
Platinum SQL and Clientele (dollars in millions):
Percentage of
Revenue Total Revenue
------------- --------------
Year ended December 31, 2000 $41.8 19%
Year ended December 31, 1999 $44.8 17%
Six months ended December 31, 1998 $28.7 45%
Year ended June 30, 1998 $48.8 50%
eBackOffice also includes a variety of Internet-enabled products to extend its
functionality via the Internet, including an information access tool, ePortal (a
customer, supplier and employee-based enterprise information portal), a
business-to-business (B2B) and business-to-consumer (B2C) storefront solution,
eCommerce StoreFront, and eProcurement for catalog based purchasing via the Web.
eBackOffice Manufacturing
eManufacturing is an integrated, Windows-based ERP solution for make-to-order
(MTO), configure-to-order (CTO) and job shop manufacturers that meets the
dynamic product requirements of custom manufacturing operations. eManufacturing
provides powerful tools for quoting, visual scheduling, job tracking and
costing, as well as shop floor data collection. eManufacturing supports a mix of
custom and standard part orders and multilevel assemblies and is comprised of 26
fully integrated business modules. eManufacturing is optimized for the rapid
deployment, minimal support and price/performance requirements of mid-market
manufacturers in the $10 to $500 million revenue range.
eManufacturing 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 eManufacturing
version 5.0: Quote Management, Order Management, Product Configuration, Job
Management, MRP, Advanced Bill of Materials, Visual Scheduling, Advanced
Planning and Scheduling, 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, Customer ePortal
for eManufacturing, EDI, and Tools. eManufacturing also includes front office
applications through its integration with eFrontOffice.
eBackOffice Warehouse
eBackOffice Warehouse (eWarehouse) extends the distribution functionality for
the eBackOffice product. It includes two applications: Data Collection Suite and
Management and Fulfillment Suite. These applications are tightly integrated with
our eBackOffice Distribution suite and provide wireless shop floor data
collection, bar coded shipping and receiving and warehouse management and
tracking.
eBackOffice People
ePeople provides a human resources and payroll solution. It consists of the
following applications: HRMS/Payroll - Client and Server, Web - Manager and
Employee Self Service, Business Intelligence. Epicor has private labeled
Ultimate Software's UltiPro solution as ePeople, powered by UltiPro, offers
greater total business value by allowing a company to streamline human resource
and payroll processes, easily report on and analyze key business metrics, and
provide Web-based self-service to empower everyone in its organization. The
solution delivers critical business value, increasing efficiency and allowing
the entire workforce to focus on key company objectives. The Business
Intelligence tools enable strategic analysis of key business trends for better
planning and informed decision-making. ePeople is available as a common
component with the following Epicor product families: e by Epicor, Vantage,
Impresa and iSolutions. It is also available to companies looking for an
HRMS/Payroll solution as the first step in building their enterprise solution.
eBackOffice Scheduling
8
9
eBackOffice Scheduling (formerly Epicor APS and C-Way) is an advanced planning
and scheduling solution. eScheduling helps manufacturers realize shorter lead
times, accurate real-time order promising, and smaller inventories. eScheduling
provides forward and backward scheduling capabilities as well as rule- and
constraint-based scheduling.
eIntelligence
eIntelligence is a complete set of tools that let you strategically analyze the
data available throughout e by Epicor. eIntelligence comprises the following
components: Decision Store (data warehousing), Analytics (packaged analyses that
drive strategic insights), Budgeting, Reporting, and Agents.
eCommerce Suite
eCommerce Suite includes eCommerce Storefront and eProcurement.
The eCommerce Storefront enables Epicor's customers to sell products and
services over the Web, giving consumers and trading partners a convenient, open
location for making purchases. By supporting both business-to-business and
business-to-consumer activity, the eCommerce StoreFront is a versatile
e-business engine that can handle all of a company's requirements. An integrated
product that supports all aspects of a customer base is critical in today's
market.
eProcurement is an integrated Web commerce application that enables
organizations to gain and improve control of operational resources by leveraging
Web technology to connect large populations of frontline employees, management
and suppliers. eProcurement provides planning, execution and analysis in a
closed-loop system. The goal: slash costs, act faster, and perform predictably.
eProcurement facilitates a true trading network, allowing buyers and suppliers
to maintain control over their trading relationships. eProcurement provides a
virtual bridge between buyers and suppliers.
ePortal
ePortal is a Web-based, interactive solution designed to help customer's access
relevant information from both within the enterprise (such as account
information, support activity) and from external sources (industry information,
news feeds, weather, etc). ePortal consists of the ePortal Enterprise
Information Server, possessing the Company's powerful Stargate(TM) Engine at its
heart, and which is then enriched by content specific information packs called
ePortlets (Customer ePortlet, Supplier ePortlet, Employee ePortlet, etc).
ePortal provides a compelling gateway to users to all of the information they
require to carry out their jobs more effectively and assist them with decision
support. ePortal makes use of a personalization paradigm to allow each users'
experience to be tailored to their specific role by filtering out "information
overload". ePortal can also be used to host key business metrics from Epicor
eIntelligence, described as XML Active Books.
eIndustry
eIndustry is a series of products and application extensions that provide
functionality and industry best practices for specific target industries.
Historically, large enterprise application vendors have created vertical
industry focus designed for Fortune 1000 industries such as automotive, retail
and healthcare. However, these systems are often too expensive and overly
complex for the mid-market. Many mid-market companies are not necessarily part
of a traditional vertical market, but rather have unique processes,
best-practices and highly specialized functionality that are critical to their
success. The Company is committed to providing industry specific solutions
deployed by vertical teams with an in-depth knowledge of the issues facing the
needs of their industry segment. Since specific industries maintain common
requirements, eIndustry solutions enable customers to leverage not only a
solution tailored to the unique needs of their market, but also focused industry
expertise through the Company's Professional Services organization. eIndustry
solutions are complemented by strategic relationships with key partners to
provide product extensions and domain expertise as part of an integrated,
end-to-end solution. Today, the Company is targeting industry sectors including:
software and computer services, hospitality, financial services, capital
equipment, metal fabrication and precision machining.
eIndustry also includes solutions for Professional Services Automation (PSA)
with an integrated end-to-end solution for service-based businesses. Epicor
eProject is at the core of the Company's PSA solution and provides professional
services organizations with the tools to improve staff utilization, optimize
resources and increase cash flow, ultimately assisting professional services
organizations in translating time to the bottom line. As with all
9
10
eIndustry solutions, the comprehensive integration provided by e by Epicor
provides professional service companies the tools to manage their entire value
chain from sale through to successful delivery.
Divisional Products
The Company's divisional applications include Vista, Avante, Impresa and
Platinum for Windows.
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 that 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.
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 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
10
11
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: Bill of Material, Customer Order
Management, End Item Effectivity, Impresa Toolbox, Inventory Management, Labor
Management, Lot Control / Serial Tracking, Planning & Scheduling, Procurement
Management, Routings / Work Centers, system Control, WIP Management, Work Order
Management Multi-Currency, Actual Costing, Average Costing, Capability
Management, Capacity Planning, Complex Assembly, Engineering Change Control,
Financial Statement Generator Accounts Payable Fixed Assets Management, Finite
Scheduling, Forecasting, Inspection / MRB, Job Costing, Models and Options,
Multi-Plant Applications, Physical Cycle Count Management, Product Costing,
Project Control, Quality Assurance Management, Repetitive Manufacturing, Rough
Cut Capacity Planning, Structures MRO, Component MRO Air Frames MRO Time and
Attendance, Tool Management, Travel and Expense, and Warranty Tracking / Return
Authorization.
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 is
fully compatible with Windows 2000, in both its client and data processing
components. The product is available to be installed as a 2 tier, or 3 tier
client server configuration, which allows users the option of offloading CPU
intensive processing from their PCs' to an application server. The application
is supported by the Pervasive SQL 2000 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.
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 Avante, the Company resells complete third
party computer hardware systems and related peripherals. The Company does not
carry inventory of computer hardware.
PROFESSIONAL SERVICES, TECHNICAL SUPPORT AND SOFTWARE MAINTENANCE
The Company's professional services organizations, including those within the
product divisions, provide 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.
These professional services are rendered in both domestic and international
markets. Professional services are generally provided on a time and materials
basis, although the Company 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 related software. The program also
guarantees a specific implementation timeframe and includes such services as
planning, installation, project
11
12
management, data migration, training and customization. The program is subject
to specific terms and conditions and strict 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.
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 generally 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 (dollars in millions):
Percentage of
Revenue Total Revenue
------------- --------------
Year ended December 31, 2000 $139.8 64%
Year ended December 31, 1999 $157.8 61%
Six months ended December 31, 1998 $ 30.4 48%
Year ended June 30, 1998 $ 40.4 41%
MARKETING, SALES AND DISTRIBUTION
The Company sells and markets its products and services worldwide, directly and
through a network of VARs, distributors and Authorized Consultants who market
the Company's products on either an exclusive or nonexclusive basis, depending
the which of the Company's product lines they handle and the region of the world
in which they are located. 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
e by Epicor product suite through a hybrid channel that includes a direct sales
force as well as a network of exclusive VARs. The Company sells its eFrontOffice
product through an internal telesales organization, a direct sales force and
through a network of exclusive VARs. The Avante and Impresa products are
presently sold by direct sales forces within the respective product divisions.
The Vista product is sold through a dedicated telesales organization. The
Company's field sales organizations are generally organized on a geographic
basis.
The Company's network of VARs and Authorized Consultants are required to undergo
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. VARs selling the e by
Epicor suite must do so exclusive of other competing 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 the VARs growth
and support. These individuals are responsible for
12
13
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, Mexico,
Germany, France, Sweden, the Netherlands, Australia, Canada, Hong Kong,
Singapore, Taiwan, 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, Central and South America, Africa, Asia and the Middle East
through third-party distributors and dealers.
Products are generally shipped as orders are received or within short period
thereafter 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 remains 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 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
(dollars in millions):
Software
Development Percentage of
Expenses Total Revenues
------------ -----------------------
Fiscal Year ended December 31, 2000 $ 33.4 15%
Fiscal Year ended December 31, 1999 $ 35.8 14%
Six Months ended December 31, 1998 $ 9.1 14%
Fiscal Year ended June 30, 1998 $ 13.0 13%
The Company intends to continue to invest in product development. In particular,
the Company plans to continue to (i) develop product enhancements, including
additional functions and features, for its product lines, (ii) develop
additional e-Business 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
e-Business market places, (iv) continue to develop common application components
such as eCommerce, 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 scalability,
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 are scheduled to support
Microsoft BizTalk, an XML framework for application integration, electronic
commerce and business interoperability. See "Certain Considerations - Forward
Looking Statements."
13
14
The Company translates and localizes certain of its products, either directly or
through outside contractors, for sale in Europe, Latin America and Asia.
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 e-Business and e-Commerce. 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 e-Business enterprise 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 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 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 enterprise 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, and 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 $100 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
14
15
looking for Microsoft SQL Server based solutions and the e by Epicor 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 e-Business and e-Commerce
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 in 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, 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. (in the
process of being acquired by Microsoft Corporation), Scala, Inc., Systems Union,
Ltd., Solomon Software (now owned by Great Plains), and Geac for financial
accounting; MAPICS, Inc., Fourth Shift Corporation, QAD, Inc., Frontstep Inc.,
Lilly Software and 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.
On December 21, 2000, Microsoft announced that it had reached an agreement to
acquire Great Plains Software Incorporated. Once the acquisition is completed,
Great Plains will become a division of Microsoft, focused on providing business
solutions to small and mid-sized companies. From a competitive perspective, the
Company believes that Microsoft will be most competitive in financials and
business management applications at the lower end of its market. The Company
believes that it will be able to competitively differentiate itself based on the
depth of its product offering, which includes manufacturing, distribution,
ebusiness and customer relationship management (CRM).
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. To date, the
Company has not relied 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, eFrontOffice (Powered
by Clientele(R)), Vista and eBackoffice (formerly 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.
15
16
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.
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.
EMPLOYEES
As of December 31, 2000, the Company had 1,368 full-time employees, including
262 in product development, 232 in support services, 323 in professional
services, 260 in sales, 93 in marketing and 198 in administration. The Company's
employees are not represented by any collective bargaining organization, and the
Company has never experienced a work stoppage.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD LOOKING STATEMENTS - SAFE HARBOR.
Certain statements in this Report on Form 10-K, including statements regarding
market trends, future product development, future revenue and expense levels and
cash flows are forward looking statements within the meaning of Section 27A of
the Securities Act of 1993, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, that involve risks and uncertainties. Any
statements contained herein (including without limitation statements to the
effect that the Company or Management "estimates," "expects," "anticipates,"
"plans," "believes," "projects," "continues," "may," or "will" or statements
concerning "potential" or "opportunity" or variations thereof or comparable
terminology or the negative thereof) that are not statements of historical fact
should be construed as forward looking statements. These statements include the
Company's expectation that (i) the Company's license revenue will continue to be
impacted in 2001 by decreases in license revenues from its divisional product
lines, (ii) consulting revenues will continue to be impacted by fluctuations in
the related license revenues in 2001, (iii) maintenance revenues will increase
as the Company's installed base continues to grow, (iv) 2001 international
revenues will continue to be residually impacted by the Company's focus on its
North American sales to existing customers as opposed to new customers and that
international revenues will continue to represent a significant portion of total
revenues, (v) it will incur additional branding costs during 2001, and (vi)
software development expenses will increase in 2001. 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 as pages
16 to 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 during 2001.
OUR CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS HAVE BEEN DECLINING AND
THE PROPORTION OF OUR ACCOUNTS RECEIVABLE OVER 90 DAYS OLD HAVE BEEN INCREASING
AND, AS A RESULT, OUR DOUBTFUL ACCOUNTS RESERVE MAY NOT BE SUFFICIENT, WE MAY
NOT BE ABLE TO COLLECT THE AGED ACCOUNTS AND WE MAY NEED TO RAISE ADDITIONAL
CASH.
16
17
The Company's cash and cash equivalents and short-term investments decreased
from $30.4 million at December 31, 1999 to $26.8 million at December 31, 2000,
principally due to the net loss incurred during the year ended December 31, 2000
and cash outlays related to the 1999 restructuring. There were additional cash
outlays in connection with facilities reductions and closures arising out of the
1999 restructuring. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Liquidity and Capital Resources." The
Company reduced operating expenses and improved collections against accounts
receivable sufficiently in order to achieve positive quarterly operating cash
flow for the third and fourth quarters of 2000. However, if the Company is not
successful in achieving targeted revenues and expenses or maintaining a positive
cash flow during 2001, the Company may be required to take further actions to
align its operating expenses such as reductions in work force or other expense
cutting measures. In addition, although the Company has obtained a bank line of
credit, as of September 30, 2000, the Company had violated the EBITDA and the
tangible net worth covenants included in the terms of the credit agreement. The
Company received waivers from its lender for these violations on November 13,
2000 and negotiated amendments to the credit agreement to reduce the thresholds
required by the EBITDA and the tangible net worth financial covenants. As of
December 31, 2000, the Company was in violation of the amended EBITDA covenant,
for which it received a waiver on January 31, 2001. If the Company is unable to
maintain a positive cash flow or comply with the financial covenants in its
current credit agreement, there can be no assurance that the Company will be
able to secure additional funding or, if secured, on favorable terms. The
Company has also experienced since December 31, 1999 an increase in the
proportion of accounts receivable over 90 days old. The increase in aged
receivables is partially attributable to delays in the Company's collections
activities related to the Company's consolidation of its previously separate
accounting systems and financial processes arising from the Company's 1998
acquisition of DataWorks. This consolidation was completed during the second
quarter of 2000 and the Company believes all issues arising from this
integration have been resolved. There are also ongoing collection issues caused
by customer uncertainty over the Company's change in product strategy and
quality issues from certain legacy product releases. If the Company is not
successful in collecting a significant portion of its net accounts receivable,
the Company may be required to seek alternative financing sources in addition to
the bank credit facility it secured in August 2000. In addition, should the
Company not reduce its aged receivables, its ability to borrow against the
revolving portion of the credit facility may be severely restricted due to the
fact that borrowings are limited to 85% of eligible receivables, which excludes
receivables over ninety days old.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND IF WE FAIL TO
MEET EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS OUR SHARE PRICE MAY
DECREASE.
The Company's quarterly operating results have fluctuated in the past. The
Company's operating results may fluctuate in the future as a result of many
factors that may include:
- - The demand for the Company's products, including reduced demand related to
changes in marketing focus for certain products
- - The size and timing of orders for the Company's products
- - The number, timing and significance of new product announcements by the
Company and its competitors
- - The Company's ability to introduce and market new and enhanced versions of
its products on a timely basis
- - The level of product and price competition
- - Changes in operating expenses of the Company
- - Changes in average selling prices
Additionally, the Company noted a trend during the last three quarters of an
extending sales cycles for some of its products as existing and prospective
customers transition to the purchase of the Company's integrated and
comprehensive e-Business suite of products. The Company is unable to determine
at this point in time whether this trend will continue or diminish in the
future. In addition, the Company will most likely record a significant portion
of its revenues in the final month of any quarter with a concentration of such
revenues recorded in the final ten business days of that month.
Due to the above factors, among others, the Company's revenues will be difficult
to forecast. The Company, however, will base its expense levels, in significant
part, on its expectations of future revenue. As a result, the Company expects
its expense levels to be relatively fixed in the short term. The Company's
failure to meet revenue expectations could adversely affect operating results.
Further, an unanticipated decline in revenue for a particular quarter may
disproportionately affect the Company's operating results 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
17
18
investors. Such an event would likely have a material adverse effect upon the
price of the Company's Common Stock.
IF WE FAIL TO RAPIDLY DEVELOP AND INTRODUCE NEW PRODUCTS AND SERVICES, WE WILL
NOT BE ABLE TO COMPETE EFFECTIVELY AND OUR ABILITY TO GENERATE REVENUES WILL
SUFFER.
The market for the Company's software products is subject to ongoing
technological developments, evolving industry standards and rapid changes in
customer requirements. The Company believes the Internet is transforming the way
businesses operate and the software requirements of customers. Specifically, the
Company believes that customers desire e-Business 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 e-Business, existing products may become obsolete and unmarketable. The
Company's future business, operating results and financial condition will depend
on its ability to:
- - Continue to deliver and achieve successful market acceptance of e-Business
application software to facilitate e-Business, including web enablement
- - Enhance its existing products
- - Continue to develop new and/or improved products that address the
increasingly sophisticated needs of its customers, particularly in the areas
of e-Business and e-Commerce
- - Develop and continue to develop products for additional platforms
- - Effectively train its sales force to sell an integrated suite of e-Business
products
Further, if the Company fails to respond to technological advances, emerging
industry standards and end-user requirements, or experiences any significant
delays in product development or introduction, the Company's competitive
position and revenues could be adversely affected. The Company's success will
depend on its ability to continue to develop and successfully introduce new
products and services, including those in the e-Business arena. The Company
cannot assure you that it will successfully develop and market such new and/or
improved products on a timely basis, if at all. In developing new products, the
Company may encounter software errors or failures that force the delay in the
commercial release of the new products. Any such delay or failure to develop
could have a material adverse effect on the Company's business, results of
operations and financial condition. From time to time, the Company or its
competitors may announce new products, capabilities or technologies that have
the potential to replace or shorten the life cycles of the Company's existing
products. The Company cannot assure you that such announcements will not cause
customers to delay or alter their purchasing decisions, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS, WHICH COULD RESULT IN THE
REJECTION OF OUR PRODUCTS AND DAMAGE OUR REPUTATION AS WELL AS CAUSE LOST
REVENUE, DELAYS IN COLLECTING ACCOUNTS RECEIVABLE, DIVERTED DEVELOPMENT
RESOURCES AND INCREASED SERVICE COSTS AND WARRANTY CLAIMS.
Software products as complex as the ERP products offered by the Company may
contain undetected errors or failures when first introduced or as new versions
are released. Despite testing by the Company, and by current and
potential customers, any of the Company's products may contain errors after
their commercial shipment. Such errors may cause loss of or delay in market
acceptance of the Company's products, damage to the Company's reputation, and
increased service and warranty costs. The Company from time to time is notified
by some of its customers of errors in its various product lines, including its e
by Epicor products. Although it has not occurred to date, the possibility of the
Company being unable to correct such errors in a timely manner could have a
material adverse effect on the Company's results of operations and its cash
flows. In addition, technical problems with the current release of the database
platforms on which the Company's products operate could impact sales of these
products, which could have a material adverse effect on the Company's results of
operations.
WE INTEND TO PURSUE STRATEGIC ACQUISITIONS, INVESTMENTS, AND RELATIONSHIPS AND
WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR OPERATIONS IF WE FAIL TO
SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES AND TECHNOLOGIES.
As part of its business strategy, the Company intends to continue 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 e-Business and e-Commerce. This strategy may involve acquisitions,
investments in other businesses that offer complementary products, joint
development agreements or technology licensing agreements. The risks commonly
encountered in the acquisitions of businesses would accompany any future
acquisitions or investments by the Company. Such risks may include the
following:
18
19
- - The difficulty of integrating previously distinct businesses into one
business unit
- - The substantial management time devoted to such activities
- - The potential disruption of the Company's ongoing business
- - Undisclosed liabilities
- - Failure to realize anticipated benefits (such as synergies and cost
savings)
- - Issues related to product transition (such as development, distribution and
customer support)
The Company expects that the consideration it would pay in such future
acquisitions would consist of stock, rights to purchase stock, cash or some
combination of the aforementioned. If the Company issues stock or rights to
purchase stock in connection with these future acquisitions, earnings (loss) per
share and then-existing holders of the Company's Common Stock may experience
dilution.
The risks that the Company may encounter in licensing technology from third
parties include the following:
- - The difficulty in integrating the third party product with the Company's
products
- - Undiscovered software errors in the third party product
- - Difficulties in selling the third party product
- - Difficulties in providing satisfactory support for the third party product
- - Potential infringement claims from the use of the third party product
WE RELY ON DISTRIBUTORS AND VARS TO SELL OUR PRODUCTS AND DISRUPTIONS TO THESE
CHANNELS WOULD ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUES FROM THE SALE
OF OUR PRODUCTS.
The Company distributes its Platinum for Windows product exclusively through
third party distributors and VARs, and distributes its e by Epicor product
(formerly named Platinum ERA) through a direct sales force as well as through
VARs and distributors. The Company's distribution channel includes distributors,
VARs and authorized consultants, which consist primarily of professional firms.
If the Company's VARs or authorized consultants cease distributing or
recommending the Company's products or emphasize competing products, the
Company's results of operations could be materially and adversely affected. In
May 2000, the Company announced that effective September 1, 2000 in the United
States it would only allow its e by Epicor product line to be resold by VARs who
offer such product line exclusive of other competing product lines. The
immediate result of this change was that as of September 1, 2000 the number of
Company VAR's selling the e by Epicor product line domestically was
approximately cut in half from 102 to 45. VAR sales for the period ended
September 30, 2000 decreased from the quarter ended June 30, 2000. However, the
Company was unable to determine how much of this drop in sales revenue, if any,
was attributable to the change in the VAR program as opposed to other
independent factors. VAR sales for the quarter ended December 31, 2000 increased
over the prior quarter. The long term impact of this change in the VAR channel
to the Company's performance is as of yet undetermined as is whether the
Company's ability to generate license revenue from its e by Epicor products will
be adversely or favorably impacted, which would effect the Company's
consolidated results of operations and cash flows.
There can be no assurance that the direct sales force will not lead to conflicts
with the Company's VAR channels.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM THE SALE OF ENTERPRISE
APPLICATION SOFTWARE AND RELATED SUPPORT SERVICES AND IF THOSE SALES SUFFER, OUR
BUSINESS WILL BE NEGATIVELY IMPACTED.
The Company derives much of its revenue from the sale of its e by Epicor
enterprise application software and related 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. For example, the industry for ERP applications was negatively
impacted in 1999 and the first half of 2000 by Year 2000 concerns. Other such
events may include:
- - Competition from other products
- - Significant flaws in the Company's products
- - Incompatibility with third-party hardware or software products
- - Negative publicity or evaluation of the Company or its products
- - Obsolescence of the hardware platforms or software environments in which
the Company's systems run
19
20
OUR PRODUCTS RELY ON THIRD PARTY SOFTWARE PRODUCTS AND OUR REPUTATION AND
RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY OUR INABILITY TO CONTROL
THEIR OPERATIONS.
The Company's products incorporate and use software products developed by other
entities. The Company cannot assure you that such third parties will:
- - Remain in business
- - Support the Company's product line
- - Maintain viable product lines
- - Make their product lines available to the Company on commercially
acceptable terms
Any significant interruption in the supply of such third-party technology could
have a material adverse effect on the Company's business, results of operation,
cash flows and financial condition.
THE MARKET FOR WEB-BASED DEVELOPMENT TOOLS, APPLICATION PRODUCTS AND CONSULTING
AND EDUCATION SERVICES IS EMERGING AND IT COULD NEGATIVELY AFFECT OUR
CLIENT/SERVER-BASED PRODUCTS.
The Company's development tools, application products and consulting and
education services generally help organizations build, customize or deploy
solutions that operate in a client/server computing environment. There can be no
assurance that these markets will continue to grow or that the Company will be
able to respond effectively to the evolving requirements of these markets. The
Company believes that the environment for application software is continuing to
change from client/server to a web-based environment to facilitate e-Business.
If the Company fails to respond effectively to evolving requirements of this
market, the Company's business, financial condition, results of operations and
cash flows will be materially and adversely affected.
THE CONTINUING IMPACT ON THE COMPANY OF EMERGING AREAS SUCH AS THE INTERNET,
ON-LINE SERVICES, E-BUSINESS APPLICATIONS AND ELECTRONIC COMMERCE IS UNCERTAIN
AND COULD NEGATIVELY IMPACT OUR BUSINESS.
There can be no assurance that the Company will be able to continue to provide a
product offering that will satisfy new customer demands in these areas. In
addition, standards for web-enabled and e-Business applications, as well as
other industry adopted and de facto standards for the Internet, are continuing
to evolve 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 that 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 partially
and/or fully unresolved and may affect the use of the Internet as a medium to
support the functionality of our products and distribution of our software. If
these critical issues are not favorably resolved, the Company's business,
operating results, cash flows and financial condition could be materially and
adversely affected.
THE MARKET FOR OUR PRODUCTS IS HIGHLY COMPETITIVE AND IF WE ARE UNABLE TO
COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS OUR BUSINESS COULD BE
NEGATIVELY IMPACTED.
The business information systems industry in general and the ERP computer
software industry in particular are very competitive and subject to rapid
technological change. Many of the Company's current and potential competitors
have (1) longer operating histories, (2) significantly greater financial,
technical and marketing resources, (3) greater name recognition, (4) larger
technical staffs, and (5) a larger installed customer base than the Company has.
A number of companies offer products that are similar to the Company's products
and that target the same markets. In addition, any of these competitors may be
able to respond quicker to new or emerging technologies and changes in customer
requirements (such as e-Business 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
20
21
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, cash flows and financial condition.
WE MAY NOT BE ABLE TO MAINTAIN AND EXPAND OUR BUSINESS IF WE ARE NOT ABLE TO
RETAIN, HIRE AND INTEGRATE SUFFICIENTLY QUALIFIED PERSONNEL.
The Company's success depends on the continued service of key management
personnel that are not subject to an employment agreement. In addition, the
competition to attract, retain and motivate qualified technical, sales and
operations personnel is intense. The Company has at times experienced, and
continues to experience, difficulty in recruiting qualified personnel,
particularly in software development and customer support. There is no assurance
that the Company can retain its key personnel or attract other qualified
personnel in the future. The failure to attract or retain such persons could
have a material adverse effect on the Company's business, operating results,
cash flows and financial condition.
OUR FUTURE RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS.
The Company believes that any future growth of the Company will be dependent, in
part, upon the Company's ability to maintain and increase revenues in
international markets. There is no assurance that the Company will maintain or
expand its international sales. If the revenues that the Company generates from
foreign activities are inadequate to offset the expense of maintaining foreign
offices and activities, the Company's business, financial condition and results
of operations could be materially and adversely affected. International sales
are subject to inherent risks, including:
- - Unexpected changes in regulatory requirements
- - Tariffs and other barriers
- - Unfavorable intellectual property laws
- - Fluctuating exchange rates
- - Difficulties in staffing and managing foreign sales and support operations
- - Longer accounts receivable payment cycles
- - Difficulties in collecting payment
- - Potentially adverse tax consequences, including repatriation of earnings
- - Development of localized and translated products
- - Lack of acceptance of localized products in foreign countries
- - Burdens of complying with a wide variety of foreign laws
- - Effects of high local wage scales and other expenses
- - Shortage of skilled personnel required for the local operation
Any one of these factors could materially and adversely affect the Company's
future international sales and, consequently, the Company's business, operating
results, cash flows and financial condition. A portion of the Company's revenues
from sales to foreign entities, including foreign governments, has been in the
form of foreign currencies. The Company does not have any hedging or similar
foreign currency contracts. Fluctuations in the value of foreign currencies
could adversely impact the profitability of the Company's foreign operations.
IF THIRD PARTIES INFRINGE OUR INTELLECTUAL PROPERTY, WE MAY EXPEND SIGNIFICANT
RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY.
The Company relies on a combination of copyright, trademark and trade secret
laws, employee and third-party nondisclosure agreements and other industry
standard methods for protecting ownership of its proprietary software. However,
the Company cannot assure you that in spite of these precautions, an
unauthorized third party will not copy or reverse-engineer certain portions of
the Company's products or obtain and use information that the Company regards as
proprietary. There is no assurance that the mechanisms that the Company uses to
protect its intellectual property will be adequate or that the Company's
competitors will not independently develop products that are substantially
equivalent or superior to the Company's products.
21
22
The Company may from time to time receive notices from third parties claiming
that its products infringe upon third-party intellectual property rights. The
Company expects that as the number of software products in the country increases
and the functionality of these products further overlaps, the number of these
types of claims will increase. Any such claim, with or without merit, could
result in costly litigation and require the Company to enter into royalty or
licensing arrangements. The terms of such royalty or license arrangements, if
required, may not be favorable to the Company.
In addition, in certain cases, the Company provides the source code for some of
its application software under licenses to its customers to enable them to
customize the software to meet their particular requirements. Although the
source code licenses contain confidentiality and nondisclosure provisions, the
Company cannot be certain that such customers will take adequate precautions to
protect the Company's source code or other confidential information.
SUBSTANTIAL SALES OF OUR STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
As of March 13, 2001, the Company had 41,786,497 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 and is entitled to vote with the holders of common
stock on an as-converted basis on all matters presented for shareholder
approval. 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, stock
grant, or restricted stock grant plans. As a result, a substantial number of
shares of common stock will be eligible for sale in the public market at various
times in the future. Sales of substantial amounts of such shares could adversely
affect the market price of the Company's Common Stock.
THE MARKET FOR OUR STOCK IS VOLATILE AND FLUCTUATIONS IN OPERATING RESULTS,
CHANGES IN EARNINGS ESTIMATES BY ANALYSTS AND OTHER FACTORS COULD NEGATIVELY
AFFECT OUR STOCK'S PRICE.
The market prices for securities of technology companies, including the Company,
have been quite 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.
POTENTIAL "YEAR 2000" PROBLEMS ASSOCIATED WITH OUR PRODUCTS COULD HARM OUR
REPUTATION OR CAUSE US TO MAKE EXPENDITURES TO FIX THE PROBLEMS.
The Company believes that the current versions of its products are Year 2000
compliant and following the transition to the Year 2000 and 2001 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, results of operations and cash flows.
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 116,000 square feet
of the San Diego facility is currently sublet to three third parties.
22
23
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, product development, and administration in various locations
worldwide. The Company is continually evaluating its facilities for cost
effectiveness and suitability for purpose and will adjust its facilities
portfolio to fit the needs of the Company at any point in time. However, the
Company believes its current facilities are suitable for their respective uses
and adequate for the Company's needs.
ITEM 3. LEGAL PROCEEDINGS
In August 1999, DataWorks filed for arbitration against AAR Corporation with the
American Arbitration Association in Denver, Colorado. The arbitration arose out
of the development, licensing and sale of Impresa for MRO software by DataWorks
to AAR in 1997. AAR counterclaimed against DataWorks alleging breach of
contract. In January 2001, the Company settled this matter by agreeing to pay
AAR $2,000,000. The Company has accrued this liability as of December 31, 2000.
In December 1998, Alyn Corporation filed a lawsuit against DataWorks in San
Diego, California Superior Court arising out of the licensing and sale of
software by DataWorks to Alyn in December 1996. In March 2000, the Company
agreed to pay Alyn $1,800,000 to settle the lawsuit. The Company accrued the
liability for this matter as of December 31, 1999. The Company is in discussions
with its insurance carrier regarding coverage for this matter, but the amount of
insurance coverage, if any, has not yet been determined.
In November 1998, a securities class action was filed in the United States
District Court for the Southern District of California against DataWorks,
certain of its current and former officers and directors, and the Company. The
consolidated complaint is purportedly brought on behalf of purchasers of
DataWorks stock between October 30, 1997 and July 16, 1998. The complaint
alleges that defendants made material misrepresentations and omissions
concerning DataWorks' acquisition of Interactive Group, Inc. and demand for
DataWorks' products. The Company is named as a defendant solely as DataWorks'
successor, and is not alleged to have taken part in the alleged misconduct. No
damage amount is specified in the complaint. The action is in the early stages
of litigation, no trial date is set, and defendants' motion to dismiss the
second amended consolidated complaint remains 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 other legal proceedings and claims in the normal
course of business. The Company is currently defending these proceedings and
claims, and anticipates that it will be able to resolve these matters in a
manner that will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
23
24
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 sale prices for the Company's Common Stock for the periods
indicated.
Fiscal Year ended June 30, 1998: High Low
- ------------------------------------ ------ ------
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
Fiscal Year ended December 31, 2000:
- ------------------------------------
1st Quarter $10.88 $ 3.75
2nd Quarter $ 8.38 $ 2.31
3rd Quarter $ 4.91 $ 2.65
4th Quarter $ 3.56 $ .66
There were approximately 1,468 security holders of record as of March 13, 2001.
The Company has not paid dividends to date and intends to retain any earnings
for use in the business for the foreseeable future.
24
25
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 for
As of or for As of or for the six
the year ended the year ended months ended As of or for the fiscal year ended June 30,
December 31, December 31, December 31, -------------------------------------------
2000 1999 1998 1998 1997 1996
-------------- -------------- ------------- ---------- --------- ----------
(3) (1)(2) (1)
Total revenues $ 219,768 $ 258,176 $ 63,716 $ 98,488 $ 60,751 $ 45,670
Income (loss) from operations $ (41,385) $ (51,094) $ (2,297) $ 11,481 $ (5,281) $ (33,075)
Diluted earnings (loss) per share $ (0.98) $ (1.25) $ (0.07) $ 0.45 $ (0.20) $ (1.83)
Diluted shares 41,409 40,605 28,373 29,716 21,758 18,128
Total assets $ 134,787 $ 170,177 $ 212,277 $ 67,988 $ 43,156 $ 41,640
Long-term debt, less current portion $ 5,621 $ 520 $ 1,116 $ 35 $ 277 $ 288
Total stockholders' equity $ 34,067 $ 71,806 $ 117,995 $ 34,910 $ 15,587 $ 16,199
(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 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 special
charges of $9,975,000 recorded relative to the Company's restructuring
activities, related charges aggregating $7,713,000 recorded in cost of license
fees and general and administrative expenses to reflect the write down of
certain operating assets, and a litigation charge of $1,800,000. For the six
months ended December 31, 1998 and the years ended June 30, 1997 and 1996, loss
from operations included $5,950,000, $1,600,000 and $5,568,000 of charges for
restructuring, respectively. See Notes 1, 3 and 5 of Notes to Consolidated
Financial Statements.
(3) For the year ended December 31, 2000, loss from operations included a charge
of $5,337,000, recorded in cost of license fees, related to the write down of
capitalized software development costs, provision for doubtful accounts of
$18,480,000 and a $2,000,000 litigation charge. See Notes 1 and 5 of Notes to
Consolidated Financial Statements.
25
26
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
OVERVIEW
The Company designs, develops, markets and supports integrated enterprise
business software solutions for use by mid-sized companies as well as divisions
and subsidiaries of larger corporations worldwide. These integrated solutions
address customers' requirements in the areas of customer relationship
management, financials, distribution, manufacturing and e-business. The
Company's business solutions are focused on the mid-market, which generally
includes companies between $10 million and $500 million in annual revenues. Its
product and services are sold worldwide by the Company's direct sales force,
international subsidiaries and an authorized network of VARs, distributors and
software consultants.
Restructurings
The following table summarizes the activity in the Company's reserves associated
with its acquisitions and restructurings (in thousands):
Reversal
Balance at Balance at Write off of
December 31, Special Cash December 31, of Fixed Facility
1998 Charges Payments 1999 Assets Accrual
------------ ------------ ------------ ------------ ------------ ------------
Separation costs for terminated
employees and contractors $ -- $ 2,072 $ (67) $ 2,005 $ -- $ --
Facilities closing and downsizing -- 4,756 (44) 4,712 (1,435) (700)
Remaining restructuring accrual
from prior periods-1998, 1997
and 1996 7,957 -- (6,772) 1,185 -- --
------------ ------------ ------------ ------------ ------------ ------------
Accrued restructuring costs $ 7,957 $ 6,828 $ (6,883) $ 7,902 $ (1,435) $ (700)
============ ============ ============ ============ ============ ============
Balance at
Cash December 31,
Payments 2000
------------ ------------
Separation costs for terminated
employees and contractors $ (2,005) $ --
Facilities closing and downsizing (2,373) 204
Remaining restructuring accrual
from prior periods-1998, 1997
and 1996 (850) 335
------------ ------------
Accrued restructuring costs $ (5,228) $ 539
============ ============
At December 31, 2000, $539,000 of the restructuring accruals remain and relate
primarily to lease commitments on which the Company will continue to make
payments until the respective leases expire.
1999 Restructuring
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 were comprised of the following:
- - $2,072,000 - To terminate 130 employees, or 11% of the workforce. Headcount
reductions were made in all functional areas of the Company.
- - $4,756,000 - To close non-strategic offices or consolidate and downsize
other office locations. Although the closure and consolidation efforts are
substantially complete by December 31, 2000, lease payments on vacated
buildings will continue to be made until the respective leases expire.
- - $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.
- - $(178,000) - To reverse a portion of the December 31, 1998 Data Works
merger- related accrual as a result of lower than anticipated severance and
facilities closing costs in the Sweden and Netherlands offices.
The Company's 1999 restructuring and reorganization resulted in or contributed
to the recording of additional reserves and write-downs of certain other assets
totaling $7,713,000. The following table summarizes where these charges have
been recognized on the statement of operations for the year ended December 31,
1999 (in thousands):
General and
Cost of Administrative
License Fees 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
26
27
As of December 31, 2000, all employee terminations as a result of the Company's
1999 restructuring have taken place and all related payments have been made.
Additionally, as of December 31, 2000, substantially all facility consolidations
and closures resulting from the 1999 restructuring have been completed. During
the quarter ended June 30, 2000, the Company determined that $700,000 of the
reserves recorded as part of the 1999 restructuring were not needed. This was
the result of the Company's ability to close certain facilities for less than
the amount originally estimated. This amount has been accounted for as a
reduction of special charges in the accompanying Consolidated Statements of
Operations in 2000.
Although the Company believes the restructuring activities were necessary, no
assurance can be given that the anticipated benefits of the restructuring will
be achieved or that similar action will not be required in the future. The
Company experienced a significant reduction in operating expenses for the year
ended December 31, 2000, compared to the year ended December 31, 1999 largely
due to the aforementioned restructuring.
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 Restructuring and Merger Accrual
In December 1998, the Company underwent a restructuring as a result of the
DataWorks merger resulting in a restructuring charge of $5,950,000. Such amount
included approximately $5,500,000 for severance and other extended benefit costs
related to a reduction in force of approximately 25 people, and approximately
$450,000 in lease terminations and buyout costs related to the closure of
duplicate facilities.
Also in connection with the Data Works acquisition, the Company accrued
$7,133,000 of merger related costs. Such amounts included approximately
$3,500,000 for severance and extended benefit costs related to a reduction in
the Data Works workforce of 150 people, approximately $2,100,000 in lease
termination and buyout costs related to duplicate facilities, and $1,533,000
related to settlement of certain third party reseller agreements and other
miscellaneous accruals. During the years ended December 31, 2000 and 1999, the
Company paid $1,234,000 and $910,000, respectively, related to such accruals.
At December 31, 2000, $2,426,000 remains accrued, related to the aforementioned
obligations.
27
28
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2000 TO THE YEAR ENDED DECEMBER 31,
1999
The following table summarizes certain aspects of Epicor's results of operations
for the year ended December 31, 2000 compared to the year ended December 31,
1999 (dollars in millions):
December 31, Change
---------------------- -------------------
2000 1999 $ %
------- ------- ------- -------
Revenues:
License fees $ 75.8 $ 94.3 $ (18.5) (19.6)%
Services 139.8 157.8 (18.0) (11.4)%
Other 4.2 6.1 (1.9) (31.1)%
------- ------- -------
Total revenues $ 219.8 $ 258.2 $ (38.4) (14.9)%
Percentage of total revenues:
License fees 34.5% 36.5%
Services 63.6% 61.1%
Other 1.9% 2.4%
------- -------
Total revenues 100.0% 100.0%
Gross profit $ 115.6 $ 135.6 $ (20.0) (14.7)%
Percentage of total revenues 52.6% 52.5%
Sales and marketing $ 76.2 $ 89.6 $ (13.4) (15.0)%
Percentage of total revenues 34.7% 34.7%
Software development $ 26.4 $ 29.7 $ (3.3) (11.1)%
Percentage of total revenues 12.0% 11.5%
General and administrative $ 53.1 $ 55.6 $ (2.5) (4.5)%
Percentage of total revenues 24.2% 21.5%
Litigation charge $ 2.0 $ 1.8 $ 0.2 11.1%
Percentage of total revenues 0.9% 0.7%
Special charges $ (0.7) $ 10.0 $ (10.7) (107.0)%
Percentage of total revenues (0.3)% 3.9%
Provision for income taxes $ -- $ 0.8 $ (0.8) (100.0)%
Percentage of total revenues -- 0.3%
Revenues
License fee revenues decreased in absolute dollars and as a percentage of
revenues for the year ended December 31, 2000 as compared to the same period of
1999. Overall license revenues were impacted by a slow recovery of the
enterprise software market following the transition to the Year 2000.
Additionally, the Company experienced decreases in license revenues from the its
divisional product lines. This decrease was primarily a result of the Company's
decision to focus sales of the Avante product line on its installed base of
customers, rather than on new customers and the Company's decision to focus
corporate marketing resources primarily on the e by Epicor product line. Sales
of the e by Epicor product line were negatively impacted by the transition of
the Company's sales force to the Company's new suite-based sales strategy as
well as an extended sales cycle as customers continue to transition to the
purchase of integrated and comprehensive e-Business suites. The Company expects
that these conditions could continue to affect demand for e-Business and
enterprise applications in 2001.
Services revenues consist of fees from software maintenance, consulting,
integration, custom programming and education services. The decrease in services
revenues in absolute dollars for the year ended December 31, 2000 as compared to
the year ended December 31, 1999 is attributable to lower consulting revenues
due to fewer implementation projects as a result of decreased license fee
revenues as previously discussed. Although services
28
29
revenues decreased in absolute dollars, as a percentage of total revenues,
services revenues increased. This is the result of an increase in maintenance
services revenues due to growth of the Company's installed base of customers.
The Company anticipates that consulting revenues will continue to be impacted by
fluctuations in the related license revenues in 2001. Similarly, maintenance
revenues are expected to increase as the Company's installed base continues to
grow.
Other revenues consist primarily of resale of third-party hardware and forms
sales. The decrease in other revenues in absolute dollars for the year ended
December 31, 2000 as compared to 1999 is directly related to the decrease in the
license fee revenues for the Company's Avante product, because all hardware
sales are directly attributable to that product line.
International revenues were $56.9 million and $72.1 million in the years ended
December 31, 2000 and 1999, respectively, representing 25.9% and 27.9%,
respectively, of total revenues. The decreases in absolute dollars and as a
percentage of total revenues are primarily attributable to decreased
international sales of the Company's Avante product line, which were residually
impacted by the Company's decision to focus North American sales on existing
customers as opposed to sales to new customers. The Company expects this trend
to continue. However, with sales offices located in the Europe, Australia, Asia
and South America, the Company expects international revenues to remain a
significant portion of total revenues.
Gross Profit
Cost of revenues consist primarily of royalties paid for licensed software
incorporated into the Company's products; costs associated with product
packaging, documentation and software duplication; costs of providing
consulting, custom programming, education and support services; and the
amortization and write-down of capitalized software development costs and other
tangible assets. The decline in gross profit in absolute dollars for the year
ended December 31, 2000 as compared to 1999 was due to the following factors (i)
a charge of $5.3 million in third quarter of 2000 to write-down to estimated
realizable value capitalized software development costs related to localized
products marketed in Latin America and continental Europe and (ii) the decreases
in license fee and service revenues. Gross profit percentage for the year ended
December 31, 2000 as compared to 1999 remained constant. However, excluding the
$5.3 million charge for the write-down of capitalized software costs, the 2000
gross profit margin would have been 55.0%. In 1999 there was a similar charge
for the write-down of capitalized software costs and prepaid licenses in the
amount of $2.7 million. Excluding this charge in 1999, the gross profit margin
would have been 53.6%. The increase in the gross profit margin, as adjusted, was
due to a decrease in the professional services cost base and an increase in the
utilization rate of the professional services personnel during the year ended
December 31, 2000.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, commissions, travel,
advertising and promotional expenses. The decrease in absolute dollars for the
year ended December 31, 2000 compared to 1999 is primarily due to a decrease in
the cost of salaries, benefits and other headcount related expenses as a result
of a reduction in sales personnel from the 1999 restructuring as well as
reductions related to a reorganization of the Company's sales force from a
product line orientation to a geographic orientation. Additionally, during the
year ended December 31, 2000, the Company decreased its advertising and related
costs as compared to 1999. This decrease was due to initial costs incurred in
1999 related to the renaming of the Company and release of the Company's e by
Epicor product, both of which required additional advertising and related
expenditures. Such initial efforts and additional expenditures were
substantially completed by 2000. However, the Company expects to incur
additional branding costs during 2001.
Software Development
Software development expenses consist primarily of compensation of development
personnel and related overhead incurred to develop the Company's products as
well as fees paid to outside consultants. Software development costs are
accounted for in accordance with Statement of Financial Accounting Standards No.
86 "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," under which the Company is required to capitalize software
development costs after technological feasibility is established. Costs that do
not qualify for capitalization are charged to software development expense when
incurred. For the year ended December 31, 2000 and 1999, the Company capitalized
$7.0 million and $6.0 million, respectively, of software development costs.
Capitalized software development costs include both internally generated
development costs for development of the
29
30
Company's future product releases and third party development costs related to
the localization and translation of certain of the Company's products for
foreign markets.
Gross software development expenditures were $33.4 million and $35.8 million or
15.2% and 13.8% of total revenues in 2000 and 1999, respectively, before
capitalization of software development costs. The decrease in gross software
development costs for the year ended December 31, 2000 as compared to 1999 is
largely due to a decrease in salaries, benefits and other headcount related
expenses as a result of a reduction in software development personnel from the
1999 restructuring as well as employee attrition. Additionally, the decrease in
software development costs is attributable to spending in 1999 for Year 2000
remediation costs in the amount $2.0 million. These costs were not incurred in
2000. The increase in software development costs as a percentage of revenues for
the year ended December 31, 2000 as compared to 1999 is due to the decrease in
the Company's revenue base for the same period. The Company expects software
development expenses to increase in 2001.
General and Administrative
General and administrative expenses consist primarily of costs associated with
the Company's executive, financial, human resources and information services
functions. The decrease in absolute dollars in general and administrative
expenses for the year ended December 31, 2000 as compared to 1999 is due to a
decrease in the costs of salaries, benefits and other headcount related expenses
as a result of a reduction in general and administrative personnel from the 1999
restructuring, employee attrition and the reduction of the general and
administrative cost structure.
In 2000, the Company changed its methodology for the calculation of its
allowance for doubtful accounts. The Company's previous methodology was based
primarily on estimates of collectibility for specific accounts with significant
past due balances. Where this method did not automatically consider an account
to be uncollectible based on age, age was a factor considered. Under the new
methodology, age is now the key determinant of the level of allowance required.
Provisions for doubtful accounts receivable were $18.5 million and $14.4 million
in 2000 and 1999, respectively.
As a percentage of revenue, general and administrative expenses increased for
the year ended December 31, 2000 as compared to 1999 as a result of the decline
in the Company's revenue base.
Litigation Charge
In August 1999, DataWorks filed for arbitration against AAR Corporation with the
American Arbitration Association in Denver, Colorado. The arbitration arose out
of the development, licensing and sale of Impresa for MRO software by DataWorks
to AAR in 1997. AAR counterclaimed against DataWorks alleging breach of
contract. In January 2001, the Company settled this matter by agreeing to pay
AAR $2,000,000. The Company has accrued this liability as of December 31, 2000.
In December 1998, Alyn Corporation filed a lawsuit against DataWorks in San
Diego, California Superior Court arising from the licensing and sale of software
by DataWorks to Alyn in December 1996. In March 2000, the Company agreed to pay
Alyn $1,800,000 to settle the lawsuit. The Company accrued the liability for
this matter as of December 31, 1999. The Company is in discussions with its
insurance carrier regarding coverage for this matter, but the amount of
insurance coverage, if any, has not yet been determined.
Provision for Income Taxes
The Company recorded no provision during 2000 and $0.8 million during 1999. The
effective tax rate during these periods was 0% and 1.5%, respectively. During
2000, the effective tax rate was lower than the statutory federal income tax
rate of 34%, primarily due to the inability to record benefits from current net
operating losses. Due to the historical losses incurred by the Company during
and prior to fiscal 2000, 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. Accordingly, as of December 31, 2000, the Company
had provided a valuation allowance of approximately $86.1 million. Any
realization of the Company's net deferred tax asset will reduce the Company's
effective tax rate in future periods.
30
31
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 (dollars in millions):
December 31, Change
------------------------------- ------------------------------
1999 1998 $ %
------------ ------------ ------------ ------------
Revenues: (unaudited)
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 $ 135.8 111.0%
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 $ -- $ 1.8 --
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:
- - The acquisition of DataWorks, which historically reported lower license
fees as a percentage of total revenues than the Company's previous revenue
mix.
- - 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.
- - Continued weak demand for enterprise resource planning software
particularly attributable to uncertainty in the software market related to
the Year 2000 problem.
31
32
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 27.9% and 26.3% 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.
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:
- - A higher proportion of overall revenues from services which bear a lower
gross margin than license fees
- - A charge totaling $2.7 million to write-down capitalized software costs and
prepaid licenses
- - Customer concessions granted for product-related issues totaling $1.0
million
- - A higher cost structure underlying services revenue generated from the
Avante customer base
- - 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 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 sales and
marketing expenses:
- - Higher compensation expense as a result of a modification in the sales
commission plan designed to retain the direct sales force
- - Increased marketing expenses associated with the name change from Platinum
Software Corporation to Epicor Software Corporation
- - Increased marketing expenses associated with improvements to the Company's
customer prospect generation process.
Software Development
During 1999, costs were capitalized related to the localization and translation
into different languages of the Platinum ERA product and certain applications of
the 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.
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
32
33
to the acquisition of DataWorks, the following factors contributed to the
increase in software development expenses:
- - Year 2000 remediation costs of $2.0 million
- - New product development including web-enablement and integration of existing
back and front office products
- - Outside consulting costs related to enhancing software development
methodologies and procedures.
General and Administrative
General and administrative expenses increased in both absolute dollars and as a
percentage of revenue due to the following:
- - The acquisition of DataWorks, which included a higher general and
administrative cost infrastructure
- - The refinement in cost alignments as discussed above
- - 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.
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% and
0%, respectively. During 1999, the effective tax rate was lower than the
statutory federal income tax rate of 34%, 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.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1998 TO THE SIX MONTHS ENDED
DECEMBER 31, 1997
Revenues
Revenues were approximately $39.9 million and $63.7 million 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 $21.7 million and $33.0 million for the
six months ended December 31, 1997 and 1998, respectively, representing an
increase of 52% 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 $18.1 million and $28.7 million for the six months
ended December 31, 1997 and 1998, respectively, representing an increase of 59%
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
$3.7 million and $4.3 million for the six months ended December 31, 1997 and
1998, respectively, representing an increase of 18% 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 $5.9 million in the six months ended December 31, 1997 to $10.5 million 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% from $18.0 million in the six
months ended December 31, 1997 to $30.4 million 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.
33
34
Gross Profit
Gross profit increased 62% from $26.7 million in the six months ended December
31, 1997 to $43.2 million in the six months ended December 31, 1998 and
increased as a percentage of revenues from 67% to 68%, 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 $24.5 million for the six months ended
December 31, 1997 to $33.1 million 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% and 53% 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 $0.8
million 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
Sales and marketing costs were approximately $15.0 million and $23.0 million in
the six months ended December 31, 1997 and 1998, respectively, or approximately
38% and 36% 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
Software development costs were approximately $6.3 million and $9.1 million in
the six months ended December 31, 1997 and 1998, respectively, or approximately
16% and 14% of total revenues, before capitalization of software costs of
approximately $0.2 million and $2.9 million. The percentage of capitalized
software development costs to total software development costs increased from 4%
in the six months ended December 31, 1997 to 32% 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
General and administrative expenses were approximately $3.4 million and $3.9
million in the six months ended December 31, 1997 and 1998, respectively, or
approximately 9% and 6% 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 $1.1 million and $0.4 million 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 $0.3 million 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
34
35
of $.2 million 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%,
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 $51.3 million.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's cash and cash equivalents,
short-term investments, working capital, long-term debt and cash flows as of and
for the years ended December 31, 2000 and 1999, (in millions):
December 31, December 31,
2000 1999
------------ ------------
Cash and cash equivalents $ 26.8 $ 18.2
Short-term investments -- 12.2
Working capital (2.0) 16.8
Long-term debt, less current portion 5.6 0.5
Net cash used in operating activities (3.7) (9.6)
Net cash provided by investing activities 0.2 4.1
Net cash provided by financing activities 13.0 2.2
The Company used $3.7 million in cash for operating activities during the year
ended December 31, 2000 primarily to fund its net loss. As part of the $3.7
million in operating cash outlays in the year ended December 31, 2000, the
Company paid $1.8 million in settlement of the previously discussed Alyn
lawsuit, $2.4 million to fund certain strategic alliances, and $5.2 million for
severance costs, lease terminations and other costs related to the
restructurings, and costs related to the 1998 DataWorks merger. At December 31,
2000, the Company has $3.0 million in cash obligations related to lease
terminations and other costs related to the restructuring plans and the 1998
DataWorks merger. The Company believes these obligations will be funded from
existing cash reserves, other working capital components, operations and
availability under the Company's revolving line of credit.
The Company's principal investing activities for the year ended December 31,
2000 included net sales of short-term investments of $12.2 million and capital
expenditures of $5.1 million to accommodate facility reorganizations and the
Company's expanding information technology infrastructure. In addition, cash
used in investing activities included capitalized software development costs of
$7.0 million primarily related to the localization and translation of certain of
the Company's products for foreign markets. See discussion regarding write-down
of capitalized software development costs under Gross Profit.
Financing activities for the year ended December 31, 2000 included proceeds of
$10.0 million from a term loan and payments made of $1.6 million on such term
loan and other long-term debt. In addition, cash provided by financing
activities included proceeds from the exercise of common stock options by
employees and issuance of stock under the employee stock purchase program of
$3.4 million as well as the receipt of $1.2 million on loans from officers
related to restricted stock grants.
On July 26, 2000, the Company entered into a $30 million senior credit facility
with a financial institution comprised of a $10 million term loan and a $20
million revolving line of credit. On August 8, 2000, the Company received the
$10.0 million proceeds from the term loan. The term loan is due in 36 equal
monthly installments, plus interest at the prime rate plus 3% (12.5% at December
31, 2000). The revolving line of credit expires in August 2003, bears interest
at a variable rate equal to either the prime rate or at LIBOR, at the Company's
option, plus a margin ranging from 0.25% to 1.25% on prime rate loans and 2.5%
to 3.75% on LIBOR loans, depending on the Company's results of operations.
Borrowings under the revolving line of credit are limited to 85% of eligible
accounts receivable, as defined. To date, the Company has not borrowed any
amounts against the revolving line of credit. As of December 31, 2000, the
Company has borrowing capacity of $14.3 million under this revolving line of
credit.
Borrowings under the credit facility are secured by substantially all of the
Company's assets and the Company is required to comply with certain financial
covenants and conditions, including minimum levels of earnings before
35
36
interest, taxes, depreciation and amortization (EBITDA) and tangible net worth.
As of September 30, 2000, the Company had violated the EBITDA and the tangible
net worth covenants included in the terms of the credit agreement. The Company
received waivers from the lender for these violations on November 13, 2000 and
negotiated amendments to the credit agreement to reduce the thresholds required
by the EBITDA and the tangible net worth financial covenants. As of December 31,
2000, the Company was in violation of the amended EBITDA covenant, for which it
received a waiver on January 31, 2001. This fourth quarter violation was solely
a result of the $2.0 million arbitration settlement with AAR Corporation (see
Note 5 of Notes to Consolidated Financial Statements) and the Company does not
anticipate needing to further renegotiate the covenants at this time.
Since December 31, 1999, the Company has experienced an increase in the
proportion of accounts receivable over 90 days old. The increase in aged
receivables is partially attributable to delays in collections related to
consolidation of our previously separate accounting systems and financial
processes arising from the Company's 1998 acquisition of DataWorks. This
consolidation was completed during the second quarter of 2000 and the Company
believes all issues arising from this integration have been resolved. There are
also ongoing collection issues caused by customer uncertainty over the Company's
change in product strategy and quality issues from certain legacy product
releases. If the Company is not successful in collecting a significant portion
of its net accounts receivable, the Company may be required to seek alternative
financing sources in addition to the $30 million bank credit facility secured in
July 2000. In addition, if the Company does not reduce its aged receivables, the
Company's ability to borrow against the revolving line of credit portion of the
credit facility may be severely restricted due to the fact that borrowings are
limited to 85% of eligible receivables, as defined, which excludes receivables
over ninety days old.
For the years ended December 31, 2000 and 1999, the Company incurred net losses
of $40.7 million and $50.6 million, respectively, and negative cash flows from
operations of $3.7 million and $9.6 million, respectively. The Company has taken
steps to reduce its operating expenses as part of its 1999 restructuring,
including a reduction in workforce and facilities consolidation and closure. As
a result of these actions, the establishment of cost controls and enhanced
receivable collection activities, the Company generated positive cash flows from
operating activities of $3.8 million during the quarter ended September 30, 2000
and $10.5 million during the quarter ended December 31, 2000. However, the
Company expects to use up to $8 million to fund its operating activities during
the quarter ended March 31, 2001.
As of December 31, 2000, the Company's principal source of liquidity consisted
of its cash and cash equivalents of $26.8 million. In addition, at such date,
the Company had borrowing capacity under its $20 million revolving line of
credit facility of $14.3 million. The Company is dependent upon its ability to
generate cash flows from license fees, providing services to its customers and
other operating revenues and through collection of its accounts receivable to
maintain current liquidity levels. If the Company is not successful in
achieving targeted 2001 revenues and expenses or positive cash flows from
operations, the Company may be required to take further cost-cutting measures
and reorganization actions.
Considering current cash reserves, and other existing sources of liquidity,
including its revolving line of credit, management believes that the Company
will have sufficient sources of financing to continue its operations
throughout at least the next twelve months.
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 averse to principal loss and ensures the safety and preservation of
its invested funds by limiting default risk, market risk, and reinvestment risk.
The Company mitigates default risk by investing in only the safest and highest
credit quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor.
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 represented 25.9% the Company's total revenues for the
year ended December 31, 2000 and 23.9% of revenues were 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.
36
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Financial Statements:
Report of Independent Auditors.................................................. 38
Consolidated Balance Sheets as of December 31, 2000 and 1999 ................... 39
Consolidated Statements of Operations for the years ended December 31,
2000 and 1999, the six months ended December 31, 1998 and the year ended
June 30, 1998 .................................................................. 40
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000 and 1999, the six months ended December 31, 1998
and the year ended June 30, 1998 ............................................... 41
Consolidated Statements of Cash Flows for the years ended December 31,
2000 and 1999, the six months ended December 31, 1998 and the year ended
June 30, 1998 .................................................................. 42
Notes to Consolidated Financial Statements...................................... 43
Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts................................. 64
All other schedules are omitted because they are not required or the required
information is included in the consolidated financial statements or notes thereto.
37
38
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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 2000 and 1999, the six months ended December 31, 1998 and the
year ended June 30, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for the years ended December 31, 2000 and
1999, the six months ended December 31, 1998 and the year ended June 30, 1998 in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, 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
January 26, 2001
38
39
EPICOR SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
DECEMBER 31,
ASSETS 2000 1999
--------- ---------
Current assets:
Cash and cash equivalents $ 26,825 $ 18,221
Short-term investments -- 12,154
Accounts receivable, net of allowance for doubtful accounts
of $24,242 and $17,100 as of December 31, 2000 and 1999, respectively 60,424 75,263
Prepaid expenses and other current assets 5,831 8,984
--------- ---------
Total current assets 93,080 114,622
Property and equipment, net 12,086 16,650
Software development costs, net of accumulated amortization
of $8,460 and $6,903 as of December 31, 2000 and 1999, respectively 6,748 9,083
Intangible assets, net 19,118 25,668
Other assets 3,755 4,154
--------- ---------
$ 134,787 $ 170,177
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,177 $ 14,591
Accrued compensation and payroll taxes 12,045 15,986
Accrued restructuring costs 539 7,902
Other accrued expenses 21,298 20,166
Deferred revenue 45,374 39,017
Current portion of long term debt 4,666 189
--------- ---------
Total current liabilities 95,099 97,851
Long-term debt 5,621 520
Commitments and contingencies (Notes 1 and 5)
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized,
95,305 shares issued and outstanding 7,501 7,501
Common stock, $.001 par value, 60,000,000 shares authorized,
41,471,399 and 40,848,162 shares issued and outstanding as of
December 31, 2000 and 1999, respectively 41 41
Additional paid-in capital 240,824 237,536
Less: notes receivable from officers for issuance of restricted stock (9,969) (11,269)
Accumulated other comprehensive loss (3,182) (1,590)
Accumulated deficit (201,148) (160,413)
--------- ---------
Total stockholders' equity 34,067 71,806
--------- ---------
$ 134,787 $ 170,177
========= =========
See accompanying notes to the consolidated financial statements.
39
40
EPICOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
2000 1999 1998 1998
------------ ------------ ------------ ------------
Revenues:
License fees $ 75,820 $ 94,344 $ 33,047 $ 57,577
Services 139,797 157,770 30,428 40,406
Other 4,151 6,062 241 505
------------ ------------ ------------ ------------
Total revenues 219,768 258,176 63,716 98,488
Cost of revenues:
Cost of license fees 25,392 18,015 4,808 5,990
Cost of services 76,469 101,349 15,731 23,971
Cost of other 2,331 3,238 -- --
------------ ------------ ------------ ------------
Total cost of revenues 104,192 122,602 20,539 29,961
------------ ------------ ------------ ------------
Gross profit 115,576 135,574 43,177 68,527
Operating expenses:
Sales and marketing 76,154 89,592 23,030 38,177
Software development 26,370 29,722 6,213 11,724
General and administrative 53,137 55,579 3,897 7,145
Litigation 2,000 1,800 -- --
Special charges (700) 9,975 5,950 --
In-process research and development -- -- 6,384 --
------------ ------------ ------------ ------------
Total operating expenses 156,961 186,668 45,474 57,046
------------ ------------ ------------ ------------
Income (loss) from operations (41,385) (51,094) (2,297) 11,481
Other income (expense):
Interest income 961 2,031 474 940
Interest expense (627) (534) (90) (39)
Other 316 (286) 37 965
------------ ------------ ------------ ------------
Total other income (expense) 650 1,211 421 1,866
------------ ------------ ------------ ------------
Income (loss) before income taxes (40,735) (49,883) (1,876) 13,347
Provision for income taxes -- 750 180 --
------------ ------------ ------------ ------------
Net income (loss) $ (40,735) $ (50,633) $ (2,056) $ 13,347
============ ============ ============ ============
Net income (loss) per share - basic $ (0.98) $ (1.25) $ (0.07) $ 0.56
Net income (loss) per share - diluted $ (0.98) $ (1.25) $ (0.07) $ 0.45
Common shares outstanding - basic 41,409 40,605 28,373 23,956
Common shares outstanding - diluted 41,409 40,605 28,373 29,716
See accompanying notes to consolidated financial statements.
40
41
EPICOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Series B Preferred Series C Preferred Common Stock
------------------ ------------------ ------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Balances June 30, 1997 2,435,000 $ 13,466 213,803 $ 16,826 22,584,610 $ 22
Net income
Foreign currency
translation adjustment
Subchapter S
distribution
to Focusoft
Conversion of Series B
Preferred stock (995,250) (5,504) 995,250 1
Conversion of Series C
Preferred stock (51,783) (4,075) 517,830 1
Employee stock purchases 45,968
Exercise of stock options 1,999,057 2
------------ ------------ ------------ ------------ ------------ ------------
Balance June 30, 1998 1,439,750 $ 7,962 162,020 $ 12,751 26,142,715 $ 26
Net loss
Foreign currency
translation adjustment
Stock issued in
connection
with Dataworks merger 11,739,459 12
Conversion of Series B
Preferred stock (1,439,750) (7,962) 1,439,750 1
Conversion of Series C
Preferred stock (66,715) (5,250) 667,150 1
Employee stock purchases 52,731
Exercise of stock options 155,027
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 1998 -- $ -- 95,305 $ 7,501 40,196,832 $ 40
Net loss
Foreign currency
translation adjustment
Proceeds from note
receivable from officer
Acceleration of options
in connection with
severance agreements
Employee stock purchases 369,396 1
Exercise of stock options 281,934
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 1999 -- $ -- 95,305 $ 7,501 40,848,162 $ 41
Net loss
Foreign currency
translation adjustment
Return of restricted stock (30,000)
Proceeds from note
receivable from officer
Employee stock purchases 296,223
Exercise of stock options 357,014
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 2000 -- $ -- 95,305 $ 7,501 41,471,399 $ 41
============ ============ ============ ============ ============ ============
Paid Notes Accumulated Total Comprehensive
in From Comprehensive Accumulated Stockholders' Income
Capital Officers Loss Deficit Equity (Loss)
------------ ------------ ------------ ------------ ------------ ------------
Balances June 30, 1997 $ 116,745 $ (11,563) $ 393 $ (120,302) $ 15,587
Net income 13,347 13,347 $ 13,347
Foreign currency
translation adjustment (1,485) (1,485) (1,485)
Subchapter S
distribution
to Focusoft (769) (769)
Conversion of Series B
Preferred stock 5,503
Conversion of Series C
Preferred stock 4,074
Employee stock purchases 435 435
Exercise of stock options 7,793 7,795
------------ ------------ ------------ ------------ ------------ ------------
Balance June 30, 1998 $ 134,550 $ (11,563) $ (1,092) $ (107,724) 34,910 $ 11,862
============
Net loss (2,056) (2,056) $ (2,056)
Foreign currency
translation adjustment 847 847 847
Stock issued in
connection
with Dataworks merger 83,194 83,206
Conversion of Series B
Preferred stock 7,961
Conversion of Series C
Preferred stock 5,249
Employee stock purchases 490 490
Exercise of stock options 598 598
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 1998 $ 232,042 $ (11,563) $ (245) $ (109,780) $ 117,995 $ (1,209)
============
Net loss (50,633) (50,633) $ (50,633)
Foreign currency
translation adjustment (1,345) (1,345) (1,345)
Proceeds from note
receivable from officer 294 294
Acceleration of options
in connection with
severance agreements 2,385 2,385
Employee stock purchases 1,745 1,746
Exercise of stock options 1,364 1,364
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 1999 $ 237,536 $ (11,269) $ (1,590) $ (160,413) $ 71,806 $ (51,978)
============
Net loss (40,735) (40,735) $ (40,735)
Foreign currency
translation adjustment (1,592) (1,592) (1,592)
Return of restricted stock (120) 120 --
Proceeds from note
receivable from officer 1,180 1,180
Employee stock purchases 1,164 1,164
Exercise of stock options 2,244 2,244
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 2000 $ 240,824 $ (9,969) $ (3,182) $ (201,148) $ 34,067 $ (42,327)
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
41
42
EPICOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
2000 1999 1998 1998
------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ (40,735) $ (50,633) $ (2,056) $ 13,347
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities:
Depreciation and amortization 17,039 18,277 3,496 5,126
Provision for doubtful accounts receivable 18,480 14,412 1,263 1,561
Write off of capitalized software development 5,337 -- -- --
costs
Impairment of long lived assets -- 4,291 -- --
Special charges (700) 9,975 5,950 --
Accrued litigation 2,000 1,800 -- --
In-process research and development -- -- 6,384 --
Changes in operating assets and liabilities:
Accounts receivable (3,173) (2,638) (4,909) (18,514)
Prepaid expenses and other current assets 3,153 3,113 (6,596) (1,146)
Accounts payable (2,182) (3,561) 1,065 (1,181)
Accrued restructuring costs (5,228) (14,778) (727) (1,329)
Accrued expenses (4,001) 8,760 (29) 3,873
Deferred revenue 6,318 1,414 3,137 4,388
------------ ------------ ------------ ------------
Net cash (used in) provided by operating activities (3,692) (9,568) 6,978 6,125
INVESTING ACTIVITIES
Capital expenditures (5,135) (11,392) (3,670) (4,099)
Capitalized software development costs (7,026) (6,032) (2,912) (1,247)
Purchase of short-term investments -- (20,970) (4,086) (13,500)
Sale of short-term investments 12,154 39,327 -- 11,514
Cash acquired in the DataWorks Merger -- -- 13,018 --
Other 227 3,175 (17) (242)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 220 4,108 2,333 (7,574)
FINANCING ACTIVITIES
Proceeds from long term debt 10,000 -- -- --
Payments on long term debt (1,577) (868) -- --
Exercise of stock options and warrants 2,244 1,364 598 7,795
Proceeds from employee stock purchase plan 1,164 1,746 490 435
Proceeds from notes receivable from officers 1,180 -- -- --
Subchapter S distributions to FocusSoft
shareholders -- -- -- (769)
------------ ------------ ------------ ------------
Net cash provided by financing activities 13,011 2,242 1,088 7,461
Effect of exchange rates on cash (935) (736) 525 (1,485)
------------ ------------ ------------ ------------
Net increase (decrease) in cash 8,604 (3,954) 10,924 4,527
Cash and cash equivalents at beginning of year 18,221 22,175 11,251 6,724
------------ ------------ ------------ ------------
Cash and cash equivalents at end of year $ 26,825 $ 18,221 $ 22,175 $ 11,251
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 627 $ 534 $ 90 $ 39
============ ============ ============ ============
Income taxes, net $ 303 $ 1,012 $ -- $ --
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
42
43
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 mid-size businesses worldwide. The Company
also offers support, consulting and education services 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.
For the years ended December 31, 2000 and 1999, the Company incurred net losses
of $40.7 million and $50.6 million, and negative cash flows from operations of
$3.7 million and $9.6 million, respectively. The Company has taken steps to
reduce its operating expenses as part of its 1999 restructuring, including a
reduction in workforce and facilities consolidation and closure. As a result of
these actions, the establishment of cost controls and enhanced receivable
collection activities, the Company generated positive cash flows from operating
activities of $3.8 million (unaudited) during the quarter ended September 30,
2000 and $10.5 million (unaudited) during the quarter ended December 31, 2000.
However, the Company expects to use up to $8 million to fund its operating
activities during the quarter ended March 31, 2001.
As of December 31, 2000, the Company's principal source of liquidity consisted
of its cash and cash equivalents of $26.8 million. In addition, at such date,
the Company had borrowing capacity under its $20 million revolving line of
credit facility of $14.3 million. The Company is dependent upon its ability to
generate cash flows from license fees, providing services to its customers and
other operating revenues and through collection of its accounts receivable to
maintain current liquidity levels. If the Company is not successful in achieving
targeted 2001 revenues and expenses or positive cash flows from operations, the
Company may be required to take further cost-cutting measures and reorganization
actions.
Considering current cash reserves, and other existing sources of liquidity,
including its revolving line of credit, management believes that the Company
will have sufficient sources of financing to continue its operations throughout
at least the next twelve months.
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. Significant estimates made in
preparing the consolidated financial statements include the allowance for
doubtful accounts, costs to complete projects accounted for under the
percentage-of-completion method, cash flows used to evaluate the recoverability
of the Company's long-lived assets, and certain accrued liabilities for
restructuring activities, and litigation claims and assessments.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a remaining
maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
The Company considers all liquid interest-earning investments with a maturity of
more than three months at the date of purchase to be short-term investments.
Short-term investments generally mature between three months and three years
from the purchase date. All short-term investments are classified as available
for sale and are recorded at market using the specific identification method;
unrealized gains and losses are reflected in other comprehensive income. Cost
approximates market for all classifications of cash and short-term investments;
realized and unrealized gains and losses are not material.
At December 31, 2000, there were no short-term investments. At December 31,
1999, short-term investments consisted $12,154,000 in corporate notes and bonds.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition. SOP 97-2, as amended by SOP 98-4 "Deferral of the Effective Date of
a Provision of SOP 97-2", was adopted by the Company as of July 1, 1998. In
December 1998, the AICPA issued SOP 98-9 "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions", which requires
recognition of revenue using the "residual method" when (1) there is
vendor-specific objective evidence of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using
long-term contract accounting, (2) vendor-specific objective evidence of fair
value does not exist for one or more of the delivered elements in the
arrangement, and (3) all revenue-recognition criteria in SOP 97-2 other than the
requirement for vendor-specific objective evidence of the fair value of each
delivered element of the arrangement are satisfied. SOP 98-9 was adopted by the
Company on January 1, 2000. In December 1999, the Securities and Exchange
Commission issues Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" (SAB 101), which provides further guidance with regard to
revenue recognition, presentation and disclosure. The Company adopted the
provisions of SAB 101 during the fourth quarter of fiscal 2000.
The adoption of SOP 97-2, SOP 98-4, SOP 98-9 and SAB 101 did not have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.
43
44
The Company enters into arrangements with end users, many of which may include
software license fees, maintenance and services or various combinations thereof,
including the sale of such elements separately. For each arrangement, revenues
are recognized when an agreement has been signed by both parties, the fees are
fixed or determinable, collection of the fees is probable, delivery of the
product has occurred and no other significant obligations remain.
For multiple-element arrangements, each element of the arrangement is analyzed
and the Company allocates a portion of the total fee under the arrangement to
the elements using vendor specific objective evidence of fair value of the
element, regardless of any separate prices stated within the contract for each
element. Vendor specific objective evidence of fair value is based on the price
the customer is required to pay when the element is sold separately (i.e.
software license fees charged when consulting and maintenance services are not
provided, hourly rates charged for consulting services when sold separately from
a software license, the renewal rate for maintenance arrangements). If vendor
specific objective evidence of fair value does not exist for the undelivered
elements, all revenue is deferred and recognized ratably over the service period
if the undelivered element is services, or over the period the maintenance is
provided if the undelivered element is maintenance, or until sufficient
objective evidence of fair value exists or all elements have been delivered.
License Revenues: Amounts allocated to license revenues are recognized at the
time of delivery of the software when vendor specific objective evidence of fair
value exits for the undelivered elements, if any, and all the other revenue
recognition criteria discussed above have been met.
Services Revenues: Revenues from services are comprised of consulting and
implementation services and, to a limited extent, training. Consulting services
are generally sold on a time-and-materials or fixed fee basis and include a
range of services including installation of off-the-shelf software, data
conversion and building non-complex interfaces to allow the software to operate
in customized environments. Services are generally separable from the other
elements under the arrangement since the performance of the services are not
essential to the functionality (i.e. do not involve significant production,
modification, or customization of the software or building complex interfaces)
of any other element of the transaction and are described in the contract such
that the total price of the arrangement would be expected to vary as the result
of the inclusion or exclusion of the services. Revenues for services are
generally recognized as the services are performed.
Maintenance Revenues: Maintenance revenues consist primarily of fees for
providing unspecified software upgrades on a when-and-if-available basis and
technical support over a specified term, which is typically twelve months.
Maintenance revenues are typically paid in advance and are recognized on a
straight-line basis over the term of the contract.
Revenues on sales made by the Company's resellers are generally recognized upon
shipment of the Company's software to the reseller, when the reseller has an
identified end user and all other revenue recognition criteria noted above are
met. Under limited arrangements with certain distributors, all the revenue
recognition criteria have been met upon delivery of the product to the
distributor and, accordingly, revenues are recognized at that time. The Company
does not offer a right of return on its products.
PROPERTY AND EQUIPMENT
Equipment, furniture and fixtures and leasehold improvements 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.
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 $2,547,000 for the year ended December 31, 2000, $1,964,000 for the
year ended December 31,1999, $453,000 for the six months ended December 31,
1998,
44
45
and $1,128,000 for the year ended June 30,1998.
During the quarter ended September 30, 2000, the Company determined that the
carrying value of its capitalized software development costs related to certain
localized products marketed in Latin America and Continental Europe exceeded its
net realizable value. Accordingly, a charge of $5,337,000 is included in cost of
license fees for year ended December 31, 2000, for the write-down of these
capitalized costs to their estimated net realizable value. During the fourth
quarter of 1999, the Company recorded a charge of $930,000 to reduce the
carrying value of capitalized software costs due to the change in product focus
and the reorganization (Note 3).
INTANGIBLE ASSETS
Intangible assets are amortized on a straight-line basis over the estimated
economic life of the asset. Amortization of intangible assets is primarily
included in cost of license fees and totaled $6,637,000 for the year ended
December 31, 2000 and $7,374,000 for the year ended December 31, 1999. There
was no such amortization for the six months ended December 31, 1998 and the year
ended June 30, 1998. During the fourth quarter of 1999, the Company recorded a
charge of $3,325,000 to reduce the carrying value of certain intangibles due to
the change in product focus and the reorganization (Note 3).
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.
ADVERTISING COSTS
The Company expenses production costs of advertising upon the first showing.
Other advertising costs are expensed as incurred. Advertising expense totaled
$2,035,000 for the year ended December 31, 2000, $3,936,000 for the year ended
December 31, 1999, $771,000 for the six months ended December 31, 1998, and
$1,034,000 for the year ended June 30, 1998.
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 for the reporting period. Translation adjustments are included in
accumulated other comprehensive loss and realized transaction gains and losses
are recorded in results of operations. For the years ended December 31, 2000 and
1999, the six months ended December 31, 1998 and the year ended June 30, 1998,
foreign currency transaction gains and losses were immaterial.
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, 2000.
Receivables from customers are generally unsecured.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during the
period. Diluted net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of common stock and dilutive
common stock equivalents outstanding during the period. For the years ended
December 31, 2000 and 1999, and the six months ended December 31, 1998, employee
stock options totaling 8,596,955, 9,856,836, and 7,133,089, respectively, and
preferred stock convertible into 953,050 shares of common 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):
45
46
Six Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, June 30,
2000 1999 1998 1998
------------ ------------ ------------ ------------
Numerator:
Net income (loss) - numerator for basic
and diluted net income (loss) per share $ (40,735) $ (50,633) $ (2,056) $ 13,347
Denominator:
Denominator for basic net income (loss)
per share - weighted average shares 41,409 40,605 28,373 23,956
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 41,409 40,605 28,373 29,716
============ ============ ============ ============
Net income (loss) per share - basic $ (0.98) $ (1.25) $ (0.07) $ 0.56
Net income (loss) per share - diluted $ (0.98) $ (1.25) $ (0.07) $ 0.45
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to financial statements carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carry forwards. The measurement of deferred tax assets and liabilities is based
on provisions of the enacted tax law. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance based on the amount of tax
benefits that, based on available evidence, is not expected to be realized.
STOCK-BASED COMPENSATION
The Company has elected to account for its stock-based compensation plans using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees", and
related interpretations. Under the provisions of APB 25, compensation expense is
determined at the measurement date as the difference between the quoted market
price of the stock, less the exercise price of the option.
COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) represents the net change in stockholders'
equity during a period from sources other than transactions with stockholders
and as such, includes net earnings (loss). For the Company, the only other
component of total comprehensive income (loss) is the change in the cumulative
foreign currency translation adjustments recorded in stockholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to amounts reported in previous periods
to conform with the current period presentation.
46
47
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement 133"),
which is required to be adopted in years beginning after June 15, 2000 for all
fiscal quarters of all fiscal years. The Company does not believe the adoption
of Statement 133 will have a material impact on its consolidated financial
position, results of operations or cash flows. The Company will adopt Statement
133 in its fiscal quarter beginning January 1, 2001.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation-an
interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44 clarifies the definition
of employee for purposes of applying Accounting Practice Board Opinion No. 25,
Accounting for Stock Issued to Employees, the criteria for determining whether a
plan qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 was effective July 1, 2000, but certain conclusions cover
specific events that occurred after either December 15, 1998, or January 12,
2000. The adoption of FIN44 did not have a material effect on the Company's
consolidated financial position, results of operations, or cash flows.
NOTE 2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
The following summarizes the components of property and equipment (in
thousands):
December 31,
-----------------------
2000 1999
-------- --------
Computer equipment $ 32,369 $ 26,405
Furniture, fixtures and equipment 6,148 9,847
Leasehold improvements 7,251 7,491
-------- --------
45,768 43,743
Less accumulated depreciation
and amortization (33,682) (27,093)
-------- --------
$ 12,086 $ 16,650
======== ========
The following summarizes the components of intangible assets (in thousands):
December 31,
-----------------------
2000 1999
-------- --------
Acquired technology $ 19,838 $ 19,710
Customer base 8,730 8,730
Assembled workforce 1,570 1,570
Covenant not to compete 1,000 1,000
-------- --------
31,138 31,010
Accumulated amortization (12,020) (5,342)
-------- --------
$ 19,118 $ 25,668
======== ========
47
48
NOTE 3. ACQUISITIONS AND RESTRUCTURINGS
ACQUISITIONS
On December 31, 1998, the Company acquired DataWorks Corporation (Dataworks), 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.
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
Purchase price allocation: period (years)
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
Assumed 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 are included in the consolidated statement of operations commencing
January 1, 1999 because the acquisition became effective on December 31, 1998.
RESTRUCTURINGS
The following table summarizes the activity in the Company's reserves associated
with its acquisitions and restructurings (in thousands):
Balance at Balance at Write off
December 31, Special Cash December 31, of Fixed
1998 Charges Payments 1999 Assets
------------ ------------ ------------ ------------ ------------
Separation costs for terminated
employees and contractors $ -- $ 2,072 $ (67) $ 2,005 $ --
Facilities closing and downsizing -- 4,756 (44) 4,712 (1,435)
Remaining restructuring accrual
from prior periods-1998, 1997
and 1996 7,957 -- (6,772) 1,185 --
------------ ------------ ------------ ------------ ------------
Accrued restructuring costs $ 7,957 $ 6,828 $ (6,883) $ 7,902 $ (1,435)
============ ============ ============ ============ ============
Reversal
of Balance at
Facility Cash December
Accrual Payments 31, 2000
------------ ------------ ------------
Separation costs for terminated
employees and contractors $ -- $ (2,005) $ --
Facilities closing and downsizing (700) (2,373) 204
Remaining restructuring accrual
from prior periods-1998, 1997
and 1996 -- (850) 335
------------ ------------ ------------
Accrued restructuring costs $ (700) $ (5,228) $ 539
============ ============ ============
At December 31, 2000, $539,000 of the restructuring accruals remain and relate
primarily to lease commitments on which the Company will continue to make
payments until the respective leases expire.
48
49
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 were comprised of the following:
- - $2,072,000 - To terminate 130 employees, or 11% of the workforce. Headcount
reductions were made in all functional areas of the Company.
- - $4,756,000 - To close non-strategic offices or consolidate and downsize
other office locations. Although the closure and consolidation efforts are
substantially complete by December 31, 2000, lease payments on vacated
buildings will continue to be made until the respective leases expire.
- - $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.
- - $(178,000) - To reverse a portion of the December 31, 1998 Data Works
merger- related accrual as a result of lower than anticipated severance and
facilities closing costs in the Sweden and Netherlands offices.
The Company's 1999 restructuring and reorganization resulted in or contributed
to the recording of additional reserves and write-downs of certain other assets
totaling $7,713,000. The following table summarizes where these charges have
been recognized on the statement of operations for the year ended December 31,
1999 (in thousands):
General and
Cost of Administrative
License Fees 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
As of December 31, 2000, all employee terminations as a result of the Company's
1999 restructuring have taken place and all related payments have been made.
Additionally, as of December 31, 2000, substantially all facility consolidations
and closures resulting from the 1999 restructuring have been completed. During
the quarter ended June 30, 2000, the Company determined that $700,000 of the
reserve recorded as part of the 1999 restructuring was not needed. This was the
result of the Company's ability to close certain facilities for less than the
amount originally estimated. This amount has been accounted for as a reduction
of special charges in the accompanying Consolidated Statements of Operations in
2000.
In December 1998, the Company underwent a restructuring as a result of the
DataWorks merger resulting in a restructuring charge of $5,950,000. Such amount
included approximately $5,500,000 for severance and other extended benefit costs
related to a reduction in force of approximately 25 people, and approximately
$450,000 in lease terminations and buyout costs related to the closure of
duplicate facilities.
Also in connection with the Data Works acquisition, the Company accrued
$7,133,000 of merger related costs. Such amounts included approximately
$3,500,000 for severance and extended benefit costs related to a reduction in
the Data Works workforce of 150 people, approximately $2,100,000 in lease
termination and buyout costs related to duplicate facilities, and $1,533,000
related to settlement of certain third party reseller agreements and other
miscellaneous accruals. During the years ended December 31, 2000 and 1999, the
Company paid $1,234,000 and $910,000, respectively, related to such accruals. At
December 31, 2000, $2,426,000 remains accrued, related to the aforementioned
obligations.
NOTE 4. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following: (in thousands)
49
50
December 31,
-----------------------------
2000 1999
------------ ------------
Term loan $ 8,611 $ -
Other 1,676 709
------------ ------------
10,287 709
Less current portion (4,666) (189)
------------ ------------
Total Long term debt $ 5,621 $ 520
============ ============
On July 26, 2000, the Company entered into a $30.0 million senior credit
facility with a financial institution comprised of a $10.0 million term loan and
a $20.0 million revolving line of credit. On August 8, 2000, the Company
received the $10.0 million proceeds from the term loan. The term loan is due in
36 equal monthly installments, plus interest at the prime rate plus 3% (12.5% at
December 31, 2000). The revolving line of credit expires in August 2003, bears
interest at a variable rate equal to either the prime rate or at LIBOR, at the
Company's option, plus a margin ranging from 0.25% to 1.25% on prime rate loans
and 2.5% to 3.75% on LIBOR loans, depending on the Company's results of
operations. Borrowings under the revolving line of credit are limited to 85% of
eligible accounts receivable, as defined. To date, the Company has not borrowed
any amounts against the revolving line of credit facility. As of December 31,
2000, the Company has borrowing capacity of $14.3 million under its revolving
line of credit.
Borrowings under the credit facility are secured by substantially all of the
Company's assets and the Company is required to comply with certain financial
covenants and conditions, including minimum levels of earnings before interest,
taxes, depreciation and amortization (EBITDA) and tangible net worth. As of
September 30, 2000, the Company had violated the EBITDA and the tangible net
worth covenants included in the terms of the credit agreement. The Company
received waivers from its lender for these violations on November 13, 2000 and
negotiated amendments to the credit agreement to reduce the thresholds required
by the EBITDA and the tangible net worth financial covenants. As of December 31,
2000, the Company was in violation of the amended EBITDA covenant, for which it
received a waiver on January 31, 2001. This fourth quarter violation was a
result of the $2.0 million arbitration settlement with AAR Corporation (Note 5)
and the Company does not anticipate needing to further renegotiate the covenants
at this time.
Maturities of long-term debt are as follows: (in thousands)
Years ended December 31, Amount
---------------------------- ---------
2001 $ 4,666
2002 $ 3,503
2003 $ 2,034
2004 $ 84
---------
Total $ 10,287
=========
50
51
NOTE 5. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain of its operating facilities and equipment under
operating leases with terms expiring through 2008. The following is a schedule
of future minimum lease payments under operating leases and future
noncancellable sublease income (in thousands):
Future Future Net Future
Minimum Lease Noncancellable Minimum Lease
Years Ended December 31, Payments Sublease Income Payments
------------------------------ --------------- ----------------- ---------------
2001 $13,007 $ 3,134 $ 9,873
2002 11,127 2,830 8,297
2003 9,773 2,805 6,968
2004 7,135 2,683 4,452
2005 5,726 939 4,787
Thereafter 23,611 4,163 19,448
------- ------- -------
$70,379 $16,554 $53,825
======= ======= =======
Rental expense under operating leases, net of sublease income, was $7,102,000
for the year ended December 31, 2000, $8,478,000 for the year ended December 31,
1999, $1,915,000 for the six months ended December 31, 1998 and $2,432,000 for
the year ended June 30, 1998.
EMPLOYMENT AGREEMENTS
The Company has entered into agreements that provide certain executive officers
with compensation totaling 6 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 under
certain circumstances related primarily to a change in control of the Company.
LITIGATION
In August 1999, DataWorks filed for arbitration against AAR Corporation with
the American Arbitration Association in Denver, Colorado. The arbitration arose
out of the development, licensing and sale of Impresa for MRO software by
DataWorks to AAR in 1997. AAR counterclaimed against DataWorks alleging breach
of contract. In January 2001, the Company settled this matter by agreeing to
pay AAR $2,000,000. The Company has accrued this liability as of December 31,
2000.
In December 1998, Alyn Corporation filed a lawsuit against DataWorks in San
Diego, California Superior Court arising from the licensing and sale of software
by DataWorks to Alyn in December 1996. In March 2000, the Company agreed to pay
Alyn $1,800,000 to settle the lawsuit. The Company accrued the liability for
this matter as of December 31, 1999. The Company is in discussions with its
insurance carrier regarding coverage for this matter, but the amount of
insurance coverage, if any, has not yet been determined.
In November 1998, a securities class action was filed in the United States
District Court for the Southern District of California against DataWorks,
certain of its current and former officers and directors, and the Company. The
consolidated complaint is purportedly brought on behalf of purchasers of
DataWorks stock between October 30, 1997 and July 16, 1998. The complaint
alleges that defendants made material misrepresentations and omissions
concerning DataWorks' acquisition of Interactive Group, Inc. and demand for
DataWorks' products. The Company is named as a defendant solely as DataWorks'
successor, and is not alleged to have taken part in the alleged misconduct. No
damage amount is specified in the complaint. The action is in the early stages
of litigation, no trial date is set, and defendants' motion to dismiss the
second amended consolidated complaint remains 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 other legal proceedings and claims in the normal
course of business. The Company is currently defending these proceedings and
claims, and anticipates that it will be able to resolve these matters in a
manner that will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
NOTE 6. INCOME TAXES
51
52
The provision for income taxes is comprised of the following (in thousands):
Six Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, June 30,
2000 1999 1998 1998
------------- ------------- ------------- -------------
Current:
Federal $ -- $ -- $ -- $ --
Foreign -- 750 180 --
State -- -- -- --
------------- ------------- ------------- -------------
Total $ -- $ 750 $ 180 $ --
============= ============= ============= =============
The income (loss) before income taxes is allocated between Federal and foreign
as follows (in thousands):
Six Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, June 30,
2000 1999 1998 1998
------------ ------------ ------------ ------------
Federal $ (19,463) $ (27,673) $ (1,772) $ 10,676
Foreign (21,272) (22,210) (104) 2,671
------------ ------------ ------------ ------------
Total $ (40,735) $ (49,883) $ (1,876) $ 13,347
============ ============ ============ ============
The reported provision (benefit) for income taxes differs from the amount
computed by applying the statutory federal income tax rate of 34 percent (35
percent in 1998) to the consolidated income (loss) before income taxes as
follows (in thousands):
Six Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, June 30,
2000 1999 1998 1998
------------ ------------ ------------ ------------
Provision (benefit) computed at statutory rates $ (13,850) $ (16,960) $ (657) $ 4,708
Increase (decrease) resulting from:
Effect of foreign operations 7,232 8,301 215 (908)
State taxes, net of federal benefit -- -- (185) 574
In-process research and development
write off -- -- 2,234 --
Valuation allowance 6,211 8,757 (1,453) (4,464)
Other 407 652 26 90
------------ ------------ ------------ ------------
Total $ -- $ 750 $ 180 $ --
============ ============ ============ ============
52
53
The components of the Company's net deferred income taxes are as follows (in
thousands):
December 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Net operating loss carry forwards $ 69,199 $ 58,488 $ 45,350
Other accruals and reserves 7,849 6,082 4,660
Allowance for doubtful accounts 7,623 4,349 3,917
Research and development credits 5,244 4,855 4,715
Accrued restructuring costs 2,581 6,164 169
Depreciation 1,077 891 771
Merger and acquisition costs, net -- -- 4,726
Purchased research and development -- -- 1,013
Software capitalization, net (1,906) (2,264) (779)
Purchased intangibles (5,613) (7,506) (13,208)
Valuation allowance (86,054) (71,059) (51,334)
-------- -------- --------
Total $ -- $ -- $ --
======== ======== ========
Due to the losses incurred by the Company during and prior to fiscal 2000 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.
Accordingly, as of December 31, 2000, the Company had provided a valuation
allowance of $86,054,000.
The Company has federal, state and foreign net operating loss carry forwards as
of December 31, 2000 of approximately $131,000,000, $67,000,000 and $58,000,000,
respectively. The federal losses expire in the years 2001 through 2020. Included
in the Company's net operating loss carry forwards are tax deductions relating
to the exercise of non-qualified stock options totaling approximately
$49,561,000. Future tax benefits from utilization of this portion of the total
loss carry forward will be accounted for as a direct benefit to stockholders'
equity. In addition, the Company has approximately $5,244,000 of federal and
state research and development credit carry forwards that expire in the years
2001 through 2020.
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 7. STOCK PLANS
The Company has a total of eight stock option plans and has reserved a total of
12,025,000 shares of its common stock for issuances pursuant to incentive and
non-qualified 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. Stock options are generally granted at
the fair market value on the date of grant, generally vest over four years and
expire ten years from the date of grant.
In connection with the acquisition of Data Works (Note 3) the Company assumed
all of the outstanding employee stock options of Data Works, which translated
into options to acquire 1,683,682 shares of the Company's common stock.
The Company has an Employee Stock Purchase Plan authorizing the issuance of up
to an aggregate of 1,250,000 shares of common stock to participating employees
which permits employees to purchase common stock at a price equal to 85% of the
fair market value at the beginning or end of a 6-month plan period. As of
December 31, 2000, 978,668 shares have been issued under this plan.
53
54
The following is a summary of common stock option activity:
Six Months Ended
Year Ended December 31, Year Ended December 31, December 31, Year Ended December 31,
2000 1999 1998 1998
------------------------ ------------------------ ----------------------- ------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Options Price Options Price Options Price Options Price
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Outstanding,
beginning of period 9,856,836 $ 8.6607 7,133,089 $ 10.3917 3,337,562 $ 10.0597 3,765,837 $ 5.2839
Granted 2,066,444 3.9626 5,084,900 6.7296 5,114,960 15.5539 1,991,378 14.0630
Exercised (357,014) 6.2910 (281,934) 4.9691 (155,027) 3.8569 (1,999,057) 3.9693
Expired or canceled (2,969,311) 8.6424 (2,079,219) 10.3466 (2,848,088) 20.4212 (420,596) 9.4058
Options assumed from
DataWorks merger -- -- -- -- 1,683,682 11.9519 -- --
---------- ---------- ---------- ----------
Outstanding,
end of period 8,596,955 $ 7.6090 9,856,836 $ 8.6607 7,133,089 $ 10.3917 3,337,562 $ 10.0597
========== ========== ========== ==========
Options exercisable 3,606,112 $ 9.8001 2,694,750 $ 9.7285 2,140,935 $ 9.6226 718,858 $ 5.7045
========== ========== ========== ==========
54
55
The following table summarizes information about stock options outstanding at
December 31, 2000:
Outstanding Exercisable
------------------------------------------------ -------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise Price
Exercise Prices Outstanding Life Price Exercisable
- ------------------ ---------------- --------------- -------------- --------------- -------------
$ 0.11 to 3.60 869,614 8.03 $1.99 275,614 $3.16
3.66 to 3.94 894,877 8.87 3.71 186,773 3.69
4.00 to 5.94 1,640,736 9.07 4.56 196,376 5.05
6.00 to 8.01 1,789,801 8.37 6.75 568,818 6.81
8.13 to 10.81 480,481 6.84 9.52 304,031 9.54
11.44 to 11.63 2,288,476 7.03 11.52 1,603,238 11.51
12.13 to 27.39 632,970 7.40 15.59 471,262 16.05
--------- ---------
Total Options 8,596,955 8.01 $7.61 3,606,112 $9.80
========= =========
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 Year Ended Ended Year Ended
December 31, December 31, December 31, June 30,
2000 1999 1998 1998
------------ ------------ ------------ ------------
Net income (loss) as reported $ (40,735) $ (50,633) $ (2,056) $ 13,347
------------ ------------ ------------ ------------
Net income (loss) - pro forma $ (59,959) $ (78,066) $ (10,895) $ 6,753
------------ ------------ ------------ ------------
Income (loss) per share as reported $ (0.98) $ (1.25) $ (0.07) $ 0.45
------------ ------------ ------------ ------------
Income (loss) per share - pro forma $ (1.45) $ (1.92) $ (0.38) $ 0.23
------------ ------------ ------------ ------------
55
56
The fair value of shares has been estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
Year Ended Year Ended Six Months Ended Year Ended
December 31, 2000 December 31, 1999 December 31, 1998 June 30, 1998
----------------------- ------------------ ------------------- -----------------------
Stock Stock Stock Stock
Option Purchase Option Purchase Option Purchase Option Purchase
Plans Plan Plans Plan Plans Plan Plans Plan
------- -------- ------ -------- ------ -------- ------- ---------
Expected life (years) 3.9 0.6 4 0.5 4 0.5 4 0.5
Risk-free interest rate 6.40% 6.20% 6.30% 4.65% 5.06% 4.70% 5.94% 5.57%
Volatility 1.260 1.260 0.911 0.911 1.496 1.496 1.4962 1.4962
Dividend Rate 0% 0% 0% 0% 0% 0% 0% 0%
For options granted during the years ended December 31, 2000 and 1999, the six
months ended December 31, 1998, and the year ended June 30, 1998, the weighted
average fair value at date of grant was $3.18, $4.57, $13.56, and $10.59 per
option, respectively. The weighted average fair value at date of grant for stock
purchase shares during the years ended December 31, 2000 and 1999, the six
months ended December 31, 1998, and the year ended June 30, 1998 was $2.22,
$3.34, $6.09, and $5.80 per share, respectively.
Stock Option Exchange
In January 2001, the Company offered to current employees that held stock
options the opportunity to exchange all of their outstanding stock options for
restricted shares of the Company's common stock, at a price equal to the par
value of such Common Stock. All employees who accepted the offer received one
share of restricted stock for every two options exchanged. The restricted stock
vests over a period of two to four years, depending upon whether the exchanged
options were vested or unvested at the time of the exchange. Employees who
elected to exchange their options are ineligible for stock option grants for a
period of six months and one day following the exchange date of January 26,
2001. The Company will record a total compensation charge of up to $4,283,000
over the vesting period of the restricted shares, which represents the fair
market value of the restricted common stock issued on the exchange date based
upon the quoted market price of the Company's common stock. Compensation expense
to be charged to operations in 2001, 2002, 2003, 2004 and 2005 approximates
$1,352,000, $1,475,000, $734,000, $666,000, and $56,000 respectively, assuming
all restricted stock grants vest.
NOTE 8. COMMON STOCK
As of December 31, 2000, the total number of shares of common stock reserved for
future issuance is as follows:
Shares
---------
Stock Option Plans 10,107,935
Employee Stock Purchase Plan 271,332
Series C Preferred Stock 953,050
----------
11,332,317
==========
On March 9, 1994, the Board of Directors adopted a Shareholder Rights Plan (the
Plan) that 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, 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.
NOTE 9. PREFERRED STOCK
The Company's outstanding 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 Preferred Stock.
56
57
NOTE 10. RELATED PARTY TRANSACTIONS
EMPLOYEE ADVANCES
In May 2000, the Company made retention and incentive loans, totaling $620,000
to several officers of the Company. The promissory notes, made as advances
against future incentive compensation and bearing interest at the rate of 6.53%
per annum, were originally scheduled to mature on the earlier of the payout of
the 2000 incentive compensation to each officer, or February 20, 2001. The due
date on the remaining loan balances aggregating $533,000 after paying the 2000
incentive compensation to each officer in February 2001 was subsequently
extended to the earlier of the payout of the 2001 incentive compensation to each
officer, or February 20, 2002. Unpaid accrued interest from the inception of the
notes to February 20, 2001 was forgiven, while interest on the notes for the
period from February 2001 to February 2002 shall accrue at 6.53%.
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 per
share, 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 full
recourse promissory note in the principal amount of $3,500,000, bearing interest
at 6% per annum. The Company also loaned to the Chief Executive Officer and
Chairman of the Board $3,500,000 pursuant to an unsecured 5-year full recourse
promissory note, bearing interest at the rate of 6% 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. In February 2001, the Company extended the due date on
both loans to February 2003. As part of the extension, interest accrues on the
notes at 6% from the date of the amendment and the principal and interest is
due and payable upon maturity of the notes in February 2003.
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 per
share, 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 full
recourse promissory note in the principal amount of $875,000, bearing interest
at 6% per annum. The Company also loaned to this senior executive officer
$875,000 pursuant to an unsecured 5-year full recourse promissory note, bearing
interest at the rate of 6% 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. As of December
31, 2000, the repurchase right lapsed with respect to 475,000 of the 500,000
shares, and the 25,000 unvested and unearned shares were returned to the
Company. During the year ended December 31, 2000, $1,180,000 was repaid in cash
on the promissory note. In February 2001, the Company extended the due date on
the remaining principal balance of the unsecured note to August 2001. As part of
the extension, the note bears interest payable monthly at 6% from the date of
the amendment.
In April 1996, one of the Company's former senior executive officers purchased
450,000 shares of restricted stock at a purchase price of $6.25 per share, 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 full
recourse note in the principal amount of $1,406,250 bearing interest at 6% per
annum. The Company also loaned to this former senior executive officer
$1,406,250 pursuant to an unsecured 5-year full recourse promissory note bearing
interest at 6% 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. As of December 31,
2000, the repurchase right lapsed with respect to 445,000 of the 450,000 shares
and the 5,000 unvested and unearned shares were returned to the Company. In
February 2001, the Company extended the due date on the remaining principal
balance of the secured and unsecured notes to April 2002. As part of this
extension, the note bears interest payable quarterly at 6% from the date of the
amendment.
NOTE 11. 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 $1,140,000 for the year ended December 31, 2000,
$820,000 for the year ended December 31, 1999 and $0 for the six months ended
December 31, 1998 and the year ended June 30, 1998. Prior to January 1, 1999,
the employer match was optional and at the Company's discretion.
57
58
NOTE 12. 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):
Latin
United States Australasia Europe Canada America Consolidated
-------------- -------------- -------- -------- -------- --------------
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
Year Ended December 31, 2000:
Net revenues $ 162,883 $ 11,681 $ 32,490 $ 10,154 $ 2,560 $ 219,768
Operating income (loss) (32,143) 1,756 (10,343) 4,668 (5,323) (41,385)
Identifiable assets 99,846 8,230 22,019 4,420 272 134,787
58
59
NOTE 13. 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):
Year 2000 Quarter Ended
---------------------------------------------------------------------
December 31 September 30 June 30 March 31
------------ ------------ ------------ ------------
Total revenues $ 53,745 $ 51,927 $ 57,485 $ 56,611
Operating income (loss) $ (5,187) $ (12,456) $ (9,106) $ (14,636)
Net income (loss) $ (5,361) $ (12,297) $ (8,841) $ (14,236)
Earnings per share - diluted $ (0.13) $ (0.30) $ (0.21) $ (0.35)
Shares outstanding - diluted 41,453 41,450 41,468 41,262
Significant to the quarterly results of operations for the year ended December
31, 2000 are write-downs of capitalized software development costs totaling
$5,337,000 incurred during the third quarter of 2000 and a $2,000,000 litigation
charge incurred during the fourth quarter of 2000. The provision for doubtful
accounts aggregated $18,480,000 in 2000. The summation of earnings per share
does not agree to the loss per share for the year as a result of rounding.
Year 1999 Quarter Ended
----------------------------------------------------------------------------
December 31 September 30 June 30 March 31
-------------- -------------- -------------- --------------
Total revenues $ 62,710 $ 63,205 $ 66,156 $ 66,105
Operating income (loss) $ (43,310) $ (9,754) $ 602 $ 1,358
Net income (loss) $ (43,405) $ (9,698) $ 395 $ 2,075
Earnings per share - diluted $ (1.06) $ (0.24) $ 0.01 $ 0.05
Shares outstanding - diluted 40,836 40,703 41,731 41,935
In the fourth quarter of 1999, special charges of $9,975,000 were recorded
relative to the Company's restructuring activities. In addition, related fourth
quarter charges aggregating $7,713,000 were recorded in cost of license fees and
general and administrative expenses to reflect the write down of certain
operating assets (Note 3). Also included in the fourth quarter of 1999 is a
litigation charge of $1,800,000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
59
60
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 May
8, 2001 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 May
8, 2001 Annual Meeting of Stockholders entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required her under is incorporated by reference from
the sections of the Company's Proxy Statement filed in connection with its May
8, 2001 Annual Meeting of Stockholders entitled Principle Shareholders.
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 May
8, 2001 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 37 of
this Report.
2. Financial Statement Schedules
See Index to Consolidated Financial Statements at Item 8 on page 37 of
this Report.
3. Exhibits
INDEX TO EXHIBITS
Exhibit No. Description LOCATION
----------- -----------
2.1 Agreement and Plan of Reorganization and Merger dated as of June 27, 1997 among the (9)
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 and among the (11)
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 Acquisition Corp. and (14)
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 Incorporation of the Company (10)
3.3 Certificate of Amendment to Second Restated Certificate of Incorporation (10)
3.4 Amended and Restated Bylaws of the Company, as currently in effect. (8)
60
61
3.6 Specimen Certificate of Common Stock. (2)
4.1 Certificate of Designation of Rights, Preferences and Privileges of Series A Junior (4)
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 Stock Option and
Restricted Stock Purchase Plan - 1990 (the "1990 Plan"). (2)
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 Plan. (2)
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 Company. (2)
10.6 Platinum Software Corporation Employee Stock Purchase Plan, as amended. (2)
10.10* 1993 Nonqualified Stock Option Plan (3)
10.11* Form of Nonqualified Stock Option Agreement pertaining to the 1993 Nonqualified Stock (3)
Option Plan.
10.12* 1994 Incentive Stock Option, Non-qualified Stock Option and Restricted Stock Purchase (5)
Plan.
10.13* Form of Non-qualified Stock Option Agreement pertaining to the 1994 Plan. (5)
10.28 Stock Purchase Agreement dated September 22, 1994 between the Company and the Series B
Preferred Stock Investors (6)
10.29 Registration Rights Agreement dated September 22, 1994 between the Company and the Series
B Preferred Stock Investors (6)
10.30 Amendment to Stock Purchase Agreement dated May 26, 1995 between the Company and the
Series C Preferred Stock Investors (6)
10.31 Amendment to Registration Rights Agreement dated May 26, 1995 between the Company and the
Series C Preferred Stock Investors (6)
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 Klaus dated as of
February 7, 1996. (7)
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. Pieser dated as of
February 7, 1996. (7)
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 dated as of April
10, 1996. (7)
10.44* 1996 Nonqualified Stock Plan and Form of Nonqualified Option Agreement. (12)
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, as amended to date
(15)
10.50* Executive Employment Agreement, effective as of October 13, 1998 between the Company and
Stuart W. Clifton, as amended (16)
10.51* Noncompetition Agreement, effective as of October 13, 1998 between the Company and Stuart
W. Clifton (16)
10.52* DataWorks 1995 Equity Incentive Plan, as amended ("Equity Plan") (17)
10.53* Forms of Incentive Stock Option and Nonstatutory Stock Option under the Equity Plan (17)
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 Corporation
("Sublease") (17)
10.56 First Amendment to Sublease dated December 1, 1994 (17)
10.57 Lease Agreement dated January 16, 1997 between DataWorks and Whiop Real Estate Limited
Partnership (19)
10.58* 1995 Stock Option Plan, as amended of Interactive (the "Interactive Option Plan") (20)
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 Incorporated (21)
10.61 Lease between James S. Hekiman and William Finard, as Trustees of the Burlington Woods
Office Trust No. 11 under a declaration of trust dated September 10, 1980 and Interactive
dated September 23, 1991 (21)
10.62* 1997 Nonstatutory Stock Plan of Interactive (22)
61
62
10.63 Single Tenant lease between ADI Research Partners, LP and DataWorks, dated as of August
14, 1998 (23)
10.64 1999 Merger Transition Stock Option Plan and Form of Nonstatutory Stock Option Agreement
(24)
10.65 Trademark License Agreement between the Company and Platinum Technology, Inc. dated as of
January 14, 1999 (24)
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 (27)
10.70* Nonstatutory Stock Option Agreement with Richard L. Roll dated November 16, 1999 (27)
10.71* Nonstatutory Stock Option Agreement with Richard L. Roll dated November 16, 1999 (27)
10.72 Loan and Security Agreement by and among Epicor Software Corporation as borrower and
Foothill Capital corporation as lender dated as of July 26, 2000. (28)
10.73 Amendment to Loan and Security Agreement dated November 20, 2000
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
24.1 Power of Attorney (included on the signature page of this Annual Report on Form 10-K)
* 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.
62
63
(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.
(27) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
(28) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
(b) Reports on Form 8-K.
None
(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.
63
64
EPICOR SOFTWARE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Balance at
Beginning of Provision for Amounts Written End of
Period Bad Debt Off Other Period
------------- ------------- ------------- ------------- -------------
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
For the Year Ended December 31, 2000 $ 17,100 $ 18,480 $ (11,338) $ -- $ 24,242
(A) Amounts acquired from the DataWorks Merger.
64
65
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 30, 2001.
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
--------- ----- ----
Chairman of the Board and Chief Executive
/s/ L. George Klaus Officer (Principal Executive Officer)
- ---------------------------
L. George Klaus March 30, 2001
Vice President and Chief Financial Officer
/s/ Lee Kim (Principal Financial and Accounting Officer)
- ---------------------------
Lee Kim March 30, 2001
/s/ Chuck Boesenberg Director
- ---------------------------
Chuck Boesenberg March 30, 2001
/s/ Arthur J. Marks Director
- ---------------------------
Arthur J. Marks March 30, 2001
/s/ Donald R. Dixon Director
- ---------------------------
Donald R. Dixon March 30, 2001
/s/ Thomas F. Kelly Director
- ---------------------------
Thomas F. Kelly March 30, 2001
65
66
EXHIBITS
Exhibit No. Description LOCATION
----------- -----------
2.1 Agreement and Plan of Reorganization and Merger dated as of June 27, 1997 among the (9)
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 and among the (11)
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 Acquisition Corp. and (14)
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 Incorporation of the Company (10)
3.3 Certificate of Amendment to Second Restated Certificate of Incorporation (10)
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 Series A Junior (4)
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 Stock Option and
Restricted Stock Purchase Plan - 1990 (the "1990 Plan"). (2)
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 Plan. (2)
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 Company. (2)
10.6 Platinum Software Corporation Employee Stock Purchase Plan, as amended. (2)
10.10* 1993 Nonqualified Stock Option Plan (3)
10.11* Form of Nonqualified Stock Option Agreement pertaining to the 1993 Nonqualified Stock (3)
Option Plan.
10.12* 1994 Incentive Stock Option, Non-qualified Stock Option and Restricted Stock Purchase (5)
Plan.
10.13* Form of Non-qualified Stock Option Agreement pertaining to the 1994 Plan. (5)
10.28 Stock Purchase Agreement dated September 22, 1994 between the Company and the Series B
Preferred Stock Investors (6)
10.29 Registration Rights Agreement dated September 22, 1994 between the Company and the Series
B Preferred Stock Investors (6)
10.30 Amendment to Stock Purchase Agreement dated May 26, 1995 between the Company and the
Series C Preferred Stock Investors (6)
10.31 Amendment to Registration Rights Agreement dated May 26, 1995 between the Company and the
Series C Preferred Stock Investors (6)
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 Klaus dated as of
February 7, 1996. (7)
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. Pieser dated as of
February 7, 1996. (7)
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 dated as of April
10, 1996. (7)
10.44* 1996 Nonqualified Stock Plan and Form of Nonqualified Option Agreement. (12)
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, as amended to date
(15)
10.50* Executive Employment Agreement, effective as of October 13, 1998 between the Company and
Stuart W. Clifton, as amended (16)
10.51* Noncompetition Agreement, effective as of October 13, 1998 between the Company and Stuart
W. Clifton (16)
10.52* DataWorks 1995 Equity Incentive Plan, as amended ("Equity Plan") (17)
10.53* Forms of Incentive Stock Option and Nonstatutory Stock Option under the Equity Plan (17)
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 Corporation
("Sublease") (17)
10.56 First Amendment to Sublease dated December 1, 1994 (17)
10.57 Lease Agreement dated January 16, 1997 between DataWorks and Whiop Real Estate Limited
Partnership (19)
10.58* 1995 Stock Option Plan, as amended of Interactive (the "Interactive Option Plan") (20)
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 Incorporated (21)
10.61 Lease between James S. Hekiman and William Finard, as Trustees of the Burlington Woods
Office Trust No. 11 under a declaration of trust dated September 10, 1980 and Interactive
dated September 23, 1991 (21)
10.62* 1997 Nonstatutory Stock Plan of Interactive (22)
61
67
10.63 Single Tenant lease between ADI Research Partners, LP and DataWorks, dated as of August
14, 1998 (23)
10.64 1999 Merger Transition Stock Option Plan and Form of Nonstatutory Stock Option Agreement
(24)
10.65 Trademark License Agreement between the Company and Platinum Technology, Inc. dated as of
January 14, 1999 (24)
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 (27)
10.70* Nonstatutory Stock Option Agreement with Richard L. Roll dated November 16, 1999 (27)
10.71* Nonstatutory Stock Option Agreement with Richard L. Roll dated November 16, 1999 (27)
10.72 Loan and Security Agreement by and among Epicor Software Corporation as borrower and
Foothill Capital corporation as lender dated as of July 26, 2000. (28)
10.73 Amendment to Loan and Security Agreement dated November 20, 2000
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
24.1 Power of Attorney (included on the signature page of this Annual Report on Form 10-K)
* 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.
(27) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
(28) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.