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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NO. 0-20740
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EPICOR SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0277592
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
195 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618-2402
(Address of principal executive offices, zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 585-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of May 4, 2001, there were 44,643,192 shares of common stock outstanding.
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FORM 10-Q INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Operations
and Comprehensive Operations (unaudited) for the Three Months
Ended March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Three Months Ended March 31, 2001 and 2000 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
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PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 17,087 $ 26,825
Accounts receivable, net 43,620 60,424
Prepaid expenses and other current assets 5,201 5,831
--------- ---------
Total current assets 65,908 93,080
Property and equipment, net 10,559 12,086
Software development costs, net 5,232 6,748
Intangible assets, net 17,604 19,118
Other assets 3,063 3,755
--------- ---------
Total assets $ 102,366 $ 134,787
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,070 $ 11,177
Accrued expenses 28,643 33,343
Current portion of long-term debt 3,759 4,666
Accrued restructuring costs 438 539
Deferred revenue 43,497 45,374
--------- ---------
Total current liabilities 85,407 95,099
--------- ---------
Long-term debt 4,515 5,621
--------- ---------
Contingencies
Stockholders' equity:
Preferred stock 7,501 7,501
Common stock 45 41
Additional paid-in capital 245,634 240,824
Less: deferred stock compensation expense (4,036) --
Less: notes receivable from officers for issuance
of restricted stock (9,969) (9,969)
Accumulated other comprehensive loss (3,488) (3,182)
Accumulated deficit (223,243) (201,148)
--------- ---------
Total stockholders' equity 12,444 34,067
--------- ---------
Total liabilities and stockholders' equity $ 102,366 $ 134,787
========= =========
See accompanying notes to consolidated financial statements.
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EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2001 2000
-------- --------
Revenues:
Software license fees $ 12,326 $ 20,645
Services 33,856 34,866
Other 760 1,100
-------- --------
Total revenues 46,942 56,611
Cost of revenues 22,734 27,487
-------- --------
Gross profit 24,208 29,124
Operating expenses:
Sales and marketing 16,929 20,685
Software development 8,031 5,746
General and administrative 21,075 17,329
Amortization of deferred stock compensation expense 246 --
-------- --------
Total operating expenses 46,281 43,760
-------- --------
Loss from operations (22,073) (14,636)
Other (expense) income, net (22) 400
-------- --------
Loss before income taxes (22,095) (14,236)
Provision for income taxes -- --
-------- --------
Net loss $(22,095) $(14,236)
======== ========
Unrealized losses on foreign currency translation adjustments (306) (490)
-------- --------
Total comprehensive loss $(22,401) $(14,726)
======== ========
Net loss per share -- basic $ (0.53) $ (0.35)
Net loss per share -- diluted $ (0.53) $ (0.35)
Weighted average common shares outstanding -- basic 41,676 41,262
Weighted average common shares outstanding -- diluted 41,676 41,262
See accompanying notes to consolidated financial statements.
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EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net loss $(22,095) $(14,236)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 4,130 4,389
Amortization of deferred stock compensation 246 --
Write down of capitalized software development costs 1,026 --
Provision for doubtful accounts 9,926 7,408
Changes in operating assets and liabilities:
Accounts receivable 6,878 (4,583)
Prepaid expenses and other current assets 629 (2,058)
Other assets 693 285
Accounts payable (2,107) (2,175)
Accrued expenses (4,910) (2,851)
Accrued merger and restructuring costs (101) (3,281)
Deferred revenue (1,877) 3,392
-------- --------
Net cash used in operating activities (7,562) (13,710)
INVESTING ACTIVITIES
Purchases of property and equipment (691) (1,624)
Proceeds from sale of short-term investments -- 8,707
Software development costs capitalized -- (2,619)
Proceeds from notes receivable from related party -- 1,155
-------- --------
Net cash (used in) provided by investing activities (691) 5,619
FINANCING ACTIVITIES
Exercise of common stock options -- 2,220
Common stock issued under the Employee Stock Purchase Plan 527 1,165
Common stock issued under Stock Option Exchange Program 3 --
Payments on bank debt (1,719) --
Payments on other long-term liabilities (294) (38)
-------- --------
Net cash (used in) provided by financing activities (1,483) 3,347
Effect of exchange rate changes on cash (2) (222)
-------- --------
Net decrease in cash and cash equivalents (9,738) (4,966)
Cash and cash equivalents at beginning of period 26,825 18,221
-------- --------
Cash and cash equivalents at end of period $ 17,087 $ 13,255
======== ========
See accompanying notes to consolidated financial statements.
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EPICOR SOFTWARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements included
herein have been prepared by Epicor Software Corporation (the "Company") in
accordance with generally accepted accounting principles and pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC") for
interim financial information for reporting on Form 10-Q. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments
except for the write-down of capitalized software development costs as discussed
below -- Write-Down of Capitalized Software Development Costs) necessary for a
fair presentation of the Company's financial position, results of operations and
cash flows.
Current and future financial statements may not be directly comparable to the
Company's historical financial statements. The results of operations for the
three months ended March 31, 2001, are not necessarily indicative of the results
of operations that may be reported for any other interim period or for the
entire year ending December 31, 2001. The balance sheet at December 31, 2000 has
been derived from the audited financial statements at that date, but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, as permitted by SEC
rules and regulations for interim reporting.
For the three months ended March 31, 2001 and 2000, the Company incurred net
losses of $22.1 million and $14.2 million, and negative cash flows from
operations of $7.6 million and $13.7 million, respectively. The Company had
taken steps to reduce its operating expenses as part of its 1999 restructuring,
including a reduction in workforce and facilities consolidation and closure. As
a result of these actions and the Company's enhanced receivable collection
activities, the Company generated positive cash flows from operating activities
of $3.8 million during the quarter ended September 30, 2000 and $10.5 million
in the quarter ended December 31, 2000. To further control costs, the Company
announced a restructuring in the second quarter of 2001 in reaction to current
economic and software market conditions. This restructuring again included a
reduction in workforce and facilities consolidations. Based on the savings
expected to be generated from this restructuring, the Company expects to again
achieve positive cash flow from operations in the fourth quarter of 2001.
As of March 31, 2001, the Company's principal source of liquidity consisted of
its cash and cash equivalents of $17.1 million. In addition, at such date, the
Company had borrowing capacity under its $20 million revolving line of credit
facility of $9.0 million. The Company is dependent upon its ability to generate
cash flows from software 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.
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 issued 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. SAB 101 did not have a material impact on the Company's
consolidated financial statements.
BASIC AND DILUTED NET LOSS PER SHARE
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings per
Share". Under the provisions of SFAS No. 128, basic net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common shares outstanding during the period, excluding shares of non-vested
restricted stock. Diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of common and potential
common shares outstanding during the period if their effect is dilutive.
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The following table presents the calculation of basic and diluted net loss per
common share (in thousands, except per share amounts):
Three Months Ended
March 31,
-----------------------------
2001 2000
-------- --------
Net loss $(22,095) $(14,236)
Weighted average shares outstanding 43,739 41,262
Weighted average common shares of non-vested restricted stock (2,063) --
-------- --------
Shares used in the computation of basic and diluted net loss per share 41,676 41,262
======== ========
Net loss per share - basic and diluted $ (0.53) $ (0.35)
======== ========
SEGMENT INFORMATION
In accordance with SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information", the Company has prepared operating segment information to
report components that are evaluated regularly by the Company's chief operating
decision maker, or decision making groups, in deciding how to allocate resources
and in assessing performance.
The Company's reportable operating segments include software licenses, services,
and other. Currently, the Company does not separately allocate operating
expenses to these segments, nor does it allocate specific assets to these
segments. Therefore, the segment information reported includes only revenues,
cost of revenues and gross profit.
Operating segment data for the three months ended March 31, 2001 and 2000 is as
follows (in thousands):
Software
Licenses Services Other Total
-------- -------- ------ -------
Three months ended March 31, 2001:
Revenues $12,326 $33,856 $ 760 $46,942
Cost of revenues 5,294 16,930 510 22,734
------- ------- ------ -------
Gross Profit $ 7,032 $16,926 $ 250 $24,208
======= ======= ====== =======
Three months ended March 31, 2000:
Revenues $20,645 $34,866 $1,100 $56,611
Cost of revenues 5,089 21,442 956 27,487
------- ------- ------ -------
Gross Profit $15,556 $13,424 $ 144 $29,124
======= ======= ====== =======
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The following schedule presents the Company's operations by geographic area for
the three months ended March 31, 2001 and 2000 (in thousands):
United Latin
States Australasia Europe Canada America Consolidated
--------- ----------- -------- ------ ------- ------------
Three months ended March 31, 2001:
Revenues $ 33,139 $2,284 $ 7,856 $2,810 $ 853 $ 46,942
Operating income (loss) (19,035) 87 (4,490) 1,399 (34) (22,073)
Identifiable assets 73,126 7,953 17,001 4,117 169 102,366
Three months ended March 31, 2000:
Revenues $ 42,692 $2,645 $ 7,946 $2,597 $ 731 $ 56,611
Operating income (loss) (12,548) 398 (3,291) 1,294 (489) (14,636)
Identifiable assets 114,176 7,335 27,736 5,787 -- 155,034
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes new accounting and reporting standards for derivative financial
instruments and for hedging activities. SFAS No. 133 requires the Company to
measure all derivatives at fair value and to recognize them in the balance sheet
as an asset or liability, depending on the Company's rights or obligations under
the applicable derivative contract. In June 1999, the FASB issued SFAS No. 137,
which deferred the effective date of the adoption of SFAS No. 133 for one year.
The Company adopted SFAS No. 133 on January 1, 2001. The adoption of SFAS No.
133 did not have a material impact on the Company's consolidated financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees ("FIN 44"). FIN 44 clarifies the application of APB No. 25 for the
following: the definition of employee for purposes of applying APB No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence for 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 occurring after either
December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a
material impact on the Company's consolidated financial statements.
RESTRUCTURINGS
The following table summarizes the activity in the Company's reserves associated
with its restructurings (in thousands):
Balance
at Balance at
December Cash March 31,
31, 2000 Payments 2001
-------- -------- ----------
Facilities closing and downsizing -- 1999 restructuring $204 $ (31) $173
Remaining restructuring accrual from prior periods -- 1998,
1997 and 1996 335 (70) 265
---- ----- ----
Accrued restructuring costs $539 $(101) $438
==== ===== ====
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At March 31, 2001, $438,000 of the restructuring accruals remained and related
primarily to lease commitments on which the Company will continue to make
payments until the respective leases expire.
2001 Restructuring
In April 2001, the Company announced a restructuring of its operations in an
effort to reduce its cost structure through a workforce reduction and the
closure or reduction in size of certain of its facilities. The Company will
record a charge for this restructuring ranging from approximately $6.0 million
to $7.0 million during the second quarter of 2001.
CREDIT FACILITY
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% (11.0% at
March 31, 2001). 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 March 31, 2001,
the Company has borrowing capacity of $9.0 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
March 31, 2001, 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 May 14, 2001. The Company is
currently negotiating with its lender to revise the financial covenants to
reduce the thresholds required by the EBITDA and the tangible net worth
covenants.
WRITE-DOWN OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS
During the quarter ended March 31, 2001, the Company determined that the
carrying value of its capitalized software development costs related to
localized products marketed in Europe as well as a component of one of its
manufacturing products exceeded their net realizable value. Accordingly, a
charge of approximately $1.0 million is included in cost of revenues for the
three months ended March 31, 2001 for the write-down of these capitalized costs
to their estimated net realizable value.
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STOCK OPTION EXCHANGE PROGRAM
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. The charge to compensation expense for the
three months ended March 31, 2001 was $246,000. The breakdown of this charge by
the Company's operating departments is as follows:
Cost of revenues $ 45,000
Sales and marketing 65,000
Software development 24,000
General and administrative 112,000
--------
Total compensation expense $246,000
========
SALE OF PRODUCT LINE
In April 2001, the Company announced the sale of the net assets of its Impresa
for MRO product line for approximately $2.8 million in cash and other future
contingent consideration. The sale will result in an after tax gain of
approximately $2.4 million which will be recorded in the Company's results of
operations for the second quarter of 2001.
CONTINGENCIES
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 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 paid this amount during the quarter ended March 31, 2001.
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 paid this amount during the
first half of 2000. The Company is continuing its discussions with its insurance
carrier regarding the amount of coverage for this matter, but the amount of
insurance coverage, if any, has not yet been determined.
In November 1998, a securities class action lawsuit 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 impact on the Company's
consolidated financial statements.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
OVERVIEW
The Company designs, develops, markets and supports integrated enterprise
business software solutions for use by mid-sized companies as well as divisions
and subsidiaries of larger corporations worldwide. These integrated solutions
address customers' requirements in the areas of customer relationship
management, financials, distribution, manufacturing and e-business. The
Company's business solutions are focused on the mid-market, which generally
includes companies between $10 million and $500 million in annual revenues. Its
product and services are sold worldwide by the Company's direct sales force,
international subsidiaries and an authorized network of VARs, distributors and
software consultants.
RESULTS OF OPERATIONS
The following table summarizes certain aspects of the Company's results of
operations for the three months ended March 31, 2001 compared to the three
months ended March 31, 2000 (in millions except percentages):
Three Months Ended March 31,
----------------------------
2001 2000 Change $ Change %
------- -------- -------- --------
Revenues:
Software license fees $ 12.3 $ 20.6 $ (8.3) (40.3%)
Services 33.9 34.9 (1.0) (2.9%)
Other 0.7 1.1 (0.4) (36.4%)
------ ------ ------ ------
Total revenues $ 46.9 $ 56.6 $ (9.7) (17.1%)
As a percentage of total revenues:
Software license fees 26.3% 36.5%
Services 72.1% 61.6%
Other 1.6% 1.9%
------ ------
Total revenues 100.0% 100.0%
Gross profit $ 24.2 $ 29.1 $ (4.9) (16.8%)
As a percentage of total revenues 51.6% 51.4%
Sales and marketing expense $ 16.9 $ 20.7 $ (3.8) (18.4%)
As a percentage of total revenues 36.1% 36.5%
Software development expense $ 8.0 $ 5.7 $ 2.3 40.4%
As a percentage of total revenues 17.1% 10.1%
General and administrative expense $ 21.1 $ 17.3 $ 3.8 22.0%
As a percentage of total revenues 45.0% 30.6%
Revenues
The Company experienced an overall decrease in software license fee revenues for
the three month period ended March 31, 2001 as compared to the same period in
2000. This decrease was across all of the Company's product lines. This decline
is due to delays in capital expenditures by customers and reduced IT budgets
based on current market conditions and economic uncertainties. The Company
expects that these conditions could continue to affect demand for eBusiness and
enterprise applications for the remainder of 2001.
Services revenues consist of fees from software maintenance, consulting, and
related services. The decrease in services revenues in absolute dollars for the
three month period ended March 31, 2001 as compared with the same period in 2000
is attributable to a $2.0 million, or 12.7%, decrease in consulting revenues due
to fewer implementation projects as a result of decreased software license fee
revenues as previously discussed. Although services revenues decreased in
absolute dollars, as a percentage of total revenues, services revenues
increased. This is the result of a $1.1 million, or 5.9%, increase in
maintenance services revenues due to growth of the Company's
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installed base of customers. The Company anticipates that consulting revenues
will continue to be negatively impacted by a decrease in the related software
license revenues for the remainder of 2001. However, as the Company's installed
base continues to grow, some of this decrease in consulting revenues is expected
to be offset by an increase in new project revenue with current customers, as
well as an increase in maintenance revenues. Other revenues consist primarily of
third-party hardware and forms sales. The decrease in other revenues in absolute
dollars for the three months ended March 31, 2001 as compared with the same
period in 2000 is due to a decrease in third-party hardware sales directly
attributable to the aforementioned decrease in software license fees.
International revenues were $13.8 million in the first quarter of 2001 and 2000,
representing 29.4% and 24.4%, respectively, of total revenues. The increase in
percentage of total revenues for the three months ended March 31, 2001 as
compared to the same 2000 period is primarily attributable to the decrease in
total revenues resulting from the aforementioned economic conditions being
primarily a domestic occurrence which has not yet impacted international
markets. With sales offices located in the Europe, Australia, Asia and South
America, the Company expects international revenues to remain a significant
portion of total revenues.
Gross Profit
Cost of revenues consist primarily of royalties paid for licensed software
incorporated into the Company's products; costs associated with product
packaging, documentation and software duplication; costs of consulting, custom
programming, education and support; and the amortization and write-down of
capitalized software development costs. A charge of approximately $1.0 million
is included in cost of revenues for the quarter ended March 31, 2001 to
write-down capitalized software development costs related to localized products
marketed in Europe and a component of one of the Company's manufacturing
products to estimated realizable value.
The decline in gross profit in absolute dollars for the three month period ended
March 31, 2001 as compared to the same period in 2000 was due to several
factors, including the aforementioned decrease in software license fee revenues,
and the previously discussed write-down of capitalized software development
costs of $1.0 million. The slight increase in gross profit percentage for the
quarter ended March 31, 2001 as compared to the same quarter in 2000, was due to
the above factors, offset by a decrease in the professional services cost base
and an increase in the utilization rate of professional services personnel
during the first quarter of 2001.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, commissions, travel,
advertising and promotional expenses. The decrease in absolute dollars for the
three months ended March 31, 2001 compared to the same period of 2000 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, and
lower commissions expense resulting from decreased software license fee revenue.
Additionally, during the three month period ended March 31, 2001, the Company
decreased its advertising and related costs as compared to the same period in
2000 as a result of its measures to decrease overall costs. As a result of the
above factors, sales and marketing expense also decreased as a percentage of
revenues. The Company expects sales and marketing expenses to decrease for the
remainder of 2001 due largely to the second quarter 2001 restructuring, as
discussed in the notes to the unaudited condensed consolidated financial
statements, and other cost control measures.
Software Development
Software development expenses consist primarily of compensation of development
personnel and related overhead incurred to develop the Company's products as
well as fees paid to outside consultants. Software development costs are
accounted for in accordance with Statement of Financial Accounting Standards No.
86 "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," under which the Company is required to capitalize software
development costs after technological feasibility is established. Costs that do
not qualify for capitalization are charged to software development expense when
incurred. During the three months ended March 31, 2000, the Company capitalized
$1.5 million of software development costs. No such costs were eligible for
capitalization during the three months ended March 31, 2001. Capitalized
software development costs include both internally generated development costs
for development of the Company's future product releases and third party
development costs related to the localization and translation of certain of the
Company's products for foreign markets.
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The increase in gross software development expenses for the three months ended
March 31, 2001 as compared to the same period of 2000 is largely due to an
increase in the cost of salaries, benefits and other headcount related expenses
as a result of an increase in software development personnel. Additionally, the
increase in software development expenses is attributable to the previously
discussed absence of capitalized expenditures for the three months ended March
31, 2001. The increase in software development costs as a percentage of revenues
for the three months ended March 31, 2001 as compared to the same period in the
prior year is due to the aforementioned increase in personnel and absence of
capitalized expenditures, as well as the decline in the Company's revenue base.
The Company expects a decrease in software development expenses for the
remainder of 2001, due to the second quarter 2001 restructuring, as discussed in
the notes to the unaudited condensed consolidated financial statements, and
other cost control measures.
General and Administrative
General and administrative expenses consist primarily of costs associated with
the Company's executive, financial, human resources and information services
functions. The increase in absolute dollars in general and administrative
expenses for the three months ended March 31, 2001 as compared to the same
period in 2000 is due to an increase in the Company's provision for doubtful
accounts to better reflect the current economic environment and geographical
market conditions.
As a percentage of revenue, general and administrative expenses increased for
the three month period ended March 31, 2001 as compared to the same period in
2000. This increase is due to both the increases in the provision for doubtful
accounts, as well as the decline in the Company's revenue base. The Company
expects general and administrative expenses to decrease for the remainder of
2001, due largely to the second quarter 2001 restructuring, as discussed in the
notes to the unaudited condensed consolidated financial statements, and other
cost control measures.
Liquidity and Capital Resources
The following table summarizes the Company's cash and cash equivalents, working
capital deficit and cash flows as of and for the three months ended March 31,
2001 (in millions):
March 31,
2001
---------
Cash and cash equivalents $ 17.1
Working capital deficit (19.5)
Net cash used in operating activities (7.6)
Net cash used in investing activities (0.7)
Net cash used in financing activities (1.5)
As of March 31, 2001, the Company's principal sources of liquidity included cash
and cash equivalents of $17.1 million. The Company used $7.6 million in cash for
operating activities during the three month period ended March 31, 2001
primarily to fund its net loss. As part of the $7.6 million in operating cash
outlays in the three months ended March 31, 2001, the Company paid $2.0 million
in settlement of the previously discussed AAR lawsuit, $0.1 million for lease
payments related to the Company's restructurings and $0.6 million for the
settlement of a third party reseller agreement accrued for as part of the 1998
DataWorks merger. At March 31, 2001, the Company has $0.4 million in cash
obligations for lease terminations related to the Company's restructurings and
$1.9 million in cash obligations for lease terminations and other costs related
to the 1998 DataWorks merger which is included in accrued expenses in the
accompanying unaudited condensed consolidated financial statements. The Company
believes these obligations will be funded from existing cash reserves, working
capital, operations and new credit facility.
The Company's principal investing activities for the three month period ended
March 31, 2001 included capital expenditures of $0.7 million.
Financing activities for the three months ended March 31, 2001 included payments
of $1.7 million made against the Company's debt obligations. In addition, cash
provided by financing activities included proceeds from the issuance of stock
under the employee stock purchase program of $0.5 million.
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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% (11.0% at
March 31, 2001). 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 March 31, 2001,
the Company has borrowing capacity of $9.0 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
March 31, 2001, 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 May 14, 2001. The Company is
currently negotiating with its lender to revise the financial covenants to
reduce the thresholds required by the EBITDA and the tangible net worth
covenants.
For the three months ended March 31, 2001 and 2000, the Company incurred net
losses of $22.1 million and $14.2 million, and negative cash flows from
operations of $7.6 million and $13.7 million, respectively. The Company had
taken steps to reduce its operating expenses as part of its 1999 restructuring,
including a reduction in workforce and facilities consolidation and closure. As
a result of these actions and the Company's enhanced receivable collection
activities, the Company generated positive cash flows from operating activities
of $3.8 million during the quarter ended September 30, 2000 and $10.5 million in
the quarter ended December 31, 2000. To further control costs, the Company
announced a restructuring in the second quarter of 2001 in reaction to current
economic and software market conditions. This restructuring again included a
reduction in workforce and facilities consolidations. Based on the savings
expected to be generated from this restructuring, the Company expects to again
achieve positive cash flow from operations in the fourth quarter of 2001.
As of March 31, 2001, the Company's principal source of liquidity consisted of
its cash and cash equivalents of $17.1 million. In addition, at such date, the
Company had borrowing capacity under its $20 million revolving line of credit
facility of $9.0 million. The Company is dependent upon its ability to generate
cash flows from software 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.
Although management's goal is to reduce losses and, ultimately, return the
Company to profitability, there can be no assurance that these actions will
enable the Company to achieve profitability. Considering 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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes new accounting and reporting standards for derivative financial
instruments and for hedging activities. SFAS No. 133 requires the Company to
measure all derivatives at fair value and to recognize them in the balance sheet
as an asset or liability, depending on the Company's rights or obligations under
the applicable derivative contract. In June 1999, the FASB issued SFAS No. 137,
which deferred the effective date of the adoption of SFAS No. 133 for one year.
The Company adopted SFAS No. 133 on January 1, 2001. The adoption of SFAS No.
133 did not have a material impact on the Company's consolidated financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees ("FIN 44"). FIN 44 clarifies the application of APB No. 25 for the
following: the definition of employee for purposes of applying APB No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence for 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 occurring after either
December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a
material impact on the Company's consolidated financial statements.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD LOOKING STATEMENTS -- SAFE HARBOR.
Certain statements in this Quarterly Report on Form 10-Q 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 software license revenue will continue to be impacted in
2001 by current software market conditions and economic uncertainties, (ii)
consulting revenues will continue to be impacted by fluctuations in the related
software 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 represent a significant portion of total revenues, (v) the
Company will be able to successfully renegotiate the financial covenants of its
credit facility, (vi) operating expenses will decrease in 2001 due to the second
quarter 2001 restructuring and other cost control measures, and (vii) the
Company will achieve positive cash flow from operations in the fourth quarter of
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 15 to 21. Because of these and other
factors that may affect the Company's operating results, past performance should
not be considered an indicator of future performance and investors should not
use historical results to anticipate results or trends in future periods. The
Company undertakes no obligation to revise or publicly release the results of
any revision to these forward-looking statements. Readers should carefully
review the risk factors described in other documents the Company files from time
to time with the Securities and Exchange Commission including its quarterly
reports on Form 10-Q to be filed by the Company during 2001, and its Annual
Report on Form 10-K filed by the Company for the year ending December 31, 2000.
OUR CASH AND CASH EQUIVALENTS 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.
The Company's cash and cash equivalents decreased from $26.8 million at December
31, 2000 to $17.1 million at March 31, 2001, principally due to the net loss
incurred during the first quarter of 2001. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Liquidity and
Capital Resources." 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 additional reductions in work force or other expense cutting measures.
In addition, although the Company has obtained a bank line of credit, as of
March 31, 2001, 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 May 14, 2001. The Company is
currently negotiating with its lender to revise the financial covenants to
reduce the thresholds required by the EBITDA and the tangible net worth
covenants. 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, including as recently as first quarter 2001 an increase in the proportion
of accounts receivable over 90 days old. 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. 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, software market
conditions or general economic conditions
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- 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 several quarters of
lengthening 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
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.
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OUR SOFTWARE PRODUCTS MAY CONTAIN ERRORS OR DEFECTS, WHICH COULD RESULT IN THE
REJECTION OF OUR PRODUCTS AND DAMAGE OUR REPUTATION AS WELL AS CAUSE LOST
REVENUE, DELAYS IN COLLECTING ACCOUNTS RECEIVABLE, DIVERTED DEVELOPMENT
RESOURCES AND INCREASED SERVICE COSTS AND WARRANTY CLAIMS.
Software products as complex as the ERP products offered by the Company may
contain undetected errors or failures when first introduced or as new versions
are released. Despite testing by the Company, and by current and potential
customers, any of the Company's products may contain errors after their
commercial shipment. Such errors may cause loss of or delay in market acceptance
of the Company's products, damage to the Company's reputation, and increased
service and warranty costs. The Company 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.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our operations are vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure and other events beyond our control. A substantial
portion of our facilities, including our corporate headquarters and other
critical business operations, are located near major earthquake faults. We do
not carry earthquake insurance and do not fund for earthquake-related losses.
Although the facilities in which we host our computer systems are designed to be
fault tolerant, the systems are susceptible to damage from fire, floods,
earthquakes, power loss, telecommunications failures, and similar events. Our
facilities in the State of California are currently subject to electrical
blackouts as a consequence of a shortage of available electrical power which is
expected to increase during the summer months. In the event these blackouts
continue or increase in severity, they could disrupt the operations of our
affected facilities. We do not carry financial reserves against business
interruptions and although we do carry business interruption insurance limited
to special causes of loss, if a business interruption occurs, our business could
be seriously harmed.
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:
- 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
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- 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 products 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. While VAR sales for the quarter ended December 31, 2000
increased over the prior quarter, VAR sales for the quarter ended March 31, 2001
decreased from the previous 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 its revenue from the sale of its various ERP application
software packages 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. Similarly, in the first
quarter of 2001, the industry for ERP applications was negatively impacted by
the perceived domestic economic slowdown. 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
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.
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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 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
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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.
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
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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 May 4, 2001, the Company had 44,643,192 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.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments with high credit quality issuers
and, by policy, limits the amount of credit exposure to any one issuer. The
Company is 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 29.4% of the Company's total revenues for the
three months ended March 31, 2001 and 27.5% 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.
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PART II
OTHER INFORMATION
ITEM 1 - 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 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 paid this amount during the quarter ended March 31, 2001.
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 paid this amount during the
first half of 2000. The Company is continuing its discussions with its insurance
carrier regarding the amount of coverage for this matter, but the amount of
insurance coverage, if any, has not yet been determined.
In November 1998, a securities class action lawsuit 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 impact on the Company's
consolidated financial statements.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPICOR SOFTWARE CORPORATION
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(Registrant)
Date: May 15, 2001 /s/ Lee Kim
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Lee Kim
Vice President and Chief Financial Officer
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