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, 2001
[ ] 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
Preferred Share Purchase Rights
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 $79,773,558 (computed using
the closing sales price of $2.35 per share of Common Stock on March 15, 2002 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 15, 2002 was
44,814,605.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 14, 2002, which Proxy Statement will be filed
no later than 120 days after the close of the registrant's fiscal year ended
December 31, 2001, are incorporated by reference in Part III of this Annual
Report on Form 10-K.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Epicor Software Corporation (Epicor or the Company) designs, develops, markets
and supports enterprise and eBusiness 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 midmarket, which
generally includes companies between $10 million and $500 million in annual
revenues. Epicor's solutions are designed to help companies focus on their
customers, suppliers, partners, and employees, through enterprise-wide
management of resources and information. This collaborative focus differentiates
the Company from conventional enterprise resource planning (ERP) vendors, whose
primary focus is improving internal business processes and efficiencies. By
automating and integrating information and critical business processes across
their entire value chain, midmarket companies can improve not just their bottom
line, but also their top line, allowing them to compete more effectively in
today's 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 service and support. Epicor also provides integrated eCommerce
capabilities that allow companies to leverage the power of the Internet to allow
their organization to further extend beyond the traditional "four walls" of
their enterprise, and further integrate their operations with their customers,
suppliers and partners.
The Company offers solutions in the following areas:
- Customer Relationship Management (CRM) - Epicor's award-winning
customer relationship management solution enables small and midsize
enterprises to manage their entire customer lifecycle. Epicor's CRM
solution enables businesses to gather, organize, track and share
prospect, customer, competitor and product information, to boost
revenues and increase customer satisfaction.
- Services and Distribution - Epicor's solutions for services and
distribution companies are focused on delivering a complete, end-to-end
enterprise and eBusiness solution. The distribution suite automates
customer acquisition and order management through to warehouse
fulfillment, accounting and customer service. Epicor's professional
services automation (PSA) solution provides service organizations with
the tools to improve staff utilization, optimize resources and increase
cash flow. The services and distribution suite includes integrated front
office, back office, business intelligence, and collaborative commerce
solutions tailored for specific vertical industries including financial
services, professional services, hospitality, not for profit, software &
computer services, sports & recreation, and wholesale distribution.
- Manufacturing - Epicor's manufacturing solutions provide integrated ERP
and eBusiness solutions for make-to-order and mixed-mode manufacturers.
The Company's solutions are designed to meet the challenges of today's
manufacturing environment typified by short product lifecycles, constant
process improvement and mass customization. The Company's products have
been designed for specific types of manufacturers -- from a small job
shop to a manufacturer of complex make-to-order components. The key
industries on which Epicor focuses its manufacturing solutions include
metal fabrication, capital equipment, electronics and aerospace.
- Supply Chain - Epicor's supply chain management solutions enable
midmarket companies to extend and optimize their enterprises and more
effectively collaborate with their customers, suppliers and partners.
From business-to-business eCommerce applications for advanced planning
and scheduling to warehouse management, forecasting and fulfillment,
Epicor offers solutions that improve operational performance, while
strengthening relationships across the supply chain to increase customer
value.
The Company's software products incorporate a significant number of features
localized to address international market opportunities, including support for
multiple languages, multiple currencies and accounting for value-added taxation
(VAT) and goods and services taxation (GST).
The Company offers consulting, training and support services to supplement the
use of its software products by its customers. Midmarket companies require cost
effective systems that have broad functionality, yet are rapidly implemented,
easily adapted and highly configurable to their unique business requirements.
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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 fourteen operating subsidiaries
worldwide.
BACKGROUND
Epicor designs its products and services primarily for midmarket companies,
which generally consist of companies with annual revenues between $10 million
and $500 million, and emerging enterprises, which generally consist of rapidly
growing businesses with annual revenues under $25 million. These rapidly growing
organizations number in the hundreds of thousands worldwide. In the past,
midmarket companies were underserved by traditional financial and ERP systems
that had originally been designed for larger corporations. These enterprise
systems, though highly functional, were also extremely complex and expensive to
purchase, install and maintain. Further, the complexity of the infrastructure
and on going maintenance to support these systems, often required a centralized
deployment model. This limited access to critical data to the organization's
management information services (MIS) department, which then limited timely
availability of information to decision makers, managers and key employees.
Moreover, these mostly proprietary systems provided little flexibility or
adaptability to the constantly evolving requirements of midmarket 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
Windows 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 small to mid-size enterprise (SME) market 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.
While SMEs 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 and profits as well as gain
a competitive advantage, mid-sized companies increasingly turned to integrated
application software to automate and link their business processes. Due to the
midmarket'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. Midmarket companies required highly functional software
applications that leveraged the new advances in client/server software
technology to deliver a truly integrated and enterprise-wide solution in a cost
effective manner.
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 has quickly become the fastest
growing technology platform, attracting midmarket companies with its features,
familiarity and ease-of-use.
The development of cost-effective infrastructures has increased the mid-sized
companies investment in enterprise applications. Epicor's product offerings,
product development efforts and services are focused on meeting the enterprise
business application needs of these growing mid-sized businesses.
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Overall, the demand for enterprise applications continues to be very strong. AMR
Research, Inc., an industry research organization, projects that the enterprise
commerce management application market will grow 23% annually for the next
several years, reaching more than $101 billion by 2005, up from just $36 billion
in 2000.
TECHNOLOGY STRATEGY
The Company's technology strategy is to develop leading enterprise and eBusiness
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, infrastructure and
connectivity (including Internet, intranet and extranet access). As the Company
continues to deliver eBusiness 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. Businesses
increasingly need to utilize a multi-channel world - the Internet, wireless,
mobile, voice response, and personal digital assistants (PDA) to support
business "anytime, anywhere". Epicor's enterprise as well as eCommerce
applications continue to transition to smaller business components that will
support true multi-channel eBusiness and collaborative commerce in a distributed
computing world.
The Company will continue to focus on leveraging emerging and industry standard
technologies to provide rapid return on investment and lower overall total cost
of ownership 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) use the
Microsoft SQL Server.NET Enterprise Server relational database management system
(RDBMS). The Company has focused the development of its e by Epicor product line
using Microsoft's industry-standard SQL language as the fundamental database
access methodology for both transaction processing and analytics. Vantage, one
of Epicor's manufacturing solutions, 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 Clientele suite leverages
both the Microsoft Access and Microsoft SQL Server.NET Enterprise Server
databases. The Company's Avante product leverages open database technology from
IBM Corporation and its Vista product is built on Microsoft's FoxPro database
and is also available on the Microsoft SQL Server. 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.
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. The Company's products incorporate the latest and most advanced GUI
features such as process wizards, cue cards, advanced on-line help and on-line
documentation. 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, extension
and customization capabilities for its e by Epicor, Avante, Clientele, Vantage,
and Vista product lines. To accomplish this, the
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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
changes to building an integrated custom application.
The eBackOffice Financials Customization Workbench is a software development kit
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, a COM 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 to
allow customers to further tailor the applications to their specific needs. The
Company is also part of Microsoft's Visual Studio for Applications (VSA)
initiative, a component of the overall .NET initiative to provide server side
Web customization.
The eBackOffice Distribution Customization Workbench 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 Commerce Server 2000.Net Enterprise
Server.
The Clientele 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 Clientele application suite to meet their specific
business needs. The Clientele 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 Clientele
suite is available completely web-enabled as well as in a traditional
client-server environment.
To minimize cost and support issues for its manufacturing customers, the Company
has tightly integrated its database and development environments. Avante was
developed using an object-based development tool, Avante Tools, that utilizes a
graphical development tool set. Through Avante Tools, the Company is able to
support products across multiple operating systems from a single object code
library. Vantage is written in the Progress 4GL, which provides a powerful,
graphical development tool set. Vantage 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.
Additionally, the Company offers a variety of Internet-based solutions,
including powerful, interactive enterprise portals that allow customers,
suppliers and employees to access relevant information from both within the
enterprise (account information, support activity, orders, etc) and from
external sources (industry information, news feeds, weather, etc). Epicor's
flexible, role-based portals incorporate powerful personalization and content
aggregation tools to enhance information self-service and improve inter- and
extra-enterprise wide collaboration. By opening up data over the Web through
personalized enterprise portals, Epicor's customers are able to provide better
service and build stronger relationships with business partners to improve
overall business performance.
Technical Architecture Strategy
The Company's technology direction currently embraces the Microsoft .NET
Platform for XML-based Web services. Through .NET, which is the next generation
of Microsoft's Distributed interNet Applications Architecture (DNA) and
component object model (COM), the Company will be able to provide comprehensive
support for Web services deployment and Enterprise Application Integration
(EAI). With .NET and the emerging standards for data exchange such as XML,
Epicor will be able to provide increased access to information both within and
between organizations -- no matter where their offices or employees are located.
This technology strategy can enable the
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Company's development teams to leverage Microsoft technology, 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. As a Microsoft Certified Partner and an early adopter of the .NET
Platform, Epicor is able to leverage its expertise with Microsoft technology to
benefit their customers.
PRODUCTS
The Company designs, develops, markets and supports enterprise and eBusiness
software applications that provide midmarket organizations with highly
functional, technically advanced business solutions. The Company's products are
aligned according to the markets that they serve - Customer Relationship
Management (Clientele), Distribution and Services (e by Epicor) and
Manufacturing and Supply Chain (Avante, Vantage, Vista).
Customer Relationship Management - Clientele
Clientele is an integrated, web-based customer relationship management solution
designed to meet the needs of rapidly growing, small and mid-sized
organizations. Clientele allows organizations to support and manage their most
important asset -- their customers. Clientele enables businesses to easily
gather, track, organize and share customer information to boost revenues and
increase customer service levels. Clientele combines employee applications such
as opportunity management with customer applications, such as web-based order
entry/inquiry to give companies and customers a true, up-to-the-minute picture
of their relationship. Clientele spans the barriers between traditional front
office and back office operations to provide marketing, sales force automation,
customer service, support, and internal help desk functionality.
Clientele Sales and Marketing empowers organizations to focus on the right
opportunities while providing access to timely information. Clientele Sales and
Marketing provides contact, lead, opportunity and account management in one
complete package. Clientele Customer Support manages the support requirements of
an organization's external customers and provides call management, product
tracking, RMA tracking, call queuing/follow-up and problem resolution. Clientele
HelpDesk provides detailed call tracking, asset/knowledge management, service
requests, maintenance and user profile tracking and management.
Clientele is designed to easily connect remote sites and laptop users to
centralized information. Data can be synchronized and exchanged between sites,
as well as between individual sites, remote users and a central database.
ClienteleNet provides access and self-service for customers over the Internet
via secure, web application.
Distribution and Services - e by Epicor
e by Epicor (incorporates products formerly named Platinum ERA and Clientele),
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, Distribution, People/Human Resources, Warehouse
Management, Assembly), eCommerce Suite, ePortal, eIntelligence, and eIndustry.
e by Epicor is typically targeted to either a distribution or service-based
business with revenues between $10 million and $500 million. 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/2000 operating system and the Microsoft SQL Server relational database. e by
Epicor 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, e by Epicor was designed for the Microsoft Windows NT server platform
and runs on Windows NT 95/98/2000 client platforms. e by Epicor 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, in order to fully utilize the capabilities of the client/server
model of computing, it is optimized for the Microsoft SQL Server database. This
implementation results in a substantial reduction in network traffic as compared
to other client/server approaches and provides scaleable high performance.
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eFrontOffice (powered by Clientele) provides integrated customer relationship
management capabilities that are tightly integrated with the eBackOffice
applications. This integrated approach to CRM enables companies to have a 360
degree view of their customer relationships. eFrontOffice Sales and Marketing
empowers organizations to focus on the right opportunities while providing
access to timely information. eFrontOffice Sales and Marketing provides contact,
lead, opportunity and account management in one package. eFrontOffice Support
manages the support requirements of an organizations external customers and
provides call management, product tracking, RMA tracking, call queuing/follow-up
and problem resolution. eFrontOffice HelpDesk provides detailed call tracking,
asset/knowledge management, service requests, maintenance and user profile
tracking and management.
eBackOffice includes financials, distribution, warehouse management, and human
resources suites of applications. eBackOffice Financials is an integrated
accounting solution that enables a company to automate the financial aspects of
their business. eBackOffice Distribution is a comprehensive solution designed to
improve the efficiency and responsiveness of a company's operations. It enables
companies to effectively manage their distribution operations, including
purchasing, quality control, inventory and order entry. The customer-centric
focus of eBackOffice enables companies to respond quickly to customer demands
and improve customer service. The integration of eBackOffice Financials and
Distribution with the rest of the e by Epicor suite ensures that a company's
entire enterprise is synchronized -- from the customer to the warehouse to the
supplier. Presently the following back office financial and distribution
applications are generally available in version 7.2: System Manager, General
Ledger with FRx, Accounts Receivable, Accounts Payable, Cash Management,
Multi-Currency Manager, Asset Management, Import Manager, Credit and
Collections, LockBox, Allocations, Budget Manager, Sales Order Processing,
Purchasing, Distribution, Assembly and Customization Workbench.
eBackOffice Warehouse (eWarehouse) extends the distribution functionality for
the eBackOffice product. It includes two applications: Data Collection Suite and
the Management and Fulfillment Suite. These applications are tightly integrated
with the Epicor eBackOffice Distribution suite so that information is available
real-time. eWarehouse provides wireless shop floor data collection, the use of
bar code technology to track inventory from the time it enters a facility until
it is shipped to a customer, and additional warehouse management capabilities.
With the eWarehouse solution in place, a company is able to streamline order
fulfillment, closely track inventory, and prioritize resources on the shop
floor.
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. The Company's 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, and Avante. It is also available to companies looking for an
HRMS/Payroll solution as the first step in building their enterprise solution.
eIntelligence is an integrated decision support suite and complete set of tools
that allows a company to 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 includes eCommerce StoreFront and eProcurement. The eCommerce
Suite enables companies to participate in a broad range of eCommerce activities,
from posting product catalogs to selling products through an electronic
storefront to linking with online marketplaces. Whether the focus is on
consumers or businesses, the goal is more efficient transactions and more
effective experiences. Electronically connecting customers with suppliers saves
time and money, ultimately creating substantial business improvements and
stronger customer relationships.
The eCommerce StoreFront enables Epicor's customers to sell products and
services over the Web, providing 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 eBusiness
engine that can handle all of a company's requirements. Through StoreFront
companies can rapidly and cost effectively introduce new products, enter new
markets, or simply provide electronic access to a catalog of standard products,
which can free up their salespeople to focus on closing more complex
transactions. Most importantly, the business data entered over the Internet is
captured and used by the other Epicor applications. In today's market, an
integrated product that supports all aspects of the customer experience is
critical.
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ePortal is a Web-based, self-service solution designed to help customers 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 Engine at its
heart, and which is then enriched by content specific information packs called
ePortals (Customer ePortal, Supplier ePortal, Employee ePortal). 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 user's 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 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 applications and practices designed for the Fortune 1000, in industries
such as automotive, retail, government and healthcare. However, for the
midmarket companies in these sectors, these vertical offerings are often too
expensive and overly complex for their requirements. More importantly, many
midmarket 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. Through eIndustry, Epicor
provides focused solutions and services designed specifically for the unique
requirements of target industries. Customers benefit through solutions that are
easier to implement, easier to use and require less customization than a
horizontal solution.
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 additionally
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, wholesale distribution, hospitality, financial services,
professional services, capital equipment, metal fabrication and precision
machining.
eIndustry includes PSA solutions 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 efficiency, utilization and visibility to optimize resources and
increase cash flow, ultimately assisting professional services organizations in
translating time to the bottom line. eProject supports time and expense
management, project planning, resource allocation, billing, commissions,
collections, and payroll. Even sales and support are integrated to ensure
maximum productivity. Flexible budgeting, reporting and analysis help support
fast, informed business decisions. With support for mobile and remote users, the
field has access to the critical information they need to be productive wherever
they are, resulting in more profitable engagements. As with all 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.
Manufacturing and Supply Chain
The Company's manufacturing applications include Avante, Vantage, and Vista.
The Company also offers an advanced planning and scheduling application,
eScheduling.
Avante is a fully integrated ERP solution that provides both a complete front
and back office business performance solution to tie together every aspect of a
manufacturing operation, from customer relationship management to supply chain
management. Avante's capabilities are geared toward high growth, midrange
manufacturers of discrete, highly engineered products 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
midmarket 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, which share a common database
architecture. Presently the following applications are presently generally
available in Avante version 9.2: Accounts Payable, General
8
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. Avante also includes front office
applications through its integration with eFrontOffice.
Vantage is an integrated, Windows-based ERP solution that meets the dynamic
requirements of custom manufacturing operations in make-to-order (MTO),
configure-to-order (CTO) and job shop manufacturers. Vantage is an easy-to-use,
yet comprehensive solution that enables manufacturers to make the most of their
expanding resources through its powerful tools for quoting, visual scheduling,
job tracking and costing, as well as shop floor data collection. Vantage is
comprised of more than 20 fully integrated business modules and offers a
complete solution, from front office functionality including sales force
automation and customer support to a complete eBusiness suite including an
online storefront and portal. Vantage provides strong scheduling and online
information access capabilities. With its graphical scheduling tools and "what
if" simulation, Vantage enables users to create and execute realistic production
schedules, based on the available resources, and react quickly and efficiently
to schedule changes. Vantage supports both custom and standard part orders,
product configuration and multilevel assemblies. Vantage is optimized for the
rapid deployment, minimal support and price/performance requirements of
midmarket manufacturers in the $10 to $500 million revenue range.
Vantage is comprised of groups of modules that can be differently configured to
comprehensively support a customer's business processes. The following
applications are presently generally available in Vantage version 5.1: Quote
Management, Order Management, Product Configuration, Job Management, MRP,
Advanced Bill of Materials, Visual Scheduling, Advanced Planning and Scheduling,
Data Collection, Advanced Material Management, 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 Portal,
Vantage StoreFront, EDI, and Tools. Vantage also supports front office
applications through its integration with eFrontOffice.
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 IT 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.
eBackOffice Scheduling (formerly Epicor APS and C-Way) is an advanced planning
and scheduling solution designed to help manufacturers realize shorter lead
times, accurate real-time order promising and smaller inventories. eScheduling
allows a company to create and maintain schedules that coordinate all aspects of
its manufacturing environment, based upon their unique business practices and
customer needs. eScheduling is designed as a real-time system --there are no
overnight batch processes to run-- which removes delays between collecting and
actually using information. This ensures that schedules include the most
up-to-date information. eScheduling provides forward and backward scheduling
capabilities, as well as minimum WIP, rule- and dynamic constraint-based
scheduling and dispatching. eScheduling can be used as a standalone product, or
as a powerful enhancement to the scheduling capabilities included in Epicor's
manufacturing solutions including Avante and Vantage.
9
Other Products
The Company 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 solutions requested by customers of Avante, the
Company resells 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 lines, 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.
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'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.
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 a nonexclusive basis. The Company's products are sold
to and used by a broad customer base, including manufacturing, distribution,
hospitality, service organizations, computer/Internet software, healthcare,
government entities, educational institutions and other users. 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 VARs. The Company sells its Clientele
product through an internal telesales organization, a direct sales force and
through a network of VARs. The Avante and Vantage products are presently sold by
direct sales forces. The Vista product is sold through a dedicated telesales
organization. The Avante, Vantage and Vista products are sold in certain
international locations through VARs and distributors. 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. 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
10
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, New Zealand, Canada, Hong
Kong, Singapore, Taiwan, and Argentina to further such sales and marketing
efforts. The Company sells its products in Europe, Central and South America,
Africa, Asia and the Middle East predominately through third-party distributors
and dealers.
Products are generally shipped as orders are received or within a 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.
The Company also provides access to its solutions through application hosting,
which allows customers to access the software over the Internet. Through Epicor
eCentre, customers purchase the infrastructure and system support on a monthly
basis through leading global infrastructure providers like IBM Corporation.
Hosting provides a deployment alternative to companies who do not want to invest
in the hardware, IT personnel or technology infrastructure necessary to support
a premise-based software deployment. By hosting the software through Epicor
eCentre, a company can free up critical capital resources, both intellectual and
monetary, and focus on their core business operations.
PRODUCT DEVELOPMENT AND QUALITY ASSURANCE
The Company plans to continue addressing the needs of midmarket users of
client/server enterprise software by continuing to develop high quality software
products that feature advanced technologies. See "Certain Factors That May
Affect Future Results -- Forward Looking Statements -- Safe Harbor." 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
continues to pursue object-oriented methodologies and Web Services-based
applications that simplify the development, maintenance, deployment and
customization of its products. Accordingly, the Company's tools offer a high
degree of customization for its products.
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 eBusiness and web-based applications supporting both
business-to-business and business-to-consumer solutions, (iii) develop
integration to vertical market trading exchanges, business communities or other
eBusiness market places, and (iv) develop and/or acquire new applications or
modules that build upon the Company's business application strategy. See
"Certain Factors That May Affect Future Results - Forward Looking Statements -
Safe Harbor."
The Company's technical strategy for its e by Epicor suite of applications is
centered on the Microsoft .NET Platform to provide enhanced scalability,
flexibility and interoperability. The 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 Commerce
Server, Microsoft COM+ (Component Object Model) and Microsoft BizTalk Server,
which provides a complete framework for enterprise application integration,
electronic commerce and business interoperability through industry leading
support for XML Web services. In 2001, Epicor was among the first early adopters
invited by Microsoft into the Visual Studio for Applications (VSA) initiative
for middle-tier XML Web Service customization, a key component of Microsoft's
Visual Studio .NET and at the heart of the Microsoft .NET Platform. See "Certain
Factors That May Affect Future Results - Forward Looking Statements - Safe
Harbor."
11
The Company translates and localizes certain of its products, either directly or
through outside contractors, for sale in Europe, Latin America and Asia.
Rapid technological advances and changes in customer requirements characterize
the computer software industry. The Company's future success will depend upon
its ability to enhance its current products and develop and introduce new
products that keep pace with technological developments, respond to evolving
customer requirements and continue to achieve market acceptance. In particular,
the Company believes it must continue to respond quickly to users' needs for
broad functionality and multi-platform support and to advances in hardware and
operating systems, particularly in the areas of eBusiness and Collaborative
Commerce (c-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 eBusiness 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 a portion of 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's products.
The Company believes that it competes in two enterprise business applications
markets: emerging enterprises and midmarket enterprises. The Company defines
emerging enterprises as rapidly growing businesses under $25 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 telesales persons 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 midmarket, which the Company defines as
growing enterprises with revenues between $10 million and $500 million. Although
the Company does not actively target larger, Fortune 1000 corporations with its
enterprise business applications, it encounters competitors from this market
segment who are increasingly targeting mid-sized enterprises. Businesses in this
market require solutions that provide a more sophisticated level of
functionality to effectively manage their business than can be found in
"off-the-shelf" applications. These businesses require applications that are
easy to implement, customize, manage and use as well as being affordable.
Mid-sized enterprises also often lack dedicated information technology
management resources and need solutions that do not require a high level of
ongoing maintenance and support for their continued operation. The Company
believes that purchases in this market are primarily influenced by
functionality, performance, availability of a Windows-based solution, price,
quality and customer service. The Company believes it competes favorably with
respect to all of these factors. Increasingly, customers in this market segment
are looking for
12
Microsoft SQL Server based solutions and the e by Epicor, Clientele, and Vantage
product lines are 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 midmarket 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 midmarket and are beginning to offer complete or partial
enterprise business applications to this market. In order to compete in the
future, the Company must respond effectively to customer needs in the area of
eBusiness and c-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., Microsoft Great Plains Business
Solutions, Scala, Inc., Systems Union, Ltd., Solomon Software (now owned by
Microsoft Corporation), and Geac for financial accounting; MAPICS, Inc., QAD,
Inc., IFS, FrontStep Inc., Lilly Software and Made2Manage, Inc. for
manufacturing; and Onyx Software Corporation, Siebel System, Inc., Pivotal
Software, Inc., FrontRange Solutions, Inc., and Best Software, Inc. (formerly
Sage) 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.
In the first half of 2001, Microsoft completed the acquisition of Great Plains
Software, Inc. Now a division of Microsoft, Great Plains is 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 can continue 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 resides exclusively 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 Clientele, Vista, Vantage and e by Epicor
(when sold through VARs and distributors) product lines pursuant to "shrink
wrap" licenses that are not signed by licensees and therefore may be
unenforceable under the laws of certain jurisdictions. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States. Certain components of the
Company's products are licensed from third parties.
The source code for the Avante 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
13
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, 2001, the Company had 973 full-time employees, including 179
in product development, 151 in support services, 260 in professional services,
184 in sales, 58 in marketing and 141 in administration. The Company's employees
are not represented by any collective bargaining organization, and the Company
has never experienced a work stoppage. The Company believes that employee
relations are good.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD LOOKING STATEMENTS - SAFE HARBOR.
Certain statements in this Annual Report on Form 10-K are forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, 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) severance costs and a substantial amount of the facilities costs will
be paid out by the end of 2002, (ii) restructuring obligations will be funded
from existing cash reserves, operations and its credit facility, (iii) the 2001
restructurings will provide approximately $10 million in quarterly cost savings
as compared to the first quarter of 2001, (iv) the Company's software license
revenue will increase slightly in 2002, as the economy begins to recover, with
total revenues approximately flat year over year due to the anticipated lag in
the recovery of the consulting component of services revenues, (v) the 2002
international revenues will continue to represent a significant portion of total
revenues, (vi) operating expenses will remain at or near 2001 levels in 2002 due
to the 2001 restructurings and other cost control measures, (vii) the Company
will maintain positive cash flow for the year ending December 31, 2002, (viii)
the Company will be able to develop and implement new technologies, including
web based technologies, and meet the needs of its midmarket users, and (ix) the
Company will have sufficient sources of financing to continue its operations
throughout at least the next twelve months. Actual results could differ
materially and adversely from those anticipated in such forward looking
statements as a result of certain factors, including the factors listed at pages
14 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 2002.
14
SINCE DECEMBER 31, 2000, OUR CASH AND CASH EQUIVALENTS AND WORKING CAPITAL HAVE
DECLINED. WE MAY NOT BE ABLE TO COLLECT AGED ACCOUNTS RECEIVABLE AND WE MAY NEED
TO RAISE ADDITIONAL CASH TO FUND OUR WORKING CAPITAL REQUIREMENTS.
The Company's cash and cash equivalents have decreased from $26.8 million at
December 31, 2000 to $24.4 million at December 31, 2001. The Company's working
capital has declined from a working capital deficit at December 31, 2000 of $2.0
million to a working capital deficit at December 31, 2001 of $16.2 million. If
the Company is not successful in achieving targeted revenues and expenses or
maintaining a positive cash flow during 2002, the Company may be required to
take further actions to reduce its operating expenses, such as additional
reductions in work force, and/or seek additional sources of funding. In
addition, although the Company currently has in place a bank line of credit, the
Company has in prior quarters violated the financial covenants included in the
terms of that credit agreement. The Company received waivers from its lender for
these violations and renegotiated the financial covenants to reduce the
thresholds required for compliance with the covenants. The Company complied with
the revised covenants in the third and fourth quarters of 2001. However, if the
Company is unable to maintain a positive cash flow or achieve operating
profitability, there can be no assurance that the Company will not violate the
covenants in the future. Should such violations occur, there can be no assurance
that the Company would be able to secure alternative funding or, if secured, on
favorable terms. Since December 31, 1999, the Company has also experienced
fluctuations in the proportion of accounts receivable over 90 days old. Although
the proportion of accounts receivables over 90 days old has decreased since the
end of 2000, if the Company cannot successfully collect a significant portion of
its net accounts receivable, the Company may be required to seek alternative
financing sources in addition to its current 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, as
defined, 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
- Fluctuations in the length of the Company's sales cycles
- Changes in accounting standards, including revenue recognition standards
- The size and timing of orders for the Company's products
- The number, timing and significance of new product announcements by the
Company and its competitors
- The Company's ability to introduce and market new and enhanced versions of
its products on a timely basis
- The level of product and price competition
- Changes in operating expenses of the Company
- Changes in average selling prices
In addition, the Company has historically realized 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
15
the way businesses operate and the software requirements of customers.
Specifically, the Company believes that customers desire eBusiness software
applications, or applications that enable a customer to engage in commerce or
service over the Internet. As companies introduce products that embody new
technologies or as new industry standards emerge, such as web-based applications
or applications that support eBusiness, existing products may become obsolete
and unmarketable. Development of new technologies may also cause the Company to
change how it licenses or prices its products, possibly adversely impacting the
Company's revenues and operating results. Such emerging licensing models include
subscription based licensing in which the licensee essentially rents the
software for a defined period of time as opposed to the current perpetual
license model. The Company's future business, operating results and financial
condition will depend on its ability to:
- Enhance its existing products
- Develop, deliver and achieve market acceptance of new and/or improved
products that address the increasingly sophisticated needs of its
customers, particularly in the areas of eBusiness and eCommerce
- Develop products for additional platforms
- Effectively train its sales force to sell an integrated suite of eBusiness
products
- Effectively recognize and implement emerging industry standards and models
Further, if the Company fails to respond to technological advances, emerging
industry standards, including licensing models, 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
eBusiness 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, 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. 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 California were subjected to an increased probability of rolling
electrical blackouts during the summer of 2001 as a consequence of a shortage of
available electrical power. It is possible that we could again be subject to
such blackouts in the future. In the event these blackouts occur or increase in
severity, they could disrupt the operations of our affected facilities. In
addition, terrorist acts or acts of war may cause damage or disruption to the
Company, its employees, facilities, suppliers, distributors and VARs, and
customers, which could have a material adverse effect on the Company's
operations and
16
financial results. 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.
REVENUE RECOGNITION ACCOUNTING STANDARDS AND INTERPRETATIONS MAY CHANGE, CAUSING
THE COMPANY TO RECOGNIZE LOWER REVENUES.
In October 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) No. 97-2, "Software Revenue Recognition." The
Company adopted SOP 97-2, as amended by SOP 98-4 "Deferral of the Effective Date
of a Provision of SOP 97-2" 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." The Company adopted SOP 98-9 on January 1,
2000. These standards address software revenue recognition matters primarily
from a conceptual level and do not include specific implementation guidance. The
Company believes that it is currently in compliance with SOPs 97-2 and SOP 98-9.
In addition, in December 1999, the Securities and Exchange Commission (SEC)
staff 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 SAB 101
during the fourth quarter of fiscal 2000.
The accounting profession and the SEC continue to discuss certain provisions of
SOP 97-2, SAB 101 and other revenue recognition standards and related
interpretations with the objective of providing additional guidance on potential
application of the standards and interpretations. These discussions could lead
to unanticipated changes in revenue recognition standards and, as a result, in
the Company's current revenue accounting practices, which could cause the
Company to recognize lower revenues. As a result, the Company may need to change
its business practices.
WE MAY PURSUE STRATEGIC ACQUISITIONS, INVESTMENTS, AND RELATIONSHIPS. 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 ERP applications, particularly in the areas of
eBusiness and eCommerce. This strategy may involve acquisitions, investments in
other businesses that offer complementary products, joint development agreements
or technology licensing agreements. The risks commonly encountered in the
acquisitions of businesses would accompany any future acquisitions or
investments by the Company. Such risks may include the following:
- The difficulty of integrating previously distinct businesses into one
business unit
- The substantial management time devoted to such activities
- The potential disruption of the Company's ongoing business
- Undisclosed liabilities
- Failure to realize anticipated benefits (such as synergies and cost
savings)
- Issues related to product transition (such as development, distribution
and customer support)
The Company expects that the consideration it would pay in such future
acquisitions would consist of stock, rights to purchase stock, cash or some
combination 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
- Discontinuation of third party product lines
17
WE RELY IN PART, ON DISTRIBUTORS AND VARS TO SELL OUR PRODUCTS. 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. The
Company recently announced that effective February 1, 2002, the Company's e by
Epicor VAR program would no longer require VARs to sell the Company's products
exclusive of competing product lines. The Company is currently in the process of
implementing this change to its VAR program. 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 prove to be adversely or favorably impacted, which would effect
the Company's consolidated results of operations and cash flows.
There can be no assurance that having a 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. 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 have a material adverse
affect on the Company's business, results of operations and performance. For
example, the market for ERP applications was negatively impacted in 1999 and the
first half of 2000 by Year 2000 concerns. Similarly, in 2001, the market for ERP
applications continued to be negatively impacted by the 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 lines
- 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 eBusiness. 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.
18
THE CONTINUING IMPACT ON THE COMPANY OF EMERGING AREAS SUCH AS THE INTERNET,
ON-LINE SERVICES, EBUSINESS APPLICATIONS AND ELECTRONIC COMMERCE IS UNCERTAIN
AND COULD NEGATIVELY IMPACT OUR BUSINESS.
There can be no assurance that the Company will be able to continue to provide a
product offering that will satisfy new customer demands in these areas. In
addition, standards for web-enabled and eBusiness applications, as well as other
industry adopted and de facto standards for the Internet, are 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. IF WE ARE UNABLE TO COMPETE
EFFECTIVELY WITH EXISTING OR NEW COMPETITORS OUR BUSINESS COULD BE NEGATIVELY
IMPACTED.
The business information systems industry in general and the ERP computer
software industry in particular are very competitive and subject to rapid
technological change. Many of the Company's current and potential competitors
have (1) longer operating histories, (2) significantly greater financial,
technical and marketing resources, (3) greater name recognition, (4) larger
technical staffs, and (5) a larger installed customer base than the Company has.
A number of companies offer products that are similar to the Company's products
and that target the same markets. In addition, any of these competitors may be
able to respond quicker to new or emerging technologies and changes in customer
requirements (such as eBusiness and Web-based application software), and to
devote greater resources to the development, promotion and sale of their
products than the Company. Furthermore, because there are relatively low
barriers to entry in the software industry, the Company expects additional
competition from other established and emerging companies. Such competitors may
develop products and services that compete with those offered by the Company or
may acquire companies, businesses and product lines that compete with the
Company. It also is possible that competitors may create alliances and rapidly
acquire significant market share. Accordingly, there can be no assurance that
the Company's current or potential competitors will not develop or acquire
products or services comparable or superior to those that the Company develops,
combine or merge to form significant competitors, or adapt quicker than will the
Company to new technologies, evolving industry trends and changing customer
requirements. Competition could cause price reductions, reduced margins or loss
of market share for the Company's products and services, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that the
competitive pressures that the Company may face will not materially adversely
affect its business, operating results, 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:
19
- 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
- Potentially adverse tax consequences, including repatriation of earnings
- Development and support 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
- Euro adoption
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. From time to time, the Company does take legal action against third
parties whom the Company believes are infringing upon the Company's intellectual
property rights. However, 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 and distributors to
enable them to customize the software to meet their particular requirements or
translate or localize the products for resale in foreign countries, as the case
may be. Although the source code licenses contain confidentiality and
nondisclosure provisions, the Company cannot be certain that such customers or
distributors 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 15, 2002, the Company had 44,814,605 shares of common stock
outstanding as well as 63,535 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.
20
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, changes in accounting standards or regulatory
requirements as promulgated by the FASB, SEC, Nasdaq or other regulatory
entities, and other events or factors may have a significant impact on the
market price of the Company's Common Stock. In addition, the securities of many
technology companies have experienced extreme price and volume fluctuations,
which have often been unrelated to the companies' operating performance. These
conditions may adversely affect the market price of the Company's Common Stock.
Because of these and other factors affecting the Company's operating results,
past financial performance should not be considered an indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.
ITEM 2. PROPERTIES
The Company leases approximately 175,000 square feet of office space in Irvine,
California located in five buildings. The majority of the leases expire in April
2004. Of the total space, approximately 22,000 square feet is on the market to
be sublet to third parties. 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. The Company also leases approximately 47,000 square feet of office
space in Minneapolis, Minnesota. The lease expires in March 2007. The principal
activities in 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 Corporation, which was acquired by the Company in
December 1998, filed for arbitration against AAR Corporation (AAR) 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 settlement was charged to operations in 2000. The Company
paid this settlement in 2001.
In December 1998, Alyn Corporation (Alyn) 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 settlement was charged
to operations in 1999. The Company paid this amount during the first half of
2000.
In November 1998, a securities class action was filed in the United States
District Court for the Southern District of California (the Court) against
DataWorks, certain of its current and former officers and directors, and the
Company. The consolidated complaint was purportedly brought on behalf of
purchasers of DataWorks stock between October 30, 1997 and July 16, 1998. The
complaint alleged that the defendants made material misrepresentations and
omissions concerning DataWorks' acquisition of Interactive Group, Inc. and
demand for DataWorks' products. The Company was named as a defendant solely as
DataWorks' successor, and was not alleged to have taken part in the alleged
misconduct. No damage amount was specified in the complaint. On January 31,
2002, the Court issued an order granting the defendants' motion to dismiss the
complaint with prejudice as to all claims and defendants. Subsequently, the
plaintiffs appealed the dismissal. The Company believes there is no merit to
this lawsuit or to the appeal and intends to continue to defend against it
vigorously. The ultimate outcome of this suit or any potential loss is not
presently determinable and no amount has been recorded in the consolidated
financial statements.
21
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, 2001.
PART II
ITEM 5. MARKET VALUE OF COMMON STOCK
The Company's Common Stock was traded on the over-the-counter market (The Nasdaq
National Market) 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 December 31, 1999: High Low
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
Fiscal Year ended December 31, 2001:
1st Quarter $ 2.13 $ .81
2nd Quarter $ 1.71 $ .69
3rd Quarter $ 1.49 $ .80
4th Quarter $ 1.72 $ .65
There were approximately 1,468 security holders of record as of March 15, 2002.
The Company has not paid dividends to date and intends to retain any earnings
for use in the business for the foreseeable future.
22
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" and our consolidated financial statements and the related notes
thereto appearing elsewhere in this Annual Report. The following selected
consolidated statement of operations data for the years ended December 31, 2001,
2000 and 1999, and the consolidated balance sheet data at December 31, 2001 and
2000, have been derived from audited consolidated financial statements included
elsewhere in this Report. The consolidated statement of operations data
presented below for the six months ended December 31, 1998 and fiscal years
ended June 30, 1998 and 1997 and the consolidated balance sheet data at December
31, 1999 and 1998 and at June 30, 1998 and 1997, are derived from audited
consolidated financial statements that are not included in this report (in
thousands, except per share amounts).
As of or for
As of or for As of or for As of or for the six
the year ended the year ended the year ended months ended As of or for the fiscal
December 31, December 31, December 31, December 31, year ended June 30,
2001 2000 1999 1998 1998 1997
-------------- --------------- -------------- ------------- ---------- -----------
(4) (3) (1)(2) (1)(2) (2)
Total revenues $ 171,011 $ 219,768 $ 258,176 $ 63,716 $ 98,488 $ 60,751
Net income (loss) $ (28,730) $ (40,735) $ (50,633) $ (2,056) $ 13,347 $ (4,408)
Diluted earnings (loss)
per share $ (0.69) $ (0.98) $ (1.25) $ (0.07) $ 0.45 $ (0.20)
Diluted shares 41,929 41,409 40,605 28,373 29,716 21,758
Total assets $ 86,771 $ 134,787 $ 170,177 $ 212,277 $ 67,988 $ 43,156
Long-term debt, less current
portion $ 2,229 $ 5,621 $ 520 $ 1,116 $ 35 $ 277
Net stockholders' equity $ 7,171 $ 34,067 $ 71,806 $ 117,995 $ 34,910 $ 15,587
(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 Statement of
Operations do not include the revenues and expenses of DataWorks 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
restructuring 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 year ended June 30, 1997,
loss from operations included $5,950,000 and $1,600,000 of charges for
restructuring, respectively. See Notes 1, 3 and 6 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 6 of Notes to
Consolidated Financial Statements.
(4) For the year ended December 31, 2001, loss from operations included gain
from sales of product lines of $11,880,000, provision for doubtful accounts of
$10,108,000, restructuring charges of $9,658,000 and a charge of $1,500,000
recorded in cost of revenues, related to the write-down of capitalized
development costs and reduction in the carrying value of certain intangible
assets. See Notes 1, 3 and 5 of Notes to Consolidated Financial Statements.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
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 eBusiness. The Company's
business solutions are focused on the midmarket, which generally includes
companies between $10 million and $500 million in annual revenues. The Company's
products and services are sold worldwide by its direct sales force and an
authorized network of VARs, distributors and Authorized Consultants.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. As such,
management is required to make judgments, estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The significant accounting policies which are most
critical to aid in fully understanding and evaluating reported financial results
include the following:
Revenue Recognition
The Company enters into contractual arrangements with end users that may include
licensing of the Company's software products, product support and maintenance
services, consulting services or various combinations thereof, including the
sale of such products or services separately. The Company's accounting policies
regarding the recognition of revenue for these contractual arrangements is fully
described in Note 1 of Notes to Consolidated Financial Statements.
The Company considers many factors when applying accounting principles generally
accepted in the United States of America related to revenue recognition. These
factors include, but are not limited to:
- The actual contractual terms, such as payment terms, delivery dates, and
pricing of the various product and service elements of a contract
- Availability of products to be delivered
- Time period over which services are to be performed
- Creditworthiness of the customer
- The complexity of customizations to the Company's software required by
service contracts
- The sales channel through which the sale is made (direct, VAR,
distributor, etc.)
- Discounts given for each element of a contract
- Any commitments made as to installation or implementation "go live"
dates
Each of the relevant factors is analyzed to determine its impact, individually
and collectively with other factors, on the revenue to be recognized for any
particular contract with a customer. Management is required to make judgments
regarding the significance of each factor in applying the revenue recognition
standards, as well as whether or not each factor complies with such standards.
Any misjudgment or error by management in its evaluation of the factors and the
application of the standards, especially with respect to complex or new types of
transactions, could have a material adverse affect on the Company's future
operating results.
Allowance for Doubtful Accounts
The Company sells its products directly to end users, generally requiring a
significant up-front payment and remaining terms appropriate for the
creditworthiness of the customer. The Company also sells its products to VARs
and other software distributors generally under terms appropriate for the
creditworthiness of the VAR or distributor. The Company believes no significant
concentrations of credit risk existed at December 31, 2001. Receivables from
customers are generally unsecured. The Company continuously monitors its
customer account balances and actively pursues collections on past due balances.
The Company maintains an allowance for doubtful accounts which is
24
comprised of a general reserve based on historical collections performance plus
a specific reserve for certain known customer collections issues. If actual bad
debts are greater then the reserves calculated based on historical trends and
known customer issues, the Company may be required to book additional bad debt
expense which could have a material adverse impact on our operating results for
the periods in which such additional expense occurs.
Capitalized 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. The
Company continually evaluates the recoverability of its capitalized software
development costs and considers any events or changes in circumstances that
would indicate that the carrying amount of an asset may not be recoverable. Any
material changes in circumstances, such as a large decrease in revenues or the
discontinuation of a particular product line could require future write-downs in
the Company's capitalized software development costs and could have a material
adverse impact on our operating results for the periods in which such
write-downs occur.
Intangible Assets
The Company's intangible assets were recorded as a result of an acquisition in
December 1998 and represent acquired technology and customer base. These
intangibles are amortized on a straight-line basis over the estimated economic
life of the asset. The Company continually evaluates the recoverability of the
intangible assets and considers any events or changes in circumstances that
would indicate that the carrying amount of an asset may not be recoverable. Any
material changes in circumstances, such as large decreases in revenue or the
discontinuation of a particular product line could require future write-downs in
the Company's intangibles assets and could have a material adverse impact on our
operating results for the periods in which such write-downs occur.
25
RESTRUCTURING CHARGES AND OTHER
The following table summarizes the activity in the Company's reserves associated
with its restructurings (in thousands):
Separation Remaining
costs accrual
for terminated Facilities from prior Total
employees and closing and periods -- 1998, Asset restructuring
contractors downsizing 1997 and 1996 impairment costs
-------------- ----------- ---------------- ---------- -------------
Balance at December 31, 1998 $ - $ - $ 7,957 $ - $ 7,957
1999 restructuring charges and other 2,072 4,756 - 3,325 10,153 (1)
Write-down of intangible assets - - - (3,325) (3,325)
Cash payments (67) (44) (6,772) - (6,883)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 2,005 4,712 1,185 - 7,902
Write-off of fixed assets - (1,435) - - (1,435)
Reversal of facility accrual - (700) - - (700)
Cash payments (2,005) (2,373) (850) - (5,228)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 - 204 335 - 539
2001 restructuring charges and other 4,271 3,654 - 1,733 9,658
Write-down of intangible assets - - - (1,733) (1,733)
Cash payments (2,745) (1,582) (147) - (4,474)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 $ 1,526 $ 2,276 $ 188 $ - $ 3,990
============ ============ ============ ============ ============
(1) Also included in the 1999 restructuring charges and other is the
reversal of $178,000 of the December 31, 1998 DataWorks merger-related
accrual as a result of lower than anticipated severance and facilities
closing costs in the Sweden and Netherlands offices.
2001 Restructurings
In April 2001, the Company underwent 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. In connection with
this restructuring, the Company recorded a restructuring charge of $5,890,000
during the quarter ended June 30, 2001. As part of the restructuring the Company
terminated 199 employees or 15% of the workforce from all functional areas of
the Company. As of December 31, 2001, these terminations were completed.
In December 2001, the Company underwent another restructuring to further reduce
its cost structure. In connection with this restructuring, the Company recorded
a restructuring charge of $2,035,000 during the quarter ended December 31, 2001.
As part of this restructuring, the Company terminated 162 employees or
approximately 15% of the workforce from all functional areas of the Company. As
of December 31, 2001, 152 of these terminations were completed. The remaining 10
terminations, which are from all functional areas of the Company, will be
completed by July 31, 2002. The Company expects the remaining severance costs
and a substantial amount of the facilities costs to be paid out by the end of
2002. The Company believes these obligations will be funded from existing cash
reserves, operations and its credit facility.
Although the closure and consolidation efforts were substantially completed as
of the end of 2001, lease payments on buildings being vacated or downsized will
continue to be made until the respective noncancelable terms of the leases
expire.
For the year ended December 31, 2001, an additional charge of $1,733,000 was
included in restructuring charges and other for the write-down of fixed assets
related to assets to be disposed of as a result of the facility closures in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. These assets consist primarily of leasehold improvements and
computer equipment related to buildings being vacated or downsized.
26
Although the Company believes the restructuring activities were necessary, no
assurance can be given that the anticipated benefits of the restructuring will
be achieved or that similar action will not be required in the future. The
Company expects that the 2001 restructurings will provide approximately $10
million in quarterly cost savings during 2002, as compared to the first quarter
of 2001.
The remaining restructuring reserves from prior periods of $188,000 relate
primarily to lease commitments on which the Company will continue to make
payments until the respective noncancelable term of the 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 of 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
into product lines 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.
As part of the restructuring, 130 employees or 11% of the Company's workforce
across all functional areas of the Company were terminated and non-strategic
offices were closed or consolidated. In addition, the Company recorded a charge
of $3,325,000 to write-down impaired intangible assets from businesses acquired
prior to 1999 to their fair values.
The Company's 1999 restructuring resulted in or contributed to the recording of
additional reserves and write-downs of prepaid software licenses, capitalized
software development costs and other assets due to change in product focus and
reorganization. These charges of $2,713,000 and $5,000,000 are included in cost
of license fees and general and administrative expenses, respectively, in the
accompanying Consolidated Statement of Operations for 1999.
During 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
restructuring and other charges in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2000.
SALES OF PRODUCT LINES
In April 2001, the Company sold the assets of its Impresa for MRO (Impresa)
product line, which primarily consisted of intellectual property, accounts
receivable, customer lists, contracts and fixed assets, for approximately
$2,900,000 in cash, plus other future consideration. Additionally, certain
liabilities of the Impresa product line were assumed by the buyer. In September
2001, the Company received $1,513,000 in cash, as final consideration for this
sale. This sale resulted in an after tax gain of $3,196,000 and is included in
gain on sales of product lines in the Consolidated Statement of Operations for
the year ended December 31, 2001. The operations of the Impresa product line
were not material to the Company's results of operations.
In May 2001, the Company sold the assets of its Platinum for Windows (PFW)
product line, which primarily consisted of intellectual property, accounts
receivable, inventories, customer lists, contracts and fixed assets, for
$7,000,000 in cash. Additionally, certain liabilities of the PFW product line
were assumed by the buyer. This sale resulted in an after tax gain of
approximately $8,684,000 and is included in gain on sales of product lines in
the Consolidated Statement of Operations for the year ended December 31, 2001.
The operations of the PFW product line were not material to the Company's
results of operations.
27
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR ENDED DECEMBER 31,
2000
The following table summarizes certain aspects of Epicor's results of operations
for the year ended December 31, 2001 compared to the year ended December 31,
2000 (in millions, except percentages):
December 31, Change
---------------------------- ----------------------------
2001 2000 $ %
------------ ------------ ------------ ------------
Revenues:
License fees $ 45.1 $ 75.8 $ (30.7) (40.5)%
Consulting 48.5 60.5 (12.0) (19.8)%
Maintenance 74.2 79.3 (5.1) (6.5)%
Other 3.2 4.2 (1.0) (22.5)%
------------ ------------ ------------ ------------
Total revenues $ 171.0 $ 219.8 $ (48.8) (22.2)%
Percentage of total revenues:
License fees 26.4% 34.5%
Consulting 28.3% 27.5%
Maintenance 43.4% 36.1%
Other 1.9% 1.9%
------------ ------------
Total revenues 100.0% 100.0%
Gross profit $ 91.0 $ 115.6 $ (24.6) (21.3)%
Percentage of total revenues 53.2% 52.6%
Sales and marketing $ 56.3 $ 76.2 $ (19.8) (26.0)%
Percentage of total revenues 32.9% 34.7%
Software development $ 25.1 $ 26.4 $ (1.2) (4.7)%
Percentage of total revenues 14.7% 12.0%
General and administrative $ 40.7 $ 53.1 $ (12.5) (23.5)%
Percentage of total revenues 23.8% 24.2%
Restructuring charges and other $ 9.7 $ (0.7) $ 10.4 (1,479.7)%
Percentage of total revenues 5.6% (0.3)%
Litigation charge $ - $ 2.0 $ (2.0) -
Percentage of total revenues - 0.9%
Gain on sales of product lines $ 11.9 $ - $ 11.9 -
Percentage of total revenues 6.9% -
Revenues
License fee revenues decreased in absolute dollars and as a percentage of
revenues for the year ended December 31, 2001 as compared to 2000. This decrease
is due largely to an accelerated downturn in the North American economy. The
Company believes that these economic conditions are causing businesses,
including mid-market businesses, to delay capital expenditures and reduce their
information technology budgets, which has had a negative impact on software
sales. The Company expects a slight increase in software license revenues for
2002, as the economy begins to recover, with total revenues approximately flat
year over year due to the anticipated lag in the recovery of consulting
revenues.
Consulting revenues decreased in absolute dollars for the year ended December
31, 2001 as compared to 2000. This decrease is mainly due to fewer
implementation projects as a result of decreased license fee revenues.
Furthermore,
28
the sale of the Impresa product line in the second quarter of 2001 resulted in a
decrease in consulting revenues of approximately $3.5 million.
Maintenance revenues decreased in absolute dollars for the year ended December
31, 2001, as compared to 2000, primarily due to the sales of the Company's PFW
and Impresa product lines.
Other revenues consist primarily of resale of third-party hardware and sales of
business forms. The decrease in other revenues in absolute dollars for the year
ended December 31, 2001, as compared to 2000, is due to a decrease in
third-party hardware sales directly attributable to the decrease in software
license fees.
International revenues were $53.0 million and $56.9 million in the years ended
December 31, 2001 and 2000, respectively, representing 31.0% and 25.9%,
respectively, of total revenues. The increase in international revenues as a
percentage of total revenues is primarily attributable to the decrease in North
American revenues resulting from the economic downturn. The Company believes the
North American economic downturn has not significantly impacted international
markets. With sales offices located in 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 third-party software
incorporated into the Company's products; costs associated with product
packaging, documentation and software duplication; costs of consulting, custom
programming, education and support; amortization and write-down of capitalized
software development costs; and the amortization and write-down of acquired
intangible assets. A charge of approximately $1.0 million is included in cost of
revenues for 2001 to write-down capitalized software development costs due to
the Company's decision to discontinue marketing one of its products in a
particular region overseas and declining revenues in a component of one of the
Company's manufacturing products. Furthermore, in 2001, the Company wrote-off
$0.5 million of acquired work force costs purchased as part of the Company's
1998 acquisition of DataWorks. Based on the decline in revenue from the former
DataWorks product lines since the acquisition and the significant decrease in
the size of the acquired workforce, the Company believes that as of December 31,
2001, this asset was impaired. A charge of approximately $5.3 million is
included in cost of revenues for 2000 to write-down to estimated realizable
value capitalized software development costs related to localized products with
lower than originally anticipated future revenues marketed in Latin America and
continental Europe.
The decline in gross profit in absolute dollars for the year ended December 31,
2001, as compared to 2000, is primarily due to the decrease in total revenues.
Gross profit percentage for the year ended December 31, 2001, as compared to
2000, increased. 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%. Excluding the $1.0 million and $0.5 million charges in 2001 as discussed
above, the 2001 gross profit margin would have been 54.1%. The decrease in gross
profit margin (excluding the write-down) is due to the decrease in software
license fees and the fixed nature of the certain costs of revenues, specifically
amortization of capitalized software development costs and acquired intangible
assets of approximately $2.0 million per quarter. The Company will continue in
future periods to assess the recoverability of the amounts recorded for
capitalized software costs and acquired intangible assets.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, commissions, travel,
advertising and promotional expenses. The decrease in absolute dollars and as a
percentage of total revenues for the year ended December 31, 2001, compared to
2000, is primarily due to a decrease in the cost of salaries, benefits and other
headcount related expenses as a result of the 2001 restructurings, and lower
commissions expense resulting from decreased software license fees revenues.
Additionally, during the year ended December 31, 2001, the Company decreased its
advertising and related costs, as compared to 2000, as a result of its efforts
to decrease overall costs. The Company expects sales and marketing expenses to
be lower in 2002 due to the 2001 restructurings and cost savings measures
implemented 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 SFAS 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
29
costs between the time that technological feasibility is established and the
time that the product is ready for general release. Costs that do not qualify
for capitalization are charged to software development expense when incurred.
For the year ended December 31, 2000, the Company capitalized $7.0 million of
software development costs. For the year ended December 31, 2001, no software
development costs were capitalized because the time period between technological
feasibility and general release decreased significantly compared to prior years,
such that for all software product releases during 2001 that time period was
insignificant. Capitalized software development costs include both internally
generated development costs for development of the Company's future product
releases and third party development costs related to the localization and
translation of certain of the Company's products for foreign markets.
The decrease in software development costs for the year ended December 31, 2001
as compared to 2000, is largely due to the decrease in salaries, benefits and
other headcount related expenses as a result of the 2001 restructurings, the
sales of the PFW and Impresa product lines and the Company's efforts to move
certain software development activities to lower-cost offshore locations. The
increase in software development costs as a percentage of total revenues for the
year ended December 31, 2001, as compared to 2000, is due to the decrease in
license fee revenues. The Company expects software development expenses to be
lower in 2002 due to the 2001 restructurings and cost saving measures
implemented 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 and includes bad debt expense. The decrease in absolute dollars and as
a percentage of total revenues in general and administrative expenses for the
year ended December 31, 2001, as compared to 2000, is due to the decrease in the
costs of salaries, benefits and other headcount related expenses as a result of
the 2001 restructurings and a decrease in the provision for doubtful accounts as
a result of improved collection efforts in 2001. The Company expects general and
administrative expenses to decrease in 2002 due to decreased bad debt expense,
the 2001 restructurings and continued cost saving measures.
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 settlement was charged to operations in 2000. The Company
paid the settlement during the quarter ended March 31, 2001.
Provision for Income Taxes
The Company recorded no provision during 2001 and 2000. The effective tax rate
during these periods was 0%. During these periods, the effective tax rate was
lower than the statutory U.S. 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 for 2001 and prior years, 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, 2001, the Company has provided a valuation
allowance on 100% of its deferred tax asset. Any realization of the Company's
net deferred tax asset will reduce the Company's effective tax rate in future
periods; with the exception of the realization of deferred tax assets that are
related to net operating losses that were generated by tax deductions resulting
from the exercise of non-qualified stock options, for which there will be an
increase directly to stockholders' equity.
30
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 (in millions, except percentages):
December 31, Change
----------------------------- ----------------------------
2000 1999 $ %
------------ ------------ ------------ ------------
Revenues:
License fees $ 75.8 $ 94.3 $ (18.5) (19.6)%
Consulting 60.5 84.9 (24.5) (28.8)%
Maintenance 79.3 72.9 6.5 8.9 %
Other 4.2 6.1 (1.9) (31.5)%
------------ ----------- ------------ -----------
Total revenues $ 219.8 $ 258.2 $ (38.4) (14.9)%
Percentage of total revenues:
License fees 34.5% 36.5%
Consulting 27.5% 32.9%
Maintenance 36.1% 28.2%
Other 1.9% 2.4%
------------ -----------
Total revenues 100.0% 100.0%
Gross profit $ 115.6 $ 135.6 $ (20.0) (14.8)%
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 $ (3.4) (11.3)%
Percentage of total revenues 12.0% 11.5%
General and administrative $ 53.1 $ 55.6 $ (2.4) (4.4)%
Percentage of total revenues 24.2% 21.5%
Restructuring charges and other $ (0.7) $ 10.0 $ (10.7) (107.0)%
Percentage of total revenues (0.3)% 3.9%
Litigation charge $ 2.0 $ 1.8 $ 0.2 11.1%
Percentage of total revenues 0.9% 0.7%
Provision for income taxes $ - $ 0.8 $ (0.8) -
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 one of
its 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 cycles as customers continued to transition to the
purchase of integrated and comprehensive eBusiness suites.
The decrease in consulting revenues in absolute dollars and as a percentage of
total revenues for the year ended December 31, 2000 as compared to the year
ended December 31, 1999 was attributable to fewer implementation projects as a
result of decreased license fee revenues.
31
Maintenance services revenues increased in absolute dollars for the year ended
December 31, 2000 as compared to the same period of 1999 due to the growth of
the Company's installed base of customers.
The decrease in other revenues in absolute dollars for the year ended December
31, 2000 as compared to 1999 was directly related to the decrease in the license
fee revenues for the Avante product, because all hardware sales were 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 was primarily attributable to decreased
international sales of the 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.
Gross Profit
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
The decrease in absolute dollars for the year ended December 31, 2000 compared
to 1999 was 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 e by Epicor product, both of which required additional
advertising and related expenditures. Such initial efforts and additional
expenditures were substantially completed by 2000.
Software Development
For the years 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 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, was
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 was attributable to spending in 1999 for Year 2000
remediation costs in the amount of $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, was due to the
decrease in the Company's revenue base for the same period.
General and Administrative
The decrease in absolute dollars in general and administrative expenses for the
year ended December 31, 2000, as compared to 1999, was 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.
32
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 was 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 settlement was charged to operations in 2000. The Company
paid the settlement 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 settlement was charged to operations
in 1999. The Company paid the settlement amount during the first half of 2000.
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
these periods, 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, 2000, the Company has provided
a valuation allowance on 100% of its deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's cash and cash equivalents, working
capital deficit, long-term debt and cash flows as of and for the year ended
December 31, 2001 (in millions):
Cash and cash equivalents $ 24.4
Working capital deficit (16.2)
Long-term debt, net of current portion 2.2
Net cash used in operating activities (9.0)
Net cash provided by investing activities 9.8
Net cash used in financing activities (3.4)
As of December 31, 2001, the Company's principal sources of liquidity included
cash and cash equivalents of $24.4 million. The Company used $9.0 million in
cash for operating activities during the year ended December 31, 2001 primarily
to fund its operations. As part of the $9.0 million in operating cash outlays
during the year ended December 31, 2001, $2.0 million was paid in settlement of
the AAR arbitration, $4.3 million for severance costs, lease terminations and
other costs related to the 2001 restructurings and $0.1 million for lease
payments related to the prior year restructurings. At December 31, 2001, the
Company has $4.0 million in cash obligations for severance costs, lease
terminations and other costs related to the Company's restructurings and $1.3
million in cash obligations for lease terminations and other costs related to
the 1998 DataWorks merger which is included in other accrued expenses in the
accompanying consolidated financial statements. These obligations are expected
to be paid through August 2009 and the Company believes these obligations will
be funded from existing cash reserves, operations and its credit facility.
The Company's principal investing activities for the year ended December 31,
2001 included proceeds from the sales of the Impresa and PFW product lines of
$11.4 million and capital expenditures of $1.6 million. For fiscal 2002, the
Company anticipates capital spending on property and equipment will remain at
2001 levels, and these expenditures will be funded from existing cash reserves,
operations and its credit facility.
33
Financing activities for the year ended December 31, 2001 included payments of
$4.4 million made against the Company's term loan obligation. In addition, cash
provided by financing activities included proceeds from the issuance of stock
under the employee stock purchase program of $0.9 million.
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. In August 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% (7.75% at December 31,
2001). The revolving line of credit, which expires in August 2003, bears
interest at a variable rate equal to either the prime rate or 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 in the credit agreement. To date, the
Company has not borrowed any amounts against the revolving line of credit. As of
December 31, 2001, the Company has borrowing capacity of $7.9 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 interest,
taxes, depreciation and amortization (EBITDA) and tangible net worth. As of
December 31, 2001, the Company was in compliance with all covenants included in
the terms of the credit agreement, as amended.
The Company's significant contractual obligations or commercial commitments
consist of the aforementioned credit facility and revolving line of credit and
the Company's operating leases for office facilities and equipment. The credit
facility and operating leases will require cash payments of $14.0 million in
2002, $11.6 million in 2003, $7.0 million in 2004, $5.6 million in 2005, $5.1
million in 2006 and $17.7 million thereafter. The Company does not have any
off-balance sheet arrangements that could significantly reduce its liquidity.
The Company has taken steps to reduce its operating expenses as part of its
December 1999, April 2001 and December 2001 restructurings, all of which
included a reduction in workforce and facilities consolidation and closure.
Based on the savings generated from the 2001 restructurings and cash received
for the sales of the Company's PFW and Impresa product lines, the Company was
cash flow positive in the second, third and fourth quarters of 2001. The Company
expects to remain cash flow positive for the year ending December 31, 2002.
As of December 31, 2001, the Company had cash and cash equivalents of $24.4
million. In addition, at such date, the Company had borrowing capacity under its
$20 million revolving line of credit facility of $7.9 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 2002 revenues and expenses or positive cash
flows from operations, the Company may be required to take further cost-cutting
measures and restructuring actions.
The Company reported net loss for the year ended December 31, 2001 of $28.7
million. The loss included a $9.7 million restructuring charge offset by $11.9
million from gains on sales of product lines. Had the Company not incurred these
items, the net loss for the year ended December 31, 2001 would have been $30.9
million. While management's goal is to continue to reduce and eliminate losses
and achieve profitability, there can be no assurance that the Company's
restructuring and other cost control actions will enable it to achieve operating
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.
Related Party Transaction
In December 2001, the Company entered into a management retention agreement with
its Chief Executive Officer (CEO) which both affirmed previously established
severance benefits as contained in his original 1996 offer letter and also
provides for his receipt of additional benefits in the event of a Change in
Control of the Company as defined in the management retention agreement. Among
other things, the agreement provides that in the event of a Change in Control
during the CEO's employment with the Company, or the involuntary termination of
his employment as defined in the management retention agreement, any unpaid
principal balance and accrued interest on any indebtedness of the CEO to the
Company will be forgiven and any imputed income from such forgiveness would be
grossed-up by the Company to account for the tax effect of such forgiveness. In
the event of such
34
forgiveness, the CEO is required to forfeit back to the Company any shares of
restricted stock held by him as a result of his February 1996 restricted stock
agreement with the Company to the extent the fair market value of the shares
does not exceed the principal amount of forgiven indebtedness. As of December
31, 2001, the balance of the CEO's indebtedness to the Company was $7,353,000.
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 July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No.142 is required to be adopted for fiscal years beginning after
December 15, 2001. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations and other intangible
assets with indefinite lives, will cease upon adoption of this statement. The
Company does not believe that the adoption of SFAS No. 142 will have a material
impact on its consolidated financial statements because as of December 31, 2001,
the Company had no goodwill or other intangible assets with indefinite lives
recorded in its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 is required to be adopted for fiscal years
beginning after June 15, 2002. The Company does not believe this statement will
have a material impact on its consolidated financial statements.
Also in August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This new statement also supersedes certain aspects of
APB 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", with regard to reporting the effects of a
disposal of a segment of a business and will require expected future operating
losses from discontinued operations to be reported in discontinued operations in
the period incurred (rather than as of the measurement date as presently
required by Accounting Principles Board No. 30). In addition, more dispositions
may qualify for discontinued operations treatment. The provisions of this
statement are required to be applied for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. The Company does not
believe that the adoption of SFAS No. 144 will have a material impact on its
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's cash and cash equivalents. At
December 31, 2001 the Company had $24.4 million in cash and cash equivalents.
Based on the investment interest rate, a hypothetical 1% decrease in interest
rates would decrease interest income by approximately $245,000 on an annual
basis, and likewise decrease our earnings and cash flows. 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.
35
The Company's interest expense associated with its term loan and revolving
credit facility will vary with market rates. The Company had approximately $5.9
million in variable rate debt outstanding at December 31, 2001. Based upon these
variable rate debt levels, a hypothetical 1% increase in interest rates would
increase interest expense by approximately $38,000 on an annual basis, and
likewise decrease our earnings and cash flows. The Company cannot predict market
fluctuations in interest rates and their impact on its variable rate debt, nor
can there be any assurance that fixed rate long-term debt will be available to
the Company at favorable rates, if at all. Consequently, future results may
differ materially from the estimated adverse changes discussed above.
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 31.0% of the Company's total revenues for the
year ended December 31, 2001 and 28.6% 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
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
----
Financial Statements:
Report of Independent Auditors - Deloitte & Touche LLP........................................................... 38
Report of Independent Auditors - Ernst & Young LLP............................................................... 39
Consolidated Balance Sheets as of December 31, 2001 and 2000.................................................... 40
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999....................... 41
Consolidated Statements of Stockholders' Equity and Comprehensive Operations
for the years ended December 31, 2001, 2000 and 1999......................................................... 42
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999....................... 43
Notes to Consolidated Financial Statements....................................................................... 44
Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts................................................................. 66
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
REPORT OF INDEPENDENT AUDITORS - DELOITTE & TOUCHE LLP
To the Board of Directors and Stockholders of
Epicor Software Corporation:
We have audited the accompanying consolidated balance sheet of Epicor Software
Corporation and subsidiaries (the Company) as of December 31, 2001, and the
related consolidated statements of operations, stockholders' equity and
comprehensive operations, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the Index at Item 14(a) for
the year ended December 31, 2001. These financial statements and this financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and this
financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such 2001 consolidated financial statements present fairly, in
all material respects, the financial position of Epicor Software Corporation and
subsidiaries as of December 31, 2001, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule for the year ended December 31, 2001,
when considered in relation to the basic 2001 consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set
forth therein.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 6, 2002, except for Note 15, as to which the date is March 27, 2002
38
REPORT OF INDEPENDENT AUDITORS - ERNST & YOUNG LLP
The Board of Directors and Stockholders
Epicor Software Corporation
We have audited the accompanying consolidated balance sheet of Epicor Software
Corporation as of December 31, 2000, and the related consolidated statements of
operations, stockholders' equity and comprehensive operations and cash flows for
the two years then ended. Our audits also included the financial statement
schedule listed in the Index at Item 14(a) for the years ended December 31, 2000
and 1999. 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 the consolidated results of its
operations and its cash flows for the two years then ended 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
39
EPICOR SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
DECEMBER 31,
----------------------------
ASSETS 2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 24,435 $ 26,825
Accounts receivable, net of allowance for doubtful accounts
of $8,266 and $24,242 as of December 31, 2001 and 2000, respectively 31,382 60,424
Prepaid expenses and other current assets 5,322 5,831
------------ ------------
Total current assets 61,139 93,080
Property and equipment, net 6,263 12,086
Software development costs, net of accumulated amortization
of $9,876 and $8,460 as of December 31, 2001 and 2000, respectively 2,946 6,748
Intangible assets, net 12,560 19,118
Other assets 3,863 3,755
------------ ------------
$ 86,771 $ 134,787
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,542 $ 11,177
Accrued compensation and payroll taxes 8,916 12,045
Other accrued expenses 16,350 22,119
Current portion of long-term debt 3,655 4,666
Accrued restructuring costs 3,990 539
Deferred revenue 37,918 44,553
------------ ------------
Total current liabilities 77,371 95,099
Long-term debt, net of current portion 2,229 5,621
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized,
95,305 shares issued and outstanding 7,501 7,501
Common stock, $0.001 par value, 60,000,000 shares authorized,
44,134,057 and 41,471,399 shares issued and outstanding as of
December 31, 2001 and 2000, respectively 44 41
Additional paid-in capital 244,771 240,824
Less: unamortized stock compensation expense (1,711) -
Less: notes receivable from officers for issuance of restricted stock (10,292) (9,969)
Accumulated other comprehensive loss (3,264) (3,182)
Accumulated deficit (229,878) (201,148)
------------ ------------
Net stockholders' equity 7,171 34,067
------------ ------------
$ 86,771 $ 134,787
============ ============
See accompanying notes to the consolidated financial statements.
40
EPICOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues:
License fees $ 45,101 $ 75,820 $ 94,344
Consulting 48,474 60,455 84,917
Maintenance 74,219 79,342 72,853
Other 3,217 4,151 6,062
------------ ------------ ------------
Total revenues 171,011 219,768 258,176
Cost of revenues:
License fees 16,965 25,392 18,015
Consulting 40,094 52,731 75,191
Maintenance 20,946 23,738 26,158
Other 2,021 2,331 3,238
------------ ------------ ------------
Total cost of revenues 80,026 104,192 122,602
------------ ------------ ------------
Gross profit 90,985 115,576 135,574
Operating expenses:
Sales and marketing 56,335 76,154 89,592
Software development 25,122 26,370 29,722
General and administrative 40,673 53,137 55,579
Restructuring charges and other 9,658 (700) 9,975
Gain on sales of product lines (11,880) - -
Litigation - 2,000 1,800
------------ ------------ ------------
Total operating expenses 119,908 156,961 186,668
------------ ------------ ------------
Loss from operations (28,923) (41,385) (51,094)
Other income (expense):
Interest income 1,261 961 2,031
Interest expense (1,100) (627) (534)
Other 32 316 (286)
------------ ------------ ------------
Other income, net 193 650 1,211
------------ ------------ ------------
Loss before income taxes (28,730) (40,735) (49,883)
Provision for income taxes - - 750
------------ ------------ ------------
Net loss $ (28,730) $ (40,735) $ (50,633)
============ ============ ============
Net loss per share - basic and diluted $ (0.69) $ (0.98) $ (1.25)
Weighted average common shares outstanding - basic
and diluted 41,929 41,409 40,605
See accompanying notes to consolidated financial statements.
41
EPICOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Series C Unamortized
Preferred Stock Common Stock Additional Stock
------------------------- ------------------------ Paid in Compensation
Shares Amount Shares Amount Capital Expense
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1998 95,305 $ 7,501 40,196,832 $ 40 $ 232,042 $ -
Net loss
Foreign currency
translation adjustment
Proceeds from note
receivable from officer
Acceleration of options in
connection with severance
agreements 2,385
Employee stock purchases 369,396 1 1,745
Exercise of stock options 281,934 1,364
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1999 95,305 $ 7,501 40,848,162 $ 41 $ 237,536 $ -
Net loss
Foreign currency
translation adjustment
Return of restricted stock (30,000) (120)
Proceeds from note receivable
Employee stock purchases 296,223 1,164
Exercise of stock options 357,014 2,244
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 2000 95,305 $ 7,501 41,471,399 $ 41 $ 240,824 $ -
Net loss
Foreign currency
translation adjustment
Issuance of restricted stock 2,644,537 3 3,964 (3,964)
Stock compensation expense 1,193
Redemption of unvested
restricted stock from
terminated employees (709,466) (1) (1,060) 1,060
Proceeds from notes
receivable from officers
Compensation expense related to
notes receivable from officers 162
Interest accrued on notes
receivable from officers
Employee stock purchases 716,819 1 879
Exercise of stock options 10,768 2
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 2001 95,305 $ 7,501 44,134,057 $ 44 $ 244,771 $ (1,711)
=========== =========== =========== =========== =========== ===========
Notes Accumulated
Receivable Other Net Comprehensive
From Comprehensive Accumulated Stockholders' Income
Officers Loss Deficit Equity (Loss)
----------- ------------- ----------- ------------ ------------
Balance December 31, 1998 $ (11,563) $ (245) $ (109,780) $ 117,995
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
Employee stock purchases 1,746
Exercise of stock options 1,364
----------- ----------- ----------- ----------- -----------
Balance December 31, 1999 $ (11,269) $ (1,590) $ (160,413) $ 71,806 $ (51,978)
===========
Net loss (40,735) (40,735) $ (40,735)
Foreign currency
translation adjustment (1,592) (1,592) (1,592)
Return of restricted stock 120 -
Proceeds from note receivable 1,180 1,180
Employee stock purchases 1,164
Exercise of stock options 2,244
----------- ----------- ----------- ----------- -----------
Balance December 31, 2000 $ (9,969) $ (3,182) $ (201,148) $ 34,067 $ (42,327)
===========
Net loss (28,730) (28,730) $ (28,730)
Foreign currency
translation adjustment (82) (82) (82)
Issuance of restricted stock 3
Stock compensation expense 1,193
Redemption of unvested
restricted stock from
terminated employees (1)
Proceeds from notes
receivable from officers 127 127
Compensation expense related to
notes receivable from officers 162
Interest accrued on notes
receivable from officers (450) (450)
Employee stock purchases 880
Exercise of stock options 2
----------- ----------- ----------- ----------- -----------
Balance December 31, 2001 $ (10,292) $ (3,264) $ (229,878) $ 7,171 $ (28,812)
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
42
EPICOR SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
OPERATING ACTIVITIES
Net loss $ (28,730) $ (40,735) $ (50,633)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 14,106 17,039 18,277
Stock based compensation expense 1,257 - -
Provision for doubtful accounts 10,108 18,480 14,412
Write-down of capitalized software development costs 1,026 5,337 -
Impairment of intangible and other long lived assets 499 - 4,291
Restructuring charges and other 9,658 (700) 9,975
Gain on sales of product lines (11,880) - -
Interest accrued on notes receivable from officers (450) - -
Accrued litigation - 2,000 1,800
Changes in operating assets and liabilities:
Accounts receivable 17,372 (3,173) (2,638)
Prepaid expenses and other current assets 229 3,153 3,113
Other assets (108) 227 3,735
Accounts payable (4,636) (2,182) (3,561)
Accrued restructuring costs (4,474) (5,228) (14,778)
Accrued expenses, compensation and payroll taxes (9,499) (4,001) 8,760
Deferred revenue (3,450) 6,318 1,414
------------ ------------ ------------
Net cash used in operating activities (8,972) (3,465) (5,833)
INVESTING ACTIVITIES
Proceeds from sales of product lines 11,413 - -
Purchases of property and equipment (1,600) (5,135) (11,392)
Capitalized software development costs - (7,026) (6,032)
Purchase of short-term investments - - (20,970)
Proceeds from sale or maturity of short-term investments - 12,154 39,327
Other - - (560)
------------ ------------ ------------
Net cash provided by (used in) investing activities 9,813 (7) 373
FINANCING ACTIVITIES
Proceeds from long term debt - 10,000 -
Payments on long term debt (4,403) (1,577) (868)
Proceeds from exercise of stock options 2 2,244 1,364
Proceeds from employee stock purchases 880 1,164 1,746
Net proceeds from issuance of restricted stock 2 - -
Proceeds from notes receivable from officers 127 1,180 -
------------ ------------ ------------
Net cash (used in) provided by financing activities (3,392) 13,011 2,242
Effect of exchange rates on cash 161 (935) (736)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (2,390) 8,604 (3,954)
Cash and cash equivalents at beginning of year 26,825 18,221 22,175
------------ ------------ ------------
Cash and cash equivalents at end of year $ 24,435 $ 26,825 $ 18,221
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest $ 1,100 $ 627 $ 534
============ ============ ============
Net income tax (refunds) payments $ (399) $ 303 $ 1,012
============ ============ ============
See accompanying notes to consolidated financial statements.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Epicor Software Corporation, a Delaware corporation, and its subsidiaries
design, develop, market and support integrated enterprise business software
solutions 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. Intercompany balances and
transactions have been eliminated in consolidation. The financial statements are
prepared in conformity with accounting principles generally accepted in the
United States of America.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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, cash flows used to
evaluate the recoverability of the Company's long-lived assets, and certain
accrued liabilities related to restructuring activities and litigation.
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.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with a wide-ranging set of
standards and interpretations of those standards under accounting principles
generally accepted in the United States of America, consisting principally of:
- Statement of Position (SOP) No. 97-2, "Software Revenue Recognition,"
issued by the American Institute of Certified Public Accountants (AICPA)
- AICPA SOP No. 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions,"
- Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," issued by the United States Securities and Exchange
Commission
The Company enters into contractual arrangements with end users of its products
that may include software licenses, maintenance services, consulting services,
or various combinations thereof, including the sale of such elements separately.
For each arrangement, revenues are recognized when both parties have signed an
agreement, the fees to be paid by the customer are fixed or determinable,
collection of the fees is probable, delivery of the product has occurred and no
other significant obligations on the part of the Company 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 based on the fair value of the element, regardless of any separate
prices stated within the contract for each element. Fair value is generally
considered the price a customer would be required to pay if the element were to
be sold separately. The Company applies the "residual method" as allowed under
SOP 98-9 in accounting for any element of an arrangement that remains
undelivered.
License Revenues: Amounts allocated to software license revenues are recognized
at the time of shipment of the software when fair value for any undelivered
elements is determinable and all the other revenue recognition criteria
discussed above have been met.
Consulting Service Revenues: Consulting service revenues are comprised of
consulting and implementation services and, to a limited extent, training.
Consulting services are generally sold on a time-and-materials basis and can
include services ranging from software installation to data conversion and
building non-complex interfaces to
44
allow the software to operate in customized environments. Services are generally
separable from the other elements under the same arrangement since the
performance of the services are not essential to the functionality of the other
elements 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 these services as well as
training are generally recognized as the services are performed.
Maintenance Service Revenues: Maintenance service 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company sells its products directly to end users generally requiring a
significant up-front payment and remaining terms appropriate for the
creditworthiness of the customer. The Company also sells its products to VARs
and other software distributors generally under terms appropriate for the
creditworthiness of the VAR or distributor. The Company believes no significant
concentrations of credit risk existed at December 31, 2001. Receivables from
customers are generally unsecured. The Company continuously monitors its
customer account balances and actively pursues collections on past due balances.
The Company maintains an allowance for doubtful accounts which is comprised of a
general reserve based on historical collections performance plus a specific
reserve for certain known customer collections issues. If actual bad debts
differ from the reserves calculated based on historical trends and known
customer issues, the Company records an adjustment to bad debt expense in the
period in which the difference occurs.
PROPERTY AND EQUIPMENT
Equipment, furniture, 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, which are
generally three to seven years. Leasehold improvements are amortized over the
lesser of their estimated useful life or the remaining term of the lease.
SOFTWARE DEVELOPMENT COSTS
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standard (SFAS) No. 86. Accordingly, 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, which is generally three to five years.
In addition to internally generated software development costs, the Company
purchases certain software from third-party software providers and capitalizes
such costs within software development costs. Amortization of software
development costs is included in cost of license fees and totaled $2,634,000 for
the year ended December 31, 2001, $2,547,000 for the year ended December 31,
2000, and $1,964,000 for the year ended December 31, 1999.
Capitalized software development costs are stated at the lower of amortized cost
or net realizable value. Recoverability of these capitalized costs is determined
by comparing the forecasted future revenues from the related products, based on
management's best estimates using appropriate assumptions and projections at the
time, to the carrying amount of the capitalized software development costs. If
the carrying value is determined not to be recoverable from future revenues, an
impairment loss is recognized equal to the amount by which the carrying amount
exceeds the future revenues.
In 2001, the Company determined that the carrying value of certain capitalized
software development costs exceeded net realizable value. This determination
related to certain localized products marketed in Europe, due to the Company's
decision to discontinue marketing such localized products, and to a component of
one of its manufacturing products, due to declining revenues related to such
component. Accordingly, a charge of
45
approximately $1,000,000 was included in cost of revenues for the year ended
December 31, 2001 to reflect the write-down of these capitalized costs.
In 2000, the Company determined that the carrying value of certain capitalized
software development costs exceeded net realizable value. This determination
related to certain localized products marketed in Latin America and continental
Europe due to lower than originally anticipated future revenues from these
products. Accordingly, a charge of $5,337,000 is included in cost of license
fees for year ended December 31, 2000, to reflect the write-down of these
capitalized costs.
In 1999, the Company recorded a charge of $930,000 to reduce the carrying value
of capitalized software costs to realizable value as a result of a change in
market focus of one of its manufacturing product lines. This charge was included
in cost of license fees for the year ended December 31, 1999.
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 $6,053,000 for the year ended
December 31, 2001, $6,637,000 for the year ended December 31, 2000 and
$7,374,000 for the year ended December 31, 1999. In 2001, the Company wrote-off
$0.5 million of acquired workforce costs purchased as part of the Company's 1998
acquisition of DataWorks. Based on the decline in revenue from the former
DataWorks product lines since the acquisition and the significant decrease in
the size of the acquired workforce, the Company believes that as of December 31,
2001, this asset was impaired. In 1999, the Company recorded a charge of
$3,325,000 to reduce the carrying value of certain intangible assets due to the
change in market focus of one of its manufacturing product lines. This charge
was included in cost of license fees for the year ended December 31, 1999 (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. In
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of", the Company reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of these assets is determined by comparing the forecasted
undiscounted future net cash flows from the operations to which the assets
relate, based on management's best estimates using appropriate assumptions and
projections at the time, to the carrying amount of the assets. If the carrying
value is determined not to be recoverable from future operating cash flows, the
asset is deemed impaired and an impairment loss is recognized equal to the
amount by which the carrying amount exceeds the estimated fair value of the
asset.
ADVERTISING COSTS
The Company expenses production costs of advertising upon the first showing of
the advertisement. Other advertising costs are expensed as incurred. Advertising
expense totaled $1,967,000 for the year ended December 31, 2001, $2,035,000 for
the year ended December 31, 2000, and $3,960,000 for the year ended December 31,
1999.
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, 2001,
2000 and 1999, foreign currency transaction gains and losses were insignificant.
CONCENTRATION OF CREDIT RISKS
The Company sells its products directly to end users generally requiring a
significant up-front payment and remaining terms appropriate for the
creditworthiness of the customer. The Company also sells its products to VARs
and other software distributors generally under terms appropriate from the
creditworthiness of the VAR or distributor. The Company believes no significant
concentrations of credit risk existed at December 31, 2001.
46
Receivables from VARs, software distributors and end users are generally
unsecured.
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 year by the weighted average number of
shares of common stock outstanding during the period, excluding shares of
non-vested restricted stock. Diluted net loss per share is computed by dividing
net loss for the year by the weighted average number of common and common
equivalent shares outstanding during the period if their effect is dilutive.
Common equivalent shares of 1,728,222, 1,289,704 and 1,424,487 for the years
ended December 31, 2001, 2000 and 1999, respectively, have been excluded from
diluted earnings per share as the effect would be anti-dilutive.
The following table computes basic and diluted net loss per share (in thousands,
except per share amounts):
Years Ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Net Loss $ (28,730) $ (40,735) $ (50,633)
Basic and Diluted:
Weighted average common shares outstanding 44,071 41,409 40,605
Weighted average common shares of non-vested
restricted stock (2,142) - -
------------ ------------ ------------
Shares used in the computation of basic and
diluted net loss per share 41,929 41,409 40,605
============ ============ ============
Net loss per share - basic and diluted $ (0.69) $ (0.98) $ (1.25)
============ ============ ============
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 statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. 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 LOSS
Total comprehensive loss represents the net change in stockholders' equity
during a period from sources other than transactions with stockholders and as
such, includes net loss and other specified components. For the Company, the
only other component of total comprehensive loss is the change in the cumulative
foreign currency translation adjustments recorded in stockholders' equity.
FINANCIAL CONDITION
The Company has reported annual net losses and negative cash flows from
operations since 1999. During that period, the Company's balance of cash, cash
equivalents and short-term investments has decreased from $30.4 million at
December 31, 1998 to $24.4 million at December 31, 2001 and the Company's
working capital has declined from a working capital deficit of $2.0 million at
December 31, 2000 to a working capital deficit of $16.2 million at December 31,
2001. The Company has taken steps to reduce its operating expenses as part of
its December 1999, April 2001 and December 2001 restructurings (see Note 3), all
of which included reductions in workforce and facilities consolidation and
closure. Based on the savings generated from the 2001 restructurings and cash
received from the sales of the Company's PFW and Impresa product lines (see Note
5), the Company
47
generated positive cash flow in the second, third and fourth quarters of 2001.
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. However, the Company is dependent upon its
ability to generate positive cash flows from license fees, providing services to
customers and other operating revenues, as well as collection of the related
accounts receivable, in order to maintain current liquidity levels. If the
Company is not successful in achieving targeted 2002 revenues and expenses or
positive cash flows from operations, the Company may be required to take further
cost-cutting measures and restructuring actions.
RECENTLY ISSUED 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 July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No.142 is required to be adopted for fiscal years beginning after
December 15, 2001. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations and other intangible
assets with indefinite lives, will cease upon adoption of this statement. The
Company does not believe that the adoption of SFAS No. 142 will have a material
impact on its consolidated financial statements because as of December 31, 2001,
the Company had no goodwill or other intangible assets with indefinite lives
recorded in its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 is required to be adopted for fiscal years
beginning after June 15, 2002. The Company does not believe this statement will
have a material impact on its consolidated financial statements.
Also in August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This new statement also supersedes certain aspects of
APB 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", with regard to reporting the effects of a
disposal of a segment of a business and will require expected future operating
losses from discontinued operations to be reported in discontinued operations in
the period incurred (rather than as of the measurement date as presently
required by Accounting Principles Board No. 30). In addition, more dispositions
may qualify for discontinued operations treatment. The provisions of this
statement are required to be applied for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. The Company does not
believe that the adoption of SFAS No. 144 will have a material impact on its
consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to amounts reported in previous periods
to conform with the current period presentation.
48
NOTE 2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
The following summarizes the components of property and equipment (in
thousands):
December 31,
----------------------------
2001 2000
------------ ------------
Computer equipment $ 33,269 $ 32,369
Furniture, fixtures and equipment 5,900 6,148
Leasehold improvements 6,905 7,251
------------ ------------
46,074 45,768
Less accumulated depreciation
and amortization (39,811) (33,682)
------------ ------------
$ 6,263 $ 12,086
============ ============
The following summarizes the components of intangible assets (in thousands):
December 31,
----------------------------
2001 2000 Amortizable Life in Years
------------ ------------ -------------------------
Acquired technology $ 19,274 $ 19,838 5
Customer base 8,730 8,730 7
Assembled workforce - 1,570 4
------------ ------------
28,004 30,138
Accumulated amortization (15,444) (11,020)
------------ ------------
$ 12,560 $ 19,118
============ ============
NOTE 3. ACQUISITIONS AND RESTRUCTURINGS
ACQUISITIONS
On December 31, 1998, the Company acquired DataWorks Corporation (DataWorks), 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.
49
RESTRUCTURING CHARGES AND OTHER
The following table summarizes the activity in the Company's reserves associated
with its restructurings (in thousands):
Remaining
Separation costs accrual
for terminated Facilities from prior Total
employees and closing and periods -- 1998, Asset restructuring
contractors downsizing 1997 and 1996 impairment costs
------------- ------------ --------------- ------------ ------------
Balance at December 31, 1998 $ - $ - $ 7,957 $ - $ 7,957
1999 restructuring charges and other 2,072 4,756 - 3,325 10,153 (1)
Write-down of intangible assets - - - (3,325) (3,325)
Cash payments (67) (44) (6,772) - (6,883)
------------- ------------ ------------- ------------ ------------
Balance at December 31, 1999 2,005 4,712 1,185 - 7,902
Write-off of fixed assets - (1,435) - - (1,435)
Reversal of facility accrual - (700) - - (700)
Cash payments (2,005) (2,373) (850) - (5,228)
------------- ------------ ------------- ------------ ------------
Balance at December 31, 2000 - 204 335 - 539
2001 restructuring charges and other 4,271 3,654 - 1,733 9,658
Write-down of intangible assets - - - (1,733) (1,733)
Cash payments (2,745) (1,582) (147) - (4,474)
------------- ------------ ------------- ------------ ------------
Balance at December 31, 2001 $ 1,526 $ 2,276 $ 188 $ - $ 3,990
============= ============ ============= ============ ============
(1) Also included in the 1999 restructuring charges and other is the
reversal of $178,000 of the December 31, 1998 DataWorks merger-related
accrual as a result of lower than anticipated severance and facilities
closing costs in the Sweden and Netherlands offices.
2001 Restructurings
In April 2001, the Company underwent 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. In connection with
this restructuring, the Company recorded a restructuring charge of $5,890,000
during the quarter ended June 30, 2001. As part of the restructuring the Company
terminated 199 employees or 15% of the workforce from all functional areas of
the Company. As of December 31, 2001, these terminations were completed.
In December 2001, the Company underwent another restructuring to further reduce
its cost structure. In connection with this restructuring, the Company recorded
an additional restructuring charge of $2,035,000 during the fourth quarter ended
December 31, 2001. As part of this restructuring, the Company terminated 162
employees or approximately 15% of the workforce from all functional areas of the
Company. As of December 31, 2001, 152 of these terminations were completed. The
remaining 10 terminations, which are from all functional areas of the Company,
will be completed by July 31, 2002. The Company expects the remaining severance
costs and a substantial amount of the facilities costs to be paid out by the end
of 2002.
Although the closure and consolidation efforts were substantially completed as
of the end of 2001, lease payments on buildings being vacated or downsized will
continue to be made until the respective noncancelable terms of the leases
expire.
For the year ended December 31, 2001, an additional charge of $1,733,000 was
included in restructuring charges and other for the write-down of fixed assets
related to assets to be disposed of as a result of the facility closures in
accordance with SFAS No. 121 Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. These assets consist primarily of
leasehold improvements and computer equipment related to buildings being vacated
or downsized.
The remaining restructuring reserves from prior periods of $188,000 relate
primarily to lease commitments on which the Company will continue to make
payments until the respective noncancelable term of the leases expire.
50
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 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.
As part of the restructuring, 130 employees or 11% of the Company's workforce
across all functional areas of the Company were terminated and non-strategic
offices were closed or consolidated. In addition, the Company recorded a charge
of $3,325,000 to write-down impaired intangible assets from businesses acquired
prior to 1999 to their fair values.
The Company's 1999 restructuring resulted in or contributed to the recording of
additional reserves and write-downs of prepaid software licenses, capitalized
software development costs and other assets due to change in product focus and
reorganization. These charges of $2,713,000 and $5,000,000 are included in cost
of license fees and general and administrative expenses, respectively in the
accompanying Consolidated Statement of Operations.
During 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
restructuring and other charges in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2000.
NOTE 4. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following: (in thousands)
December 31,
----------------------------
2001 2000
------------ ------------
Term loan $ 5,555 $ 8,611
Other 329 1,676
------------ ------------
5,884 10,287
Less current portion (3,655) (4,666)
------------ ------------
Total long-term debt $ 2,229 $ 5,621
============ ============
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. The term loan is due in 36 equal monthly
installments, plus interest at the prime rate plus 3% (7.75% at December 31,
2001). The revolving line of credit expires in August 2003 and it bears interest
at a variable rate equal to either the prime rate or 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, 2001,
the Company has borrowing capacity $7.9 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
December 31, 2001, the Company was in compliance with all covenants included in
the terms of the credit agreement, as amended.
Maturities of long-term debt are as follows: (in thousands)
Years ended December 31,
------------------------
2002 $ 3,655
2003 2,150
2004 79
---------
Total $ 5,884
=========
51
NOTE 5. SALES OF PRODUCT LINES
In April 2001, the Company sold the assets of its Impresa for MRO (Impresa)
product line, which primarily consisted of intellectual property, accounts
receivable, customer lists, contracts and fixed assets, for approximately
$2,900,000 in cash, plus other future consideration. Additionally, certain
liabilities of the Impresa product line were assumed by the buyer. In September
2001, the Company received $1,513,000 in cash, as final consideration for this
sale. This sale resulted in an after tax gain of $3,196,000 and is included in
gain on sales of product lines in the Consolidated Statement of Operations for
the year ended December 31, 2001. The operations of the Impresa product line
were not material to the Company's results of operations.
In May 2001, the Company sold the assets of its Platinum for Windows (PFW)
product line, which primarily consisted of intellectual property, accounts
receivable, inventories, customer lists, contracts and fixed assets, for
$7,000,000 in cash. Additionally, certain liabilities of the PFW product line
were assumed by the buyer. This sale resulted in an after tax gain of
approximately $8,684,000 and is included in gain on sales of product lines in
the Consolidated Statement of Operations for the year ended December 31, 2001.
The operations of the PFW product line were not material to the Company's
results of operations.
NOTE 6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain of its operating facilities and equipment under
operating leases with terms expiring through 2014. The following is a schedule
of future minimum lease payments under operating leases and future
noncancellable sublease income (in thousands):
Future Net Future
Future Minimum Noncancellable Minimum Lease
Years Ending December 31, Lease Payments Sublease Income Payments
------------------------------ -------------- --------------- ------------
2002 $ 10,705 $ 3,813 $ 6,892
2003 9,726 3,342 6,384
2004 7,041 3,200 3,841
2005 5,595 1,968 3,627
2006 5,053 1,645 3,408
Thereafter 17,711 5,340 12,371
------------ ------------ ------------
$ 55,831 $ 19,308 $ 36,523
============ ============ ============
Rental expense under operating leases, net of sublease income, was $6,902,000
for the year ended December 31, 2001, $7,102,000 for the year ended December 31,
2000 and $8,478,000 for the year ended December 31, 1999.
TAX LIABILITY
The Company has recorded a liability of $1,452,000 related to international
employment tax issues, which is included in other accrued expenses in the
accompanying consolidated balance sheet. The Company is currently in
negotiations with the local taxing authority and anticipates settling this
matter in 2002. While the Company believes this accrual to be appropriate and
adequate, any difference between the settlement amount and the recorded
liability will be reflected in the Company's consolidated financial statements
at the time of settlement.
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 (AAR)
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 settlement
52
was charged to operations in 2000. The Company paid this settlement in 2001.
In December 1998, Alyn Corporation (Alyn) 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 settlement was charged
to operations in 1999. The Company paid this amount during the first half of
2000.
In November 1998, a securities class action was filed in the United States
District Court for the Southern District of California (the Court) against
DataWorks, certain of its current and former officers and directors, and the
Company. The consolidated complaint was purportedly brought on behalf of
purchasers of DataWorks stock between October 30, 1997 and July 16, 1998. The
complaint alleged that the defendants made material misrepresentations and
omissions concerning DataWorks' acquisition of Interactive Group, Inc. and
demand for DataWorks' products. The Company was named as a defendant solely as
DataWorks' successor, and was not alleged to have taken part in the alleged
misconduct. No damage amount was specified in the complaint. On January 31,
2002, the Court issued an order granting the defendants' motion to dismiss the
complaint with prejudice as to all claims and defendants. Subsequently, the
plaintiffs appealed the dismissal. The Company believes there is no merit to
this lawsuit or to the appeal and intends to continue to defend against it
vigorously. The ultimate outcome of this suit or any potential loss is not
presently determinable and no amount has been recorded in the consolidated
financial statements.
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 7. INCOME TAXES
The provision for income taxes is comprised of the following (in thousands):
Years Ended December 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Current:
Federal $ - $ - $ -
State - - -
Foreign - - 750
------------ ------------ ------------
Total $ - $ - $ 750
============ ============ ============
The loss before income taxes is allocated between U.S. federal and foreign
jurisdictions as follows (in thousands):
Years Ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Federal $ (12,231) $ (19,463) $ (27,673)
Foreign (16,499) (21,272) (22,210)
------------ ------------ ------------
Total $ (28,730) $ (40,735) $ (49,883)
============ ============ ============
53
The reported provision for income taxes differs from the amount computed by
applying the statutory U.S. federal income tax rate of 34 percent to the
consolidated loss before income taxes as follows (in thousands):
Years Ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Benefit computed at statutory rates $ (9,768) $ (13,850) $ (16,960)
Increase resulting from:
Earnings in jurisdictions taxed at rates
different from the statutory U.S. federal rate 2,467 7,232 8,301
Valuation allowance 7,027 6,211 8,757
Other 274 407 652
------------ ------------ ------------
Total $ - $ - $ 750
============ ============ ============
The tax effects of temporary differences and carryforwards that give rise to the
Company's deferred income taxes assets and liabilities consist of the following
(in thousands):
December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Net operating loss carryforwards $ 65,526 $ 69,199 $ 58,488
Other accruals and reserves 5,250 7,849 6,082
Allowance for doubtful accounts 1,348 7,623 4,349
Research credit carryforward 6,822 5,244 4,855
Accrued restructuring costs 708 2,581 6,164
Depreciation 1,714 1,077 891
Software capitalization, net (973) (1,906) (2,264)
Purchased intangibles (2,876) (5,613) (7,506)
Valuation allowance (77,519) (86,054) (71,059)
------------ ------------ ------------
Total $ - $ - $ -
============ ============ ============
Due to the operating losses incurred by the Company for 2001 and prior years 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, 2001, the Company has provided a valuation
allowance on 100% of the deferred tax asset.
The Company has U.S. federal, state and foreign net operating loss carryforwards
as of December 31, 2001 of approximately $116,000,000, $59,000,000 and
$66,000,000, respectively. The federal and state losses expire in the years 2002
through 2022. The state net operating loss carryforwards that expire by 2003
approximate $2,600,000. The foreign losses have no expiration date. In addition,
the Company has approximately $6,800,000 of federal and state research and
development credit carryforwards that expire in the years 2002 through 2022. The
federal research and development credit carryforwards that expire by 2003
approximate $175,000. As of December 31, 2001, the Company has a receivable of
approximately $1,000,000 as a result of the carryback of federal net operating
losses.
Included in the Company's net operating loss carryforwards are tax deductions
relating to the exercise of non-qualified stock options totaling approximately
$50,000,000. These losses are fully offset by a valuation allowance. Upon future
realization of these deductions, approximately $20 million of the deferred tax
asset will be credited directly to stockholders' equity.
NOTE 8. 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
with an exercise price equal to the fair market value on the date of grant,
generally vest over four years and expire ten years from the date of grant.
The Company has an Employee Stock Purchase Plan (the Purchase Plan) authorizing
the issuance of up to 2,250,000 shares of common stock to participating
employees. The Purchase Plan permits employees to purchase common stock at a
price equal to 85% of the fair market value at the beginning or end of a
six-month offering
54
period. As of December 31, 2001, a total of 1,695,487 shares have been issued
under this plan.
The following is a summary of activity under the stock option plans:
Years Ended December 31,
------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------- ---------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------ ------------ ------------ ------------ ------------ ------------
Outstanding,
beginning of period 8,596,955 $ 7.6090 9,856,836 $ 8.6607 7,133,089 $ 10.3917
Granted 1,523,880 1.1280 2,066,444 3.9626 5,084,900 6.7296
Exercised (10,768) 0.2029 (357,014) 6.2910 (281,934) 4.9691
Expired or canceled (6,957,679) 7.2555 (2,969,311) 8.6424 (2,079,219) 10.3466
------------ ------------ ------------
Outstanding, end of
period 3,152,388 $ 5.3319 8,596,955 $ 7.6090 9,856,836 $ 8.6607
============ ============ ============
Options exercisable 1,243,580 $ 10.4117 3,606,112 $ 9.8001 2,694,750 $ 9.7285
============ ============ ============
The following table summarizes information about stock options outstanding at
December 31, 2001:
Outstanding Exercisable
---------------------------------------------------------- -----------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
---------------------- ----------------- --------------------- --------------- ----------------- ----------------
$ 0.11 to 1.13 789,384 9.43 $ 1.00 54,072 $ 0.90
1.14 to 1.49 763,640 9.56 1.17 46,042 1.15
1.66 to 3.60 130,612 6.59 2.38 65,100 3.47
3.66 to 3.94 275,250 7.88 3.71 133,952 3.70
4.00 to 5.94 190,825 8.21 4.27 48,326 4.37
6.00 to 8.01 93,483 7.01 6.74 54,358 6.82
8.13 to 10.81 131,261 6.05 9.49 103,486 9.51
11.44 to 11.63 238,676 6.20 11.53 204,404 11.53
12.13 to 27.39 539,257 6.58 15.38 533,840 15.36
--------------- ---------------
3,152,388 8.19 $ 5.33 1,243,580 $ 10.41
=============== ===============
The Company complies with APB No. 25 "Accounting for Stock Issued to Employees"
in accounting for stock 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 consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net loss and loss per share would have
been as follows (in thousands, except per share amounts):
Years Ended December 31,
-------------------------------------------
2001 2000 1999
------------ ------------ -----------
Net loss as reported $ (28,730) $ (40,735) $ (50,633)
Net loss -- pro forma $ (28,462) $ (59,959) $ (78,066)
Loss per share as reported $ (0.69) $ (0.98) $ (1.25)
Loss per share -- pro forma $ (0.68) $ (1.45) $ (1.92)
55
The fair value of shares has been estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Years Ended December 31,
--------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------- ---------------------------- ----------------------------
Stock Stock Stock
Option Purchase Option Purchase Option Purchase
Plans Plan Plans Plan Plans Plan
------------ ------------ ------------ ------------ ------------ ------------
Expected life (years) 4.0 0.5 3.9 0.6 4.0 0.5
Risk-free interest rate 4.1% 3.5% 6.4% 6.2% 6.3% 4.7%
Volatility 1.4 1.4 1.3 1.3 0.9 0.9
Dividend rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
For options granted during the years ended December 31, 2001, 2000 and 1999, the
weighted average fair value at date of grant was $0.96, $3.18, and $4.57, per
option, respectively. The weighted average fair value at date of grant for stock
purchase plan shares during the years ended December 31, 2001, 2000 and 1999,
was $0.61, $2.22, and $3.34, per share, respectively.
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 were ineligible for stock option grants for a
period of six months and one day following the exchange date of January 26,
2001. For the year ended December 31, 2001, the Company recorded compensation
expense of $1,095,000 related to restricted stock. The Company will record
future compensation expense of up to $1,711,000 over the vesting period of the
restricted shares, which represents the fair market value of the restricted
common stock issued on the exchange date. Compensation expense to be charged to
operations in 2002, 2003, 2004 and 2005 approximates $892,000, $415,000,
$372,000, and $32,000 respectively, assuming all restricted stock grants vest.
The stock compensation expense for the year ended December 31, 2001 was charged
to the following lines in the Consolidated Statement of Operations:
Cost of consulting revenues $ 198,000
Sales and marketing 305,000
Software development 98,000
General and administrative 494,000
----------
Total compensation expense $1,095,000
==========
NOTE 9. COMMON STOCK
As of December 31, 2001, the total number of shares of common stock reserved for
future issuance is as follows:
Stock Option Plans 5,882,500
Employee Stock Purchase Plan 554,513
Series C Preferred Stock 953,050
---------
7,390,063
=========
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
56
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. On October
30, 2001, pursuant to Section 27 of the Plan, the Company's Board of Directors
agreed to restate the dividend it had declared under the Plan in an Amended and
Restated Preferred Stock Rights Agreement dated November 13, 2001. The Company
amended and restated the Plan to provide, among other things, that each right
entitles the holder to purchase from the Company one one-hundredths of a share
of preferred stock for $8.00 and that the rights will become exercisable ten
days after a person or group announces acquisition of 15% or more of the
Company's Common Stock or ten days after the commencement of a tender offer that
would result in ownership of the offeror of 15% or more of the Company's Common
Stock (unless the rights are redeemed by the Company). The rights, which expire
on November 13, 2011, may be redeemed by the Company at a price of $0.01 per
right.
NOTE 10. 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 ten 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.
The holders of the Preferred Stock are entitled to receive, when and if declared
by the Board of Directors, dividends out of any assets of the Company legally
available. Such dividends are required to be prior and on an equal basis to any
dividend, which may be declared by the Board of Directors for holders of common
stock. Dividends shall not be cumulative and no dividends have been declared or
paid as of December 31, 2001. In the event of liquidation, dissolution or
winding up of the Company, the holders of the Preferred Stock shall be entitled
to receive, prior and in preference to any distribution to the common
stockholders, an amount per share equal to $78.70. The Preferred Stock have an
aggregate liquidation preference of approximately $7,500,000 at December 31,
2001.
NOTE 11. 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
dates of all loans still outstanding as of February 20, 2001 were subsequently
extended to February 20, 2002. All loans except two were paid in full by the
extended due date. The due dates on the two remaining loan balances aggregating
$162,000, after applying the 2000 and 2001 incentive compensation to each
officer in February 2001 and 2002, have been extended to June 30, 2002 and
February 20, 2003. 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 was accrued at 6.53%. Interest shall continue to
accrue at 6.53% until notes are paid off in full.
RESTRICTED STOCK
In February 1996, the Company's Chief Executive Officer 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 five-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 $3,500,000
pursuant to an unsecured five-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 interest on such notes. In February 2001, the
Company extended the due date on both loans to February 2003. In consideration
for the extension, interest accrues on the notes at 6% per annum from the date
of the amendment and the principal and interest is due and payable upon maturity
of the notes in February 2003. In 2001, the Company recorded interest income of
$345,000 related to these notes. Outstanding principal and interest related to
these notes was $7,353,000 as of December 31, 2001.
In December 2001, the Company entered into a management retention agreement with
its Chief Executive Officer which both affirmed previously established severance
benefits as contained in his original 1996 offer letter and also provides for
his receipt of additional benefits in the event of a Change in Control of the
Company as defined in the management retention agreement. Among other things,
the agreement provides that in the event of a
57
Change in Control during the CEO's employment with the Company, or the
involuntary termination of his employment as defined in the management retention
agreement, any unpaid principal balance and accrued interest on any indebtedness
of the CEO to the Company will be forgiven and any imputed income from such
forgiveness would be grossed-up by the Company to account for the tax effect of
such forgiveness. In the event of such forgiveness, the CEO is required to
forfeit back to the Company any shares of restricted stock held by him as a
result of his February 1996 restricted stock agreement with the Company to the
extent the fair market value of the shares does not exceed the principal amount
of forgiven indebtedness. As of December 31, 2001, the balance of the CEO's
indebtedness to the Company was $7,353,000 as discussed above.
In February 1996, one of the Company's former senior executive officers
purchased 500,000 shares of restricted stock at a purchase price of $3.50 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 five-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 five-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 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 years ended December 31, 2001 and 2000, $127,000 and
$1,180,000, respectively, was repaid in cash on the promissory notes. In
February 2001, the Company extended the due date on the remaining principal
balance of the unsecured note to August 2001 and then subsequently on August 7,
2001 extended the then remaining principal balance to February 2002. As part of
the extensions, the note bears interest payable monthly at 6% per annum from the
date of the first amendment. In 2001, the Company recorded interest income of
$8,000 related to this note.
At the original modification date in February 2001, the interest rate in effect
for this note was below a market rate of interest; thus, being accounted for as
a variable stock award. As a result, during the year ended December 31, 2001,
the Company recorded $4,000 of compensation expense related to this note, which
was calculated using the Black-Scholes option pricing model. The secured note
was fully paid in 2000. Outstanding principal and interest related to the
unsecured note was $64,000 as of December 31, 2001. The remaining principal on
the note was fully paid in February 2002, however, $8,000 in interest remains
payable.
In April 1996, one of the Company's current 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 five-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 officer $1,406,250 pursuant to an unsecured five-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
and then subsequently on October 30, 2001 extended the notes to February 2003.
In consideration for these extensions, the notes bear interest payable quarterly
at 6% per annum beginning in April 2001. In 2001, the Company recorded interest
income of $97,000 related to these notes.
At the modification date, the interest rate in effect for these notes was below
a market rate of interest; thus, being accounted for as a variable stock award.
Prior this individual returning to the Company as an employee in October 2001,
the Company recorded $158,000 of compensation expense related to this award as a
result of the variable nature of this stock award, which was calculated using
the Black-Scholes option pricing model. On the date of change in grantee status,
there was no intrinsic value related to these notes, and as a result, no
additional compensation expense shall be recorded for these notes. Outstanding
principal and interest related to these notes was $2,875,000 as of December 31,
2001.
NOTE 12. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) salary deferral plan (the 401(k) Plan), which is funded
based on employee contributions. Terms of the 401(k) Plan provide for the
Company to make contributions to the 401(k) 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 401(k) Plan were approximately $950,000 for the
year ended December 31, 2001, $1,140,000 for the year ended December 31, 2000,
and $820,000 for the year ended December 31, 1999.
58
NOTE 13. SEGMENT AND GEOGRAPHIC INFORMATION
In accordance with SFAS No. 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,
consulting, maintenance and other. Other consists primarily of resale of third
party hardware and sales of business forms. 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 years ended December 30, 2001, 2000 and 1999 is
as follows (in thousands):
Software
Licenses Consulting Maintenance Other Total
------------ ------------ ------------ ------------ ------------
Year Ended December 31, 2001:
Revenues $ 45,101 $ 48,474 $ 74,219 $ 3,217 $ 171,011
Cost of revenues 16,965 40,094 20,946 2,021 80,026
------------ ------------ ------------ ------------ ------------
Gross Profit $ 28,136 $ 8,380 $ 53,273 $ 1,196 $ 90,985
============ ============ ============ ============ ============
Year Ended December 31, 2000:
Revenues $ 75,820 $ 60,455 $ 79,342 $ 4,151 $ 219,768
Cost of revenues 25,392 52,731 23,738 2,331 104,192
------------ ------------ ------------ ------------ ------------
Gross Profit $ 50,428 $ 7,724 $ 55,604 $ 1,820 $ 115,576
============ ============ ============ ============ ============
Year Ended December 31, 1999:
Revenues $ 94,344 $ 84,917 $ 72,853 $ 6,062 $ 258,176
Cost of revenues 18,015 75,191 26,158 3,238 122,602
------------ ------------ ------------ ------------ ------------
Gross Profit $ 76,329 $ 9,726 $ 46,695 $ 2,824 $ 135,574
============ ============ ============ ============ ============
The following schedule presents the Company's operations by geographic area for
the years ended December 31, 2001, 2000 and 1999:
United Australia Latin
States and Asia Europe Canada America Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Year Ended December 31, 2001:
Total revenues $ 117,985 $ 10,135 $ 30,168 $ 9,827 $ 2,896 $ 171,011
Operating income (loss) (26,135) 420 (8,165) 6,058 (1,101) (28,923)
Identifiable assets 56,800 8,697 16,660 4,024 590 86,771
Year Ended December 31, 2000:
Total 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
Year Ended December 31, 1999:
Total revenues $ 186,086 $ 11,661 $ 42,308 $ 12,545 $ 5,576 $ 258,176
Operating income (loss) (45,054) 236 (13,334) 6,192 866 (51,094)
Identifiable assets 123,426 8,126 31,666 6,959 - 170,177
NOTE 14. 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 adjustments) have been included in the amounts stated below to present
fairly the results of such periods
59
when read in conjunction with the annual financial statements and related notes
(in thousands, except per share data):
Year 2001 Quarter Ended
-----------------------------------------------------------
December 31 September 30 June 30 March 31
------------ ------------ ------------ ------------
Total revenues $ 39,230 $ 38,567 $ 46,272 $ 46,942
Operating (loss) income $ (3,284) $ (4,115) $ 549 $ (22,073)
Net (loss) income $ (2,695) $ (4,494) $ 554 $ (22,095)
Earnings per share - diluted $ (0.06) $ (0.11) $ 0.01 $ (0.53)
Shares outstanding - diluted 42,186 42,058 42,770 41,676
Significant to the quarterly results of operations for the year ended December
31, 2001 are gain on sales of product lines of $11,880,000 recorded in the
second quarter, $8,700,000 of provision for doubtful accounts due to declining
economic conditions and write-downs of $1,000,000 relating to capitalized
software development costs incurred during the first quarter, restructuring
charges totaling $7,610,000 and $2,048,000 incurred in the second and fourth
quarters, respectively, and a charge of $500,000 to reduce the carrying value of
certain intangibles also incurred in the fourth quarter.
Year 2000 Quarter Ended
------------------------------------------------------------
December 31 September 30 June 30 March 31
------------ ------------ ------------ ------------
Total revenues $ 53,745 $ 51,927 $ 57,485 $ 56,611
Operating loss $ (5,187) $ (12,456) $ (9,106) $ (14,636)
Net 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.
NOTE 15. SUBSEQUENT EVENTS
On March 27, 2002, the Company entered into Restricted Stock Purchase Agreements
with two separate accredited non-affiliated investors, which provide for the
sale at $2.00 per share of 25,000 and 133,239 shares, respectively, of the
Company's common stock being held in treasury. The total net proceeds from the
sale were $316,000. The shares in treasury were acquired by the Company as a
result of the vesting of shares on January 26, 2002 pursuant to the stock option
exchange program executed in January 2001 (see Note 8), and the Company's
repurchase of some of the vested shares as consideration for the Company's
payment of applicable employee withholding taxes. Under the terms of the
Restricted Stock Purchase Agreements, the shares must be held indefinitely by
the purchasers unless subsequently registered or unless and until the purchasers
hold the shares for a minimum of one year and fulfill the other requirements of
Rule 144 promulgated under the Securities Act.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Item 304(a) of Regulation S-K: The Company had a change in its certifying
accountants as previously reported on Form 8-K dated April 10, 2001.
Item 304(b) of Regulation S-K: The Company had no disagreements with its
accountants on accounting and financial disclosure.
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 14,
2002 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 14,
2002 Annual Meeting of Stockholders entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required here under is incorporated by reference from
the sections of the Company's Proxy Statement filed in connection with its May
14, 2002 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 14,
2002 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 Company, CSI (9)
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 Company, FS (11)
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 DataWorks (14)
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)
61
3.6 Specimen Certificate of Common Stock. (2)
4.1 Certificate of Designation of Rights, Preferences and Privileges of Series A Junior Participating (4)
Preferred Stock
4.2 Amended and Restated Preferred Stock Rights Agreement, dated as of November 13, 2001, between Epicor (5)
Software Corporation and Mellon Investor Services LLC, including the form of Rights Certificate and the
Summary of Rights attached thereto as Exhibits A and B, respectively.
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 (2)
Purchase Plan - 1990 (the "1990 Plan").
10.2* Form of Incentive Option Agreement pertaining to the 1990 Plan. (2)
10.3* Form of Nonqualified Stock Option Agreement pertaining to the 1990 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 Option Plan. (3)
10.12* 1994 Incentive Stock Option, Non-qualified Stock Option and Restricted Stock Purchase Plan. (5)
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 (6)
Investors
10.29 Registration Rights Agreement dated September 22, 1994 between the Company and the Series B Preferred (6)
Stock Investors
10.30 Amendment to Stock Purchase Agreement dated May 26, 1995 between the Company and the Series C Preferred (6)
Stock Investors
10.31 Amendment to Registration Rights Agreement dated May 26, 1995 between the Company and the Series C (6)
Preferred Stock Investors
10.33* Employment Offer letter with L. George Klaus dated February 7, 1996. (7)
10.34* Restricted Stock Purchase Agreement between the Company and L. George 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, (7)
1996.
10.42* Employment Offer letter with Ken Lally dated as of April 1, 1996. (7)
10.43* Restricted Stock Purchase Agreement between the Company and Ken Lally 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. (16)
Clifton, as amended
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)
62
10.61 Lease between James S. Hekiman and William Finard, as Trustees of the Burlington Woods Office Trust No. (21)
11 under a declaration of trust dated September 10, 1980 and Interactive dated September 23, 1991
10.62* 1997 Nonstatutory Stock Plan of Interactive (22)
10.63 Single Tenant lease between ADI Research Partners, LP and DataWorks, 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 (28)
corporation as lender dated as of July 26, 2000.
10.73 Amendment to Loan and Security Agreement dated November 20, 2000 (29)
10.74 Amendment to Loan and Security Agreement dated May 21, 2001 (30)
10.75* Amendment to Note Secured by Stock Pledge Agreement dated February 7, 2001 by and between the Company and
L. George Klaus
10.76* Amendment to Unsecured Note dated February 7, 2001 by and between the Company and L. George Klaus
10.77* Management Retention Agreement dated as of December 17, 2001 by and between the Company and L. George
Klaus
16.1 Letter re Change in Certified Auditor (31)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors -- Deloitte & Touche LLP
23.2 Consent of Independent Auditors -- Ernst & Young LLP
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
Registration Statement on Form 8-A, dated November 21, 2001.
(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
Registration Statement on Form 8-A, dated November 21, 2001.
(9) Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated
63
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.
(29) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
(30) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for
64
the quarter ended June 30, 2001.
(31) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 8-K dated April 16, 2001.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated April 10,
2001 to report under Item 4 its change in certifying accountants.
(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: Epicor, e by Epicor, Vantage, Avante, Vista, Clientele and Platinum.
Epicor, e by Epicor, Vantage, Avante, Vista, and Clientele are trademarks or
registered trademarks of the Company. Platinum is a registered trademark of
Computer Associates International, Inc. All other product names are trademarks
or registered trademarks of their respective companies.
65
EPICOR SOFTWARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at Provision Balance at
Beginning of for Bad Amounts End of
Period Debt Written Off Period
------------ ------------ ------------ ------------
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
For the Year Ended December 31, 2001 $ 24,242 $ 10,108 $ (26,084) $ 8,266
66
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 29, 2002.
EPICOR SOFTWARE CORPORATION
By: /s/ L. George Klaus
----------------------------
L. George Klaus
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Epicor Software Corporation, do
hereby constitute and appoint L. George Klaus our true and lawful attorney and
agent, with full power of substitution to do any and all acts and things in our
name and behalf in our capacities as directors and officers and to execute any
and all instruments for us and in our names in the capacities indicated below,
which said attorney and agent may deem necessary or advisable to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K, including
specifically but without limitation, power and authority to sign for us or any
of us in our names in the capacities indicated below, any and all amendments
(including post-effective amendments) hereto; and we do hereby ratify and
confirm all that said attorney and agent, shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ L. George Klaus Chairman of the Board, President
------------------------------- and Chief Executive Officer
L. George Klaus (Principal Executive Officer) March 29, 2002
/s/ Lee Kim Senior Vice President and
------------------------------- Chief Financial Officer
Lee Kim (Principal Financial and
Accounting Officer) March 29, 2002
/s/ Charles M. Boesenberg Director
-------------------------------
Charles Boesenberg March 29, 2002
/s/ Harold D. Copperman Director
-------------------------------
Harold D. Copperman March 29, 2002
/s/ Donald R. Dixon Director
-------------------------------
Donald R. Dixon March 29, 2002
/s/ Thomas F. Kelly Director
-------------------------------
Thomas F. Kelly March 29, 2002
67
EXHIBIT INDEX
Exhibit No. Description LOCATION
----------- ----------- --------
2.1 Agreement and Plan of Reorganization and Merger dated as of June 27, 1997 among the Company, CSI (9)
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 Company, FS (11)
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 DataWorks (14)
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)
68
3.6 Specimen Certificate of Common Stock. (2)
4.1 Certificate of Designation of Rights, Preferences and Privileges of Series A Junior Participating (4)
Preferred Stock
4.2 Amended and Restated Preferred Stock Rights Agreement, dated as of November 13, 2001, between Epicor (5)
Software Corporation and Mellon Investor Services LLC, including the form of Rights Certificate and the
Summary of Rights attached thereto as Exhibits A and B, respectively.
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 (2)
Purchase Plan - 1990 (the "1990 Plan").
10.2* Form of Incentive Option Agreement pertaining to the 1990 Plan. (2)
10.3* Form of Nonqualified Stock Option Agreement pertaining to the 1990 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 Option Plan. (3)
10.12* 1994 Incentive Stock Option, Non-qualified Stock Option and Restricted Stock Purchase Plan. (5)
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 (6)
Investors
10.29 Registration Rights Agreement dated September 22, 1994 between the Company and the Series B Preferred (6)
Stock Investors
10.30 Amendment to Stock Purchase Agreement dated May 26, 1995 between the Company and the Series C Preferred (6)
Stock Investors
10.31 Amendment to Registration Rights Agreement dated May 26, 1995 between the Company and the Series C (6)
Preferred Stock Investors
10.33* Employment Offer letter with L. George Klaus dated February 7, 1996. (7)
10.34* Restricted Stock Purchase Agreement between the Company and L. George 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, (7)
1996.
10.42* Employment Offer letter with Ken Lally dated as of April 1, 1996. (7)
10.43* Restricted Stock Purchase Agreement between the Company and Ken Lally 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. (16)
Clifton, as amended
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)
69
10.61 Lease between James S. Hekiman and William Finard, as Trustees of the Burlington Woods Office Trust No. (21)
11 under a declaration of trust dated September 10, 1980 and Interactive dated September 23, 1991
10.62* 1997 Nonstatutory Stock Plan of Interactive (22)
10.63 Single Tenant lease between ADI Research Partners, LP and DataWorks, 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 (28)
corporation as lender dated as of July 26, 2000.
10.73 Amendment to Loan and Security Agreement dated November 20, 2000 (29)
10.74 Amendment to Loan and Security Agreement dated May 21, 2001 (30)
10.75* Amendment to Note Secured by Stock Pledge Agreement dated February 7, 2001 by and between the Company and
L. George Klaus
10.76* Amendment to Unsecured Note dated February 7, 2001 by and between the Company and L. George Klaus
10.77* Management Retention Agreement dated as of December 17, 2001 by and between the Company and L. George
Klaus
16.1 Letter re Change in Certified Auditor (31)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors -- Deloitte & Touche LLP
23.2 Consent of Independent Auditors -- Ernst & Young LLP
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
Registration Statement on Form 8-A, dated November 21, 2001.
(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
Registration Statement on Form 8-A, dated November 21, 2001.
(9) Incorporated by reference to the referenced exhibit to the Company's
Current Report on Form 8-K dated
70
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.
(29) Incorporated by reference to the referenced exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
(30) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 10-Q for
71
the quarter ended June 30, 2001.
(31) Incorporated by reference to the referenced exhibit to the Company's
Quarterly Report on Form 8-K dated April 16, 2001.
72