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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NO. 0-20740
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EPICOR SOFTWARE CORPORATION
(FORMERLY NAMED PLATINUM SOFTWARE CORPORATION)
(Exact name of registrant as specified in its charter)
DELAWARE 33-0277592
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
195 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618-2402
(Address of principal executive offices, zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 585-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of August 4, 1999, there were 40,816,773 shares of common stock outstanding.
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FORM 10-Q INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Income (unaudited)
for the Three Months and Six Months Ended June 30, 1999
and 1998 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURE 21
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PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,957 $ 22,175
Short-term investments 30,001 30,511
Accounts receivable, net 82,062 84,789
Inventories 1,169 971
Prepaid expenses and other 10,421 13,826
--------- ---------
Total current assets 136,610 152,272
Property and equipment, net 14,228 13,388
Software development costs, net 8,185 5,572
Intangible assets, net 32,286 32,056
Other assets 7,624 8,989
--------- ---------
Total assets $ 198,933 $ 212,277
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,474 $ 16,490
Accrued expenses 17,651 24,741
Accrued merger and restructuring costs 8,954 15,090
Deferred revenue 37,761 36,845
--------- ---------
Total current liabilities 75,840 93,166
Long-term liabilities 1,205 1,116
Stockholders' equity:
Preferred stock 7,501 7,501
Common stock 41 40
Additional paid-in capital 233,803 232,042
Less: notes receivable from officers for issuance
of restricted stock (11,563) (11,563)
Accumulated other comprehensive loss (584) (245)
Accumulated deficit (107,310) (109,780)
--------- ---------
Total stockholders' equity 121,888 117,995
--------- ---------
Total liabilities and stockholders' equity $ 198,933 $ 212,277
========= =========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1999 1998 1999 1998
-------- ------- -------- -------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
License fees $ 23,806 $20,420 $ 49,444 $35,830
Services 40,318 11,605 79,020 22,433
Other 2,032 175 3,797 310
-------- ------- -------- -------
Total revenues 66,156 32,200 132,261 58,573
Cost of revenues 30,046 8,988 58,050 16,714
-------- ------- -------- -------
Gross profit 36,110 23,212 74,211 41,859
Operating expenses:
Sales and marketing 19,568 12,886 40,213 23,178
Software development 6,559 2,706 12,118 5,649
General and administrative 9,381 2,520 19,920 3,739
-------- ------- -------- -------
Total operating expenses 35,508 18,112 72,251 32,566
-------- ------- -------- -------
Income from operations 602 5,100 1,960 9,293
Other income (expense), net (137) 577 946 727
-------- ------- -------- -------
Income before income taxes 465 5,677 2,906 10,020
Provision for income taxes 70 -- 436 --
-------- ------- -------- -------
Net income $ 395 $ 5,677 $ 2,470 $10,020
======== ======= ======== =======
Net income per share - basic $ 0.01 $ 0.22 $ 0.06 $ 0.40
Net income per share - diluted $ 0.01 $ 0.19 $ 0.06 $ 0.33
Common shares outstanding - basic 40,449 25,660 40,441 25,187
Common shares outstanding - diluted 41,731 30,628 41,833 30,287
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED
JUNE 30,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net income $ 2,470 $ 10,020
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,103 2,394
Provision for doubtful accounts 2,686 1,326
Changes in operating assets and liabilities:
Accounts receivable 3,079 (14,784)
Inventories (198) (109)
Prepaid expenses and other (157) 129
Other assets (112) (308)
Accounts payable (6,085) 203
Deferred revenue 103 4,446
Accrued restructuring costs (6,136) (693)
Other accrued liabilities and income taxes payable (7,637) 5,588
-------- --------
Net cash provided by (used in) operating activities (3,884) 8,212
INVESTING ACTIVITIES
Purchases of property and equipment (4,126) (2,798)
Purchases of short-term investments (21,275) (12,500)
Proceeds from sale or maturity of short-term investments 21,785 9,033
Additions to capitalized software costs (2,804) (996)
-------- --------
Net cash used in investing activities (6,420) (7,261)
FINANCING ACTIVITIES
Exercise of common stock options 1,761 7,356
Common stock issued under the Employee Stock Purchase Plan -- 204
Payments of long-term liabilities (594) --
-------- --------
Net cash provided by financing activities 1,167 7,560
Effect of exchange rate on cash (81) (1,726)
-------- --------
Net increase (decrease) in cash and cash equivalents (9,218) 6,785
Cash and cash equivalents at beginning of period 22,175 4,466
-------- --------
Cash and cash equivalents at end of period $ 12,957 $ 11,251
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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EPICOR SOFTWARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements included
herein have been prepared by Epicor Software Corporation (the "Company") in
accordance with generally accepted accounting principles and pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading. The unaudited
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Transition Report on Form 10-K for the transition period of July 1,
1998 to December 31, 1998.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position, results of operations and cash flows.
Current and future financial statements may not be directly comparable to the
Company's historical financial statements. The results of operations for the
three and six months ended June 30, 1999, are not necessarily indicative of the
results of operations which may be reported for any other interim period or for
the entire year ending December 31, 1999.
COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three and six months ended
June 30, 1999 and 1998 are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ---------------------
1999 1998 1999 1998
----- ------ ------- --------
Net income $ 395 $5,677 $ 2,470 $ 10,020
Unrealized gains (losses) on foreign
currency translation adjustments (762) 275 (339) (139)
----- ------ ------- --------
Total comprehensive income (loss) $(367) $5,952 $ 2,131 $ 9,881
===== ====== ======= ========
BASIC AND DILUTED NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
net income per share is computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period.
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The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
Numerator:
Net income - numerator for basic
and diluted net income per share $ 395 $ 5,677 $ 2,470 $10,020
Denominator:
Denominator for basic net income
per share - weighted average shares 40,449 25,660 40,441 25,187
Effect of dilutive securities:
Employee stock options 329 1,898 439 2,030
Preferred stock 953 3,070 953 3,070
------- ------- ------- -------
Dilutive potential common shares 1,282 4,968 1,392 5,100
Denominator for diluted net income
per share 41,731 30,628 41,833 30,287
======= ======= ======= =======
Basic net income per share $ 0.01 $ 0.22 $ 0.06 $ 0.40
Diluted income per share $ 0.01 $ 0.19 $ 0.06 $ 0.33
In July 1998, the remaining outstanding Series B Preferred Stock automatically
converted to common stock
SOFTWARE REVENUE RECOGNITION
In December 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions." The SOP addresses software revenue recognition
as it applies to certain multiple-element arrangements. SOP 98-9 also amends SOP
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2," to extend the
deferral of application of certain passages of SOP 97-2 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. The Company will comply with the requirements of this SOP as they
become effective, which is not expected to have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Board issued SOP 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." The SOP
requires the capitalization of certain costs incurred after the date of adoption
in connection with developing or obtaining software for internal use. The
Company adopted the SOP on January 1, 1999. The adoption of the SOP did not have
a material effect on the Company's consolidated financial position, results of
operations or cash flows.
ACQUISITIONS
On April 1, 1999, the Company acquired the remaining 80.1% interest in evosoft
DataWorks Software GmbH ("evosoft") for approximately $0.7 million in cash. The
original 19.9% investment was made in January 1998. Evosoft, located in
Nuremberg, Germany, will primarily market, distribute and support the Avante and
Platinum ERA product lines in Germany. The excess costs over fair market value
of the net assets purchased has been allocated to developed technology and
assembled workforce and is being amortized over five years. The acquisition was
accounted for as a purchase for financial reporting purposes, and the results of
operations of evosoft, which are not material, are included in the results of
the Company's operations subsequent to April 1, 1999.
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On December 31, 1998, the Company acquired DataWorks Corporation, ("DataWorks")
a publicly traded provider of enterprise resource planning software based in San
Diego, California. As consideration for the acquisition, the Company issued
11,739,459 shares of common stock in exchange for all of the outstanding shares
of common stock of DataWorks. In addition, options and warrants to acquire
DataWorks common stock were converted as a result of the acquisition into
equivalent options and warrants for the Company's common stock. The acquisition
was accounted for as a purchase for financial reporting purposes, and the
results of operations of DataWorks are included with the results of the
Company's operations beginning January 1, 1999.
In connection with the acquisition of DataWorks, Impresa for MRO, a division of
DataWorks, was initially accounted for as an asset held for sale. On April 1,
1999 the Company discontinued attempts to actively sell the Impresa for MRO
division and, accordingly, the results of operations of the division are
included in the results of the Company's operations beginning April 1, 1999.
COMMITMENT
During May 1999, the Company entered into a lease agreement to house its
European headquarters in Bracknell, England. The lease agreement, which is for
twenty years, is expected to commence in August 1999. Total lease commitment
approximates $20.0 million.
CONTINGENCIES
DataWorks, and certain of its officers, directors and former officers, have been
named as defendants in two lawsuits alleging violations of the federal
securities laws. The complaints were filed in the United States District Court
for the Southern District of California. They purport to be brought on behalf of
classes of stockholders who purchased DataWorks stock, and allege that between
October 30, 1997 and July 16, 1998, the defendants issued misleading statements
concerning DataWorks' acquisition of the Interactive Group, Inc. and sales of
certain products. The complaints do not specify the dollar amount of damages
alleged or relief requested. The Company is also named as a defendant in the
lawsuit as a successor of DataWorks.
The Company is subject to miscellaneous legal proceedings in the normal course
of business and other legal proceedings. The Company is currently defending
these proceedings and claims, and anticipates that it will be able to resolve
these matters in a manner that will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
OVERVIEW
Acquisitions
On December 31, 1998, the Company acquired DataWorks Corporation ("DataWorks") a
publicly traded provider of enterprise resource planning software based in San
Diego, California. As consideration for the acquisition, the Company issued
11,739,459 shares of common stock in exchange for all of the outstanding shares
of common stock of DataWorks. In addition, options and warrants to acquire
DataWorks common stock were converted as a result of the acquisition into
equivalent options and warrants for the Company's common stock. The acquisition
was accounted for as a purchase for financial reporting purposes, and the
results of operations of DataWorks are included in the results of the Company's
operations beginning January 1, 1999. The acquisition of DataWorks resulted in a
material increase in the Company's revenues and expenses for the three and six
months ended June 30, 1999; accordingly, current and future financial statements
are not directly comparable to the Company's historical financial statements.
On April 1, 1999, the Company acquired the remaining 80.1% interest in evosoft
DataWorks Software GmbH ("evosoft") for approximately $0.7 million in cash. The
excess costs over fair market value of the net assets purchased has been
allocated to developed technology and assembled workforce and is being amortized
over five years. The original 19.9% investment was made in January 1998.
Evosoft, located in Nuremberg, Germany, will primarily market, distribute and
support the Avante and Platinum ERA product lines in Germany. The acquisition
was accounted for as a purchase for financial reporting purposes, and the
results of operations of evosoft, which are not material, are included in the
results of the Company's operations subsequent to April 1, 1999.
RESULTS OF OPERATIONS
Net income decreased $5.3 million or 93% to $0.4 million for the quarter ended
June 30, 1999 from $5.7 million for the same period in the prior year, and
decreased $7.5 million or 75% to $2.5 million for the first six months of 1999
from $10.0 million for the same period in 1998. The following summarizes the
significant aspects related to the Company's results of operations.
Revenues
Revenues of $66.2 million in the quarter ended June 30, 1999 increased $36.0
million over the same quarter of fiscal 1998. On a year to date basis, revenue
in the first two quarters of fiscal 1999 totaled $132.3 million, an increase of
126% over the first two quarters of fiscal 1998. The increase for the three
months ended June 30, 1999 as well as year to date revenue growth was primarily
a result of the DataWorks acquisition as stated above.
License fee revenues increased $3.4 million or 17% to $23.8 million for the
quarter ended June 30, 1999 from $20.4 million for the same period in the prior
year, and increased $13.6 million or 38% to $49.4 million for the first six
months of fiscal 1999 from $35.8 million for the same period in 1998. The growth
in license fee revenue was attributable to the DataWorks suite of software
products licensed during both the three and six month periods ended June 30,
1999 which consisted primarily of the Avante product and to a lesser extent, the
Vantage and Vista products. An increase in license fee revenue from the
Company's Clientele product also contributed to the growth. Although license fee
revenue increased in absolute dollars, as a percentage of total revenues,
license fee revenue decreased from 63% in the three months ended June 30, 1998
to 36% in the three months ended June 30, 1999. On a year to date basis, license
fee revenue decreased from 61% in the six months ended June 30, 1998 to 37% for
the six months ended June 30, 1999. The change in revenue mix was impacted by
the acquisition of DataWorks, which in recent quarters reported less license
fees as a percentage of total revenues than the Company's previous results. In
addition, the change in revenue mix was due to reduced license fee revenue as a
result of unusually high attrition in the Avante sales force following the
acquisition and to a lesser extent, reduced Vantage license fees attributable to
a sales force reorganization. A decrease in license fee revenue from the
Company's Platinum ERA product line also contributed to the change in revenue
mix. The reduced license fees experienced from the Platinum ERA product line was
attributable to increased competition and uncertainty in the marketplace over
the integration of applications following the DataWorks acquisition.
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Services revenue of $40.3 million in the quarter ended June 30, 1999 increased
$28.7 million or 247% over the same quarter of fiscal 1998. Services revenue of
$79.0 million for the first six months of 1999 increased $56.6 million or 252%
increase over the first six months of 1998. The increases were primarily a
result of the DataWorks acquisition and to a lesser extent, revenue growth
realized from the existing Platinum ERA customer base. Services revenue
attributable to the DataWorks acquisition derived from the Avante, Vantage and
Vista customer base, totaled approximately $22.6 million and $44.8 million for
the three and six months ended June 30, 1999, respectively. The remaining
increase was generated primarily from the Company's Platinum ERA customer base
and attributable to an overall rise in the installed base of end-users and an
increase in the number of revenue-generating professional service personnel.
Other revenue consisted primarily of third-party hardware sales and the increase
for both the three and the six month periods ended June 30, 1999 was
attributable to the DataWorks acquisition.
International revenues increased $8.5 million or 92% to $17.7 million for the
quarter ended June 30, 1999 from $9.2 million during the comparable quarter in
1998. As a percentage of total revenue, international revenues represented 27%
and 29% for the three months ended June 30, 1999 and 1998, respectively. The
decrease in international revenues as a percentage of total revenues for the
three months ended June 30, 1999 was due to a reduction in the Company's
European license fee revenues primarily related to the Avante product line. On a
year to date basis, international revenues increased $22.6 million or 147% to
$37.9 million for the six months ended June 30, 1999 from $15.3 million during
the same period in 1998. For the six months ended June 30, 1999 and 1998,
international revenues as a percentage of total revenue represented 29% and 26%,
respectively. The increase in the six months ended June 30, 1999 was primarily
attributable to the DataWorks acquisition as DataWorks had a larger European
sales force and marketing presence than the Company prior to the acquisition.
Gross Profit
Gross profit increased $12.9 million or 56% from $23.2 million in the three
months ended June 30, 1998 to $36.1 million for the three months ended June 30,
1999. On a year to date basis, gross profit for the six months ended June 30,
1999 totaled $74.2 million, an increase of $32.3 million or 77% over the first
two quarters of fiscal 1998. Gross profit as a percentage of revenues was 55%
and 56% for the three and six months ended June 30, 1999, respectively as
compared to 72% for the three and six months ended June 30, 1998. The reduction
in gross margin percentage was due to a higher proportion of overall revenues
from services during the three and six months ended June 30, 1999, which bear a
lower gross margin percentage than license fee revenue. In addition, the overall
gross profit percentage was unfavorably impacted by a higher cost structure
underlying services revenue generated from the Avante, Vantage and Vista
customer base combined with lower gross profit percentage realized from
third-party hardware sales.
Operating Expenses
Total operating expenses increased to $35.5 million for the three months ended
June 30, 1999 from $18.1 million in the comparable period in 1998 and increased
to $72.3 million for the six months ended June 30, 1999 from $41.9 million in
the comparable period in 1998. The increase in absolute dollars was primarily a
result of the DataWorks acquisition. Total operating expenses as a percentage of
revenues were 54% and 55% for the three and six months ended June 30, 1999,
respectively, as compared to 56% during comparable 1998 periods. In connection
with the acquisition, the Company broadened its qualified pool of general and
administrative costs in order to report results of operations more consistent
with the Company's actual operating infrastructure. Although this had little
impact on total operating expenses as a percentage of total revenue, it did
impact the relative percentage of each operating expense component to total
operating expenses.
Sales and marketing expenses were $19.6 million and $12.9 million for the three
months ended June 30, 1999 and 1998, respectively, or 30% and 40% of total
revenues. For the six months ended June 30, 1999 and 1998 sales and marketing
expenses were $40.2 million and $23.2 million, respectively, or 30% and 40% of
total revenues. The absolute dollar increase was a result of the DataWorks
acquisition. The decrease as a percentage of total revenues in both the three
and the six month periods ended June 30, 1999 was attributable to lower
marketing related infrastructure costs due to a refinement in cost alignments as
discussed above.
Gross software development expenditures were $7.8 million and $3.0 million or
12% and 9% of total revenues for the three months ended June 30, 1999 and 1998,
respectively, before capitalization of software costs of $1.2 million
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and $0.3 million. For the six months ended June 30, 1999 and 1998, gross
software development expenditures were $14.9 million and $6.6 million or 11% and
10% of total revenues, respectively, before capitalization of software costs of
$2.8 million and $1.0 million. These expenses as a percentage of total revenues
were impacted by the above referenced refinement in cost alignments as discussed
above, as well as Year 2000 remediation costs of $0.3 million and $0.4 million
incurred during the three and six month periods ended June 30, 1999,
respectively. The Company expects software development expenses, as a percentage
of total revenues, to increase as the Year 2000 readiness efforts continue
during the fiscal year.
Upon the release for general availability of the Company's software products,
the Company amortizes capitalized software development costs over a five-year
period. Such amortization is included in cost of revenues. During the six months
ended June 30, 1999, costs were capitalized for the localization and translation
into different languages of the Platinum ERA product and certain applications of
the Platinum ERA 7.0a release.
General and administrative expenses were $9.4 million and $2.5 million for the
three months ended June 30, 1999 and 1998, respectively, or 14% and 8% of total
revenues. These expenses were $19.9 million and $3.7 million, or 15% and 6% of
total revenues for the six months ended June 30, 1999 and 1998, respectively.
The increases were attributable to the acquisition of DataWorks, which included
a higher general and administrative cost infrastructure and by the current
refinement in cost alignments as discussed above.
Other Income (Expense)
Other income (expense) for the quarters ended June 30, 1999 and 1998, was ($0.1)
million and $0.6 million, respectively. For the six months ended June 30, 1999
and 1998, other income (expense) was $0.9 million and $0.7 million. Other income
(expense) reflects realized foreign currency gains and losses due to the
fluctuation of the U.S. dollar against primarily the Canadian dollar, Irish punt
and the British pound as well as interest earned on the Company's cash, cash
equivalents and short-term investments.
Provision for Income Taxes
The Company recorded a provision for income taxes of $70,000 and $436,000 during
the three and six months ended June 30, 1999, respectively for expected federal
alternative minimum taxes payable and expected foreign taxes payable. For the
comparable periods in 1998, the Company's tax expense was offset by a reduction
of valuation allowances related to net deferred tax assets recorded in prior
years.
Liquidity and Capital Resources
As of June 30, 1999, the Company's principal sources of liquidity included cash
and cash equivalents and short-term investments of $43.0 million. These
resources decreased by $9.7 million from the December 31, 1998 balance primarily
due to the payment of accrued restructuring and merger costs, 1998 bonuses,
sales commissions, accounts payable and capital expenditures, offset in part by
the collection of accounts receivable. The Company had working capital of $60.8
million at June 30, 1999 compared to working capital of $59.1 million at
December 31, 1998.
During the six months ended June 30, 1999, the Company paid $5.9 million for
severance, lease termination and other costs related to the 1998 restructuring.
In addition, the Company paid $0.2 million in duplicate facility costs related
to restructuring charges accrued in 1996 and 1997. At June 30, 1999, the Company
has $9.0 million in cash obligations related to severance payments, lease
terminations and other costs of the 1996, 1997 and 1998 restructurings. The
Company believes that these obligations will be funded from existing cash
reserves, working capital and operations.
The Company is dependent upon its ability to generate cash flow from license
fees and other operating revenues, as well as the collection of its outstanding
accounts receivable to maintain current liquidity levels. The Company believes
that its current cash reserves, together with existing sources of liquidity,
will satisfy the Company's projected short-term liquidity and other cash
requirements for the next 12 months.
Year 2000 Issues
Overview. The Year 2000 Problem generally involves whether a computer system,
software product or business system, when working alone or in conjunction with
other software or hardware systems, accepts input of, stores, manipulates and
outputs dates in the Year 2000 or thereafter without error or interruption (the
"Year 2000
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Problem"). The Year 2000 Problem potentially impacts the Company in the
following principal areas: (i) The Company's software products, including
products manufactured by third parties that are resold by the Company; (ii) the
Company's internal technology systems; (iii) the Company's non-internal
technology systems which contain embedded computer devices; and (iv) the
business systems of the Company's distributors, resellers and customers. The
Company's Year 2000 efforts are being managed by a team of internal staff and
third party consultants specializing in Year 2000 issues.
Company Products. As a leading supplier of client/server enterprise resource
planning software for the middle market, the Company is aware of the Year 2000
Problem and is committed to offering software products that are Year 2000
compliant. The Company presently believes that the current releases of its
Platinum ERA and Platinum for Windows software products are Year 2000 compliant.
The Company's Platinum for DOS product, which was initially released in the
mid-1980s was not Year 2000 compliant until the release of version 4.6 in August
1998. The version 4.6 release is being offered for free to all existing Platinum
for DOS users on maintenance. The Company believes that the current releases of
the products acquired in the DataWorks merger are also Year 2000 compliant.
While the Company's products are the subject of a continuing testing program,
there can be no assurance that these products do not contain undetected errors
associated with the year 2000-date functions that may result in material costs
to the Company. See "Certain Factors that May Affect Future Results - Risks
Associated with Year 2000 Compliance."
As part of its Platinum ERA and Platinum for Windows product lines the Company
resells certain products that are manufactured by third parties, both on an OEM
and reseller basis. In addition, such products, in certain cases, include third
party technology. The Company has received assurances from such third parties
regarding the Year 2000 compliance of the third party products. Despite these
assurances, there can be no guaranty that the third party products do not
contain undetected errors associated with Year 2000 date functions. The Company
is in the process of formally querying the suppliers of third party products
that are resold with or embedded in the DataWorks software products as to their
progress in identifying and addressing Year 2000 Problems. It is possible that
such formal inquiries will uncover unanticipated Year 2000 issues.
Internal Technology Systems. The Company's internal technology systems include
telecommunications (phones, voice mail and network connections), computer
hardware (personal computers and network servers) and software. The Company has
assessed the Year 2000 Problem with respect to telecommunications for all
offices. The Company has identified fixes that need to be made to its
telecommunications systems to make them Year 2000 compliant. These fixes relate
primarily to upgrades to voice mail and phone systems at some of the Company's
international offices and sales offices. The voice and phone upgrades have been
installed at all sites except two sites and the remaining two sites are
scheduled to be completed by September 1, 1999. In addition, the Company has
assessed approximately 98 percent of its hardware used for Year 2000 compliance
and has not uncovered any material non-compliance. The Company's principal
software systems include accounting, customer support, order entry and desktop
productivity (e-mail, word processing, spreadsheets, etc.). The Company uses
Microsoft Corporation products for desktop productivity which have been
certified by Microsoft as Year 2000 compliant with minor issues. The Company,
for the most part, uses its own products for its accounting, order entry and
customer support software needs. Certain former DataWorks offices use third
party accounting software and the Company is in the process of converting to its
own accounting software for internal use.
Noninternal Technology Systems. Noninternal technology systems include security
systems, elevators and other systems which contain an embedded computer or
computer like device which is used to control the operation of plant, machinery
and equipment. Most of embedded systems on which the Company relies in its daily
operations are owned and managed by the lessors of the facilities in which the
Company's operations are located. The Company has not assessed completely
whether there are any Year 2000 Problems with its noninternal technology systems
and anticipates that the full assessment will be completed by August 31, 1999.
The Company is in the process of completing a contingency plan for its internal
and non-internal technology systems which it expects to complete by September 1,
1999.
Third Party Relationships. The Company has over 350 resellers of its software
products, including distributors and VARs. No one of the resellers is
responsible for a material amount of the Company's license fees. The Company,
from time to time, queries its resellers as to their progress in identifying and
addressing Year 2000 Problems. Although the Company feels confident that its
internal technology will be Year 2000 ready, the Company does recognize that it
is vulnerable, as are most organizations, to the inability of significant
suppliers and utility organizations to become Year 2000 ready. For example, the
failure or interruption of electrical services would
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disrupt the Company's ability to communicate with its customers, suppliers,
business partners and others and would adversely affect the Company's
operations.
To date the Company has incurred approximately $440,000 in Year 2000 remediation
costs which was funded from working capital. The Company expects to incur an
additional $200,000 by September 1, 1999 to upgrade voice mail and phone systems
at some of the Company's international offices and sales offices. The Company
has engaged a third party consulting firm to assist with Year 2000 readiness
efforts. These efforts include continued product testing and contingency
planning. The Company anticipates spending between approximately $1.2 million
and $1.7 million for this effort over the remainder of 1999 and the first half
of 2000. These fees will be expensed as incurred.
Forward Looking Statements. The Company has made forward looking statements
regarding its Year 2000 readiness, anticipated dates for completion of
assessment, testing, and implementation of fixes and anticipated costs to be
incurred. The Company has described many of the risks associated with these
forward looking statements. See "Certain Factors that May Affect Future Results
- - Risks Associated with Year 2000 Compliance." The Company wishes to caution the
reader that there are many factors that could cause its actual results to differ
materially from those stated in the forward looking statements. This is
especially the case because many aspects of Year 2000 readiness are outside the
control of the Company, such as the performance of third party suppliers. All of
these factors make it impossible for the Company to ensure that it will be able
to resolve all Year 2000 problems in a timely manner to avoid materially
adversely affecting its operations or business.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Forward Looking Statements. Certain statements in this Quarterly Report,
including statements regarding the anticipated dates of product releases and
commercial shipments, and the anticipated dates of completion of Year 2000
assessments, testing and implementation of fixes are forward looking statements
within the meaning of Section 27A of the Securities and Exchange Act of 1993, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
that involve risks and uncertainties. Any statements contained herein (including
without limitation statements to the effect that the Company or Management
"estimates," "expects," "anticipates," "plans," "believes," "projects,"
"continues," "may," or "will" or statements concerning "potential" or
"opportunity" or variations thereof or comparable terminology or the negative
thereof,) that are not statements of historical fact should be construed as
forward looking statements. Actual results could differ materially and adversely
from those anticipated in such forward looking statements as a result of certain
factors including the factors listed at pages 13-17. 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.
Fluctuations in Quarterly Operating Results. The Company's quarterly operating
results have fluctuated in the past. The Company's operating results may
fluctuate in the future as a result of many factors that may include:
o The demand for the Company's products
o The size and timing of orders for the Company's products
o The number, timing and significance of new product announcements by
the Company and its competitors
o The Company's ability to introduce and market new and enhanced
versions of its products on a timely basis
o The level of product and price competition
o Changes in operating expenses of the Company
o Changes in average selling prices
In addition, the Company will most likely record a significant portion of its
revenues in the final month of a quarter with a concentration of such revenues
recorded in the final 10 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 run. The Company's
failure to meet revenue expectations could adversely affect operating results.
Further, an unanticipated decline in revenue for a particular quarter may
disproportionately affect the Company's net income because a relatively small
amount of the Company's expenses will vary with its revenues in the short run.
As a result, the Company believes that period-to-period comparisons of the
Company's results of operations are not and will not necessarily be meaningful,
and you should not rely upon them as an indication of future performance. Due to
the foregoing factors, it is likely that in
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some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. Such an event would likely
have a material adverse effect upon the price of the Company's Common Stock.
Integration of DataWorks. On December 31, 1998, a wholly owned subsidiary of the
Company was merged with DataWorks and DataWorks became a subsidiary of the
Company. The Company is still in the process of integrating the operations of
the two companies. During the first and second quarter of 1999, a significant
number of Avante sales representatives and certain sales management employees
resigned from the Company. The Company expects that these departures will
materially adversely effect the Company's revenues from the Avante product in
the near term, as well as the Company's financial results. There can be no
assurance that other employees will not resign from the Company. There may be
substantial difficulties, costs and delays involved in integrating the
operations of DataWorks. These difficulties, costs and delays may include:
o Distracting management from the business of the Company
o Potential incompatibility of business cultures
o Perceived and potential adverse change in client service standards,
business focus, billing practices or service offerings available to
clients
o Potential inability to successfully coordinate the research and
development and sales and marketing efforts
o Costs and delays in implementing common systems and procedures,
including financial accounting systems
o Costs and inefficiencies in delivering services to the clients of the
Company
o Inability to retain and integrate key management, technical sales and
customer support personnel
o Potential conflicts in direct sales channels and VARs
Further, there is no assurance that the Company will retain and successfully
integrate its key management, technical, sales and customer support personnel,
or that it will realize any of the anticipated benefits of the DataWorks merger.
Any one or all of the factors identified above may cause increased operating
costs, lower than anticipated financial performance or the loss of customers and
employees. The failure to integrate the Company and DataWorks will have a
material adverse effect on the business, financial condition and results of
operations of the Company.
Horizontal Product Strategy. As part of its business strategy, the Company
intends to expand its product offerings to include application software products
that are complementary to its existing client/server enterprise resource
planning applications, such as human resources and payroll products. This
strategy may involve acquisitions, investments in other businesses that offer
complementary products, joint development agreements or licensing of technology
agreements. The risks commonly encountered in the acquisitions of businesses
would accompany any future acquisitions or investments by the Company. Such
risks may include, the following:
o The difficulty of integrating previously distinct businesses into one
business unit
o The substantial management time devoted to such activities
o The potential disruption of the Company's ongoing business
o Undisclosed liabilities
o Failure to realize unanticipated benefits (such as synergies and cost
savings)
o Issues related to product transition (such as development,
distribution and customer support)
The Company expects that the consideration it would pay in such future
acquisitions would consist of stock, rights to purchase stock, cash or some
combination. If the Company issues stock or rights to purchase stock in
connection with these future acquisitions, earnings per share and then-existing
holders of the Company's Common Stock may experience dilution.
Dependence on Distribution Channels. The Company distributes its Platinum for
Windows product exclusively through third-party distributors and VARs, and
distributes its Platinum ERA product, including Clientele, through a direct
sales force as well as through VARs and distributors. The Company's distribution
channel includes distributors, VARs and authorized consultants, which consist
primarily of professional firms. The Company's agreements with its VARs and
authorized consultants do not require such VARs and consultants to offer
exclusively or recommend the Company's products, and either party can terminate
such agreements with or without cause. If the Company's VARs or authorized
consultants cease distributing or recommending the Company's products or
emphasize competing products, the Company's results of operations could be
materially and adversely affected. In addition, Platinum ERA, a client/server
ERP application, requires additional skill and training for successful
implementation. Although the Company is actively seeking additional VARs to sell
Platinum ERA, delays in
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training or recruiting VARs could adversely impact the Company's ability to
generate license revenue from its Platinum ERA line of products.
The Company sells certain products directly and through VARs. There can be no
assurance that the direct sales force will not lead to conflicts with the
Company's VAR channel.
Dependence on Principal Products. The Company derives a substantial portion of
its revenue from the sale of information systems and related support services.
Accordingly, any event that adversely affects fees derived from the sale of such
systems would materially and adversely affect the Company's business, results of
operations and performance. These events may include:
o Competition from other products
o Significant flaws in the Company's products
o Incompatibility with third-party hardware or software products
o Negative publicity or evaluation of the Company or its products
o Obsolescence of the hardware platforms or software environments in
which the Company's systems run.
Risks of Product Defects. Software products as complex as those ERP products
offered by the Company may contain undetected errors or failures when first
introduced or as new versions are released. Despite testing by the Company, and
by current and potential customers, any of the Company's products may contain
errors after their commercial shipment. Such errors may cause loss of or delay
in market acceptance of the Company's products. The Company has been informed by
customers of certain errors with respect to its Avante and Platinum ERA
products, which the Company is addressing. The inability of the Company to
correct such errors in a timely manner could have a material adverse effect on
the Company's results of operations. In addition, technical problems with the
current release of the database platforms on which the Company's products
operate could impact sales of these products, which could have a material
adverse effect on the Company's results of operations.
Reliance on Third-Party Suppliers. The Company's products incorporate and use
software products developed by other entities. The Company cannot assure you
that such third parties will:
o Remain in business
o Support the Company's product line
o Maintain viable product lines
o Make their product lines available to the Company on commercially
acceptable terms
Any significant interruption in the supply of such third-party technology could
have a material adverse effect on the Company's business, results of operation
and financial condition.
Risks Associated with Rapid Technological Change and Product Development. The
market for the Company's software products is subject to ongoing technological
developments, evolving industry standards and rapid changes in customer
requirements. As companies introduce products that embody new technologies or as
new industry standards emerge, existing products may become obsolete and
unmarketable. The Company's future business, operating results and financial
condition will depend on its ability to:
o Enhance its existing products
o Develop new products that address the increasingly sophisticated needs
of its customers
o Develop products for additional platforms
Further, if the Company fails to respond to technological advances, emerging
industry standards and end-user requirements, or experiences any significant
delays in product development or introduction, the Company's competitive
position and revenues could be adversely affected. The Company's success will
depend on its ability to develop and successfully introduce new products and
services. The Company cannot assure you that it will successfully develop and
market new products on a timely basis, if at all. Any such delay or failure
could have a material adverse effect on the Company's business, results of
operations and financial condition. From time to time, the Company or its
competitors may announce new products, capabilities or technologies that have
the potential to replace or shorten the life cycles of the Company's existing
products. The Company cannot assure you that such announcements will not cause
customers to delay or alter their purchasing decisions, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
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Dependence on Client/Server Environment. The Company's development tools,
application products and consulting and education services help organizations
build, customize or deploy solutions that operate in a client/server computing
environment. The Company cannot assure you that these markets will continue to
grow or that the Company will be able to respond effectively to the evolving
requirements of these markets. If the market for client/server application
products and services does not grow in the future, or grows slower than the
Company anticipates, or if the Company fails to respond effectively to evolving
requirements of this market, the Company's business, financial condition and
results of operations will be materially and adversely affected.
Highly Competitive Industry. The business information systems industry in
general and the ERP computer software industry in particular are very
competitive and subject to rapid technological change. Many of the Company's
current and potential competitors have (1) longer operating histories, (2)
significantly greater financial, technical and marketing resources, (3) greater
name recognition, (4) larger technical staffs, and (5) a larger installed
customer base than the Company has. A number of companies offer products that
are similar to the Company's products and that target the same markets. In
addition, any of these competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, 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 to experience 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, the Company cannot assure you 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 more quickly 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. The Company cannot assure you that the Company will be able
to compete successfully against current and future competitors or that the
competitive pressures that the Company may face will not materially adversely
affect its business, operating results and financial condition.
Dependence on Manufacturing Industry. The Company's business depends, in large
part, upon the capital expenditures of mid-range discrete manufacturers, which
in part depend upon the demand for such manufacturers' products. A recession or
other adverse event that affects the manufacturing industry in the United States
or in other markets that the Company serves could affect such demand. Decreased
demand could force manufacturers in the Company's target markets to curtail or
postpone capital expenditures on business information systems. Any such change
in the amount or timing of capital expenditures in its target markets could
materially and adversely affect the Company's business and operations.
Risks Associated With Year 2000 Compliance. Significant uncertainty exists in
the software industry concerning the potential effects of the "Year 2000" issue.
The "Year 2000" issue exists because the date codes used in some computer
software and hardware systems use only two digits so that many computer systems
cannot distinguish between the years 1900 and 2000. The Company believes that
the current versions of its products are Year 2000 compliant. However, despite
its belief and although the Company has conducted or is conducting its own
quality testing procedures, we cannot assure you that the Company's software
products contain all necessary date code changes or do not contain errors
related to the Year 2000. If any of the Company's software products fail to
perform, including failures due to the onset of calendar year 2000 there would
likely be a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is currently evaluating its information technology infrastructure
for Year 2000 compliance, including reviewing what actions are required to make
all software systems used internally Year 2000 compliant as well as actions
necessary to make the Company less vulnerable to Year 2000 compliance problems
associated with third parties' systems. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Year 2000 Issues." We
cannot assure you that such measures will alleviate all Year 2000 problems which
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company believes that as the Year 2000 approaches, potential purchasers of
ERP software systems may curtail or delay their purchases of ERP software until
the Year 2000 passes and the potential purchaser is comfortable that its
business operations are not negatively impacted by the Year 2000. As a result,
it is possible that in the remainder
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of calendar 1999 and into the first six months of 2000 the Company may
experience a reduction in revenues from ERP software sales and such reduction
may materially and adversely affect the Company's financial results.
Dependence on Retention and Integration of Key Personnel. The Company's success
depends on the continued service of key management personnel not subject to an
employment agreement for a specified time duration with the Company. In
addition, the competition to attract, retain and motivate qualified technical,
sales and operations personnel is intense. During the first and second quarters
of 1999, a significant number of Avante sales representatives and certain sales
management employees resigned from the Company. The Company expects that these
departures will materially adversely affect the Company's revenues from the
Avante product in the near term as well as the Company's financial results. The
Company is actively seeking qualified replacements. 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 replace the departed employees in a timely
manner or retain its key personnel or attract other qualified personnel in the
future. The failure to attract or retain such persons could have a material
adverse effect on the Company's business, operating results, cash flows and
financial condition.
Risks Associated with International Sales. The Company believes that any future
growth of the Company will be dependent, in part, upon its ability to increase
revenues in international markets. The Company intends to expand its operations
outside of the United States. The expansion will require significant management
attention and financial resources and could adversely affect the Company's
margins. To increase international sales in subsequent periods, the Company must
establish additional foreign operations, hire additional personnel and recruit
international resellers. The Company cannot assure you that the Company will
maintain or expand its international sales. If the revenues that the Company
generates from foreign activities are inadequate to offset the expense of
maintaining foreign offices and activities, the Company's business, financial
condition and results of operations could be materially and adversely affected.
International sales are subject to inherent risks, including:
o Unexpected changes in regulatory requirements
o Tariffs and other barriers
o Unfavorable intellectual property laws
o Fluctuating exchange rates
o Difficulties in staffing and managing foreign sales and support
operations
o Longer accounts receivable payment cycles
o Difficulties in collecting payment
o Potentially adverse tax consequences, including repatriation of
earnings
o Lack of acceptance of localized products in foreign countries
o Burdens of complying with a wide variety of foreign laws
o Effects of high local wage scales and other expenses
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. In the recent past, the financial
markets in Asia, Latin America and other world regions have experienced
significant turmoil. Such turmoil in the Asian financial markets, in particular,
may negatively affect the Company's sales to that region. A portion of the
Company's revenues from sales to foreign entities, including foreign
governments, has been in the form of foreign currencies. The Company does not
have any hedging or similar foreign currency contracts. Fluctuations in the
value of foreign currencies could adversely impact the profitability of the
Company's foreign operations.
Risks Associated with Intellectual Property and Proprietary Rights Protection.
The Company relies on a combination of copyright, trademark and trade secret
laws, employee and third-party nondisclosure agreements and other industry
standard methods for protecting ownership of its proprietary software. However,
the Company cannot assure you that in spite of these precautions, an
unauthorized third party will not copy or reverse-engineer certain portions of
the Company's products or obtain and use information that the Company regards as
proprietary. The Company cannot assure you 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
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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 acceptable to the Company.
In addition, in certain cases, the Company provides the source code for its
application software under licenses to its customers to enable them to customize
the software to meet particular requirements. Although the source code licenses
contain confidentiality and nondisclosure provisions, we cannot assure you that
such customers will take adequate precautions to protect the Company's source
code or other confidential information.
Shares Eligible for Future Sale. As of August 4, 1999, the Company had
40,816,773 shares of common stock outstanding. There are presently 95,305 shares
of Series C Preferred Stock outstanding. Each share of Series C Preferred Stock
is convertible into ten shares of common stock, as adjusted for stock dividends,
combinations or splits at the option of the holder. As a result, the Series C
Preferred Stock is convertible into 953,050 shares of common stock. The holders
of the Series C Preferred Stock have the right to cause the Company to register
the sale of the shares of common stock issuable upon conversion of the Series C
Preferred Stock. Also, the Company has a substantial number of options or shares
issuable to employees under employee option or stock grant plans. As a result, a
substantial number of shares of common stock will be eligible for sale in the
public market at various times in the future. Sales of substantial amounts of
such shares could adversely affect the market price of the Company's Common
Stock.
Possible Volatility of Stock Prices. The market prices for securities of
technology companies, including the Company, have been volatile. Quarter to
quarter variations in operating results, changes in earnings estimates by
analysts, announcements of technological innovations or new products by the
Company or its competitors, announcements of major contract awards and other
events or factors may have a significant impact on the market price of the
Company's Common Stock. In addition, the securities of many technology companies
have experienced extreme price and volume fluctuations, which have often been
unrelated to the companies' operating performance. These conditions may
adversely affect the market price of the Company's Common Stock.
Because of these and other factors affecting the Company's operating results,
past financial performance should not be considered an indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Interest Risk. The Company's exposure to market risk for changes in interest
rates relates primarily to the Company's investment portfolio. The Company does
not use derivative financial instruments in its investment portfolio. The
Company places its investments with high credit quality issuers and, by policy,
limits the amount of credit exposure to any one issuer. The Company is averse to
principal loss and ensures the safety and preservation of its invested funds by
limiting default risk, market risk, and reinvestment risk. The Company mitigates
default risk by investing in only the safest and highest credit quality
securities and by constantly positioning its portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer or
guarantor. The portfolio includes only corporate debt securities and municipal
bonds.
Foreign Currency Risk. The Company transacts business in various foreign
currencies, primarily in certain European countries, Canada and Australia. The
Company does not have any hedging or similar foreign currency contracts.
Although international revenues approximated 29% of the Company's total revenues
for the six months ended June 30, 1999, less than 20% of the revenues are
denominated in foreign currencies. Significant currency fluctuations could
adversely impact foreign revenues; however the Company does not foresee or
expect any significant changes in foreign currency exposure in the near future.
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PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
DataWorks, and certain of its officers, directors and former officers have been
named as defendants in two lawsuits alleging violations of the federal
securities laws. The complaints were filed in the United States District Court
for the Southern District of California. They purport to be brought on behalf of
classes of stockholders who purchased DataWorks stock, and allege that between
October 30, 1997 and July 16, 1998, the defendants issued misleading statements
concerning DataWorks' acquisition of the Interactive Group, Inc. and sales of
certain products. The complaints do not specify the dollar amount of damages
alleged or relief requested. The Company is also named in the lawsuit as a
defendant as a successor of DataWorks.
The Company is subject to miscellaneous legal proceedings in the normal course
of business. The Company is currently defending these proceedings and claims,
and anticipates that it will be able to resolve these matters in a manner that
will not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On April 29, 1999, the Company held its annual meeting of stockholders. At this
meeting 36,067,724 shares of Common Stock were available for voting and 953,050
shares of Series C Preferred Stock (on an as-converted basis) were available for
voting. Each share of Series C Preferred Stock is convertible into ten (10)
shares of Common Stock and is entitled to vote with the holders of Common Stock
on an as-converted basis on all matters presented for stockholder approval.
At the meeting, L. George Klaus, Stuart W. Clifton, Donald R. Dixon, Arthur J.
Marks and L. John Doerr were elected as directors of the Company by the Common
and Series C stockholders. All shares of Series C Preferred Stock voted in favor
of all of the nominated directors. With respect to the election of directors,
the following nominees received the votes by common stockholders as noted below:
NAME VOTES FOR WITHHELD AUTHORITY
L. George Klaus 34,792,141 1,275,583
Arthur J. Marks 34,843,286 1,224,438
Stuart W. Clifton 34,698,921 1,368,803
L. John Doerr 34,848,854 1,218,870
Donald R. Dixon 34,843,506 1,224,218
With respect to the proposal to ratify the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ended December 31, 1999, 35,630,736
shares of Common Stock and 953,050 shares of Series C Preferred Stock (on an
as-converted basis) voted in favor of the proposal, 317,174 shares of Common
Stock voted against, and 119,814 shares of Common Stock abstained from voting.
There were no broker non-votes on this proposal.
With respect to the proposal to approve an amendment to the Company's
Certificate of Incorporation to change the Company's name to Epicor Software
Corporation, 34,890,207 shares of Common Stock and 953,050 shares of Series C
Preferred Stock (on an as-converted basis) voted in favor of the proposal,
857,812 shares of Common Stock voted against, and 319,705 shares of Common Stock
abstained from voting. There were no broker non-votes on this proposal.
With respect to the proposal to approve the Company's 1999 Nonstatutory Stock
Option Plan, 14,627,477 shares of Common Stock and 953,050 shares of Series C
Preferred Stock (on an as-converted basis) voted in favor of the proposal,
9,338,193 shares of Common Stock voted against, and 755,684 shares of Common
Stock abstained from voting. There were 11,346,370 broker non-votes on this
proposal.
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With respect to the proposal to approve an amendment to the Company's Employee
Stock Purchase Plan to increase the authorized number of shares reserved for
issuance by 550,000 shares, 23,348,370 shares of Common Stock and 953,050 shares
of Series C Preferred Stock (on an as converted basis) voted in favor of the
proposal, 1,050,615 shares of Common Stock voted against, and 286,564 shares of
Common Stock abstained from voting. There were 11,382,175 broker non-votes on
this proposal.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
10.66 1999 Nonstatutory Stock Option Plan (incorporated by reference
to the referenced exhibit to the Company's Registration
Statement on Form S-8, Reg. No. 333-85105.)
10.67 Bracknell Lease Agreement dated May 19, 1999
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated April 26, 1999 to
report under Item 5 its results for the fiscal quarter ended March 31,
1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPICOR SOFTWARE CORPORATION
----------------------------------------
(Registrant)
Date: August 13, 1999 /s/ Norman R. Farquhar
----------------------------------------
Norman R. Farquhar
Principal Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.66 1999 Nonstatutory Stock Option Plan (incorporated by reference to the
referenced exhibit to the Company's Registration Statement on Form
S-8, Reg. No. 333-85105.)
10.67 Bracknell Lease Agreement dated May 19, 1999
27 Financial Data Schedule