1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NO. 0-20740
--------------------------------------
EPICOR SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0277592
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
195 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618-2402
(Address of principal executive offices, zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 585-4000
--------------------------------------
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 2, 2001, there were 44,232,925 shares of common stock
outstanding.
2
FORM 10-Q INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2001
(unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Operations
and Comprehensive Operations (unaudited) for the Three Months
and Six Months Ended June 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Six Months Ended June 30, 2001 and 2000 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURE 27
2
3
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS:
EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
JUNE 30, DECEMBER 31,
2001 2000
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 23,151 $ 26,825
Accounts receivable, net 40,734 60,424
Prepaid expenses and other current assets 5,153 5,831
--------- ---------
Total current assets 69,038 93,080
Property and equipment, net 7,687 12,086
Software development costs, net 4,266 6,748
Intangible assets, net 16,091 19,118
Other assets 2,970 3,755
--------- ---------
Total assets $ 100,052 $ 134,787
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,307 $ 11,177
Accrued expenses 27,440 33,343
Current portion of long-term debt 3,683 4,666
Accrued restructuring costs 4,650 539
Deferred revenue 39,560 45,374
--------- ---------
Total current liabilities 82,640 95,099
--------- ---------
Long-term debt 3,660 5,621
--------- ---------
Contingencies
Stockholders' equity:
Preferred stock 7,501 7,501
Common stock 44 41
Additional paid-in capital 244,528 240,824
Less: deferred stock compensation expense (2,478) --
Less: notes receivable from officers for issuance of restricted stock (9,969) (9,969)
Accumulated other comprehensive loss (3,185) (3,182)
Accumulated deficit (222,689) (201,148)
--------- ---------
Total stockholders' equity 13,752 34,067
--------- ---------
Total liabilities and stockholders'equity $ 100,052 $ 134,787
========= =========
See accompanying notes to condensed consolidated financial statements.
3
4
EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Software license fees $ 13,276 $ 20,360 $ 25,602 $ 41,005
Services 32,132 36,244 65,988 71,110
Other 864 881 1,624 1,981
--------- --------- --------- ---------
Total revenues 46,272 57,485 93,214 114,096
Cost of revenues 20,414 26,546 43,148 54,033
--------- --------- --------- ---------
Gross profit 25,858 30,939 50,066 60,063
Operating expenses:
Sales and marketing 14,879 19,113 31,808 39,798
Software development 6,317 7,327 14,348 13,073
General and administrative 6,418 14,305 27,493 31,634
Stock based compensation expense 452 -- 698 --
Restructuring charges and other 7,610 (700) 7,610 (700)
Gain on sales of product lines (10,367) -- (10,367) --
--------- --------- --------- ---------
Total operating expenses 25,309 40,045 71,590 83,805
--------- --------- --------- ---------
Income (loss) from operations 549 (9,106) (21,524) (23,742)
Other income (expense), net 5 265 (17) 665
--------- --------- --------- ---------
Income (loss) before income taxes 554 (8,841) (21,541) (23,077)
Provision for income taxes -- -- -- --
--------- --------- --------- ---------
Net income (loss) $ 554 $ (8,841) $ (21,541) $ (23,077)
========= ========= ========= =========
Net income (loss) per share - basic $ .01 $ (0.21) $ (0.52) $ (0.56)
Net income (loss) per share - diluted $ .01 $ (0.21) $ (0.52) $ (0.56)
Weighted average common shares outstanding - basic 41,789 41,468 41,733 41,365
Weighted average common shares outstanding - diluted 42,770 41,468 41,733 41,365
See accompanying notes to condensed consolidated financial statements.
4
5
EPICOR SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
-----------------------
2001 2000
--------- --------
OPERATING ACTIVITIES
Net loss $(21,541) $(23,077)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 7,745 8,726
Stock based compensation expense 698 --
Write-down of capitalized software development costs 1,026 --
Provision for doubtful accounts 9,259 12,636
Restructuring charges and other 7,610 (700)
Gain on sales of product lines (10,367) --
Changes in operating assets and liabilities:
Accounts receivable 8,869 (9,448)
Prepaid expenses and other current assets 398 424
Other assets 785 271
Accounts payable (3,870) (1,923)
Accrued expenses (6,601) (5,884)
Accrued restructuring costs (1,779) (3,961)
Deferred revenue (2,630) 5,218
-------- --------
Net cash used in operating activities (10,398) (17,718)
INVESTING ACTIVITIES
Proceeds from sales of product lines 9,900 --
Proceeds from sale of short-term investments -- 9,711
Purchases of property and equipment (1,124) (3,620)
Capitalized software development costs -- (3,984)
-------- --------
Net cash provided by investing activities 8,776 2,107
FINANCING ACTIVITIES
Proceeds from exercise of common stock options -- 2,224
Common stock issued under the Employee Stock Purchase Plan 527 1,165
Common stock issued under Stock Option Exchange Program 2 --
Payments from notes receivable from officers -- 1,181
Principal payments on long-term debt (2,946) (105)
-------- --------
Net cash (used in) provided by financing activities (2,417) 4,465
Effect of exchange rate changes on cash 365 (488)
-------- --------
Net decrease in cash and cash equivalents (3,674) (11,634)
Cash and cash equivalents at beginning of period 26,825 18,221
-------- --------
Cash and cash equivalents at end of period $ 23,151 $ 6,587
======== ========
See accompanying notes to condensed consolidated financial statements.
5
6
EPICOR SOFTWARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements included
herein have been prepared by Epicor Software Corporation (the "Company") in
accordance with generally accepted accounting principles and pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC") for
interim financial information for reporting on Form 10-Q. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000.
Certain prior period amounts in the Condensed Consolidated Statement of Cash
Flows have been reclassified to conform to the current period presentation.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments
except for the write-down of capitalized software development costs as discussed
below -- see Write-Down of Capitalized Software Development Costs) necessary for
a fair presentation of the Company's financial position, results of operations
and cash flows.
Current and future financial statements may not be directly comparable to the
Company's historical financial statements. The results of operations for the
three months and six months ended June 30, 2001, are not necessarily indicative
of the results of operations that may be reported for any other interim period
or for the entire year ending December 31, 2001. The balance sheet at December
31, 2000 has been derived from the audited financial statements at that date,
but does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements, as permitted
by SEC rules and regulations for interim reporting.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition. SOP 97-2, as amended by SOP 98-4 "Deferral of the Effective Date of
a Provision of SOP 97-2", was adopted by the Company as of July 1, 1998. In
December 1998, the AICPA issued SOP 98-9 "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions", which requires
recognition of revenue using the "residual method" when (1) there is
vendor-specific objective evidence of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted for using
long-term contract accounting, (2) vendor-specific objective evidence of fair
value does not exist for one or more of the delivered elements in the
arrangement, and (3) all revenue-recognition criteria in SOP 97-2 other than the
requirement for vendor-specific objective evidence of the fair value of each
delivered element of the arrangement are satisfied. SOP 98-9 was adopted by the
Company on January 1, 2000.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which
provides further guidance with regard to revenue recognition, presentation and
disclosure. The Company adopted the provisions of SAB 101 during the fourth
quarter of fiscal 2000. SAB 101 did not have a material impact on the Company's
consolidated financial statements.
BASIC AND DILUTED NET LOSS PER SHARE
Net income (loss) per share is calculated in accordance with SFAS No. 128,
"Earnings per Share". Under the provisions of SFAS No. 128, basic net income
(loss) per share is computed by dividing the net income (loss) for the period by
the weighted average number of common shares outstanding during the period,
excluding shares of non-vested restricted stock. Diluted net income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common and common equivalent shares outstanding
during the period if
6
7
their effect is dilutive. Common equivalent shares of 1,171,277 have been
excluded from diluted weighted average common shares for the six month period
ended June 30, 2001 as the effect would be anti-dilutive.
The following table presents the calculation of basic and diluted net income
(loss) per common share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss) $ 554 $ (8,841) $(21,541) $(23,077)
Basic:
Weighted average common shares outstanding 44,256 41,468 43,999 41,365
Weighted average common shares of
non-vested restricted stock (2,467) -- (2,266) --
-------- -------- -------- --------
Shares used in the computation of basic net income (loss) per share 41,789 41,468 41,733 41,365
======== ======== ======== ========
Net income (loss) per share - basic $ 0.01 $ (0.21) $ (0.52) $ (0.56)
======== ======== ======== ========
Diluted:
Weighted average common shares outstanding 41,789 41,468 41,733 41,365
Preferred stock 953 -- -- --
Common stock equivalents 28 -- -- --
-------- -------- -------- --------
Shares used in the computation of diluted net income (loss) per
share 42,770 41,468 41,733 41,365
======== ======== ======== ========
Net income (loss) per share - diluted $ 0.01 $ (0.21) $ (0.52) $ (0.56)
======== ======== ======== ========
SEGMENT INFORMATION
In accordance with SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information", the Company has prepared operating segment information to
report components that are evaluated regularly by the Company's chief operating
decision maker, or decision making groups, in deciding how to allocate resources
and in assessing performance.
The Company's reportable operating segments include software licenses, services,
and other. Other consists primarily of third-party hardware and forms sales.
Currently, the Company does not separately allocate operating expenses to these
segments, nor does it allocate specific assets to these segments. Therefore, the
segment information reported includes only revenues, cost of revenues and gross
profit.
Operating segment data for the three months and six months ended June 30, 2001
and 2000 is as follows (in thousands):
Software
Licenses Services Other Total
-------- ------- ------- --------
Three months ended June 30, 2001:
Revenues $13,276 $32,132 $ 864 $46,272
Cost of revenues 3,966 15,897 551 20,414
------- ------- ------- -------
Gross Profit $ 9,310 $16,235 $ 313 $25,858
======= ======= ======= =======
Three months ended June 30, 2000:
Revenues $20,360 $36,244 $ 881 $57,485
Cost of revenues 5,697 20,493 356 26,546
------- ------- ------- -------
Gross Profit $14,663 $15,751 $ 525 $30,939
======= ======= ======= =======
7
8
Six months ended June 30, 2001:
Revenues $ 25,602 $ 65,988 $ 1,624 $ 93,214
Cost of revenues 9,260 32,828 1,060 43,148
-------- -------- -------- --------
Gross Profit $ 16,342 $ 33,160 $ 564 $ 50,066
======== ======== ======== ========
Six months ended June 30, 2000:
Revenues $ 41,005 $ 71,110 $ 1,981 $114,096
Cost of revenues 10,786 41,935 1,312 54,033
-------- -------- -------- --------
Gross Profit $ 30,219 $ 29,175 $ 669 $ 60,063
======== ======== ======== ========
The following schedule presents the Company's operations by geographic area for
the three months and six months ended June 30, 2001 and 2000 (in thousands):
United Australia/ Latin
States Asia Europe Canada America Consolidated
--------- --------- ---------- ---------- ---------- ------------
Three months ended June 30, 2001:
Revenues $ 32,040 $ 3,001 $ 7,864 $ 2,580 $ 787 $ 46,272
Operating income (loss) 3,163 (253) (4,317) 2,295 (339) 549
Identifiable assets 68,595 8,027 17,936 5,216 278 100,052
Three months ended June 30, 2000:
Revenues $ 42,064 $ 3,461 $ 8,458 $ 2,803 $ 699 $ 57,485
Operating income (loss) (8,691) 893 (2,220) 1,330 (418) (9,106)
Identifiable assets 104,683 6,952 25,454 4,992 61 142,142
United Australia/ Latin
States Asia Europe Canada America Consolidated
--------- --------- ---------- ---------- ---------- ------------
Six months ended June 30, 2001:
Revenues $ 65,180 $ 5,284 $ 15,720 $ 5,390 $ 1,640 $ 93,214
Operating income (loss) (15,872) (166) (8,807) 3,694 (373) (21,524)
Identifiable assets 68,595 8,027 17,936 5,216 278 100,052
Six months ended June 30, 2000:
Revenues $ 84,755 $ 6,106 $ 16,403 $ 5,401 $ 1,431 $ 114,096
Operating income (loss) (21,231) 1,292 (5,520) 2,624 (907) (23,742)
Identifiable assets 104,683 6,952 25,454 4,992 61 142,142
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 Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not believe that
the adoption of SFAS 141 will have a significant impact on its consolidated
financial statements.
8
9
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 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, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002 and it has not determined the impact, if any, that this
statement will have on its consolidated financial statements. The Company had no
goodwill amortization during the three and six months ended June 30, 2001.
RESTRUCTURING CHARGES AND OTHER
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
will terminate 199 employees or 15% of the workforce from all functional areas
of the Company. During the quarter ended June 30, 2001, 150 of these employees
were terminated; the remaining employees will be terminated by the end of 2001.
The Company expects the severance costs and a substantial amount of the
facilities costs to be paid out by the end of 2001. Although the closure and
consolidation efforts are expected to be substantially complete by the end of
fiscal 2001, lease payments on buildings being vacated or downsized will
continue to be made until the respective non-cancelable term of the leases
expire.
The following table summarizes the activity in the Company's reserves associated
with its restructuring (in thousands):
Balance at 2001 Balance at
December 31, Restructuring Cash June 30,
2000 Charges Payments 2001
-------- ------- -------- --------
Separation costs for terminated employees $ -- $ 2,288 $(1,229) $ 1,059
Facilities closing and downsizing -- 3,439 (409) 3,030
Other costs -- 163 -- 163
Facilities closing and downsizing -- 1999,
1998, 1997, and 1996 restructuring 539 -- (141) 398
------- ------- ------- -------
Accrued restructuring costs $ 539 $ 5,890 $(1,779) $ 4,650
======= ======= ======= =======
An additional charge of $1,720,000 is included in restructuring charges and
other in the accompanying Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 2001 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 $398,000 relate
primarily to lease commitments on which the Company will continue to make
payments until the respective non-cancelable term of the leases expire.
During 2000, the Company determined $700,000 of the 1999 restructuring reserves
were not needed. This was the result of the Company's ability to close certain
of its facilities for less than the originally estimated amount. No other
adjustments have been made to the restructuring liabilities as of June 30, 2001.
CREDIT FACILITY
On July 26, 2000, the Company entered into a $30.0 million senior credit
facility with a financial institution comprised of a $10.0 million term loan and
a $20.0 million revolving line of credit. On August 8, 2000, the Company
received the $10.0 million proceeds from the term loan. The term loan is due in
36 equal monthly installments, plus interest at the prime rate plus 3% (10.0% at
June 30, 2001). The revolving line of credit expires in August 2003, bears
interest at a variable rate equal to either the prime rate or at LIBOR, at the
Company's option, plus a margin ranging from 0.25% to 1.25% on prime rate loans
and 2.5% to 3.75% on LIBOR loans, depending on
9
10
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 June 30, 2001, the Company has borrowing capacity of $8.7
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 June
30, 2001 the Company was in compliance with all covenants included in the terms
of the credit agreement, as amended.
WRITE-DOWN OF CAPITALIZED SOFTWARE DEVELOPMENT COSTS
During the first quarter of 2001, the Company determined that the carrying value
of its capitalized software development costs related to localized products
marketed in Europe as well as a component of one of its manufacturing products
exceeded their net realizable value. Accordingly, a charge of approximately $1.0
million was included in cost of revenues for the first quarter of 2001 for the
write-down of these capitalized costs to their estimated net realizable value.
STOCK OPTION EXCHANGE PROGRAM
In January 2001, the Company offered to current employees that held stock
options the opportunity to exchange all of their outstanding stock options for
restricted shares of the Company's common stock, at a price equal to the par
value of such Common Stock. All employees who accepted the offer received one
share of restricted stock for every two options exchanged. The restricted stock
vests over a period of two to four years, depending upon whether the exchanged
options were vested or unvested at the time of the exchange. Employees who
elected to exchange their options 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 three and six months ended June 30, 2001 the Company recorded
compensation expense of $452,000 and $698,000, respectively, related to
restricted stock. The Company will record future compensation expense of up to
$2,478,000 over the vesting period of the restricted shares, which represents
the fair market value of the restricted common stock issued on the exchange date
based upon the quoted market price of the Company's common stock, for the
current plan participants. Compensation expense to be charged to operations for
the remainder of 2001, 2002, 2003, 2004 and 2005 approximates $514,000,
$1,026,000, $476,000, $426,000, and $36,000, respectively, assuming all
remaining restricted stock grants vest. The breakdown of the compensation charge
for the three and six months ended June 30, 2001 by the Company's operating
functions is as follows (in thousands):
Three Months Six Months
ended ended
June 30, 2001 June 30, 2001
------------- -------------
Cost of revenues $ 53,000 $ 98,000
Sales and marketing 78,000 143,000
Software development 32,000 56,000
General and administrative 289,000 401,000
-------- --------
Total compensation expense $452,000 $698,000
======== ========
SALES OF PRODUCT LINES
In April 2001, the Company sold the assets of its Impresa for MRO product line,
which primarily consisted of accounts receivable and fixed assets, for
approximately $2,900,000 in cash, plus other future consideration. Additionally,
certain liabilities of the Impresa for MRO product line were assumed by the
buyer. The sale resulted in an after tax gain of approximately $1,683,000 and is
included in gain on sales of product lines in the accompanying Condensed
Consolidated Statements of Operations. The operations of the Impresa for MRO
product line were not material to the Company's results of operations.
10
11
In May 2001, the Company sold the assets of its Platinum for Windows ("PFW")
product line, which primarily consisted of account receivable, inventory, and
fixed assets, for $7,000,000 in cash. Additionally, certain liabilities of the
PFW product line were assumed by the buyer. The sale resulted in an after tax
gain of approximately $8,684,000 and is included in gain on sales of product
lines in the accompanying Condensed Consolidated Statements of Operations. The
operations of the PFW product line were not material to the Company's results of
operations.
CONTINGENCIES
In August 1999, DataWorks filed for arbitration against AAR Corporation with the
American Arbitration Association in Denver, Colorado. The arbitration arose out
of the development, licensing and sale of software by DataWorks to AAR in 1997.
AAR counterclaimed against DataWorks alleging breach of contract. In January
2001, the Company settled this matter by agreeing to pay AAR $2,000,000. The
Company paid this amount during the quarter ended March 31, 2001.
In December 1998, Alyn Corporation filed a lawsuit against DataWorks in San
Diego, California Superior Court arising from the licensing and sale of software
by DataWorks to Alyn in December 1996. In March 2000, the Company agreed to pay
Alyn $1,800,000 to settle the lawsuit. The Company paid this amount during the
first half of 2000.
In November 1998, a securities class action lawsuit was filed in the United
States District Court for the Southern District of California against DataWorks,
certain of its current and former officers and directors, and the Company. The
consolidated complaint is purportedly brought on behalf of purchasers of
DataWorks stock between October 30, 1997 and July 16, 1998. The complaint
alleges that defendants made material misrepresentations and omissions
concerning DataWorks' acquisition of Interactive Group, Inc. and demand for
DataWorks' products. The Company is named as a defendant solely as DataWorks'
successor, and is not alleged to have taken part in the alleged misconduct. No
damage amount is specified in the complaint. The action is in the early stages
of litigation, no trial date is set, and defendants' motion to dismiss the
second amended consolidated complaint remains pending. The Company believes
there is no merit to this lawsuit and intends to continue to defend against it
vigorously. Ultimate outcome of this suit or any potential loss is not presently
determinable.
The Company is subject to other legal proceedings and claims in the normal
course of business. The Company is currently defending these proceedings and
claims, and anticipates that it will be able to resolve these matters in a
manner that will not have a material adverse impact on the Company's
consolidated financial statements.
11
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
OVERVIEW
The Company designs, develops, markets and supports integrated enterprise
business software solutions for use by mid-sized companies as well as divisions
and subsidiaries of larger corporations worldwide. These integrated solutions
address customers' requirements in the areas of customer relationship
management, financials, distribution, manufacturing and e-business. The
Company's business solutions are focused on the mid-market, which generally
includes companies with annual revenues of between $10 million and $500 million.
Its products and services are sold worldwide by the Company's direct sales
force, international subsidiaries and an authorized network of VARs,
distributors and software consultants.
RESTRUCTURING CHARGES AND OTHER
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
will terminate 199 employees or 15% of the workforce from all functional areas
of the Company. During the quarter ended June 30, 2001, 150 of these employees
were terminated; the remaining employees will be terminated by the end of 2001.
The Company expects the severance costs and a substantial amount of the
facilities costs to be paid out by the end of 2001. Although the closure and
consolidation efforts are expected to be substantially complete by the end of
fiscal 2001, lease payments on buildings being vacated or downsized will
continue to be made until the respective non-cancelable term of the leases
expire. The Company believes the restructuring obligations will be funded from
existing cash reserves, working capital and operations.
The following table summarizes the activity in the Company's reserves associated
with its restructuring (in thousands):
Balance at 2001 Balance at
December 31, Restructuring Cash June 30,
2000 Charges Payments 2001
-------- ------- -------- --------
Separation costs for terminated employees $ -- $ 2,288 $(1,229) $ 1,059
Facilities closing and downsizing -- 3,439 (409) 3,030
Other costs -- 163 -- 163
Facilities closing and downsizing -- 1999,
1998, 1997, and 1996 restructuring 539 -- (141) 398
------- ------- ------- -------
Accrued restructuring costs $ 539 $ 5,890 $(1,779) $ 4,650
======= ======= ======= =======
An additional charge of $1,720,000 is included in restructuring charges and
other in the accompanying Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 2001 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.
Although the Company believes the restructuring activities were necessary, no
assurance can be given that the anticipated benefits of the restructuring will
be achieved or that similar action will not be required in the future. The
Company expects the restructuring will provide approximately $6.0 million to
$7.0 million in cost savings per quarter for the remainder of 2001.
The remaining restructuring reserves from prior periods of $398,000 relate
primarily to lease commitments on which the Company will continue to make
payments until the respective non-cancelable term of the leases expire.
12
13
During 2000, the Company determined $700,000 of the 1999 restructuring reserves
were not needed. This was the result of the Company's ability to close certain
of its facilities for less than the originally estimated amount. No other
adjustments have been made to the restructuring liabilities as of June 30, 2001.
SALES OF PRODUCT LINES
In April 2001, the Company sold the assets of its Impresa for MRO product line,
which primarily consisted of accounts receivable and fixed assets, for
approximately $2,900,000 in cash, plus other future consideration. Additionally,
certain liabilities of the Impresa for MRO product line were assumed by the
buyer. The sale resulted in an after tax gain of approximately $1,683,000 and is
included in gain on sales of product lines in the accompanying Condensed
Consolidated Statements of Operations. The operations of the Impresa for MRO
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 account receivable, inventory, and
fixed assets, for $7,000,000 in cash. Additionally, certain liabilities of the
PFW product line were assumed by the buyer. The sale resulted in an after tax
gain of approximately $8,684,000 and is included in gain on sales of product
lines in the accompanying Condensed Consolidated Statements of Operations. The
operations of the PFW product line were not material to the Company's results of
operations.
RESULTS OF OPERATIONS
The following table summarizes certain aspects of the Company's results of
operations for the three and six months ended June 30, 2001 compared to the
three and six months ended June 30, 2000 (in millions except percentages):
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ---------------------------------------
2001 2000 Change $ Change % 2001 2000 Change $ Change %
------- ---- -------- -------- ---- ---- -------- --------
Revenues:
Software license fees $ 13.3 $ 20.4 $ (7.1) (34.8)% $ 25.6 $ 41.0 $ (15.4) (37.6)%
Services 32.1 36.2 (4.1) (11.3)% 66.0 71.1 (5.1) (7.2)%
Other 0.9 0.9 -- 0.0% 1.6 2.0 (0.4) (20.0)%
-------- -------- ------ ----- -------- -------- ------- ------
Total revenues 46.3 57.5 (11.2) (19.5)% 93.2 114.1 (20.9) (18.3)%
As a percentage of revenues:
License fees 28.7% 35.4% 27.5% 35.9%
Services 69.4% 63.0% 70.8% 62.3%
Other 1.9% 1.6% 1.7% 1.8%
-------- -------- -------- -------
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit $ 25.9 $ 30.9 $ (5.0) (16.2)% $ 50.1 $ 60.1 $ (10.0) (16.6)%
As a percentage of
revenues 55.9% 53.8% 53.7% 52.6%
Sales and marketing $ 14.9 $ 19.1 $ (4.2) (22.0)% $ 31.8 $ 39.8 $ (8.0) (20.1)%
As a percentage
of revenues 32.2% 33.2% 34.1% 34.9%
Software development $ 6.3 $ 7.3 $ (1.0) (13.7)% $ 14.3 $ 13.1 $ 1.2 9.2%
As a percentage of
revenues 13.7% 12.7% 15.4% 11.5%
General and administrative $ 6.4 $ 14.3 $ (7.9) (55.2)% $ 27.5 $ 31.6 $ (4.1) (13.0)%
As a percentage of
revenues 13.9% 24.9% 29.5% 27.7%
13
14
Revenues
License fees revenues decreased substantially both in absolute dollars and as a
percentage of total revenues for the three and six months periods ended June 30,
2001 as compared to the same periods in 2000. This decrease is due largely to
the current slowing of 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 anticipates that these economic conditions could continue to affect
demand for eBusiness and enterprise applications throughout the remainder of the
year.
Services revenues consist of fees from software maintenance, consulting, and
related services. For the three and six months ended June 30, 2001, the Company
had a decrease in consulting revenues of $3.7 million and $5.9 million,
respectively, as compared to the same periods of 2000. This decrease is due to
fewer implementation projects as a result of the decreased software license fees
revenues.
For the three months ended June 30, 2001 the company had a decrease in
maintenance revenue of $0.4 million, as compared to the same period in 2000.
This decrease is due to the previously discussed sales of the Company's PFW and
Impresa product lines in the second quarter of 2001. The Company would have
experienced an increase in maintenance revenues of approximately $0.6 million
during the quarter, had these product lines not been sold. For the six months
ended June 30, 2001 the Company had an increase in maintenance revenue of $0.8,
as compared to the same period in 2000. This increase is due to the continued
growth of the Company's installed base of customers.
As a percentage of revenues, service revenues increased for both the three and
six months ended June 30, 2001 as compared to the three and six months ended
June 30, 2000. These increases are due primarily to the significant decreases in
license fees revenues and the decrease in the total revenue base. The Company
anticipates that services revenues will continue to be negatively impacted by a
decrease in the related software license revenues and the sale of the PFW and
Impresa product lines for the remainder of 2001.
Other revenues consist primarily of third-party hardware and forms sales. The
decrease in other revenues in absolute dollars for the six months ended June 30,
2001 as compared with the same periods in 2000 is due to a decrease in
third-party hardware sales directly attributable to the aforementioned decrease
in software license fees.
International revenues were $14.2 million and $15.4 million in the second
quarter of 2001 and 2000, representing 30.8% and 26.8%, respectively, of total
revenues. International revenues were $28.0 million and $29.3 million for the
six months ended June 30, 2000 and 2001 representing 30.1% and 25.7%,
respectively, of total revenues. The increase in international revenues as a
percentage of total revenues for the three and six months ended June 30, 2001 as
compared to the same periods in 2000 is primarily attributable to the decrease
in North American revenues resulting from the economic downturn. The Company
believes the economic downturn has not yet impacted international markets. With
sales offices located in the Europe, Australia, Asia and South America, the
Company expects international revenues to remain a significant portion of total
revenues.
Gross Profit
Cost of revenues consists of royalties paid for licensed software incorporated
into the Company's products; costs associated with product packaging,
documentation and software duplication; costs of consulting, custom programming,
education and support; and the amortization and write-down of capitalized
software development costs. A charge of approximately $1.0 million is included
in cost of revenues for the first quarter of 2001 to write-down capitalized
software development costs related to localized products marketed in Europe and
a component of one of the Company's manufacturing products to estimated net
realizable value.
The decline in gross profit in absolute dollars for the three months ended June
30, 2001 as compared to the same period in 2000 was primarily due to the
decrease in license fees revenues. For the six month period ended June 30, 2001
compared to the same period of 2000, the decrease was due to the decrease in
license fees revenues as well as the previously discussed write-down of
capitalized software development costs of $1.0 million. The increase in gross
profit as a percentage of revenues for the three and six months ended June 30,
2001 as compared to the same periods in 2000 was due to a decrease in the
professional services cost base as a result of the previously discussed 2001
restructuring and an increase in the utilization rate of professional services
personnel during the first and second quarter of 2001.
14
15
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, commissions, travel,
advertising and promotional expenses. The decrease in absolute dollars for the
three and six months ended June 30, 2001 compared to the same periods of 2000 is
primarily due to a decrease in the cost of salaries, benefits and other
headcount related expenses as a result of the previously discussed 2001
restructuring, and lower commissions expense resulting from decreased software
license fees revenue. Additionally, during the three and six month period ended
June 30, 2001, the Company decreased its advertising and related costs as
compared to the same period in 2000 as a result of its measures to decrease
overall costs. The Company expects sales and marketing expenses to remain at
these reduced levels for the remainder of 2001 due largely to the second quarter
2001 restructuring and continued cost control measures.
Software Development
Software development costs consist primarily of compensation of development
personnel, related overhead incurred to develop the Company's products and third
party development costs for the localization and translation of certain of the
Company's products for foreign markets. Software development costs are accounted
for in accordance with Statement of Financial Accounting Standards No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," under which the Company is required to capitalize software
development costs after technological feasibility is established. Costs that do
not qualify for capitalization are charged to software development expense when
incurred. During the three and six months ended June 30, 2000, the Company
capitalized $1.4 million and $4.0 million, respectively, of software development
costs. No such costs were capitalized during the three and six months ended June
30, 2001.
The decrease in software development expenses for the three months ended June
30, 2001 as compared to the same period of 2000 is due to a decrease in the cost
of salaries, benefits and other headcount related expenses as a result of the
previously discussed 2001 restructuring and the Company's efforts to move
certain software development activities to lower-cost offshore locations. The
increase in gross software development expenses for the six months ended June
30, 2001 as compared to the same period of 2000 is due to an increase in cost of
salaries, benefits and other headcount related expenses as a result of an
increase in software development personnel in the first of quarter of 2001 as
compared to the first quarter of 2000. The increase in software development
costs as a percentage of revenues for the three and six months ended June 30,
2001 as compared to the same periods in the prior year is due to the decline in
the Company's revenue base. The Company expects software development expenses
for the remainder of 2001 to remain at current levels due to the second quarter
2001 restructuring, continued shifting to offshore development and continued
cost control measures.
General and Administrative
General and administrative expenses consist primarily of costs associated with
the Company's executive, financial, human resources and information services
functions. The decrease in absolute dollars and as a percentage of revenues in
general and administrative expenses for the three months ended June 30, 2001 as
compared to the same period in 2000 is due to a decrease in the cost of
salaries, benefits and other headcount related expenses as a result of the
previously discussed 2001 restructuring and a decrease in the Company's
provision for doubtful accounts as a result of improved collection efforts in
the second quarter of 2001. For the six months ended June 30, 2001 compared to
the same period of 2000, general and administrative expenses also decreased in
absolute dollars as a result of the headcount reductions related to the 2001
restructuring, however, this decrease was offset by an increase in the first
quarter of 2001 of the Company's provision for doubtful accounts to better
reflect the current economic environment and geographical market conditions.
The Company expects general and administrative expenses to remain at or near
second quarter levels for the remainder of 2001, due largely to the second
quarter 2001 restructuring and continued cost control measures.
15
16
Liquidity and Capital Resources
The following table summarizes the Company's cash and cash equivalents, working
capital deficit and cash flows as of and for the six months ended June 30, 2001
(in millions):
June 30,
2001
--------
Cash and cash equivalents $ 23.2
Working capital deficit (13.6)
Net cash used in operating activities (10.4)
Net cash provided by investing activities 8.8
Net cash used in financing activities (2.4)
As of June 30, 2001, the Company's principal sources of liquidity included cash
and cash equivalents of $23.2 million. The Company used $10.4 million in cash
for operating activities during the six month period ended June 30, 2001
primarily to fund its operations. As part of the $10.4 million in operating cash
outlays in the six months ended June 30, 2001, the Company paid $2.0 million in
settlement of the previously discussed AAR lawsuit, $0.6 million for the
settlement of a third party reseller agreement accrued for as part of the 1998
DataWorks merger, $1.6 million for severance costs, lease terminations and other
costs related to the 2001 restructuring and $0.1 million for lease payments
related to the prior year restructurings. At June 30, 2001, the Company has $4.7
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 accrued expenses in the accompanying unaudited
condensed consolidated financial statements. The Company believes these
obligations will be funded from existing cash reserves, working capital,
operations and its credit facility.
The Company's principal investing activities for the six month period ended June
30, 2001 included proceeds from the sales of product lines of $9.9 million and
capital expenditures of $1.1 million.
Financing activities for the six months ended June 30, 2001 included payments of
$2.9 million made against the Company's debt obligations. In addition, cash
provided by financing activities included proceeds from the issuance of stock
under the employee stock purchase program of $0.5 million.
On July 26, 2000, the Company entered into a $30.0 million senior credit
facility with a financial institution comprised of a $10.0 million term loan and
a $20.0 million revolving line of credit. On August 8, 2000, the Company
received the $10.0 million proceeds from the term loan. The term loan is due in
36 equal monthly installments, plus interest at the prime rate plus 3% (10.0% at
June 30, 2001). The revolving line of credit expires in August 2003, bears
interest at a variable rate equal to either the prime rate or at LIBOR, at the
Company's option, plus a margin ranging from 0.25% to 1.25% on prime rate loans
and 2.5% to 3.75% on LIBOR loans, depending on the Company's results of
operations. Borrowings under the revolving line of credit are limited to 85% of
eligible accounts receivable, as defined. To date, the Company has not borrowed
any amounts against the revolving line of credit facility. As of June 30, 2001,
the Company has borrowing capacity of $8.7 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 June
30, 2001 the Company was in compliance with all covenants included in the terms
of the credit agreement, as amended.
The Company had taken steps to reduce its operating expenses as part of its
December 1999 and April 2001 restructurings, both of which included a reduction
in workforce and facilities consolidation and closure. As a result of the 1999
restructuring actions and the Company's enhanced receivable collection
activities, the Company generated cash flow savings from operating activities of
$3.8 million during the quarter ended September 30, 2000 and $10.5 million in
the quarter ended December 31, 2000. Based on the savings expected to be
generated from the
16
17
April 2001 restructuring, the Company expects to again achieve positive cash
flow from operations in the third quarter of 2001.
As of June 30, 2001, the Company had cash and cash equivalents of $23.2 million.
In addition, at such date, the Company had borrowing capacity under its $20
million revolving line of credit facility of $8.7 million. The Company is
dependent upon its ability to generate cash flows from software license fees,
providing services to its customers and other operating revenues and through
collection of its accounts receivable to maintain current liquidity levels. If
the Company is not successful in achieving targeted 2001 revenues and expenses
or positive cash flows from operations, the Company may be required to take
further cost-cutting measures and reorganization actions.
Although the Company reported net income for the three months ended June 30,
2001, this net income included $10.4 million from gains on sales of product
lines partially offset by a $7.6 million in restructuring and other charges. Had
the Company not had these nonrecurring items, the net loss for the three months
ended June 30, 2001 would have been $2.2 million. While management's goal is to
continue to reduce and eliminate losses and maintain profitability, there can be
no assurance that the Company's restructuring and other cost control actions
will enable the Company 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.
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 Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not believe that
the adoption of SFAS 141 will have a significant impact on its consolidated
financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 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, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002 and it has not determined the impact, if any, that this
statement will have on its consolidated financial statements. The Company had no
goodwill amortization during the three and six months ended June 30, 2001.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
FORWARD LOOKING STATEMENTS -- SAFE HARBOR.
Certain statements in this Quarterly Report on Form 10-Q are forward looking
statements within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
that involve risks and uncertainties. Any statements contained herein (including
without limitation statements to the effect that the Company or Management
"estimates," "expects," "anticipates," "plans," "believes," "projects,"
"continues," "may," or "will" or statements concerning "potential" or
"opportunity" or variations thereof or comparable terminology or the negative
thereof) that are not statements of historical fact should be construed as
forward looking statements. These statements include the Company's expectation
that (i) severance costs and a substantial amount of the facilities costs will
be paid out by the end of 2001, (ii) the restructuring will provide
approximately $6.0 million to $7.0 million in cost savings per quarter for the
remainder of 2001, (iii) the Company's software license revenue will continue to
be impacted in 2001 by current software market conditions and economic
uncertainties, (iv) services revenues will continue to be negatively impacted by
a decrease in the related software license revenues and the sale of PFW and
Impresa product lines for the remainder of 2001, (v) 2001 international revenues
will continue to represent a significant portion of total revenues, (vi)
operating expenses will remain at second quarter levels in 2001 due to the
second quarter 2001 restructuring and other cost control measures, and (vii) the
Company will achieve positive cash flow from operations in the third quarter of
2001. Actual results could differ materially and adversely from those
anticipated in such forward looking statements as a result of certain factors
including the factors listed at pages 18 to 24. 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
17
18
Commission including its quarterly reports on Form 10-Q to be filed by the
Company during 2001, and its Annual Report on Form 10-K filed by the Company for
the year ending December 31, 2000.
SINCE DECEMBER 31, 2000, OUR CASH AND CASH EQUIVALENTS HAVE BEEN DECLINING AND
THE PROPORTION OF OUR ACCOUNTS RECEIVABLE OVER 90 DAYS OLD HAVE BEEN INCREASING
AND, AS A RESULT, OUR DOUBTFUL ACCOUNTS RESERVE MAY NOT BE SUFFICIENT, WE MAY
NOT BE ABLE TO COLLECT THE AGED ACCOUNTS AND WE MAY NEED TO RAISE ADDITIONAL
CASH.
The Company's cash and cash equivalents have decreased from $26.8 million at
December 31, 2000 to $23.2 million at June 30, 2001. As of March 31, 2001 cash
and cash equivalents had declined to $17.1 million principally due to the net
loss incurred during the first quarter of 2001. During the second quarter ended
June 30, 2001, cash and cash equivalents rose approximately $6.0 million to
$23.1 million primarily as a result of the sales of the Impresa and PFW product
lines. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Liquidity and Capital Resources." If the Company is not
successful in achieving targeted revenues and expenses or maintaining a positive
cash flow during 2001, the Company may be required to take further actions to
align its operating expenses such as additional reductions in work force or
other expense cutting measures. In addition, although the Company has obtained a
bank line of credit, the Company has in prior quarters violated the EBITDA and
the tangible net worth covenants included in the terms of the credit agreement.
The Company received waivers from its lender for these violations and
renegotiated with its lender to revise the financial covenants to reduce the
thresholds required by the EBITDA and the tangible net worth covenants. No such
violations occurred in the second quarter 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 or be
able to secure additional funding or, if secured, on favorable terms. The
Company has also experienced since December 31, 1999 an increase in the
proportion of accounts receivable over 90 days old. Although such proportion of
accounts receivables over 90 days old remained level from the first to second
quarters 2001, if the Company is not successful in the future in collecting a
significant portion of its net accounts receivable, the Company may be required
to seek alternative financing sources in addition to the bank credit facility.
In addition, should the Company not reduce its aged receivables, its ability to
borrow against the revolving portion of the credit facility may be severely
restricted due to the fact that borrowings are limited to 85% of eligible
receivables, which excludes receivables over ninety days old.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND IF WE FAIL TO
MEET EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS OUR SHARE PRICE MAY
DECREASE.
The Company's quarterly operating results have fluctuated in the past. The
Company's operating results may fluctuate in the future as a result of many
factors that may include:
- The demand for the Company's products, including reduced demand related to
changes in marketing focus for certain products, software market conditions
or general economic conditions
- The size and timing of orders for the Company's products
- The number, timing and significance of new product announcements by the
Company and its competitors
- The Company's ability to introduce and market new and enhanced versions of
its products on a timely basis
- The level of product and price competition
- Changes in operating expenses of the Company
- Changes in average selling prices
Additionally, the Company noted a trend during the last several quarters of
lengthening sales cycles for some of its products as existing and prospective
customers transition to the purchase of the Company's integrated and
comprehensive e-Business suite of products. The Company is unable to determine
at this point in time how long this trend will continue and whether it will
diminish in the future. In addition, the Company historically records 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
18
19
some future quarter the Company's operating results will be below the
expectations of public market analysts and investors. Such an event would likely
have a material adverse effect upon the price of the Company's Common Stock.
IF WE FAIL TO RAPIDLY DEVELOP AND INTRODUCE NEW PRODUCTS AND SERVICES, WE WILL
NOT BE ABLE TO COMPETE EFFECTIVELY AND OUR ABILITY TO GENERATE REVENUES WILL
SUFFER.
The market for the Company's software products is subject to ongoing
technological developments, evolving industry standards and rapid changes in
customer requirements. The Company believes the Internet is transforming the way
businesses operate and the software requirements of customers. Specifically, the
Company believes that customers desire e-Business software applications, or
applications that enable a customer to engage in commerce or service over the
Internet. As companies introduce products that embody new technologies or as new
industry standards emerge, such as web-based applications or applications that
support e-Business, existing products may become obsolete and unmarketable. The
Company's future business, operating results and financial condition will depend
on its ability to:
- Continue to deliver and achieve successful market acceptance of e-Business
application software to facilitate e-Business, including web enablement
- Enhance its existing products
- Continue to develop new and/or improved products that address the
increasingly sophisticated needs of its customers, particularly in the
areas of e-Business and e-Commerce
- Develop and continue to develop products for additional platforms
- Effectively train its sales force to sell an integrated suite of e-Business
products
Further, if the Company fails to respond to technological advances, emerging
industry standards and end-user requirements, or experiences any significant
delays in product development or introduction, the Company's competitive
position and revenues could be adversely affected. The Company's success will
depend on its ability to continue to develop and successfully introduce new
products and services, including those in the e-Business arena. The Company
cannot assure you that it will successfully develop and market such new and/or
improved products on a timely basis, if at all. In developing new products, the
Company may encounter software errors or failures that force the delay in the
commercial release of the new products. Any such delay or failure to develop
could have a material adverse effect on the Company's business, results of
operations and financial condition. From time to time, the Company or its
competitors may announce new products, capabilities or technologies that have
the potential to replace or shorten the life cycles of the Company's existing
products. The Company cannot assure you that such announcements will not cause
customers to delay or alter their purchasing decisions, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
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, including its e by Epicor
products. Although it has not occurred to date, the possibility of the Company
being unable to correct such errors in a timely manner could have a material
adverse effect on the Company's results of operations and its cash flows. In
addition, technical problems with the current release of the database platforms
on which the Company's products operate could impact sales of these products,
which could have a material adverse effect on the Company's results of
operations.
BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our operations are vulnerable to interruption by fire, earthquake, power loss,
telecommunications failure and other events beyond our control. A substantial
portion of our facilities, including our corporate headquarters and other
critical business operations, are located near major earthquake faults. We do
not carry earthquake insurance and do not fund for earthquake-related losses.
Although the facilities in which we host our computer systems are designed
19
20
to be fault tolerant, the systems are susceptible to damage from fire, floods,
earthquakes, power loss, telecommunications failures, and similar events. Our
facilities in the State of California are currently subject to electrical
blackouts as a consequence of a shortage of available electrical power which is
expected to increase during the current summer months. In the event these
blackouts occur or increase in severity, they could disrupt the operations of
our affected facilities. We do not carry financial reserves against business
interruptions and although we do carry business interruption insurance limited
to special causes of loss, if a business interruption occurs, our business could
be seriously harmed.
WE MAY PURSUE STRATEGIC ACQUISITIONS, INVESTMENTS, AND RELATIONSHIPS AND WE MAY
NOT BE ABLE TO SUCCESSFULLY MANAGE OUR OPERATIONS IF WE FAIL TO SUCCESSFULLY
INTEGRATE ACQUIRED BUSINESSES AND TECHNOLOGIES.
As part of its business strategy, the Company intends to continue to expand its
product offerings to include application software products that are
complementary to its existing client/server ERP applications, particularly in
the areas of e-Business and e-Commerce. This strategy may involve acquisitions,
investments in other businesses that offer complementary products, joint
development agreements or technology licensing agreements. The risks commonly
encountered in the acquisitions of businesses would accompany any future
acquisitions or investments by the Company. Such risks may include the
following:
- The difficulty of integrating previously distinct businesses into one
business unit
- The substantial management time devoted to such activities
- The potential disruption of the Company's ongoing business
- Undisclosed liabilities
- Failure to realize anticipated benefits (such as synergies and cost
savings)
- Issues related to product transition (such as development, distribution and
customer support)
The Company expects that the consideration it would pay in such future
acquisitions would consist of stock, rights to purchase stock, cash or some
combination of the aforementioned. If the Company issues stock or rights to
purchase stock in connection with these future acquisitions, earnings (loss) per
share and then-existing holders of the Company's Common Stock may experience
dilution.
The risks that the Company may encounter in licensing technology from third
parties include the following:
- The difficulty in integrating the third party product with the Company's
products
- Undiscovered software errors in the third party product
- Difficulties in selling the third party product
- Difficulties in providing satisfactory support for the third party product
- Potential infringement claims from the use of the third party product
WE RELY ON DISTRIBUTORS AND VARS TO SELL OUR PRODUCTS AND DISRUPTIONS TO THESE
CHANNELS WOULD ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUES FROM THE SALE
OF OUR PRODUCTS.
The Company distributes products through a direct sales force as well as through
VARs and distributors. The Company's distribution channel includes distributors,
VARs and authorized consultants, which consist primarily of professional firms.
If the Company's VARs or authorized consultants cease distributing or
recommending the Company's products or emphasize competing products, the
Company's results of operations could be materially and adversely affected. In
May 2000, the Company announced that effective September 1, 2000 in the United
States it would only allow its e by Epicor product line to be resold by VARs who
offer such product line exclusive of other competing product lines. The
immediate result of this change was that as of September 1, 2000 the number of
Company's VARs selling the e by Epicor product line domestically was
approximately cut in half from 102 to 45. VAR sales for the period ended
September 30, 2000 decreased from the quarter ended June 30, 2000. However, the
Company was unable to determine how much of this drop in sales revenue, if any,
was attributable to the change in the VAR program as opposed to other
independent factors. Subsequently, VAR sales have fluctuated from quarter to
quarter with VAR sales for the quarter ended December 31, 2000 increasing over
the prior quarter, while VAR sales for the quarter ended March 31, 2001
decreased from the previous quarter. For the quarter ended June 30, 2001, VAR
sales generally increased over the previous quarter. Thus, 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.
20
21
There can be no assurance that the direct sales force will not lead to conflicts
with the Company's VAR channels.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM THE SALE OF ENTERPRISE
APPLICATION SOFTWARE AND RELATED SUPPORT SERVICES AND IF THOSE SALES SUFFER, OUR
BUSINESS WILL BE NEGATIVELY IMPACTED.
The Company derives its revenue from the sale of its various ERP application
software packages and related services. Accordingly, any event that adversely
affects fees derived from the sale of such systems would materially and
adversely affect the Company's business, results of operations and performance.
For example, the industry for ERP applications was negatively impacted in 1999
and the first half of 2000 by Year 2000 concerns. Similarly, in the first half
of 2001, the industry 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 line
- Maintain viable product lines
- Make their product lines available to the Company on commercially
acceptable terms
Any significant interruption in the supply of such third-party technology could
have a material adverse effect on the Company's business, results of operation,
cash flows and financial condition.
THE MARKET FOR WEB-BASED DEVELOPMENT TOOLS, APPLICATION PRODUCTS AND CONSULTING
AND EDUCATION SERVICES IS EMERGING AND IT COULD NEGATIVELY AFFECT OUR
CLIENT/SERVER-BASED PRODUCTS.
The Company's development tools, application products and consulting and
education services generally help organizations build, customize or deploy
solutions that operate in a client/server computing environment. There can be no
assurance that these markets will continue to grow or that the Company will be
able to respond effectively to the evolving requirements of these markets. The
Company believes that the environment for application software is continuing to
change from client/server to a web-based environment to facilitate e-Business.
If the Company fails to respond effectively to evolving requirements of this
market, the Company's business, financial condition, results of operations and
cash flows will be materially and adversely affected.
THE CONTINUING IMPACT ON THE COMPANY OF EMERGING AREAS SUCH AS THE INTERNET,
ON-LINE SERVICES, E-BUSINESS APPLICATIONS AND ELECTRONIC COMMERCE IS UNCERTAIN
AND COULD NEGATIVELY IMPACT OUR BUSINESS.
There can be no assurance that the Company will be able to continue to provide a
product offering that will satisfy new customer demands in these areas. In
addition, standards for web-enabled and e-Business applications, as well as
other industry adopted and de facto standards for the Internet, are continuing
to evolve rapidly. There can be no assurance that standards chosen by the
Company will position its products to compete effectively for business
opportunities as they arise on the Internet and other emerging areas. The
success of the Company's product offerings depends, in part, on its ability to
continue developing products that are compatible with the Internet. The
increased commercial use of the Internet will require substantial modification
and customization of the Company's products and the introduction of new
products. The Company may not be able to effectively compete in the
Internet-related products and services market.
21
22
Critical issues concerning the commercial use of the Internet, including
security, demand, reliability, cost, ease of use, accessibility, quality of
service and potential tax or other government regulation, remain partially
and/or fully unresolved and may affect the use of the Internet as a medium to
support the functionality of our products and distribution of our software. If
these critical issues are not favorably resolved, the Company's business,
operating results, cash flows and financial condition could be materially and
adversely affected.
THE MARKET FOR OUR PRODUCTS IS HIGHLY COMPETITIVE AND IF WE ARE UNABLE TO
COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS OUR BUSINESS COULD BE
NEGATIVELY IMPACTED.
The business information systems industry in general and the ERP computer
software industry in particular are very competitive and subject to rapid
technological change. Many of the Company's current and potential competitors
have (1) longer operating histories, (2) significantly greater financial,
technical and marketing resources, (3) greater name recognition, (4) larger
technical staffs, and (5) a larger installed customer base than the Company has.
A number of companies offer products that are similar to the Company's products
and that target the same markets. In addition, any of these competitors may be
able to respond quicker to new or emerging technologies and changes in customer
requirements (such as e-Business and Web-based application software), and to
devote greater resources to the development, promotion and sale of their
products than the Company. Furthermore, because there are relatively low
barriers to entry in the software industry, the Company expects additional
competition from other established and emerging companies. Such competitors may
develop products and services that compete with those offered by the Company or
may acquire companies, businesses and product lines that compete with the
Company. It also is possible that competitors may create alliances and rapidly
acquire significant market share. Accordingly, there can be no assurance that
the Company's current or potential competitors will not develop or acquire
products or services comparable or superior to those that the Company develops,
combine or merge to form significant competitors, or adapt quicker than will the
Company to new technologies, evolving industry trends and changing customer
requirements. Competition could cause price reductions, reduced margins or loss
of market share for the Company's products and services, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that the
competitive pressures that the Company may face will not materially adversely
affect its business, operating results, cash flows and financial condition.
WE MAY NOT BE ABLE TO MAINTAIN AND EXPAND OUR BUSINESS IF WE ARE NOT ABLE TO
RETAIN, HIRE AND INTEGRATE SUFFICIENTLY QUALIFIED PERSONNEL.
The Company's success depends on the continued service of key management
personnel that are not subject to an employment agreement. In addition, the
competition to attract, retain and motivate qualified technical, sales and
operations personnel is intense. The Company has at times experienced, and
continues to experience, difficulty in recruiting qualified personnel,
particularly in software development and customer support. There is no assurance
that the Company can retain its key personnel or attract other qualified
personnel in the future. The failure to attract or retain such persons could
have a material adverse effect on the Company's business, operating results,
cash flows and financial condition.
OUR FUTURE RESULTS COULD BE HARMED BY ECONOMIC, POLITICAL, REGULATORY AND OTHER
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS.
The Company believes that any future growth of the Company will be dependent, in
part, upon the Company's ability to maintain and increase revenues in
international markets. There is no assurance that the Company will maintain or
expand its international sales. If the revenues that the Company generates from
foreign activities are inadequate to offset the expense of maintaining foreign
offices and activities, the Company's business, financial condition and results
of operations could be materially and adversely affected. International sales
are subject to inherent risks, including:
- Unexpected changes in regulatory requirements
- Tariffs and other barriers
- Unfavorable intellectual property laws
- Fluctuating exchange rates
- Difficulties in staffing and managing foreign sales and support operations
- Longer accounts receivable payment cycles
- Difficulties in collecting payment
22
23
- Potentially adverse tax consequences, including repatriation of earnings
- Development of localized and translated products
- Lack of acceptance of localized products in foreign countries
- Burdens of complying with a wide variety of foreign laws
- Effects of high local wage scales and other expenses
- Shortage of skilled personnel required for the local operation
Any one of these factors could materially and adversely affect the Company's
future international sales and, consequently, the Company's business, operating
results, cash flows and financial condition. A portion of the Company's revenues
from sales to foreign entities, including foreign governments, has been in the
form of foreign currencies. The Company does not have any hedging or similar
foreign currency contracts. Fluctuations in the value of foreign currencies
could adversely impact the profitability of the Company's foreign operations.
IF THIRD PARTIES INFRINGE OUR INTELLECTUAL PROPERTY, WE MAY EXPEND SIGNIFICANT
RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY.
The Company relies on a combination of copyright, trademark and trade secret
laws, employee and third-party nondisclosure agreements and other industry
standard methods for protecting ownership of its proprietary software. However,
the Company cannot assure you that in spite of these precautions, an
unauthorized third party will not copy or reverse-engineer certain portions of
the Company's products or obtain and use information that the Company regards as
proprietary. 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 to enable them to
customize the software to meet their particular requirements. Although the
source code licenses contain confidentiality and nondisclosure provisions, the
Company cannot be certain that such customers will take adequate precautions to
protect the Company's source code or other confidential information.
SUBSTANTIAL SALES OF OUR STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
As of August 2, 2001, the Company had 44,232,925 shares of common stock
outstanding. There are presently 95,305 shares of Series C Preferred Stock
outstanding. Each share of Series C Preferred Stock is convertible into ten
shares of common stock, as adjusted for stock dividends, combinations or splits
at the option of the holder and is entitled to vote with the holders of common
stock on an as-converted basis on all matters presented for shareholder
approval. The holders of the Series C Preferred Stock have the right to cause
the Company to register the sale of the shares of common stock issuable upon
conversion of the Series C Preferred Stock. Also, the Company has a substantial
number of options or shares issuable to employees under employee option, stock
grant, or restricted stock grant plans. As a result, a substantial number of
shares of common stock will be eligible for sale in the public market at various
times in the future. Sales of substantial amounts of such shares could adversely
affect the market price of the Company's Common Stock.
THE MARKET FOR OUR STOCK IS VOLATILE AND FLUCTUATIONS IN OPERATING RESULTS,
CHANGES IN EARNINGS ESTIMATES BY ANALYSTS AND OTHER FACTORS COULD NEGATIVELY
AFFECT OUR STOCK'S PRICE.
The market prices for securities of technology companies, including the Company,
have been quite volatile. Quarter to quarter variations in operating results,
changes in earnings estimates by analysts, announcements of technological
innovations or new products by the Company or its competitors, announcements of
major contract awards and other
23
24
events or factors may have a significant impact on the market price of the
Company's Common Stock. In addition, the securities of many technology companies
have experienced extreme price and volume fluctuations, which have often been
unrelated to the companies' operating performance. These conditions may
adversely affect the market price of the Company's Common Stock.
Because of these and other factors affecting the Company's operating results,
past financial performance should not be considered an indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments with high credit quality issuers
and, by policy, limits the amount of credit exposure to any one issuer. The
Company is averse to principal loss and ensures the safety and preservation of
its invested funds by limiting default risk, market risk, and reinvestment risk.
The Company mitigates default risk by investing in only the safest and highest
credit quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor.
In July 2000, the Company entered into a $30.0 million senior credit facility
with a financial institution comprised of a $10.0 million term loan and a $20.0
million revolving line of credit. On August 8, 2000, the Company received the
$10.0 million proceeds under the term loan. To date, the Company has not
borrowed any amounts against the revolving line of credit. The interest rate on
the term loan is based on the prime rate plus 3%. On the revolving line of
credit, the Company has the option to pay interest at a variable rate equal to
either the prime rate or at LIBOR 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. As a result, the Company's interest expense associated
with these borrowings will vary with market rates. The Company had approximately
$7.2 million in variable rate debt outstanding at June 30, 2001. Based upon
these variable rate debt levels, a hypothetical 1% increase in interest rates
would increase interest expense by approximately $71,000 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 30.1% of the Company's total revenues for the
six months ended June 30, 2001 and 27.6% 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.
24
25
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In August 1999, DataWorks filed for arbitration against AAR Corporation with the
American Arbitration Association in Denver, Colorado. The arbitration arose out
of the development, licensing and sale of software by DataWorks to AAR in 1997.
AAR counterclaimed against DataWorks alleging breach of contract. In January
2001, the Company settled this matter by agreeing to pay AAR $2,000,000. The
Company paid this amount during the quarter ended March 31, 2001.
In December 1998, Alyn Corporation filed a lawsuit against DataWorks in San
Diego, California Superior Court arising from the licensing and sale of software
by DataWorks to Alyn in December 1996. In March 2000, the Company agreed to pay
Alyn $1,800,000 to settle the lawsuit. The Company paid this amount during the
first half of 2000.
In November 1998, a securities class action lawsuit was filed in the United
States District Court for the Southern District of California against DataWorks,
certain of its current and former officers and directors, and the Company. The
consolidated complaint is purportedly brought on behalf of purchasers of
DataWorks stock between October 30, 1997 and July 16, 1998. The complaint
alleges that defendants made material misrepresentations and omissions
concerning DataWorks' acquisition of Interactive Group, Inc. and demand for
DataWorks' products. The Company is named as a defendant solely as DataWorks'
successor, and is not alleged to have taken part in the alleged misconduct. No
damage amount is specified in the complaint. The action is in the early stages
of litigation, no trial date is set, and defendants' motion to dismiss the
second amended consolidated complaint remains pending. The Company believes
there is no merit to this lawsuit and intends to continue to defend against it
vigorously. Ultimate outcome of these suits or any potential loss is not
presently determinable.
The Company is subject to other legal proceedings and claims in the normal
course of business. The Company is currently defending these proceedings and
claims, and anticipates that it will be able to resolve these matters in a
manner that will not have a material adverse impact on the Company's
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 15, 2001, the Company held its annual meeting of stockholders. At this
meeting 35,967,888 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, Donald R. Dixon, Thomas F. Kelly and Charles M.
Boesenberg 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 34,309,084 1,658,804
Donald R. Dixon 35,217,784 750,104
Thomas F. Kelly 35,221,188 746,700
Charles M. Boesenberg 35,221,731 745,157
With respect to the proposal to ratify the appointment of Deloitte & Touche LLP
as independent auditors for the fiscal year ended December 31, 2001, 35,444,316
shares of Common Stock and 953,050 shares of Series C Preferred Stock (on an
as-converted basis) voted in favor of the proposal, 367,752 shares of Common
Stock voted against, and 155,820 shares of Common Stock abstained from voting.
There were no broker non-votes on this proposal.
25
26
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.74 Amendment to Loan and Security Agreement dated May 21, 2001
(b) Reports on Form 8-K
None
26
27
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 14, 2001 /s/ Lee Kim
-------------------------------
Lee Kim
Vice President and Chief Financial Officer
27
28
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.74 Amendment to Loan and Security Agreement dated May 21, 2001