-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EEg+CNdjtxZJXlmi8Ksluf6olBiEeYt5edaSsvocHxvHOiEPXUFC09c5Kfup4cLG Kb0GAF6xiU+dScopnuxm1g== 0001095811-00-000766.txt : 20000411 0001095811-00-000766.hdr.sgml : 20000411 ACCESSION NUMBER: 0001095811-00-000766 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPICOR SOFTWARE CORP CENTRAL INDEX KEY: 0000891178 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 330277592 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20740 FILM NUMBER: 581658 BUSINESS ADDRESS: STREET 1: 195 TECHNOLOGY DR CITY: IRVINE STATE: CA ZIP: 92718-2402 BUSINESS PHONE: 9495854000 MAIL ADDRESS: STREET 1: 195 TECHNOLOGY DR CITY: IRVINE STATE: CA ZIP: 92718-2402 FORMER COMPANY: FORMER CONFORMED NAME: PLATINUM SOFTWARE CORP DATE OF NAME CHANGE: 19940715 10-K 1 FORM 10-K YEAR ENDED DECEMBER 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________ TO __________________ COMMISSION FILE NUMBER 0-20740 EPICOR SOFTWARE CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 33-0277592 - -------------------------------- ------------------- (State or other jurisdiction of (I.R.S Employer incorporation or organization) Identification No.) 195 TECHNOLOGY DRIVE IRVINE, CALIFORNIA 92618-2402 - -------------------------------------------------------------------------------- (Address of principal executive offices, zip code) Registrant's telephone number, including area code: (949) 585-4000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's voting Common Stock held by non-affiliates of the registrant was approximately $327,927,215 (computed using the closing sales price of $8.72 per share of Common Stock on March 13, 2000 as reported by the Nasdaq National Market). Shares of Common Stock held by each officer and director and each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of Common Stock outstanding as of March 13, 2000 was 41,455,036. --------------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 2000, which Proxy Statement will be filed no later than 120 days after the close of the registrant's fiscal year ended December 31, 1999, are incorporated by reference in Part III of this Annual Report on Form 10-K. 2 PART I ITEM 1. BUSINESS Epicor Software Corporation ("Epicor" or the "Company") designs, develops, markets and supports enterprise software solutions for use by mid-sized companies as well as divisions and subsidiaries of larger corporations worldwide. The Company's business solutions are focused on the mid-market, which generally includes companies between $10 million and $500 million in annual revenues. Epicor's solutions are designed to help the Company's customers focus on their customers. This customer-centric focus differentiates the Company from conventional enterprise resource planning ("ERP") vendors, whose primary focus is improving business processes and efficiencies. The Company's products and services are designed to focus on customer satisfaction, retention and referrals and are intended to facilitate enterprise-wide management of resources and information which allows mid-market companies to compete more effectively in an increasingly global economy. The Company's products integrate Back Office applications for manufacturing, distribution and accounting with Front Office applications for sales, marketing and customer support. Leveraging the power of the Internet, these applications allow an organization to extend beyond the traditional "four walls" of their enterprise to integrate their operations with their customers, suppliers and partners. The Company has three primary areas of focus for its software products: 1. Front Office applications, which include its Clientele(R) and Platinum(R) ERA (Enterprise Ready Applications) Front Office sales force automation and customer service and support applications, which provide growing and mid-sized companies with comprehensive customer relationship management ("CRM") functionality; 2. General Services applications, which include Platinum ERA Financials, Platinum ERA Distribution and Platinum(R) for Windows, designed to support the requirements of distributors and service organizations; and 3. Manufacturing applications, which include Platinum ERA Manufacturing - an ERP suite designed for assemble-to-order ("ATO") and light manufacturers, Avante - an ERP suite designed to meet the needs of rapidly growing manufacturers of discrete, highly engineered products, Vantage - an ERP suite designed for make-to-order ("MTO") and job shop manufacturers, Vista -an integrated business management application targeted at small job shop manufacturers, and Impresa - an integrated solution designed for the specialized needs of remanufacturers and maintenance, repair and overhaul ("MRO") businesses The Company's software products incorporate a significant number of internationalized features to address global market opportunities, including support for national languages, multiple currencies and accounting for value-added taxation. The Company offers consulting, training and support services to supplement the use of its software products by its customers. Mid-market companies require cost effective systems that have broad functionality, yet are rapidly implemented, easily adapted and highly configurable to their unique business requirements. To enable rapid implementation and return on investment, Epicor provides a fixed fee implementation program, the Up-Front Guarantee program. The Company was incorporated in Delaware in November 1987 under the name "Platinum Holdings Corporation." In September 1992, the Company changed its name to Platinum Software Corporation. In April 1999, the Company changed its name to Epicor Software Corporation. The Company has twelve operating subsidiaries worldwide. BACKGROUND Epicor designs its products and services exclusively for mid-market companies, which generally consist of companies with annual revenues between $10 million and $500 million. These rapidly growing organizations number in the hundreds of thousands worldwide. In the past, mid-market companies were underserved by traditional 2 3 financial and ERP systems that had originally been designed for larger corporations. These enterprise systems were dominated by mainframes and minicomputers, which were expensive to purchase, install and maintain. Though highly functional, the centralized nature of these generally proprietary systems meant that access to critical data was typically limited to an organization's management information services ("MIS") department and not readily available to decision makers, managers and key employees. Moreover, these systems provided little flexibility or adaptability to the constantly evolving requirements of mid-market companies. The explosion of enterprise business applications began as an extension of the corporate reengineering efforts of the early 1990s and the emergence of new technology paradigms including client/server computing. The dramatic scalability, supportability and performance improvements made possible by client/server and other open systems technologies based on Unix, Microsoft NT and Microsoft SQL server, allowed many organizations to leverage this technology and implement enterprise business applications for the first time. As Fortune 1000 companies aggressively invested in information technology to help them streamline and integrate disparate business processes, they created a tremendous demand in the mid to small enterprise markets for enterprise-wide software applications that integrated business processes and information. At first, only larger organizations had the technological expertise, budget and ability to support the lengthy implementations typified by the early solutions. This demand helped make the enterprise applications market one of the largest and fastest growing segments of the software industry. AMR Research, Inc., an industry analyst organization, projects that the enterprise applications market will grow 32 percent annually for the next several years, reaching more than $66.6 billion by 2003, up from just $16.6 billion in 1998. While smaller companies understood the business value of enterprise applications, they lacked the extensive resources required to implement and support such first-generation solutions. In their own quest to boost productivity, profits and gain a competitive advantage, mid-sized companies increasingly turned to integrated application software to automate and link their business processes. Due to the mid-market's unique business constraints of limited budgets and limited implementation timeframes, "best-of-breed" solutions and after-market application integrations were far too cumbersome and costly to be an effective enterprise solution. Mid-market companies required a software application that leveraged the new advances in client/server software technology to deliver a truly integrated and enterprise wide solution. Enterprise applications employed by mid-sized companies are required to satisfy business and technology requirements that are significantly different from those found in Fortune 1000 organizations. As a group, mid-sized companies face tremendous global competitive pressures as they compete for business against larger corporations, other mid-sized competitors and smaller start-ups. They understand the need to remain close to their customers and to make the most effective use of relatively limited resources. Mid-sized companies demand a quick return on technology investments and require that solutions be affordable not only to acquire and implement, but also to support throughout its entire operational life span. With respect to technology, mid-sized companies are practical consumers. Mid-sized companies generally do not take risks on cutting-edge technology, but instead typically select affordable, proven solutions. The decade's dramatic decrease in information technology costs, coupled with a simultaneous increase in computing power, have made key new technologies accessible to this cost-conscious market. Microsoft Corporation took advantage of increased computing capabilities to develop Microsoft BackOffice(R), a robust network operating system and scaleable relational database that provides smaller businesses with a sophisticated technology infrastructure previously accessible only to Fortune 1000 corporations. Microsoft Windows NT(R) and SQL Server have quickly become the fastest growing technology platforms, attracting mid-market companies with their features, familiarity and ease-of-use. The development of cost-effective infrastructures has increased the mid-sized company's investment in enterprise applications. Spurred by outside issues, such as Year 2000 readiness and pending Euro currency mandates, mid-sized companies realized they could not afford to be without enterprise business solutions. The Company's product offerings, product development efforts and services are focused on meeting the enterprise business application needs of these growing mid-sized businesses. 3 4 TECHNOLOGY STRATEGY The Company's technology strategy is to develop leading line of enterprise business software applications using industry-standard tools where possible, and to take advantage of leading third-party, industry-standard technologies for database management systems, operating systems, user interfaces and connectivity (including Internet, Intranet and Extranet access). The Company developed its own proprietary application development tools to create its first generation of client/server products, as well as acquired several proprietary application development tools through acquisitions. These technologies and tools were developed to meet the unique needs of the current marketplace. However, as industry-standard tools mature, the Company intends to increasingly exploit these leading tools as they become generally available. The Company's core product architecture incorporates many of the foundation technologies of client/server computing, including: Open Database Technology The Company utilizes open database technology to provide extremely flexible, yet integrated enterprise business applications. This open database orientation is based on widely accepted database management systems. The Company's Platinum ERA product line (formerly Platinum SQL) uses the Microsoft SQL Server relational database management system ("RDBMS"). The Company has focused the development of its Platinum ERA product line using Microsoft's industry-standard SQL language as the fundamental database access methodology. The Company's Platinum for Windows financial accounting application is optimized for Pervasive, Inc.'s Pervasive.SQL database. The Company's Clientele Front Office suite leverages both the Microsoft Access and Microsoft SQL Server databases. The Company has designed some of its manufacturing products to run on databases that are best suited for the particular applications required by customers, including Informix (formerly Ardent), Progress, and Microsoft FoxPro. The Company has chosen these open databases in order to maximize the throughput of its customers' transactions, to provide realistic models of business data and to maximize price and performance under the budget constraints of its customer base. The Company's Avante product leverages open database technology from Informix Inc., its Vantage product is designed for Progress Software Corporation's Progress database, its Vista product is built on Microsoft's FoxPro database, and its Impresa product incorporates database tools and technology from Oracle Corporation. Advanced Networking/Connectivity The Company's products are designed to operate on local area networks ("LAN"), wide area networks ("WAN"), the Internet (including Intranets and Extranets) as well as through mobile and remote dial-up connections. The Company supports popular industry-standard networking protocols such as TCP/IP, Novell IPX/SPX and Microsoft NETBEUI/Named Pipes. The Company's connectivity and networking support offers advanced features such as: (i) concurrent access to data and critical functions for all network users; (ii) a high degree of fault tolerance; (iii) high levels of security; (iv) a wide range of options for configuring different users on the network; (v) remote access and data processing; and (vi) mobile computing. Industry Standard User Interfaces The Company has incorporated numerous features into its user interfaces to simplify the operation of and access to its products. All of the Company's product lines incorporate the popular Microsoft Windows graphical user interface ("GUI"). The Company's GUI tools include industry-standard field controls, pull-down menus, tool bars and tab menus that facilitate the use of the software. In addition, the Company's products incorporate the latest and most advanced GUI features such as process wizards, cue cards, advanced on-line help and on-line documentation. Powerful Application Development Tools The Company provides comprehensive, ground-up application development and customization capabilities for its Platinum ERA, Avante, Vantage, Vista, Clientele, Impresa and Platinum for Windows product lines. To accomplish this, the Company provides extensive, integrated application development environments for these product lines. These customization tools deliver a complete development environment, enabling a user to make changes ranging from a simple field name change to building an integrated custom application. 4 5 The Platinum ERA Customization Workbench is a software development kit for Platinum ERA that enables customers and authorized resellers to build comprehensive software solutions that augment the standard product. The intuitive Windows interface of the visual forms designer provides a powerful tool to modify and extend the functionality of standard applications. In addition, industry-standard Visual Basic macro language and ActiveX Automation support enables all Platinum ERA product suites to exchange and integrate with external COM-enabled Microsoft Windows applications. The Customization Workbench includes technical reference guides and diagrams, an OLE integration kit and certain report script source code. The Company has licensed Visual Basic for Applications and has incorporated it in Platinum ERA. The Platinum ERA Distribution and Platinum ERA Manufacturing suites employ PowerBuilder from Sybase, Inc. to provide its user interface. Due to the complexity and wide variations of the changes needed for many end users of the manufacturing and distribution products, the Company offers complete customization services through its professional services group. In addition to its Windows-based client, the Company provides a Java-based user interface and middle-tier application server to provide electronic commerce functionality on top of the same database platform. Users are provided with complete capabilities to change the user interface, validation rules and business processing of business-to-business transactions using a complete application extension environment. The Platinum ERA Front Office and Clientele Front Office suites use a proprietary forms package to build and modify the user interface. These suites also include Clientele Basic to enable users and consultants to tailor the look, feel, behavior and processing of the both the Platinum ERA Front Office and Clientele Front Office application suites to meet their specific business needs. Both front office suites offer additional applications designed to extend the suite's functionality, including Conductor, Connector and Smart Delivery. Conductor provides workflow routing and rules capabilities that allow any user, no matter where they are, to receive messages and tasks from the front office system. Connector enables remote sites and traveling sales and support representatives to connect to their master front office database and synchronize customer information, ensuring timely information whether the user is at headquarters, a remote site or on the road. Smart Delivery is a marketing encyclopedia system that enables current marketing information to be automatically distributed to the field. Additionally, the Company offers Internet-enabled solutions, including Platinum ERA.net Front Office, Clientele.Net and Vantage.Net, which enables internal remote users as well as customers to interact with the system via an Internet browser. Platinum for Windows was developed using industry standard development tools such as Visual Basic and utilizes the industry standard Pervasive.SQL database engine. As a result, a series of reusable objects have been created. By exposing certain aspects of the objects, users have the ability to modify and extend the system without losing a consistent user interface. Platinum for Windows also includes template definition for easier document entry and wizards which make it easier for a user to set up the software or define users or groups. To minimize cost and support issues for its manufacturing customers, the Company has tightly integrated its database and development environments. Avante was developed using an object-based development tool, Avante Tools, that utilizes a graphical development tool set. Through Avante Tools, the Company is able to support products across multiple operating systems from a single object code library. Vantage is written in the Progress 4GL and database, which provides a powerful, graphical development tool set. Vista provides VB Forms, a powerful form designer tool that supports user-definable screen generation. Impresa incorporates Oracle's Developer rapid application development (RAD) tool to provide sophisticated, highly interactive forms, reports and charts. Technical Architecture Strategy and Common Components A key element of the Company's technology strategy is the development of common components that can be used by all product families. These common components are developed by focused development teams according to common standards to leverage advanced functionality and technology across all the Company's solutions. The Company's technology direction embraces the Microsoft Windows Distributed interNetwork Architecture ("DNA") for building distributed application components. This strategy enables the Company's development teams to leverage COM+ and advanced services and components of the Windows 2000 operating system and Office 2000 productivity suite, while allowing each product family to continue to utilize the individual databases and development tools appropriate to the requirements of each product's target market. 5 6 This standardized application integration infrastructure is intended to enable all the Company's product families to enjoy the benefits of certain common components required in most markets. These common components include Front Office, Enterprise Business Intelligence, Advanced Planning and Scheduling and Electronic Commerce. The Front Office application suite, which has already been integrated with Platinum ERA and Avante, is scheduled to be integrated with other application suites, such as Vantage and Platinum for Windows to provide integrated customer service, sales and marketing functionality. See "Certain Considerations - Forward Looking Statements." Enterprise Business Intelligence components provide a common suite of applications for data navigation, ad-hoc analysis, strategic planning and on-line analytical processing ("OLAP") which all products can use to gain strategic insights into their business. Common components for electronic commerce will enable both business-to-business and business-to-consumer eCommerce applications for all products, whether through the Internet or other private networks. PRODUCTS The Company designs, develops, markets and supports enterprise software applications that provide organizations with technically advanced business solutions. The Company has seven primary software solutions, including Platinum ERA, Avante, Vantage, Vista, Clientele, Impresa and Platinum for Windows. The Platinum ERA product suite includes sales force automation, customer service and support, financial accounting, budgeting, distribution and light manufacturing functionality. Avante is an easy-to-use ERP solution for mid-sized manufacturers of discrete and highly engineered products. Vantage is a comprehensive, integrated software system specifically designed for MTO and mixed-mode manufacturers. Vista is a Windows-based desktop business management system specifically designed for the needs of small job shops and the MTO departments of larger companies. Clientele is an integrated customer relationship management ("CRM") solution that enables growing companies to easily track and share customer information to boost revenues and increase customer satisfaction. Impresa is an object-oriented, client-server software solution designed for the unique requirements of remanufacturers and MRO organizations. Platinum for Windows is a robust accounting solution designed for small- to medium-sized businesses operating in the LAN environment. In addition, the Company continues to provide support for the installed base of the Platinum for DOS financial accounting software product, which the Company discontinued marketing in 1998 after providing a Year 2000 compliant version, and certain other legacy products. Platinum ERA Platinum ERA (formerly named Platinum SQL), an integrated, customer-centric suite of client/server ERP software applications, is designed to meet the unique business needs of mid-sized companies worldwide (including divisions and subsidiaries of larger corporations). Platinum ERA is typically targeted to either a non-manufacturing or service-based business with revenues between $50 million and $500 million or a distributor/light manufacturer with the same revenues. These organizations require the functional depth and sophistication of traditional high-end enterprise business applications, but desire a rapid and cost-effective product implementation. The product is optimized for use with the Microsoft Windows NT operating system and the Microsoft SQL Server relational database. Platinum ERA minimizes the complexities of client/server installation by providing the user with installation wizards that help configure the Microsoft SQL Server database based upon information provided by the installer. As previously indicated, Platinum ERA was designed for the Microsoft Windows NT server platform and runs on Windows NT and Windows 95/98 client platforms. Platinum ERA supports various industry standard technologies including, Microsoft's Message Queue Server, Transaction Server and COM architecture along with eXtensible Markup Language ("XML") documents to improve componentization and support reliable integration between applications and distributed servers. Microsoft's Visual Basic for Applications ("VBA") is also included to enhance customization and allow easy integration with third party applications. In addition, Platinum ERA is a 32-bit client and server application that takes full advantage of the Microsoft SQL server for Windows NT. In order to fully exploit the capabilities of the client/server model of computing, the Company has optimized its Platinum ERA product line for the Microsoft SQL Server database. All major data manipulation functions are implemented in the native language of the database server, Transact SQL, and thereby are executed as "stored procedures" and/or "triggers" that are processed solely on the server. This implementation results in a substantial reduction in network traffic as compared to other client/server approaches, provides scaleable high performance, 6 7 and provides inherent portability of the RDBMS to a large number of server, hardware and operating system platforms without code change or conversion. Platinum ERA includes both front and back office applications. The front office applications include Customer Support, Sales and Marketing, Conductor, Connector, Help Desk, Smart Delivery Server and ERA.net Front Office. The back office includes financial, distribution and manufacturing suites of applications. The following back office financial applications are presently generally available in version 7.0: System Manager, General Ledger with FRx, Accounts Receivable, Accounts Payable, Cash Management, Multi-Currency Manager, Asset Management, Import Manager, Credit and Collections, Allocations, Budget Manager, Advanced Purchasing, Advanced Distribution, Manufacturing and Customization Workbench. Platinum ERA Distribution includes Purchasing and Distribution. Platinum ERA also includes a variety of Internet-enabled products to extend its functionality via the Internet, including an information access tool, ERA.net Decision Support, and a business-to-business electronic commerce solution, ERA.net Order. Version 7.0b of Platinum ERA is scheduled for release in March 2000, and is expected to include features such as: (i) a customization workbench based on PowerBuilder that will enable consultants, resellers and customers to customize the Platinum ERA Manufacturing and Distribution suites, (ii) enhanced integration between the front and back office components of Platinum ERA, (iii) comprehensive enterprise reporting enhancements, data warehousing, OLAP and advanced analytic solutions to support business decision making, and (iv) a new desktop that provides a common user interface and navigation tool for all Platinum ERA applications. See "Certain Considerations - Forward Looking Statements." The Platinum ERA Front Office suite enables small to mid-sized businesses to organize, maintain and share customer information to improve customer service and improve support and sales personnel productivity. Platinum ERA Front Office is also used for managing customer service and support operations, including internal help desks that support an organization's internal workforce (traditionally, the MIS department) as well as external customer support centers that support the businesses' customers, vendors, and suppliers. The Platinum ERA front office suite also includes a sales and marketing automation application which, when combined with the customer service and support application, enables organizations to share customer information from the initial contact throughout the duration of the customer life cycle. The sales and marketing application includes contact management, opportunity management, account management, territory management, a marketing encyclopedia, scheduling and calendaring functionality. The Platinum ERA Distribution and Platinum ERA Manufacturing suites are comprehensive, client/server applications designed to improve the efficiency and responsiveness of manufacturing and distribution operations. The manufacturing and distribution suites are fully integrated with the Platinum ERA Financial and Platinum ERA Front Office suites to ensure that repetitive, assemble-to-order or configure-to-order manufacturing operations are in sync with sales, distribution, purchasing and financial departments. This customer-centric focus of the Platinum ERA enables companies to respond quickly to customer demands and improve customer service. License fees for Platinum ERA vary depending upon the number of modules, servers and concurrent users. The following table shows revenues attributable to licenses of Platinum ERA including the predecessor of Platinum ERA, Platinum SQL and Clientele (in millions): Percentage of Revenue Total Revenue ------- ------------- Year ended June 30, 1997 $24.7 41% Year ended June 30, 1998 48.8 50% Six month ended December 31, 1998 28.7 45% Year ended December 31, 1999 44.8 17% e by Epicor In February, the Company announced "e by Epicor," the Company's next generation of eBusiness applications for the midmarket. e by Epicor represents the Company's strategy to empower and enable mid-market companies to take full advantage of the Internet to integrate their enterprise processes with the online operations of their customers, suppliers and partners. e by Epicor will incorporate Epicor's Platinum ERA suite, as well as the next generation of its Vantage solution, which combined, will evolve into a suite of six applications: Epicor eCommerce, Epicor eFrontOffice, Epicor eBackOffice, Epicor ePortals, Epicor eIntelligence and Epicor eIndustry. See "Certain 7 8 Considerations - Forward Looking Statements." The entire solution will be based on proven Microsoft technologies and platforms to provide an enterprise application framework. e by Epicor will incorporate financials, budgeting, distribution, manufacturing, sales and marketing and customer service solutions, into a common integrated suite of applications. The front office CRM application, combined with back office financial, distribution and manufacturing applications leverages advanced integration technologies that transform line of business applications into a complete enterprise solution. e by Epicor will leverage the Internet through advanced architecture, easy to use portals and eBusiness applications and is scalable as a business grows. In addition to advanced enterprise functionality, e by Epicor will support various industry standard technologies including, Microsoft's Message Queue Server, Commerce Server, Transaction Server and architecture along with XML documents to improve componentization and support reliable integration between applications on different servers at different sites. See "Certain Considerations - Forward Looking Statements." Microsoft VBA is provided to enhance customization and allow easy integration with third party applications. Manufacturing Applications The Company's dedicated manufacturing applications include Vista, Vantage, Avante, and Impresa,. All of these products were acquired as part of the merger with DataWorks in December 1998. Vista Vista is a Windows-based desktop business management system specifically designed for needs of small job shops and the MTO departments of larger businesses that have less developed infrastructures, lower MIS budgets, require a shorter deployment period and seek established, user-friendly products. Vista fully integrates 15 core business modules and features WebTracker, a business-to-business eCommerce application which allows companies to link their Vista database to the Internet to provide customers with online access to real-time account information, including all open orders, shipments, invoices, and payments. Vista incorporates the DesignWare feature which permits users to, among other things, define their own screens, add fields, change colors, hide fields, change grid sizes and drag choices from menus to the desktop. Vista is comprised of groups of modules that can be configured to support a customer's business processes. Vantage Vantage is an integrated, Windows-based ERP solution for MTO and job shop manufacturers that meets the dynamic product requirements of custom manufacturing operations. Vantage provides powerful tools for quoting, visual scheduling, job tracking and costing, as well as shop floor data collection. Vantage supports a mix of custom and standard part orders and multilevel assemblies and is comprised of 26 fully integrated business modules. Vantage is optimized for the rapid deployment, minimal support and price/performance requirements of custom and mixed-mode manufacturers in the $10 to $250 million revenue range. Vantage is comprised of groups of modules that can be differently configured to comprehensively support a customer's business processes. The following applications are presently generally available in Vantage version 4.0: Quote Management, Order Management, Product Configuration, Job Management, MRP, Advanced Bill of Materials, Visual Scheduling, Advanced Planning and Scheduling, VantagePoint Data Collection, Quality Assurance, Multi-Site Management, Field Service, Document Management, Inventory Management, Shipping\Receiving, Purchasing RFQ Management, Purchasing Management, Accounts Receivable, Accounts Payable, General Ledger, Currency Management, Payroll, ShopVision Executive Query, Enterprise Business Intelligence, Vantage.net, Vantage EDI, and Vantage Tools. Vantage also includes front office applications through its integration with Clientele. Avante Avante is a fully integrated ERP solution for mid-sized businesses with complex manufacturing requirements in eight principal industries: industrial equipment, computer/office equipment, consumer electronics, instrumentation and controls, medical/dental products, transportation/aerospace products, capital equipment and contract 8 9 manufacturers. Avante combines ease-of-use with advanced functionality and technology to provide manufacturers of discrete, complex products with an affordable and comprehensive business performance solution. Avante has the flexibility that discrete manufacturers in make-to-stock and mixed-mode environments require. Built on proven technologies, Avante is a cost-effective and rapidly deployable solution that has the built-in flexibility mid-market manufacturers need to meet the challenges of constant production process improvements, global sourcing and mass customization. Avante is comprised of groups of modules that comprehensively support a manufacturing company's business process. These modules provide and integrate feature-rich applications for front and back office, are built upon a common set of design and development standards and tools, and share a common database architecture. The following applications are presently generally available in Avante version 9.1.7: Accounts Payable , General Ledger, Accounts Receivable, Inventory Management, Asset Management, Job Order Tracking, Barcode Document Manager, Master Production Scheduling, Bills of Material, Material Requirements Planning, Capacity Requirements Planning, Multi-Plant Planning, Cost Accounting, Product Costing, Cash Management, Purchasing, Distribution Requirements Planning, Quality Management, Equipment Maintenance & Repair, Return Material Tracking, Estimating & Quotations, Sales Order Processing, Executive Information System, Shop Floor Control, Focus Factory Management, Work Centers & Routings, Expert Product Configurator, Service Suite, Front Office, Decision Support, Material Real Time Tracking , Barcode Shipping, Shop Floor Control/Time & Attendance, Advanced Planning and Scheduling, Human Resources, Payroll, Sales Analysis DataMart, and Operational Data Store. Avante is highly modular in nature and can be scaled from small to large configurations on a variety of platforms supporting the Microsoft NT and UNIX operating systems. This enterprise-wide system can be implemented in a variety of multi-currency, multi-company and multi-plant environments networked through client and host-based configurations. Impresa Impresa is an enterprise, client-server software solution designed for the unique business requirements of remanufacturers, maintenance, repair, and overhaul organizations and contract/project manufacturers. Impresa's fully integrated suite of software automates all areas of the enterprise, including MRO activities, product design, inventory control, procurement, quality control, manufacturing and finance. Impresa offers specialized information and tools to handle the project orientation, cyclical nature and variable workload of the MRO process. Impresa supports the three major disciplines of back office MRO management: Complex Assemblies, Structures and Components. In the aerospace and defense sector, Impresa is well-suited to the requirements of in-house and third-party remanufacturers of airframes, engines, components, landing gear and defense systems. It is also an excellent solution for enterprises remanufacturing other complex, engineered systems such as ships, power plants, and motor vehicles. Impresa incorporates Oracle's relational database and Developer/2000 development environment to provide a software solution suitable for single sites or global-scale enterprises. Impresa includes integrated manufacturing, MRO and financial applications. The current release includes the following modules: Average Costing, Labor, Bill of Material, Models and Options, Capacity Planning, Physical Inventory/Cycle Count, Customer Order Processing, Planning & Scheduling, Engineering Change Control, Product Costing, Inspection / MRB, Project Control, Inventory, Purchasing, Routings / Work Centers, Job Costing, Work in process Applications, Work Order Management, Accounts Payable, Financial Statement Generator, Accounts Receivable, Fixed Assets, General Ledger, Actual Costing, Lot Control / Serial Tracking, End Item Effectivity, Rough Cut Capacity Planning, Bar Code Printing, Multi-Currency, EDI API Interface, EDI Customer, EDI Vendor, Quality Assurance, Multi-Plant Applications, Time and Attendance, Finite Scheduling, Tool Management, Forecasting, Travel & Expense, IMPRESA Development Environment, IMPRESA Toolbox and System Control. 9 10 Clientele Clientele is an integrated customer relationship management solution designed to meet the needs of rapidly growing, mid-sized organizations. Clientele allows organizations to support and manage their most important asset - their customers. Clientele enables businesses to easily gather, track, organize and share customer information to boost revenues and increase customer service levels. Clientele combines employee applications such as opportunity management with customer applications, such as web-based order entry/inquiry to give companies and customers a true, up-to-the-minute picture of their relationship. Clientele spans the barriers between traditional Front Office and Back Office operations to provide customer service, support, help desk and sales force automation information. Clientele for Sales and Marketing empowers organizations to focus on the right opportunities while providing access to timely information. Clientele provides contact, lead, opportunity and account management in one package. Clientele for Customer Support manages the support needs of an organizations external customers and provides call management, product tracking, RMA tracking, call queuing/follow-up and problem resolution. Clientele for Help Desks provides detailed call tracking, asset/knowledge management, service requests, maintenance and user profile tracking and management. Clientele is designed to easily connect remote sites and laptop users to centralized information. Data can be synchronized and exchanged between sites, as well as between individual sites and a central database. ClienteleNet provides access for customers, partners and field representatives over the Internet via secure, web application. Platinum for Windows Platinum for Windows is a Windows-based client/server financial accounting software package for smaller businesses whose corporate computing environment consists of LANs comprised of personal computers. Platinum for Windows is the next generation of the Company's Platinum for DOS and Platinum Premier financial accounting applications. First introduced in June 1995, Platinum for Windows includes a Windows-based client that was designed around the interface standards of Microsoft Windows 95 to handle all user interaction and data maintenance. The Windows-based client interacts with an application server that runs postings, reports and utilities. Both the client and the server communicate with the LAN-based Pervasive SQL database. No database conversions are required to upgrade from the Platinum for DOS product to Platinum for Windows, ensuring a smooth upgrade path for Platinum for DOS users. The following modules of Platinum for Windows are presently generally available: Premier Ledger with FRx, Premier Consolidations, Premier Currency Translation, Premier Inter-Company Processing, Premier Budgeting, Foreign Currency Manager, System Manager, General Ledger, Bank Book, Accounts Receivable, Accounts Payable, Purchase Order, Sales Order, Inventory, Project Costing, Bank Book, Advanced Allocations, Budget Manager, and PFWeb Decision Support. The following table shows revenues attributable to licenses of the Platinum for Windows and Platinum for DOS applications (in millions): Percentage of Revenue Total Revenue ------- ------------- Year ended June 30, 1997 $7.4 12% Year ended June 30, 1998 8.8 9% Six months ended December 31, 1998 4.3 7% Year ended December 31, 1999 6.9 3% Other Products The Company also offers a line of integration kits and database products that support its Platinum for Windows and Platinum for DOS lines of software products and licenses these products to its Value Added Resellers ("VARs"), distributors, Authorized Consultants and end-users. The Company also serves as an original equipment manufacturer vendor or reseller for certain third-party software applications and pays royalties to various organizations in connection with the distribution of third-party software and the sale of products that incorporate third-party technologies. In addition, in certain cases, as part of turnkey solutions requested by a customer of 10 11 Avante, the Company resells complete third party computer hardware systems and related peripherals. The Company does not typically carry inventory of computer hardware. PROFESSIONAL SERVICES, TECHNICAL SUPPORT AND SOFTWARE MAINTENANCE The Company's professional services division provides consulting services to customers in the implementation of the Company's software products, as well as custom software development, education, training and other consulting and programming services. The professional services division functions in domestic and international markets. Professional services are generally provided on a time and materials basis, although it does occasionally enter into fixed fee arrangements or arrangements in which customer payments are tied to achievement of specific milestones. The Company believes its professional services, in conjunction with its current and planned product offerings, facilitates the licensing of technology to customers, stimulates demand for the Company's products and provides a key market differentiator over its competition. In 1999, the Company introduced the Up-Front Guarantee program, an implementation program in which the Company guarantees that the implementation costs will not exceed the price of the software. The program also guarantees a specific implementation timeframe and includes such services as planning, installation, project management, data migration, training and customization. The program is subject to specific terms and conditions and customer qualifications. The Company is committed to providing timely, high-quality technical support, which the Company believes is critical to maintaining customer satisfaction. The Company provides technical support by offering telephone support, e-mail support, facsimile support and communications through its World Wide Web site, http://www.epicor.com. Telephone support is available five days a week during normal business hours on a nearly worldwide basis. The Company also believes customer satisfaction can be maintained by ensuring that its VARs, Distributors and Authorized Consultants are able to effectively provide front-line technical support and assistance to end-users. The Company offers comprehensive training, telephone consultation and product support for its VARs, Distributors and Authorized Consultants. Training courses are held regularly in major cities worldwide. The Company offers its customers several software maintenance options, at varying annual fees. The Company's software maintenance programs are the customer's sole avenue for product updates and technical support. The annual maintenance fee is a percentage of the then current list price of the software purchased. Customers who subscribe for maintenance receive telephone and technical support, timely information on product enhancements and features and product updates and upgrades. Revenue from these software maintenance agreements is recognized ratably over the maintenance period. The Company provides a three-month warranty for the media on which its products are licensed and also provides a performance warranty on certain products ranging from three months to one year. The following table shows services revenues, which include consulting, education, training, maintenance and support services (in millions): Percentage of Revenue Total Revenue ------- ------------- Year ended June 30, 1997 $27.4 45% Year ended June 30, 1998 40.4 41% Six months ended December 31, 1998 30.4 48% Year ended December 31, 1999 157.8 61% MARKETING, SALES AND DISTRIBUTION The Company sells and markets its products and services worldwide, directly and through a network of VARs, distributors and software consultants who generally market the Company's products on a nonexclusive basis. The Company's products are sold to and used by a broad customer base, including manufacturing, distribution, hospitality, service organizations, computer/internet software, healthcare, government bodies, educational institutions and other users. The Company sells its Platinum for Windows product exclusively through VARs or distributors. The Company sells its Platinum ERA product through a hybrid channel that includes a direct sales force as well as a network of VARs. The Company sells its Clientele product through an internal telesales organization, a direct sales force and through a network of VARs. The Avante, Impresa and Vantage products are presently sold by a direct sales force in the United States and the Vista product is sold through a dedicated telesales 11 12 organization. The domestic sales organization includes sales representatives, pre-sale consultants, telemarketers and sales management personnel. The Company's field sales organization is organized by product group, either general services (covering Platinum ERA, Clientele and Platinum for Windows) or manufacturing products (covering Avante, Impresa, Vantage and Vista). The Company's network of VARs and Authorized Consultants are required to undergo extensive training and certification procedures provided by the Company on the use, installation and implementation of the Company's products as a condition of being authorized by the Company to sell its products. The Company's VARs include consulting groups and resellers, the majority of which provide computer installations, systems integration and consulting services to organizations. The Company's Authorized Consultants generally are not resellers of the Company's products, but professional firms who offer implementation services and product support to end-users. The Company believes that its Authorized Consultants are product influencers and are a valuable part of the Company's marketing, sales and distribution efforts. To support the Company's network of VARs and Authorized Consultants, the Company provides experienced personnel who are specifically tasked with their growth and support. These individuals are responsible for educating and training the distribution channel, disseminating information, implementing marketing programs and developing regional markets. In recognition of international opportunities for its software products, the Company has committed resources to an international sales and marketing effort. The Company has established subsidiaries in the United Kingdom, Ireland, Germany, France, Sweden, the Netherlands, Australia, New Zealand, Canada, Hong Kong, Singapore, and Argentina to further such sales and marketing efforts. The Company also has sale offices in these countries. The Company sells its products in Europe, including Russia, Latin and South America, Africa, Asia and the Middle East through third-party distributors and dealers. For further discussion, see "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Note 10 of Notes to Consolidated Financial Statements." The Company currently has sales offices located in the following metropolitan areas: o Atlanta o Boston o Chicago o Dallas o Detroit o Louisville o Irvine o San Jose o San Diego o Minneapolis o New York o Portland o San Francisco o St. Louis o Seattle o Tampa o Washington, D.C. o Buenos Aires, Argentina o Calgary and Toronto, Canada o Auckland, New Zealand o London, England o Paris, France o Munich, Germany o Leidschendam, Netherlands o Stockholm, Sweden o Sydney and Melbourne, o Taikoo Shing, Hong Kong o Singapore Australia
Products are generally shipped as orders are received or within 30 days thereof and, accordingly, the Company has historically operated with little or no backlog. Because of the generally short cycle between order and shipment, the Company does not believe that its backlog as of any particular date is meaningful. PRODUCT DEVELOPMENT AND QUALITY ASSURANCE The Company plans to continue addressing the needs of mid-market users of client/server enterprise software by continuing to develop high quality software products that feature advanced technologies. See "Certain Considerations Forward Looking Statements." The Company's technology strategy is to develop leading business application software using its own technologies combined with leading third-party, industry-standard technologies in database management systems, application development tools, operating systems, user interfaces and networks. The Company plans to use technologies from Microsoft Corporation whenever possible and plans to build technologies based on Microsoft Corporation's recommended technical architecture. In particular, the Company believes that it has been an industry leader in designing and developing products for operation on LANs/WANs and Microsoft's SQL Server database. The Company has also been a pioneer in the use of GUIs with integrated business application software. Currently, the Company pursues object-oriented methodologies that simplify the 12 13 development, maintenance and customization of its products. Accordingly, the Company's tools offer a high degree of customization for its products. The following table shows software development expenses before capitalization (in millions): Software Development Percentage of Expenses Total Revenues -------- -------------- Fiscal Year ended June 30, 1997 $11.9 20% Fiscal Year ended June 30, 1998 13.0 13% Six Months ended December 31, 1998 9.1 14% Fiscal Year ended December 31, 1999 35.8 14% The Company intends to continue to invest in product development. In particular, the Company plans to continue to (i) develop enhancements, including additional functions and features, for its Platinum ERA, Avante, Vantage, Vista, Clientele, Impresa and Platinum for Windows product lines, (ii) develop additional eBusiness and web-based applications supporting both business-to-business and business-to-consumer solutions, (iii) develop integration to vertical market trading exchanges, business communities or other eBusiness market places, (iv) continue to develop common application components such as eCommerce, supply chain management, advanced planning and scheduling, data warehousing and on-line analytical processing that can be integrated with all of the Company's solutions to extend their functionality and (V) develop and/or acquire new applications or modules that build upon the Company's business application strategy. See "Certain Considerations - Forward Looking Statements." In the first quarter of 2000, the Company released its technical strategy centered on the Microsoft DNA architecture to provide enhanced scalablility, flexibility and interoperability of its e by Epicor suite of applications. The Microsoft Windows DNA architecture consists of a multi-tiered, distributed application model and a comprehensive set of infrastructure and application services. This architecture provides tools, technologies and services to develop highly adaptive applications that support multiple client deployments including thin-client, browser-based and mobile clients. More importantly, this architecture provides the infrastructure to take business to the Internet by leveraging key Microsoft technologies such Microsoft Site Server Commerce Edition (Commerce Server), Microsoft COM ("Component Object Model") and expanded use of XML. Future versions of this architecture will support Microsoft BizTalk, an XML framework for application integration, electronic commerce and business interoperability. See "Certain Considerations - Forward Looking Statements." The Company translates and localizes certain of its products in Dublin, Ireland for sale in Europe. In addition, the Company has contracted with a third party to develop the necessary changes to translate and localize certain of its products for sale in Latin and South America. The computer software industry is characterized by rapid technological advances and changes in customer requirements. The Company's future success will depend upon its ability to enhance its current products and develop and introduce new products that keep pace with technological developments, respond to evolving customer requirements and continue to achieve market acceptance. In particular, the Company believes it must continue to respond quickly to users' needs for broad functionality and multi-platform support and to advances in hardware and operating systems, particularly in the areas of eBusiness and eCommerce. In the past, the Company has occasionally experienced delays in the introduction of new products and product enhancements. There can be no assurance that the Company will not experience significant delays in the introduction of new products or product enhancements in the future, which could have a material adverse effect on the Company's results of operations. The Company's future business is dependent on the execution of the strategy that is in place to target the client/server and eBusiness ERP software needs of mid-sized businesses. Any significant delay in shipping new modules or enhancements could have a material adverse effect on the Company's results of operations. In addition, there can be no assurance that new modules or product enhancements developed by the Company will adequately achieve market acceptance. COMPETITION The client/server enterprise business applications software industry is intensely competitive, rapidly changing and significantly affected by new product offerings and other market activities. A number of companies offer enterprise 13 14 application suites similar to the Company's product offerings that are targeted at the same markets. In addition, a number of companies offer a "best-of-breed," or point solution, similar or competitive to one product in the Company's enterprise business application suite. Some of the Company's existing competitors, as well as a number of new potential competitors, have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than the Company. There can be no assurance that competitors will not develop products that are superior to the Company's products or that achieve greater market acceptance. The Company's future success will depend significantly upon its ability to increase its share of its target markets and to license additional products and product enhancements to existing customers. There can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's results of operations. In addition, potential customers may increasingly demand that certain of the Company's ERP systems incorporate certain RDBMS software offered by competing products, but not currently supported by the Company products. The Company believes that it competes in two distinct enterprise business applications markets: emerging enterprises and mid-market enterprises. The Company defines emerging enterprises as rapidly growing businesses between $10 and $100 million in annual revenues. Businesses in this market require solutions that provide a more sophisticated level of functionality to effectively manage their business than can be found in "off-the-shelf" applications. These businesses require applications that are easy to implement, customize, manage and use as well as being affordable. Emerging enterprises generally lack dedicated information technology management resources and require solutions that do not require a high level of ongoing maintenance and support for their continued operation. Products in this market are principally sold through VARs and solution-oriented computer retail stores with the purchasing decision often influenced by professionals providing consulting services. The Company believes that purchases in this market are primarily influenced by functionality, performance, availability of a Windows-based solution, price and quality. The Company believes it competes favorably with respect to all of these factors. The Company competes primarily in the mid-market, which the Company defines as growing enterprises with revenues between $10 million and $500 million. Although the Company does not actively target larger, Fortune 1000 corporations with its enterprise business applications, it encounters competitors from this market segment who are increasingly targeting mid-sized enterprises. Businesses in this market require solutions that provide a more sophisticated level of functionality to effectively manage their business than can be found in "off-the-shelf" applications. These businesses require applications that are easy to implement, customize, manage and use as well as being affordable. Mid-sized enterprises also often lack dedicated information technology management resources and need solutions that do not require a high level of ongoing maintenance and support for their continued operation. The Company believes that purchases in this market are primarily influenced by functionality, performance, availability of a Windows-based solution, price, quality and customer service. The Company believes it competes favorably with respect to all of these factors. Increasingly, customers in this market segment are looking for Microsoft SQL Server based solutions and the Platinum ERA product line is well positioned to address this requirement. The Company believes it is one of only a few vendors in this market space that is exclusively dedicated to providing mid-market companies with comprehensive, integrated enterprise business applications. However, there are competitors from both the high-end and low-end who are attracted to the business opportunity represented by the mid-market and are beginning to offer complete or partial enterprise business applications to this market. In order to compete in the future, the Company must respond effectively to customer needs in the area of eBusiness and eCommerce and incorporate those technologies and application functionality that will meet the challenges posed by competitors' innovations. To accomplish this objective, the Company will be required to continue to invest in enhancing its current products and, when necessary, introduce new products to remain competitive. There can be no assurance that the Company will be able to continue to invest in such enhancements or new products, or introduce such enhancements or new products in a timely fashion or at all. The Company has a number of competitors that vary is size, target markets and overall product scope. The Company's primary competition comes from independent software vendors in three distinct groups, including (i) large, multinational ERP vendors that are increasingly targeting mid-sized businesses as their traditional market becomes saturated, including J.D. Edwards, Baan Co. NV, Oracle Corporation, PeopleSoft, Inc. and SAP AG, (ii) mid-range ERP vendors, including Lawson Corporation and Navision, and (iii) established "best-of-breed" or point solution providers that compete with only one portion of the Company's overall ERP suite, including Sage Software, Ltd., Great Plains Software, Inc., Scala, Inc., Systems Union, Ltd., Solomon Software, and Geac for financial accounting; MAPICS, Inc, Fourth Shift Corporation, QAD, Inc., Symix Systems, Inc. Lilly Software and 14 15 Macola Software, Inc. for manufacturing and distribution; and Onyx Software Corporation, Siebel Systems Inc., Pivotal Software, Inc. and Sales Logix Corporation for sales force automation and customer service and support. While these competitors offer dedicated applications, the Company believes that its broader product offerings and level of product integration provide a significant competitive advantage. INTELLECTUAL PROPERTY The Company regards its software as proprietary, in that title to and ownership of the software generally exclusively resides with the Company, and the Company attempts to protect it with a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and other industry standard methods for protecting ownership of its proprietary software. Despite these precautions, there can be no assurance unauthorized third-parties will not copy certain portions of the Company's products or reverse engineer or obtain and use information the Company regards as proprietary. Like many software firms, the Company presently does not rely on patent protection for its software products. While the Company's competitive position may be affected by its ability to protect its proprietary information, the Company believes that trademark and copyright protections are less significant to the Company's success than other factors such as the knowledge, ability and experience of the Company's personnel, name recognition and ongoing product development and support. There can be no assurance that the mechanisms used by the Company to protect its software will be adequate or that the Company's competitors will not independently develop software products that are substantially equivalent or superior to the Company's software products. The Company's software products are generally licensed to end-users on a "right to use" basis pursuant to a perpetual, non-exclusive license that generally restricts use of the software to the organization's internal business purposes and the end user is generally not permitted to sublicense or transfer the products. The Company licenses its Platinum for Windows, Clientele, Vista and Platinum ERA (when sold through VARs and distributors) product lines pursuant to "shrink wrap" licenses that are not signed by licensees and therefore may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Certain components of the Company's products are licensed from third parties. The source code for the Avante, Impresa and, in certain cases, Vantage products historically has been licensed to customers to enable them to customize the software to meet particular requirements. The standard customer license contains a confidentiality clause protecting the products. In the event of termination of the license agreement, the customer remains responsible for the confidentiality obligation and for any accrued and unpaid license fees. However, there can be no assurance that such customers will take adequate precautions to protect the source code or other confidential information. As the number of software products in the industry increases and the functionality of these products further overlap, the Company believes that software programs will increasingly become subject to infringement claims. There can be no assurance that third-parties will not assert infringement claims against the Company in the future with respect to current or future products or that any such assertion may not require the Company to enter into royalty arrangements or will result in costly litigation. The Company is not aware of any material infringement actions or claims. PRODUCTION The principal materials and components used in the Company's software products include computer media, including disks and CD-ROMs, and user manuals. For each product, the Company prepares a master software disk or CD-ROM, user manuals, which may be in printed form or distributed on a CD-ROM, and packaging. Substantially all of the Company's disk and CD-ROM duplication is performed by third-party vendors, using disks and blank CD-ROMs acquired from various sources. Outside sources print the Company's packaging and related materials to the Company's specifications. Portions of the completed packages are assembled by third-party vendors. To date, the Company has not experienced any material difficulties or delays in the manufacture and assembly of its products, or material returns due to product defects. 15 16 EMPLOYEES As of December 31, 1999, prior to the reduction in force of 130 employees associated with the 1999 restructuring, the Company had 1,623 full-time employees, including 283 in product development, 237 in support services, 473 in professional services, 284 in sales, 116 in marketing and 230 in administration. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Restructuring. The Company's employees are not represented by any collective bargaining organization, and the Company has never experienced a work stoppage. CERTAIN CONSIDERATIONS Forward Looking Statements. Certain statements in this Annual Report, including statements regarding the anticipated dates of new product releases and commercial shipments 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 16 - 22. Because of these and other factors that may affect the Company's operating results, past performance should not be considered an indicator of future performance and investors should not use historical results to anticipate results or trends in future periods. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including its Quarterly Reports on Form 10-Q to be filed by the Company in fiscal year 2000. Liquidity. The Company's cash and cash equivalents decreased from $52.7 million at December 31, 1998 to $30.4 million at December 31, 1999, principally due to the net loss incurred during the twelve months ended December 31, 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." There will be additional cash outlays in connection with severance payouts and facilities reductions and closures arising out of the 1999 restructuring. In addition, there will be further cash outlays in connection with prior restructurings and in connection with the 1998 DataWorks' merger. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources." The Company believes it has reduced operating expenses sufficiently in order to achieve positive cash flow during fiscal year 2000. See "Certain Considerations - Forward Looking Statements." If the Company is not successful in achieving targeted revenues, targeted expenses or a positive cash flow, the Company may be required to take further actions to align its operating expenses such as reductions in work force or other expense cutting measures. In addition, the Company is presently pursuing alternatives to raise additional cash, such as a bank line of credit and there can be no assurance that the Company will be able to secure additional funding or, if secured, on terms favorable to the Company. 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 any quarter with a concentration of such revenues recorded in the final 10 business days of that month. 16 17 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 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, the Company acquired DataWorks Corporation. The Company is still in the process of integrating certain operations of the two companies, particularly in the areas of operating and financial systems, business processes and products. Following the acquisition, a significant number of sales representatives and certain sales management employees resigned from the Company and there can be no assurance that other employees will not resign from the Company as the integration of the two companies continues. 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 and reseller channels Further, there is no assurance that the Company will retain and successfully integrate its key management, technical, sales and customer support personnel. 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. Difficulties in completing the integration of the Company and DataWorks will have a material adverse effect on the business, financial condition and results of operations of the Company. 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. The Company believes the Internet is transforming the way businesses operate and the software requirements of customers. Specifically, the Company believes that customers desire eBusiness software applications, or applications that enable a customer to engage in commerce or service over the Internet. As companies introduce products that embody new technologies or as new industry standards emerge, such as web-based applications or applications that support eBusiness, existing products may become obsolete and unmarketable. The Company's future business, operating results and financial condition will depend on its ability to: o Deliver eBusiness application software to facilitate eBusiness, including web enablement o Enhance its existing products o Develop new products that address the increasingly sophisticated needs of its customers, particularly in the areas of eBusiness and eCommerce 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, including the eBusiness arena. The Company cannot assure you that it will successfully develop and market new products on a timely basis, if at all. In developing new 17 18 products, the Company may encounter software errors or failures which 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. Fiscal 1999 Restructuring. As part of the fiscal 1999 restructuring, the Company reorganized its operations by placing the Avante, Platinum for Windows and Impresa products in their own separate divisions with profit and loss responsibility. Each division has its own general manager and a dedicated staff of developers, consultants and support representatives. Although the divisionalization into business units was intended to improve the value proposition for customers through focused development efforts, it is possible that such divisionalization will be perceived as a negative by the Company's current and potential Avante, Platinum for Windows and Impresa customers. There can be no assurance that this operating structure will not have a material adverse affect on the sales, maintenance renewals and results of operations for the above referenced product lines. Risks of Product Defects. Software products as complex as the ERP products offered by the Company may contain undetected errors or failures when first introduced or as new versions are released. Despite testing by the Company, and by current and potential customers, any of the Company's products may contain errors after their commercial shipment. Such errors may cause loss of or delay in market acceptance of the Company's products, damage to the Company's reputation, and increased service and warranty costs. The Company has been notified by some of its customers of errors in its ERA and Avante product lines. 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. 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 ERP applications, particularly in the areas of eBusiness and eCommerce. This strategy may involve acquisitions, investments in other businesses that offer complementary products, joint development agreements or 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 anticipated 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. The risks that the Company may encounter in licensing technology from third parties includes the following: o The difficulty in integrating the third party product with the Company's products o Undiscovered software errors in the third party product o Difficulties in selling the third party product o Difficulties in providing satisfactory support for the third party product o Potential infringement claims from the use of the third party product 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 18 19 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 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 channels. Dependence on Principal Products. The Company derives a substantial portion of its revenue from the sale of ERP application software 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 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. Change from Client/Server to Web-Based Environment. 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 changing from client/server to a web-based environment to facilitate eBusiness. If the Company fails to respond effectively to evolving requirements of this market, the Company's business, financial condition and results of operations will be materially and adversely affected. Uncertainty of Emerging Areas. The impact on the Company of emerging areas such as the Internet, on-line services, eBusiness applications and electronic commerce is uncertain. There can be no assurance that the Company will be able to provide a product offering that will satisfy new customer demands in these areas. In addition, standards for web-enabled and eBusiness applications, as well as other industry adopted and de facto standards for the Internet, are evolving 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 which are compatible with the Internet. The increased commercial use of the Internet will require substantial modification and customization of the Company's products and the introduction of new products. The Company may not be able to effectively compete in the Internet-related products and services market. Critical issues concerning the commercial use of the Internet, including security, demand, reliability, cost, ease of use, accessibility, quality of service and potential tax or other government regulation, remain unresolved and may 19 20 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 and financial condition could 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 quicker to new or emerging technologies and changes in customer requirements (such as eBusiness and Web-based application software), and to devote greater resources to the development, promotion and sale of their products than the Company. Furthermore, because there are relatively low barriers to entry in the software industry, the Company expects additional competition from other established and emerging companies. Such competitors may develop products and services that compete with those offered by the Company or may acquire companies, businesses and product lines that compete with the Company. It also is possible that competitors may create alliances and rapidly acquire significant market share. Accordingly, there can be no assurance that the Company's current or potential competitors will not develop or acquire products or services comparable or superior to those that the Company develops, combine or merge to form significant competitors, or adapt quicker than will the Company to new technologies, evolving industry trends and changing customer requirements. Competition could cause price reductions, reduced margins or loss of market share for the Company's products and services, any of which could materially and adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that the competitive pressures that the Company may face will not materially adversely affect its business, operating results and financial condition. Risks Associated With Year 2000 Compliance. 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 and following the transition to the year 2000 the Company has not encountered any material problems relating to Year 2000 issues, either with its products, internal systems or products and services of third parties. However, despite the Company's belief and prior testing and remediation efforts, there can be no assurance that the Company's software products contain all necessary date code changes or that errors will not be discovered in the future. If errors are discovered in the future regarding Year 2000 issues, it is possible that such errors could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Retention and Recruitment of Key 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. Risks Associated with International Sales. The following table shows international sales of the Company for the periods indicated (in millions): Percentage of Revenues Total Revenues -------- -------------- Fiscal Year ended June 30, 1997 $17.4 29% Fiscal Year ended June 30, 1998 27.5 28% Six Months ended December 31, 1998 17.1 27% Fiscal Year ended December 31, 1999 72.1 28% 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 continue expansion of its international operations. The expansion will require significant management attention and financial resources and could adversely affect the 20 21 Company's margins. To increase international sales in subsequent periods, the Company must establish additional foreign operations, hire additional personnel and recruit international resellers. 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: 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 o 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. 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. 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 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. Shares Eligible for Future Sale. As of March 13, 2000, the Company had 41,455,036 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 21 22 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 2. PROPERTIES The Company leases approximately 175,000 square feet of office space in Irvine, California located in six buildings. The majority of the leases expire in April 2004. The principal activities in Irvine, California are corporate headquarters, sales, marketing, development and customer support. In addition, the Company leases approximately 173,000 square feet of office space in San Diego, California. The lease expires in August 2009. Approximately 63,000 of the San Diego facility is currently sublet to two third parties. The Company also leases approximately 47,000 square feet of office space in Minneapolis, Minnesota. The lease expires in March 2002. The principal activities of San Diego and Minneapolis are sales, development, consulting and customer support. In addition to the locations listed above the Company leases other offices for sales, service, and administration in various locations worldwide. The Company plans to close non-strategic offices worldwide as well as consolidate and downsize other offices as deemed necessary as part of the 1999 restructuring. The closure and consolidation is expected to be substantially completed by the end of fiscal year 2000. After the facilities closures, the Company believes its facilities will be suitable for their respective uses and adequate for the Company's needs. ITEM 3. LEGAL PROCEEDINGS On December 24, 1998, Alyn Corporation filed a lawsuit against DataWorks Corporation in Superior Court for the State of California, County of San Diego, Alyn Corporation v. DataWorks, David Roper, Daniel Horter and Mike White. The lawsuit arises out of the licensing and sale of software by DataWorks to Alyn in December 1996. On March 22, 2000, the Company agreed to pay Alyn $1,800,000 to settle the lawsuit. The Company has accrued $1,800,000 for the liability arising out of the settlement. The Company will pay one-half of the settlement amount on March 24, 2000 and the other half on or before April 3, 2000. The Company is in discussions with its insurance carrier regarding coverage for this matter, but it has not been determined at the present time the amount of insurance coverage. In November 1998, a securities class action was filed in the United States District Court for the Southern District of California against DataWorks, certain of its current and former officers and directors, and the Company. The consolidated complaint is purportedly brought on behalf of purchasers of DataWorks stock between October 30, 1997 and July 16, 1998. The complaint alleges that defendants made material misrepresentations and omissions concerning DataWorks' acquisition of Interactive Group, Inc. and demand for DataWorks' products. The Company is a 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 is pending. The Company believes there is no merit to this lawsuit and intends to continue to defend against it vigorously. The Company is subject to miscellaneous other legal proceeding 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. 22 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the security holders during the fourth quarter of the fiscal year ended December 31, 1999. PART II ITEM 5. MARKET VALUE OF THE REGISTRANT'S COMMON STOCK The Company's Common Stock was traded on the over-the-counter market (The Nasdaq National Market System) under the symbol PSQL until May 3, 1999 and under the symbol EPIC subsequent to that date. The following table sets forth the range of high and low closing sale prices for the Company's Common Stock for the periods indicated. Fiscal Year ended June 30, 1997: High Low - -------------------------------- ---- --- 1st Quarter $11.13 $ 6.25 2nd Quarter 13.00 10.63 3rd Quarter 13.38 8.69 4th Quarter 11.00 7.00 Fiscal Year ended June 30, 1998: 1st Quarter 12.94 10.38 2nd Quarter 11.75 7.75 3rd Quarter 24.00 10.25 4th Quarter 24.38 17.50 Six Months ended December 31, 1998: Quarter ended September 30, 1998 27.00 8.00 Quarter ended December 31, 1998 12.81 5.75 Fiscal Year ended December 31, 1999: 1st Quarter 13.69 5.88 2nd Quarter 8.13 6.06 3rd Quarter 7.28 3.56 4th Quarter 6.78 4.09 There were approximately 1,500 security holders of record as of March 13, 2000. The Company has not paid dividends to date and intends to retain any earnings for use in the business for the foreseeable future. 23 24 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements of the Company and related notes included elsewhere in this Annual Report on Form 10-K. All amounts were derived from the Company's audited financial statements.
AS OF OR AS OF OR FOR THE FOR THE SIX FISCAL MONTHS YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, AS OF OR FOR THE FISCAL YEAR ENDED JUNE 30, ----------- ------------ ---------------------------------------------- 1999(1) 1998(1) 1998 1997 1996 1995 ----------- ------------ ---------- ---------- ----------- ------- Net revenues $ 258,176 $ 63,716 $98,488 $ 60,751 $ 45,670 $ 58,867 Income (loss) from operations(2) $ (51,094) $ (2,297) $11,481 $ (5,281) $(33,075) $ (5,828) Net income (loss) per share - diluted $ (1.25) $ (0.07) $ 0.45 $ (0.20) $ (1.83) $ (0.35) Diluted shares 40,605 28,373 29,716 21,758 18,128 16,196 Total assets $ 170,177 $ 212,277 $67,988 $ 43,156 $ 41,640 $ 66,691 Long-term obligations, less current portion $ 400 $ 1,116 $ 35 $ 277 $ 288 $ 16,035 Total stockholders' equity $ 71,806 $ 117,995 $34,910 $ 15,587 $ 16,199 $ 30,212
- --------------- (1) Effective December 31, 1998, the Company acquired DataWorks Corporation. The Company's Consolidated Balance Sheet data includes DataWorks' consolidated balance sheet as of December 31, 1998. The Company's Consolidated Statements of Operations do not include the revenues and expenses of the acquired business until the fiscal year ended December 31, 1999. See Note 3 of Notes to Consolidated Financial Statements. (2) For the year ended December 31, 1999, loss from operations included $9,975,000 in special charges related to the 1999 restructuring, $7,713,000 to write-down receivables, capitalized software costs and prepaid software licenses to their fair value, and a $1,800,000 litigation charge. For the years ended June 30, 1997 and June 30, 1996, loss from operations included $1,600,000 and $5,568,000 of charges for restructuring, respectively. See Notes 3 and 12 of Notes to Consolidated Financial Statements. 24 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company designs, develops, markets and supports enterprise software solutions for use by mid-sized companies as well as divisions and subsidiaries of larger corporations worldwide. The Company's business solutions are focused on the mid-market, which generally includes companies between $10 million and $500 million in annual revenues. Its product and services are sold worldwide by the Company's direct sales force, international subsidiaries and an authorized network of VARs, distributors and software consultants. 1999 Restructuring and Reorganization In December 1999, the Company underwent a restructuring as a result of reorganizing certain aspects of its business. Elements of the restructuring plan included refocusing development activities related to certain product lines on sales to current users of these products as opposed to new customers; termination of plans to market certain products in selected international markets; organizing certain product lines into divisions with profit and loss responsibilities; reducing the workforce; and closing or significantly reducing the size of various offices worldwide. In connection with this reorganization, the Company incurred various charges totaling $9,975,000 during the year ended December 31, 1999. These charges are comprised of the following: o $3,325,000 - To write-down impaired intangible assets from businesses acquired prior to 1999 to their estimated fair values based on projected future cash flows as a result of the shift in development and marketing focus of certain product lines. o $2,072,000 - To terminate 130 employees, or 11% of the workforce. Headcount reductions were made in all functional areas of the Company. o $4,756,000 - To close non-strategic offices or consolidate and downsize other office locations. Although the closure and consolidation efforts are expected to be substantially complete by the end of fiscal 2000, lease payments on vacated buildings will continue to be made until the respective leases expire. o $(178,000) - To reverse a portion of the December 31, 1998 DataWorks merger-related accrual as a result of lower than anticipated severance and facilities closing costs in the Sweden and Netherlands offices. 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 reorganization will provide approximately $5.0 million per quarter in cost savings in fiscal 2000. See "Business - Certain Considerations - Forward Looking Statements." The Company's accounting policies with respect to its restructuring are in accordance with the guidance provided in the consensus of the Emerging Issues Task Force (EITF) in connection with EITF Issues No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity ("EITF 94-3") and No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, as well as SFAS No 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of ("SFAS 121"). EITF 94-3 and EITF 95-3 generally require with respect to recognition of severance expenses, management approval of the restructuring plan, communication of benefit arrangements to employees, and the determination of the employees to be terminated. SFAS No. 121 generally requires that assets to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. In addition to the $9,975,000 special charge, the Company's reorganization resulted in or contributed to the recording of additional reserves and write-downs of certain other assets totaling $7.7 million. 25 26 The table below summarizes where these charges have been recognized on the statement of operations for the year ended December 31, 1999 (in thousands):
GENERAL AND ADMINISTRATIVE COST OF SALES EXPENSE TOTAL ------------- -------------- ----- Write-down of prepaid software licenses, capitalized software development costs, and other assets due to change in product focus and reorganization $2,713 $5,000 $7,713
The following table summarizes the 1999 activity in the Company's reserves associated with all acquisitions and restructurings (in thousands):
Balance at Write-Down Additional Balance at December 31, 1999 Special of Intangible Paid in Cash December 31, 1998 Charges Assets Capital Payments 1999 ------------ ------------ ------------- ---------- -------- ------------ Asset impairment $ -- $ 3,325 $(3,325) $ -- $ -- $ -- Separation costs for terminated employees and contractors 2,072 (67) 2,005 Facilities closing and downsizing 4,756 (44) 4,712 Remaining restructuring accrual from prior periods - 1998, 1997 and 1996 7,957 (6,772) 1,185 ------ ------- ------- ------- ------- ------ Accrued restructuring costs $7,957 $10,153 $(3,325) $ -- $(6,883) $7,902 ====== ======= ======= ======= ======= ====== Accrued severance and merger costs $7,133 $ (178) $ -- $(2,385) $ (910) $3,660 ====== ======= ======= ======= ======= ====== 1999 special charges $ 9,975 =======
The Company expects the 1999 separation costs for terminated employees to be paid out during the first quarter of fiscal 2000 and a substantial amount of the 1999 facilities restructuring costs to be paid out by the end of fiscal 2000. The Company believes that these obligations will be funded from existing cash reserves, working capital and operations. The remaining restructuring accrual from prior years - 1998, 1997 and 1996 is primarily due to lease commitments which the Company will continue to make payments until the respective leases expire. 1998 Acquisition of DataWorks On December 31, 1998, the Company acquired DataWorks Corporation, a publicly-held developer of manufacturing ERP solutions. As consideration for the acquisition, the Company issued 11,739,459 shares of common stock to former stockholders of DataWorks. The acquisition was accounted for as a purchase and, accordingly, the operating results and financial position of DataWorks are included in the Company's consolidated financial statements beginning on the effective date of the acquisition. See Note 3 of Notes to the Consolidated Financial Statements. 1998 and 1997 Restructurings In December 1998, the Company underwent a restructuring as a result of the DataWorks merger. This resulted in a restructuring charge of $6.0 million, which was recorded in the three months ended December 31, 1998. Such amount included approximately $5.5 million for severance and other extended benefit costs related to a reduction in force of approximately 25 people, and approximately $0.5 million in lease terminations and buyout costs related to the closure of duplicate facilities. In June 1997, the Company underwent a restructuring as a result of the acquisition of Clientele Software, Inc ("Clientele") which resulted in a restructuring charge of $1.6 million, which was recorded in the quarter ended June 30, 1997. Such amount included approximately $1.1 million for excess facility costs, as well as approximately $0.5 million for severance and other extended benefit costs. At December 31, 1999, $1,185,000 of restructuring accruals from prior periods remain and relate primarily to lease commitments on which the Company will continue to make payments until the respective leases expire. 26 27 1997 Acquisitions On June 30, 1997, the Company acquired Clientele, a privately held provider of help desk automation software based in Portland, Oregon. As consideration for the acquisition, the Company issued 887,636 shares of common stock in exchange for all of the outstanding shares of common stock of Clientele. In addition, the Company assumed all of the outstanding employee stock options of Clientele, which translated into stock options to acquire 212,356 shares of common stock of the Company. The transaction was accounted for as a pooling of interests, and accordingly, the accompanying consolidated financial statements have been restated to incorporate the financial position, results of operations and cash flows of Clientele for all periods presented. On November 14, 1997, the Company acquired FocusSoft, Inc. ("FocusSoft"), a privately held provider of enterprise resource planning and distribution software based in Louisville, Kentucky. As consideration for the acquisition, the Company issued 2,474,794 shares of common stock in exchange for all of the outstanding shares of common stock of FocusSoft. In addition, the Company assumed all of the employee stock options of FocusSoft, which translated into stock options to acquire 225,206 shares of common stock of the Company. The transaction was accounted for as a pooling of interests, and accordingly, the accompanying consolidated financial statements have been restated to incorporate the financial position, results of operations and cash flows of FocusSoft for all periods presented. 27 28 RESULTS OF OPERATIONS COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31, 1998 The following table summarizes certain aspects of Epicor's results of operations for the year ended December 31, 1999 compared to the year ended December 31, 1998 (in millions):
DECEMBER 31, --------------------- 1999 1998 $ CHANGE % CHANGE ------ ------ -------- -------- (unaudited) Revenues: License fees $ 94.3 $ 68.9 $ 25.4 36.9% Services 157.8 52.9 104.9 198.3% Other 6.1 0.6 5.5 916.7% ------ ------ ------ ----- Total revenues 258.2 122.4 135.8 111.1% Percentage of total revenues: License fees 36.5% 56.3% Services 61.1% 43.3% Other 2.4% 0.4% ------ ------ Total revenues 100.0% 100.0% Gross profit 135.6 85.0 50.6 59.5% Percentage of total revenues 52.5% 69.5% Sales and marketing 89.6 46.2 43.4 93.9% Percentage of total revenues 34.7% 37.8% Software development 29.7 11.9 17.8 149.6% Percentage of total revenues 11.5% 9.7% General and administrative 55.6 7.6 48.0 631.6% Percentage of total revenues 21.5% 6.2% Litigation charge 1.8 0.0 1.8 NA Percentage of total revenues 0.7% Special charges 10.0 6.0 4.0 66.7% Percentage of total revenues 3.9% 4.9% Provision for income taxes 0.8 0.2 0.6 300.0% Percentage of total revenues 0.3% 0.2%
Revenues The growth in license fee revenue for 1999 compared to 1998 was attributable to the acquisition of the DataWorks suite of software products, which consisted primarily of the Avante, Vantage, and Vista products. License fee revenue from DataWorks' products approximated $34.1 million for the twelve months ended December 31, 1999. An increase in license fee revenue from the Company's Clientele product also contributed to the growth. Although license fee revenue increased in absolute dollars, as a percentage of total revenues, license fee revenue decreased. The following factors impacted this change in revenue mix: o The acquisition of DataWorks, which historically reported lower license fees as a percentage of total revenues than the Company's previous revenue mix o Decreased Platinum ERA license fees attributable to increased competition and uncertainty in the marketplace over the integration of applications following the DataWorks acquisition as well as sales force attrition o Continued weak demand for enterprise resource planning software particularly attributable to uncertainty in the software market related to the Year 2000 problem 28 29 Services revenue consists of fees from software maintenance, consulting, custom programming and education services. The increase in services revenue both in absolute dollars and as a percentage of sales, for 1999 as compared with 1998, was primarily due to the DataWorks acquisition. Services revenue from DataWorks' customer base approximated $89.0 million for 1999. The remaining increase was generated primarily from the Company's Platinum ERA customer base and attributable to an overall increase in the installed base of end users and an increase in the number of revenue-generating professional service personnel. Other revenue consists primarily of third-party hardware sales. The increase in other revenue was attributable to the DataWorks acquisition which contributed $5.2 million to the increase for the year ended December 31, 1999. International revenues were $72.1 million and $32.2 million in the years ended December 31, 1999 and 1998, representing 28% and 26% of total revenue, respectively. The increase was primarily attributable to the DataWorks acquisition as DataWorks had a larger European sales force and marketing presence than the Company prior to the acquisition. With sales offices located in Europe, Australasia, and South America, the Company expects international revenues to remain a significant portion of total revenues. See "Business - Certain Considerations -Forward Looking Statements" and "Business - Certain Considerations - Risks Associated with International Sales." Gross Profit The absolute dollar increase in gross profit was attributable to the DataWorks acquisition. The reduction in gross profit percentage for 1999 as compared to 1998 was attributable to following: o A higher proportion of overall revenues from services which bear a lower gross margin than license fees o A charge totaling $1.8 million to write-down capitalized software costs and prepaid licenses o Customer concessions granted for product-related issues totaling $1.0 million o A higher cost structure underlying services revenue generated from the Avante customer base o Non-billable one-time activities including Year 2000 testing and quality assurance testing of future product releases Operating Expenses The operating expense increase in absolute dollars was primarily a result of the DataWorks acquisition. In connection with the acquisition, the Company broadened its qualified pool of general and administrative costs in order to report results of operations more consistent with the Company's actual operating infrastructure. Although this had little impact on total operating expenses as a percentage of total revenue, it did impact the relative percentage of each operating expense component to total operating expenses. Sales and Marketing - Sales and marketing ("S&M") expenses as a percentage of revenue decreased due to the refinement in cost alignments as discussed above. In addition to the acquisition of DataWorks, the following factors contributed to the increase in S&M expenses: o Higher compensation expense as a result of a modification in the sales commission plan designed to retain the direct sales force o Increased marketing expenses associated with the name change from Platinum Software Corporation to Epicor Software Corporation o Increased marketing expenses associated with improvements to the Company's customer prospect generation process Software development - Epicor continues to invest in the future by funding research and development projects particularly in the area of eBusiness applications. Research and development costs are expensed as incurred. However, certain costs are capitalized pursuant to Statement of Financial Accounting Standards No. 86, The Cost of Computer Software to be Sold, Leased, or otherwise Marketed. During 1999, costs were capitalized related to the localization and translation into different languages of the Platinum ERA product and certain applications of the 29 30 Platinum ERA 7.0a release. During 1998, costs were capitalized for the creation of translations into different languages and localizations for the Platinum SQL product, the serial lot tracking feature for the Platinum for Windows product, Year 2000 enhancements for the Platinum for DOS product and certain applications of the Platinum ERA 7.0a release. Amortization of these costs is included in cost of revenues and begins when the product is released for general availability. Amortization of capitalized software development costs commences when the products are available for general release to customers over the expected useful life of the respective products, which is generally three to five years. Gross software development expenditures were $35.8 million and $15.8 million or 14% and 13% of total revenues for 1999 and 1998, respectively, before capitalization of software costs of $6.0 million and $3.9 million. In addition to the acquisition of DataWorks, the following factors contributed to the increase in software development expenses: o Year 2000 remediation costs of $2.0 million o New product development including web-enablement and integration of existing back and front office products o Outside consulting costs related to enhancing software development methodologies and procedures General and administrative - General and administrative ("G&A") expenses increased in both absolute dollars and as a percentage of revenue due to the following: o The acquisition of DataWorks, which included a higher G&A cost infrastructure o The recent refinement in cost alignments as discussed above o An increased provision for doubtful accounts as a result of continued difficulty in collecting receivables assumed in the DataWorks merger, the change in product direction and certain product quality and customer service issues Litigation charge - On December 24, 1998, Alyn Corporation filed a lawsuit against DataWorks Corporation in Superior Court for the State of California, County of San Diego, Alyn Corporation v. DataWorks, David Roper, Daniel Horter and Mike White. The lawsuit arises out of the licensing and sale of software by DataWorks to Alyn in December 1996. On March 22, 2000, the Company agreed to pay Alyn $1.8 million to settle the lawsuit. The Company has accrued $1.8 million for the liability arising out of the settlement. The Company will pay one-half of the settlement amount on March 24, 2000 and the other half on or before April 3, 2000. The Company is in discussions with its insurance carrier regarding coverage for this matter, but it has not been determined at the present time the amount of insurance coverage. Provision for Income Taxes The Company recorded a provision of $0.8 million and $0.2 million during 1999 and 1998, respectively. The effective tax rate during these periods was 1.5 percent and 0 percent, respectively. During 1999, the effective tax rate was lower than the statutory federal income tax rate of 34 percent, primarily due to the inability to record benefits from current net operating losses. As of December 31, 1999, the Company had provided a valuation allowance of approximately $71.1 million because realization of the Company's net deferred tax asset is not more likely than not due to the historical losses incurred by the Company prior to 1999, and the uncertainty as to profits in the future. Any realization of the Company's net deferred tax asset will reduce the Company's effective tax rate in future periods. COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1998 TO THE SIX MONTHS ENDED DECEMBER 31, 1997 Revenues Revenues were approximately $39,915,000 and $63,716,000 in the six months ended December 31, 1997 and 1998, respectively, representing an increase of approximately 60 percent in the six months ended December 31, 1998. License fee revenues were approximately $21,747,000 and $33,047,000 for the six months ended December 31, 1997 and 1998, respectively, representing an increase of 52 percent in the six months ended December 31, 1998. License fee revenues for the Company's Platinum ERA product, formerly Platinum SQL (including Clientele) were approximately $18,076,000 and $28,720,000 for the six months ended December 31, 1997 and 1998, respectively, 30 31 representing an increase of 59 percent in the six months ended December 31, 1998. The increase in revenues was primarily attributable to an overall increase in personnel in the direct sales force for the Platinum ERA product; the Company's broader product offering following the FocusSoft acquisition; the release of the Clientele 3.0 product in February 1998, which included sales force functionality; the release of FocusSoft's version 5.0 product (now named Platinum ERA Advanced Distribution and Manufacturing) with enhanced distribution and manufacturing functionality; additional lead generation, telesales and marketing efforts and an increased effort to sell Platinum ERA internationally. License fee revenues for the Company's Platinum for Windows and Platinum for DOS products were approximately $3,671,000 and $4,327,000 for the six months ended December 31, 1997 and 1998, respectively, representing an increase of 18 percent in the six months ended December 31, 1998. The increase in revenues was primarily due to increased domestic demand created by the commercial availability of a complete suite of the Platinum for Windows modules. International license fee revenues increased from $5,924,000 in the six months ended December 31, 1997 to $10,530,000 in the six months ended December 31, 1998. The increase was due to an increased effort to sell Platinum ERA internationally. Services revenues, which include consulting, education, training, and maintenance and support services, increased 69 percent from $17,973,000 in the six months ended December 31, 1997 to $30,428,000 in the six months ended December 31, 1998. The increase was primarily attributable to the increase in installations. Also, the increase was attributable to an overall rise in the installed base of end-users of Platinum ERA and the increased effort to renew customers on maintenance contracts. The number of days sales outstanding was 76 days at June 30, 1998 as compared to 164 days at December 31, 1998. The increase in days sales outstanding was primarily attributable to the effect of purchase accounting treatment of the DataWorks Merger which provides for the inclusion of the accounts receivable of DataWorks, but not the revenue for DataWorks in the Company's financial statements. Excluding the receivables acquired from DataWorks, the number of days sales outstanding was 89 days at December 31, 1998. This increase was primarily due to giving longer payment terms on receivables due to competitive pressures. Gross Profit Gross profit increased 62 percent from $26,668,000 in the six months ended December 31, 1997 to $43,177,000 in the six months ended December 31, 1998 and increased as a percentage of revenues from 67 percent to 68 percent, respectively. The increase in gross profit was due to higher license revenues which have higher margins than services revenues. Operating Expenses Total operating expenses increased from $24,480,000 for the six months ended December 31, 1997 to $33,140,000 for the six months ended December 31, 1998, excluding the charge for the 1998 restructuring and the charge for in-process research and development costs associated with the DataWorks Merger. Total operating expenses as a percentage of revenues were 62 percent and 53 percent for the six months ended December 31, 1997 and December 31, 1998, respectively, excluding the charge for the 1998 restructuring and the charge for in-process research and development costs associated with the DataWorks merger. Included in operating expenses for the six months ended December 31, 1997 were approximately $800,000 in charges for the FocusSoft acquisition. The increase in dollar amount was primarily attributable to an overall increase in direct sales personnel as well as additional commissions for the sales personnel as their quota was exceeded because additional commissions were paid as if the six months ended December 31, 1998 was the last six months of the commission plan year. Sales and marketing costs were approximately $14,999,000 and $23,030,000 in the six months ended December 31, 1997 and 1998, respectively, or approximately 38 percent and 36 percent of total revenues. The increase in the dollar amount of sales and marketing expenses was primarily due to the increase in the direct sales force for the Platinum ERA product. Software development costs were approximately $6,326,000 and $9,125,000 in the six months ended December 31, 1997 and 1998, respectively, or approximately 16 percent and 14 percent of total revenues, before capitalization of software costs of approximately $251,000 and $2,912,000. Upon the release for general availability of the Company's software products, the Company amortizes capitalized software development costs over a 5-year period. 31 32 Such amortization is included in cost of revenues. The percentage of capitalized software development costs to total software development costs increased from 4 percent in the six months ended December 31, 1997 to 32 percent in the six months ended December 31, 1998. During the six months ended December 31, 1997, costs were capitalized for the creation of translation into different languages for the Platinum SQL and Platinum for Windows products and for the Job Cost module for Platinum for Windows and Job Shop and Engineer to Order for the Platinum SQL Advanced Distribution and Advanced Manufacturing applications. During the six months ended December 31, 1998, costs were capitalized for the creation of translations into different languages and localizations for the Platinum SQL product, the serial lot tracking feature for the Platinum for Windows product, Year 2000 enhancements for the Platinum for DOS product and certain applications of the Platinum ERA 7.0 release. General and administrative expenses were approximately $3,406,000 and $3,897,000 in the six months ended December 31, 1997 and 1998, respectively, or approximately 9 percent and 6 percent of total revenues. The increase in dollar amount was primarily attributable to management bonuses and employee profit sharing accrued during the six months ended December 31, 1998 due to the Company's improved operating results as compared to no bonuses or profit sharing accrued during the six months ended December 31, 1997 due to historical operating losses. Other Income Other income was approximately $1,139,000 and $421,000 in the six months ended December 31, 1997 and 1998, respectively. Other income for the six months ended December 31, 1998 primarily represented interest earned on the Company's cash and cash equivalents and short-term investments net of foreign currency losses realized. Other income for the six months ended December 31, 1997 primarily represented interest earned on the Company's cash and cash equivalents and short-term investments as well as an increase of $298,000 in the fair value of an investment. Provision for Income Taxes The Company recorded no provision for income taxes in the six months ended December 31, 1997 and a provision of $180,000 during the six months ended December 31, 1998. The effective tax rate during these periods was 0 percent for both periods. During 1998, the effective tax rate was lower than the statutory federal income tax rate of 35 percent, primarily due to the inability to record benefits from current net operating losses. During 1997, the Company's tax expense was offset by the reduction of valuation allowances recorded in prior years as a result of the Company's profitability in the current year. As of December 31, 1998, the Company had provided a valuation allowance of approximately $51,334,000 because realization of the Company's net deferred tax asset is not more likely than not due to the historical losses incurred by the Company prior to fiscal 1998, and the uncertainty as to profits in the future. Any realization of the Company's net deferred tax asset will reduce the Company's effective tax rate in future periods. COMPARISON OF THE YEAR ENDED JUNE 30, 1997 TO THE YEAR ENDED JUNE 30, 1998 Revenues Revenues were approximately $60,751,000 and $98,488,000 in fiscal years 1997 and 1998, respectively, representing an increase of approximately 62 percent in fiscal 1998. License fee revenues were approximately $32,123,000 and $57,577,000 for the years ended June 30, 1997 and 1998, respectively, representing an increase of 79 percent in fiscal 1998. License fee revenues for the Company's Platinum SQL product (including Clientele) were approximately $24,687,000 and $48,825,000 for the years ended June 30, 1997 and 1998, respectively, representing an increase of 98 percent in fiscal 1998. The increase in revenues was primarily attributable to an overall increase in personnel in the direct sales force for the Platinum SQL product; the Company's broader product offering following the FocusSoft acquisition; the release of the Clientele 3.0 product in February 1998, which included sales force functionality; the release of FocusSoft's version 5.0 product (now named Platinum SQL Advanced Distribution and Manufacturing) with enhanced distribution and manufacturing functionality; additional lead generation, telesales and marketing efforts and an increased effort to sell Platinum SQL internationally. License fee revenues for the Company's Platinum for Windows and Platinum for DOS products were approximately $7,436,000 and $8,752,000 for the years ended June 30, 1997 and 1998, 32 33 respectively, representing an increase of 18 percent in fiscal 1998. The increase in revenues was primarily due to increased domestic demand created by the commercial availability of a complete suite of the Platinum for Windows modules. International license fee revenues increased from $8,969,000 in fiscal 1997 to $18,713,000 in fiscal 1998. The increase was due to an increased effort to sell Platinum SQL internationally. Services revenues, which include consulting, education, training, and maintenance and support services, increased 47 percent from $27,420,000 in fiscal year 1997 to $40,406,000 in fiscal year 1998. The increase was primarily attributable to the increase in installations. Also, the increase was attributable to an overall rise in the installed base of end-users of Platinum SQL and the increased effort to renew customers on maintenance contracts. The number of days sales outstanding was 62 days at June 30, 1997 as compared to 76 at June 30, 1998. The increase in days sales outstanding was primarily attributable to increased international revenues, which generally have longer payment terms than domestic revenues. Gross Profit Gross profit increased 77 percent from $38,771,000 in fiscal year 1997 to $68,527,000 in fiscal year 1998 and increased as a percentage of revenues from 64 percent to 70 percent, respectively. The increases in gross profit and the gross profit percentage were due to higher license revenues as a percentage of total revenues, which have higher margins than services revenues. Operating Expenses Total operating expenses increased from $42,452,000 for fiscal year 1997 to $57,046,000 for fiscal year 1998, excluding the one time charge for the fiscal 1997 restructuring. Total operating expenses as a percentage of revenues were 70 percent and 58 percent for the years ended June 30, 1997 and 1998, respectively, excluding the one time charge for the fiscal 1997 restructuring. Included in operating expenses for the fiscal year ended June 30, 1998 were approximately $800,000 in one time charges for the FocusSoft acquisition. The increase in dollar amount was primarily attributable to an overall increase in direct sales personnel as well as additional commissions for the sales personnel as their quota was exceeded. Sales and marketing costs were approximately $26,024,000 and $38,177,000 in fiscal years 1997 and 1998, respectively, or approximately 43 percent and 39 percent of total revenues. The increase in the dollar amount of sales and marketing expenses was primarily due to the increase in the direct sales force for the Platinum SQL product. Software development costs were approximately $11,855,000 and $12,971,000 in fiscal years 1997 and 1998, respectively, or approximately 20 percent and 13 percent of total revenues, before capitalization of software costs of approximately $1,457,000 and $1,247,000. Upon the release for general availability of the Company's software products, the Company amortizes capitalized software development costs over a 5-year period. Such amortization is included in cost of revenues. The percentage of capitalized software development costs to total software development costs decreased from 12 percent in fiscal year 1997 to 10 percent in fiscal year 1998. During fiscal year 1997, costs were capitalized for Platinum SQL multi-currency functionality, as well as certain Platinum for Windows development costs for the Inventory and Order Entry modules and development of Platinum SQL Customization Workbench. During fiscal year 1998, costs were capitalized for the creation of translations into different languages and localizations for the Platinum SQL product, the Job Cost module for the Platinum for Windows product, Year 2000 enhancements for the Platinum for DOS product, Job Shop and Engineer to Order for the Platinum SQL Advanced Distribution and Manufacturing applications, Clientele 3.0 sales force automation functionality and certain applications of the Platinum SQL 4.2 release. General and administrative expenses were approximately $6,030,000 and $7,145,000 in fiscal years 1997 and 1998, respectively, or approximately 10 percent and 7 percent of total revenues. The increase was primarily attributable to management bonuses and employee profit sharing earned in fiscal 1998 due to the Company's improved operating results. 33 34 Other Income Other income was approximately $873,000 and $1,866,000 in fiscal years 1997 and 1998, respectively. Other income primarily represented interest earned on the Company's cash and cash equivalents and short-term investments as well as foreign currency gains realized in fiscal 1998. Provision for Income Taxes The Company recorded no provision for income taxes in fiscal years 1997 and 1998. The effective tax rate during these periods was 0 percent for both years. During 1997, the effective tax rate was lower than the statutory federal income tax rate of 35 percent, primarily due to the inability to record benefits from current net operating losses. During 1998, the Company's tax expense was offset by the reduction of valuation allowances recorded in prior years as a result of the Company's profitability in the current year. As of June 30, 1998, the Company had provided a valuation allowance of approximately $46,495,000 because realization of the Company's net deferred tax asset is not more likely than not due to the historical losses incurred by the Company prior to fiscal 1998, and the uncertainty as to profits in the future. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes Epicor's liquidity position and cash flows as of and for the year ended December 31, 1999 (in millions): AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 ------------------ Cash and cash equivalents $18.2 Short-term investments 12.2 Working Capital 16.7 Net cash used in operating activities (9.7) Net cash provided by investing activities 4.1 Net cash provided by financing activities 2.4 As of December 31 1999, the Company's principal sources of liquidity included cash and cash equivalents and short-term investments of $30.4 million. The Company used $9.7 million in cash for operating activities during the year ended December 31, 1999 primarily to fund its net loss. During the year ended December 31, 1999, the Company paid $6.8 million for severance costs, lease terminations and other costs related to the 1998, 1997 and 1996 restructurings, and paid $1.0 million for costs related to the 1998 DataWorks merger. At December 31, 1999, the Company has $7.9 million in cash obligations related to severance payments, lease terminations and other costs related to the restructuring plans and $3.7 million related to the 1998 DataWorks merger. The Company believes these obligations will be funded from existing cash reserves, working capital and operations. The Company's principal investing activities for the year ended December 31, 1999 included net sales of short-term investments and capital expenditures to accommodate facility reorganizations and the Company's expanding information technology infrastructure. In addition, cash used in investing activities included capitalized software costs primarily related to the localization and translation of the Platinum ERA product and certain applications of the Platinum ERA 7.0a release for foreign markets. Financing activities for fiscal 1999 included proceeds from the exercise of common stock options by employees and issuance of stock under the employee stock purchase program. The Company has taken steps to significantly reduce its operating expenses as part of its 1999 restructuring, including a reduction in work force and facilities consolidation and closure. If the Company is not successful in achieving targeted revenues, targeted expenses or positive cash flow, the Company may be required to take further actions to align its operating expenses such as reductions in work force or other cost cutting measures. 34 35 The Company experienced negative cash flow from operations in the year ended December 31, 1999 and expects this to continue through at least the first quarter of 2000. See "Business - Certain Considerations - Forward Looking Statements." Epicor is dependent upon its ability to generate cash flow from license fees and other operating revenues, through the collection of its outstanding accounts receivable to maintain current liquidity levels. However, 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. In order to ensure an additional source for working capital requirements for the next twelve months, the Company is pursuing alternative sources of funding, such as a bank line of credit. There can be no assurance that additional financing will be available on terms favorable to the Company, or at all. 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 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. In prior periods, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of its products, internal technology systems and noninternal technology systems. Following the transition to the year 2000, the Company has not encountered any material problems relating to Year 2000 issues, either with its products, internal systems or products of third parties. The Company expensed approximately $2.0 million during 1999 in connection with Year 2000 remediation costs, including costs of third party consultants and employee compensation related to year-end staffing requirements. The Company will continue to monitor the performance of its products, its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. Despite the Company's prior testing and remediation efforts, we cannot assure you that the Company's software products contain all necessary date code changes or that errors will not be discovered in the future. If errors are discovered in the future regarding Year 2000 problems, it is possible that such errors could have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company does not use derivative financial instruments in its investment portfolio. The Company places its investments with high credit quality issuers and, by policy, limits the amount of credit exposure to any one issuer. The Company is adverse 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. International revenues approximated 28% of the Company's total revenues for the twelve months ended December 31, 1999 and approximately 24% of the revenues are 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. 35 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements
Page ---- Financial Statements: Report of Independent Auditors.................................................................... 37 Consolidated Balance Sheets as of December 31, 1999, December 31, 1998 and June 30, 1998.......... 38 Consolidated Statements of Operations for the year ended December 31, 1999, the six months ended December 31, 1998 and the years ended June 30, 1998 and 1997......................... 39 Consolidated Statements of Stockholders' Equity for the year ended December 31, 1999, the six months ended December 31, 1998 and the years ended June 30, 1998 and 1997.................. 40 Consolidated Statements of Cash Flows for the year ended December 31, 1999, the six months ended December 31, 1998, and the years ended June 30, 1998 and 1997........................ 41 Notes to Consolidated Financial Statements........................................................ 42 Financial Statement Schedules: Report of Independent Auditors.................................................................... 62 Schedule II - Valuation and Qualifying Accounts................................................... 63
All other schedules are omitted because they are not required or the required information is included in the consolidated financial statements or notes thereto. 36 37 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Epicor Software Corporation We have audited the accompanying consolidated balance sheets of Epicor Software Corporation as of December 31, 1999 and 1998 and June 30, 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1999, the six months ended December 31, 1998, and each of the two years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Epicor Software Corporation as of December 31, 1999 and 1998 and June 30, 1998, and the consolidated results of its operations and its cash flows for the year ended December 31, 1999, the six months ended December 31, 1998 and each of the two years in the period ended June 30, 1998 in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Orange County, California February 2, 2000, except for Note 11, as to which the date is March 22, 2000 37 38 EPICOR SOFTWARE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
DECEMBER 31, ------------------------- JUNE 30, 1999 1998 1998 --------- --------- --------- ASSETS Current assets: Cash and cash equivalents $ 18,221 $ 22,175 $ 11,251 Short-term investments 12,154 30,511 11,528 Accounts receivable, net of allowance for doubtful accounts of $17,100, $11,795 and $5,159, respectively 75,263 84,789 28,929 Prepaid expenses and other 8,984 14,797 3,654 --------- --------- --------- Total current assets 114,622 152,272 55,362 Property and equipment, net 16,650 13,388 8,688 Software development costs, net of accumulated amortization of $6,903, $5,073 and $4,620, respectively 9,083 5,750 3,057 Intangible assets, net 25,668 32,878 -- Other assets 4,154 7,989 881 --------- --------- --------- $ 170,177 $ 212,277 $ 67,988 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 14,591 $ 16,490 $ 3,571 Accrued compensation and payroll taxes 15,986 15,932 7,244 Accrued restructuring costs 7,902 7,957 1,280 Accrued severance and merger costs 3,660 7,133 -- Accrued litigation charge 1,800 -- -- Other accrued expenses 15,015 8,809 4,922 Deferred revenue 39,017 36,845 16,026 --------- --------- --------- Total current liabilities 97,971 93,166 33,043 --------- --------- --------- Long-term liabilities 400 1,116 35 Commitments and Contingencies (Note 4) Stockholders' equity: Preferred stock, $.001 par value, 5,000,000 shares authorized: Series B preferred stock, 0, 0 and 1,439,750, respectively -- -- 7,962 Series C preferred stock, 95,305, 95,305 and 162,020, respectively 7,501 7,501 12,751 Common stock, $.001 par value: 60,000,000 shares authorized, 40,848,162, 40,196,832 and 26,142,715, respectively 41 40 26 Additional paid-in capital 237,536 232,042 134,550 Less: notes receivable from officers for issuance of restricted stock (11,269) (11,563) (11,563) Accumulated other comprehensive loss (1,590) (245) (1,092) Accumulated deficit (160,413) (109,780) (107,724) --------- --------- --------- Total stockholders' equity 71,806 117,995 34,910 --------- --------- --------- $ 170,177 $ 212,277 $ 67,988 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 38 39 EPICOR SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED JUNE 30, ------------ ------------ ----------------------- 1999 1998 1998 1997 ------------ ------------ -------- -------- Revenues: License fees $ 94,344 $ 33,047 $ 57,577 $ 32,123 Services 157,770 30,428 40,406 27,420 Other 6,062 241 505 1,208 --------- -------- -------- -------- Total revenues 258,176 63,716 98,488 60,751 Cost of revenues: Cost of license fees 18,015 4,808 5,990 5,159 Cost of services 101,349 15,731 23,971 16,821 Cost of other 3,238 -- -- -- --------- -------- -------- -------- Total cost of revenues 122,602 20,539 29,961 21,980 --------- -------- -------- -------- Gross profit 135,574 43,177 68,527 38,771 Operating expenses: Sales and marketing 89,592 23,030 38,177 26,024 Software development 29,722 6,213 11,724 10,398 General and administrative 55,579 3,897 7,145 6,030 Litigation 1,800 -- -- -- Special charges 9,975 5,950 -- 1,600 Charge for in-process research and development -- 6,384 -- -- Total operating expenses --------- -------- -------- -------- 186,668 45,474 57,046 44,052 --------- -------- -------- -------- Income (loss) from operations (51,094) (2,297) 11,481 (5,281) Other income (expense): Interest income 2,031 474 940 835 Interest expense (534) (90) (39) (71) Other (286) 37 965 109 --------- -------- -------- -------- Total other income (expense) 1,211 421 1,866 873 --------- -------- -------- -------- Income (loss) before income taxes (49,883) (1,876) 13,347 (4,408) Provision for income taxes 750 180 -- -- --------- -------- -------- -------- Net income (loss) $ (50,633) $ (2,056) $ 13,347 $ (4,408) ========= ======== ======== ======== Net income (loss) per share - basic $ (1.25) $ (0.07) $ 0.56 $ (0.20) Net income (loss) per share - diluted $ (1.25) $ (0.07) $ 0.45 $ (0.20) Common shares outstanding - basic 40,605 28,373 23,956 21,758 Common shares outstanding - diluted 40,605 28,373 29,716 21,758
The accompanying notes are an integral part of these consolidated financial statements. 39 40 EPICOR SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts)
Series B Series C Preferred Stock Preferred Stock Common Stock Additional -------------------------- --------------------- ------------------------ Paid-in Shares Amount Shares Amount Shares Amount Capital ------------ -------- ------ ------- ---------- ------- ----------- Balance, June 30, 1996 2,490,000 $13,770 231,598 $18,226 21,471,872 $21 $111,231 Net loss -- -- -- -- -- -- -- Foreign currency translation adjustments -- -- -- -- -- -- -- Subchapter S distributions to FocusSoft shareholders -- -- -- -- -- -- -- Conversion of Series B Preferred Stock (55,000) (304) -- -- 55,000 -- 304 Conversion of Series C Preferred Stock -- -- (17,795) (1,400) 177,950 -- 1,400 Issuance of Common Stock -- -- -- -- 6,600 -- -- Exercise of warrants -- -- -- -- 55,000 -- 399 Employee stock purchases -- -- -- -- 41,540 -- 237 Exercise of stock options -- -- -- -- 776,648 1 3,174 ---------- ------- -------- ------- ----------- ----- --------- Balance, June 30, 1997 2,435,000 13,466 213,803 16,826 22,584,610 22 116,745 Net income -- -- -- -- -- -- -- Foreign currency translation adjustments -- -- -- -- -- -- -- Subchapter S distributions to FocusSoft shareholders -- -- -- -- -- -- -- Conversion of Series B Preferred Stock (995,250) (5,504) -- -- 995,250 1 5,503 Conversion of Series C Preferred Stock -- -- (51,783) (4,075) 517,830 1 4,074 Employee stock purchases -- -- -- -- 45,968 -- 435 Exercise of stock options -- -- -- -- 1,999,057 2 7,793 ---------- ------- -------- ------- ----------- ----- --------- Balance, June 30, 1998 1,439,750 7,962 162,020 12,751 26,142,715 26 134,550 Net loss -- -- -- -- -- -- -- Common stock issued in connection with the DataWorks Merger -- -- -- -- 11,739,459 12 83,194 Foreign currency translation adjustments -- -- -- -- -- -- -- Conversion of Series B Preferred Stock (1,439,750) (7,962) -- -- 1,439,750 1 7,961 Conversion of Series C Preferred Stock -- -- (66,715) (5,250) 667,150 1 5,249 Employee stock purchases -- -- -- -- 52,731 -- 490 Exercise of stock options -- -- -- -- 155,027 -- 598 ---------- ------- -------- ------- ----------- ---- --------- Balance, December 31, 1998 -- -- 95,305 7,501 40,196,832 40 232,042 Net loss Foreign currency translation adjustments Proceeds from notes receivable from officer Acceleration of options in connection with severance agreements 2,385 Employee stock purchases 369,396 1 1,745 Exercise of stock options 281,934 1,364 ---------- ------- -------- ------- ----------- ----- --------- Balance, December 31, 1999 $ -- $ -- 95,305 $ 7,501 40,848,162 $ 41 $ 237,536 ========== ======== ======== ======= =========== ===== =========
Accumulated Notes Other Receivable Comprehensive Total Comprehensive from Income Accumulated Stockholders' Income Officers (Loss) Deficit Equity (Loss) ------------ ------------- ----------- ------------- ------------- Balance, June 30, 1996 $(11,563) $ 349 $(115,835) $16,199 $(33,262) ======== Net loss -- -- (4,408) (4,408) (4,408) Foreign currency translation adjustments -- 44 -- 44 44 Subchapter S distributions to FocusSoft shareholders -- -- (59) (59) Conversion of Series B Preferred Stock -- -- -- -- Conversion of Series C Preferred Stock -- -- -- -- Issuance of Common Stock -- -- -- -- Exercise of warrants -- -- -- 399 Employee stock purchases -- -- -- 237 Exercise of stock options -- -- -- 3,175 -------- -------- --------- -------- -------- Balance, June 30, 1997 (11,563) 393 (120,302) 15,587 $ (4,364) ======== Net income -- -- 13,347 13,347 13,347 Foreign currency translation adjustments -- (1,485) -- (1,485) (1,485) Subchapter S distributions to FocusSoft shareholders -- -- (769) (769) Conversion of Series B Preferred Stock -- -- -- -- Conversion of Series C Preferred Stock -- -- -- -- Employee stock purchases -- -- -- 435 Exercise of stock options -- -- -- 7,795 -------- -------- --------- -------- ------- Balance, June 30, 1998 (11,563) (1,092) (107,724) 34,910 $ 11,862 ======== Net loss -- -- (2,056) (2,056) (2,056) Common stock issued in connection with the DataWorks Merger -- -- -- 83,206 Foreign currency translation adjustments -- 847 -- 847 847 Conversion of Series B Preferred Stock -- -- -- -- Conversion of Series C Preferred Stock -- -- -- -- Employee stock purchases -- -- -- 490 Exercise of stock options -- -- -- 598 -------- ------ --------- -------- -------- Balance, December 31, 1998 (11,563) (245) (109,780) 117,995 $ (1,209) ======== Net loss (50,633) (50,633) (50,633) Foreign currency translation adjustments (1,345) (1,345) (1,345) Proceeds from notes receivable from officer 294 294 Acceleration of options in connection with severance agreements 2,385 Employee stock purchases 1,746 Exercise of stock options 1,364 -------- -------- --------- -------- -------- Balance, December 31, 1999 $(11,269) $(1,590) $(160,413) $ 71,806 $(51,978) ======== ======== ========= ======== ========
The accompanying notes are an integral part of these consolidated statements. 40 41 EPICOR SOFTWARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED JUNE 30, ------------ ------------ ------------------------ 1999 1998 1998 1997 ------------ ------------ -------- --------- OPERATING ACTIVITIES Net income (loss) $(50,633) $ (2,056) $ 13,347 $ (4,408) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 18,277 3,496 5,126 5,822 Provision for doubtful accounts receivable 14,412 1,263 1,561 2,095 Impairment of assets 4,291 -- -- -- Special charges 9,975 5,950 -- 1,600 Accrued litigation 1,800 -- -- -- Charge for in-process research and development -- 6,384 -- -- Changes in operating assets and liabilities: Accounts receivable (2,638) (4,909) (18,514) (6,197) Prepaid expenses and other current assets 3,113 (6,596) (1,146) 93 Accounts payable (3,561) 1,065 (1,181) 693 Accrued merger and restructuring (11,118) (727) (1,329) (912) Other accrued expenses 4,948 (29) 3,873 400 Deferred revenue 1,414 3,137 4,388 359 -------- -------- -------- -------- Net cash (used in) provided by operating activities (9,720) 6,978 6,125 (455) INVESTING ACTIVITIES Cash acquired in the DataWorks Merger -- 13,018 -- -- Capital expenditures (11,392) (3,670) (4,099) (3,035) Capitalized software development costs (6,032) (2,912) (1,247) (1,457) Purchase of short-term investments (20,970) (4,086) (13,500) (10,500) Sale of short-term investments 39,327 -- 11,514 11,056 Purchase of subsidiary (560) -- -- -- Other 3,735 (17) (242) 540 -------- -------- -------- -------- Net cash provided by (used in) investing activities 4,108 2,333 (7,574) (3,396) FINANCING ACTIVITIES Subchapter S distributions to FocusSoft shareholders -- -- (769) (59) Payments of long-term liabilities (716) -- -- -- Exercise of stock options and warrants 1,364 598 7,795 3,574 Employee stock purchases 1,746 490 435 237 Decrease in restricted cash -- -- -- 1,006 -------- -------- -------- -------- Net cash provided by financing activities 2,394 1,088 7,461 4,758 Effect of exchange rates on cash (736) 525 (1,485) 44 -------- -------- -------- -------- Net (decrease) increase in cash and cash equivalents (3,954) 10,924 4,527 951 Cash and cash equivalents at beginning of year 22,175 11,251 6,724 5,773 -------- -------- -------- -------- Cash and cash equivalents at end of year $ 18,221 $ 22,175 $ 11,251 $ 6,724 ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 534 $ 90 $ 39 $ 71 ======== ======== ======== ======== Income tax refund $ 1,012 $ -- $ -- $ -- ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 41 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES COMPANY OPERATIONS AND BASIS OF PRESENTATION Epicor Software Corporation, a Delaware corporation, and its subsidiaries design, develop, market and support a broad range of client/server enterprise resource planning software for use by businesses of all sizes worldwide. The Company also offers support, consulting and education in support of its customers' use of its software products. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from these estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. SHORT-TERM INVESTMENTS Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities that the Company has both the positive intent and ability to hold to maturity are carried at amortized cost. Debt securities that the Company does not have the positive intent and ability to hold to maturity are classified as available-for-sale and are carried at cost which approximates fair value. The Company classifies its short-term investments as available-for-sale securities and carries them at cost, which approximates fair market value. At December 31, 1999, short-term investments consisted of corporate debt securities and money market funds with interest rates ranging from 5.84 percent to 8.24 percent. Realized and unrealized holding gains and losses on securities classified as available-for-sale are not material. REVENUE RECOGNITION Provided that the Company believes collectibility of an amount to be recognized as a revenue is probable, revenue is recognized from licenses of software upon completion of contract execution, shipment of products, and performance by the Company of all of its significant contractual obligations. The Company also provides for the estimated cost of insignificant performance obligations at the time revenue is recognized. When a software license agreement obligates the Company to provide more than one software module, all license revenue under the agreement is deferred until all modules achieve general availability and are delivered, except when the license agreement contains a specific financial remedy in the event the unavailable module is not delivered. In such instance, revenue is deferred in the amount attributable to the specific financial remedy. When the arrangement with the customer includes multiple elements, revenues are allocated to the various elements based on their vendor specific objective evidence of fair value. The Company's customers may enter into maintenance agreements with the Company and such revenue is recognized ratably over the term of the agreement. Revenue from consulting services is recognized based on the terms of the specific agreement. Generally, revenue from time and material contracts is recognized as services are performed. Revenue from fixed fee contracts are recognized over the period of each engagement using primarily the percentage-of-completion 42 43 method using cost as incurred as the measure of progress towards completion. Provisions for contract adjustments and losses are recorded in the period such items are identified. Deferred revenue represents amounts billed in advance of services being performed. 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, Software Revenue Recognition " 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; such requirements are not expected to have a material effect on the Company's consolidated financial position, results of operations or cash flows. PROPERTY AND EQUIPMENT Equipment, furniture and fixtures are recorded at cost. The Company depreciates equipment, furniture and fixtures using the straight-line method over the estimated useful lives of the assets, generally three to seven years. Leasehold improvements are amortized over the lesser of their estimated useful life or term of the lease. LONG-LIVED ASSETS Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In 1999, the Company recorded an impairment charge of $3,325,000 (see Note 3) to write-down assets deemed impaired to their estimated fair value primarily based upon projected future cash flows. SOFTWARE DEVELOPMENT COSTS Software development costs incurred subsequent to the determination of technological feasibility and marketability of a software product are capitalized. Amortization of capitalized software development costs commences when the products are available for general release. Amortization is determined on a product by product basis using the greater of a ratio of current product revenues to projected current and future product revenues or an amount calculated using the straight-line method over the estimated economic life of the product, generally three to five years. In addition to in-house software development costs, the Company purchases certain software from third-party software providers and capitalizes such costs in software development costs. Amortization of software development costs is included in cost of license fees and totaled $1,964,000 for the year ended December 31, 1999, $453,000 for the six months ended December 31, 1998, and $1,128,000 and $2,131,000 for the years ended June 30, 1998 and 1997, respectively. INTANGIBLE ASSETS Intangible assets are amortized over the estimated economic life of the asset. Amortization of intangible assets is primarily included in cost of license fees and totaled $7,374,000 for the year ended December 31, 1999, and zero for the six months ended December 31, 1998, and the years ended June 30, 1998 and 1997, respectively. ADVERTISING COSTS The Company expenses production costs of advertising upon the first showing. Other advertising costs are expensed as incurred. Advertising expense totaled $3,936,000 for the year ended December 31, 1999, $771,000 for the six months ended December 31, 1998, and $1,034,000 and $1,490,000 for the years ended June 30, 1998 and 1997, respectively. 43 44 FOREIGN CURRENCY TRANSLATION The functional currency of the Company's foreign operations is the respective local country's currency. Assets and liabilities of the foreign operations are translated into U.S. dollars at the exchange rate at the balance sheet date, whereas revenues and expenses are translated into U.S. dollars at average exchange rates. Translation adjustments are included in accumulated other comprehensive loss. CONCENTRATION OF CREDIT RISKS The Company sells its products to VARs and other software distributors generally under credit terms ranging from 30 to 90 days. The Company also sells its products directly to end-users generally requiring a significant up-front payment and remaining credit terms of 30 to 90 days. The Company believes no significant concentrations of credit risk existed at December 31, 1999. Receivables from customers are generally unsecured. NET INCOME (LOSS) PER SHARE Basic net income per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. For the year ended December 31, 1999, the six months ended December 31, 1998 and the year ended June 30, 1997, employee stock options and preferred stock were not considered in calculating diluted net loss per common share as their effect would be anti-dilutive. As a result, during those periods the Company's basic and diluted net loss per common share are the same. The following table computes basic and diluted net income (loss) per share (in thousands, except per share amounts):
Six Months Year Ended Ended December 31, December 31, Year Ended June 30, ------------ ------------ ------------------------ 1999 1998 1998 1997 ------------ ------------ --------- -------- Numerator: Net income (loss) - numerator for basic and diluted net income (loss) per share $(50,633) $ (2,056) $ 13,347 $ (4,408) Denominator: Denominator for basic net income (loss) per share - weighted average shares 40,605 28,373 23,956 21,758 Effect of dilutive securities: Employee stock options -- -- 1,942 -- Preferred stock -- -- 3,818 -- -------- -------- -------- -------- Dilutive potential common shares -- -- 5,760 -- -------- -------- -------- -------- Denominator for diluted net income (loss) per share 40,605 28,373 29,716 21,758 ======== ======== ======== ======== Net income (loss) per share - basic $ (1.25) $ (0.07) $ (0.56) $ (0.20) Net income (loss) per share - diluted $ (1.25) $ (0.07) $ (0.45) $ (0.20)
RECLASSIFICATIONS Certain reclassifications have been made to December 31, 1998, and June 30, 1998 and 1997 amounts to conform with the current period presentation. 44 45 NOTE 2. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS The following summarizes the components of short-term investments as of December 31, 1999 and 1998 and June 30, 1998 (in thousands):
DECEMBER 31, -------------------- JUNE 30, 1999 1998 1998 ------- ------- -------- Corporate debt securities $12,154 $15,614 $11,528 Municipal bonds -- 14,897 -- ------- ------- ------- $12,154 $30,511 $11,528 ======= ======= =======
The following summarizes the components of property and equipment as of December 31, 1999 and 1998 and June 30, 1998, (in thousands):
DECEMBER 31, ----------------------- JUNE 30, 1999 1998 1998 -------- -------- -------- Computer equipment $ 26,405 $ 27,612 $ 22,222 Office furniture, fixtures and equipment and other 9,847 4,873 3,653 Leasehold improvements 7,491 3,852 2,719 -------- -------- -------- 43,743 36,337 28,594 Less accumulated depreciation and amortization (27,093) (22,949) (19,906) -------- -------- -------- $ 16,650 $ 13,388 $ 8,688 ======== ======== ========
The following summarizes the components of intangible assets as of December 31, 1999 and 1998 and June 30, 1998 (in thousands):
DECEMBER 31, ----------------------- JUNE 30, 1999 1998 1998 ------------ --------- -------- Acquired technology $ 19,710 $19,055 $ -- Customer base 8,730 8,710 -- Assembled workforce 1,570 4,113 -- Covenant not to compete 1,000 1,000 -- -------- ------- ---- 31,010 32,878 -- Accumulated amortization (5,342) -- -- -------- ------- ---- $ 25,668 $32,878 $ -- ======== ======= ====
NOTE 3. ACQUISITIONS AND RESTRUCTURINGS ACQUISITIONS On December 31, 1998, the Company acquired DataWorks Corporation, a publicly held developer and marketer of manufacturing enterprise resource planning software. As consideration for the acquisition, the Company issued 11,739,459 shares of common stock in exchange for all of the outstanding shares of DataWorks. In addition, each outstanding option or right to purchase DataWorks common stock under the DataWorks 1995 Equity Incentive Plan, the DataWorks 1995 Non-employee Directors Stock Option Plan, the Interactive Group, Inc. 1997 Nonstatutory Stock Option Plan, the Interactive 1995 Stock Option Plan and each other outstanding option or right to purchase DataWorks common stock was assumed by the Company. 45 46 The Merger was a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended, and was accounted for as a purchase for financial reporting purposes. The total purchase price and allocation among the tangible and intangible assets and liabilities acquired (including purchased in-process technology) is summarized as follows (in thousands): Total purchase price: Value of stock issued $ 83,522 Value of options assumed 376 Transaction costs 2,102 -------- $ 86,000 ======== Amortization period (years) -------------- Purchase price allocation: Tangible assets $ 97,091 Intangible assets: Developed and core technology 19,055 5 Customer base 8,710 7 Assembled workforce 4,113 4 In-process research and development 6,384 expensed Tangible liabilities (49,353) -------- $ 86,000 ======== The Company recorded a charge of $6,384,000 during the six months ended December 31, 1998 for purchased in-process research and development related to development projects that had not reached technological feasibility, had no alternative future use, and for which successful development was uncertain. The conclusion that each in-process development effort, or any material sub-component, had no alternative future use was reached in consultation with engineering personnel from both the Company and DataWorks. The operating results of DataWorks have not been included in the consolidated statement of operations until January 1, 1999 because the acquisition became effective on December 31, 1998. Had the acquisition taken place at the beginning of fiscal 1998, the unaudited pro forma results of operation for the year ended June 30, 1998 and the six months ended December 31, 1998 would have been as follows (in thousands, except per share data): SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1998 JUNE 30, 1998 ----------------- ------------- Net revenues $150,337 $264,616 Net income (loss) $(24,352) $ 10,732 Basic net income (loss) per share $ (0.61) $ 0.30 Diluted net income (loss) per share $ (0.61) $ 0.26 The pro forma results of operations give effect to certain adjustments, including amortization of purchased intangibles. In connection with the acquisition of DataWorks, Impresa, a division of DataWorks, was accounted for as an asset held for sale. On April 1, 1999, the Company discontinued attempts to actively sell the Impresa division and, accordingly, the results of operations of the division are included in the results of the Company's operations beginning April 1, 1999. On November 14, 1997, the Company acquired FocusSoft, Inc. ("FocusSoft"), a privately held provider of enterprise resource planning and distribution software based in Louisville, Kentucky. As consideration for the acquisition, the Company issued 2,474,794 shares of common stock in exchange for all of the outstanding shares of common stock of FocusSoft. In addition, the Company assumed all of the employee stock options of FocusSoft, which translated into stock options to acquire 225,206 shares of common stock of the Company. The transaction was accounted for as a pooling of interests, and accordingly, the accompanying consolidated financial statements have been restated to incorporate the financial position, results of operations and cash flows of FocusSoft for all periods presented. On June 30, 1997, the Company acquired Clientele Software, Inc. ("Clientele"), a privately held provider of help desk automation software based in Portland, Oregon. As consideration for the acquisition, the Company issued 887,636 shares of common stock in exchange for all of the outstanding shares of common stock of 46 47 Clientele. In addition, the Company assumed all of the outstanding employee stock options of Clientele, which translated into stock options to acquire 212,356 shares of common stock of the Company. The transaction was accounted for as a pooling of interests, and accordingly, the accompanying consolidated financial statements have been restated to incorporate the financial position, results of operations and cash flows of Clientele for all periods presented. RESTRUCTURINGS The Company's accounting policies with respect to its restructuring are in accordance with the guidance provided in the consensus of the Emerging Issues Task Force (EITF) in connection with EITF Issues No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity ("EITF 94-3") and No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, as well as SFAS No 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of ("SFAS 121"). EITF 94-3 and EITF 95-3 generally require with respect to recognition of severance expenses, management approval of the restructuring plan, communication of benefit arrangements to employees, and the determination of the employees to be terminated. SFAS No. 121 generally requires that assets to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. In December 1999, the Company underwent a restructuring as a result of reorganization of certain aspects of its business. Elements of the restructuring plan included refocusing development activities related to certain product lines on sales to current users of these products as opposed to new customers; termination of plans to market certain products in selected international markets; organizing certain product lines into divisions with profit and loss responsibilities; reducing the workforce; and closing or significantly reducing the size of various offices worldwide. In connection with this reorganization, the Company incurred various charges totaling $9,975,000 during the fourth quarter of fiscal year 1999. The Company expects the 1999 separation costs for terminated employees to be paid out during the first quarter of fiscal 2000 and a substantial amount of the 1999 facilities restructuring costs to be paid out by the end of fiscal 2000. In December 1998, the Company underwent a restructuring as a result of the DataWorks Merger. This resulted in a restructuring charge of $5,950,000, which was recorded during the three months ended December 31, 1998. Such amounts included approximately $5,500,000 for severance and extended benefit costs related to a reduction in force of approximately 25 people and approximately $450,000 in lease termination and buyout costs related to the closure of duplicate facilities. All severance amounts were paid in 1999. As part of the purchase accounting related to the DataWorks acquisition, $7,133,000 of severance and merger costs were accrued. Such amounts included approximately $3,500,000 for severance and extended benefit costs related to a reduction in force of approximately 150 people, approximately $2,100,000 in lease termination and buyout costs related to the closure of duplicate facilities, and $1,533,000 related to the settlement of certain third-party reseller agreements and other miscellaneous accruals. In June 1997, the Company underwent a restructuring as a result of the Clientele acquisition. This resulted in a restructuring charge of $1,600,000 recorded in the fourth quarter of fiscal year 1997. Such amount included approximately $1,100,000 for excess facility costs, as well as approximately $500,000 for severance and other extended benefit costs. At December 31, 1999, $1,185,000 of restructuring accruals from prior periods remain and relate primarily to lease commitments on which the Company will continue to make payments until the respective leases expire. 47 48 The following table summarizes the 1999 activity in the Company's reserves associated with all acquisitions and restructurings (in thousands):
BALANCE AT 1999 WRITE-DOWN ADDITIONAL BALANCE AT DECEMBER 31, SPECIAL OF INTANGIBLE PAID IN CASH DECEMBER 31, 1999 CHARGES ASSETS CAPITAL PAYMENTS 1999 ----------- ------- ------------- ---------- -------- ------------ Asset impairment $ -- $ 3,325 $(3,325) $ -- $ -- $ -- Separation costs for terminated employees and contractors 2,072 (67) 2,005 Facilities closing and downsizing 4,756 (44) 4,712 Remaining restructuring accrual from prior periods - 1998, 1997 and 1996 7,957 (6,772) 1,185 ------ ------- ------- ------- ------- ------ Accrued restructuring costs $7,957 $10,153 $(3,325) $ -- $(6,883) $7,902 ====== ======= ======= ======= ======== ====== Accrued severance and merger costs $7,133 $ (178) $ -- $(2,385) $ (910) $3,660 ====== ======= ======= ======= ======= ====== 1999 special charges $ 9,975 ========
NOTE 4. COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain of its operating facilities and equipment under operating leases with terms ranging up to 30 years. The following is a schedule by years of future minimum lease payments under operating leases and future noncancellable sublease income (in thousands): FUTURE NONCANCELLABLE NET FUTURE FUTURE MINIMUM SUBLEASE MINIMUM LEASE YEARS ENDED DECEMBER 31, LEASE PAYMENTS INCOME PAYMENTS - ------------------------ -------------- -------------- ------------- 2000 $10,070 $ 1,645 $ 8,425 2001 8,938 1,619 7,319 2002 7,591 1,440 6,151 2003 6,402 1,476 4,926 2004 and thereafter 32,008 1,358 30,650 ------- ------- ------- $65,009 $ 7,538 $57,471 ======= ======= ======= Rental expense under operating leases, net of sublease income, was $8,478,000 for the year ended December 31, 1999, $1,915,000 for the six month ended December 31, 1998, and $2,432,000 and $2,067,000 for the years ended June 30, 1998 and 1997, respectively. EMPLOYMENT AGREEMENTS The Company has entered into agreements that provide certain executive officers with compensation totaling six to 12 months base salary and bonus in the event the Company terminates the executive without cause. Those agreements also call for the acceleration of vesting of certain stock options and restricted stock. LITIGATION In November 1998, a securities class action was filed in the United States District Court for the Southern District of California against DataWorks, certain of its current and former officers and directors, and the Company. The consolidated complaint is purportedly brought on behalf of purchasers of DataWorks stock between October 30, 1997 and July 16, 1998. The complaint alleges that defendants made material misrepresentations and omissions concerning DataWorks' acquisition of Interactive Group, Inc. and demand for DataWorks' products. The Company is a 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 48 49 amended consolidated complaint is pending. The Company believes there is no merit to this lawsuit and intends to continue to defend against it vigorously. The Company is subject to miscellaneous legal proceedings in the normal course of business and other legal proceedings (see Note 11). 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. NOTE 5. INCOME TAXES The provision for income taxes for the year ended December 31, 1999, the six months ended December 31, 1998, and the years ended June 30, 1998 and 1999 is comprised of the following (in thousands):
SIX MONTHS YEAR ENDED ENDED YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, --------------------- 1999 1998 1998 1997 ------------ ------------ -------- ------ Current: Federal $ -- $ -- -- Foreign 750 180 -- -- State -- -- -- -- ---- ---- ---- --- 750 180 -- -- Deferred: Federal -- -- -- -- Foreign -- -- -- -- State -- -- -- -- ---- ---- ---- --- Total $750 $180 -- -- ==== ==== ==== ===
The income (loss) before income taxes between Federal and foreign jurisdictions for the year ended December 31, 1999, the six months ended December 31, 1998, and the years ended June 30, 1998 and 1997 are as follows (in thousands):
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED JUNE 30, ------------ ------------ --------------------------- 1999 1998 1998 1997 ------------ ------------ ------- -------- Federal $(27,673) $(1,772) $10,676 $(4,375) Foreign (22,210) (104) 2,671 (33) -------- ------- ------- ------- Total $(49,883) $(1,876) $13,347 $(4,408) ======== ======= ======= =======
The reported provision (benefit) for income taxes for the year ended December 31, 1999, the six months ended December 31, 1998 and for the years ended June 30, 1998 and 1997 differ from the amount computed by applying the statutory federal income tax rate of 34 percent to the consolidated income (loss) before income taxes as follows (in thousands):
SIX MONTHS YEAR ENDED ENDED YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ----------------------- 1999 1998 1998 1997 -------- ------------ ------- ------- Provision (benefit) computed at statutory rates $(16,960) $ (657) $ 4,708 $(1,659) Increase (reduction) resulting from: Effect of foreign operations 8,301 215 (908) 11 State taxes, net of federal benefit -- (185) 574 (414) In-process research and development write off -- 2,234 -- -- Valuation allowance 8,757 (1,453) (4,464) 2,674 Other 652 26 90 (612) -------- ------- ------- ------- Total $ 750 $ 180 $ -- $ -- ======== ======= ======= =======
49 50 The components of the Company's net deferred income tax asset (liability) as of December 31, 1999, December 31, 1998 and June 30, 1998 are as follows (in thousands):
DECEMBER 31, ------------------------- JUNE 30, 1999 1998 1998 -------- -------- -------- Net operating loss carry forwards $ 58,488 $ 45,350 $ 37,750 Allowance for doubtful accounts 4,349 3,917 1,330 Merger and acquisition costs, net -- 4,726 3,380 Research and development credits 4,855 4,715 2,720 Other accruals and reserves 6,082 4,660 1,820 Purchased research and development -- 1,013 -- Accrued restructuring costs 6,164 169 685 Depreciation 891 771 (410) Software capitalization, net (2,264) (779) (780) Purchased intangibles (7,506) (13,208) -- Valuation allowance (71,059) (51,334) (46,495) -------- -------- -------- Total $ -- $ -- $ -- ======== ======== ========
As of December 31, 1999, the Company had provided a valuation allowance of approximately $71,059,000 because due to the historical losses incurred by the Company during and prior to fiscal 1999, and the uncertainty as to profits in the future, management cannot conclude that realization of the Company's net deferred tax asset is more likely than not. The Company has federal, state and foreign net operating loss carry forwards as of December 31, 1999 of approximately $117,000,000, $62,000,000 and $41,000,000, respectively. The federal losses expire in the years 1999 through 2019. Included in the Company's net operating loss carry forwards are tax deductions relating to the exercise of non-qualified stock options totaling approximately $48,700,000. These losses are fully offset by the valuation allowance. Upon future realization of net operating losses, the Company's effective income tax rates will be reduced except to the extent the utilized losses reflect a deduction for the exercise of nonqualified stock options. The tax benefit from utilization of this portion of the total loss carry forward will be charged to stockholders' equity. In addition, the Company has approximately $3,500,000 of federal research and development credit carry forwards that expire in the years 2001 through 2012. Utilization of the federal and state net operating loss and research and development credit carry forwards could be limited in future years if the Company were to experience a greater than 50 percent change in ownership within a 3-year period as defined in section 382 of the United States Internal Revenue Code of 1986. NOTE 6. STOCK OPTION PLAN AND OTHER EMPLOYEE BENEFITS As of December 31, 1998, the Company had reserved a total of 9,125,000 shares of its Common Stock for issuances pursuant to incentive and nonqualified stock option and stock purchase rights that may be granted to officers, key employees, directors, consultants, and others with important business relationships with the Company under six stock plans. Additionally, as of December 31, 1998, the Company had assumed stock options to acquire 1,683,682 shares, 225,206 shares and 212,356 shares of the Company's common stock as a result of business combinations with DataWorks, FocusSoft and Clientele, respectively. The Company adopted a seventh stock plan effective February 4, 1999, whereby nonqualified stock options may be granted to employees, directors and consultants. The total number of shares that may be granted under this plan is 2,000,000. The Company adopted the 1999 merger transition nonstatutory stock option plan on February 4, 2000 under which nonstatutory stock options may be granted to employees and directors. The total shares that may be granted under this plan is 900,000. Additionally, effective July 1990, the Company adopted a profit sharing plan pursuant to Section 401 of the Internal Revenue Code. The Company has not made any contributions to the profit sharing plan as of 50 51 December 31, 1999. The Company also adopted an Employee Stock Purchase Plan in August 1992 authorizing the issuance of up to an aggregate of 450,000 shares of common stock to participating employees which permits employees to purchase common stock at a price equal to 85 percent of the fair market value at the beginning or end of a 6-month plan period. In April 1999, the authorized number of shares under the Employee Stock Purchase Plan was increased to 1,000,000. As of December 31, 1999, 682,445 shares have been sold under this plan. The following is a summary of common stock option activity for the respective periods:
Year Ended Six Months Ended December 31, December 31, Year Ended June 30, ---------------------- ------------------------ -------------------------------------------------- 1999 1998 1998 1997 ---------------------- ------------------------ ---------------------- ------------------------ Weighted Weighted Weighted Weighted Average Average Average Average Exercise Exercise Exercise Exercise Options Price Options Price Options Price Options Price ---------- -------- ----------- -------- ---------- ---------- ---------- -------- Outstanding, Beginning of period 7,133,089 $10.3917 3,337,562 $10.0597 3,765,837 $ 5.2839 $ 3,763,658 $5.8039 Granted 5,084,900 6.7296 5,114,960 15.5539 1,991,378 14.0630 3,771,877 5.4211 Exercised (281,934) 4.9691 (155,027) 3.8569 (1,999,057) 3.9693 (776,648) 3.8445 Expired or Canceled (2,079,219) 10.3466 (2,848,088) 20.4212 (420,596) 9.4058 (2,993,050) 6.4843 Options Assumed from DataWorks merger -- -- 1,683,682 11.9519 -- -- -- -- ---------- -------- ---------- -------- ---------- -------- ----------- ------- Outstanding, End of Period 9,856,836 $ 8.6607 7,133,089 $10.3917 3,337,562 $10.0597 $ 3,765,837 $5.2839 ========== ======== ========== ======== ========== ======== =========== ======= Options Exercisable 2,694,750 $ 9.7285 2,140,935 $ 9.6226 718,858 $ 5.7045 $ 2,008,293 $4.1165 ========== ======== ========== ======== ========== ======== =========== =======
The following table summarizes information about stock options outstanding at December 31, 1999:
OUTSTANDING EXERCISABLE ---------------------------------------------- ------------------------------- WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE --------------- ----------- ----------- -------------- ----------- -------------- $ 0.11 to 3.60 436,094 5.06 $ 3.0472 419,712 $ 0.6013 3.69 to 3.78 1,041,500 9.68 3.6893 -- -- 4.06 to 6.63 2,149,627 9.68 5.5534 155,627 6.0925 7.00 to 8.88 1,461,840 8.43 7.6333 501,731 7.9963 9.19 to 10.81 460,836 7.65 10.0683 232,927 9.9367 11.44 to 11.63 3,598,919 8.14 11.5251 1,061,435 11.5000 12.13 to 27.39 708,020 8.35 15.5814 323,318 16.7264 --------------- --------- ---- -------- --------- -------- $ 0.11 to 27.39 9,856,836 8.53 $ 8.6607 2,694,750 $ 9.7285 =============== ========= ==== ======== ========= ========
51 52 The Company complies with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting for options issued to employees. Accordingly, no compensation expense has been recognized for options issued to employees and stock issued under the stock purchase plan. Had compensation costs for the Company's stock option plans and stock purchase plan been determined based upon fair value at the grant date under these plans consistent with Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," the Company's net income (loss) and income (loss) per share would have been as follows (in thousands, except per share amounts):
Six Months Year Ended Ended Year Ended Year Ended December 31, December 31, June 30, June 30, 1999 1998 1998 1997 --------- ------------ ---------- ---------- Net income (loss) as reported $(50,633) $ (2,056) $13,347 $ (4,408) ======== ========= ======= ======== Net income (loss) - pro forma $(78,066) $(10,895) $ 6,753 $(11,426) ======== ========= ======= ======== Income (loss) per share as reported $ (1.25) $ (0.07) $ 0.45 $ (0.20) ======== ========= ======= ======== Income (loss) per share - pro forma $ (1.92) $ (0.38) $ 0.23 $ (0.53) ======== ========= ======= ========
The fair value of shares had been estimated using the Black-Scholes option pricing model with the following weighted average assumptions: STOCK PURCHASE OPTION PLANS PLAN ------------ -------- Expected life (years) 4.0 0.5 Risk-free interest rate 6.3% 4.65% Volatility 0.911 0.911 Dividend rate 0% 0% For options granted during the year ended December 31, 1999, the six months ended December 31, 1998, and the years ended June 30, 1998 and 1997, the weighted average fair value at date of grant was $4.5678, $13.5639, $10.5921 and $4.0667 per option, respectively. The weighted average fair value at date of grant for stock purchase shares during the year ended December 31, 1999, the six months ended December 31, 1998, and the years ended June 30, 1998 and June 30, 1997 was $3.3353, $6.0867, $5.798 and $3.007 per share, respectively. NOTE 7. COMMON STOCK As of December 31, 1999, the total number of shares of common stock reserved for future issuance under existing stock option plans and Series C Preferred Stock (see Note 8) is approximately 10,809,886. On March 9, 1994, the Board of Directors adopted a Shareholder Rights Plan (the Plan) which is intended to protect stockholders from unfair takeover practices. Under the Plan, each share of common stock carries a right to obtain additional stock according to terms provided in the Plan. The rights will not be exercisable or separable from the common stock until a third-party acquires at least 20 percent of the Company's then outstanding common stock or commences a tender offer for at least 20 percent of the Company's then outstanding common stock. In the event the Company is acquired in a merger or other business combination transaction which the Company is not the surviving corporation or 50 percent or more of its consolidated assets or earning power are sold or transferred, each right will entitle its holder to receive, at the then current exercise price, common stock of the acquiring company, having a market value equal to two times the exercise price of the right. If a person or entity were to acquire 20 percent or more of the outstanding shares of the Company's common stock, or if the Company is the surviving corporation in a merger and its common stock is not changed or exchanged, each right will entitle the holder to receive at the then current exercise price common stock having a market value equal to two times the exercise price of the right. Until a right is exercised, the holder of a right, as such, will have no rights as a stockholder of the Company, including, 52 53 without limitation, the rights to vote as a stockholder or receive dividends. The rights, which expire on March 9, 2004, may be redeemed by the Company at a price of $0.01 per right. RESTRICTED STOCK In February 1996, the Chief Executive Officer and Chairman of the Board purchased 2,000,000 shares of restricted stock at a purchase price of $3.50, the then fair market value of the Company's common stock. In payment of one-half of the purchase price, the Company executed a secured five-year promissory note in the principal amount of $3,500,000. The note bears simple interest at 6 percent per annum and is a full recourse promissory note. The Company retained a repurchase right with respect to the restricted stock. At December 31, 1999, the repurchase right lapsed with respect to all 2,000,000 shares. The Company also has loaned to the Chief Executive Officer and Chairman of the Board $3,500,000 pursuant to an unsecured 5-year full recourse promissory note, which bears interest at the rate of 6 percent per annum. This loan was used to fund the restricted stock purchase along with the secured note referenced above. In February 1996, one of the Company's former senior executive officers purchased 500,000 shares of restricted stock at a purchase price of $3.50, the then fair market value of the Company's common stock. In payment of one-half of the purchase price, the Company executed a secured 5-year promissory note in the principal amount of $875,000. The note bears simple interest at 6 percent per annum and is a full recourse promissory note. During the year ended December 31, 1999, approximately $294,000 was repaid on the promissory note. The Company retained a repurchase right with respect to the restricted stock. At December 31, 1999, the repurchase right lapsed with respect to 475,000 of the 500,000 shares. The Company also has loaned to this senior executive officer $875,000 pursuant to an unsecured 5-year full recourse promissory note, which bears interest at the rate of 6 percent per annum. This loan was used to fund the restricted stock purchase along with the secured note referenced above. In April 1996, one of the Company's senior executive officers purchased 450,000 shares of restricted stock at a purchase price of $6.25, the then fair market value of the Company's common stock. In payment of one-half of the purchase price, the Company executed a secured 5-year promissory note in the principal amount of $1,406,250. The note bears simple interest at 6 percent per annum and is a full recourse promissory note. At December 31, 1999, the repurchase right lapsed with respect to 445,000 of the 450,000 shares. The Company also has loaned to this senior executive officer $1,406,250 pursuant to an unsecured 5-year full recourse promissory note, which bears interest at 6 percent per annum. This loan was used to fund the restricted stock purchase along with the secured note referenced above. In April 1998, the Board of Directors forgave any and all interest on such notes. NOTE 8. PREFERRED STOCK The Company's Series C Preferred Stock is convertible into common shares of the Company on a ten-for-one basis at any time at the option of the holders. Such shares automatically convert into common stock of the Company 10 days after formal notification by the Company that the average consecutive 20-trading day closing stock price of the common stock has exceeded $25.00 per share. The holders of preferred stock are entitled to vote with holders of common stock on an as converted basis and have the right to cause the Company to register the sale of shares of common stock issuable upon conversion of the Series C Preferred Stock. NOTE 9. EMPLOYEE BENEFIT PLAN The Company has a 401(K) salary deferral plan ("Plan"), which is funded based on employee contributions. Terms of the Plan provide for the Company to make contributions to the Plan on behalf of each eligible employee (as defined) in an amount equal to 50% on the first four percent of the eligible employee's deferred compensation contribution (as defined). The Company's contributions to the Plan were approximately $820,000 for the year ended December 31, 1999 and $0 for the six months ended December 31, 1998 and for the years ended June 30, 1998 and 1997. Prior to January 1, 1999, the employer match was optional and at the Company's discretion. 53 54 NOTE 10. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one industry segment: the design, development, marketing and support of client/server enterprise resource planning applications software products. A summary of the Company's operations by geographic area is as follows (in thousands):
UNITED LATIN STATES AUSTRALASIA EUROPE CANADA AMERICA CONSOLIDATED --------- ----------- ------- -------- ------- ------------ Year Ended June 30, 1997: Net revenues $ 43,383 $ 7,993 $ 4,426 $ 3,957 $ 992 $ 60,751 ========= ======== ======== ======== ====== ========= Operating income (loss) (5,422) 388 (1,429) 190 992 (5,281) ========= ======== ======== ======== ====== ========= Identifiable assets 34,882 3,565 2,488 2,281 -- 43,156 ========= ======== ======== ======== ====== ========= Year Ended June 30, 1998: Net revenues $ 71,008 $ 9,560 $ 8,169 $ 7,232 $2,519 $ 98,488 ========= ======== ======== ======== ====== ========= Operating income (loss) 9,721 (1,818) 1,109 (50) 2,519 11,481 ========= ======== ======== ======== ====== ========= Identifiable assets 51,956 5,809 4,974 5,249 -- 67,988 ========= ======== ======== ======== ====== ========= Six Months Ended December 31, 1998: Net revenues $ 46,555 $ 5,528 $ 5,256 $ 4,864 $1,513 $ 63,716 ========= ======== ======== ======== ====== ========= Operating income (loss) (2,407) (1,366) (200) 163 1,513 (2,297) ========= ======== ======== ======== ====== ========= Identifiable assets 169,925 7,892 28,929 5,531 -- 212,277 ========= ======== ======== ======== ====== ========= Year Ended December 31, 1999: Net revenues $ 186,086 $ 11,661 $ 42,308 $ 12,545 $5,576 $ 258,176 ========= ======== ======== ======== ====== ========= Operating income (loss) (45,054) 236 (13,334) 6,192 866 (51,094) ========= ======== ======== ======== ====== ========= Identifiable assets 123,426 8,126 31,666 6,959 -- 170,177 ========= ======== ======== ======== ====== =========
NOTE 11. SUBSEQUENT EVENT On December 24, 1998, Alyn Corporation filed a lawsuit against DataWorks Corporation in Superior Court for the State of California, County of San Diego. The lawsuit arose out of the licensing and sale of software by DataWorks to Alyn Corporation in December 1996. On March 22, 2000, the Company agreed to pay Alyn $1,800,000 to settle the lawsuit. The Company will pay one-half of this amount by March 24, 2000 and the other half by April 3, 2000. The Company is seeking to recover the settlement amount from its insurance carrier. Because the Company cannot reasonably predict the recoverability from its insurance carrier, the Company has accrued in its December 31, 1999 financial statements $1,800,000 representing management's best estimate of its exposure for the settlement. 54 55 NOTE 12. SELECTED QUARTERLY INFORMATION (UNAUDITED) The following table sets forth selected unaudited quarterly information for the Company's last four fiscal quarters. The Company believes that all necessary adjustments (which, except as discussed below, consisted only of normal recurring adjustment) have been included in the amounts stated below to present fairly the results of such periods when read in conjunction with the annual financial statements and related notes (in thousands, except per share data):
FISCAL 1999 QUARTER ENDED -------------------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, ----------- ------------- -------- --------- Total revenues $ 62,710 $ 63,205 $66,156 $66,105 ======== ======== ======= ======= Operating income (loss) $(43,300) $ (9,754) $ 602 $ 1,358 ======== ======== ======= ======= Net income (loss) $(43,405) $ (9,698) $ 395 $ 2,075 ======== ======== ======= ======= Earnings per share - diluted $ (1.07) $ (0.24) $ 0.01 $ 0.05 ======== ======== ======= ======= Shares outstanding - diluted 41,935 40,703 41,731 41,935
In addition to the $9,975,000 special charge (see Note 3), significant to the results of operations are reserves and write-downs totaling $7,713,000 incurred during the fourth quarter of 1999. The table below summarizes where these charges have been recognized on the statement of operations for the year ended December 31, 1999 (in thousands):
GENERAL AND ADMINISTRATIVE COST OF SALES EXPENSE TOTAL ------------- -------------- ------ Write-down of prepaid software licenses, capitalized software development costs, and other assets due to change in product focus and reorganization $2,713 $5,000 $7,713
55 56 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required hereunder is incorporated by reference from the sections of the Company's Proxy Statement filed in connection with its April 27, 2000 Annual Meeting of Stockholders entitled "Nominees" and "Other Executive Officers." ITEM 11. EXECUTIVE COMPENSATION The information required hereunder is incorporated by reference from the sections of the Company's Proxy Statement filed in connection with its April 27, 2000 Annual Meeting of Stockholders entitled "Executive Compensation." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required hereunder is incorporated by reference from the sections of the Company's Proxy Statement filed in connection with its April 27, 2000 Annual Meeting of Stockholders entitled "Executive Compensation." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report on 10-K: 1. Financial Statements See Index to Consolidated Financial Statements at Item 8 on page 27 of this Report. 2. Financial Statements See Index to Consolidated Financial Statements at Item 8 on page 27 of this Report. 3. Exhibits INDEX TO EXHIBITS
Exhibit Number Description LOCATION - -------- ----------- -------- 2.1 Agreement and Plan of Reorganization and Merger dated as of June 27, (9) 1997 among the Company, CSI Acquisition Corp., Clientele Software, Inc., Dale E. Yocum, Pamela Yocum, William L. Mulert (Schedules not included pursuant to Rule 601(b)(2) of Reg. S-K) 2.2 Agreement and Plan of Reorganization dated as of November 4, 1997 by (11) and among the Company, FS Acquisition Corp., FocusSoft, Inc., John Lococo, Michael Zimmerman and Joseph Brumleve. (Schedules not included pursuant to Rule 601(b)(2) of Reg. S-K) 2.3 Agreement and Plan of Reorganization by and among the Company, Zoo (14) Acquisition Corp. and DataWorks Corporation, dated as of October 13, 1998, as amended as of October 30, 1998. (Schedules not included pursuant to Rule 601(b)(2) of Reg. S-K) 3.1 Second Restated Certificate of Incorporation of the Company. (1) 3.2 Certificate of Amendment to Second Restated Certificate of (10) Incorporation of the Company 3.3 Certificate of Amendment to Second Restated Certificate of (8) Incorporation 3.4 Amended and Restated Bylaws of the Company, as currently in effect. (8) 3.6 Specimen Certificate of Common Stock. (2) 4.1 Certificate of Designation of Rights, Preferences and Privileges of (4) Series A Junior Participating Preferred Stock 4.2 Certificate of Designation of Preferences of Series B Preferred Stock (5) 4.3 Certificate of Designation of Preferences of Series C Preferred Stock (6) 10.1* Platinum Software Corporation Incentive Stock Option, Nonqualified (2) Stock Option and Restricted Stock Purchase Plan - 1990 (the "1990 Plan"). 10.2* Form of Incentive Option Agreement pertaining to the 1990 Plan. (2)
56 57
Exhibit Number Description LOCATION - -------- ----------- -------- 10.3* Form of Nonqualified Stock Option Agreement pertaining to the 1990 (2) Plan. 10.4* Form of Restricted Share Agreement pertaining to the 1990 Plan. (2) 10.5 Form of Indemnification Agreement for Officers and Directors of the (2) Company. 10.6 Platinum Software Corporation Employee Stock Purchase Plan, as (2) amended. 10.10* 1993 Nonqualified Stock Option Plan (3) 10.11* Form of Nonqualified Stock Option Agreement pertaining to the 1993 (3) Nonqualified Stock Option Plan. 10.12* 1994 Incentive Stock Option, Non-qualified Stock Option and Restricted (5) Stock Purchase Plan. 10.13* Form of Non-qualified Stock Option Agreement pertaining to the 1994 (5) Plan. 10.28 Stock Purchase Agreement dated September 22, 1994 between the Company (6) and the Series B Preferred Stock Investors 10.29 Registration Rights Agreement dated September 22, 1994 between the (6) Company and the Series B Preferred Stock Investors 10.30 Amendment to Stock Purchase Agreement dated May 26, 1995 between the (6) Company and the Series C Preferred Stock Investors 10.31 Amendment to Registration Rights Agreement dated May 26, 1995 between (6) the Company and the Series C Preferred Stock Investors 10.33* Employment Offer letter with L. George Klaus dated February 7, 1996. (7) 10.34* Restricted Stock Purchase Agreement between the Company and L. George (7) Klaus dated as of February 7, 1996. 10.35* Employment Offer letter with William L. Pieser dated February 7, 1996. (7) 10.36* Restricted Stock Purchase Agreement between the Company and William L. (7) Pieser dated as of February 7, 1996. 10.42* Employment Offer letter with Ken Lally dated as of April 1, 1996. (7) 10.43* Restricted Stock Purchase Agreement between the Company and Ken Lally (7) dated as of April 10, 1996. 10.44* 1996 Nonqualified Stock Plan and Form of Nonqualified Option (12) Agreement. 10.45 Platinum Software Corporation Clientele Incentive Stock Plan. (12) 10.47* 1997 Nonqualified Stock Option Plan (13) 10.48* Amended and Restated 1998 Nonqualified Stock Option Plan (15) 10.49 Software Distribution License Agreement with FRx Software Corporation, (15) as amended to date 10.50* Executive Employment Agreement, effective as of October 13, 1998 between the Company and Stuart W. Clifton, as amended 10.51* Noncompetition Agreement, effective as of October 13, 1998 between the (16) Company and Stuart W. Clifton 10.52* DataWorks 1995 Equity Incentive Plan, as amended ("Equity Plan") (17) 10.53* Forms of Incentive Stock Option and Nonstatutory Stock Option under (17) the Equity Plan 10.54* DataWorks 1995 Non-Employee Directors Stock Option Plan, as amended (18) 10.55* Sublease Agreement dated November 22, 1991 between DataWorks and Titan (17) Corporation ("Sublease") 10.56 First Amendment to Sublease dated December 1, 1994 (17) 10.57 Lease Agreement dated January 16, 1997 between DataWorks and Whiop (19) Real Estate Limited Partnership 10.58* 1995 Stock Option Plan, as amended of Interactive (the "Interactive (20) Option Plan")
57 58
Exhibit Number Description LOCATION - -------- ----------- -------- 10.59 Form of Incentive Stock Option Plan under the Interactive Option Plan (21) 10.60 Warrant to purchase common stock by DataWorks to Cruttenden Roth (21) Incorporated 10.61 Lease between James S. Hekiman and William Finard, as Trustees of the (21) Burlington Woods Office Trust No. 11 under a declaration of trust dated September 10, 1980 and Interactive dated September 23, 1991 10.62* 1997 Nonstatutory Stock Plan of Interactive (22) 10.63 Single Tenant lease between ADI Research Partners, LP and DataWorks, (23) dated as of August 14, 1998 10.64 1999 Merger Transition Stock Option Plan and Form of Nonstatutory (24) Stock Option Agreement 10.65 Trademark License Agreement between the Company and Platinum (24) Technology, Inc. dated as of January 14, 1999 10.66 Value Added Reseller Agreement with Ardent Software (24) 10.67* 1999 Nonstatutory Stock Option Plan (25) 10.68 Bracknell Lease Agreement dated May 19, 1999 (26) 10.69* Employment Offer Letter with Richard L. Roll dated November 16, 1999 10.70* Nonstatutory Stock Option Agreement with Richard L. Roll dated November 16, 1999 10.71* Nonstatutory Stock Option Agreement with Richard L. Roll dated November 16, 1999 21.1 Subsidiaries of the Company 23.1 Consent of Ernst & Young LLP 24.1 Power of Attorney (included on the signature page of this Annual Report on Form 10-K) 27.1 Financial Data Schedule
- ------------ * Management contract or compensatory plan or arrangement. (1) Incorporated by reference to the referenced exhibit number to the Company's Registration Statement on Form S-1, Reg. No. 33-57294. (2) Incorporated by reference to the referenced exhibit number to the Company's Registration Statement on Form S-1, Reg. No. 33-51566. (3) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1993. (4) Incorporated by reference to the referenced exhibit to the Company's Registration Statement on Form 8-A, dated April 14, 1994. (5) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1994. (6) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1995. (7) Incorporated by reference to the referenced exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (8) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1996. (9) Incorporated by reference to the referenced exhibit to the Company's Current Report on Form 8-K dated June 30, 1997. (10) Incorporated by reference to the referenced exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996. (11) Incorporated by reference to the referenced exhibit to the Company's Current Report on Form 8-K dated November 14, 1997. (12) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1997. 58 59 (13) Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Reg. No. 333-41321. (14) Incorporated by reference to the referenced exhibit to the Company's Schedule 13D filed with the SEC on October 23, 1998, as amended. (15) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1998. (16) Incorporated by reference to Company's Registration Statement on Form S-4, Reg. No. 333-67577. (17) Incorporated by reference to the DataWorks Registration Statement on Form S B-2 (No. 33-97022LA) or amendments thereto. (18) Incorporated by reference to the referenced exhibit to the DataWorks Annual Report on Form 10-K for its fiscal year ended December 31, 1997. (19) Incorporated by reference to the referenced exhibit to the DataWorks Annual Report on Form 10-K for its fiscal year ended December 31, 1996. (20) Incorporated by reference to the referenced exhibit to the Interactive Group, Inc. Annual Report on Form 10-K for its fiscal year ended December 31, 1996. (21) Incorporated by reference to the Interactive Group, Inc. Registration Statement on Form S-1 (Reg. No. 33-90816). (22) Incorporated by reference to the referenced exhibit to the Interactive Group, Inc. Registration Statement on Form S-8 (Reg. No. 333-30259). (23) Incorporated by reference to the referenced exhibit to the Company's Transition Report on Form 10-K for the six months ended December 31, 1998. (24) Incorporated by reference to the referenced exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (25) Incorporated by reference to the referenced exhibit to the Company's Registration Statement on Form S-8, Registration No. 333-85105. (26) Incorporated by reference to the referenced exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. (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, "Other Events", the Company's results for the quarter ended March 31, 1999. In addition, the Company filed a current report on Form 8-K dated July 7, 1999 to report under Item 5, "Other Events" the Company's preliminary financial results for the quarter ended June 30, 1999. The Company also filed a current report on Form 8-K, dated July 29, 1999 to report under Item 5 "Other Events" the Company's financial results for the quarter ended June 30, 1999. The Company also filed a current report on Form 8-K dated October 21, 1999 to report under Item 5, "Other Events" the Company's financial results for the quarter ended September 30, 1999. In addition, the Company filed a current report on Form 8-K dated December 31, 1999 to report under Item 5, "Other Events" the Company's preliminary financial results for the quarter and year ended December 31, 1999 as well as a workforce reduction. 59 60 (c) Exhibits. The exhibits required by this Item are listed under Item 14(a). (d) Financial Statement Schedules The financial statement schedules required by this Item are listed under Item 14(a). The following trademarks may be mentioned in the foregoing Annual Report on Form 10-K: Platinum, Clientele, and SeQueL to Platinum. Clientele is a registered trademark of the Company. Platinum and SeQueL to Platinum are registered trademarks of PLATINUM technology International, inc. All other product names are trademarks or registered trademarks of their respective companies. 60 61 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Epicor Software Corporation We have audited the consolidated financial statements of Epicor Software Corporation as of December 31, 1999 and 1998 and June 30, 1998 and for the year ended December 31, 1999, the six months ended December 31, 1998, and for each of the two years in the period ended June 30, 1998, and have issued our report thereon dated February 2, 2000, except for Note 11, as to which the date is March 22, 2000. Our audits also included the financial statement schedule listed in Item 14(a) of this Annual Report on Form 10-K. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Orange County, California February 2, 2000, except for Note 11, as to which the date is March 22, 2000 61 62 EPICOR SOFTWARE CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands) ALLOWANCE FOR DOUBTFUL ACCOUNTS
BALANCE AT BALANCE BEGINNING OF PROVISION FOR AMOUNTS AT END YEAR BAD DEBT WRITTEN OFF OTHER OF YEAR ------------ ------------- ----------- ------- -------- For the Year Ended June 30, 1997 $ 9,123 $ 2,095 $(4,955) $ -- $ 6,263 ======= ======= ======= ======== ======= For the Year Ended June 30, 1998 $ 6,263 $ 1,561 $(2,665) $ -- $ 5,159 ======= ======= ======= ======== ======= For the Six Months Ended December 31, 1998 $ 5,159 $ 1,263 $(2,573) $ 7,946(A) $11,795 ======= ======= ======= ======== ======= For the Year Ended December 31, 1999 $11,795 $14,412 $(9,107) $ -- $17,100 ======= ======= ======= ======== =======
- --------------- (A) Amounts acquired from the DataWorks Merger. 62 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Irvine, State of California, on March 24, 2000. EPICOR SOFTWARE CORPORATION By: /s/ L. George Klaus ------------------------------- L. George Klaus Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY We, the undersigned directors and officers of Epicor Software Corporation, do hereby constitute and appoint L. George Klaus our true and lawful attorney and agent, with full power of substitution to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that said attorney and agent, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ L. George Klaus Chairman of the Board and Chief Executive March 24, 2000 - ------------------------------ Officer (Principal Executive Officer) L. George Klaus /s/ Lee Kim Vice President and Chief Financial Officer March 24, 2000 - ------------------------------ (Principal Financial and Accounting Officer) Lee Kim /s/ L. John Doerr Director March 24, 2000 - ------------------------------ L. John Doerr /s/ Arthur J. Marks Director March 24, 2000 - ------------------------------ Arthur J. Marks /s/ Donald R. Dixon Director March 24, 2000 - ------------------------------ Donald R. Dixon /s/ Thomas F. Kelly Director March 24, 2000 - ------------------------------ Thomas F. Kelly
63 64 EXHIBIT INDEX
Exhibit Number Description Location - -------- ----------- -------- 2.1 Agreement and Plan of Reorganization and Merger dated as of June 27, (9) 1997 among the Company, CSI Acquisition Corp., Clientele Software, Inc., Dale E. Yocum, Pamela Yocum, William L. Mulert (Schedules not included pursuant to Rule 601(b)(2) of Reg. S-K) 2.2 Agreement and Plan of Reorganization dated as of November 4, 1997 by (11) and among the Company, FS Acquisition Corp., FocusSoft, Inc., John Lococo, Michael Zimmerman and Joseph Brumleve. (Schedules not included pursuant to Rule 601(b)(2) of Reg. S-K) 2.3 Agreement and Plan of Reorganization by and among the Company, Zoo (14) Acquisition Corp. and DataWorks Corporation, dated as of October 13, 1998, as amended as of October 30, 1998. (Schedules not included pursuant to Rule 601(b)(2) of Reg. S-K) 3.1 Second Restated Certificate of Incorporation of the Company. (1) 3.2 Certificate of Amendment to Second Restated Certificate of (10) Incorporation of the Company 3.3 Certificate of Amendment to Second Restated Certificate of (8) Incorporation 3.4 Amended and Restated Bylaws of the Company, as currently in effect. (8) 3.6 Specimen Certificate of Common Stock. (2) 4.1 Certificate of Designation of Rights, Preferences and Privileges of (4) Series A Junior Participating Preferred Stock 4.2 Certificate of Designation of Preferences of Series B Preferred Stock (5) 4.3 Certificate of Designation of Preferences of Series C Preferred Stock (6) 10.1* Platinum Software Corporation Incentive Stock Option, Nonqualified (2) Stock Option and Restricted Stock Purchase Plan - 1990 (the "1990 Plan"). 10.2* Form of Incentive Option Agreement pertaining to the 1990 Plan. (2) 10.3* Form of Nonqualified Stock Option Agreement pertaining to the 1990 (2) Plan. 10.4* Form of Restricted Share Agreement pertaining to the 1990 Plan. (2) 10.5 Form of Indemnification Agreement for Officers and Directors of the (2) Company. 10.6 Platinum Software Corporation Employee Stock Purchase Plan, as (2) amended. 10.10* 1993 Nonqualified Stock Option Plan (3)
65
Exhibit Number Description Location - -------- ----------- -------- 10.11* Form of Nonqualified Stock Option Agreement pertaining to the 1993 (3) Nonqualified Stock Option Plan. 10.12* 1994 Incentive Stock Option, Non-qualified Stock Option and Restricted (5) Stock Purchase Plan. 10.13* Form of Non-qualified Stock Option Agreement pertaining to the 1994 (5) Plan. 10.28 Stock Purchase Agreement dated September 22, 1994 between the Company (6) and the Series B Preferred Stock Investors 10.29 Registration Rights Agreement dated September 22, 1994 between the (6) Company and the Series B Preferred Stock Investors 10.30 Amendment to Stock Purchase Agreement dated May 26, 1995 between the (6) Company and the Series C Preferred Stock Investors 10.31 Amendment to Registration Rights Agreement dated May 26, 1995 between (6) the Company and the Series C Preferred Stock Investors 10.33* Employment Offer letter with L. George Klaus dated February 7, 1996. (7) 10.34* Restricted Stock Purchase Agreement between the Company and L. George (7) Klaus dated as of February 7, 1996. 10.35* Employment Offer letter with William L. Pieser dated February 7, 1996. (7) 10.36* Restricted Stock Purchase Agreement between the Company and William L. (7) Pieser dated as of February 7, 1996. 10.42* Employment Offer letter with Ken Lally dated as of April 1, 1996. (7) 10.43* Restricted Stock Purchase Agreement between the Company and Ken Lally (7) dated as of April 10, 1996. 10.44* 1996 Nonqualified Stock Plan and Form of Nonqualified Option (12) Agreement. 10.45 Platinum Software Corporation Clientele Incentive Stock Plan. (12) 10.47* 1997 Nonqualified Stock Option Plan (13) 10.48* Amended and Restated 1998 Nonqualified Stock Option Plan (15) 10.49 Software Distribution License Agreement with FRx Software Corporation, (15) as amended to date 10.50* Executive Employment Agreement, effective as of October 13, 1998 between the Company and Stuart W. Clifton, as amended 10.51* Noncompetition Agreement, effective as of October 13, 1998 between the (16) Company and Stuart W. Clifton
66
Exhibit Number Description LOCATION - -------- ----------- -------- 10.52* DataWorks 1995 Equity Incentive Plan, as amended ("Equity Plan") (17) 10.53* Forms of Incentive Stock Option and Nonstatutory Stock Option under (17) the Equity Plan 10.54* DataWorks 1995 Non-Employee Directors Stock Option Plan, as amended (18) 10.55* Sublease Agreement dated November 22, 1991 between DataWorks and Titan (17) Corporation ("Sublease") 10.56 First Amendment to Sublease dated December 1, 1994 (17) 10.57 Lease Agreement dated January 16, 1997 between DataWorks and Whiop (19) Real Estate Limited Partnership 10.58* 1995 Stock Option Plan, as amended of Interactive (the "Interactive (20) Option Plan") 10.59 Form of Incentive Stock Option Plan under the Interactive Option Plan (21) 10.60 Warrant to purchase common stock by DataWorks to Cruttenden Roth (21) Incorporated 10.61 Lease between James S. Hekiman and William Finard, as Trustees of the (21) Burlington Woods Office Trust No. 11 under a declaration of trust dated September 10, 1980 and Interactive dated September 23, 1991 10.62* 1997 Nonstatutory Stock Plan of Interactive (22) 10.63 Single Tenant lease between ADI Research Partners, LP and DataWorks, (23) dated as of August 14, 1998 10.64 1999 Merger Transition Stock Option Plan and Form of Nonstatutory (24) Stock Option Agreement 10.65 Trademark License Agreement between the Company and Platinum (24) Technology, Inc. dated as of January 14, 1999 10.66 Value Added Reseller Agreement with Ardent Software (24) 10.67* 1999 Nonstatutory Stock Option Plan (25) 10.68 Bracknell Lease Agreement dated May 19, 1999 (26) 10.69* Employment Offer Letter with Richard L. Roll dated November 16, 1999 10.70* Nonstatutory Stock Option Agreement with Richard L. Roll dated November 16, 1999 10.71* Nonstatutory Stock Option Agreement with Richard L. Roll dated November 16, 1999 21.1 Subsidiaries of the Company 23.1 Consent of Ernst & Young LLP 24.1 Power of Attorney (included on the signature page of this Annual Report on Form 10-K) 27.1 Financial Data Schedule
67 - ------------ * Management contract or compensatory plan or arrangement. (1) Incorporated by reference to the referenced exhibit number to the Company's Registration Statement on Form S-1, Reg. No. 33-57294. (2) Incorporated by reference to the referenced exhibit number to the Company's Registration Statement on Form S-1, Reg. No. 33-51566. (3) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1993. (4) Incorporated by reference to the referenced exhibit to the Company's Registration Statement on Form 8-A, dated April 14, 1994. (5) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1994. (6) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1995. (7) Incorporated by reference to the referenced exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (8) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1996. (9) Incorporated by reference to the referenced exhibit to the Company's Current Report on Form 8-K dated June 30, 1997. (10) Incorporated by reference to the referenced exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996. (11) Incorporated by reference to the referenced exhibit to the Company's Current Report on Form 8-K dated November 14, 1997. (12) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1997. (13) Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Reg. No. 333-41321. (14) Incorporated by reference to the referenced exhibit to the Company's Schedule 13D filed with the SEC on October 23, 1998, as amended. (15) Incorporated by reference to the referenced exhibit to the Company's Annual Report on Form 10-K for the year ended June 30, 1998. (16) Incorporated by reference to Company's Registration Statement on Form S-4, Reg. No. 333-67577. (17) Incorporated by reference to the DataWorks Registration Statement on Form S B-2 (No. 33-97022LA) or amendments thereto. (18) Incorporated by reference to the referenced exhibit to the DataWorks Annual Report on Form 10-K for its fiscal year ended December 31, 1997. (19) Incorporated by reference to the referenced exhibit to the DataWorks Annual Report on Form 10-K for its fiscal year ended December 31, 1996. (20) Incorporated by reference to the referenced exhibit to the Interactive Group, Inc. Annual Report on Form 10-K for its fiscal year ended December 31, 1996. (21) Incorporated by reference to the Interactive Group, Inc. Registration Statement on Form S-1 (Reg. No. 33-90816). (22) Incorporated by reference to the referenced exhibit to the Interactive Group, Inc. Registration Statement on Form S-8 (Reg. No. 333-30259). (23) Incorporated by reference to the referenced exhibit to the Company's Transition Report on Form 10-K for the six months ended December 31, 1998. (24) Incorporated by reference to the referenced exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (25) Incorporated by reference to the referenced exhibit to the Company's Registration Statement on Form S-8, Registration No. 333-85105. (26) Incorporated by reference to the referenced exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. EX-10.50 2 MATERIAL CONTRACT 1 EXHIBIT 10.50 AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT This Amendment to Executive Employment Agreement ("Amendment") is made and entered into as of this 28th day of July, 1999 by and between Epicor Software Corporation, formerly known as Platinum Software Corporation ("Epicor") and Stuart W. Clifton ("Executive"). R E C I T A L S A. Executive, Epicor and DataWorks Corporation, a subsidiary of Epicor ("DataWorks") entered into an Executive Employment Agreement effective as of October 13, 1998 ("Employment Agreement"). B. Pursuant to the Employment Agreement, Executive is currently employed as the Vice Chairman of Epicor and is a member of the Board of Directors of Epicor. C. Executive and Epicor mutually desire that Executive cease being employed as Vice Chairman of Epicor and desire to amend the Employment Agreement as provided herein. NOW THEREFORE, in consideration of the above recitals, the mutual and covenants and conditions contained below, Epicor and Executive agree as follows: 1. TERMINATION OF EMPLOYMENT STATUS. Epicor and Executive mutually agree to terminate Executive's employment status as Vice Chairman of Epicor effective July 31, 1999 ("Termination Date"). In connection with such termination, Executive agrees to submit to Epicor a written resignation from the Board of Directors effective as of the Termination Date. Following the Termination Date Executive shall serve as a consultant to Epicor pursuant to the terms of Section 5.6 of the Employment Agreement and the Consulting Period shall be from the Termination Date until December 31, 2001. 2. IMPACT ON COMPENSATION AND BENEFITS. (a) Salary. During the remainder of calendar year 1999 and through the end of the Consulting Period, Executive shall receive the consulting fees specified in Section 5.6 (c) of the Employment Agreement (namely, an annualized rate of $450,000 per year, payable in installments on dates coinciding with salary payments made to Epicor's other executives). (b) Bonus. For calendar year 1999 (which is Epicor's fiscal year 1999), Executive shall be eligible to receive a bonus as described on Exhibit A to the Employment Agreement, if Epicor fulfills the revenue and net income targets which are consistent with those used with respect to Epicor's other executive officers. Epicor and Executive acknowledge that Epicor has changed its fiscal year since the execution of the Employment Agreement and that the bonus plan described on Exhibit A to the 2 Employment Agreement shall be amended in the same manner as the bonus plans for Epicor's other executive officers, including adjustments to the revenue and net income targets. For Epicor's fiscal 2000 and 2001 (calendar years 2000 and 2001) Epicor shall pay to Executive bonus consulting fees for each such fiscal year of Epicor in accordance with Exhibit A of the Employment Agreement (namely, Executive shall be entitled to the maximum amount of the "INCENTIVE at 100% of Target" without consideration of whether projected revenue and net income targets are actually met during the fiscal year). (c) Health Benefits. During the Consulting Period Epicor shall pay, pursuant to COBRA, or if COBRA coverage is not available, coverage that is COBRA comparable, all costs (excluding ExecuCare) associated with the continuation of coverage under Epicor's group health plans for the duration of the Consulting Period. This coverage shall provide for the same terms under which Executive's, Executive's spouse and Executive's dependents were covered immediately prior to the Termination Date. (d) Stock Options. The exercise period of all Epicor stock options (inclusive of those options brought forward at the time of the Epicor/DataWorks merger) held by Executive shall be extended to the extent necessary so that the period ends ninety (90) days after the last day of the Consulting Period. 3. EFFECT ON AGREEMENT. Except as provided herein, the terms and conditions of the Employment Agreement shall remain in full force and effect. All terms not defined in this Amendment shall have the meanings given to them in the Employment Agreement. IN WITNESS WHEREOF, the undersigned parties have executed this Amendment as of the dates indicated below. Epicor Software Corporation By: ------------------------- --------------------------------- Stuart W. Clifton Its: ------------------------ Date: Date: ------------------------ --------------------------- 2 EX-10.69 3 MATERIAL CONTRACT 1 EXHIBIT 10.69 November 16, 1999 Mr. Richard L. Roll 15 Celano Laguna Niguel, California 92677 Re: Offer of Employment Dear Rick: I am happy to extend you the following offer of employment at Epicor Software Corporation (the "Company"). 1. Title. Your position will be President and Chief Operating Officer and you will report to the Chief Executive Officer of the Company. You will be headquartered in the Company's Irvine, California offices. 2. Base Salary. Your base salary will be $400,000 per year paid semi-monthly in accordance with the Company's normal payroll policies and subject to standard withholding. 3. Annual Bonus. You will receive an annual target bonus of $150,000 on a fiscal year basis. The bonus will be based on the Company fulfilling specified revenue and net income targets which are consistent with the targets for the Company's other executive officers. The Company's fiscal year is the calendar year and your bonus plan will begin for fiscal 2000. Attached as Exhibit A is a sample management bonus plan agreement. The Company will document your bonus plan by entering a similar agreement at such time as bonus plan agreements are entered into with other executives. For fiscal 1999, you will receive a bonus of up to $150,000 based on the same revenue and net income targets applicable to other executives for fiscal 1999. The bonus will be paid (if the targets are fulfilled) when other similarly situated executives are paid. The bonus will be prorated as follows: $150,000 multiplied by a fraction, the numerator of which is the number of days you were employed in fiscal 1999, and the denominator of which is 365. 4. Stock Option. The Company will grant you a stock option to purchase 500,000 shares of common stock ("Option #1"). The exercise price of Option #1 will be the closing price of the Company's common stock on the NASDAQ National Market System on your start date. Option #1 shall vest as follows: 2 November 16, 1999 Mr. Richard L. Roll Page 2 (a) Option #1 will vest with respect to 350,000 shares according to the following schedule: (i) 80,000 shares immediately upon the date of commencement of your employment. (ii) 90,000 shares on the first year anniversary of your employment start date. (iii) 7,500 shares on the first day of each month beginning on the first day of the 13th month after your start date and continuing for each month thereafter for a period of 24 months. Option #1 will vest with respect to the remaining 150,000 shares according to the following schedule: (i) 50,000 shares if in FY 2000 the Company's pretax earnings per share equal or exceed 15 cents per share. (ii) 50,000 shares if in FY 2001 the Company's pretax earnings per share equal or exceed 30 cents per share. (iii) 50,000 shares if in FY 2002 if the Company's pretax earnings per share equal or exceed 60 cents per share. (iv) If any of such 150,000 shares have not otherwise vested pursuant to the provisions of clauses (i), (ii), or (iii) above, all of the remaining unvested shares shall vest on the fifth anniversary of your employment start date. If you voluntarily terminate your employment, you will have 90 days following termination to exercise that portion of the option which is vested as of the termination date. 5. Stock Option. The Company will grant you an additional stock option to purchase 200,000 shares of common stock ("Option #2"). The exercise price of Option #2 will be the closing price of the Company's common stock on the NASDAQ National Market System on your start date. If you are promoted to the position of Chief Executive Officer of the Company on or before January 1, 2001, then commencing on your date of promotion Option #2 will vest with respect to 5,556 shares and an additional 5,556 shares shall vest on first day of each month thereafter for a period of 35 months and 5,540 shares shall vest on the first day of the 36th month. If you are not promoted to the position of Chief Executive Officer by January 1, 2001, then the shares subject to Option #2 will vest on the 5 year anniversary of the grant date, provided you are 3 November 16, 1999 Mr. Richard L. Roll Page 3 still an employee of the Company. If you voluntarily terminate your employment, you will have 90 days following termination to exercise that portion of the option which is vested as of the termination date. (a) If a Change of Control (as defined below) occurs prior to the one year anniversary of your employment start date then vesting with respect to 50% of the shares subject to Option #1 and Option #2 (only if you are Chief Executive Officer at the time of the Change of Control) shall accelerate and vest concurrent with the Change of Control. If a Change of Control occurs following the one year anniversary of your employment start date, then all of the shares subject to Option #1 and Option #2 (only if you are Chief Executive Officer at the time of the Change of Control) shall become fully vested upon the Change of Control. For purposes of this section, a Change in Control shall mean (i) the sale, lease, conveyance or other disposition of all or substantially all of the Company's assets as an entirety or substantially as an entirety to any person, entity or group of persons acting in concert, (ii) any transaction or series of transactions that results in, or that is in connection with, any person, entity or group acting in concert (other than existing affiliates of the Company), acquiring "beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of such percentage of the aggregate voting power of all classes of voting equity stock of the Company as shall exceed fifty percent (50%) of such aggregate voting power, (iii) a merger or consolidation in which the Company is not the surviving entity, except for a transaction, the principal purpose of which is to change the state in which the Company is incorporated; or (iv) any reverse merger in which the Company is a surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such reverse merger; or (v) a liquidation of the Company. Upon a Change of Control, you may elect, in your sole discretion, not to have any portion of such restrictions lapse in order to avoid any "parachute payment" under Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended. (b) If the Company shall terminate your employment agreement without "cause" or if a "constructive termination" has occurred or if you die or become disabled while employed by the Company: (i) the Company shall pay you all compensation (including the base salary and any bonus that would have been payable for the next twelve months under paragraph 3 hereof) and benefits due you to the date of termination and for a period of twelve months following the date of such termination; and (ii) the shares that would have vested under Options #1 and #2 (by time elapsing) during the next 12 months, shall accelerate and become vested. During the twelve month period, you shall continue to be entitled to participate in the Company's employee benefits plans or arrangements (as set forth in Section 6 herein) on the same basis as if you were an employee. For purposes of this Agreement, disabled shall mean your inability due to any physical or mental condition to perform a substantial portion of your duties as Chief Operating Officer for 24 or more consecutive weeks. 4 November 16, 1999 Mr. Richard L. Roll Page 4 (c) For the purposes of this paragraph 5: (i) "cause" shall mean (A) willful and repeated failure to comply with the lawful directions of the Company's Board of Directors, or the Chief Executive Officer (B) gross negligence or willful misconduct in the performance of duties to the Company and/or its subsidiaries, (C) commission of any act of fraud with respect to the Company and/or its subsidiaries, (D) conviction of a felony or a crime involving moral turpitude causing material harm to the standing and reputation of the Company and/or its subsidiaries, in each case as determined in good faith by the Company's Board of Directors; and (ii) "constructive termination" shall be deemed to occur if (A)(1) there is a material adverse change in your position causing it to be of less stature or of less responsibility, (2) a change in the persons to whom you report (other than a change in Board of Director composition) or (3) a reduction of more than 20% of your base compensation and (B) the Company shall fail to correct the occurrence to your reasonable satisfaction following written notice by you within the thirty (30) days following receipt of such notice and you elect to terminate your employment voluntarily. (d) Registration Rights. In connection with Options #1 and #2 the Company will register the shares underlying such options on Form S-8. If registration of such shares is not permissible on Form S-8 the Company will register such shares on Form S-3, subject to customary underwriter lock ups and cutbacks, if applicable, and shall rank in equal priority with the registration rights held by existing preferred stockholders. 6. Other. Effective the beginning of the month following your start date, you will be eligible to participate in the Company's health plan, including the Exec-U-Care plan. After meeting eligibility requirements, you will be able to participate in various company benefit programs including the Company's 401(k) savings program, Section 125 Reimbursement Account, and the Confidential Employee Assistance Program (EAP). 7. Indemnification. In the event you are made, or threatened to be made, a party to any legal action or proceeding, whether civil or criminal, by reason of the fact that you are or were a director or officer of the Company or serves or served any other corporation fifty percent (50%) or more owned or controlled by the Company in any capacity at Company's request, you shall be indemnified by the Company, and the Company shall pay your related expenses when and as incurred, all to the full extent permitted by law. 8. Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets shall assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a 5 November 16, 1999 Mr. Richard L. Roll Page 5 succession. The terms of this Agreement and all of your rights hereunder shall inure to the benefit of, and be enforceable by, your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. This offer is contingent upon execution of the Company's Employee Proprietary Agreement and the Employee Acknowledgment Statement. Upon accepting this offer, you will be required to sign and agree to the terms therein. Additionally, due to the Immigration Reform Act and Control of 1986, if you are an employee of the Company in the United States, prior to or on your first day of employment, you will be required to show proof of identity and authorization to work in the United States. Please be prepared to show appropriate documentation for evidence of identity and employment eligibility. I look forward to your joining Epicor Software Corporation. We have a great opportunity to take the Company to a new level of performance. I believe your past experience and skills would be a great fit with Epicor and I look forward to working with you. Please indicate your acceptance of this offer by signing in the space below. Upon receipt, I will have the necessary agreements prepared to document the items described in this offer letter. If you have any questions, please do not hesitate to call. Very truly yours, Accepted: - ------------------------------------- ------------------------------------ L. George Klaus Richard L. Roll President and Chief Executive Officer LGK:vs EX-10.70 4 MATERIAL CONTRACT 1 EXHIBIT 10.70 NONQUALIFIED OPTION AGREEMENT THIS NONQUALIFIED OPTION AGREEMENT (the "Agreement"), made as of November 16, 1999, between EPICOR SOFTWARE CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), and Richard L. Roll, an employee of the Company, its parent or one or more of its subsidiaries (the "Optionee"), is made with reference to the following facts: R E C I T A L S A. Optionee is being employed by the Company as its President and Chief Operating Officer and the option grant represented by this Agreement is part of Optionee's compensation package in joining the Company. B. The Company and the Optionee acknowledge that the option grant represented by this Agreement is an inducement essential to Optionee entering into employment with the Company. NOW, THEREFORE, IN CONSIDERATION of the mutual covenants hereinafter set forth, and for good and valuable consideration, the parties hereto have agreed, and do hereby agree, as follows: 1. GRANT OF OPTION. The Company hereby irrevocably grants to the Optionee the right and option (hereinafter called the "Option") to purchase all or any part of an aggregate of 500,000 Shares (such number being subject to adjustment as provided in Paragraph 7 hereof) on the terms and conditions herein set forth. The Option granted herein is a "nonqualified option" and is not subject to the provisions of Section 422A of the Internal Revenue Code of 1986, as amended. 2. PURCHASE PRICE. The purchase price of the Shares covered by the Option shall be $6.3594 per share (the "Exercise Price"), representing one hundred percent (100%) of the fair market of the Company's common stock as of the date hereof. 3. TERM OF OPTION. The term of the Option shall commence on the date hereof and all rights to purchase shares hereunder shall cease at 11:59 p.m. on the day before the tenth (10th) anniversary of the date hereof, subject to earlier termination as provided herein. Except as may otherwise be provided in this Agreement, options granted hereunder may be cumulative and shall vest as follows: (a) This Option will vest with respect to 350,000 shares according to the following schedule: (i) 80,000 shares immediately upon the date of commencement of this Agreement. 2 (ii) 90,000 shares on the first year anniversary of this Agreement. (iii) 7,500 shares on the first day of each month beginning on the first day of the 13th month after the date of this Agreement and continuing for each month thereafter for a period of 24 months. (b) This Option will vest with respect to the remaining 150,000 shares according to the following schedule: (i) 50,000 shares if in FY 2000 the Company's pretax earnings per share equal or exceed 15 cents per share. The Company's fiscal year is the calendar year. (ii) 50,000 shares if in FY 2001 the Company's pretax earnings per share equal or exceed 30 cents per share. (iii) 50,000 shares if in FY 2002 if the Company's pretax earnings per share equal or exceed 60 cents per share. (iv) If any of such 150,000 shares have not otherwise vested pursuant to the provisions of clauses (i), (ii), or (iii) above, all of the remaining unvested shares shall vest on the fifth anniversary of the date of this Agreement. The purchase price of the Shares as to which the Option shall be exercised shall be paid in full at the time of exercise, as provided in Paragraph 9 below. Except as provided in Paragraph 5 hereof, the Option may not be exercised at any time unless the Optionee shall have been continuously, from the date hereof to the date of the exercise of the Option, a Service Provider to the Company. The holder of the Option shall not have any of the rights of a shareholder with respect to the Shares covered by the Option as to any Shares of Common Stock not actually issued and delivered to Optionee. 4. NONTRANSFERABILITY. The Option shall not be transferable other than by will or the laws of descent and distribution or with the prior written consent of the Company's stock plan administrator, and the Option may be exercised, during the lifetime of the Optionee, only by Optionee. More particularly (but without limiting the generality of the foregoing), the Option may not be assigned, transferred, pledged or hypothecated in any way, shall not be assignable by operation of law and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions hereof, and the levy of any execution, attachment or similar process upon the Option, shall be null and void and without effect. 5. TERMINATION OF OPTION. Except as provided below in this Section 5, this Option shall terminate on the date Optionee ceases to be a Service Provider for the Company (the "Termination Date"). Optionee shall be considered to be a Service Provider to the Company for all purposes under this Agreement if the Board of Directors or the Company's stock plan administrator determines that Optionee is rendering or available to render substantial services as a part-time employee, consultant, contractor or advisor to the Company or any parent, subsidiary or affiliate of the Company. A leave of absence (regardless of the reason therefor) 2 3 shall be deemed to constitute the cessation of Service Provider status as of the commencement date of the leave, unless such leave is authorized by the Company in writing and the Optionee recommences providing services prior to the expiration date of such leave. Accordingly, the Optionee shall receive credit as a Service Provider to the Company during a leave of absence only if the leave is authorized by the Company and the Optionee recommences providing services on or prior to the expiration date of the leave. (a) TERMINATION GENERALLY. In the event Optionee ceases to be a Service Provider to the Company for any reason except death or disability (including voluntary termination) and except as provided below, this Option, to the extent (and only to the extent) that it would have been exercisable by Optionee on the Termination Date, may be exercised by Optionee within 3 months after the Termination Date, but in no event later than the Expiration Date. (b) TERMINATION WITHOUT CAUSE. If the Company terminates Optionee's employment without "cause" or if a "constructive termination" has occurred (as such terms are defined in that certain offer letter between the Company and Optionee dated November 16, 1999), then the shares subject to the Option that would have vested by time elapsing during the 12 month period following such termination (constructive or without cause) shall accelerate and become vested. In such case, this Option may be exercised by Optionee within 12 months after the Termination Date, but in no event later than the Expiration Date. (c) DEATH OR DISABILITY. In the event Optionee ceases to be a Service Provider to the Company because of the death of Optionee or the disability of Optionee within the meaning of Section 22(e)(3) of the Code, then the shares subject to the Option that would have vested during the 12 month period following cessation of service provider status shall accelerate and become vested, and the Option may be exercised by Optionee (or Optionee's legal representative) within one year after the Termination Date, but in no event later than the Expiration Date. 6. OTHER TERMINATIONS OR EXPIRATIONS. (a) In the event that a Change of Control (as defined below) occurs on or before November 16, 2000, the vesting of 50% of the shares subject to the Option shall be accelerated immediately prior thereto and Optionee shall have the right to exercise this Option in respect to 50% of the shares then subject thereto. In the event that a Change of Control (as defined below) occurs after November 16, 2000, the vesting of all of the shares subject to the Option shall be accelerated immediately prior thereto and Optionee shall have the right to exercise this Option in respect to any or all of the shares then subject thereto. To the extent possible, the Company's stock plan administrator shall cause written notice of the Change of Control to be given to the Optionee not less then 10 days prior to the anticipated effective date of the Change of Control. (b) For the purpose of this Agreement the term "Change of Control" shall mean the occurrence of any of the following: (i) The sale, lease, conveyance or other disposition of all or substantially all of the Company's assets as an entirety or substantially as an entirety to any person, entity or group of persons acting in concert; (ii) Any transaction or series of transactions that results in, or that is in connection with, any person, entity or group acting in concert (other than existing affiliates 3 4 of the Company), acquiring "beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of such percentage of the aggregate voting power of all classes of voting equity stock of the Company as shall exceed fifty percent (50%) of such aggregate voting power; (iii) A merger or consolidation in which the Company is not the surviving entity, except for a transaction, the principal purpose of which is to change the state in which the Company is incorporated; or (iv) Any reverse merger in which the Company is a surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such reverse merger; or (v) A liquidation of the Company. 7. ADJUSTMENTS. The number and class of shares subject to this Option, and the purchase price per share (but not the total purchase price), and the minimum number of shares as to which this Option may be exercised at any one time, shall all be proportionately adjusted in the event of any change or increase or decrease in the number of issued shares of Common Stock in the Company, without receipt of consideration by the Company, which result from a split-up or consolidation of shares, payment of a share dividend (in excess of two percent (2%)), a recapitalization, combination of shares or other like capital adjustment, so that, upon exercise of this Option, the Optionee shall receive the number and class of shares Optionee would have received had Optionee been the holder of the number of shares of Common Stock in the Company, for which this Option is being exercised, on the date of such change or increase or decrease in the number of issued shares of Common Stock in the Company. Adjustments under this paragraph shall be made by the Board of Directors whose determination with respect thereto shall be final and conclusive. No fractional share shall be issued under this Option or upon any such adjustment. 8. NOTICE. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or mailed, by United States certified or registered mail, prepaid, to the parties or their assignees at the addresses set forth opposite their signatures below (or such other address as shall be given in writing by either party to the other). 9. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of this Agreement, this Option may be exercised by written notice to the Company, at its principal office in the State of California, which presently is located at 195 Technology Drive, Irvine, California 92618-2402 Attn: Stock Plan Administrator. Such notice shall state the election to exercise the Option and the number of shares in respect of which it is being exercised and shall be signed by the person or persons so exercising the Option. Such notice shall be accompanied by payment in (i) cash, certified check, bank draft; (ii) (subject to the limitations and with the terms and provisions specified under Paragraph 3 above) certificates for shares of the Common Stock of the Company; or (iii) (subject to the limitations and with the terms and provisions specified pursuant to Paragraph 3 above) with the prior written consent and approval of the Company, by the execution and 4 5 delivery of Optionee's promissory note in the principal amount of the exercise price, with such term, interest rate and other terms and provisions, including, without limitation, requiring the Shares acquired upon exercise to be pledged to the Company to secure payment of the note, as the Board of Directors may specify, equal to at the time of exercise, in the aggregate, the full purchase price of such shares, (iv) by cancellation of indebtedness of the Company to Optionee, (v) by waiver of compensation due or accrued to Optionee for services rendered, or (vi) provided that a public market for the Company's stock exists, through consideration received by the Company under a cashless exercise program implemented by the Company, or (vii) any combination of (i), (ii), (iii), (iv), (v), or (vi) above, and the Company shall deliver a certificate or certificates representing the Shares subject to such exercise as soon as practicable after the notice shall be received. The certificate or certificates for the shares as to which the Option shall have been so exercised shall be registered in the name of the person or persons so exercising the Option and shall be delivered as provided above to or upon the written order of the person or persons exercising the Option. In the event the Option shall be exercised by any person or persons other than the Optionee in accordance with the terms hereof, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option. All shares that shall be purchased upon the exercise of the Option as provided herein shall be fully paid and nonassessable. The holder of this Option shall not be entitled to the privileges of share ownership as to any shares of Common Stock not actually issued and delivered to Optionee. Until and unless this Option and the issuance of securities hereunder shall have been registered under the Securities Act of 1933, as amended (the "Securities Act"), the Optionee hereby certifies that all shares of Common Stock in the Company purchased or to be purchased by Optionee pursuant to the exercise of this Option are being or are to be acquired by Optionee for investment and not with a view to the distribution thereof. 10. NO AGREEMENT TO EMPLOY. Nothing in this Agreement shall be construed to constitute or be evidence of any agreement or understanding, express or implied, on the part of the Company to employ or retain Optionee for any specific period of time. This Agreement is being entered into pursuant to the terms of that certain offer letter between the Company and the Optionee. 11. MARKET STANDOFF AGREEMENT. Optionee agrees in connection with any underwritten registration of the Company's securities that, upon the request of the Company or the underwriters managing any public offering of the Company's securities, Optionee will not sell or otherwise dispose of any Shares without the prior written consent of the Company or such underwriters, as the case may be, for a period of time (not to exceed 90 days) from the effective date of such registration as the Company or the underwriters may specify. 12. STOP-TRANSFER NOTICES. Optionee understands and agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop-transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. 5 6 13. GENERAL. The Company shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Option Agreement, shall pay all original issue and transfer taxes with respect to the issue and transfer of shares pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will from time to time use its best efforts to comply with all laws and regulations, which, in the opinion of counsel for the Company, shall be applicable thereto. IN WITNESS WHEREOF, the Company has caused this Nonqualified Option Agreement to be duly executed by its officers thereunto duly authorized, and the Optionee has hereunto set his hand, all as of the day and year first above written. COMPANY: EPICOR SOFTWARE CORPORATION Address: 195 Technology Drive Irvine, CA 92618-2402 By: ---------------------------------- OPTIONEE: Address: 15 Celano Laguna Niguel, CA 92677 -------------------------------------- Richard L. Roll 6 EX-10.71 5 MATERIAL CONTRACT 1 EXHIBIT 10.71 NONQUALIFIED OPTION AGREEMENT THIS NONQUALIFIED OPTION AGREEMENT (the "Agreement"), made as of November 16, 1999, between EPICOR SOFTWARE CORPORATION, a Delaware corporation (hereinafter referred to as the "Company"), and Richard L. Roll, an employee of the Company, its parent or one or more of its subsidiaries (the "Optionee"), is made with reference to the following facts: R E C I T A L S A. Optionee is being employed by the Company as its President and Chief Operating Officer and the option grant represented by this Agreement is part of Optionee's compensation package in joining the Company. B. The Company and the Optionee acknowledge that the option grant represented by this Agreement is an inducement essential to Optionee entering into employment with the Company. NOW, THEREFORE, IN CONSIDERATION of the mutual covenants hereinafter set forth, and for good and valuable consideration, the parties hereto have agreed, and do hereby agree, as follows: 1. GRANT OF OPTION. The Company hereby irrevocably grants to the Optionee the right and option (hereinafter called the "Option") to purchase all or any part of an aggregate of 200,000 Shares (such number being subject to adjustment as provided in Paragraph 7 hereof) on the terms and conditions herein set forth. The Option granted herein is a "nonqualified option" and is not subject to the provisions of Section 422A of the Internal Revenue Code of 1986, as amended. 2. PURCHASE PRICE. The purchase price of the Shares covered by the Option shall be $6.3594 per share (the "Exercise Price"), representing one hundred percent (100%) of the fair market of the Company's common stock as of the date hereof. 3. TERM OF OPTION. The term of the Option shall commence on the date hereof and all rights to purchase shares hereunder shall cease at 11:59 p.m. on the day before the tenth (10th) anniversary of the date hereof, subject to earlier termination as provided herein. Except as may otherwise be provided in this Agreement, options granted hereunder may be cumulative and shall vest as follows: (a) This Option will vest according to the following schedule if Optionee is promoted to the position of Chief Executive Officer of the Company on or before January 1, 2001. If Optionee is not promoted to the position of Chief Executive Officer on or before January 1, 2001, then all of the shares subject to the Option shall vest on November 16, 2004. 2 (i) Vesting schedule (if promotion occurs on or before January 1, 2001: Commencing on the date of promotion to Chief Executive Officer of the Company, this Option will vest with respect to 5,556 shares and an additional 5,556 shares shall vest on the first day of each month thereafter for the next 34 months and 5,540 shares shall vest on the first day of the 35th month. The purchase price of the Shares as to which the Option shall be exercised shall be paid in full at the time of exercise, as provided in Paragraph 9 below. Except as provided in Paragraph 5 hereof, the Option may not be exercised at any time unless the Optionee shall have been continuously, from the date hereof to the date of the exercise of the Option, a Service Provider to the Company. The holder of the Option shall not have any of the rights of a shareholder with respect to the Shares covered by the Option as to any Shares of Common Stock not actually issued and delivered to Optionee. 4. NONTRANSFERABILITY. The Option shall not be transferable other than by will or the laws of descent and distribution or with the prior written consent of the Company's stock plan administrator, and the Option may be exercised, during the lifetime of the Optionee, only by Optionee. More particularly (but without limiting the generality of the foregoing), the Option may not be assigned, transferred, pledged or hypothecated in any way, shall not be assignable by operation of law and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions hereof, and the levy of any execution, attachment or similar process upon the Option, shall be null and void and without effect. 5. TERMINATION OF OPTION. Except as provided below in this Section 5, this Option shall terminate on the date Optionee ceases to be a Service Provider for the Company (the "Termination Date"). Optionee shall be considered to be a Service Provider to the Company for all purposes under this Agreement if the Board of Directors or the Company's stock plan administrator determines that Optionee is rendering or available to render substantial services as a part-time employee, consultant, contractor or advisor to the Company or any parent, subsidiary or affiliate of the Company. A leave of absence (regardless of the reason therefor) shall be deemed to constitute the cessation of Service Provider status as of the commencement date of the leave, unless such leave is authorized by the Company in writing and the Optionee recommences providing services prior to the expiration date of such leave. Accordingly, the Optionee shall receive credit as a Service Provider to the Company during a leave of absence only if the leave is authorized by the Company and the Optionee recommences providing services on or prior to the expiration date of the leave. (a) TERMINATION GENERALLY. In the event Optionee ceases to be a Service Provider to the Company for any reason except death or disability (including voluntary termination) and except as provided below, this Option, to the extent (and only to the extent) that it would have been exercisable by Optionee on the Termination Date, may be exercised by Optionee within 3 months after the Termination Date, but in no event later than the Expiration Date. (b) TERMINATION WITHOUT CAUSE. If the Company terminates Optionee's employment without "cause" or if a "constructive termination" has occurred (as such terms are defined in that certain offer letter between the Company and Optionee dated November 16, 1999), then the shares subject to the Option that would have vested by time elapsing during the 12 month period following such termination 2 3 (constructive or without cause) shall accelerate and become vested. This vesting acceleration shall occur only if monthly vesting has commenced pursuant to Section 3 above. In such case, this Option may be exercised by Optionee within 12 months after the Termination Date, but in no event later than the Expiration Date. (c) DEATH OR DISABILITY. In the event Optionee ceases to be a Service Provider to the Company because of the death of Optionee or the disability of Optionee within the meaning of Section 22(e)(3) of the Code, then the shares subject to the Option that would have vested during the 12 month period following cessation of service provider status shall accelerate and become vested, and the Option may be exercised by Optionee (or Optionee's legal representative) within one year after the Termination Date, but in no event later than the Expiration Date. This vesting acceleration shall occur only if monthly vesting has commenced pursuant to Section 3 above 6. OTHER TERMINATIONS OR EXPIRATIONS. (a) In the event that a Change of Control (as defined below) occurs on or before November 16, 2000, the vesting of 50% of the shares subject to the Option shall be accelerated immediately prior thereto and Optionee shall have the right to exercise this Option in respect to 50% of the shares then subject thereto. In the event that a Change of Control (as defined below) occurs after November 16, 2000, the vesting of all of the shares subject to the Option shall be accelerated immediately prior thereto and Optionee shall have the right to exercise this Option in respect to any or all of the shares then subject thereto. The vesting acceleration described in this Section 6(a) shall occur only if at the time of the Change of Control, monthly vesting has commenced purusant to Section 3 above. If monthly vesting has not commenced then there will be no vesting acceleration on the Change of Control. To the extent possible, the Company's stock plan administrator shall cause written notice of the Change of Control to be given to the Optionee not less then 10 days prior to the anticipated effective date of the Change of Control. (b) For the purpose of this Agreement the term "Change of Control" shall mean the occurrence of any of the following: (i) The sale, lease, conveyance or other disposition of all or substantially all of the Company's assets as an entirety or substantially as an entirety to any person, entity or group of persons acting in concert; (ii) Any transaction or series of transactions that results in, or that is in connection with, any person, entity or group acting in concert (other than existing affiliates of the Company), acquiring "beneficial ownership" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of such percentage of the aggregate voting power of all classes of voting equity stock of the Company as shall exceed fifty percent (50%) of such aggregate voting power; (iii) A merger or consolidation in which the Company is not the surviving entity, except for a transaction, the principal purpose of which is to change the state in which the Company is incorporated; or (iv) Any reverse merger in which the Company is a surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a 3 4 person or persons different from the persons holding those securities immediately prior to such reverse merger; or (v) A liquidation of the Company. 7. ADJUSTMENTS. The number and class of shares subject to this Option, and the purchase price per share (but not the total purchase price), and the minimum number of shares as to which this Option may be exercised at any one time, shall all be proportionately adjusted in the event of any change or increase or decrease in the number of issued shares of Common Stock in the Company, without receipt of consideration by the Company, which result from a split-up or consolidation of shares, payment of a share dividend (in excess of two percent (2%)), a recapitalization, combination of shares or other like capital adjustment, so that, upon exercise of this Option, the Optionee shall receive the number and class of shares Optionee would have received had Optionee been the holder of the number of shares of Common Stock in the Company, for which this Option is being exercised, on the date of such change or increase or decrease in the number of issued shares of Common Stock in the Company. Adjustments under this paragraph shall be made by the Board of Directors whose determination with respect thereto shall be final and conclusive. No fractional share shall be issued under this Option or upon any such adjustment. 8. NOTICE. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or mailed, by United States certified or registered mail, prepaid, to the parties or their assignees at the addresses set forth opposite their signatures below (or such other address as shall be given in writing by either party to the other). 9. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of this Agreement, this Option may be exercised by written notice to the Company, at its principal office in the State of California, which presently is located at 195 Technology Drive, Irvine, California 92618-2402 Attn: Stock Plan Administrator. Such notice shall state the election to exercise the Option and the number of shares in respect of which it is being exercised and shall be signed by the person or persons so exercising the Option. Such notice shall be accompanied by payment in (i) cash, certified check, bank draft; (ii) (subject to the limitations and with the terms and provisions specified under Paragraph 3 above) certificates for shares of the Common Stock of the Company; or (iii) (subject to the limitations and with the terms and provisions specified pursuant to Paragraph 3 above) with the prior written consent and approval of the Company, by the execution and delivery of Optionee's promissory note in the principal amount of the exercise price, with such term, interest rate and other terms and provisions, including, without limitation, requiring the Shares acquired upon exercise to be pledged to the Company to secure payment of the note, as the Board of Directors may specify, equal to at the time of exercise, in the aggregate, the full purchase price of such shares, (iv) by cancellation of indebtedness of the Company to Optionee, (v) by waiver of compensation due or accrued to Optionee for services rendered, or (vi) provided that a public market for the Company's stock exists, through consideration received by the Company under a cashless exercise program implemented by the Company, or (vii) any combination of (i), (ii), (iii), (iv), (v), or (vi) above, and the Company shall deliver a certificate or certificates representing the Shares subject to such exercise as soon as practicable after the notice shall be received. The certificate or certificates for the shares as to which the Option shall have been so exercised shall be registered in the name of the person or persons so exercising the Option and 4 5 shall be delivered as provided above to or upon the written order of the person or persons exercising the Option. In the event the Option shall be exercised by any person or persons other than the Optionee in accordance with the terms hereof, such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the Option. All shares that shall be purchased upon the exercise of the Option as provided herein shall be fully paid and nonassessable. The holder of this Option shall not be entitled to the privileges of share ownership as to any shares of Common Stock not actually issued and delivered to Optionee. Until and unless this Option and the issuance of securities hereunder shall have been registered under the Securities Act of 1933, as amended (the "Securities Act"), the Optionee hereby certifies that all shares of Common Stock in the Company purchased or to be purchased by Optionee pursuant to the exercise of this Option are being or are to be acquired by Optionee for investment and not with a view to the distribution thereof. 10. NO AGREEMENT TO EMPLOY. Nothing in this Agreement shall be construed to constitute or be evidence of any agreement or understanding, express or implied, on the part of the Company to employ or retain Optionee for any specific period of time. This Agreement is being entered into pursuant to the terms of that certain offer letter between the Company and the Optionee. 11. MARKET STANDOFF AGREEMENT. Optionee agrees in connection with any underwritten registration of the Company's securities that, upon the request of the Company or the underwriters managing any public offering of the Company's securities, Optionee will not sell or otherwise dispose of any Shares without the prior written consent of the Company or such underwriters, as the case may be, for a period of time (not to exceed 90 days) from the effective date of such registration as the Company or the underwriters may specify. 12. STOP-TRANSFER NOTICES. Optionee understands and agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate "stop-transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. 13. GENERAL. The Company shall at all times during the term of the Option reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Option Agreement, shall pay all original issue and transfer taxes with respect to the issue and transfer of shares pursuant hereto and all other fees and expenses necessarily incurred by the Company in connection therewith, and will from time to time use its best efforts to comply with all laws and regulations, which, in the opinion of counsel for the Company, shall be applicable thereto. 5 6 IN WITNESS WHEREOF, the Company has caused this Nonqualified Option Agreement to be duly executed by its officers thereunto duly authorized, and the Optionee has hereunto set his hand, all as of the day and year first above written. COMPANY: EPICOR SOFTWARE CORPORATION Address: 195 Technology Drive Irvine, CA 92618-2402 By: -------------------------------------------- OPTIONEE: Address: 15 Celano Laguna Niguel, CA 92677 ----------------------------------------------- Richard L. Roll 6 EX-21.1 6 SUBSIDIARIES 1 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY
Name Jurisdiction of Incorporation - ------------------------------------------ ------------------------------------------- Cypher Business Systems, Limited United Kingdom Epicor Software (Aust.) Pty., Ltd. Australia Epicor Software BVI, Ltd. British Virgin Islands Epicor Software Canada, Ltd. Canada Slatershelfco 173 Limited United Kingdom Epicor Software (Holdings) Limited Ireland Epicor Software (Ireland) Limited Ireland Epicor Software (North Asia) Limited Hong Kong Epicor Software (NZ) Limited New Zealand Epicor Software (UK) Limited United Kingdom Epicor Software Asia PTE, Ltd. Singapore DataWorks International Export Corporation Barbados Epicor Nederland B.V. Netherlands Epicor Nordic A.B. Sweden Epicor France S.A. France Epicor Software (Argentina) S.A. Argentina Evosoft (Epicor) Software GMBH Germany
EX-23.1 7 CONSENT OF EXPERTS AND COUNSEL 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8, No. 33-54604) pertaining to the 1990 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Option Purchase Plan, (Form S-8, No. 33-70518) pertaining to the 1993 Nonqualified Stock Option Plan and Key Employee Warrants, (Form S-8, No. 33-92270) pertaining to the 1994 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan, (Form S-8, No. 333-06419) pertaining to the 1996 Nonqualified Stock Option Plan, (Form S-8, No. 333-06415) pertaining to Key Employee Restricted Stock Purchase Plan, (Form S-8, No. 333-28259) pertaining to the Key Employee Restricted Stock Purchase Plan, (Form S-8, No 333-46393) pertaining to Key Employee Options and FocusSoft Stock Option Plan, (Form S-8, No. 333-41321), pertaining to the 1997 Nonqualified Stock Option Plan and Platinum Software Corporation Clientele Incentive Plan, (Form S-3, No. 333-38105) pertaining to the registration of 450,935 shares, (Form S-3, 333-46395) pertaining to the registration of 2,474,794 shares, (Form S-4, No. 333-67577) pertaining to the registration of 16,950,379 shares, (Form S-8, No. 333-67841) pertaining to the 1998 Nonqualified Stock Option Plan, (Form S-8, No. 333-70855) pertaining to DataWorks 1995 Equity Incentive Plan, DataWorks 1995 Non-Employee Directors Stock Option Plan, Interactive 1997 Nonstatutory Stock Option Plan, Interactive 1995 Stock Option Plan, and Nonstatutory Stock Option Agreements, Nonqualified Stock Option Agreement, (Form S-8, No. 333-84257) pertaining to the Employee Stock Purchase Plan, (Form S-8, No. 333-85105) pertaining to the 1999 Nonstatutory Stock Option Plan and 1999 Merger Transition Nonstatutory Stock Plan, and (Form S-8, No. 333-91505) pertaining to the Key Employee Nonqualified Option Agreement, of our reports dated February 2, 2000, except for Note 11, as to which the date is March 22, 2000, with respect to the consolidated financial statements and schedule of Epicor Software Corporation, included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP Orange County, California March 22, 2000 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements included in the Company's Form 10-K for the twelve months ended December 31, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 18,221 12,154 92,363 17,100 0 114,622 43,743 27,093 170,177 97,971 400 0 7,501 41 64,264 170,177 100,406 258,176 21,252 122,602 186,668 0 534 (49,883) 750 (50,633) 0 0 0 (50,633) (1.25) (1.25)
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