| EPICOR SOFTWARE CORP Item 1A RISK FACTORS Certain Factors That May Affect Future Results Forward Looking Statements – Safe Harbor Certain statements in this Annual Report on Form 10-K are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, that involve risks and uncertainties |
| Any statements contained herein (including without limitation statements to the effect that the Company or Management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” or “will” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements including statements about (i) the Company’s future revenues, (ii) the impact of new accounting pronouncements, (iii) future sales and marketing expenses, software development expenses and general and administrative expenses, (iv) 2006 tax rate, (v) the Company’s capital spending, (vi) the Company’s future cash flow from operations, (vii) sufficient sources of financing to continue operations for next twelve months, (viii) the effect of current legal proceedings, (ix) future cash tax payments and net operating loss carry forwards; (x) the future use of forward or other hedging contracts; (xi) the future impact of recent acquisitions on the Company; (xii) future levels of international revenues and (xiii) future investments in product development |
| Actual results could differ materially and adversely from those anticipated in such forward looking statements as a result of certain factors, including the factors listed at pages 18 to 26 |
| Because these factors 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 below and in other documents the Company files from time to time with the Securities and Exchange Commission |
| Our quarterly operating results are difficult to predict and subject to substantial fluctuation |
| The Company’s quarterly operating results have fluctuated significantly in the past |
| For example, from the first quarter of 2001 through the fourth quarter of 2005, quarterly operating results have ranged from an operating loss of dlra22dtta1 million to operating income of dlra11dtta0 million |
| The Company’s operating results may continue to fluctuate in the future as a result of many specific factors that include: • The demand for the Company’s products, including reduced demand related to changes in marketing focus for certain products, software market conditions or general economic conditions as they pertain to information technology (IT) spending • Fluctuations in the length of the Company’s sales cycles which may vary depending on the complexity of our products as well as the complexity of the customer’s specific software and service needs • The size and timing of orders for the Company’s software products and services, which, because many orders are completed in the final days of each quarter, may be delayed to future quarters • The number, timing and significance of new software product announcements, both by the Company and its competitors • Customers’ unexpected postponement or termination of expected system upgrades or replacement due to a variety of factors including economic conditions, changes in IT strategies or management changes • Changes in accounting standards, including software revenue recognition standards • Currency fluctuations • Fluctuations in number of customers renewing maintenance In addition, the Company has historically realized a significant portion of its software license revenues in the final month of any quarter, with a concentration of such revenues recorded in the final ten business days of that month |
| Further, the Company generally realizes a significant portion of its annual software license revenues in the final quarter of the fiscal year |
| Due to the above factors, among others, the Company’s revenues are difficult to forecast |
| The Company, however, bases its expense levels, including operating expenses and hiring plans, in significant part, on its expectations of future revenue |
| As a result, the Company expects its expense levels to be relatively fixed in the short term |
| The Company’s failure to meet revenue expectations could adversely affect operating results |
| Further, an unanticipated decline in revenue for a particular quarter may disproportionately affect the Company’s operating results in that quarter because the majority of the Company’s expenses will be fixed in the short term |
| 18 ______________________________________________________________________ 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, as in past quarters, in some future quarters the Company’s operating results will be below the expectations of public market analysts and investors |
| As in those past quarters, such an event would likely have an adverse effect upon the price of the Company’s Common Stock |
| If the emerging technologies and platforms of Microsoft and others upon which the Company builds its products do not gain or retain broad market acceptance, or if we fail to develop and introduce in a timely manner new products and services compatible with such emerging technologies, we may not be able to compete effectively and our ability to generate revenues will suffer |
| The Company’s software products are built and depend upon several underlying and evolving relational database management system platforms such as Microsoft SQL Server, Progress and IBM To date, the standards and technologies that the Company has chosen to develop its products upon have proven to be popular and have gained broad industry acceptance |
| However, the market for the Company’s software products is subject to ongoing rapid technological developments, quickly evolving industry standards and rapid changes in customer requirements, and there may be existing or future technologies and platforms that achieve industry standard status, which are not compatible with our products |
| Additionally, because the Company’s products rely significantly upon popular existing user interfaces to third party business applications, the Company must forecast which user interfaces will be or remain popular in the future |
| For example, the Company believes the Internet is transforming the way businesses operate and the software requirements of customers |
| Specifically, the Company believes that customers desire business software applications that enable a customer to engage in commerce or service over the Internet |
| The Company has announced its determination to pursue development of several of its primary product lines upon the new Microsoft |
| NET technology |
| If the Company cannot develop such |
| NET compatible products in time to effectively bring them to market, or if |
| NET does not become or continue to be a widely accepted industry standard, the ability of the Company’s products to interface with popular third party applications will be negatively impacted and the Company’s competitive position and revenues could be adversely affected |
| New software technologies could cause us to alter our business model resulting in adverse affects on our operating results |
| Development of new technologies may also cause the Company to change how it licenses or prices its products, which may adversely impact the Company’s revenues and operating results |
| Emerging licensing models include hosting as well as subscription-based licensing, in which the licensee essentially rents software for a defined period of time, as opposed to the current perpetual license model |
| The Company’s future business, operating results and financial condition will depend on its ability to effectively train its sales force to sell an integrated comprehensive set of business software products and recognize and implement emerging industry standards and models, including new pricing and licensing models |
| If the Company fails to respond to emerging industry standards, including licensing models, and end-user requirements, the Company’s competitive position and revenues could be adversely affected |
| Our increasingly complex software products may contain errors or defects which could result in the rejection of our products and damage to our reputation as well as cause lost revenue, delays in collecting accounts receivable, diverted development resources and increased service costs and warranty claims |
| The Company’s software products are made up of increasingly complex computer programs |
| Software products are complex and products offered by the Company often contain undetected errors or failures (commonly referred to as bugs) when first introduced to the market or as new updates or upgrades of such products are released to the market |
| Despite testing by the Company, and by current and potential customers, prior to general release to the market, the Company’s products may still contain material errors after their initial commercial shipment |
| Such material errors may result in loss of or delay in market acceptance of the Company’s products, damage to the Company’s reputation, and increased service and warranty costs |
| Ultimately, such errors could lead to a decline in the Company’s revenues |
| The Company has from time to time been notified by some of its customers of errors in its various software products |
| Although it has not occurred to date, the possibility of the Company being unable to correct such errors in a timely manner could have a material adverse effect on the Company’s results of operations and its cash flows |
| In addition, if material technical problems with the current release of the various database and technology platforms on which the Company’s products operate, including Progress, IBM, Microsoft SQL or Microsoft |
| NET, occur, such difficulties could also negatively impact sales of these products, which could in turn have a material adverse effect on the Company’s results of operations |
| 19 ______________________________________________________________________ A variety of specific business interruptions could adversely affect our business |
| A number of particular types of business interruptions could greatly interfere with our ability to conduct business |
| For example, a substantial portion of our facilities, including our corporate headquarters and other critical business operations, are located near major earthquake faults |
| We do not carry earthquake insurance and do not fund for earthquake-related losses |
| In addition, our computer systems are susceptible to damage from fire, floods, earthquakes, power loss, telecommunications failures, and similar events |
| The Company continues to consider and implement its options and develop contingency plans to avoid and/or minimize potential disruptions to its telecommunication services |
| We may pursue strategic acquisitions, investments, and relationships and may not be able to successfully manage our operations if we fail to successfully integrate such acquired businesses and technologies, which could adversely affect our operating results |
| As part of its business strategy, the Company may continue to expand its product offerings to include application software products and services that are complementary to its existing software applications, particularly in the areas of electronic commerce or commerce over the Internet, or may gain access to established customer bases into which the Company can sell its current products |
| The Company’s acquisitions of Scala Business Solutions in 2004 and CRS in 2005 are typical of this ongoing strategy |
| However while this strategy has historically and may in the future involve acquisitions, investments in other businesses that offer complementary products, joint development agreements or technology licensing agreements, the specific risks we commonly encounter in these types of transactions include the following: • Difficulty in effectively integrating any acquired technologies or software products into our current products and technologies • Difficulty in predicting and responding to issues related to product transition such as development, distribution and customer support • The possible adverse impact of such acquisitions on existing relationships with third party partners and suppliers of technologies and services • The possibility that customers of the acquired company might not accept new ownership and may transition to different technologies or attempt to renegotiate contract terms or relationships, including maintenance or support agreements • The possibility that the due diligence process in any such acquisition may not completely identify material issues associated with product quality, product architecture, product development, intellectual property issues, key personnel issues or legal and financial contingencies • Difficulty in integrating acquired operations, including incorporating internal control structures, due to geographical distance, and language and cultural differences • Difficulty in retaining employees of the acquired company A failure to successfully integrate acquired businesses or technology for any of these reasons could have a material adverse effect on the Company’s results of operations |
| Future acquisitions of technologies or companies, which are paid for partially, or entirely through the issuance of stock or stock rights could prove dilutive to existing shareholders |
| Consistent with past experience, the Company expects that the consideration it might pay for any future acquisitions of companies or technologies could include stock, rights to purchase stock, cash or some combination of the foregoing |
| For example, the Company’s acquisition of Scala Business Solutions in 2004 involved the issuance of approximately 4dtta25 million shares of the Company’s Common Stock |
| If the Company issues stock or rights to purchase stock in connection with future acquisitions, earnings (loss) per share and then-existing holders of the Company’s Common Stock may experience dilution |
| We rely, in part, on third parties to sell our products |
| Disruptions to these channels would adversely affect our ability to generate revenues from the sale of our products |
| The Company distributes products through a direct sales force as well as through an indirect distribution channel, which includes value-added resellers (VARs) and other distributors and authorized consultants, consisting primarily of professional firms |
| During the years ended December 31, 2005 and 2004, approximately 16prca and 13prca, respectively, of the Company’s software license revenues were generated by VARs and distributors |
| If the 20 ______________________________________________________________________ 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 |
| Historically, the Company has sold its financial and customer relationship management (CRM) products through direct sales as well as through the indirect distribution channel |
| However, the Company is currently developing a distribution channel for certain of its manufacturing product lines not previously widely sold through VARs and other distributors |
| It is not yet certain that these products can be successfully sold through such a channel and the long term impact of this new distribution channel on the Company’s performance is as of yet undetermined as is the Company’s ability to generate additional license and services revenue from such a channel |
| The success of the Company’s distributors depends in part upon their ability to attract and maintain qualified sales and consulting personnel |
| Additionally, the Company’s distributors may generally terminate their agreements with the Company upon 30 days notice, while the Scala partners may generally terminate their agreements upon 30 days to several months notice |
| Almost all partners though may effectively terminate their agreements at any time by ceasing to promote or sell our products |
| If our VARs or other distributors are unable to maintain such qualified personnel or if several of the Company’s VARs or other distributors terminate their agreements and the Company is unable to replace them in a timely fashion, such factors could negatively impact the Company’s results of operations |
| Finally, there can be no assurance that having both a direct sales force and a distribution channel for the Company’s products will not lead to conflicts between those two sales forces which could adversely impact the Company’s ability to close sales transactions or could have a negative impact upon average selling prices, any of which may negatively impact the Company’s operating revenues and results of operations |
| A significant portion of our future revenue is dependent upon our existing installed base of customers continuing to license additional products as well as purchasing consulting services and renewing their annual maintenance and support contracts |
| If our existing customers fail to renew their maintenance and support agreements or fail to purchase new product enhancements or additional services from the Company at historical levels, the Company’s revenues and results of operations could be materially impacted |
| Historically, approximately 50prca to 60prca of the Company’s license revenues, 90prca of the Company’s maintenance revenues and a substantial portion of the Company’s consulting revenues are generated from the Company’s installed base of customers |
| Maintenance and support agreements with these customers are traditionally renewed on an annual basis at the customer’s discretion, and apart from historical MANAGE 2000 customers, there is normally no requirement that a customer so renew or that a customer pay new license fees or service fees to the Company following the initial purchase |
| As a result, if the Company’s existing customers fail to renew their maintenance and support agreements or fail to purchase new product enhancements or additional services at historical levels, our revenues and results of operations could be materially impacted |
| Our software products incorporate and rely upon third party software products for certain key functionality and our revenues, as well as our ability to develop and introduce new products, could be adversely affected by our inability to control or replace these third party products and operations |
| The Company’s products incorporate and rely upon software products developed by several other third party entities such as Microsoft, IBM and Progress |
| Specifically, the Company’s software products are built and depend upon several underlying and evolving relational database management system platforms including Microsoft SQL Server, Progress OpenEdge and IBM U2 and also are integrated with several other third party provider products for the purpose of providing or enhancing necessary functionality |
| In the event that these third party products were to become unavailable to the Company or to our customers, either directly from the third party manufacturers or through other resellers of such products, the Company could not readily replace these products with substitute products |
| As a result, the Company cannot provide assurance that these third parties will: • Remain in business • Continue to support the Company’s product lines • Maintain viable product lines • Make their product lines available to the Company on commercially acceptable terms • Not make their products available to the Company’s competitors on more favorable terms In the long term (ie a year or more), an interruption of supply from these vendors could potentially be overcome through migration to another third party supplier or development within the Company |
| However, any interruption in the short term could have a significant detrimental effect on the Company’s ability to continue to market and sell those of its products relying on these specific third party products and could have a material adverse effect on the Company’s business, results of operation, cash flows and financial condition |
| 21 ______________________________________________________________________ The market for Web-based development tools, application products and consulting and education services continues to emerge, which could negatively affect our client/server-based products and if the Company fails to respond effectively to evolving requirements of this market, the Company’s business, financial condition, results of operations and cash flows will be materially and adversely affected |
| The 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 the market for client/server computing will continue to grow, or will not decrease, or that the Company will be able to respond effectively to the evolving requirements of these markets |
| The Company believes that the environment for application software is continuing to change from client/server to a Web-based environment to facilitate commerce on the Internet |
| The market for our software products and services is highly competitive |
| If we are unable to compete effectively with existing or new competitors our business could be negatively impacted |
| The business information systems industry in general and the manufacturing, CRM and financial computer software industry specifically, in which the Company competes are very competitive and subject to rapid technological change, evolving standards, frequent product enhancements and introductions and changing customer requirements |
| 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 |
| A number of companies offer products that are similar to the Company’s products and target the same markets |
| In addition, any of these competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements (such as commerce on the Internet 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, including in new and emerging markets |
| 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 more quickly than will the Company to new technologies, evolving industry trends and changing customer requirements |
| Competition could cause price reductions, reduced margins or loss of market share for the Company’s products and services, any of which could materially and adversely affect the Company’s business, operating results and financial condition |
| There can be no assurance that the Company will be able to compete successfully against current and future competitors or that the competitive pressures that the Company may face will not materially adversely affect its business, operating results, cash flows and financial condition |
| We may not be able to maintain and expand our product offerings or business if we are not able to retain, hire and integrate sufficiently qualified personnel |
| The Company’s success depends in large part on the continued service of key management personnel that are not subject to employment agreements, including, but not limited to several of the key personnel employed as a result of the Company’s recent acquisition of Scala |
| In addition, the competition to attract, retain and motivate qualified technical, sales and software development personnel is intense |
| For example, the Company has at times, including during the rise of the Internet companies in the mid to late 1990’s, experienced significant attrition and difficulty in recruiting qualified personnel, particularly in software development and customer support |
| Additionally, the sudden unexpected loss of such technical personnel, such as developers can have a negative impact on the Company’s ability to develop and introduce new products in a timely and effective manner |
| There is no assurance that the Company will retain its key personnel, including those who came to the Company as part of acquisitions, or attract other qualified key personnel in the future |
| The failure to retain or attract such persons could have a material adverse effect on the Company’s business, operating results, cash flows and financial condition |
| 22 ______________________________________________________________________ Our future results could be harmed by economic, political, geographic, regulatory and other specific risks associated with our international operations |
| The Company believes that any future growth of the Company will be dependent, in part, upon the Company’s ability to maintain and increase revenues in its existing and emerging international markets, including Asia and Latin America |
| During the years ended December 31, 2005 and 2004, 45dtta8prca and 41dtta1prca, respectively, of total Company revenues were generated by the Company’s international operations |
| The Company expects its total revenues generated by international operations to be approximately 30prca to 40prca |
| However, there can be 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 |
| The increasingly international reach of the Company’s businesses could also subject the Company and its results of operations to unexpected, uncontrollable and rapidly changing economic and political conditions |
| Specifically, our international sales and operations are subject to inherent risks, including: • Differing intellectual property and labor laws • Lack of experience in a particular geographic market • Different and changing regulatory requirements in various countries and regions • Tariffs and other barriers, including import and export requirements and taxes on subsidiary operations • Fluctuating exchange rates and currency controls • Difficulties in staffing and managing foreign sales and support operations • Longer accounts receivable payment cycles • Potentially adverse tax consequences, including repatriation of earnings • Development and support of localized and translated products • Lack of acceptance of localized products or the Company in foreign countries • Shortage of skilled personnel required for local operations • Perceived health risks (eg SARS and avian influenza), natural disasters or terrorist risks which impact a geographic region and business operations therein Any one of these factors or a combination of them 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 |
| While the Company does enter into hedges and other similar foreign currency contracts, there can be no assurance that such activities will minimize the impact that fluctuations in the value of foreign currencies may have on the Company |
| As of December 31, 2005, the Company does not have any hedging or similar foreign currency contracts outstanding |
| Fluctuations in the value of foreign currencies could adversely impact the profitability of the Company’s foreign operations |
| If third parties infringe upon our intellectual property, we may expend significant resources enforcing our rights or suffer competitive injury, which could adversely affect our operating results |
| In addition, we may be subject to claims that we infringe upon the intellectual property of others |
| The Company considers its proprietary software and the related intellectual property rights in such products to be among its most valuable assets |
| The Company relies on a combination of copyright, trademark and trade secret laws (domestically and internationally), employee and third-party nondisclosure agreements and other industry standard methods for protecting ownership of its proprietary software |
| However, the Company cannot assure you that in spite of these precautions, an unauthorized third party will not copy or reverse-engineer certain portions of the Company’s products or obtain and use information that the Company regards as proprietary |
| From time to time, the Company does take legal action against third parties whom the Company believes are infringing upon the Company’s intellectual property rights |
| However, there is no assurance that the mechanisms that the Company uses to protect its intellectual property will be adequate or that the Company’s competitors will not independently develop products that are substantially equivalent or superior to the Company’s products |
| Moreover, the Company from time to time receives claims from third parties that the Company’s software products infringe upon the intellectual property rights of others |
| The Company expects that as the number of software products in the United States and worldwide increases and the functionality of these products further overlaps, the number of these types of claims will increase |
| This risk is potentially heightened by the Company’s recent acquisition of Scala Business solutions, which historically has done business in such diverse international markets as Eastern Europe, Asia and the Middle East |
| Although it has not yet occurred to date, any such claim, with or without merit, could result in costly litigation and require the Company to enter into royalty or licensing arrangements |
| The terms of such royalty or license arrangements, if required, may not be favorable to the Company |
| In addition, in certain cases, the Company provides the source code for some of its application 23 ______________________________________________________________________ software under licenses to its customers and distributors to enable them to customize the software to meet their particular requirements or translate or localize the products for resale in foreign countries, as the case may be |
| Although the source code licenses contain confidentiality and nondisclosure provisions, the Company cannot be certain that such customers or distributors will take adequate precautions to protect the Company’s source code or other confidential information |
| Moreover, regardless of contractual arrangements, the laws of some countries in which the Company does business or distributes its products do not offer the same level of protection to intellectual property, as do the laws of the United States |
| If open source software expands into enterprise software applications, our software license revenues may decline |
| Open source software includes a broad range of software applications and operating environments produced by companies, development organizations and individual software developers and typically licensed for use, distribution and modification at a nominal cost or often, free of charge |
| A notable example of open source software is the Linux operating system, which continues to gain in popularity |
| To the extent that the open source software models expand and non-commercial companies and software developers create and contribute competitive enterprise software applications to the open source community, we may have to adjust our pricing, maintenance and distribution strategies and models, which could adversely affect our revenue and operating margins |
| Our operating cash flows are subject to fluctuation, primarily related to our ability to timely collect accounts receivable and to achieve anticipated revenues and expenses |
| Negative fluctuations in operating cash flows may require us to seek additional cash sources to fund our working capital requirements |
| If additional cash sources are not available to the Company, our operations could be adversely affected |
| From January 1, 2001 through December 31, 2005, the Company’s quarterly operating cash flows have ranged from negative dlra7dtta6 million to positive dlra13dtta2 million |
| The Company’s cash and cash equivalents have increased from dlra26dtta8 million at December 31, 2000 to dlra49dtta8 million at December 31, 2005 |
| However, the Company has at times experienced decreasing revenues and, prior to the first quarter of 2003, continued operating losses |
| If in the future, the Company is not successful in achieving its anticipated revenues and expenses or maintaining a positive cash flow, the Company may be required to take actions to reduce its operating expenses, such as reductions in work force, and/or seek additional sources of funding |
| Since December 31, 1999, the Company has also experienced fluctuations in the proportion of accounts receivable over 90 days old |
| These fluctuations have been due to various issues, including product and service quality, deteriorating financial condition of customers during the recent recession, and lack of effectiveness of the Company’s collection processes |
| If the Company cannot successfully collect a significant portion of its net accounts receivable, the Company may be required to seek alternative financing sources |
| As of December 31, 2005, the Company has borrowed dlra125 million under its revolving credit facility |
| The market for our stock is volatile and fluctuations in operating results, changes in the Company’s guidance on revenues and earnings estimates and other factors could negatively impact our stock’s price |
| During the three year period ended December 31, 2005, the price of the Company’s common stock ranged from a low of dlra1dtta23 to a high of dlra17dtta50 |
| For year ended December 31, 2005, the stock price ranged from a low of dlra10dtta59 to a high of dlra15dtta75 |
| As of March 10, 2006, the Company had 54cmam743cmam094 shares of Common Stock outstanding |
| The market prices for securities of technology companies, including the Company’s, have historically been quite volatile |
| Quarter to quarter variations in operating results, changes in the Company’s guidance on revenues and earnings estimates, announcements of technological innovations or new products by the Company or its competitors, announcements of major contract awards, announcements of industry acquisitions by us or our competitors, changes in accounting standards or regulatory requirements as promulgated by the FASB, SEC, NASDAQ or other regulatory entities, changes in management, 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 related more to changes in recommendations or financial estimates by securities analysts than to the companies’ actual operating performance |
| Any of these conditions may adversely affect the market price of the Company’s Common Stock |
| 24 ______________________________________________________________________ When the recently adopted accounting standard for share-based compensation takes effect, the Company’s business practices may be materially altered |
| The Company historically compensated and incentivized its employees, including many of its key personnel and new hires, through the issuance of options to acquire Company Common Stock |
| The Company currently accounts for the issuance of stock options to employees using the intrinsic value method according to APB Opinion Nodtta 25, “Accounting for Stock Issued to Employees |
| ” As a result of recently enacted accounting standards, which require expense recognition for the fair value of stock options, effective January 1, 2006, the Company changed its previous practice by reducing the number of stock options granted to employees and granting restricted stock as an alternative |
| The effects of such change, if any, could impact the Company’s ability to retain existing employees or to attract qualified new candidates |
| As a result, the Company might have to increase cash compensation to these individuals |
| Such changes could have a negative impact upon the Company’s earnings and cash flows |
| If we are not able to successfully integrate CRS Retail Technology Group, Inc |
| and its operations with Epicor, our ability to achieve anticipated revenues and related profits, as well as our results for the CRS products may be adversely impacted and the business of Epicor may be disrupted and negatively impacted |
| The success of our recent acquisition of CRS will depend in large part upon our ability to successfully integrate the CRS business into Epicor |
| As with most acquisitions, integration issues are complex, time-consuming and expensive and, without proper planning and implementation, could significantly disrupt the business of CRS and thus, Epicor |
| The challenges involved in integrating CRS with Epicor include: • Coordinating sales and marketing efforts to effectively communicate the combined company’s capabilities; • Introducing and effectively selling and cross selling the CRS products into international (non-US) markets where they have not traditionally been offered; • Combining product offerings and technology; • Coordinating and combining domestic operations, relationships and facilities; • Coordinating and rationalizing research and development activities to enhance introduction of new products and technologies with reduced cost; • Coordinating CRS’ research and development efforts here in the United States with Epicor’s R&D facilities both in the US as well as in Moscow, Russia and Monterrey, Mexico; • Continuing to demonstrate to the existing CRS customers that the acquisition will not result in adverse changes in client service standards or business focus and helping customers conduct business easily with the Company; • Preserving distribution, marketing or other important relationships of both Epicor and CRS and resolving potential conflicts that may arise; • Successfully integrating the business cultures of Epicor and CRS, maintaining employee morale and retaining key employees; and • Consolidating and rationalizing corporate information technology and administrative infrastructures |
| The integration of the CRS business into Epicor’s business may not realize all of the anticipated benefits of the acquisition to the extent, or in the time frame, anticipated |
| The failure to fully integrate the CRS business successfully into Epicor or to realize all of the anticipated benefits of the acquisitions could seriously hinder our plans for product development and business and market expansion |
| Improvements to CRS’s internal controls may be required and if these improvements are not completed in a timely manner it could have an adverse effect on the Company’s ability to comply with the Sarbanes-Oxley Act of 2002 which could in turn have a material adverse impact on our business and financial condition |
| Although management has completed its assessment of the Company’s internal controls, as required by Section 404 of the Sarbanes-Oxley Act of 2002 as of December 31, 2005 and has concluded that the Company’s controls over financial reporting are not effective, in making this assessment, management has excluded the operations of CRS In excluding CRS from its assessment, the Company has considered the “Frequently Asked Questions” as set forth by the office of the Chief Accountant of the Division of Corporate Finance on June 24, 2004, as revised on October 6, 2004, which acknowledges that it may not be possible to conduct an assessment of an acquired business’s internal control over financial reporting in the period between the consummation date and the date of management’s assessment and contemplates that such business would be excluded from management’s assessment in the year of acquisition |
| 25 ______________________________________________________________________ While we are currently evaluating CRS’s internal controls in order to allow management to include CRS’s internal controls in management’s assessment of internal controls over financial reporting, as required by Section 404 as of December 31, 2006, it is possible that we may encounter significant delays in implementing these requirements as they relate to CRS Therefore, we cannot be certain about the timing of the completion of this evaluation, testing and remediation or the impact that these activities will have on the Company’s operations |
| If we are unable to comply with these requirements as they relate to CRS by December 31, 2006, it could have an adverse effect on the Company’s ability to comply with the Sarbanes-Oxley Act of 2002 and/or could subject the Company to sanctions or investigation by regulatory authorities |
| Any such actions could adversely affect our business and financial condition |
| We have recorded a large amount of goodwill and other acquired intangible assets which we will be required to write down and record an expense if they become impaired |
| In connection with our recent acquisitions, we currently have goodwill of dlra164dtta5 million and dlra73dtta5 million of amortizing acquired intangible assets on our balance sheet |
| Although the goodwill is not amortized, we are required to test the goodwill for impairment at least yearly and any time there is an indication an impairment may have occurred |
| If we determine that the carrying value of the goodwill or other acquired intangible assets is in excess of its fair value we will be required to write down a portion or all of the goodwill or other acquired intangible assets, which would adversely impact our results of operations |
| Foreign currency fluctuations may negatively impact the financial results of the Company |
| The results of operations or financial condition of the Company may be negatively impacted by foreign currency fluctuations |
| The Company operates throughout the world through international sales subsidiaries, network of exclusive third party distributors, and non-exclusive dealers |
| As a result, certain sales and related expenses are denominated in currencies other than the US dollar |
| The Company’s results of operations may fluctuate due to exchange rate fluctuation between the US dollar and other currencies because our financial results are reported on a consolidated basis in US dollars |
| In an effort to minimize operation fluctuations due to currency movements, we may attempt to limit foreign exchange exposure through operational strategies (eg natural hedges, netting, leading and lagging of accounts payables and account receivables) to offset the effects of exchange rate changes on inter-company trade balances |
| In addition, the Company may enter into forward currency contracts and purchased options contracts to mitigate unfavorable impacts to the other income section of the income statement |
| The Company will be required to estimate the volume of sales transactions in various currencies |
| Our estimates of transaction volumes in these various currencies could be overstated or understated |
| If these estimates are overstated or understated during periods of currency volatility, the Company may experience material currency gains or losses |
| 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 |