Form 10-K/A for Epicor Software Corporation

10-K/A 1 d10ka.htm FORM 10-K/A FOR EPICOR SOFTWARE CORPORATION Form 10-K/A for Epicor Software Corporation

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2005

¨	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 incorporation or organization)		(I.R.S Employer Identification No.)

18200 Von Karman Ave, Suite 1000

Irvine, California 92612

(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code: (949) 585-4000


Securities registered pursuant to Section 12(b) of the Act:		None
Securities registered pursuant to Section 12(g) of the Act:		Common Stock, par value $.001 per share Preferred Share Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filed. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filed x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the registrant’s voting Common Stock held by non-affiliates of the registrant was approximately $601,131,920 computed using the closing sales price of $13.20 per share of Common Stock on June 30, 2005 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 10, 2006 was 54,743,094.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2006 Annual Meeting of Stockholders, which Proxy Statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2005, are incorporated by reference in Part III of Annual Report on Form 10-K/A.

EXPLANATORY NOTE

This Annual Report on Form 10-K/A (“Form 10-K/A”) is being filed as Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, which was filed with the Securities and Exchange Commission (SEC) on March 31, 2006 (the “Original Filing”). We are filing this Amendment No. 1 to include Note 14 in the Notes to the Consolidated Financial Statements, which was inadvertently excluded from the Original Filing. We are therefore amending and restating “Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” in its entirety in this Amendment No. 1 to include Note 14 to the Notes to the Consolidated Financial Statements. Other than including Note 14 to the Notes to the Consolidated Financial Statements, there have been no other changes to the Original Filing.

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements


		Page
Financial Statements:

Report of Independent Registered Public Accounting Firm		2

Consolidated Balance Sheets as of December 31, 2005 and 2004 (Restated)		3

Consolidated Statements of Operations for the year ended December 31, 2005, 2004 (Restated) and 2003 (Restated)		4

Consolidated Statements of Comprehensive Income for the year ended December 31, 2005, 2004 (Restated) and 2003 (Restated)		5

Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2005, 2004 (Restated) and 2003 (Restated)		6

Consolidated Statements of Cash Flows for the year ended December 31, 2005, 2004 (Restated) and 2003 (Restated)		7

Notes to Consolidated Financial Statements		9

Financial Statement Schedule:

Schedule II – Valuation and Qualifying Accounts		49

All other schedules are omitted because they are not required or the required information is included in the consolidated financial statements or notes thereto.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Epicor Software Corporation

Irvine, California:

We have audited the accompanying consolidated balance sheets of Epicor Software Corporation and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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, such consolidated financial statements present fairly, in all material respects, the financial position of Epicor Software Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 16, the accompanying consolidated balance sheet as of December 31, 2004 and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the two years in the period December 31, 2004 have been restated.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 31, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an adverse opinion on the effectiveness of the Company’s internal control over financial reporting because of a material weakness.

/s/ Deloitte & Touche LLP

Costa Mesa, California

March 31, 2006

EPICOR SOFTWARE CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


	December 31,
	2005			2004
				(as Restated, see Note 16)
ASSETS
Current assets:
Cash and cash equivalents	$	49,768		$	53,711
Short term investments		3,271			—
Accounts receivable, net of allowance for doubtful accounts of $6,011 and $6,603 as of 2005 and 2004, respectively		67,728			55,296
Deferred income taxes		20,726			—
Inventory		4,572			253
Prepaid expenses and other current assets		6,759			6,466

Total current assets		152,824			115,726
Property and equipment, net		11,347			7,045
Deferred income taxes		22,449			—
Intangible assets, net		73,539			45,080
Goodwill		164,451			83,492
Other assets		4,341			4,406

	$	428,951		$	255,749

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,150		$	10,437
Accrued compensation and payroll taxes		27,114			21,404
Other accrued expenses		29,595			26,372
Current portion of long-term debt		100			352
Current portion of accrued restructuring costs		2,812			3,287
Current portion of deferred revenue		57,183			61,872

Total current liabilities		128,954			123,724
Long-term debt, less current portion		124,639			30,264
Long-term portion of accrued restructuring costs		1,460			2,462
Long-term portion of deferred revenue		2,284			1,642
Long-term deferred income taxes		1,164			—

Total long-term liabilities		129,547			34,368
Commitments and contingencies (Note 7)
Stockholders’ equity:
Series C and D convertible preferred stock, $0.001 par value, 5,000,000 shares authorized, zero and 168,158 shares issued and outstanding as of 2005 and 2004		—			3,046
Common stock, $0.001 par value, 60,000,000 shares authorized, 55,730,610 and 53,155,638 shares issued and outstanding as of 2005 and 2004, respectively		56			53
Additional paid-in capital		338,534			308,264
Less: treasury stock at cost, 884,357 and 416,825 shares as of 2005 and 2004, respectively		(10,679	)		(4,431	)
Less: unamortized stock compensation expense		(2,395	)		(2,379	)
Accumulated other comprehensive (loss)		(1,053	)		(848	)
Accumulated deficit		(154,013	)		(206,048	)

Net stockholders’ equity		170,450			97,657

	$	428,951		$	255,749

See accompanying notes to the consolidated financial statements.

EPICOR SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)


	Year ended December 31,
	2005			2004			2003
				(as Restated, see Note 16)			(as Restated, see Note 16)
Revenues:
License fees	$	77,052		$	59,037		$	36,715
Consulting		73,666			56,891			38,821
Maintenance		134,544			105,455			76,576
Other		4,151			3,483			2,220

Total revenues		289,413			224,866			154,332
Cost of revenues:
License fees		15,548			11,220			6,704
Consulting		58,640			41,580			31,330
Maintenance		28,212			25,114			18,254
Other		2,046			2,108			1,342
Amortization of intangible assets and capitalized software development costs		11,759			7,327			7,097

Total cost of revenues		116,205			87,349			64,727

Gross profit		173,208			137,517			89,605
Operating expenses:
Sales and marketing		61,034			47,975			37,537
Software development		28,454			24,736			20,058
General and administrative		42,087			35,043			20,424
Provision for doubtful accounts		1,544			1,485			(1,022	)
Stock-based compensation		2,625			2,617			3,336
Restructuring charges and other		359			2,382			937
Write-off of in-process research and development		2,000			—			—
Settlement of claim		—			(284	)		—

Total operating expenses		138,103			113,954			81,270

Income from operations		35,105			23,563			8,335
Other income (expense):
Interest income		1,235			819			748
Interest expense		(1,471	)		(604	)		(70	)
Other income (expense)		(935	)		1,698			(410	)

Other income (expense), net		(1,171	)		1,913			268

Income before income taxes		33,934			25,476			8,603
Provision (benefit) for income taxes		(18,189	)		1,336			399
Minority interest in income of consolidated subsidiary		88			171			—

Net income	$	52,035		$	23,969		$	8,204

Value of beneficial conversion related to preferred stock		—			—			(241	)

Net income applicable to common stockholders	$	52,035		$	23,969		$	7,963

Net income per share applicable to common stockholders:
Basic	$	0.95		$	0.47		$	0.17
Diluted	$	0.92		$	0.45		$	0.16
Weighted average common shares outstanding:
Basic		54,665			50,753			46,392
Diluted		56,574			53,714			49,509

See accompanying notes to consolidated financial statements.

EPICOR SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)


	Year Ended December 31,
	2005			2004			2003
				(as Restated, see Note 16)			(as Restated, see Note 16)
Net income applicable to common stockholders	$	52,035		$	23,969		$	7,963
Foreign currency translation adjustment		(205	)		(1,093	)		2,550

Comprehensive income	$	51,830		$	22,876		$	10,513

See accompanying notes to consolidated financial statements.

Epicor Software Corporation

Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)


	Series C and D convertible Preferred Stock					Common Stock					Additional Paid in Capital			Treasury Stock				Unamortized Stock Compensation Expense			Notes Receivable From Officers			Accumulated Other Comprehensive Income (loss)			Accumulated Deficit			Net Stockholders’ Equity
	Shares		Amount			Shares		Amount			Additional Paid in Capital			Shares	Amount			Unamortized Stock Compensation Expense			Notes Receivable From Officers			Accumulated Other Comprehensive Income (loss)			Accumulated Deficit			Net Stockholders’ Equity
Balance December 31, 2002, as previously reported	61,735		$	4,859		44,456,173		$	44		$	246,936		58,347	$	(87	)	$	(723	)	$	(7,796	)	$	(2,305	)	$	(237,142	)	$	3,786
Prior period adjustment (see Note 16)																												(838	)		(838	)

Balance December 31, 2002 (as Restated, see Note 16)	61,735		$	4,859		44,456,173		$	44		$	246,936		58,347	$	(87	)	$	(723	)	$	(7,796	)	$	(2,305	)	$	(237,980	)	$	2,948
Issuance of preferred stock	300,000			5,323																											5,323
Beneficial conversion option				241																								(241	)		—
Acquisition of treasury stock related to stock option exchange program														54,714		(235	)														(235	)
Issuance of restricted stock						3,000,000			3			7,727							(7,727	)											3
Collection of notes receivable from officers						(2,000,000	)		(2	)		(4,258	)									7,840									3,580
Interest accrued on notes receivable from officers																						(44	)								(44	)
Excess options in acquisition												112																			112
Stock-based compensation expense																			3,321												3,321
Forfeiture of unvested restricted stock from terminated employees						(74,591	)					(112	)						127												15
Employee stock purchases						357,988						519																			519
Exercise of stock options						490,651			1			1,164																			1,165
Net income (as Restated, see Note 16)																												8,204			8,204
Foreign currency translation adjustment (as Restated, see Note 16)																									2,550						2,550

Balance December 31, 2003 (as Restated)	361,735		$	10,423		46,230,221		$	46		$	252,088		113,061	$	(322	)	$	(5,002	)	$	—		$	245		$	(230,017	)	$	27,461
Conversion of preferred stock	(193,577	)		(7,377	)	1,935,770			2			7,375																			—
Acquisition of treasury stock related to stock option exchange program														303,764		(4,109	)														(4,109	)
Stock-based compensation expense																			2,617												2,617
Shares issued for acquisition of Scala, net of issuance cost of $679						4,248,207			4			45,329																			45,333
Forfeiture of unvested restricted stock from terminated employees						(4,102	)					(6	)						6												—
Employee stock purchases						134,329						1,086																			1,086
Exercise of stock options						611,213			1			2,392																			2,393
Net income (as Restated, see Note 16)																												23,969			23,969
Foreign currency translation adjustment (as Restated, see Note 16)																									(1,093	)					(1,093	)

Balance December 31, 2004 (as Restated)	168,158		$	3,046		53,155,638		$	53		$	308,264		416,825	$	(4,431	)	$	(2,379	)	$	—			(848	)	$	(206,048	)	$	97,657
Conversion of preferred stock	(168,158	)		(3,046	)	1,681,580			2			3,044																			—
Acquisition of treasury stock related to stock option exchange program														467,532		(6,248	)														(6,248	)
Stock-based compensation expense																			2,625												2,625
Issuance of restricted stock						200,000			—			2,643							(2,641	)											2
Forfeiture of unvested restricted stock from terminated employees						(190	)					—																			—
Employee stock purchases						122,997			—			1,326																			1,326
Exercise of stock options						570,585			1			2,298																			2,299
Tax benefits of excess stock option deductions												20,959																			20,959
Net income																												52,035			52,035
Foreign currency translation adjustment																									(205	)					(205	)

Balance December 31, 2005	—		$	—		55,730,610		$	56		$	338,534		884,357	$	(10,679	)	$	(2,395	)	$	—		$	(1,053	)	$	(154,013	)	$	170,450

See accompanying notes to consolidated financial statements

EPICOR SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Year Ended December 31,
	2005			2004			2003
				(as Restated, see Note 16)			(as Restated, see Note 16)
OPERATING ACTIVITIES
Net income applicable to shareholders	$	52,035		$	23,969		$	7,963
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		16,265			10,447			9,232
Stock-based compensation expense		2,625			2,617			3,336
Provision for doubtful accounts		1,544			1,485			(1,022	)
Restructuring charges and other		359			2,382			937
Write-off of in-process R&D		2,000			—			—
Deferred income taxes		(41,179	)		—			—
Tax benefits of excess stock option deductions		20,959			—			—
Settlement of claim		—			(284	)		—
Interest accrued on notes receivable from officers		—			—			(44	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(5,707	)		(18,729	)		1,114
Prepaid expenses and other current assets		2,010			5,211			(285	)
Other assets		573			(541	)		(514	)
Accounts payable		(4,339	)		2,762			2,081
Accrued expenses, compensation and payroll taxes		(3,423	)		(1,664	)		(1,072	)
Accrued restructuring costs		(1,687	)		(6,416	)		(3,507	)
Deferred revenue		(4,333	)		6,469			(1,295	)

Net cash provided by operating activities		37,702			27,708			16,924

INVESTING ACTIVITIES
Purchases of property and equipment		(3,393	)		(4,453	)		(1,346	)
Cash paid for acquisitions, net of cash acquired		(125,077	)		(36,905	)		(19,032	)
Purchases of short-term investments		(12,271	)		—			—
Sales of short-term investments		9,000			—			—
Decrease (increase) in restricted cash		—			501			(501	)

Net cash used in investing activities		(131,741	)		(40,857	)		(20,879	)

FINANCING ACTIVITIES
Proceeds from long-term debt		140,101			30,000			—
Proceeds from exercise of stock options		2,299			2,393			1,165
Proceeds from employee stock purchases		1,326			1,086			519
Net proceeds from issuance of restricted stock		—			—			3
Purchase of treasury stock		(6,248	)		(4,109	)		(235	)
Costs to register shares issued for Scala acquisition		—			(679	)		—
Issuance of preferred stock, net of transaction costs		—			—			5,323
Collections of notes receivable from officers		—			—			3,580
Principal payments on long term debt		(45,255	)		—			(2,229	)

Net cash provided by financing activities		92,223			28,691			8,126
Effect of exchange rates on cash		(2,127	)		(712	)		3,397

Net increase (decrease) in cash and cash equivalents		(3,943	)		14,830			7,568
Cash and cash equivalents at beginning of year		53,711			38,881			31,313

Cash and cash equivalents at end of year	$	49,768		$	53,711		$	38,881

See accompanying notes to consolidated financial statements.

EPICOR SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(in thousands)


	Year Ended December 31,
	2005		2004		2003
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest	$	1,458	$	216	$	92

Net income tax payments	$	2,382	$	702	$	320

Beneficial conversion option	$	—	$	—	$	241

NON CASH ITEMS:
Capital lease	$	—	$	599	$	—

Purchases of property and equipment not paid during the period	$	664	$	—	$	—

Common stock received in payment of notes receivable from officers	$	—	$	—	$	4,260

Conversion of preferred stock into common stock	$	3,046	$	7,377	$	—

See Note 3 for details of assets acquired and liabilities assumed in purchase transactions.

See accompanying notes to consolidated financial statements.

EPICOR SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

Epicor Software Corporation, a Delaware corporation, and its subsidiaries (Epicor or the Company) design, develop, market and support integrated enterprise business software solutions for use by mid-size businesses as well as divisions and subsidiaries of larger corporations worldwide. The Company also offers support, consulting and education services in support of its customers’ use of its software products. The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America.

Restatement of Financial Statements

As detailed in Note 16 “Restatement of Financial Statements,” the Company has restated its historical consolidated financial statements for the years ended December 31, 2004 and 2003 to correct the Company’s allocation of revenue between license fees and maintenance in multiple element arrangements and the timing of the recognition of these revenues. In addition, as a result of evaluating the impact of the incorrect allocation of revenues and the timing of the recognition of such revenues in the years ended December 31, 2005 and 2004, the Company has restated the quarterly financial data for the year ended December 31, 2004 and through September 30, 2005, see Note 17.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual amounts could differ from these estimates. Significant estimates made in preparing the consolidated financial statements include the allowance for doubtful accounts, cash flows used to evaluate the recoverability of the Company’s long-lived assets, deferred tax assets, and certain accrued liabilities related to restructuring activities and litigation.

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

The Company considers all liquid interest-earning investments with a maturity of more than three months at the date of purchase to be short-term investments. Short-term investments generally mature between three months and twelve months from the purchase date based on the Company’s cash management policy. All short-term investments are classified as available for sale and are recorded at market using the specific identification method; unrealized gains and losses are reflected in other comprehensive income. Cost approximates market for all classifications of cash and short-term investments; realized and unrealized gains and losses are not material.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, marketable securities, trade receivables and payables, and its credit facilities (Note 6). The carrying amounts of these instruments approximate fair value because of their short-term maturities and variable interest rates.

Inventory

Inventories, which are comprised solely of finished goods, are stated at the lower of cost (first-in, first-out or “FIFO”) or market. Probable losses from obsolete and slow moving inventories are recorded when identified.

Revenue Recognition

The Company recognizes revenue in accordance with accounting principles generally accepted in the United States of America, principally:

•

Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” issued by the American Institute of Certified Public Accountants (AICPA) and interpretations;

•

AICPA SOP No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions;”

•

Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” issued by the United States Securities and Exchange Commission as amended by Staff Accounting Bulletin No. 104, and

•

Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) EITF 00-21 “Revenue Arrangements with Multiple Deliverables.”

•

Statement of Position (SOP) No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” issued by the AICPA.

The Company enters into contractual arrangements with end users of its products that may include software licenses, maintenance services, consulting services, or various combinations thereof, including the sale of such elements separately. For each arrangement, revenues are recognized when both parties have signed an agreement, the fees to be paid by the customer are fixed or determinable, collection of the fees is probable, delivery of the product has occurred, vendor-specific objective evidence (VSOE) of the fair value of any undelivered elements exists and no other significant obligations on the part of the Company remain.

For multiple-element arrangements, the Company accounts for the software license component using the residual method. The residual method generally requires recognition of software license revenue in a multiple-element arrangement once all software products have been delivered and accepted by the customer and the only undelivered element is maintenance services or consulting services. The fair value of the maintenance services is determined based on VSOE of fair value and is deferred and recorded to revenue ratably over the maintenance term. The residual revenue is allocated to the license fee associated with the software products in the transaction. The Company’s maintenance services’ VSOE of fair value is determined by reference to the price the Company’s customers are required to pay for the services when sold separately (i.e. the maintenance services fees paid by the Company’s customers upon renewal).

If the services element of the arrangement is deemed essential to the functionality of the software arrangement, or if the Company enters into arrangements in which the customer payments are tied to specific milestones, the Company applies the provisions of SOP 81-1.

License Revenues: Amounts allocated to software license revenues are recognized at the time of shipment of the software when fair value for any undelivered elements is determinable and all the other revenue recognition criteria discussed above have been met.

Revenues on sales made to the Company’s resellers are recognized upon shipment of the Company’s software to the reseller, when the reseller has an identified end user and all other revenue recognition criteria noted above are met. Under limited arrangements with certain distributors, all the revenue recognition criteria have been met upon delivery of the product to the distributor and, accordingly, revenues are recognized at that time. The Company does not offer a right of return on its products.

Consulting Service Revenues: Consulting service revenues are comprised of consulting and implementation services and, to a limited extent, training. Consulting services are generally sold on a time-and-materials basis and can include services ranging from software installation to data conversion and building non-complex interfaces to allow the software to operate in integrated environments. Consulting engagements can last anywhere from one week to several months and are based strictly on the customer’s requirements and complexities and are independent of the functionality of the Company’s software. The Company’s software, as delivered, can be used by the customer for the customer’s purpose upon installation. Further, implementation and integration services provided are not essential to the functionality of the software, as delivered, and do not result in any material changes to the underlying software code. Services are generally separable from the other elements under the same arrangement since the performance of the services are not essential to the functionality of the other elements of the transaction, the services are described in the contract such that the total price of the arrangement would be expected to vary as the result of the inclusion or exclusion of the services, and VSOE of fair value exists for the services based on sold separately data. For services performed on a time-and-material basis, revenue is

recognized when the services are performed and billed. On occasion, the Company enters into fixed fee arrangements or arrangements in which customer payments are tied to achievement of specific milestones. In fixed fee arrangements revenue is recognized on a percentage-of-completion basis as measured by costs incurred to date as compared to total estimated costs to be incurred. In milestone achievement arrangements, the Company recognizes revenue as the respective milestones are met.

The Company has recorded unbilled consulting revenues totaling $851,000 and $885,000 at December 31, 2005 and 2004, respectively. These unbilled revenues represent consulting services performed during the last two weeks of the quarter but not billed until the 15^th of the following month. The Company cuts-off consulting billing on the 15^th of each month. Unbilled consulting revenue is recorded in accounts receivable in the accompanying consolidated balance sheet.

Maintenance Service Revenues: Maintenance service revenues consist primarily of fees for providing unspecified software upgrades on a when-and-if-available basis and technical support over a specified term, which is typically twelve months. Maintenance revenues are typically paid in advance and are recognized on a straight-line basis over the term of the contract.

Hardware revenues: The Company resells third party hardware systems and related peripherals as part of an end-to-end solution requested by its customers. This revenue is included in Other Revenues on the Company’s consolidated statements of operations. Hardware revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is considered probable. The Company considers delivery to occur upon shipment of the product, so long as title and risk of loss have passed to the customer.

Software License Indemnification: The Company’s standard software license agreements contain an infringement indemnity clause under which we agree to defend, indemnify and hold harmless the Company’s customers and business partners against liability and damages arising from third party claims that the Company’s products violate or infringe the intellectual property rights of others. These clauses constitute a form of guarantee that is subject to the disclosure requirements, but not the initial recognition or measurement provisions of Financial Accounting Standards Board issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guars of Indebtedness of Others.” We have never lost a third party infringement claim and to date, the Company’s costs to defend such claims and/or lawsuits have been insignificant. Although it is possible that in the future third parties may claim that the Company’s current or potential future software solutions infringe on their intellectual property, we do not currently expect a significant impact on the Company’s business, operating results or financial condition from such claims.

Allowance for Doubtful Accounts

The Company sells its products directly to end users, generally requiring a significant up-front payment and remaining terms appropriate for the creditworthiness of the customer. The Company also sells its products to VARs and other software distributors generally under terms appropriate for the creditworthiness of the VAR or distributor. The Company believes no significant concentrations of credit risk existed at December 31, 2005. Receivables from customers are generally unsecured. The Company continuously monitors its customer account balances and actively pursues collections on past due balances.

The Company maintains an allowance for doubtful accounts comprised of two components, one of which is based on historical collections performance and a second component based on specific collection issues. If actual bad debts differ from the reserves calculated based on historical trends and known customer issues, the Company records an adjustment to bad debt expense in the period in which the difference occurs. Such adjustment could result in additional expense or, as occurred in the first quarter of 2003, a reduction of expense.

The Company’s accounts receivable go through a collection process that is based on the age of the invoice and requires attempted contacts with the customer at specified intervals and the assistance from other personnel within the Company who have a relationship with the customer. If after a specified number of days, the Company has been unsuccessful in its collection efforts, the Company may turn the account over to a collection agency. The Company writes-off accounts to its allowance when the Company has determined that collection is not likely. The factors considered in reaching this determination are (i) the apparent financial condition of the customer, (ii) the success that the Company has had in contacting and negotiating with the customer and (iii) the number of days the account has been with a collection agency. To the extent that the Company’s collections do not correspond with historical experience, the Company may be required to incur additional charges.

Property and Equipment

Equipment, furniture, fixtures and leasehold improvements are recorded at cost. The Company depreciates equipment, furniture and fixtures using the straight-line method over the estimated useful lives of the assets, which are generally three to seven years. Leasehold improvements are amortized over the lesser of their estimated useful life or the remaining term of the lease.

Long-Lived Assets

Long-lived assets, such as property, plant and equipment and purchased intangible assets with finite lives, are evaluated for impairment. In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” long-lived assets are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable from future cash flows. Based on the Company’s most recent analysis, the Company has concluded there is no impairment at December 31, 2005.

Software Development Costs

Software development costs are accounted for in accordance with Statement SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” Accordingly, software development costs incurred subsequent to the determination of technological feasibility and marketability of a software product are capitalized. Amortization of capitalized software development costs commences when the products are available for general release. Amortization is determined on a product by product basis using the greater of a ratio of current product revenues to projected current and future product revenues or an amount calculated using the straight-line method over the estimated economic life of the product, which is generally three to five years. In addition to internally generated software development costs, the Company purchases certain software from third-party software providers and capitalizes such costs within software development costs. Software development costs were fully amortized prior to 2005. Amortization of software development costs is included in cost of revenues and totaled $795,000 for the year ended December 31, 2003.

Capitalized software development costs are stated at the lower of amortized cost or net realizable value. Recoverability of these capitalized costs is determined by comparing the forecasted future revenues from the related products, based on management’s best estimates using appropriate assumptions and projections at the time, to the carrying amount of the capitalized software development costs. If the carrying value is determined not to be recoverable from future revenues, an impairment loss is recognized equal to the amount by which the carrying amount exceeds the future revenues.

Intangible Assets

The Company’s intangible assets were recorded as a result of the following:

•

DataWorks Corporation (DataWorks) acquisition in December 1998

•

Clarus asset purchase in December 2002

•

ROI acquisition in July 2003

•

TDC/T7 asset purchase in July 2003

•

Platsoft acquisition in February 2004

•

Scala acquisition in June 2004

•

Strongline acquisition in December 2004

•

Scala Romania in March 2005

•

Scala Italy in April 2005

•

CRS Retail Technology Group, Inc. (CRS) in December 2005

The intangible assets represent acquired technology, customer base, trademarks, covenants not to compete and a third party funded development agreement. These intangibles are amortized on a straight-line basis over the estimated economic life of the asset. The Company continually evaluates the recoverability of the intangible assets and considers any events or changes in circumstances that would indicate that the carrying amount of an asset may not be recoverable. Any material changes in circumstances, such as large decreases in revenue or the discontinuation of a particular product line could require future write-downs in the Company’s intangible assets and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur. Amortization of intangible assets included in cost of revenues totaled $11,759,000 for the year

ended December 31, 2005, $7,327,000 for the year ended December 31, 2004 and $7,097,000 for the year ended December 31, 2003. Amortization included in general and administration expenses totaled $581,000 for the year ended December 31, 2005, $171,000 for the year ended December 31, 2004 and $75,000 for the year ended December 31, 2003.

Goodwill

The Company’s goodwill was recorded as a result of the Company’s acquisition of ROI and TDC/T7 in July 2003, the acquisition of Platsoft in February 2004, the acquisition of Scala in June 2004, the acquisition of Strongline in April 2005 and the acquisition of CRS in December 2005. In accordance with SFAS No. 141, “Business Combinations” issued by FASB in July 2001, the Company has recorded these acquisitions using the purchase method of accounting. Also in July 2001, FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead tested annually and written down when impaired. In accordance with SFAS No. 142, the Company performed an impairment review of its recorded goodwill in 2005 and determined that no impairment of goodwill existed because the estimated fair value of each reporting unit exceeded its carrying amount. The Company will test its recorded goodwill for impairment on an annual basis, or more often if indicators of potential impairment exist, by determining if the carrying value of each reporting unit exceeds its estimated fair value. Factors that could trigger an impairment include, but are not limited to, underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the Company’s overall business and significant negative industry or economic trends. Future impairment reviews may require write-downs in the Company’s goodwill and could have a material adverse impact on the Company’s operating results for the periods in which such write-downs occur.

Advertising Costs

The Company expenses production costs of advertising upon the first showing of the advertisement. Other advertising costs are expensed as incurred. Advertising expense totaled $1,069,000 for 2005, $962,000 for 2004 and $842,000 for 2003.

Foreign Currency Translation

The functional currency of the Company’s foreign operations is the respective local country’s currency. Assets and liabilities of the foreign operations are translated into U.S. dollars at the exchange rate at the balance sheet date, whereas revenues and expenses are translated into U.S. dollars at average exchange rates for the reporting period. Translation adjustments are included in accumulated other comprehensive income (loss) and realized transaction gains and (losses) are recorded in results of operations. For the years ended December 31, 2005, 2004 and 2003, the Company recorded translation gains (losses) of $(205,000), ($1,093,000) and $2,550,000, respectively, in accumulated other comprehensive income (loss). For the years ended December 31, 2005, 2004 and 2003 the Company realized transaction gains (losses) of ($1,207,000), $1,698,000 and ($414,000), respectively, in results of operations, primarily due to the strengthening of the Euro and the British pound.

The Company’s board of directors has approved a foreign currency risk policy that allows the Company to enter into forward contracts and purchase option agreements to hedge foreign currency risks. The Company has an on going program to evaluate its foreign currency risk and to minimize these risks whenever possible through leading and lagging accounts payables and accounts receivables, centralized cash management and other forms of natural hedging. The Company also uses forward contracts or purchased options to hedge some of its foreign currency transaction exposure. Gains and losses resulting from these transactions are included in other income and expense. As of December 31, 2005, the Company had no open forward contracts or purchase options.

Concentration of Credit Risks

The Company sells its products directly to end users generally requiring a significant up-front payment and remaining terms appropriate for the creditworthiness of the customer. The Company also sells its products to Value Added Resellers (VARs) and other software distributors generally under terms appropriate for the creditworthiness of the VAR or distributor. The Company believes no significant concentrations of credit risk existed at December 31, 2005 or 2004. Receivables from VARs, software distributors and end users are unsecured.

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. Deposits with its US issuers may exceed the amounts of federal deposit insurance provided on such deposits and deposits held outside the US are not afforded such protection. The Company is averse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk, and reinvestment risk. The Company mitigates default risk by investing in only the safest and highest credit quality securities and by constantly positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The Company has not experienced any losses on deposits of cash or cash equivalents.

Basic and Diluted Net Income per Share

Net income per share is calculated in accordance with SFAS No. 128, “Earnings per Share.” Under the provisions of SFAS No. 128, basic net income (loss) per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period and the weighted average common equivalent of convertible preferred stock outstanding for the period, excluding shares of unvested restricted stock. The convertible preferred stock is included because the holders of the convertible preferred stock participate in any dividends paid on the Company’s common stock on an as-converted basis, and because the Company believes the convertible preferred stock is a participating security that is essentially equivalent to common stock, based on all the rights and preferences of both types of stock. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period if their effect is dilutive. For the quarter ended June 30, 2004, the Company adopted EITF 03-6 “Participating Securities and the Two-Class Method under FASB Statement No. 128” and such adoption had no impact on the Company’s earnings per share calculation.

For the years ended December 31, 2005, 2004 and 2003 options to purchase 509,000, 529,000 and 537,000 shares, respectively, of common stock with a weighted average price of $15.07, $15.16 and $8.91, respectively, were outstanding but not included in the computation because the exercise prices of the options were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

The following table computes basic and diluted net income per share (in thousands, except per share amounts):


	Year Ended December 31,
	2005			2004			2003
Net income applicable to common stockholders	$	52,035		$	23,969		$	7,963
Basic:
Weighted average common shares outstanding		54,371			49,138			45,124
Weighted average common equivalent of convertible preferred stock		991			3,353			3,256
Weighted average common shares of unvested restricted stock		(697	)		(1,738	)		(1,988	)

Shares used in the computation of basic net income per share		54,665			50,753			46,392

Net income per share applicable to common stockholders – basic	$	0.95		$	0.47		$	0.17

Diluted:
Weighted average common shares outstanding		54,665			50,753			46,392
Stock options		1,594			2,096			1,708
Unvested restricted stock		315			865			1,409

Shares used in the computation of diluted net income per share		56,574			53,714			49,509

Net income per share applicable to common stockholders – diluted	$	0.92		$	0.45		$	0.16

Income Taxes

The Company accounts for income taxes using the asset and liability method, which recognizes deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company regularly reviews its deferred tax assets for recoverability and has established a valuation allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The Company assesses the recoverability of the deferred tax assets on an ongoing basis. In making this assessment the Company is required to consider all available positive and negative evidence to determine whether, based on such evidence, it is more likely than not that some portion, or all, of the net deferred assets will be realized in future periods.

Stock-Based Compensation

The Company applies with Accounting Principles Board (APB) No. 25 “Accounting for Stock Issued to Employees” in accounting for stock options issued to employees. Stock options are granted with an exercise price equal to the fair market value on the date of grant. Shares of stock purchased under the Company’s stock purchase plan are deemed non-compensatory as the plan qualifies under Section 423 of the Internal Revenue Code. Accordingly, no compensation expense has been recognized for options issued to employees and stock issued under the stock purchase plan.

Had compensation costs for the Company’s stock option plans and stock purchase plan been determined based upon fair value at the grant date consistent with SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net income and net income per share would have been as follows (in thousands, except per share amounts):


	Year Ended December 31,
	2005			2004			2003
Net income applicable to common stockholders as reported	$	52,035		$	23,969		$	7,963
Stock-based compensation included in net income		2,625			2,617			3,336
Stock based employee compensation expense determined under fair value based method for all awards – net of tax		(8,431	)		(5,503	)		(4,850	)

Net income – pro forma	$	46,229		$	21,083		$	6,449

Net income per share applicable to common stockholders as reported:
Basic	$	0.95		$	0.47		$	0.17

Diluted	$	0.92		$	0.45		$	0.16

Net income per share applicable to common stockholders – pro forma:
Basic	$	0.85		$	0.42		$	0.14

Diluted	$	0.83		$	0.39		$	0.13

For purposes of computing pro forma net income, the Company estimates the fair value of each option grant and employee stock purchase plan right on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable, while the options issued by the Company are subject to both vesting and restrictions on transfer. In addition, option-pricing models require input of highly subjective assumptions including expected stock price volatility. The Company uses projected data for expected volatility and estimates the expected life of its stock options based upon historical data.

The weighted average assumptions used to value the option grants and the stock purchase plan rights are as follows:


	Year Ended December 31,
	2005				2004				2003
	Stock Option Plans		Purchase Plan		Stock Option Plans		Purchase Plan		Stock Option Plans		Purchase Plan
Expected life (years)	4.0		0.5		4.4		0.5		3.7		0.5
Risk-free interest rate	3.8	%	3.5	%	3.2	%	2.5	%	2.4	%	1.0	%
Volatility	0.7		0.4		0.6		0.6		0.8		0.8
Dividend rate	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%	0.0	%

Comprehensive Income

Total comprehensive income represents the net change in stockholders’ equity during a period from sources other than transactions with stockholders and, as such, includes net income and other specified components. For the Company, the only components of total comprehensive income, other than net income, are the change in the cumulative foreign currency translation adjustments recorded in stockholders’ equity and unrealized gain loss associated with the short term investments.

New Accounting Pronouncements

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides new guidelines for the evaluation and determination of whether a loss on certain investments is other-than-temporary and requires certain additional disclosures pertaining to unrealized investment losses in a company’s financial statements. The effective date of the evaluation and measurement criteria of EITF Issue No. 03-1 has been delayed pending issuance of additional implementation guidance by the Financial Accounting Standards Board (FASB). The additional disclosure requirements, however, remain effective for annual periods ending after December 15, 2004. Management continues to monitor the FASB’s progress and does not currently expect the adoption of the evaluation and measurement criteria, as currently drafted to have a material impact on the Company’s consolidated results of operations or financial position.

In December 2004, the FASB issued SFAS No. 123-R, “Share-Based Payment” to replace SFAS No. 123, “Accounting for Stock-Based Compensation” and APB Opinion No. 25 “Accounting for Stock Issued to Employees.” SFAS 123-R requires, among other things, that all share-based payments to employees, including grants of stock options, be measured based on their grant-date fair value and recognized as expense in the financial statements effective for annual periods beginning after June 15, 2005. Unless observable market prices exist, the grant-date fair value is estimated using an appropriate option-pricing model as determined by management. Management must also make certain assumptions about employee exercise habits, forfeiture rates and select an appropriate amortization methodology for recognizing compensation expense. The Statement requires a modified prospective method of adoption or modified retrospective method. Under the modified prospective method, compensation expense will be recorded in the financial statements for (i) all awards granted after January 1, 2006 and the (ii) future vesting of awards outstanding as of January 1, 2006. Companies may also elect to restate their previously issued financial statements to provide consistency across all periods presented under the modified retrospective method. Management believes the adoption of SFAS 123-R will have a material impact on the Company’s consolidated results of operations and earnings per share. The Company has selected the modified prospective method for adoption. The Company is still evaluating the impact of SFAS 123-R, but based on current methodology, the Company expects stock-based compensation to be approximately $2.5 million for 2006.

Note 2. Composition of Certain Financial Statement Captions

The following summarizes the components of property and equipment (in thousands):


	December 31,
	2005			2004
Computer equipment	$	19,249		$	23,255
Furniture, fixtures and equipment		6,205			5,512
Leasehold improvements		10,131			8,259

		35,585			37,026
Less accumulated depreciation and amortization		(24,238	)		(29,981	)

	$	11,347		$	7,045

The following summarizes the components of deferred revenue (in thousands):


	As of
	December 31, 2005			December 31, 2004
Deferred license fees	$	576		$	1,116
Deferred maintenance		54,290			56,121
Deferred consulting		4,601			6,277

		59,467			63,514
Less current portion		(57,183	)		(61,872	)

Total long term deferred revenue	$	2,284		$	1,642

Deferred software license fees have been deferred because one or more of the revenue recognition criteria have not been met. Once these criteria have been fully met, the revenue will be recognized. Deferred maintenance represents fees paid in advance for unspecified software upgrades on a when-and-if available basis and technical support over a specified time and recognized on a straight-line basis over the term of the contract. Deferred consulting services represent prepaid and unearned consulting, implementation and training services. Revenue for these services will be recognized as the services are performed. Long-term deferred revenue relates to amounts deferred for maintenance expected to be provided beyond 2006.

Note 3. Acquisitions

CRS

On December 6, 2005, pursuant to a stock purchase agreement, the Company acquired approximately 96% of the outstanding capital stock of CRS Retail Technology Group, Inc. (CRS), a privately held company. The Company acquired the remaining 4% of the outstanding capital stock of CRS effective December 20, 2005. CRS is a provider of merchandising and point-of sale software solutions, hardware and services to the retail industry.

The total preliminary purchase price of CRS as of December 31, 2005 is as follows (in thousands):


Cash paid	$	121,000
Transaction costs		2,246

Total purchase price	$	123,246

Epicor used working capital and funds available under a Credit Agreement (Note 6) in order to finance the acquisition.

In connection with the acquisition, the Company is considering closing one of the CRS facilities. This assessment is ongoing and is expected to be finalized by June 2006. Certain costs associated with such an action will result in an increase in the goodwill recorded in the transaction in accordance with EITF 95-3 “Recognition of Liabilities in Connection with a Business Combination.” The Company expects to incur additional transaction costs related to the acquisition, primarily legal and accounting costs, during the first quarter of 2006. These costs will also result in an increase in the amount of goodwill recorded in the transaction.

In accordance with SFAS No. 141, “Business Combinations,” the acquisition has been accounted for under the purchase method of accounting and the results of CRS’s operations are included in the accompanying consolidated statement of operations from the December 6, 2005 acquisition date forward.

The preliminary purchase price was allocated to CRS’s tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of December 6, 2005 with any excess being ascribed to goodwill. Management is responsible for determining the fair values of these assets. The fair value of assets acquired and liabilities assumed represent management’s estimate of fair values. The following table summarizes the preliminary allocation of the purchase price, which is subject to completion (in thousands):


Fair value of tangible assets acquired:
Cash and marketable securities	$	3,438
Accounts receivable		9,356
Inventory		3,447
Property and equipment		3,802
Prepaid and other assets		3,280

Total tangible assets acquired		23,323
Acquired technology		26,700
Acquired in-process research and development		2,000
Customer base		6,000
Trade name		2,900
Non competition agreements		800
Goodwill		78,201
Accounts payable and accrued expenses		(11,918	)
Deferred revenue		(1,215	)
Other long-term liabilities		(3,545	)

Net assets acquired	$	123,246

Included in the Company’s operating results for the year ended December 31, 2005 is a charge of $2,000,000 for the write-off of the acquired in-process research and development expenses related to the CRS acquisition. The in-process research and development expenses arose from new product projects that were under development at the date of the acquisition and were expected to eventually lead to new products but had not yet established technological feasibility and for which no future alternative use was identified. Four in-process research and development projects were identified, ranging in completeness from 20% to 40%. Two of these projects are significant enhancements to existing projects; they are expected to be completed by the end of 2006 and represent 50% of the in-process research and development. The other two projects are new modules to exiting products; one will be complete in mid 2006 and the other in 2007. These represent the other 50% of the in-process research and development. The total estimated cost to complete all four projects is approximately $1.7 million. The valuation of the in-process research and development projects was based upon the discounted expected future cash flows of the products over the products expected life, reflecting the estimated stage of completion of the projects and the estimate of the costs to complete the projects.

Goodwill recorded in this transaction is not deductible for tax purposes.

Scala Italy

On April 5, 2005, the Company acquired certain assets of Scala Italia SRL (Scala Italy), a privately held company located in Italy, for approximately $1.5 million (including transaction costs of $0.2 million), of which approximately $1.0 million was paid at closing, $0.1 million paid in July 2005 and $0.1 million is to be paid in April 2006. The final payment, which was earned as of December 31, 2005, represents the amount due on a contingent earn-out against maintenance and support revenues generated by Scala Italy’s customer base. Prior to the acquisition, Scala Italy had been a distributor of Scala’s products and related consulting services in Italy. This acquisition is consistent with the Company’s continuing efforts to make selective acquisitions of dealers and partners in countries where the Company has a strong installed base of customers.

In accordance with SFAS No. 141, “Business Combinations,” the acquisition has been accounted for under the purchase method of accounting. The purchase price was allocated entirely to Scala Italy’s intangible assets acquired based on their estimated fair values as of April 5, 2005 as no tangible assets or liabilities were assumed. Management is responsible for determining the fair value of these assets. The fair value of the assets acquired and

liabilities assumed represent management’s estimate of fair value. The following table summarizes the components of the purchase price (in thousands):


Cash	$	1,163
Future payments, detailed above		108
Transaction costs		226

Total purchase price	$	1,497

Fair value of intangible assets acquired:
Customer base	$	770
Acquired technology		213
Covenant not to compete		20
Goodwill		494

Net assets acquired	$	1,497

Goodwill is amortizable for tax purposes when determining foreign earnings subject to tax in the U.S. It is not amortizable for tax in the foreign jurisdictions. The pro forma impact of this acquisition was not significant to the Company’s historical results of operations.

Scala Romania

On March 31, 2005, the Company acquired the remaining 80.1% of the outstanding shares it did not already own in SC Scala Business Solutions SRL (Scala Romania), a privately held company located in Romania, for approximately $2.0 million (including transaction costs of $0.1 million), of which approximately $0.1 million was paid at closing and $1.5 million was paid May 31, 2005. The final payment represented a contingent earn-out against maintenance and support revenues generated by Scala Romania’s customer base. The contingent earn-out was finalized on December 31, 2005 for $0.4 million and was paid on March 1, 2006. Prior to the acquisition, Scala Romania had been a distributor of Scala’s products and related consulting services in the Eastern European region. This acquisition is consistent with the Company’s continuing efforts to make selective acquisitions of dealers and partners in countries where the Company has a strong installed base of customers.

In accordance with SFAS No. 141, “Business Combinations,” the acquisition has been accounted for under the purchase method of accounting. The purchase price was allocated to Scala Romania’s tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of March 31, 2005. Management is responsible for determining the fair value of these assets. The fair value of the assets acquired and liabilities assumed represent management’s estimate of fair value. The following table summarizes the components of the purchase price (in thousands):


Cash	$	1,561
Future payments, detailed above		390
Transaction costs		67

Total purchase price	$	2,018

Fair value of tangible assets acquired:
Cash and marketable securities	$	347
Accounts receivable		426
Property and equipment		79
Prepaid and other assets		118
Customer base		1,699
Covenant not to compete		56
Assumed liabilities		(707	)

Net assets acquired	$	2,018

The pro forma impact of this acquisition was not significant to the Company’s historical results of operations.

Strongline

On December 14, 2004, the Company acquired all of the outstanding stock of Strongline A/S (Strongline), a privately held company located in Denmark, for approximately $5.5 million in cash (including transaction costs of

$0.1 million); $3.0 million was paid on December 14, 2004, $0.5 million was paid on December 23, 2005, $0.5 million is to be paid on December 14, 2006 and a $1.3 million working capital adjustment as described below. Prior to the acquisition, Strongline had been a distributor of Scala’s products and related consulting services in the Denmark region. This acquisition is consistent with the Company’s efforts to strengthen its presence in the Nordic market and continuing efforts to make selective acquisitions of dealers and partners in countries where the Company has a strong installed base of customers.

In accordance with SFAS No. 141, “Business Combinations,” the acquisition has been accounted for under the purchase method of accounting. The final purchase price was subject to a working capital adjustment based on the difference of the target working capital of Strongline, as specified in the Share Purchase Agreement, and the actual working capital as of the acquisition date. In June 2005, the working capital adjustment was finalized for $1.3 million and was paid in July 2005.

The purchase price was allocated to Strongline’s tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of December 14, 2004. Management is responsible for determining the fair value of these assets. The fair value of the assets acquired and liabilities assumed represent management’s estimate of fair value. The following table summarizes the components of the purchase price (in thousands):


Cash	$	4,865
Future payments, detailed above		500
Transaction costs		104

Total purchase price	$	5,469

Fair value of tangible assets acquired:
Cash and marketable securities	$	1,750
Accounts receivable		872
Property and equipment		158
Prepaid and other assets		74
Customer base		1,851
Acquired technology		500
Trademark		100
Covenant not to compete		680
Goodwill		879
Assumed liabilities		(1,395	)

Net assets acquired	$	5,469

Goodwill is amortizable for tax purposes when determining foreign earnings subject to tax in the U.S. It is not amortizable for tax in the foreign jurisdictions.

Scala

On June 18, 2004, Epicor acquired 22,570,851 ordinary shares of Scala Business Solutions N.V. (Scala), a publicly held software company headquartered in Amsterdam, the Netherlands, by means of an exchange offer made for all of the outstanding ordinary shares of Scala (the Exchange Offer). On July 8, 2004, Epicor acquired 1,096,048 shares of Scala during a subsequent offering period. The shareholders of Scala received 0.1795 newly issued shares of Epicor common stock and a cash payment of $1.8230 for each Scala ordinary share validly tendered during the initial and subsequent offering period. On July 12, 2004, Epicor purchased 27,452 additional Scala shares on Euronext for a price of $83,500. As described below, on August 9, 2005 the Company deposited the funds to “buy-out” the remaining 461,074 Scala shares not owned by Epicor. Therefore, as of August 9, 2005, the Company became the legal owner of all outstanding Scala shares.

Scala designs, develops, markets and supports collaborative enterprise resource planning (ERP) software that is used by the small- and medium-size divisions and subsidiaries of large multinational corporations, as well as by independent stand-alone companies, in developed and emerging markets. Scala’s solutions are based on a web services platform and utilize Microsoft^® technologies. Scala’s software and services support local currencies and accounting regulations, are available in more than 30 languages, and are used by customers in over 140 countries. The Scala acquisition provides the Company a significantly expanded worldwide presence and synergistic product offerings; both of which contributed to a purchase price in excess of the fair value of assets acquired and liabilities assumed and the creation of goodwill.

Epicor began the “buy-out procedures” in the fourth quarter of 2004 of Scala ordinary shares from the remaining minority Scala shareholders in accordance with Section 2:92a of the Dutch Civil Code. As part of that process, Epicor requested the Enterprise Section of the Amsterdam Court of Appeal to enter a judgment ordering the remaining shareholders of Scala to transfer their shares in exchange for a cash payment. On May 26, 2005, the Amsterdam Court of Appeal granted Epicor’s request and entered a judgment ordering the holders of the remaining 461,074 Scala shares not owned by Epicor or Scala to tender their shares to Epicor in return for payment to them of $4.07 per Scala share (to be exchanged into euros against the rate on June 18, 2004 as published on the website of the European Central Bank), and increased by the 4% Dutch statutory interest rate over the period from the May 26, 2005 Court ruling until the consignment as referred to below. On August 9, 2005, pursuant to the order of the Amsterdam Court of Appeal, the Company deposited EUR 1,571,409.90 into a consignment account of the Ministry of Finance (Afdeling Consignatie) in order to fund the consignation upon which Epicor became the legal owner of the Scala ordinary shares. The admitted institutions (the banks through which the remaining individual shareholders hold their shares) have been requested by Euroclear to transfer the shares via the giro clearing system as maintained by NECIFEF (Nederlands Centraal Instituut voor Giraal Effectenverkeer) to the account established for this consignment purpose for payment of the corresponding amount out of the consignment account by the Ministry of Finance. Subsequently, the shares were transferred and the admitted institutions paid out such amounts to their clients (i.e. the former Scala shareholders). The process was completed by December 31, 2005.

The total purchase price of Scala as of December 31, 2005, reflecting the 22,570,851 shares tendered during the initial offering period, the 1,096,048 shares tendered during the subsequent offering period and the 27,452 shares purchased on Euronext, and the buy-out of the remaining 461,074 shares, as described above, is summarized as follows (in thousands). The value of the Epicor common shares issued was $10.83 per share and is based on the average closing price for three days before, the day of, and three days after announcement of the transaction.


Value of securities issued	$	46,012
Cash paid		44,899
Transaction costs		4,839

Total purchase price	$	95,750

Epicor used working capital and funds available under a Credit Agreement (Note 6) in order to finance the cash portion of the offer price.

In connection with the acquisition, the Company formulated a restructuring plan for the Scala operations. As a result, the Company recorded a liability of $6.2 million for the costs related to Scala facility closures and office consolidations and involuntary employee terminations. These liabilities were included in the allocation of the purchase price in accordance with SFAS No. 141, “Business Combinations” and EITF Issue No. 95-3 “Recognition of Liabilities in Connection with a Purchase Business Combination.” Execution of the restructuring plan was largely completed as of December 31, 2005.

The Company has evaluated Scala’s pre-acquisition tax contingencies. At June 30, 2005, it was determined that a probable additional liability exists for these matters and an accrual was recorded as an adjustment to goodwill.

In accordance with SFAS No. 141, “Business Combinations,” the acquisition has been accounted for under the purchase method of accounting and the results of Scala’s operations are included in the accompanying consolidated statements of income from the June 18, 2004 acquisition date forward and include a minority interest of 1.9% through August 9, 2005, representing the amounts allocable to Scala shares that have not been tendered.

The purchase price was allocated to Scala’s tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of June 18, 2004 with any excess being ascribed to goodwill. Management is responsible for determining the fair value of these assets. The fair value of the assets acquired and liabilities assumed represent management’s estimate of fair values. The following table summarizes (in thousands) the allocation of the purchase price. Such amounts will change as discussed above.


Fair value of tangible assets acquired:
Cash and marketable securities	$	13,474
Accounts receivable		8,443
Property and equipment		1,406
Prepaid and other assets		5,910

Total tangible assets acquired		29,233
Acquired technology		21,650
Customer base		7,260
Trademark		5,740
Third party funded development agreement		950
Goodwill		74,406
Accounts payable and accrued expenses		(21,345	)
Accrued restructuring		(6,248	)
Deferred revenue		(15,896	)

Net assets acquired	$	95,750

Goodwill is amortizable for tax purposes when determining foreign earnings subject to tax in the U.S. It is not amortizable for tax in the foreign jurisdictions.

Platsoft

On February 18, 2004, the Company acquired all of the outstanding stock of the Quantum Group, Amida Limited, and Platsoft Limited (Platsoft) a privately held group of companies for approximately $1.4 million (including transaction costs of $0.2 million); $0.7 million was paid on February 18, 2004, $0.2 million was paid on February 18, 2005 and $0.2 million was paid on February 20, 2006. The group includes Platsoft, a value-added-reseller (VAR) that has been one of the Company’s leading resellers in the United Kingdom and Europe delivering integrated business solutions which enable companies to reduce their costs, improve profitability and benefit from Microsoft technologies. The Company plans to continue to develop and support Platsoft’s existing customer base to create new sales opportunities. The acquisition of Platsoft was driven by the continuing success of the Company’s products in the United Kingdom and the synergistic strengths of the two companies. Platsoft’s technical resources are expected to enhance the Company’s services efforts and the combined consulting and support resources will provide a critical mass that should benefit all of the Company’s customers. These factors contributed to a purchase price in excess of the fair value of assets acquired and liabilities assumed and the creation of goodwill. The Company recorded the acquisition of Platsoft as a purchase in the first quarter of 2004 and the results of Platsoft operations are included in the accompanying consolidated statements of operations from the date of acquisition.

In accordance with SFAS No. 141, “Business Combinations,” the acquisition has been accounted for under the purchase method of accounting. The purchase price was allocated to Platsoft’s tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of February 18, 2004, with any excess being ascribed to goodwill. Management is responsible for determining the fair value of these assets. The fair value of the assets acquired and liabilities assumed represent management’s estimate of fair values. The following table summarizes the components of the purchase price (in thousands):


Cash	$	1,168
Transaction costs		228

Total purchase price	$	1,396

Fair value of tangible assets acquired	$	1,267
Customer base		1,065
Covenant not to compete		38
Goodwill		406
Assumed liabilities		(1,380	)

Net assets acquired	$	1,396

Goodwill recorded in this transaction is not deductible for tax purposes.

The pro forma impact of this acquisition was not significant to the Company’s historical results of operations.

ROI

On July 8, 2003, the Company acquired all of the outstanding stock of ROI, a privately held ERP provider of manufacturing software solutions, for approximately $20.8 million in an all cash transaction. The Company plans to continue to develop and support ROI’s existing product line and to also leverage ROI’s existing market position and customer base to create new sales opportunities which complement the Company’s existing market position in

the discrete make-to-order manufacturing, distribution, hospitality and services-oriented industries. Further, this acquisition allows the Company to deliver its Web services manufacturing solution to an expanded base of midmarket customers. The Company recorded the acquisition of ROI as a purchase in 2003 and the results of ROI operations are included in the accompanying consolidated statement of operations from the date of acquisition.

Other Acquisitions

In June 2005, the Company purchased certain assets of a distributor of Scala’s products and provider of related consulting services for approximately $0.4 million. As no tangible assets or liabilities were acquired, the purchase price of $0.4 million was allocated to customer base and covenant not to compete. In January 2005, the Company purchased certain assets of a distributor of Scala’s products and provider of related consulting services for approximately $0.7 million. As no tangible assets or liabilities were acquired, the purchase price of $0.7 million was allocated to customer base. In October 2004, the Company purchased certain assets of a distributor of Scala’s products and provider of related consulting services for approximately $0.3 million. As no tangible assets or liabilities were acquired, the purchase price of $0.3 million was allocated to customer base.

Pro Forma Information

Actual results of operations of the companies acquired in 2005 and 2004 are included in the consolidated financial statements from the dates of acquisition. The unaudited pro forma statement of operations data of the Company set forth below gives effect to the acquisitions by Epicor of CRS, Strongline, and Scala using the purchase method as if they occurred on January 1, 2004 and 2005 and include amortization of identified intangibles, interest expense on debt incurred to finance the acquisitions, elimination of amortization and interest related to CRS debt and intangibles not assumed in the acquisition, and the write-off of in-process research and development. The pro forma impact of Scala Romania, Scala Italy, and Platsoft are not included as the impact of these acquisitions was not significant to the Company’s historical results of operations. This pro forma information is presented for illustrative purposes only and is not necessarily indicative of the combined financial position or results of operations for future periods or the financial position or result of operations that actually would have been realized had the acquisitions occurred at that time. (in thousands, except per share data)


	*(Unaudited)* December 31,
	2005		2004
Total revenues	$	343,022	$	332,270
Net income	$	43,810	$	6,170
Net income per share:
Basic	$	0.80	$	0.12

Diluted	$	0.77	$	0.11

Note 4. Goodwill and Intangible Assets

In acquisitions accounted for using the purchase method, goodwill is recorded for the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired. SFAS No. 142 requires a periodic review of goodwill and indefinite life intangibles for possible impairment. In accordance with SFAS No. 142, the Company performed an impairment review of its recorded goodwill in 2005 and determined that no impairment of goodwill existed because the estimated fair value of each reporting unit exceeded its carrying amount. The following table represents the balance and changes in goodwill as of and for the years ended December 31, 2005 and 2004 (in thousands):


Balance as of December 31, 2003	$	10,841
Scala		72,245
Platsoft		406

Balance as of December 31, 2004	$	83,492
Strongline goodwill		879
Additional Scala goodwill		2,161
Scala Italy goodwill		494
CRS goodwill		78,201
Reduction of ROI goodwill		(738	)
Foreign currency translation		(38	)

Balance as of December 31, 2005	$	164,451

The Strongline goodwill is the result of the Company recording a working capital adjustment and management completing its analysis during the year of 2005 of the fair value of the assets acquired and the liabilities assumed. The additional Scala goodwill is the result of additional transaction costs incurred during 2005, the buy-out of the remaining outstanding shares and a liability for pre-acquisition tax contingencies (Note 3). The reduction of ROI goodwill is related to the release of the deferred tax asset and is in accordance with SFAS No. 109.

The Company added or allocated the following intangible assets as a result of acquisitions completed during 2005 and the Strongline adjustment and reallocation as discussed above (in thousands):


	Strongline			Scala Romania		Scala Italy		CRS		Other		Foreign Currency Translation			Total		Weighted Average Amortization Period
Acquired technology	$	500		$	—	$	213	$	26,700	$	—	$	—		$	27,413	5 years
Customer base		(653	)		1,699		770		6,000		1,208		(88	)		8,936	7 years
Trademark		100			—		—		2,900		—		—			3,000	5 years
Covenant not to compete		680			56		20		800		9		—			1,565	1-2 years

Total	$	627		$	1,755	$	1,003	$	36,400	$	1,217	$	(88	)	$	40,914

These intangibles will be amortized on a straight-line basis over the estimated economic life of the assets. As of December 31, 2005, the Company has not identified any indicators of impairment associated with identified intangible assets.

The following table summarizes the components of intangible assets (in thousands):


	As of December 31, 2005						As of December 31, 2004						Amortization Period
	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net		Amortization Period
Acquired technology	$	77,401	$	31,095	$	46,306	$	49,988	$	24,439	$	25,549	5 years
Customer base		29,486		11,608		17,878		20,550		8,295		12,255	7 years
Trademark		10,290		2,589		7,701		7,290		1,071		6,219	5 years
Third party funded development agreement		950		583		367		950		203		747	3 years
Covenant not to compete		2,115		828		1,287		550		240		310	1-2 years

Total	$	120,242	$	46,703	$	73,539	$	79,328	$	34,248	$	45,080

Amortization expense of the Company’s intangible assets included in cost of revenues for the years ended December 31, 2005, 2004 and 2003 was $11,759,000, $7,327,000 and $7,097,000, respectively. Amortization expense of the Company’s intangible assets included in general and administrative expense for the years ended December 31, 2005 and 2004 was $581,000 and $171,000, respectively. Estimated amortization expense for 2006, 2007, 2008, 2009, 2010 and thereafter is approximately $18,222,000, $16,586,000, $15,542,000, $11,584,000, $8,433,000 and $3,172,000, respectively.