1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-27876
JDA SOFTWARE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0787377
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
14400 NORTH 87TH STREET
SCOTTSDALE, ARIZONA 85260
(602) 404-5500
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether 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) had been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of the Registrant's Common Stock,
$0.01 par value, was 24,342,423 as of July 31, 2000.
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JDA SOFTWARE GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 .... 3
Condensed Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2000 and June 30, 1999 .............................. 4
Condensed Consolidated Statements of Comprehensive Income for the Three and Six
Months ended June 30, 2000 and June 30, 1999 .............................. 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and June 30, 1999 ........................................... 6
Notes to Interim Condensed Consolidated Financial Statements ........................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......................... 28
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 30
Item 4. Submission of Matters to a Vote of Security Holders ................................. 30
Item 6. Exhibits and Reports on Form 8-K .................................................... 30
Signature ................................................................................... 31
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 42,844 $ 58,283
Marketable securities 28,201 30,423
Accounts receivable, net 49,129 32,302
Income tax receivable 24 2,201
Deferred tax asset 3,767 2,345
Prepaid expenses and other current assets 8,364 5,114
--------- ---------
Total current assets 132,329 130,668
PROPERTY AND EQUIPMENT, NET 22,473 23,987
GOODWILL AND OTHER INTANGIBLES, NET 52,004 31,635
DEFERRED TAX ASSET 4,468 5,933
MARKETABLE SECURITIES 5,374 4,822
--------- ---------
Total assets $ 216,648 $ 197,045
========= =========
CURRENT LIABILITIES:
Accounts payable $ 2,776 $ 2,669
Accrued expenses and other liabilities 17,316 11,929
Deferred revenue 13,983 7,584
--------- ---------
Total current liabilities 34,075 22,182
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized 2,000,000 Shares; None issued or -- --
outstanding
Common stock, $.01 par value. Authorized 50,000,000 Shares; Issued and
outstanding 24,225,101 and 23,954,537, respectively 242 240
Additional paid in capital 178,831 176,101
Accumulated earnings (deficit) 5,886 (93)
Accumulated other comprehensive loss (2,386) (1,385)
--------- ---------
Total stockholders' equity 182,573 174,863
--------- ---------
Total liabilities and stockholders' equity $ 216,648 $ 197,045
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
Software licenses $ 18,630 $ 10,669 $ 34,132 $ 18,093
Consulting services 19,703 21,759 38,258 45,033
Maintenance services 7,770 4,748 12,913 9,236
-------- -------- -------- --------
Total revenues 46,103 37,176 85,303 72,362
-------- -------- -------- --------
COST AND EXPENSES:
Cost of software licenses 807 529 1,698 1,013
Cost of consulting services 16,090 15,883 31,635 32,634
Cost of maintenance services 2,088 1,472 3,862 3,047
Product development 7,019 6,180 13,174 11,794
Sales and marketing 7,442 6,385 13,904 12,878
General and administrative 5,309 5,240 9,318 9,315
Amortization of intangibles 1,917 1,103 3,009 2,225
Purchased in-process research and development 200 -- 200 --
Restructuring and asset disposition charge -- -- 828 2,111
-------- -------- -------- --------
Total cost and expenses 40,872 36,792 77,628 75,017
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 5,231 384 7,675 (2,655)
Other income, net 935 916 2,127 1,839
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 6,166 1,300 9,802 (816)
Income tax provision (benefit) 2,405 520 3,823 (326)
-------- -------- -------- --------
NET INCOME (LOSS) $ 3,761 $ 780 $ 5,979 $ (490)
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ .16 $ .03 $ .25 $ (.02)
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ .15 $ .03 $ .24 $ (.02)
======== ======== ======== ========
SHARES USED TO COMPUTE:
Basic earnings (loss) per share 24,218 23,724 24,148 23,636
======== ======== ======== ========
Diluted earnings (loss) per share 25,448 23,724 25,379 23,636
======== ======== ======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------ ----------
2000 1999 2000 1999
------- ------- ------- -------
NET INCOME (LOSS) $ 3,761 $ 780 $ 5,979 $ (490)
OTHER COMPREHENSIVE LOSS:
Unrealized holding gain (loss) on marketable securities
available for sale, net 7 -- 29 --
Foreign currency translation adjustment (820) (83) (1,030) (712)
------- ------- ------- -------
COMPREHENSIVE INCOME (LOSS) $ 2,948 $ 697 $ 4,978 $(1,202)
------- ------- ------- -------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
--------------
2000 1999
---- ----
OPERATING ACTIVITIES:
Net income (loss) $ 5,979 $ (490)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,955 5,888
Provision for doubtful accounts 1,194 1,950
Net loss on disposal of property and equipment 96 218
Write-off of purchased in-process research and development 200 --
Deferred income taxes 43 74
Changes in assets and liabilities:
Accounts receivable (13,060) (1,325)
Income tax receivable 2,109 (871)
Prepaid expenses and other current assets (1,984) (166)
Accounts payable (128) (1,799)
Accrued expenses and other liabilities (708) (1,045)
Deferred revenue 588 24
--------- ---------
Net cash provided by operating activities 1,284 2,458
--------- ---------
INVESTING ACTIVITIES:
Purchase of marketable securities (274,339) (105,396)
Sales of marketable securities 5,244 14,349
Maturities of marketable securities 270,794 81,545
Purchase of Intactix International, Inc., net of cash acquired (18,677) --
Purchase of property and equipment (2,618) (6,677)
Proceeds from disposal of property and equipment 582 1,237
--------- ---------
Net cash used in investing activities (19,014) (14,942)
--------- ---------
FINANCING ACTIVITIES:
Issuance of common stock - stock option plan 1,132 421
Issuance of common stock - employee stock purchase plan 1,338 1,574
Tax benefit - stock options and employee stock purchase plan 262 --
Payments on capital lease obligations (20) (46)
--------- ---------
Net cash provided by financing activities 2,712 1,949
--------- ---------
Effect of exchange rates on cash (421) (118)
--------- ---------
Net (decrease) increase in cash and cash equivalents (15,439) (10,653)
--------- ---------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 58,283 42,376
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 42,844 $ 31,723
========= =========
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
--------------
2000 1999
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 1,424 $ 1,288
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquisition of Intactix International, Inc.:
Fair value of current assets acquired, other than cash $ (6,680)
Fixed assets (534)
In-process research and development (200)
Developed software and other intangibles (23,381)
Liabilities assumed 6,325
Deferred revenue 5,793
----------
Net cash used to purchase Intactix International, Inc. $ (18,677)
----------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PERCENTAGES, SHARES, PER SHARE
AMOUNTS, OR AS OTHERWISE STATED)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
applicable to interim financial statements. Accordingly, they do not include all
of the information and notes required for complete financial statements. In the
opinion of management, all adjustments and reclassifications considered
necessary for a fair and comparable presentation have been included and are of a
normal recurring nature. Operating results for the three and six months ended
June 30, 2000, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
2. ACQUISITION
We acquired certain assets of Intactix International, Inc. ("Intactix")
from Pricer AB in April 2000 for $20.5 million in cash and assumed certain
leasehold, trade and other accrued liabilities, and specific acquisition related
liabilities. Intactix is a leading provider of space management solutions for
the retail industry and consumer product goods manufacturers. The acquisition
was accounted for as a purchase, and accordingly, the operating results of
Intactix have been included in our consolidated financial statements from the
date of acquisition. The purchase price was allocated to the assets acquired,
which include certain intangible assets and in-process research and development
("IPR&D"), based on their fair market values. The acquisition resulted in an
excess of acquired net assets over cost. This excess has been allocated to
reduce proportionately the values assigned to certain intangible assets in
determining their fair values. IPR&D includes the value of products in the
development stage for which technological feasibility has not been established
and which we believe have no alternative future use. In accordance with
applicable accounting rules and the valuation guidance provided by the
Securities and Exchange Commission, we expensed $200,000 of purchased IPR&D
during the second quarter of 2000 and recorded a related tax benefit of $78,000.
The following pro forma consolidated results of operations for the six months
ended June 30, 2000 and 1999 assume the Intactix acquisition occurred as of
January 1 of each year. The pro forma results are not necessarily indicative of
the actual results that would have occurred had the acquisition been completed
as of the beginning of each of the periods presented, nor are they necessarily
indicative of future consolidated results.
SIX MONTHS
ENDED JUNE 30,
--------------
2000 1999
---- ----
Total revenues .................. $ 91,540 $ 84,589
Net income (loss) ............... $ 5,336 $ (2,626)
Basic earnings (loss) per share . $ .22 $ (.11)
Diluted earnings (loss) per share $ .21 $ (.11)
3. EARNINGS PER SHARE
Shares used in the earnings per share calculation are as follows.
Common stock equivalents have been excluded from the earnings (loss) per share
calculation for the three and six months ended June 30, 1999 as their effect
would be antidilutive:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
Shares--Basic earnings per share . ...... 24,218 23,724 24,148 23,636
Dilutive common stock equivalents ....... 1,230 -- 1,231 --
------ ------ ------ ------
Shares--Diluted earnings per share ...... 25,448 23,724 25,379 23,636
====== ====== ====== ======
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4. SEGMENT DISCLOSURES
We are a leading provider of software solutions designed specifically to
address the supply chain management, business process, analytical application
and e-commerce requirements of the retail industry. Our products link
point-of-sale level information with the centralized merchandising, planning and
financial functions that ultimately affect decisions with suppliers and vendors.
We conduct business in five geographic regions that have separate management
teams and reporting infrastructures: the United States, EMEA (Europe, Middle
East and Africa), Asia/Pacific, Canada and Latin America. Similar products and
services are offered in each geographic region and local management is evaluated
primarily based on total revenues and operating income. Identifiable assets are
also managed by geographic region. The geographic distribution of our revenues
and identifiable assets is as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
United States $ 27,582 $ 18,657 $ 46,961 $ 38,869
EMEA 8,500 10,775 18,216 20,697
Asia/Pacific 6,568 3,168 13,494 5,371
Canada 2,700 2,175 3,827 4,925
Latin America 1,501 3,070 3,873 4,289
-------- -------- -------- --------
Total International 19,269 19,188 39,410 35,282
-------- -------- -------- --------
Sales and transfers among regions (748) (669) (1,068) (1,789)
-------- -------- -------- --------
Total revenues $ 46,103 $ 37,176 $ 85,303 $ 72,362
======== ======== ======== ========
JUNE 30, DECEMBER 31,
2000 1999
IDENTIFIABLE ASSETS:
United States $174,670 $161,126
EMEA 23,373 20,443
Asia/Pacific 9,516 6,979
Canada 5,411 4,396
Latin America 3,678 4,101
-------- --------
Total International 41,978 35,919
-------- --------
Total identifiable assets $216,648 $197,045
======== ========
We classify our products and services into three primary product
categories: Enterprise Systems which are corporate level merchandise management
systems that gather and distribute data throughout an organization to support
the retail process and provide decision support for inventory control, cost and
price management, purchase order management, automated replenishment,
merchandise planning and allocation; In-store Systems that provide point-of-sale
and back office applications which enable a retailer to capture, analyze and
transmit customer demographic and other operational information to corporate
level merchandise management systems; and Analytic Applications that provide a
comprehensive set of tools for analyzing business results and trends, monitoring
strategic plans and enabling tactical decisions. A summary of the revenues and
operating income (loss) attributable to each of these product categories for the
three and six months ended June 30, 2000 and 1999 is as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
REVENUES:
Enterprise Systems $22,104 $21,262 $44,521 $44,182
In-store Systems 8,329 6,072 14,458 11,026
Analytic Applications 15,670 9,842 26,324 17,154
------- ------- ------- -------
Total revenues $46,103 $37,176 $85,303 $72,362
======= ======= ======= =======
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THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
OPERATING INCOME (LOSS):
Enterprise Systems $ 3,498 $ 980 $ 7,514 $ 2,563
In-store Systems 3,401 1,133 4,839 1,705
Analytic Applications 1,635 2,070 3,268 2,571
Other (3,303) (3,799) (7,946) (9,494)
------- ------- ------- -------
Total income (loss) from operations $ 5,231 $ 384 $ 7,675 $(2,655)
======= ======= ======= =======
DEPRECIATION AND AMORTIZATION:
Enterprise Systems $ 1,466 $ 1,509 $ 2,901 $ 2,957
In-store Systems 393 329 753 620
Analytic Applications 2,110 1,159 3,301 2,311
------- ------- ------- -------
Total depreciation and amortization $ 3,969 $ 2,997 $ 6,955 $ 5,888
======= ======= ======= =======
The operating income shown for Enterprise Systems, In-store Systems and
Analytic Applications includes direct expenses for software licenses, consulting
services, maintenance services, sales and marketing expenses, product
development expenses and amortization of related intangibles, as well as
allocations for occupancy costs and depreciation expense. All other
non-allocated expenses that are not directly identified with a particular
operating segment are reported under the caption "Other" including the $828,000
and $2.1 million restructuring and asset disposition charges that were recorded
during the first quarters of 2000 and 1999, respectively. The improvements in
operating income between the periods presented reflect the increased gross
profits resulting from a higher mix of software sales as a percentage of total
revenues.
5. RESTRUCTURING AND ASSET DISPOSITION CHARGE
During the first quarter of 2000, we recorded the following restructuring and
asset disposition charge.
ACTUAL
LOSS ON
DESCRIPTION OF THE INITIAL DISPOSAL OF NON-CASH ADJUSTMENTS TO BALANCE AT
CHARGE RESERVE CASH CHARGES ASSETS CHARGES EXPENSE JUNE 30, 2000
------ ------- ------------ ------ ------- ------- -------------
Severance, benefits
and related legal costs $ 770 $(759) $ -- $ (11) $ -- $--
Write down of fixed
assets 58 -- (56) (2) -- --
------------------------------------------------------------------------------------------
TOTAL JUNE 30, 2000 $ 828 $(759) $ (56) $ (13) $ -- $--
===========================================================================================
The restructuring initiatives involved a workforce reduction of 65
full-time employees including certain implementation and maintenance service
employees (43 FTE), administrative functions in the United States, Europe and
Canada (15 FTE) and certain product development activities (7 FTE). All
workforce reductions associated with this charge were made on or before March
31, 2000. As of June 30, 2000 we had utilized all of the remaining reserve.
During the first quarter of 1999, we recorded the following
restructuring and asset disposition charge:
ACTUAL
LOSS ON
DESCRIPTION OF THE INITIAL DISPOSAL OF NON-CASH ADJUSTMENTS TO BALANCE AT
CHARGE RESERVE CASH CHARGES ASSETS CHARGES EXPENSE JUNE 30, 2000
------ ------- ------------ ------ ------- ------- -------------
Severance, benefits and $ 1,378 $(1,488) -- -- $ 110 $ --
related legal costs
Lease Exit Costs 226 (154) -- (72) --
Write down of fixed 507 -- (614) -- 107 --
assets
-------------------------------------------------------------------------------------------------
TOTAL JUNE 30, 2000 $ 2,111 $(1,642) $ (614) $ (72) $ 217 $ --
=================================================================================================
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The restructuring initiatives involved a workforce reduction of 54
full-time employees in the United States and Europe , the closure of three
unprofitable sales and support locations in Germany, France and South Africa,
the disposal of property and equipment related to the closure of these locations
and the disposal of furniture that was abandoned with the consolidation of our
corporate operations into one facility , and the release of over 80
subcontractors worldwide. The employees that were terminated were out of our
consulting services group (31 FTE), executive and administrative positions (9
FTE), product development (9 FTE) and sales and marketing (5 FTE). All workforce
reductions included in the restructuring charge were made on or before March 31,
1999. As of June 30, 2000 we had utilized all of the remaining reserve.
6. LEGAL PROCEEDINGS
On March 23, 2000, the U.S. District Court for the District of Arizona
dismissed, without leave to amend, all pending securities class action
complaints previously filed against the Company and certain of our current and
former directors and officers. The complaint, originally filed on January 13,
1999 (Bernat v. JDA Software Group, Inc., et al., Dist. of Arizona No.
CIV'99-0065 PHX RGS), alleged that we misled investors as to certain aspects of
our business and prospects. The court approved the stipulation regarding
termination of action on May 30, 2000.
7. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"), which is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 will require companies to value
derivative financial instruments, including those used for hedging foreign
currency earnings, at current market value with the impact of any change in
market value being charged against earnings in each period. We have not
completed the process of evaluating the impact that will result from the
adoption of SFAS No. 133; however, on a preliminary basis, management does not
believe that the eventual adoption will have a significant impact on our
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The adoption of SAB No. 101 did not have a material effect on our
revenues or revenue recognition policy.
8. RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial
statements to conform to the June 30, 2000 presentation.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains forward-looking statements
reflecting management's current forecast of certain aspects of our future. It is
based on current information which we have assessed but which by its nature is
dynamic and subject to rapid and even abrupt changes. Forward looking statements
include statements regarding future operating results, liquidity, capital
expenditures, product development and enhancements, numbers of personnel,
strategic relationships with third parties, and strategy. The forward-looking
statements are generally accompanied by words such as "plan," "estimate,"
"expect," "believe," "should," "would," "could," "anticipate" or other words
that convey uncertainty of future events or outcomes. Our actual results could
differ materially from those stated or implied by our forward looking statements
due to risks and uncertainties associated with our business. These risks are
described throughout this Quarterly Report on Form 10-Q, which you should read
carefully. We would particularly refer you to the section under the heading
"Certain Risks" for an extended discussion of the risks confronting our
business. The forward looking statements in this Quarterly Report on Form 10-Q
should be considered in the context of these risk factors.
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OVERVIEW
We are a leading provider of software solutions designed specifically to
address the supply chain management, business process, analytic application and
e-commerce requirements of the retail industry. We have developed and marketed
our software solutions for over 15 years, principally for operation on the IBM
AS/400 platform, and more recently, for multiple open/client server environments
including Windows NT and UNIX. We classify our software products into three
primary categories: Enterprise Systems, In-store Systems and Analytic
Applications. Our Enterprise Systems are corporate level merchandise management
systems that gather and distribute operational information throughout an
organization to support the retail process. These systems provide decision
support to the retailer for core inventory control, cost and price management,
purchase order management, automated replenishment, merchandise planning and
allocation. These systems also contain warehouse management and logistics
functionality that provide tools to assist retailers in automating the
receiving, putaway, picking, shipping and allocation of inventory. Our In-store
Systems provide point-of-sale and back office applications that enable a
retailer to capture, analyze and transmit customer demographic and other
operational information to corporate level merchandise management systems. These
systems allow store level personnel to access enterprise-wide information, such
as stock availability, pricing and inventory replenishment to better serve the
consumer at the point of sale. Our Analytic Applications provide a comprehensive
set of tools for analyzing business results and trends, monitoring strategic
plans and enabling tactical decisions. In addition, our MMS.com product and our
other announced e-commerce products under development are designed to enable
retailers to expand their distribution channels and facilitate a powerful,
cost-effective means of conducting business-to-consumer and business-to-business
e-commerce on the Internet. We also offer a wide range of retail specific
professional services that are designed to enable our clients to rapidly achieve
the benefits of our solutions, including project management, system planning,
design and implementation, custom configurations, training and support services.
For a discussion of the financial information regarding these product categories
please see the discussion in Note 4 of the Notes to Interim Condensed
Consolidated Financial Statements.
We have historically derived a significant portion of our revenues from
software licenses, consulting services and maintenance services relating to our
IBM AS/400-based Merchandise Management System ("MMS"). Total revenues from MMS
are included in the Enterprise Systems product category and represented 30% of
our total revenues during both the three months and six months ended June 30,
2000, as compared with 41% and 44%, respectively in the comparable periods of
1999. Although we expect MMS revenues to continue to represent a significant
portion of total revenues for the foreseeable future, MMS revenues as a
percentage of total revenues may continue to decline as a result of increased
revenues attributable to our other product lines and/or reduced demand for MMS.
We believe the IBM AS/400 is a widely deployed platform among those retailers we
target for our products, particularly in North America. However, the lifecycle
of the MMS product line is difficult to estimate due largely to the potential
effect of new products, hardware platforms, applications and product
enhancements, including our own changes, on the retail industry and future
competition.
Software license revenues, consulting services revenues and maintenance
services revenues represented 40%, 43% and 17%, respectively, of our total
revenues during the three months ended June 30, 2000, as compared with 29%, 58%
and 13%, respectively in the comparable quarter of 1999. We believe that sales
of our Enterprise Systems and In-Store Systems were affected during 1999 by
deferred purchasing decisions related to the millennium change, external and
internal marketing issues, longer sales cycles, increased competition and/or
lack of desired feature and functionality, and in the case of ODBMS, a limited
number of referenceable implementations. Software license revenues for the three
months ended June 30, 2000 increased 75% over the comparable quarter of 1999.
This increase was due to increases in each of our product categories and $2.2
million in software license revenues from the Intactix product line that was
acquired in April 2000. We expect continued year-over-year growth in the third
and fourth quarters of 2000, however, on a sequential basis we expect software
licenses to be down in the third quarter of 2000 due to the seasonal lows
associated with the peak summer vacation periods during July and August which
tend to extend the sales process. This trend is consistent with that experienced
during the comparable periods of 1999 and 1998.
Our service business continues to be an important source of operating
income and an important competitive strength as we position ourselves as a total
solution provider for retailers. Consulting services and maintenance
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services revenues are derived from a range of services, the demand for which
stems primarily from sales of our software products. These services include
system design and implementation, software maintenance, support and training.
Consulting services and maintenance services revenues are generally more
predictable but generate lower gross margins than software revenues and are to a
significant extent dependent upon new software license sales. Consulting
services revenues decreased 9% in the second quarter of 2000 compared to 1999.
This decrease was expected and is due to lower implementation revenues that
resulted from the decline in new software license sales we experienced
throughout most of 1999. We believe consulting services revenues will begin to
recover in late 2000 as a result of the strong software license sales in the
first half of 2000. Maintenance services revenues increased 64% over the second
quarter of 1999 primarily as a result of incremental maintenance services
revenues from the Intactix product line that was acquired in April 2000.
ACQUISITION OF INTACTIX INTERNATIONAL, INC.
We acquired certain assets of Intactix International, Inc. ("Intactix")
from Pricer AB in April 2000 for $20.5 million in cash and assumed certain
leasehold, trade and other accrued liabilities, and specific acquisition related
liabilities. Intactix is a leading provider of space management solutions for
the retail industry and consumer product goods manufacturers. The acquisition
was accounted for as a purchase, and accordingly, the operating results of
Intactix have been included in our consolidated financial statements from the
date of acquisition. The purchase price was allocated to the assets acquired,
which include certain intangible assets and in-process research and development
("IPR&D"), based on their fair market values. The acquisition resulted in an
excess of acquired net assets over cost. This excess has been allocated to
reduce proportionately the values assigned to certain intangible assets in
determining their fair values. IPR&D includes the value of products in the
development stage for which technological feasibility has not been established
and which we believe have no alternative future use. In accordance with
applicable accounting rules and the valuation guidance provided by the
Securities and Exchange Commission, we expensed $200,000 of purchased IPR&D
during the second quarter of 2000 and recorded a related tax benefit of $78,000.
The Intactix product line generated $5.5 million in total revenues during the
second quarter of 2000, including $2.2 million in software license revenues,
provided $648,000 of operating profit and contributed $.01 per share to the
second quarter of 2000.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues
Total revenues for three months ended June 30, 2000 were $46.1 million,
an increase of 24% over the $37.6 million reported in the comparable quarter of
1999. Revenues consisted of software licenses, consulting services and
maintenance services, which represented 40%, 43% and 17%, respectively, of total
revenues during the three months ended June 30, 2000, as compared with 29%, 58%
and 13%, respectively in the comparable quarter of 1999.
Software Licenses. Software license revenues for the three months ended
June 30, 2000 were $18.6 million, an increase of 75% over the $10.7 million
reported in the comparable quarter of 1999. This increase includes increases in
each of our product categories and $2.2 million in software license revenues
from the Intactix product line that was acquired in April 2000. We expect
continued year-over-year growth in the third and fourth quarters of 2000,
however, on a sequential basis we expect software licenses to be down in the
third quarter of 2000 due to the seasonal lows associated with the peak summer
vacation periods during July and August which tend to extend the sales process.
This trend is consistent with that experienced during the comparable periods of
1999 and 1998. Domestic software license revenues increased 317% in the second
quarter of 2000 compared to the second quarter of 1999 and international
software license revenues decreased 14% in the second quarter of 2000 compared
to the second quarter of 1999.
Consulting Services. Consulting services revenues for the three months
ended June 30, 2000 were $19.7 million, a decrease of 9% from the $21.8 million
reported in the comparable quarter of 1999. This decrease was expected and is
due to the lower implementation revenues that resulted from the decline in new
software license sales we experienced throughout most of 1999. We believe
consulting services revenues will begin to recover in late 2000 as a result of
the strong software license sales in the first half of 2000.
Maintenance Services. Maintenance services revenues for the three
months ended June 30, 2000 were $7.8 million, an increase of 64% over the $4.8
million reported in the comparable quarter of 1999. The increase results
primarily from the incremental maintenance services revenues from the Intactix
product line that was acquired in April 2000.
Product Line Revenues
Total revenues in our Enterprise Systems business unit increased 4% to
$22.1 million in the second quarter of 2000 from $21.3 million in the comparable
quarter of 1999. Software license revenues in our Enterprise Systems business
unit increased 68% in the second quarter of 2000 compared to the second quarter
of 1999. The increase is due primarily to increased sales of ODBMS and
incremental revenues from sales of the MMS.com product that was commercially
released in the second half of 1999. Consulting services revenues in this
segment decreased 16% in the second quarter of 2000 compared to the second
quarter of 1999. This decrease was expected and is due to lower implementation
revenues that resulted from the decline in new software license sales we
experienced throughout most of 1999. We believe consulting services revenues
will begin to recover in late 2000 as a result of the strong software license
sales in the first half of 2000. Total maintenance revenues for Enterprise
Systems increased 12% in
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the second quarter of 2000 compared to the second quarter of 1999 as a result of
increased software license sales.
Total revenues in our In-Store Systems business unit increased 37% to
$8.3 million in the second quarter of 2000 from $6.1 million in the comparable
quarter of 1999. The improvement is attributable to a 164% increase in software
license revenues in the second quarter of 2000 compared to the second quarter of
1999. We believe the increase is attributable to the reorganization of our sales
force in early 2000 and our research and development investment to new feature
and functionality for this product to address increased competition in this
business segment in 1999. Consulting services revenues in this segment decreased
12% in the second quarter of 2000 compared to the second quarter of 1999. This
decrease was expected and is due to the lower implementation revenues that
resulted from the decline in new software license sales we experienced
throughout most of 1999. Total maintenance revenues for In-store Systems
increased 8% in the second quarter of 2000 compared to the second quarter of
1999 as a result of increased software license sales.
Total revenues in our Analytic Applications business unit increased 59%
to $15.7 million in the second quarter of 2000 from $9.8 million in the
comparable quarter of 1999. The increase results primarily from the incremental
revenues from the Intactix product line that was acquired in April 2000 which
generated $5.5 million in total revenues during the second quarter of 2000,
including $2.2 million in software license revenues.
Geographic Revenues
Total revenues in the United States increased 48% to $27.6 million in
the second quarter of 2000 from $18.7 million in the comparable quarter of 1999.
This increase results from increases in software license sales in all product
categories and maintenance service revenues of 317% and 50%, respectively in the
United States in the second quarter of 2000 compared to the second quarter of
1999, offset in part by a decrease in consulting services revenues that resulted
from the decline in new software license sales we experienced throughout most of
1999.
Total revenues in the EMEA region decreased 21% to $8.5 million in the
second quarter of 2000 from $10.8 million in the comparable quarter of 1999. The
decrease results from a slow down in demand for software licenses and consulting
services in all product categories. The decline in demand for consulting
services results primarily from the decline in new software license sales we
experienced throughout most of 1999.
Total revenues in the Asia/Pacific region increased 107% to $6.6
million in the second quarter of 2000 from $3.2 million in the comparable
quarter of 1999. The increase is due to increased software license sales,
consulting revenues and maintenance revenues in all product categories. We
experienced strong increases in Australia which produced $3.7 million in total
revenue in the second quarter of 2000 compared to $1.2 million in the second
quarter of 1999.
Total revenues in Canada increased 24% to $2.7 million in the second
quarter of 2000 from $2.2 million in the comparable quarter of 1999. The
increase is due to increased software license sales in all product categories,
offset in part by a decline in consulting services revenues resulting from the
decline in new software license sales we experienced throughout most of 1999. We
believe that this region is no longer growing and has a high degree of market
penetration.
Total revenues in the Latin America region decreased 51% to $1.5
million in the second quarter of 2000 from $3.1 million in the comparable
quarter of 1999. The decrease results primarily from a decline in software
license sales in the second quarter of 2000 compared to the second quarter of
1999, particularly sales of Analytic Applications and the deferral of certain
software license purchasing decision to future periods. The 1999 results
contained two unusually large software license sales of this product category.
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Cost of Revenues
Cost of Software Licenses. Cost of software license revenues was
$807,000 for the three months ended June 30, 2000 as compared to $529,000 in the
comparable quarter of 1999. Cost of software licenses represented 4% and 5%,
respectively, of software license revenues in these comparable periods. We
license the Uniface client/server application development technology from
Compuware, Inc. for use in ODBMS. Our license with Compuware, Inc. was
re-negotiated in April 2000 and will require us to pay moderately higher royalty
rates to Compuware, Inc. in the future.
Cost of Consulting Services. Consulting services costs for the three
months ended June 30, 2000 were $16.1 million, an increase of 1% over the $15.9
million reported in the comparable quarter of 1999. We had 50 less FTE in our
consulting services organization in the second quarter of 2000 compared to the
second quarter of 1999, and as of June 30, 2000, there were 543 employees
involved in the consulting services function, including 32 employees that were
added to this function during the second quarter of 2000 in connection with the
acquisition of Intactix. We will continue to adjust the size and composition of
the workforce in our consulting services organization to match the different
geographic and product demand cycles and we expect only modest growth, if any,
in the overall size of our consulting services organization during the remainder
of 2000.
Cost of Maintenance Services. Cost of maintenance services increased
42% to $2.1 million in 2000 from $1.5 million in 1999. We have added headcount
in this function to support our growing client base, including 18 employees that
were added to this function during the second quarter of 2000 in connection with
the acquisition of Intactix. At June 30, 2000 there were 81 employees in this
function compared to 59 at June 30, 1999.
Gross Profit
Gross profit for the three months ended June 30, 2000 was $27.1
million, an increase of 41% over the $19.3 million reported in the comparable
quarter of 1999. Gross profit, as a percentage of total revenues, increased to
59% in the second quarter of 2000 compared with 52% in the second quarter of
1999. This increase resulted primarily from the higher mix of software license
revenues as a percentage of total revenues during the three months ended June
30, 2000, which was partially offset by a reduction in our consulting service
margins to 18% in the second quarter of 2000 from 27% in the comparable quarter
of 1999. We reduced the headcount in our service organization by 66 FTE during
the first quarter of 2000, however, the workforce reduction did not fully offset
the decrease in consulting services revenues in the second quarter of 2000
compared to 1999, and as a result, our utilization rates decreased. We expect
that our utilization rates and service margins will gradually improve over the
remainder of 2000 if we experience a sustained increase in demand for our
software products.
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Operating Expenses
Product Development. Product development expenses for the three months
ended June 30, 2000 were $7.1 million, a 14% increase over the $6.2 million
reported in the comparable quarter of 1999. The increase in product development
expenses resulted primarily from the acquisition of Intactix in April 2000 and
our increased investment in new e-commerce initiatives. Our product development
staff increased by approximately 16% in the second quarter of 2000 compared to
the second quarter of 1999, and as of June 30, 2000 there were 235 employees
involved in the product development function including 26 employees that were
added to this function during the second quarter of 2000 in connection with the
acquisition of Intactix. We expect to invest between $16.0 million to $17.0
million in product research and development during the remainder of 2000.
Sales and Marketing. Sales and marketing expenses for the three months
ended June 30, 2000 were $7.4 million, a 17% increase over the $6.4 million
reported in the comparable quarter of 1999. The increase in sales and marketing
expenses results primarily from the acquisition of Intactix in April 2000. As of
June 30, 2000 there were 130 employees involved in our sales and marketing
function including 30 employees that were added to this function during the
second quarter of 2000 in connection with the acquisition of the Intactix
product line. During the remainder of 2000, we will continue to upgrade and
realign our sales force to match the demand for our various products and among
the geographic regions in which we operate.
General and Administrative. General and administrative expenses for the
three months ended June 30, 2000 were $5.3 million, a 1% increase from the $5.2
million reported in the comparable quarter of 1999. General and administrative
expense, as a percentage of total revenues, decreased to 12% in the second
quarter of 2000 from 14% in the comparable quarter of 1999 due to the growth in
revenues we experienced in the second quarter of 2000 and the related leveraging
of indirect costs.
Amortization of Intangibles. Amortization of intangibles for the three
months ended June 30, 2000 was $1.9 million, a 74% increase over the $1.1
million reported in the comparable quarter of 1999. Amortization of intangibles
consists primarily of amortization on goodwill and other intangibles recorded in
connection with the acquisition of Arthur Retail in June 1998 and the
acquisition of Intactix in April 2000.
Operating Income (Loss)
Operating income in our Enterprise Systems business unit increased 257%
to $3.5 million in the second quarter of 2000 from $980,000 in the comparable
quarter of 1999. The increase is primarily attributable to a 68% increase in
software license sales, which have gross margins ranging from 95% to 100%, and a
reduction in consulting services personnel in the second quarter of 2000
compared to the second quarter of 1999.
Operating income in our In-Store Systems business unit increased 200%
to $3.4 million in the second quarter of 2000 compared to $1.1 million in the
comparable quarter of 1999. The increase is primarily attributable to a 164%
increase in software license sales, which have gross margins ranging from 95% to
100%.
Operating income in our Analytic Applications business unit decreased
21% to $1.6 million in the second quarter of 2000 from $2.1 million in the
comparable quarter of 1999. The decrease results from lower consulting services
margins and higher product development costs, offset in part by $648,000 in
operating profit from the Intactix product line that was acquired in April 2000.
The Intactix results include a one-time charge of $200,000 for acquired
in-process research and development.
Provision for Income Taxes
Our effective income tax rate reflects statutory federal, state and
foreign tax rates, partially offset by reductions for research and development
expense tax credits. From time to time, we may be subject to audit by federal,
state and/or foreign taxing authorities. The IRS has completed an audit of our
1996 and 1997 Federal Income Tax Returns. As a result of the audit, we have
received proposed adjustments from the IRS reducing our 1996 and 1997 research
and development expense tax credits. The Company and its tax advisors disagree
with the
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adjustments proposed by the IRS and intend to vigorously contest them.
Accordingly, we are unable to determine the financial impact of the audit at
this time. However, we do not believe that the IRS adjustments, even as
currently proposed, would have a material impact on our business, operating
results or financial condition.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues
Total revenues for six months ended June 30, 2000 were $85.3 million,
an increase of 18% over the $72.4 million reported in the comparable period of
1999. Revenues consisted of software licenses, consulting services and
maintenance services, which represented 40%, 45% and 15%, respectively, of total
revenues during the six months ended June 30, 2000, as compared with 25%, 62%
and 13%, respectively in the comparable period of 1999.
Software Licenses. Software license revenues for the six months ended
June 30, 2000 were $34.1 million, an increase of 89% over the $18.1 million
reported in the comparable period of 1999. This increase includes increases in
each of our product categories and $2.2 million in software license revenues
from the Intactix product line that was acquired in April 2000. Domestic and
international software license revenues increased 172% and 43%, respectively in
the six-month period of 2000 compared to the six-month period of 1999.
Consulting Services. Consulting services revenues for the six months
ended June 30, 2000 were $38.3 million, a decrease of 15% from the $45.0 million
reported in the comparable period of 1999. This decrease was expected and is due
to the lower implementation revenues that resulted from the decline in new
software license sales we experienced throughout most of 1999. We believe
consulting services revenues will begin to recover in late 2000 as a result of
the strong software license sales in the first half of 2000.
Maintenance Services. Maintenance services revenues for the six months
ended June 30, 2000 were $12.9 million, an increase of 40% over the $9.2 million
reported in the comparable period of 1999. The increase results primarily from
the maintenance services revenues from the Intactix product line that was
acquired in April 2000.
Product Line Revenues
Total revenues in our Enterprise Systems business unit increased 1% to
$44.5 million in the six-month period of 2000 from $44.2 million in the
comparable period of 1999. Software license revenues in our Enterprise Systems
business unit increased 90% in the six-month period of 2000 compared to the
six-month period of 1999. The increase is due primarily to increased sales of
ODBMS and incremental revenues from sales of the MMS.com product that was
commercially released in the second half of 1999. MMS Software License Revenues
for the six-month period of 2000 decreased in comparison to the six-month period
of 1999. Consulting services revenues in this segment decreased 26% in the
six-month period of 2000 compared to the six-month period of 1999. This decrease
was expected and is due to lower implementation revenues that resulted from the
decline in new software license sales we experienced throughout most of 1999. We
believe consulting services revenues will begin to recover in late 2000 as a
result of the strong software license sales in the first half of 2000. Total
maintenance revenues for Enterprise Systems increased 11% in the six-month
period of 2000 compared to the six-month period of 1999.
Total revenues in our In-Store Systems business unit increased 31% to
$14.5 million in the six-month period of 2000 from $11.0 million in the
comparable period of 1999. The improvement is attributable to a 146% increase in
software license revenues in the six-month period of 2000 compared to the
six-month period of 1999. We believe the increase is attributable to the
reorganization of our sales force in early 2000 and our research and development
investment to new feature and functionality for this product to address
increased competition in this business segment in 1999. Consulting services
revenues in this segment decreased 9% in the six-month period of 2000 compared
to the six-month period of 1999. This decrease was expected and is due to the
lower implementation revenues that resulted from the decline in new software
license sales we experienced throughout most of 1999. Total maintenance revenues
for In-store Systems increased 13% in the six-month period of 2000 compared to
the six-month period of 1999.
Total revenues in our Analytic Applications business unit increased 53%
to $26.3 million in the six-month period of 2000 from $17.2 million in the
comparable period of 1999. The increase results primarily from the incremental
revenues from the Intactix product line that was acquired in April 2000 which
generated $5.5 million in total revenues during the second quarter of 2000,
including $2.2 million in software license revenues.
Geographic Revenues
Total revenues in the United States increased 21% to $47.0 million in
the six-month period of 2000 from $38.9 million in the comparable period of
1999. This increase results from a 172% increase in software license sales in
the United States in the six-month period of 2000 compared to the six-month
period of 1999, offset in part by a decrease in consulting services revenues
that resulted from the decline in new software license sales we experienced
throughout most of 1999.
Total revenues in the EMEA region decreased 12% to $18.2 million in the
six-month period of 2000 from $20.7 million in the comparable period of 1999.
The decrease results from a slow down in demand for software licenses and
consulting services in all product categories. The decline in demand for
consulting services results primarily from the decline in new software license
sales we experienced throughout most of 1999.
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Total revenues in the Asia/Pacific region increased 151% to $13.5
million in the six-month period of 2000 from $5.4 million in the comparable
period of 1999. The increase is due to increased software license sales,
consulting revenues and maintenance revenues in all product categories. We
experienced strong increases in Australia which produced $5.4 million in total
revenues in the six-month period of 2000 compared to $2.0 million in the
six-month period of 1999. In addition, Japan contributed $4.1 million in total
revenues in the six-month period of 2000 compared to $1.1 million in the
six-month period of 1999.
Total revenues in Canada decreased 22% to $3.8 million in the six-month
period of 2000 from $4.9 million in the comparable period of 1999. Consulting
services revenues decreased in all product categories in the six-month period of
2000 compared to the six-month period of 1999 as a result of the decline in new
software license sales we experienced throughout most of 1999. These decreases
were offset in part by a 112% increase in software license sales in the
six-month period of 2000 compared to the six-month period of 1999. We believe
that this region is no longer growing and has a high degree of market
penetration.
Total revenues in the Latin America region decreased 10% to $3.9 million
in the six-month period of 2000 from $4.3 million in the comparable period of
1999. The decrease results primarily from decreases in software license sales
and consulting services revenues in the six-month period of 2000 compared to the
six-month period of 1999.
Cost of Revenues
Cost of Software Licenses. Cost of software license revenues was $1.7
million for the six months ended June 30, 2000 as compared to $1.0 million in
the comparable period of 1999. The increase results from increased royalties on
the higher mix of software products that incorporate functionality from third
party software providers such as Compuware, Inc. and Silvon Software, Inc. Cost
of software licenses represented 5% and 6%, respectively, of software license
revenues in these comparable periods.
Cost of Consulting services. Consulting services costs for the six
months ended June 30, 2000 were $31.6 million, a decrease of 3% from the $32.6
million reported in the comparable period of 1999.
Cost of Maintenance Services. Cost of maintenance services increased 27%
to $3.9 million in the six-month period of 2000 from $3.0 million in the
six-month period of 1999.
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Gross Profit
Gross profit for the six months ended June 30, 2000 was $48.1 million,
an increase of 35% over the $35.7 million reported in the comparable period of
1999. Gross profit, as a percentage of total revenues, increased to 56% in the
six-month period of 2000 compared with 49% in the six-month period of 1999. This
increase resulted primarily from the higher mix of software license revenues as
a percentage of total revenues during the six months ended June 30, 2000, which
was partially offset by a reduction in our consulting service margins to 17% in
the six-month period of 2000 from 28% in the six-month period of 1999. The
workforce reductions we made in our services organization during 2000 did not
fully offset the decrease in consulting services revenues in the six-month
period of 2000 compared to the six-month period of 1999, and as a result, our
utilization rates decreased. We expect that our utilization rates and service
margins will gradually improve over the remainder of 2000 if we experience a
sustained increase in demand for our software products.
Operating Expenses
Product Development. Product development expenses for the six months
ended June 30, 2000 were $13.2 million, a 12% increase over the $11.8 million
reported in the comparable period of 1999. Product development expense as a
percentage of total revenues was 15% in the six-month period of 2000 compared to
16% in the six-month period of 1999. The increase in product development
expenses results primarily from the acquisition of Intactix in April 2000 and
our increased investment in new e-commerce initiatives.
Sales and Marketing. Sales and marketing expenses for the six months
ended June 30, 2000 were $13.9 million, an 8% increase over the $12.9 million
reported in the comparable period of 1999. Sales and marketing expense as a
percentage of total revenues decreased to 16% in the six-month period of 2000
from 18% in the six-month period of 1999. The increase in sales and marketing
expenses results primarily from the acquisition of Intactix in April 2000.
General and Administrative. General and administrative expenses for the
six months ended June 30, 2000 were $9.3 million which is flat with the
comparable period of 1999. General and administrative expense, as a percentage
of total revenues, decreased to 11% in the six-month period of 2000 from 13% in
the six-month period of 1999.
Amortization of Intangibles. Amortization of intangibles for the six
months ended June 30, 2000 was $3.0 million, a 35% increase over the $2.2
million reported in the comparable period of 1999. Amortization of intangibles
consists primarily of amortization on goodwill and other intangibles recorded in
connection with the acquisition of Arthur Retail in June 1998 and the
acquisition of Intactix in April 2000.
Restructuring and Asset Disposition Charge. We recorded an $828,000
restructuring and asset disposition charge during the first quarter of 2000. The
restructuring initiatives involved a workforce reduction of 65 full-time
employees in certain implementation service groups and administrative functions
in the United States, Europe and Canada. We believe this reduction will help
stabilize service margins, optimize our labor resources in these geographic
regions, and free up funds for investment in staff that support higher growth
product lines, including the Arthur Suite and our e-commerce initiatives. All
workforce reductions associated with this charge were made on or before March
31, 2000. A similar restructuring and asset disposition charge of $2.1 million
was recorded during the first quarter of 1999 for a workforce reduction of 54
full-time employees in the United States and Europe ($1.4 million), the closure
of three unprofitable locations in Germany, France and South Africa ($226,000),
the disposal of property and equipment related to the closure of these locations
and the disposal of furniture that was abandoned with consolidation of our
corporate operations into one facility ($507,000), and the release of over 80
subcontractors worldwide.
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Operating Income (Loss)
Operating income in our Enterprise Systems business unit increased 193%
to $7.5 million in the six-month period of 2000 from $2.6 million in the
comparable period of 1999. The increase is primarily attributable to a 90%
increase in software license sales, which have gross margins ranging from 95% to
100%.
Operating income in our In-Store Systems business unit increased 184% to
$4.8 million in the six-month period of 2000 from $1.7 million in the comparable
period of 1999. The increase is primarily attributable to a 146% increase in
software license sales, which have gross margins ranging from 95% to 100%.
Operating income in our Analytic Applications business unit increased
27% to $3.3 million in the six-month period of 2000 from $2.6 million in the
comparable period of 1999. The increase results primarily from $648,000 in
operating profit from Intactix that was acquired in April 2000. The Intactix
results include a one-time charge of $200,000 for acquired in-process research
and development.
Provision for Income Taxes
Our effective income tax rate reflects statutory federal, state and foreign
tax rates, partially offset by reductions for research and development expense
tax credits. From time to time, we may be subject to audit by federal, state
and/or foreign taxing authorities. The IRS has completed an audit of our 1996
and 1997 Federal Income Tax Returns. As a result of the audit, we have received
proposed adjustments from the IRS reducing our 1996 and 1997 research and
development expense tax credits. The Company and its tax advisors disagree with
the adjustments proposed by the IRS and intend to vigorously contest them.
Accordingly, we are unable to determine the financial impact of the audit at
this time. However, we do not believe that the IRS adjustments, even as
currently proposed, would have a material impact on our business, operating
results or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through
cash generated from operations and public sales of equity securities. We had
working capital of $98.3 million at June 30, 2000 compared with $108.5 million
at December 31, 1999. Cash and cash equivalents at June 30, 2000 were $42.8
million, a decrease of $15.5 million from the $58.3 million reported at December
31, 1999. In April 2000 we acquired Intactix for $20.5 million and subsequently
invested another $2.9 million in the acquired company. We also had $33.6 million
in marketable securities at June 30, 2000, a decrease of $1.6 million from the
$35.2 million reported at December 31, 1999.
Operating activities provided cash of $1.8 million and $3.0 million in
the six months ended June 30, 2000 and 1999, respectively. Cash provided by
operating activities during the six months ended June 30, 2000 resulted
primarily from net income of $6.0 million, depreciation and amortization of $7.0
million, a $1.2 million provision for doubtful accounts, a $2.1 million decrease
in income tax receivables and a $588,000 increase in deferred revenue, offset in
part by a $13.1 million increase in accounts receivable, a $2.0 million increase
in prepaid expenses and decreases in accounts payable and accrued expenses of
$128,000 and $708,000, respectively. We had net receivables of $49.1 million, or
97 days sales outstanding ("DSOs") at June 30, 2000 compared to $36.8 million,
or 86 DSOs at March 31, 2000, $32.3 million, or 85 DSOs at December 31, 1999 and
$39.8 million, or 97 DSOs at June 30, 1999. The sequential increase in DSOs
results from $6.8 million in net receivables from the Intactix acquisition in
April 2000, an increase in deferred software revenue, and the increased mix of
software licenses as a percentage of total receivables and total revenues.
Software licenses generally include extended payment terms whereas service
revenues do not. DSOs may fluctuate significantly on a quarterly basis due to a
number of factors including seasonality, shifts in customer buying patterns,
contractual payment terms, the underlying mix of products and services, and the
geographic concentration of revenues.
Investing activities utilized cash of $19.0 million and $14.9 million in
the six months ended June 30, 2000 and 1999, respectively. The activity in the
six-month period of 2000 includes the net maturity of $1.7 million of
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marketable securities, offset by $2.6 million in capital expenditures and the
$18.7 million net cash payment for the acquisition of Intactix. The 1999
activity includes $9.5 million in net purchases of marketable securities and
$6.6 million in capital expenditures. We may in the future pursue additional
acquisitions of businesses, products and technologies, or enter into joint
venture arrangements, that could complement or expand our business. Any material
acquisition or joint venture could result in a decrease to our working capital
depending on the amount, timing and nature of the consideration to be paid. In
addition, any material acquisitions of complementary businesses, products or
technologies could require that we obtain additional equity or debt financing.
Financing activities provided cash of $2.7 million and $1.9 million
during the six months ended June 30, 2000 and 1999, respectively. The activity
in both periods consists primarily of proceeds from the issuance of common stock
and related tax benefits under our stock option and employee stock purchase
plans.
Changes in the currency exchange rates of our foreign operations had the
effect of reducing cash by $421,000 and $118,000 in the six months ended June
30, 2000 and 1999, respectively. We did not enter into any foreign exchange
contracts or engage in similar hedging strategies during either of the periods.
During the first half of 2000 we maintained a $5.0 million revolving
line of credit with a commercial bank. The line of credit is collateralized by
property and equipment, receivables, and intangibles; accrues interest at the
bank's reference rate (which approximates prime) less .25 percentage points; and
requires that we maintain certain current ratios and tangible net worth. The
line of credit expired on July 1, 2000 and we do not intend to renew this credit
facility. There were no amounts outstanding on the line of credit at June 30,
2000. We believe that our cash and cash equivalents, investments in marketable
securities, and funds generated from operations will provide adequate liquidity
to meet our normal operating requirements for at least the next twelve months.
YEAR 2000 COMPLIANCE
No significant Year 2000 compliance issues have been reported on our
software products since the millennium change. We are aware, however, that some
of our customers may have been running earlier versions of our software products
that were not Year 2000 compliant (i.e., able to distinguish 21st century dates
from 20th century dates). We contacted and encouraged such customers to migrate
to current product versions. Moreover, our products are generally integrated
into enterprise systems involving complicated software products developed by
other vendors. We may in the future be subject to claims based on Year 2000
problems in others' products, custom configurations made by us or third parties
to our products, or issues arising from the integration of multiple products
within an overall system. We have not been a party to any litigation or
arbitration proceeding to date alleging that our products or services are not
Year 2000 compliant. However, we are from time to time involved in payment
disputes and may be subject to Year 2000 counter claims. There can be no
assurance that we will not in the future be required to defend our products or
services in such proceedings, or to negotiate resolutions of claims based upon
Year 2000 issues. The costs of defending and resolving Year 2000-related
disputes, and any liability we may incur for Year 2000-related damages,
including consequential damages, could have a material adverse effect on our
business, operating results and financial condition.
To date, we have not encountered any Year 2000-related problems with our
financial institutions, investment advisors or suppliers of products, services
and systems purchased by us, nor others with whom we transact business on a
worldwide basis. Further, we have not encountered any Year 2000-related problems
with our internal systems. All of our financial and operational systems were
available over the millennium change and the integrity of the historical
information contained within those systems has not been affected. We incurred
less than $100,000 on our Year 2000 compliance effort.
EURO CURRENCY
In January 1999, a new currency called the ECU or the "Euro" was
introduced in participating European Economic and Monetary Union ("EMU")
countries. During 2002, all participating EMU countries are expected to be
operating with the Euro as their single currency. During the next two years,
business in participating EMU countries will be conducted in both the existing
national currency and the Euro. As a result, companies operating in or
conducting business in these EMU member countries will need to ensure that their
financial and other software systems are capable of processing transactions and
properly handling these currencies, including the Euro. We
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currently offer software products that are designed to be Euro-currency enabled,
and we believe these products can be modified to accommodate any change to Euro
currency requirements. We have also provided warranties in various European
contracts that certain of our products will meet all Euro currency requirements.
There can be no assurance, however, that our products will contain all the
necessary changes or meet all the Euro currency requirements. If our software
products do not meet all the Euro currency requirements, our business, operating
results, and financial condition would be materially adversely impacted. We have
not had and do not expect a material impact on our results of operations from
foreign currency gains or losses as a result of a transition to the Euro as the
functional currency for our subsidiaries based in EMU countries.
CERTAIN RISKS
Our Operating Results May Fluctuate Significantly. Our quarterly
operating results have varied and are expected to continue to vary in the
future. Many factors may cause these fluctuations, including: demand for our
software products and services; the size and timing of individual contracts,
particularly with respect to our larger customers; changes in the length of our
sales cycle; competitive pricing pressures; customer order deferrals in
anticipation of new products; changes in the mix of software license revenues;
changes in the mix of software license revenues compared to consulting services
revenues and maintenance services revenues; the timing of new software product
introductions and enhancements to our software products or those of our
competitors; market acceptance of new software products; technological changes
in platforms supporting our software products; changes in our operating
expenses; changes in the mix of domestic and international revenues; our ability
to complete fixed price consulting contracts within budget; employee hiring and
retention; foreign currency exchange rate fluctuations; expansion of
international operations; integration issues association with newly acquired
businesses; changes in our strategies; and general industry and economic
conditions. In addition, we believe we experienced a decline in overall demand
for our Enterprise Systems and In-store Systems during 1999. In particular,
although sales of our ODBMS product have shown some improvement during the last
six months of 1999 and the first six months of 2000, overall sales of the ODBMS
product have historically failed to meet our expectations. We believe that sales
of ODBMS were affected by a significant drop-off in demand related to the
millennium change, external and internal marketing issues, increased
competition, a limited number of referenceable implementations in the early
years of release, and certain design and stability issues in earlier versions of
the ODBMS product. In addition, MMS revenues as a percentage of total revenues
may decline as a result of increased revenues attributable to our other product
lines and/or reduced demand for MMS. We believe the IBM AS/400 is a widely
deployed platform among those retailers we target for our products, particularly
in North America. However, the lifecycle of the MMS product line is difficult to
estimate due largely to the potential effect of new products, hardware
platforms, applications and product enhancements, including our own changes, on
the retail industry and future competition.
We also believe that the decline in demand for our In-store Systems
products during 1999 was affected by deferred purchasing decisions related to
the millennium change, longer sales cycles, increased competition and/or lack of
desired feature and functionality. We have addressed increased competition in
this business unit by reorganizing our sales force and refocusing some of our
research and development investment into new feature and functionality.
We believe that the prevailing business reasons for purchasing
merchandising systems and the other software products that we offer still exist.
You should not rely on the current performance or historic growth rates for our
Enterprise Systems, In-store Systems, and Analytic Applications as an indication
of their future performance. Because the gross margin on software licenses is
significantly greater than the gross margins on consulting services, our
combined gross margin has fluctuated from quarter to quarter, and we expect that
it will continue to fluctuate significantly based on revenue mix and service
utilization rates. Consulting services revenues are to a significant extent
dependent upon new software license sales. Although there can be no assurance,
we expect that our utilization rates and service margins will gradually improve
over the remainder of 2000 if we experience a sustained increase in demand for
our software products. However, in the event software license revenues fail to
meet our expectations or there is a decline in demand, our consulting services
revenues would be adversely impacted.
We typically ship our software products when contracts are signed.
Consequently, our software license backlog at the beginning of any quarter has
represented only a small portion of that quarter's expected revenues. As a
result, software license revenues in any quarter depend substantially upon
contracts signed and the related
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shipment of software in that quarter. It is therefore difficult for us to
predict revenues. Because of the timing of our sales, we typically recognize a
substantial amount of our software license revenues in the last weeks or days of
the quarter, and we generally derive a significant portion of our quarterly
software license revenues from a small number of relatively large sales. It is
difficult to forecast the timing of large individual software license sales with
a high degree of certainty. Accordingly, large individual sales have sometimes
occurred in quarters subsequent to when we anticipated. We expect that the
foregoing trends will continue. If we receive any significant cancellation or
deferral of customer orders, or we are unable to conclude license negotiations
by the end of a fiscal quarter, our operating results may be lower than
anticipated. In addition, any weakening or uncertainty in international
economies may make it more difficult for us to predict quarterly results in the
future, and could negatively impact our business, operating results and
financial condition for an indefinite period of time.
Our expense levels are based on our expectations of future revenues.
Since software license sales are typically accompanied by a significant amount
of consulting and maintenance services, the size of our services organization
must be managed to meet our anticipated software license revenues. As a result,
we hire and train service personnel and incur research and development costs in
advance of anticipated software license revenues. If software revenues fall
short of our expectations, or if we are unable to fully utilize our service
personnel, our operating results are likely to decline because a significant
portion of our expenses cannot be quickly reduced to respond to any unexpected
revenue shortfall.
We believe there was a slowing in demand in 1999 for our Enterprise
Systems and In-store Systems due, in part, to deferred purchasing decisions
related to the millennium change. Although we believe the deferred purchasing
decisions that affected our 1999 results are being released and that normal
selling cycles are returning, we still remain cautious regarding the length and
predictability of selling cycles. Based on the foregoing, we believe that future
revenues, expenses and operating results are likely to vary significantly from
quarter-to-quarter. As a result, quarter-to-quarter comparisons of operating
results are not necessarily meaningful. Furthermore, it is likely that in some
future quarter our operating results may be below the expectations of public
market analysts or investors. If that happens, or if adverse conditions prevail,
or are perceived to prevail, with respect to our business or generally, the
price of our common stock may decline.
We Are Dependent Upon the Retail Industry. We have derived substantially
all of our revenues to date from the license of software products and the
performance of related services to the retail industry. Our future growth is
critically dependent on increased sales to the retail industry. The success of
our customers is directly linked to economic conditions in the retail industry,
which in turn are subject to intense competitive pressures and are affected by
overall economic conditions. In addition, we believe that the license of our
software products generally involves a large capital expenditure, which is often
accompanied by large-scale hardware purchases or commitments. As a result,
demand for our products and services could decline in the event of instability
or downturns in the retail industry. Such downturns may cause customers to exit
the industry or delay, cancel or reduce any planned expenditure for information
management systems and software products.
In addition, e-commerce on the Internet has recently impacted the retail
industry. The traditional "brick and mortar" retailers that we have historically
served have begun to face substantial competition from Internet-based retailers
that may negatively impact their ability to purchase our products. We announced
the commercial availability of the MMS.com e-commerce product during the second
half of 1999 and to date there have only been limited sales of this product. In
addition, we have recently announced our intentions to develop a series of
business-to-business e-commerce solutions. These solutions include Internet
Portals which are web-based interfaces that provide retailers with a one-stop
destination for internal users, customers and suppliers to access multiple
information sources and applications. The markets for e-commerce products are
new and quickly evolving. We expect significant growth in these e-commerce
markets over the Internet; however, we are unable to predict the full impact
this emerging form of commerce will have on the traditional "brick and mortar"
retail operations we have historically served. If the markets for our MMS.com
and Internet Portals products, or other future web-enabled products fail to
develop, develop more slowly than expected or become saturated with competitors,
or if our e-commerce products are not accepted in the marketplace, our business,
operating results and financial condition could be negatively impacted.
We also believe that the retail industry may be consolidating and that
the industry is from time-to-time subject to increased competition and weakening
economic conditions that could negatively impact the industry, our
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customers' ability to pay for our products and services and which have and could
potentially lead to an increased number of bankruptcy filings. Such
consolidation and weakening economic conditions have in the past, and may in the
future, negatively impact our revenues, reduce the demand for our products and
may negatively impact our business, operating results and financial condition.
Ability to Attract and Retain Skilled Personnel Is Important to Our
Growth. Our success is heavily dependent upon our ability to attract, hire,
train, retain and motivate skilled personnel, including sales and marketing
representatives, qualified software engineers involved in ongoing product
development, and consulting personnel who assist in the implementation of our
products and services. The market for such individuals is intensely competitive,
particularly in international markets. Given the critical roles of our sales,
product development and consulting staffs, our inability to recruit successfully
or any significant loss of key personnel in our sales, product development or
consulting staffs would hurt us. The software industry is characterized by a
high level of employee mobility and aggressive recruiting of skilled personnel.
We cannot guarantee that we will be able to retain our current personnel,
attract and retain other highly qualified technical and managerial personnel in
the future, or be able to assimilate the employees from any acquired businesses.
We will continue to adjust the size and composition of the workforce in our
services organization to match the different product and geographic demand
cycles. If we are unable to attract and retain the necessary technical and
managerial personnel, or assimilate the employees from any acquired businesses,
our business, operating results and financial condition would be adversely
affected.
A Significant Portion of Our Revenues Are Derived from the Sale of the
MMS Product. We have historically derived a significant portion of our revenues
from software licenses, consulting services and maintenance services related to
MMS. MMS revenues are partially dependent on the continued vitality in and
support of the IBM AS/400 platform, which we believe is a favored platform in
the retail industry. Although we expect MMS revenues to continue to represent a
significant portion of total revenues for the foreseeable future, MMS revenues
as a percentage of total revenues may continue to decline as a result of
increased revenues attributable to our other product lines and/or reduced demand
for MMS. The lifecycle of the MMS product line is difficult to estimate due
largely to the potential effect of new products, hardware platforms,
applications and product enhancements, including our own changes, in the retail
industry and future competition. Any decline in MMS revenues, as a result of
competition, technological change, a decline in the market for or support of the
IBM AS/400 platform, or other factors, which are not offset by increases in
revenues from other products, will cause our business, operating results and
financial condition to decline. We cannot guarantee that prospective purchasers
of our IBM AS/400-based products will respond favorably to our future or
enhanced software products or that we will continue to be successful in selling
our software products or services in the IBM AS/400 market.
We Have Only Deployed Certain of Our Software Products On a Limited
Basis. Certain of our software products, including MMS.com, Internet Portals,
ODBMS, Win/DSS, Retail IDEAS, and the Arthur Suite have been commercially
released within the last five years. The market for these products is
continually evolving, and we believe that retailers may be more cautious than
other businesses in adopting client/server technologies. Consequently, we cannot
predict the growth rate, if any, and size of the markets for our client/server
or e-commerce products or that these markets will continue to develop. Potential
and existing customers may find it difficult, or be unable, to successfully
implement our client/server and e-commerce products, or may not purchase our
products for a variety of reasons, including: their inability to obtain
hardware, software, networking infrastructure, or sufficient internal staff
required to implement, operate and maintain an open, client/server solution; the
generally longer time periods and greater cost required to implement such
products as compared to IBM AS/400-based products; and limited implementation
experience with such products or third-party implementation providers. In
addition, we must overcome significant obstacles to successfully market our
client/server and e-commerce products, including limited experience of our sales
and consulting personnel in the client/server market and a limited market size.
If the markets for our client/server or e-commerce products fail to develop,
develop more slowly than expected or become saturated with competitors, or if
our products are not accepted in the marketplace or are technically flawed, our
business, operating results and financial condition will decline.
Although sales of our ODBMS product have shown some improvement during
the last twelve months, overall sales of the ODBMS product have historically
failed to meet our expectations. We believe that sales of ODBMS were affected by
a significant drop-off in demand related to the millennium change, external and
internal marketing issues, increased competition, a limited number of
referenceable implementations in the early years of release, and certain design
and stability issues in earlier versions of the ODBMS product. Since
implementation of
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ODBMS generally involves customer-specific configuration and integration with a
variety of hardware and software systems developed by third parties, each
version of the product may contain undetected errors when first released. We
have only discovered and evaluated certain of these problems after the ODBMS
product has been implemented and used by our clients with live data over time,
with different computer systems and in a variety of applications and
environments. There can be no assurance the future generations of the ODBMS
open/client server solution will not contain undetected errors.
We announced the commercial availability of the MMS.com e-commerce
product during the second half of 1999 and to date there have only been limited
sales of this product. In addition, we have only recently announced our
intentions to develop a series of business-to-business e-commerce solutions.
These solutions include Internet Portals, which are web-based interfaces that
provide retailers with a one-stop destination for internal users, customers and
suppliers to access multiple information sources and applications. The markets
for e-commerce products are new and quickly evolving. We expect significant
growth in these e-commerce markets over the Internet, however, we are unable to
predict the full impact this emerging form of commerce will have on the
traditional "brick and mortar" retail operations historically served by our
other software products. If the markets for our MMS.com and Internet Portals
products, or other future web-enabled products fail to develop, develop more
slowly than expected or become saturated with competitors, or if our e-commerce
products are not accepted in the marketplace, our business, operating results
and financial condition could be negatively impacted.
There Are Many Risks Associated with International Operations. Our
international revenues represented 46% of total revenues in the first six months
of 2000 as compared 47%, 46% and 55% in the years ended December 31, 1999, 1998
and 1997, respectively. Although, we expect international revenues will continue
to account for a significant portion of our revenues for the foreseeable future,
we remain cautious about our expectations regarding international operations in
the near term. If our international operations grow, we must recruit and hire a
number of new consulting, sales and marketing and support personnel in the
countries we have or will establish offices. Our entry into new international
markets typically requires the establishment of new marketing and distribution
channels as well as the development and subsequent support of localized versions
of our software. International introductions of our products often require a
significant investment in advance of anticipated future revenues. The opening of
our new offices typically results in initial recruiting and training expenses
and reduced labor efficiencies associated with the introduction of products to a
new market. We cannot guarantee that the countries in which we operate will have
a sufficient pool of qualified personnel from which to hire or that we will be
successful at hiring, training or retaining such personnel. In addition, we
cannot assure you that we will be able to successfully expand our international
operations in a timely manner which could negatively impact our business,
operating results and financial condition.
Our international business operations are subject to risks associated
with international activities, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, longer accounts receivable payment cycles in
certain countries, potentially negative tax consequences, difficulties in
staffing and managing geographically disparate operations, greater difficulty in
safeguarding intellectual property, licensing and other trade restrictions,
currency fluctuations, repatriation of earnings, the burdens of complying with a
wide variety of foreign laws, and general economic conditions in international
markets. In addition, consulting services in support of international software
licenses typically have lower gross margins than those achieved domestically due
to generally lower billing rates and/or higher costs in certain of our
international markets. Accordingly, any significant growth in our international
operations may result in further declines in gross margins on consulting
services. We expect that an increasing portion of our international software
license, consulting services and maintenance services revenues will be
denominated in foreign currencies, subjecting us to fluctuations in foreign
currency exchange rates. As we continue to expand our international operations,
exposures to gains and losses on foreign currency transactions may increase. We
may choose to limit such exposure by entering into forward foreign exchange
contracts or engaging in similar hedging strategies. We cannot guarantee that
any currency exchange strategy would be successful in avoiding exchange-related
losses. In addition, revenues earned in various countries where we do business
may be subject to taxation by more than one jurisdiction, which would reduce our
earnings.
Our Markets Are Highly Competitive. The markets for our software
products are highly competitive. We believe the principal competitive factors
are price, feature and functionality, product reputation and referenceable
accounts, retail industry expertise, e-commerce capabilities and quality of
customer support. We encounter
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competitive products from a different set of vendors in each of our primary
product categories. Our Enterprise Systems compete with internally developed
systems and with third-party developers such as Island Pacific (a subsidiary of
SVI Holdings, Inc.), Radius PLC, Retek, Inc., SAP AG, and STS Systems. As we
continue to develop MMS.com and other e-commerce products, we expect to face
potential competition from business-to-business e-commerce application
providers, including Ariba, Broadvision, Commerce One, i2 Technologies,
Manugistics Group, Inc., Retek, Inc., and Microsoft as a result of its recently
announced investment in Radiant Systems, Inc. In addition, new competitors may
enter our markets and offer merchandise management systems that target the
retail industry.
The competition for our In-store Systems is more fragmented than the
Enterprise Systems market. We compete with major hardware equipment
manufacturers such as ICL, NCR and IBM, as well as software companies such as
CRS Business Computers, Datavantage, Inc., Riva Group PLC, RTC, and Trimax. In
the Analytic Applications markets, the Arthur Suite competes primarily with
Marketmax, Inc. and the Makaro product line which was recently acquired by i2
Technologies. The Retail IDEAS product competes with products from vendors such
as Microstrategy. In the market for consulting services, we have pursued a
strategy of forming informal working relationships with leading retail systems
integrators such as Andersen Consulting, Ernst & Young and
PriceWaterhouseCoopers. These integrators, as well as independent consulting
firms such as CAP Gemini, Kurt Salmon Associates, IBM Global Services, AIG
Neplex, CFT Consulting, Lakewest Consulting, SPL and ID Applications, also
represent competition to our consulting services group.
Some of our existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical, marketing and
other resources than we do, which could provide them with a significant
competitive advantage over us. We cannot guarantee that we will be able to
compete successfully against our current or future competitors or that
competition will not have a material adverse effect on our business, operating
results and financial condition.
There are Risks Associated with Our Strategic Relationships. We have
from time to time established, or attempted to establish, formal and informal
relationships with other companies, including IBM, Microsoft, Compuware, Inc.
and Silvon, Inc., to collaborate in areas such as product development, marketing
and distribution. The maintenance of these relationships and the development of
other similar relationships is a meaningful part of our business strategy.
Currently, our relationships with IBM and Microsoft are cooperative, and there
is no written agreement defining the parties' obligations. We cannot assure you
that our current informal relationships with IBM, Microsoft or other companies
will be beneficial to us, that such relationships can be maintained, or that we
will be able to enter into successful new strategic relationships in the future.
Implementation of Our Products Is A Lengthy Process; Our Fixed-Price
Service Contracts May Result In Losses. Our software products are complex and
perform or directly affect mission-critical functions across many different
functional and geographic areas of the enterprise. Consequently, implementation
of our software products can be a lengthy process and commitment of resources by
our clients is subject to a number of significant risks over which we have
little or no control. We believe the implementation of the of the client/server
versions of our products can be longer and more complicated than our other
applications as they typically (i) appeal to larger retailers who have multiple
divisions requiring multiple implementation projects, (ii) require the execution
of implementation procedures in multiple layers of software, (iii) offer a
retailer more options for product hierarchy, order processing and other
configuration choices, and (iv) involve third party integrators to change
business processes concurrent with the implementation of the software. Delays in
the implementations of any of our software products, whether by us or our
business partners, may result in client dissatisfaction or damage to our
reputation and a decline in our business, operating results and financial
condition.
We offer a combination of software products, consulting and maintenance
services to our customers. Typically, we enter into service agreements with our
customers that provide for consulting services on a "time and expenses" basis.
Certain clients have asked for, and we have from time to time entered into,
fixed-price service contracts. We believe that fixed-price service contracts may
increasingly be offered by our competitors to differentiate their product and
service offerings. As a result, we may enter into more fixed-price contracts in
the future.
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We Must Keep Pace With Technological Change To Remain Competitive. The
computer software industry and the business-to-business e-commerce markets for
our products are subject to rapid technological change, changing customer
requirements, frequent product introductions embodying new technologies and the
emergence of new industry standards could render our products and services
obsolete and unmarketable. As a result, our position in our existing markets, or
other markets that we may enter, could erode rapidly from technological
advancements not adopted by us, or through our failure to develop products and
services and maintain strategic relationships that are compatible with industry
standards. The products must keep pace with technological developments, conform
to evolving industry standards and address increasingly sophisticated client
needs. We believe that we must continue to respond quickly to the retailers'
needs for broad functionality and multi-platform support and to advances in
hardware and operating systems. We may experience future difficulties that could
delay or prevent the successful development, introduction and marketing of new
products, or that new products and product enhancements will meet the
requirements of the marketplace and achieve market acceptance. If we are unable
to develop and introduce products in a timely manner in response to changing
market conditions or customer requirements, our business, operating results and
financial condition would be negatively impacted.
Our Success Depends Upon Our Proprietary Technology. Our success and
competitive position is dependent in part upon our ability to develop and
maintain the proprietary aspect of our technology. We rely on a combination of
trademark, trade secret, copyright law and contractual restrictions to protect
the proprietary aspects of our technology. We seek to protect the source code to
our software, documentation and other written materials under trade secret and
copyright laws. Effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. We license our software
products under signed license agreements that impose restrictions on the
licensee's ability to utilize the software and do not permit the re-sale,
sublicense or other transfer of the source code. Finally, we seek to avoid
disclosure of our intellectual property by requiring employees and independent
consultants to execute confidentiality agreements with us and by restricting
access to our source code.
We license and integrate technology from third parties in our certain of
our software products. For example, we license the Uniface client/server
application development technology from Compuware, Inc. for use in ODBMS,
certain applications from Silvon Software, Inc. for use in Retail IDEAS, IBM's
Net.commerce merchant server software for use in MMS.com, and the Syncsort
application for use in the Arthur Suite. These third party licenses generally
require us to pay royalties and fulfill confidentiality obligations. Our license
with Compuware, Inc. was re-negotiated in April 2000 and will require us to pay
moderately higher royalty rates to Compuware, Inc. in the future. If we are
unable to continue to license any of this third party software, or if the third
party licensors do not adequately maintain or update their products, we would
face delays in the releases of our software until equivalent technology can be
identified, licensed or developed, and integrated into our software products.
These delays, if they occur, could have a material adverse effect on our
business, operating results and financial condition. It is also possible that
intellectual property acquired from third parties through acquisitions, mergers,
licenses or otherwise may not have been adequately protected. The reverse
engineering, unauthorized copying, or other misappropriation of our technology
could enable third parties to benefit from our technology without paying for it.
There has been a substantial amount of litigation in the software and
Internet industries regarding intellectual property rights. It is possible that
in the future third parties may claim that we or our current or potential future
software solutions infringe on their intellectual property. We expect that
software product developers and providers of e-commerce products will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlap. In addition, we may find it necessary to
initiate claims or litigation against third parties for infringement of our
proprietary rights or to protect our trade secrets. Any claims, with or without
merit, could be time consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or license agreements.
Royalty or licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could have a material adverse effect on our
business, operating results and financial condition.
There Are Risks Related To Product Defects, Product Liability, and
Integration Difficulties. Our software products are highly complex and
sophisticated. As a result, they may occasionally contain design defects or
software errors that could be difficult to detect and correct. In addition,
implementation of our products may involve customer-specific configuration by us
or third parties, and may involve integration with systems developed by third
parties. In particular, it is common for complex software programs, such as our
client/server and e-commerce software products, to contain undetected errors
when first released. They are discovered only after the product has
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been implemented and used over time with different computer systems and in a
variety of applications and environments. Despite extensive testing, we have in
the past discovered defects or errors in our products or custom configurations
only after our software products have been used by many clients. In addition,
our clients may occasionally experience difficulties integrating our products
with other hardware or software in their environment that are unrelated to
defects in our products. Such defects, errors or difficulties may cause future
delays in product introductions and shipments, result in increased costs and
diversion of development resources, require design modifications or impair
customer satisfaction with our products.
We believe that significant investments in research and development are
required to remain competitive and that speed to market is critical to our
success. Our future performance will depend in large part on our ability to
enhance our current products and develop new products that achieve market
acceptance. These new products must incorporate state-of-the-art technology,
enable our clients to remain competitive, and facilitate a powerful,
cost-effective means of conducting business-to-consumer and business-to-business
e-commerce on the Internet. If clients experience significant problems with
implementation of our products or are otherwise dissatisfied with their
functionality or performance or if they fail to achieve market acceptance for
any reason, our business, operating results and financial condition would be
negatively impacted.
Our products are typically used by our clients to perform
mission-critical functions. As a result, design defects, software errors, misuse
of our products, incorrect data from external sources or other potential
problems arising from the use of our products could result in financial or other
damages to our clients. Prior to 1998, we did not maintain product liability
insurance. Our license agreements with our clients typically contain provisions
designed to limit our exposure to potential claims as well as any liabilities
arising from such claims. However, such provisions may not effectively protect
us against such claims and the associated liability and costs.
We Are Dependent on Key Personnel. Our performance depends in large part
on the continued performance of our executive officers and other key employees,
particularly the performance and services of James D. Armstrong our Chief
Executive Officer. We do not have in place "key person" life insurance policies
on any of our employees. The loss of the services of Mr. Armstrong or other key
executive officers or employees could negatively affect our financial
performance.
We May Have Difficulty Integrating Acquisitions. We continually evaluate
potential acquisitions of complementary businesses, products and technologies,
including those which are significant in size and scope. On April 6, 2000 we
acquired certain assets of Intactix International, Inc. ("Intactix") from Pricer
AB. Acquisitions such as Intactix or others we may pursue involve a number of
special risks. Those risks include the inability to obtain, or meet conditions
imposed for, governmental approvals for the acquisition, diversion of
management's attention to the assimilation of the operations and personnel of
acquired businesses, costs related to the acquisition and the integration of the
acquired businesses, products, technologies and employees into our business and
product offerings. Achieving the anticipated benefits of any acquisition will
depend, in part, upon whether integration of the acquired business, products,
technology, or employees is accomplished in an efficient and effective manner,
and there can be no assurance that this will occur. The difficulties of such
integration may be increased by the necessity of coordinating geographically
disparate organizations, the complexity of the technologies being integrated,
and the necessity of integrating personnel with disparate business backgrounds
and combining different corporate cultures. The inability of management to
successfully integrate any acquisition that we may pursue, and any related
diversion of management's attention, could have a material adverse effect on our
business, operating results and financial condition. Moreover, there can be no
assurance that any products acquired will gain acceptance in our markets, or
that we will be able to penetrate new markets successfully or that we will
obtain the anticipated or desired benefits of such acquisitions. Any acquisition
which we pursue or consummate could result in the incurrence of debt and
contingent liabilities, amortization of goodwill and other intangibles,
purchased research and development expense, other acquisition-related expenses
and the loss of key employees, any of which could have a material adverse effect
on our business, operating results and financial condition.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks in the ordinary course of our
business. These risks result primarily from changes in foreign currency exchange
rates and interest rates. In addition, our international operations are subject
to risks related to differing economic conditions, changes in political climate,
differing tax structures, and other regulations and restrictions.
Foreign currency exchange rates. Our international operations expose us
to foreign currency exchange rate changes that could impact translations of
foreign denominated assets and liabilities into U.S. dollars and future earnings
and cash flows from transactions denominated in different currencies.
International revenues represented 42% of our total revenues in the second
quarter of 2000, as compared with 52% in the second quarter of 1999. In
addition, the identifiable net assets of our foreign operations totaled 19% of
consolidated assets as of June 30, 2000, as compared with 18% at December 31,
1999. Our exposure to currency exchange rate changes is diversified due to the
number of different countries in which we conduct business. We operate outside
the United States primarily through wholly owned subsidiaries in Europe,
Asia/Pacific, Canada and Latin America. We have determined that the functional
currency of each of our foreign subsidiaries is the local currency and as such,
foreign currency translation adjustments are recorded as a separate component of
stockholders' equity. Changes in the currency exchange rates of our foreign
subsidiaries resulted in our reporting unrealized foreign currency exchange
losses of $820,000 for the three months ended June 30, 2000, as compared with
$83,000 in the comparable quarter of 1999. We have not engaged in foreign
currency hedging transactions. Foreign currency gains and losses will continue
to result from fluctuations in the value of the currencies in which we conduct
operations as compared to the U.S. Dollar, and future operating results will be
affected to some extent by gains and losses from foreign currency exposure. We
prepared sensitivity analyses of our exposures from foreign net assets as of
June 30, 2000, to assess the impact of hypothetical changes in foreign currency
rates. Based upon the results of these analyses, a 10% adverse change in foreign
currency rates for the June 30, 2000 rates would result in a currency
translation loss of $632,000 before tax.
Interest rates. We invest our cash in a variety of financial
instruments, including bank time deposits, and variable and fixed rate
obligations of the U.S. Government and its agencies, states, municipalities,
commercial paper and corporate bonds. These investments are denominated in U.S.
dollars. We classify all of our investments as available-for-sale in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Cash balances in foreign
currencies overseas are operating balances and are invested in short-term
deposits of the local operating bank. Interest income earned on our investments
is reflected in our financial statements under the caption "Other income, net."
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due to these factors, our future investment income may fall short of
expectations due to changes in interest rates, or we may suffer losses in
principal if forced to sell securities which have seen a decline in market value
due to a change in interest rates. We hold our investment securities for
purposes other than trading. The fair value of securities held at June 30, 2000
was $33.6 million with interest rates generally ranging between 5% and 6%.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
On March 23, 2000, the U.S. District Court for the District of Arizona
dismissed, without leave to amend, all pending securities class action
complaints previously filed against the Company and certain of our current and
former directors and officers. The complaint, originally filed on January 13,
1999 (Bernat v. JDA Software Group, Inc., et al., Dist. of Arizona No.
CIV'99-0065 PHX RGS), alleged that we misled investors as to certain aspects of
our business and prospects. The court approved the stipulation regarding
termination of action on May 30, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Our 2000 Annual Meeting of Stockholders was held on May 25, 2000 at our
World Headquarters at 14400 North 87th Street, Scottsdale, Arizona 85260. Two
proposals were voted at the Annual Meeting and one proposal was adjourned for
consideration at a later date. The results of each proposal are as follows.
Proposal No. 1: To elect two Class I directors to serve a three-year
term on our Board of Directors. The Class I director nominees were J. Michael
Gullard and William C. Keiper. Mr. Gullard and Mr. Keiper received the following
votes: For - 21,069,585; Against - 490,865; Abstain - 0; Not Voted - 2,646,243.
Stephen A. McConnell and Jock Patton will continue to serve their
existing terms through 2001 and James D. Armstrong and Frederick M. Pakis will
continue to serve their existing terms through 2002.
Proposal No. 2: To approve an amendment to our 1996 Stock Option Plan to
increase the number of shares of common stock authorized for issuance thereunder
from 4,500,000 to 8,500,000. Before a vote was taken on Proposal 2, the Annual
Meeting with respect to Proposal 2 was adjourned, and has been successively
adjourned to reconvene on August 18, 2000 to consider only Proposal 2.
Proposal No. 3: To ratify the appointment of Deloitte & Touche LLP as
the Company's independent public accountants for the year ending December 31,
2000. Proposal 3 received the following votes: For 21,496,711; Against - 20,510;
Abstain - 0; Not Voted - 2,646,243.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits: See Exhibit Index
(b) Reports on Form 8-K:
A Form 8-K dated April 6, 2000 was filed with the Securities and
Exchange Commission to announce the acquisition of certain assets
and the assumption of certain liabilities of Intactix
International, Inc. from Pricer AB pursuant to an Asset Purchase
Agreement dated February 24, 2000. The financial statements of
the business acquired and the required pro forma financial
information was subsequently filed on Form 8-K/A on June 20,
2000.
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JDA SOFTWARE GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JDA SOFTWARE GROUP, INC.
Dated: August 11, 2000 By: /s/ Kristen L. Magnuson
--------------------------------
Kristen L. Magnuson
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit # DESCRIPTION OF DOCUMENT
2.1** -- Asset Purchase Agreement dated as of June 4, 1998, by
and among JDA Software Group, Inc., JDA Software, Inc.
and Comshare, Incorporated.
2.2### -- Asset Purchase Agreement dated as of February 24, 2000,
by and among JDA Software Group, Inc., Pricer AB, and
Intactix International, Inc.
3.1*** -- Second Restated Certificate of Incorporation of the
Company together with Certificate of Amendment dated
June 12, 1998.
3.2*** -- First Amended and Restated Bylaws.
4.1* -- Specimen Common Stock certificate.
4.2*(1) -- Stock Redemption Agreement among the Company, James D.
Armstrong and Frederick M. Pakis dated March 30, 1995.
10.1*(1) -- Form of Indemnification Agreement.
10.2*(1) -- 1995 Stock Option Plan, as amended, and form of
agreement thereunder.
10.3#(1) -- 1996 Stock Option Plan, as amended.
10.4*(1) -- 1996 Outside Directors Stock Option Plan and forms of
agreement thereunder.
10.5***(1) -- Employment Agreement between James D. Armstrong and JDA
Software, Inc. dated January 1, 1998.
10.6***(1) -- Employment Agreement between Frederick M. Pakis and JDA
Software, Inc. dated January 1, 1998.
10.7##(1) -- Employment Agreement between Frederick M. Pakis, JDA
Software Group, Inc. and JDA Software, Inc. effective as
of July 31, 1999.
10.8#(1) -- 1998 Nonstatutory Stock Option Plan.
10.9#(1) -- 1998 Employee Stock Purchase Plan.
10.10+ -- 1999 Employee Stock Purchase Plan.
10.11*** -- Lease Agreement between Opus West Corporation and JDA
Software Group, Inc. dated April 30, 1998, together with
First Amendment dated June 30, 1998.
10.12** -- Software License Agreement dated as of June 4, 1998 by
and between Comshare, Incorporated and JDA Software,
Inc.
10.14(2) -- Value-Added Reseller License Agreement for Uniface
Software between Compuware Corporation and JDA Software
Group, Inc. dated April 1, 2000.
10.15*(1) -- JDA Software, Inc. 401(k) Profit Sharing Plan, adopted
as amended effective January 1, 1995.
10.16# -- Business Loan Agreement between Bank of America Arizona
and JDA Software, Inc. dated September 30, 1998.
10.17***(1) -- Form of Amendment of Stock Option Agreement between JDA
Software Group, Inc and Kristen L. Magnuson, amending
certain stock options granted to Ms. Magnuson pursuant
to the JDA Software Group, Inc. 1996 Stock Option Plan
on September 11, 1997 and January 27, 1998.
10.18++(1) -- Form of Rights Agreement between the Company and
ChaseMellon Shareholder Services, as Rights Agent
(including as Exhibit A the Form of Certificate of
Designation, Preferences and Rights of the Terms of the
Series A Preferred Stock, as Exhibit B the From of Right
Certificate, and as Exhibit C the Summary of Terms and
Rights Agreement).
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10.19+++(1) -- Form of Incentive Stock Option Agreement between JDA
Software Group, Inc. and Kristen L. Magnuson to be used
in connection with stock option grants to Ms. Magnuson
pursuant to the JDA Software Group, Inc. 1996 Stock
Option Plan.
10.20@ -- Form of Incentive Stock Option Agreement between JDA
(1)(3) Software Group, Inc. and certain Senior Executive
Officers to be used in connection with stock options
granted pursuant to the JDA Software Group, Inc. 1996
Stock Option Plan.
10.21@ -- Form of Nonstatutory Stock Option Agreement between JDA
(1)(3) Software Group, Inc. and certain Senior Executive
Officers to be used in connection with stock options
granted pursuant to the JDA Software Group, Inc. 1996
Stock Option Plan.
10.22@(1) -- Form of Amendment of Stock Option Agreement between JDA
(4) Software Group, Inc and certain Senior Executive
Officers, amending certain stock options granted
pursuant to the JDA Software Group, Inc. 1995 Stock
Option Plan
10.23@ -- Form of Amendment of Stock Option Agreement between JDA
(1)(5) Software Group, Inc and certain Senior Executive
Officers, amending certain stock options granted
pursuant to the JDA Software Group, Inc. 1996 Stock
Option Plan
10.24@ -- Form of Incentive Stock Option Agreement between JDA
(1)(6) Software Group, Inc. and certain Senior Executive
Officers to be used in connection with stock options
granted pursuant to the JDA Software Group, Inc. 1996
Stock Option Plan
27.1 -- Financial Data Schedule
- ----------
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-748), declared effective on March 14, 1996.
** Incorporated by reference to the Company's Current Report on Form 8-K
dated June 4, 1998, as filed on June 19, 1998.
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998, as filed on August 14,
1998.
+ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1999, as filed on August 19,
1999.
++ Incorporated by reference to the Company's Current Report on Form 8-K
dated October 2, 1998, as filed on October 28, 1998.
+++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998, as filed on November
13, 1998.
# Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, as filed on March 31, 1998.
## Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1999, as filed on November
12, 1999.
### Incorporated by reference to the Company's Current Report on Form 8-K
dated February 24, 2000, as filed on March 1, 2000.
@ Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, as filed on March 16, 2000.
(1) Management contracts or compensatory plans or arrangements covering
executive officers or directors of the Company.
(2) Confidential treatment has been granted as to part of this exhibit.
(3) Applies to James D. Armstrong and Frederick M. Pakis.
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(4) Applies to Hamish N. Brewer and Gregory L. Morrison.
(5) Applies to Hamish N. Brewer, Peter J. Charness, Scott D. Hines, Gregory
L. Morrison and David J. Tidmarsh.
(6) Applies to Senior Executive Officers with the exception of James D.
Armstrong, Frederick M. Pakis and Kristen L. Magnuson.
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