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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 SEPTEMBER 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
(480) 308-3000
(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 24,563,466 as of October 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 September 30, 2000 and December 31, 1999 ................ 3
Condensed Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2000 and September 30, 1999 ...................................................... 4
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine
Months ended September 30, 2000 and September 30, 1999 ......................................... 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and September 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 4. Submission of Matters to a Vote of Security Holders ................................................. 30
Item 5. Other Information ................................................................................... 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)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 46,959 $ 58,283
Marketable securities 26,249 30,423
Accounts receivable, net 49,940 32,302
Income tax receivable 2,468 2,201
Deferred tax asset 3,588 2,345
Prepaid expenses and other current assets 7,936 5,114
--------- ---------
Total current assets 137,140 130,668
PROPERTY AND EQUIPMENT, NET 22,360 23,987
GOODWILL AND OTHER INTANGIBLES, NET 50,285 31,635
DEFERRED TAX ASSET 3,863 5,933
MARKETABLE SECURITIES 3,480 4,822
--------- ---------
Total assets $ 217,128 $ 197,045
========= =========
CURRENT LIABILITIES:
Accounts payable $ 3,706 $ 2,669
Accrued expenses and other liabilities 13,261 11,929
Deferred revenue 13,350 7,584
--------- ---------
Total current liabilities 30,317 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 24,556,887 and 23,954,537, respectively 246 240
Additional paid in capital 181,710 176,101
Accumulated earnings (deficit) 7,847 (93)
Accumulated other comprehensive loss (2,992) (1,385)
--------- ---------
Total stockholders' equity 186,811 174,863
--------- ---------
Total liabilities and stockholders' equity $ 217,128 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
REVENUES:
Software licenses $ 14,621 $ 8,662 $ 48,753 $ 26,755
Maintenance services 8,566 4,779 21,479 14,015
--------- --------- --------- ---------
Product revenues 23,187 13,411 70,232 40,770
Consulting services 20,308 21,882 58,566 66,915
--------- --------- --------- ---------
Total revenues 43,495 35,323 128,798 107,685
--------- --------- --------- ---------
COST AND EXPENSES:
Cost of software licenses 668 539 2,366 1,552
Cost of maintenance 1,931 1,614 5,793 4,661
--------- --------- --------- ---------
Cost of product revenues 2,599 2,153 8,159 6,213
Cost of consulting services 16,433 16,467 48,068 49,101
Product development 7,676 6,181 20,850 17,975
Sales and marketing 7,159 5,547 21,063 18,425
General and administrative 5,729 4,491 15,047 13,806
Amortization of intangibles 1,716 1,092 4,725 3,317
Purchased in-process research and development -- -- 200 --
Restructuring and asset disposition charge -- -- 828 2,111
--------- --------- --------- ---------
Total cost and expenses 41,312 35,931 118,940 110,948
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 2,183 (608) 9,858 (3,263)
Other income, net 1,032 901 3,159 2,740
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 3,215 293 13,017 (523)
Income tax provision (benefit) 1,254 117 5,077 (209)
--------- --------- --------- ---------
NET INCOME (LOSS) $ 1,961 $ 176 $ 7,940 $ (314)
========= ========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE $ .08 $ .01 $ .33 $ (.01)
========= ========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE $ .08 $ .01 $ .31 $ (.01)
========= ========= ========= =========
SHARES USED TO COMPUTE:
Basic earnings (loss) per share 24,436 23,821 24,245 23,689
========= ========= ========= =========
Diluted earnings (loss) per share 25,494 23,821 25,415 23,689
========= ========= ========= =========
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
NET INCOME (LOSS) $ 1,961 $ 176 $ 7,940 $ (314)
OTHER COMPREHENSIVE LOSS:
Unrealized holding gain (loss) on marketable
securities available for sale, net 54 -- 83 --
Foreign currency translation adjustment (660) 422 (1,690) (289)
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 1,355 $ 598 $ 6,333 $ (603)
--------- --------- --------- ---------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
2000 1999
---------- ----------
OPERATING ACTIVITIES:
Net income (loss) $ 7,940 $ (314)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 10,780 8,997
Provision for doubtful accounts 2,504 3,072
Net loss on disposal of property and equipment 115 238
Write-off of purchased in-process research and development 200 --
Deferred income taxes 827 180
Changes in assets and liabilities:
Accounts receivable (14,717) 1,273
Income tax receivable (276) (953)
Prepaid expenses and other current assets (1,906) (14)
Accounts payable 812 (1,620)
Accrued expenses and other liabilities (757) (3,778)
Deferred revenue (21) 417
---------- ----------
Net cash provided by operating activities 5,501 7,498
---------- ----------
INVESTING ACTIVITIES:
Purchase of marketable securities (416,432) (218,736)
Sales of marketable securities 12,371 33,999
Maturities of marketable securities 409,660 185,478
Purchase of Intactix International, Inc., net of cash acquired (23,138) --
Purchase of property and equipment (4,899) (9,185)
Proceeds from disposal of property and equipment 896 2,153
---------- ----------
Net cash used in investing activities (21,542) (6,291)
---------- ----------
FINANCING ACTIVITIES:
Issuance of common stock - stock option plan 2,287 421
Issuance of common stock - employee stock purchase plan 3,009 2,725
Tax benefit - stock options and employee stock purchase plan 319 --
Payments on capital lease obligations (39) (60)
---------- ----------
Net cash provided by financing activities 5,576 3,086
---------- ----------
Effect of exchange rates on cash (859) 48
---------- ----------
Net (decrease) increase in cash and cash equivalents (11,324) 4,341
---------- ----------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 58,283 42,376
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 46,959 $ 46,717
========== ==========
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
2000 1999
--------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 4,035 $ 1,436
========= ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquisition of Intactix International, Inc.:
Fair value of current assets acquired $ (8,732)
Fixed assets (508)
In-process research and development (200)
Developed software and other intangibles (23,380)
Liabilities assumed 2,073
Deferred revenue 5,786
---------
Total Acquisition Cost of Intactix International, Inc. $ (24,961)
Cash acquired 1,823
---------
Total cash expended to acquire Intactix International, Inc. $ (23,138)
---------
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 nine months ended
September 30, 2000, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
2. ACQUISITION
On April 6, 2000, we completed the acquisition of Intactix
International, Inc. ("Intactix") from Pricer AB. 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 of $20.5
million was paid in cash for certain assets, including certain intangible assets
and in-process research and development ("IPR&D"). In addition, we incurred
direct costs related to the transaction totaling $4.5 million. The total
acquisition cost of $25.0 million, which consists of the purchase price plus the
direct costs related to the transaction, was allocated to the acquired assets
and liabilities 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 nine months
ended September 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.
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------
2000 1999
--------- ---------
Total revenues................................ $ 135,035 $ 125,347
Net income (loss)............................. $ 7,267 $ (3,282)
Basic earnings (loss) per share............... $ .30 $ (.14)
Diluted earnings (loss) per share............. $ .29 $ (.14)
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 nine months ended September 30, 1999 as their
effect would be antidilutive:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Shares--Basic earnings per share.......................... 24,436 23,821 24,245 23,689
--------- --------- --------- ---------
Dilutive common stock equivalents......................... 1,058 -- 1,170 --
--------- --------- --------- ---------
Shares--Diluted earnings per share........................ 25,494 23,821 25,415 23,689
========= ========= ========= =========
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4. SEGMENT DISCLOSURES
We are a leading provider of software solutions designed specifically to
address the demand 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------------------------------
2000 1999 2000 1999
------------- ------------ ------------- ------------
REVENUES:
United States $ 24,573 $ 19,943 $ 71,535 $ 58,812
EMEA 9,154 9,353 27,370 30,050
Asia/Pacific 5,353 3,436 18,847 8,807
Latin America 3,301 2,110 7,174 6,399
Canada 1,458 1,237 5,285 6,162
------------- ------------ ------------- ------------
Total International 19,266 16,136 58,676 51,418
------------- ------------ ------------- ------------
Sales and transfers among regions (344) (756) (1,413) (2,545)
------------- ------------ ------------- ------------
Total revenues $ 43,495 $ 35,323 $ 128,798 $ 107,685
============= ============ ============= ============
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
IDENTIFIABLE ASSETS:
United States $ 173,690 $ 161,126
EMEA 24,250 20,443
Asia/Pacific 10,373 6,979
Latin America 3,939 4,101
Canada 4,876 4,396
------------- ------------
Total International 43,438 35,919
------------- ------------
Total identifiable assets $ 217,128 $ 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 nine months ended September 30, 2000 and 1999 is as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
REVENUES:
Enterprise Systems $ 19,687 $ 21,814 $ 64,208 $ 65,998
In-store Systems 4,810 4,791 19,268 15,816
Analytic Applications 18,998 8,718 45,322 25,871
---------- ---------- ---------- ----------
Total revenues $ 43,495 $ 35,323 $ 128,798 $ 107,685
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THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS):
Enterprise Systems $ 618 $ 1,197 $ 8,132 $ 3,760
In-store Systems 495 (149) 5,334 1,556
Analytic Applications 4,939 2,037 8,207 4,608
Other (3,869) (3,693) (11,815) (13,187)
---------- ---------- ---------- ----------
Total income (loss) from operations $ 2,183 $ (608) $ 9,858 $ (3,263)
========== ========== ========== ==========
DEPRECIATION AND AMORTIZATION:
Enterprise Systems $ 1,489 $ 1,585 $ 4,390 $ 4,542
In-store Systems 381 353 1,135 973
Analytic Applications 1,954 1,171 5,255 3,482
---------- ---------- ---------- ----------
Total depreciation and amortization $ 3,824 $ 3,109 $ 10,780 $ 8,997
========== ========== ========== ==========
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, IPR&D 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.
7. SUBSEQUENT EVENTS - STOCKHOLDERS' EQUITY
- On October 24, 2000, our Board of Directors authorized a repurchase of
up to two million shares of our outstanding common stock. Under the
buy-back plan, we may periodically repurchase shares over the next
twelve months on the open market at prevailing market prices. We will
make the purchase decisions based upon market conditions and other
considerations.
- A Special Meeting of Stockholders was held on November 9, 2000 to
approve an amendment to our 1996 Stock Option Plan to increase the
number of shares of common stock reserved for issuance thereunder from
4,500,000 to 7,000,000. The proposal was approved by our stockholders.
8. 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. The adoption of SFAS
No. 133 will not 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.
9. RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial
statements to conform to the September 30, 2000 presentation.
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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.
OVERVIEW
We are a leading provider of software solutions designed specifically to
address the demand chain management, business process, analytic application and
e-commerce requirements of the retail industry. Our solutions enable our
customers to collect, manage, organize and analyze information throughout their
retail enterprise, and to interact with suppliers and customers over the
Internet at multiple levels within their organizations.
We classify our software products into three primary categories:
Enterprise Systems, In-store Systems and Analytic Applications.
- - 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 and
management tools for retailing operations, warehouse management and
logistics, and tools for business-to-business and business-to-consumer
e-commerce.
- - In-store Systems provide point-of-sale and back office applications that
enable a retailer to capture, analyze and transmit certain sales and other
operational information to corporate level merchandise management systems.
We have also announced the development of JDA Affinity, a collection of
open applications designed to enable retailers to support and proactively
manage their customer information and transactions.
- - Analytic Applications provide a comprehensive set of tools for analyzing
business results and trends, monitoring strategic plans and enabling
tactical decisions.
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 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. 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 services revenues
are derived from a range of services, the demand for which stems primarily from,
and often trails, 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.
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Because of the significantly higher gross margins on revenues from
software licenses and maintenance compared to consulting services revenues, the
mix in our revenues components is significant to our operating results.
Software license revenues, maintenance services revenues and consulting
services revenues represented 38%, 17% and 45%, respectively, of our total
revenues during the nine months ended September 30, 2000, as compared with 25%,
13% and 62%, respectively in the comparable period of 1999.
CERTAIN MATTERS RELATED TO OUR ACQUISITION STRATEGY AND OUR INTACTIX ACQUISITION
- - STRATEGY
We believe there are opportunities to grow our business through the
acquisition of complementary or synergistic companies, products and
technologies. We look for acquisitions that can readily be integrated and
accretive to earnings, although we may pursue non-accretive acquisitions that
appear strategically important. We believe the general size of any cash
acquisitions we would currently consider to be in the $5.0 million to $30.0
million range. Larger acquisitions could possibly require us to issue our stock
in lieu of or in addition to cash.
- - INTACTIX INTERNATIONAL, INC.
On April 6, 2000, we completed the acquisition of Intactix
International, Inc. ("Intactix") from Pricer AB. 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 of $20.5
million was paid in cash for certain assets, including certain intangible assets
and in-process research and development ("IPR&D"). In addition, we incurred
direct costs related to the transaction totaling $4.5 million. The total
acquisition cost of $25.0 million, which consists of the purchase price plus the
direct costs related to the transaction, was allocated to the acquired assets
and liabilities 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 has generated $12.9 million in total revenues since
its acquisition, including $5.9 million in software license revenues.
RECENT DEVELOPMENTS
- - We announced a reorganization and expansion of our senior management team
in October 2000 to support our growth plans and accelerate our presence in
the business-to-business Internet market. We have promoted KEVIN W.
STADLER, the former president and CEO of Intactix, to serve in the new
executive role of Senior Vice President, Collaborative Business Solutions.
In addition, we have appointed GREGORY L. MORRISON, our former Senior Vice
President, Analytic Applications, to the new position of Senior Vice
President, Worldwide
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Regional Operations and MICHEL RAMIS, the former Managing Director of our
French operation, to the new position of Regional Vice President, Southern
Europe. MR. HERBERT C. CLINE, formerly Vice President and Managing Partner
of Trademark Technologies, joined our Company in October 2000 and will
serve as our Regional Vice President, United States. We have identified two
other new senior executive positions, Senior Vice President, Customer
Support and Senior Vice President, Product Development, and are actively
recruiting candidates to serve in these roles. All other members of our
senior management team will continue to serve in their existing roles.
- - On October 24, 2000, our Board of Directors authorized a repurchase of up
to two million shares of our outstanding common stock. Under the buy-back
plan, we may periodically repurchase shares over the next twelve months on
the open market at prevailing market prices. We will make the purchase
decisions based upon market conditions and other considerations.
- - A Special Meeting of Stockholders was held on November 9, 2000 to approve
an amendment to our 1996 Stock Option Plan to increase the number of shares
of common stock reserved for issuance thereunder from 4,500,000 to
7,000,000. The proposal was approved by our stockholders.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues
Total revenues for three months ended September 30, 2000 were $43.5
million, an increase of 23% over the $35.3 million reported in the comparable
quarter of 1999. Revenues consisted of software licenses, maintenance services
and consulting services, which represented 33%, 20% and 47%, respectively, of
total revenues during the three months ended September 30, 2000, as compared
with 25%, 13% and 62%, respectively in the comparable quarter of 1999.
Software Licenses. Software license revenues for the three months ended
September 30, 2000 were $14.6 million, an increase of 69% over the $8.7 million
reported in the comparable quarter of 1999. This increase results primarily from
increased sales of our Analytic Application solutions and includes $3.7 million
in software license revenues from the Intactix product line that was acquired in
April 2000. Domestic and international software license revenues increased 107%
and 34%, respectively in the third quarter of 2000 compared to the third quarter
of 1999. As expected, software licenses were down sequentially 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.
We currently expect software license revenues to be approximately $20.0 million
in the fourth quarter of 2000.
Maintenance Services. Maintenance services revenues for the three
months ended September 30, 2000 were $8.6 million, an increase of 79% 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 and the increased demand stemming
from new software license sales in the first nine months of 2000. We currently
expect modest sequential expansion of our maintenance services revenues during
the fourth quarter of 2000.
Consulting Services. Consulting services revenues for the three months
ended September 30, 2000 were $20.3 million, a decrease of 7% from the $21.9
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 are beginning to recover as a result of the new
software license sales in the first nine months of 2000. However, we currently
expect consulting services revenues to decrease slightly in the fourth quarter
of 2000 compared to the third quarter of 2000 due to lower utilization around
the holiday season.
Product Line Revenues
Total revenues in our Enterprise Systems business unit decreased 10% to
$19.7 million in the third quarter of 2000 from $21.8 million in the comparable
quarter of 1999. Software license revenues in our Enterprise Systems
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business unit were flat between the comparable quarters. This business unit
signed 13 new licenses during the third quarter of 2000 compared to 10 in the
third quarter of 1999, including two new MMS.com sales and the successful
go-live of our Store Portal beta sites and the resulting commercial release of
this product. Consulting services revenues in this segment decreased 15% in the
third quarter of 2000 compared to the third 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,
particularly implementation revenues associated with the MMS product line. Total
maintenance revenues for Enterprise Systems increased 19% in the third quarter
of 2000 compared to the third quarter of 1999 as a result of our increased
software license installed base.
Total revenues in our In-Store Systems business unit were flat at $4.8
million between the comparable quarters. Software license revenues increased 39%
in the third quarter of 2000 compared to the third 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 in new feature and
functionality for our In-Store Systems to address increased competition in this
business segment in 1999. Consulting services revenues in this segment decreased
5% in the third quarter of 2000 compared to the third 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 14% in the third quarter of 2000 compared to the third quarter of 1999
as a result of our increased software license installed base.
Total revenues in our Analytic Applications business unit increased
118% to $19.0 million in the third quarter of 2000 from $8.7 million in the
comparable quarter of 1999. The increase results primarily from increases in
software license sales for all Analytic Applications products including the
incremental revenues from the Intactix product line which generated $7.5 million
in total revenues during the third quarter of 2000.
Geographic Revenues
Total revenues in the United States increased 23% to $24.6 million in
the third quarter of 2000 from $19.9 million in the comparable quarter of 1999.
This increase results from increases in all product categories for software
license sales and maintenance service revenues in the third quarter of 2000
compared to the third 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 2% to $9.2 million in the
third quarter of 2000 from $9.4 million in the comparable quarter of 1999. The
decrease results from reduced demand for Enterprise Systems and In-store Systems
software licenses between the comparable periods and a decrease in consulting
services revenues 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. In addition, we believe that
demand in the EMEA region has been temporarily impacted by an increase in the
consolidation activities in the retail sector. The fourth quarter 2000 pipeline
appears somewhat stronger than the past six months.
Total revenues in the Asia/Pacific region increased 56% to $5.4 million
in the third quarter of 2000 from $3.4 million in the comparable quarter of
1999. The increase is due to increased Analytic Applications software license
sales, and increases in consulting revenues and maintenance revenues in all
product categories. We experienced strong increases in Australia which produced
$2.4 million in total revenue in the third quarter of 2000 compared to $1.4
million in the third quarter of 1999.
Total revenues in the Latin America region increased 56% to $3.3
million in the third quarter of 2000 from $2.1 million in the comparable quarter
of 1999. The increase results primarily from increased sales of Enterprise
Systems and Analytic Applications software licenses in the third quarter of 2000
compared to the third quarter of 1999, offset in part by decreased consulting
revenues from Enterprise Systems and In-store Systems.
Total revenues in Canada increased 18% to $1.5 million in the third
quarter of 2000 from $1.2 million in the comparable quarter of 1999. The
increase is due to increased maintenance revenues in all product categories,
offset in part by a decline in software license sales and consulting services
revenues between the comparable quarters. The decline in demand for consulting
services results primarily from the decline in new software license
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sales we experienced throughout most of 1999. We believe that this region has a
high degree of market penetration and may grow at reduced rates in the future.
Cost of Revenues
Cost of Software Licenses. Cost of software license revenues was
$668,000 for the three months ended September 30, 2000 as compared to $539,000
in the comparable quarter of 1999. Cost of software licenses represented 5% and
6%, respectively, of software license revenues in these comparable periods.
Cost of Maintenance Services. Cost of maintenance services increased
20% to $1.9 million in 2000 from $1.6 million in 1999. We have added headcount
in this function to support our growing client base, including 18 employees that
were added during the second quarter of 2000 in connection with the acquisition
of Intactix. At September 30, 2000 there were 73 employees in this function
compared to 50 at September 30, 1999.
Cost of Consulting Services. Consulting services costs for the three
months ended September 30, 2000 were $16.4 million, a decrease of less than 1%
from the $16.5 million reported in the comparable quarter of 1999. We had 57
less FTE in our consulting services organization in the third quarter of 2000
compared to the third quarter of 1999, and as of September 30, 2000, there were
557 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. Although we reduced the headcount
in our consulting services organization by 10% between the comparable periods,
higher costs were incurred in the third quarter of 2000 related to salary
increases, the increased use of outside contractors and increased costs for
recruiting and relocation. There was a shift of approximately $1.3 million in
consulting services costs from the Enterprise Systems business unit to the
Analytic Applications business unit between the comparable periods which
reflects the changes in demand for these products. 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 fourth quarter of 2000.
Gross Profit
Gross profit for the three months ended September 30, 2000 was $24.5
million, an increase of 46% over the $16.7 million reported in the comparable
quarter of 1999. Gross profit, as a percentage of total revenues, increased to
56% in the third quarter of 2000 compared with 47% in the third quarter of 1999.
This increase results from the higher mix of software license revenues as a
percentage of total revenues during the three months ended September 30, 2000
and the increase in our maintenance base. Consulting services margins decreased
to 19% in the third quarter of 2000 from 25% in the comparable quarter of 1999
primarily as a result of lower consulting revenues in all geographic regions
except Asia/Pacific, lower utilization and a higher average cost per FTE due to
salary increases, increased use of outside contractors and increased costs for
recruiting and relocation. We believe our fourth quarter 2000 service margins
will be somewhat lower than the third quarter of 2000 due to lower utilization
around the holiday season.
Operating Expenses
Product Development. Product development expenses for the three months
ended September 30, 2000 were $7.7 million, a 24% 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 our new Analytic Applications and e-commerce
products. Our product development staff increased by approximately 15% in the
third quarter of 2000 compared to the third quarter of 1999, and as of September
30, 2000 there were 247 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 $7.5 million to $8.0 million in product research and development
during the fourth quarter of 2000.
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Sales and Marketing. Sales and marketing expenses for the three months
ended September 30, 2000 were $7.2 million, a 29% increase over the $5.5 million
reported in the comparable quarter of 1999. The increase in sales and marketing
expenses results from the acquisition of Intactix in April 2000 and increased
commissions due to higher software license revenues between the comparable
periods, primarily in the Analytic Applications business unit. As of September
30, 2000 there were 131 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.
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 September 30, 2000 were $5.7 million, a 28% increase from the
$4.5 million reported in the comparable quarter of 1999. The increase in general
and administrative expenses results primarily from the acquisition of Intactix
in April 2000. General and administrative expense, as a percentage of total
revenues, was 13% in each of the comparable quarters.
Amortization of Intangibles. Amortization of intangibles for the three
months ended September 30, 2000 was $1.7 million, a 57% 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. We finalized the purchase price
allocation for Intactix during the third quarter of 2000 and as a result, our
overall amortization expense decreased sequentially from the $1.9 million
reported for the second quarter of 2000. We expect quarterly amortization to be
approximately $1.8 million per quarter in the future.
Operating Income (Loss)
Operating income in our Enterprise Systems business unit decreased 48%
to $618,000 in the third quarter of 2000 from $1.2 million in the comparable
quarter of 1999. The decrease is due primarily to reduced consulting services
revenues and lower consulting margins in the third quarter of 2000 compared to
the third quarter of 1999.
Operating income in our In-Store Systems business unit increased 422%
to $495,000 in the third quarter of 2000 compared to an operating loss of
($149,000) in the comparable quarter of 1999. The increase is due to lower
product development and sales and marketing costs and higher software license
revenues between the comparable quarters.
Operating income in our Analytic Applications business unit increased
142% to $4.9 million in the third quarter of 2000 from $2.0 million in the
comparable quarter of 1999. The increase results primarily from the Intactix
product line which generated $7.5 million in total revenues during the third
quarter of 2000, including $3.7 million in software license revenues.
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.
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.
Net Income
We currently expect and have previously announced that our earnings
per share will meet or exceed $.16 per share for the fourth quarter of 2000.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenues
Total revenues for nine months ended September 30, 2000 were $128.8
million, an increase of 20% over the $107.7 million reported in the comparable
period of 1999. Revenues consisted of software licenses, maintenance services
and consulting services, which represented 38%, 17% and 45%, respectively, of
total revenues during the nine months ended September 30, 2000, as compared with
25%, 13% and 62%, respectively in the comparable period of 1999.
Software Licenses. Software license revenues for the nine months ended
September 30, 2000 were $48.8 million, an increase of 82% over the $26.8 million
reported in the comparable period of 1999. This increase includes increases in
each of our product categories and $5.9 million in software license revenues
from the Intactix product line that was acquired in April 2000. Domestic and
international software license revenues increased 146% and 41%, respectively in
the nine-month period of 2000 compared to the nine-month period of 1999.
Maintenance Services. Maintenance services revenues for the nine months
ended September 30, 2000 were $21.5 million, an increase of 53% over the $14.0
million reported in the comparable period of 1999. The increase results
primarily from the incremental maintenance services revenues from the Intactix
product line that was acquired in April 2000 and the increased demand stemming
from new software license sales in the first nine months of 2000.
Consulting Services. Consulting services revenues for the nine months
ended September 30, 2000 were $58.6 million, a decrease of 12% from the $66.9
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.
Product Line Revenues
Total revenues in our Enterprise Systems business unit decreased 3% to
$64.2 million in the nine-month period of 2000 from $66.0 million in the
comparable period of 1999. Software license revenues in our Enterprise Systems
business unit increased 54% in the nine-month period of 2000 compared to the
nine-month period of 1999. The increase is due primarily to increased sales of
ODBMS and incremental revenues from sales of the MMS.com and Store Portals
products that were commercially released in the second half of 1999 and third
quarter of 2000, respectively. MMS software license revenues for the nine-month
period of 2000 decreased 15% compared to the nine-month period of 1999.
Consulting services revenues in this segment decreased 20% in the nine-month
period of 2000 compared to the nine-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.
Total maintenance revenues for Enterprise Systems increased 14% in the
nine-month period of 2000 compared to the nine-month period of 1999 as a result
of our increased software license installed base.
Total revenues in our In-Store Systems business unit increased 22% to
$19.3 million in the nine-month period of 2000 from $15.8 million in the
comparable period of 1999. The increase includes a 134% increase in software
license revenues in the nine-month period of 2000 compared to the nine-month
period of 1999. We believe the increase in software license sales is
attributable to the reorganization of our sales force in early 2000 and our
research and development investment to add new feature and functionality to this
product in response to increased competition in this business segment during
1999. Consulting services revenues in this segment decreased 8% in the
nine-month period of 2000 compared to the nine-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 14% in the nine-month period of 2000 compared to the nine-month period
of 1999 as a result of our increased software license installed base.
Total revenues in our Analytic Applications business unit increased 75%
to $45.3 million in the nine-month period of 2000 from $25.9 million in the
comparable period of 1999. The increase results primarily from
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increases in software license sales for all Analytic Application products and
the incremental revenues from the Intactix product line which has generated
$12.9 million in total revenues since its acquisition in April 2000, including
$5.9 million in software license revenues.
Geographic Revenues
Total revenues in the United States increased 22% to $71.5 million in
the nine-month period of 2000 from $58.8 million in the comparable period of
1999. This increase results from increases in all product categories for
software license sales and maintenance service revenues in the nine-month period
of 2000 compared to the nine-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 9% to $27.4 million in the
nine-month period of 2000 from $30.1 million in the comparable period of 1999.
The decrease results from a slow down in demand for software licenses and
consulting services in most product categories, offset in part by the
incremental software license and maintenance services revenues from the Intactix
product line. The decline in demand for consulting services results primarily
from the decline in new software license sales we experienced throughout most of
1999. In addition, we believe that demand in the EMEA region has been
temporarily impacted by an increase in consolidation activities in the retail
sector.
Total revenues in the Asia/Pacific region increased 114% to $18.8
million in the nine-month period of 2000 from $8.8 million in the comparable
period of 1999. The increase is due primarily to increased software license
sales, consulting revenues and maintenance revenues from the Enterprise Systems
and Analytic Applications business units. We experienced strong increases in
Australia which produced $7.8 million in total revenues in the nine-month period
of 2000 compared to $3.4 million in the nine-month period of 1999. In addition,
Japan contributed $5.0 million in total revenues in the nine-month period of
2000 compared to $1.7 million in the nine-month period of 1999.
Total revenues in the Latin America region increased 12% to $7.2
million in the nine-month period of 2000 from $6.4 million in the comparable
period of 1999. The increase results primarily from an increase in software
license sales from the Enterprise Systems and Analytic Applications business
units in the nine-month period of 2000 compared to the nine-month period of
1999.
Total revenues in Canada decreased 14% to $5.3 million in the
nine-month period of 2000 from $6.2 million in the comparable period of 1999.
Consulting services revenues decreased in all product categories in the
nine-month period of 2000 compared to the nine-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 72% increase in software license
sales in the nine-month period of 2000 compared to the nine-month period of
1999.
Cost of Revenues
Cost of Software Licenses. Cost of software license revenues was $2.4
million for the nine months ended September 30, 2000 as compared to $1.6 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. (ODBMS) and Silvon Software,
Inc. (Retail IDEAS). Cost of software licenses represented 5% and 6%,
respectively, of software license revenues in these comparable periods.
Cost of Maintenance Services. Cost of maintenance services increased
24% to $5.8 million in the nine-month period of 2000 from $4.7 million in the
nine-month period of 1999. We have added headcount in this function during the
nine-month period of 2000 to support our growing client base.
Cost of Consulting services. Consulting services costs for the nine
months ended September 30, 2000 were $48.1 million, a decrease of 2% from the
$49.1 million reported in the comparable period of 1999. We had 57 less
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FTE in our consulting services organization at September 30, 2000 compared to
September 30, 1999. This decrease was offset by salary increases, the higher
costs incurred for outside contractors and increased costs for recruiting and
relocation.
Gross Profit
Gross profit for the nine months ended September 30, 2000 was $72.6
million, an increase of 39% over the $52.4 million reported in the comparable
period of 1999. Gross profit, as a percentage of total revenues, increased to
56% in the nine-month period of 2000 compared with 49% in the nine-month period
of 1999. This increase resulted primarily from the higher mix of software
license revenues as a percentage of total revenues during the nine months ended
September 30, 2000, which was partially offset by a reduction in our consulting
service margins to 18% in the nine-month period of 2000 from 27% in the
nine-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 nine-month period of 2000 compared to the nine-month
period of 1999, and as a result, our utilization rates decreased. We do not
expect our consulting services margins to recover until mid-2001.
Operating Expenses
Product Development. Product development expenses for the nine months
ended September 30, 2000 were $20.9 million, a 16% increase over the $18.0
million reported in the comparable period of 1999. Product development expense
as a percentage of total revenues was 16% in the nine-month period of 2000
compared to 17% in the nine-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 our new Analytic Applications and
e-commerce products.
Sales and Marketing. Sales and marketing expenses for the nine months
ended September 30, 2000 were $21.1 million, a 14% increase over the $18.4
million reported in the comparable period of 1999. Sales and marketing expense
as a percentage of total revenues decreased to 16% in the nine-month period of
2000 from 17% in the nine-month period of 1999. The increase in sales and
marketing expenses results primarily from the acquisition of Intactix in April
2000 and increased commissions due to higher software license revenues between
the comparable periods.
General and Administrative. General and administrative expenses for the
nine months ended September 30, 2000 were $15.0 million, a 9% increase over the
$13.8 million reported in the comparable period of 1999. The increase in general
and administrative expense results primarily from the acquisition of Intactix in
April 2000. General and administrative expense, as a percentage of total
revenues, decreased to 12% in the nine-month period of 2000 from 13% in the
nine-month period of 1999.
Amortization of Intangibles. Amortization of intangibles for the nine
months ended September 30, 2000 was $4.7 million, a 42% increase over the $3.3
million reported in the comparable period of 1999. The increase in amortization
of intangibles consists primarily of amortization on goodwill and other
intangibles recorded in connection with 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 helped
stabilize service margins, optimized our labor resources in these geographic
regions, and freed 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 116%
to $8.1 million in the nine-month period of 2000 from $3.8 million in the
comparable period of 1999. The increase is primarily attributable to a 54%
increase in software license sales, which have gross margins ranging from 95% to
100% and increased maintenance services revenues, offset in part by reduced
consulting services revenues and lower consulting margins in the nine-month
period of 2000 compared to the nine-month period of 1999.
Operating income in our In-Store Systems business unit increased 243%
to $5.3 million in the nine-month period of 2000 from $1.6 million in the
comparable period of 1999. The increase is primarily attributable to a 134%
increase in software license sales, which have gross margins ranging from 95% to
100%, and lower product development and sales and marketing costs in the
nine-month period of 2000.
Operating income in our Analytic Applications business unit increased
78% to $8.2 million in the nine-month period of 2000 from $4.6 million in the
comparable period of 1999. The increase results primarily from operating profit
from Intactix that was acquired in April 2000 and a 46% increase in Arthur and
Retail IDEAS software license sales, which have gross margins ranging from 75%
to 95%. 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.
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 $106.8 million at September 30, 2000 compared with $108.5
million at December 31, 1999. Cash and cash equivalents at September 30, 2000
were $47.0 million, a decrease of $11.3 million from the $58.3 million reported
at December 31, 1999. We also had $29.7 million in marketable securities at
September 30, 2000, a decrease of $5.5 million from the $35.2 million reported
at December 31, 1999. In April 2000 we acquired Intactix for $20.5 million. In
addition, we incurred direct costs related to the transaction totaling $4.5
million.
Operating activities provided cash of $5.5 million and $7.5 million in
the nine months ended September 30, 2000 and 1999, respectively. Cash provided
by operating activities during the nine months ended September 30, 2000 resulted
primarily from net income of $7.9 million, and depreciation and amortization of
$10.8 million, offset in part by a $14.7 million increase in accounts
receivable. We had net receivables of $49.9 million, or 104 days sales
outstanding ("DSOs") at September 30, 2000 compared to $36.2 million, or 94 DSOs
at September 30, 1999. The increase in DSOs results from the higher mix of
software licenses as a percentage of total receivables and total revenues, and
our decision to lengthen certain contractual payments terms on software licenses
in response to competitive pressure. The increase is not due to a deterioration
in the aging of our accounts receivable. 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 $21.5 million and $6.3 million in
the nine months ended September 30, 2000 and 1999, respectively. The activity in
the nine-month period of 2000 includes the net maturity of $6.0
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million of marketable securities, offset by $4.9 million in capital expenditures
and the $23.1 million cash payment for the acquisition of Intactix, net of cash
acquired. The 1999 activity includes $741,000 in net maturities of marketable
securities and $9.2 million in capital expenditures. We are actively pursuing
additional acquisitions of businesses, products and technologies that could
complement or expand our business, some of which could be significant in size
and scope. We believe the general size of any cash acquisitions would be in the
$5.0 million to $30.0 million range with larger acquisitions possibly requiring
a stock component. 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 $5.6 million and $3.1 million
during the nine months ended September 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 $859,000 in the nine months ended September 30,
2000 and increasing cash by $48,000 in the nine months ended September 30, 1999.
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 was collateralized by
property and equipment, receivables, and intangibles; accrued interest at the
bank's reference rate (which approximates prime) less .25 percentage points; and
required that we maintain certain current ratios and tangible net worth. We have
never utilized this credit facility. The line of credit expired on July 1, 2000
and has not been renewed. 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. On October 24, 2000, we announced that our board
of directors authorized a repurchase of up to two million shares of our
outstanding common stock. Under the buy-back plan, we may periodically
repurchase shares over the next twelve months on the open market at prevailing
market prices. We will make the purchase decisions based upon market conditions
and other considerations. We intend to use our available cash and cash
equivalents, investments in marketable securities and funds generated from
operations to effect these stock buy-back transactions.
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 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 Which Could Adversely
Affect the Price of Our Stock. Our quarterly operating results have varied and
are expected to continue to vary in the future. If our quarterly operating
results fail to meet analysts' expectations, the price of our stock could
decline. Many factors may cause these fluctuations, including:
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- demand for our software products and services, including the size
and timing of individual contracts and our ability to recognize
revenue currently with respect to contracts signed in the quarter,
particularly with respect to our significant 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, including 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, and market
acceptance of our new software products;
- changes in our operating expenses;
- changes in the mix of domestic and international revenues, or
expansion of international operations;
- our ability to complete fixed price consulting contracts within
budget;
- employee hiring and retention;
- foreign currency exchange rate fluctuations;
- integration issues association with newly acquired businesses; and
- general industry and economic conditions.
We believe it is likely that in some future quarter our operating results
will vary from the expectations of public market analysts or investors. If this
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.
Significant fluctuations have included, or may include in the future, the
following:
- A Decline in Overall Demand For Our Products or Services. 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 since the third
quarter of 1999, 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.
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. To
address increased competition and lack of desired features and
functionality in this business unit, we have reorganized our sales
force and refocused some of our research and development investment
into new feature and functionality. However, there can be no
assurance that these efforts will result in an increase in demand
for our In-Store Systems.
- Fluctuating Gross Margins. Because the gross margins on software
licenses and maintenance services are 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 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.
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- Timing of Software Sales. 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 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.
- Forecasting Expense Levels. 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.
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 will vary from 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 been facing 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, and JDA Affinity, a collection of
open applications designed to enable a retailer to support and proactively
manage their customer information and transactions. Our first Internet Portal,
Store Portal, was commercially released for both MMS and ODBMS in September
2000. The markets for e-commerce products are new and quickly evolving. 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, Internet Portals, and JDA Affinity
products, or other future web-enabled products fail to develop, develop more
slowly or differently 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 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
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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.
We Have Only Deployed Certain of Our Software Products On a Limited
Basis. Certain of our software products, including MMS.com and Internet Portals,
have been commercially released within the last year. The markets for these
products are new and evolving, and we believe that retailers may be cautious in
adopting web-based and other new technologies. Consequently, we cannot predict
the growth rate, if any, and size of the markets for our 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 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 or differently 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.
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, and JDA
Affinity, a collection of open applications designed to enable a retailer to
support and proactively manage their customer information and transactions. Our
first Internet Portal, Store Portal, was commercially released for both MMS and
ODBMS in September 2000. 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, Internet Portals, and JDA Affinity products, or other future
web-enabled products fail to develop, develop more slowly or differently 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 45% of total revenues in the first nine
months of 2000 as compared 46% and 44% in the years ended December 31, 1999 and
1998, 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
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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 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 NSB Retail Systems PLC, Radius PLC, Retek, Inc., SAP AG, STS Systems, and SVI
Holdings, Inc. 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,
Commercialware, i2 Technologies, Manugistics Group, Inc., Retek, Inc., Smith
Gardner, 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., NSB Retail Systems PLC, and Trimax.
In the Analytic Applications markets, the Arthur Suite competes primarily with
Marketmax, Inc., Retek, 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. The Intactix products compete with products
from Marketmax, Inc., AC Nielsen Corporation, and IRI. 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
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current or future competitors or that competition will not have a material
adverse effect on our business, operating results and financial condition.
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 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. If we are unable to meet our contractual obligations under
fixed-price contracts within our estimated cost structure, our operating results
could suffer.
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, any one of which 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 requires 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
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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 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, particularly in
countries outside the United States.
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.
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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
that 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.
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 46% of our total revenues in the nine months
ended September 30, 2000, as compared with 48% in the comparable period of 1999.
In addition, the identifiable net assets of our foreign operations totaled 20%
of consolidated assets as of September 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 $1.7 million for the nine months ended September 30, 2000, as
compared with $289,000 in the comparable period 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 September 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 from the September 30, 2000 rates would result
in a currency translation loss of $1.6 million 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."
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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 September 30,
2000 was $29.7 million with interest rates generally ranging between 5% and 7%.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On August 18, 2000, we reconvened our 2000 Annual Meeting of
Stockholders with respect only to Proposal No. 2. Proposal No. 2 sought
stockholder approval to increase the number of shares of common stock authorized
for issuance under our 1996 Stock Option Plan from 4,500,000 to 8,500,000
shares. The voting results were 9,175,124 for and 9,439,862 against (including
abstentions). As a result, the proposal did not pass.
ITEM 5. OTHER INFORMATION
A Special Meeting of Stockholders was held on November 9, 2000 to
approve an amendment to our 1996 Stock Option Plan to increase the number of
shares of common stock reserved for issuance thereunder from 4,500,000 to
7,000,000. The proposal passed with the following voting results: For -
9,955,687; Against - 8,278,437; Abstain - 625,819.
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 August 28, 2000 was filed with the Securities and
Exchange Commission on September 6, 2000 for the following events:
- On August 28, 2000, we announced the resignation of Mr. Frederick
M. Pakis as Co-Chairman and a member of our Board of Directors.
In addition, we announced that we would not immediately appoint a
replacement for Mr. Pakis.
- On August 18, 2000, we reconvened our 2000 Annual Meeting of
Stockholders with respect only to Proposal No. 2. Proposal No. 2
sought stockholder approval to increase the number of shares of
common stock authorized for issuance under our 1996 Stock Option
Plan from 4,500,000 to 8,500,000 shares. The voting results were
9,175,124 for and 9,439,862 against (including abstentions)
Proposal No 2. As a result, the proposal did not pass.
Subsequently, on August 28, 2000, the Board of Directors approved
amendments to our 1996 Stock Option Plan designed to address
concerns of certain of our stockholders raised in connection with
Proposal No. 2.
A Form 8-K dated October 25, 2000 was filed with the Security and
Exchange Commission on October 27, 2000 for the following event:
- On October 24, 2000 our Board of Directors authorized a
repurchase of up to two million shares of our outstanding common
stock. Under the buy-back plan, we may periodically repurchase
shares over the next twelve months on the open market at
prevailing market prices. We will make the purchase decisions
based upon market conditions and other considerations.
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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: November 13, 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@(1)(3) -- Form of Incentive Stock Option Agreement between
JDA 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@(1)(3) -- Form of Nonstatutory Stock Option Agreement
between JDA 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)(4) -- Form of Amendment of Stock Option Agreement
between JDA 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@(1)(5) -- Form of Amendment of Stock Option Agreement
between JDA 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@(1)(6) -- Form of Incentive Stock Option Agreement between
JDA 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.
@@ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2000, as filed on August 14, 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.
(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.
33