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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-27876
JDA SOFTWARE GROUP, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 86-0787377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14400 NORTH 87TH STREET
SCOTTSDALE, ARIZONA 85260
(Address of principal executive offices, including zip code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(480) 308-3000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The approximate aggregate market value of the registrant's common stock
held by non-affiliates of the registrant (based on the closing sales price of
such stock as reported by the NASDAQ Stock Market) on June 30, 2003 was
$300,433,967. Excludes shares of common stock held by directors, officers and
each person who holds 5% or more of the registrant's common stock. Number of
shares of common stock, $0.01 par value per share, outstanding as of March 5,
2004 was 29,040,595.
DOCUMENTS INCORPORATED BY REFERENCE
<Table>
<Caption>
DOCUMENTS FORM 10-K REFERENCE
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Portions of the Proxy Statement for the Items 10, 11, 12, 13 and 14 of Part III
registrant's 2004 Annual Meeting of
Stockholders are incorporated by
reference into Part III of this Form
10-K
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This Annual Report on Form 10-K contains forward-looking statements
reflecting management's current forecast of certain aspects of our future. It is
based on current information that 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," "intend," "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 Annual Report on Form 10-K, which you should
read carefully. We would particularly refer you to the section under the heading
"Factors That May Affect Our Future Results or the Market Price of Our Stock"
for an extended discussion of the risks confronting our business. The
forward-looking statements in this Annual Report on Form 10-K should be
considered in the context of these risk factors.
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading provider of sophisticated software solutions designed
specifically to address the demand and supply chain management, business
process, decision support, e-commerce, inventory optimization, and collaborative
planning and forecasting requirements of the retail industry and suppliers to
the retail industry. Our solutions enable customers to manage and optimize their
inventory flows throughout the demand chain to the consumer, and provide
optimized labor scheduling for retail store operations. Our customers include
approximately 4,500 of the world's leading retail, consumer package goods
("CPG") manufacturers and wholesalers. We believe we have the largest retail
customer installed base among our direct competitors, with more than 1,200
retail customers in over 60 countries and nearly 3,300 CPG manufacturers and
wholesalers. Our customers include many of the world's leading retail, CPG
manufacturing and wholesale organizations including AEON Company Ltd.,
Anheuser-Busch Companies, Carrefour, Colgate-Palmolive, CVS Pharmacy, Inc.,
Dollar General Corporation, Energizer Holdings, Inc., The Estee Lauder
Companies, Inc., H. E. Butt Grocery Company, The Kroger Company, The Limited,
Meijer Stores, Michaels Stores, Sodimac, Tesco and Wal-Mart. Our software
solutions business is enhanced and supported by our retail and supplier specific
professional services.
We market our JDA Portfolio software solutions to approximately 3,200
retailers worldwide with annual sales of $100 million or more. More than 1,200
of these potential retail customers own at least one of our products. Our
acquisitions of the Arthur Retail Business Unit ("Arthur"), Intactix
International, Inc. ("Intactix"), E3 Corporation ("E3") and Vista Software
Solutions, Inc. ("Vista"), have enabled us to expand our client base to include
nearly 3,300 suppliers to the retail industry and added software applications
that enable business-to-business collaborative planning, forecasting and
replenishment ("CPFR") between retailers and their suppliers. These
acquisitions, together with the investments we've made over the past few years
to increase the scalability of our products, have enabled us to pursue emerging
growth opportunities in the demand chain and further expand our target markets
to include larger multi-national retail organizations and approximately 26,000
suppliers to the retail industry worldwide with annual sales of $100 million or
more.
MARKET BACKGROUND
Retail organizations and their suppliers are facing intensifying
competition, fluctuating demand, evolving retail channels and increasing
globalization. Sales are pressured, margins are compressed through intensified
competition and almost all companies are trying to achieve improved results with
fewer people. As a result, retail organizations seek technology solutions to
better manage their increasingly complex businesses, improve their operating
efficiencies and financial performance, and strengthen their relationships with
customers and suppliers.
1
Companies in the retail market we serve have specific technology
requirements to support and optimize their operations. General enterprise
resource planning ("ERP") solution providers have been unable to fully meet the
demands of these organizations. Although our retail and wholesale customers have
typically invested a low proportion of their total revenues in technology, as
the leaders in this industry begin to demonstrate an ability to achieve market
advantage through effective use of specialized applications, the requirement for
all retailers to increase their investment in technology and adopt best
practices has grown. Many of these companies have not yet replaced their
customized legacy systems with packaged software solutions, and as result, there
is substantial opportunity in our targeted retail market. In addition, many of
the companies in our targeted retail market do not utilize sophisticated
optimization solutions.
The CPG manufacturing customers we serve employ solutions from JDA to
optimize their ability to sell to consumers through the retail channel. While
most of these companies have historically invested heavily in manufacturing
systems from other providers, the technology support for their sales operations
is generally limited. JDA is developing a new solutions market with these
companies, focused on optimizing sales of consumer products to end consumers
through collaborative solutions that allow the CPG manufacturer and the retailer
to improve inventory assortment and availability at the point of sale.
JDA SOLUTIONS
We are the leading provider of comprehensive, integrated software solutions
specifically designed for the retail industry and its suppliers. We have
developed and marketed our Retail Enterprise Systems and In-Store Systems to
retailers for over 19 years, and our installed base of more than 1,200 retail
customers is comprised of many of the world's leading retail organizations. In
addition, our Collaborative Solutions have been installed at nearly 3,300
suppliers to the retail industry, enabling them to collaborate with their
retailer customers to improve their supply chain management and business
processes. We offer a wide range of retail specific professional services to
help clients rapidly achieve the benefits of our solutions, including project
management, system planning, design and implementation, custom configurations,
training and support services.
We are moving the organization of our solutions into six business
application domains supported by several shared technology components:
- MERCHANDISE MANAGEMENT SYSTEMS. These systems are typically utilized by
retailers and provide solutions for enterprise management of inventory
throughout the retail demand chain.
- IN-STORE SYSTEMS. These systems are specific to retailers and provide
point-of-sale tilling functions, in-store inventory management functions
such as receiving, transfers, price management and physical inventory.
Our in-store systems now include a workforce management solution to
optimize in-store labor scheduling.
- DEMAND CHAIN SOLUTIONS. These solutions provide management and
optimization of inventory from finished goods at the CPG manufacturer
through the demand chain to the end consumer.
- PLANNING AND FORECASTING SOLUTIONS. These solutions provide retailers
and their suppliers the ability to plan and project demand and ensure
that customer service levels are optimized.
- CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS. These solutions allow
management of large numbers of consumer relationships through loyalty
programs. These solutions are distinct in nature from typical one-to-one
selling solutions and focus explicitly on the management of large numbers
of end consumers.
- REVENUE MANAGEMENT SOLUTIONS. These solutions are designed to optimize
pricing and margin, and incorporate the management of advertising and
marketing functions.
Our development initiative to move the JDA Portfolio to the Microsoft .Net
Platform (".Net Platform") will enable us to provide point solutions that allow
for the rapid deployment of a portion of the JDA Portfolio to solve a specific
business requirement, while at the same time offering an integrated solution
infrastructure that allows our customers to more readily expand and optimize
their use of the JDA Portfolio (See "OUR PRODUCT STRATEGY").
2
JDA BUSINESS SEGMENTS
We have organized our business segments around the distinct requirements of
retail enterprises, retail stores, and suppliers to the retail industry:
Retail Enterprise Systems. The modern retail enterprise is required to
rapidly collect, organize, distribute and analyze, and optimize information
throughout its organization. Retail Enterprise Systems include corporate level
merchandise management systems ("MERCHANDISE MANAGEMENT SYSTEMS") that enable
retailers to manage their inventory, product mix, pricing and promotional
execution, and enhance the productivity and accuracy of warehouse processes. In
addition, Retail Enterprise Systems include a comprehensive set of tools for
planning inventory and in-store space decisions throughout the demand chain,
analyzing business results and trends, automating demand forecasting and
replenishment, tracking customer shopping patterns, optimizing revenues through
trade allowance and promotional program management ("STRATEGIC MERCHANDISE
MANAGEMENT SOLUTIONS").
In-Store Systems. Store-level personnel require systems that enhance and
facilitate the retailer's direct interaction with the customer, and integrate
the store-level operations into the overall business processes of the
organization. In-Store Systems include point-of-sale, labor scheduling and back
office applications that enable retailers to capture, analyze and transmit
certain sales, store inventory and other operational information to corporate
level merchandise management and payroll systems using hand-held, radio
frequency devices, point-of-sale workstations or via the Internet. In-Store
Systems now include a workforce management solution to optimize the scheduling
of in-store labor, which typically represents the next largest operational cost
for a retailer after inventory.
Collaborative Solutions. CPG manufacturers and distributors are
increasingly required by industry practices developed by retailers such as
Wal*Mart, to collaborate with other participants in the demand chain. While
these companies have historically focused on technology to support their ability
to manufacture and supply products, this new era of collaboration with retailers
has created a requirement for new technology solutions that are designed to
optimize sales of products to end consumers through the retail channel.
Collaborative Solutions provide applications that enable business-to-business
collaborative activities such as collaborative planning, forecasting and
replenishment ("CPFR"), collaborative category management including
collaborative space and assortment planning, and collaborative revenue
management through trade funds management programs. Our Collaborative Solutions
offerings leverage existing solutions deployed to retailers within our Retail
Enterprise Systems business segment.
Our software products and services are designed to provide the following
benefits:
A Broad Set of Solutions for the Retail Demand Chain. We believe the JDA
Portfolio is the broadest, most functional set of industry leading retail demand
chain software solutions available to retailers and their suppliers. Integration
costs often represent a significant expenditure for large enterprise systems.
Our products are designed to be pre-integrated, reducing the time and cost
required to deploy our solutions compared with our competitors. Our broad
solution suite also encourages our customers to adopt our JDA Portfolio
solutions as an internal standard for business applications, allowing them to
simplify their technology partner relationships while reducing the risk of
having one component of their enterprise solution set to be disrupted by the
failure of a smaller point solution provider.
Enhanced Decision Making and Responsiveness to Consumer Demands. The JDA
Portfolio solutions help our customers better understand and fulfill consumer
demands while improving operational efficiency. Our products enable vast amounts
of consumer, sales and inventory data to be rapidly collected, organized,
distributed and analyzed. Retailers and their suppliers can explore "what if"
merchandising plans, track and analyze performance, business results and trends,
monitor strategic plans, quickly implement operational strategies based upon
sophisticated fact-based optimization techniques and adjust to changes in
consumer purchasing patterns. The JDA Portfolio solutions also allow our
customers to reduce their inventory exposure while offering the consumer a more
compelling assortment at optimized prices.
Improved Inventory Management. The JDA Portfolio solutions enable our
customers to continuously monitor and reduce inventory levels, achieve higher
gross margins, improve their inventory turnover rates and
3
more effectively manage their order and distribution processes. We provide
retailers with tools for vendor analysis, stock status monitoring, sales capture
and analysis, merchandise allocation and replenishment, purchase order
management and distribution center management.
Enhanced Collaboration Between Retailers and Their Suppliers. As consumer
markets become more competitive, retail customers realize they must do more than
simply achieve increased efficiencies in their own organizations. A retailer's
competitive advantage is now being defined by the efficiencies of their entire
supply chain. As retailers and their suppliers cooperate to improve all aspects
of the supply chain, a new breed of collaborative technology solutions continues
to evolve. We have established a leading position in this new but rapidly
growing market for software solutions. Our Collaborative Solutions allow
retailers and their suppliers to plan and fulfill consumer demand through a
complete suite of collaboration solutions that also enable trading partners to
collaborate in planning, forecasting, replenishment, and space planning
decisions. In addition, we are developing additional functionality that will
enable retailers and their suppliers to make collaborative decisions for
marketing, assortment, and promotion activities. As of December 31, 2003, there
were approximately 200 trading partners worldwide live and fully operational on
our MARKETPLACE REPLENISHMENT CPFR solution.
OUR PRODUCT STRATEGY
The JDA Portfolio product strategy offers a suite of applications that can
be deployed independently in order to provide a quick return on investment.
These products have been developed or acquired by JDA in order to present
customers with an enterprise offering that we believe is the broadest, most
functional set of industry leading retail demand chain software solutions
available to retailers and their suppliers. In addition, we have developed and
provided the industry with a guaranteed series of integrations between the JDA
Portfolio applications, which allow our customers to rapidly deploy large
portions of the JDA Portfolio functionality with minimal integration costs.
While we have achieved market leadership with this strategy, we believe there
are significant opportunities and advantages to be gained by integrating our
solutions into a common technical framework. This technical framework is based
upon open Web Services standards, and is largely focused around the .Net
Platform. We believe this approach will provide substantial benefits for both
our customers and JDA:
- Benefits for our Customers. It will be significantly easier for our
customers to support and optimize their business processes with the full
set of products in the JDA Portfolio, which in turn should enhance and
accelerate our customers' return on their investment. Customers will find
it easier to learn how to use our applications as the user interfaces
will be standardized. Additionally, customers will be able to reduce
their investments in information technology ("IT") infrastructure, and
the skill levels required of our customers' internal IT personnel to
support our products will be simplified.
- Benefits for JDA. Ultimately, we will be able to reduce the number of
applications and technologies we maintain while at the same time increase
the overall depth and breadth of our solution offering. This change
should reduce our R&D investment requirements in the long-term and allow
us to accelerate delivery of new functionality. The .Net Platform will
also enhance our ability to integrate acquisitions of technology that are
also based upon open Web Services technology. We have incurred and will
continue to incur, higher than usual R&D expenses as a percentage of
product revenues, as we complete this transition, one product at a time,
and keep our current product offerings competitive.
Our goal is to begin delivering applications on the .Net Platform in third
quarter 2004, starting with PORTFOLIO REPLENISHMENT BY E3, followed by PORTFOLIO
PLANNING BY ARTHUR, and certain of our INTELLECT applications. We expect to
complete the transition to the .Net Platform within the next two to three years.
This is a significant investment by the Company as we are building our next
generation of products, while at the same time, we continue development efforts
on our existing products and complete the integration of acquired products.
Throughout our product transition, we believe that we can also maintain our
ability to deliver point solutions that can quickly address specific business
requirements.
We believe that enterprise solution providers will increasingly be expected
to provide component-based and Web Services-based solution suites. We further
believe that our ability to provide fully integrated
4
solutions within a common technical framework will provide a significant
competitive advantage as many competitive offerings become outdated. We hope to
gain market share as many of our competitors may find it hard to fund a similar
fundamental transition. In addition, our In-Store Systems development initiative
is based on the emerging Java technology.
As of December 31, 2003, we had 394 employees on our product development
staff. Our product development expenditures in 2003, 2002, and 2001 were $48.5
million $41.8 million, and $34.4 million, which represented 23%, 19%, and 16%,
of total revenues, respectively. We also invested nearly $78 million in
acquisitions of complementary products during the three years ended December 31,
2003. In order to take advantage of certain efficiencies that the migration to
the .Net Platform offers, we consolidated the majority of our development
operations in Scottsdale, Arizona during 2003.
The risks of our commitment to the .Net Platform include, but are not
limited to, the following:
- The possibility that prospective customers will refrain from purchasing
the current versions of products to be re-written because they are
waiting for the .Net Platform versions;
- The possibility that our .Net Platform beta customers will not become
favorable reference sites;
- Adequate scalability of the .Net Platform for our largest customers;
- The ability of our development staff to learn how to efficiently and
effectively develop products using the .Net Platform;
- Our ability to transition our installed base onto the .Net Platform when
it is available;
- Microsoft's ability to achieve market acceptance of the .Net platform;
and
- Microsoft's continued commitment to enhancing and marketing the .Net
platform.
We are attempting to mitigate some of the foregoing risks with the
following strategies:
- Provide customers who remain on maintenance with .Net Platform versions
of our products as part of maintenance;
- Use of large beta customers to test and to demonstrate scalability;
- Use of the inherent component-based architecture that will enable us to
manage changes to the code more efficiently;
- Focus business process programmers on only certain components, which will
isolate them from the overall complexity of the technology; and
- Use of a development methodology whereby we conduct a series of
performance benchmarks throughout the development effort so that
performance enhancements are made continuously throughout the project.
Despite efforts to mitigate the risks of the .Net Platform project, there
can be no assurances that our efforts to re-write many of our current products
and to develop new products using the .Net Platform will be successful. If the
..Net Platform project is not successful, it likely will have a material adverse
effect on our business, operating results and financial condition.
OUR BUSINESS STRATEGY
Despite relatively flat revenue performance over the past three years, we
believe that our strategy will deliver growth as the level of economic activity
in our markets improves. The major elements of our growth strategy are as
follows:
- We will continue to invest in our next generation of products based on
open Web Services technology. We believe this will differentiate us from
many of our competitors and increase our market share as we bring these
products to market.
5
- During the development of our next generation of products, we will
continue to offer support and enhancements to our existing products and
add complementary functionality to the JDA Portfolio through acquisition.
- We will continue to focus on providing strategic value to our customers
through our Customer Value Program. We believe we have the largest retail
customer base, and that we have an opportunity to grow by achieving a
more strategic relationship with our customers. Although 70% of our
software license sales in 2003 were from our existing customer base, we
still see a growth opportunity because two thirds of our retail customer
base, and nearly all of our CPG manufacturers and wholesale customers,
still only own one JDA product.
- We intend to maintain the functional leadership that we have established
in the industry. Our solutions, the people who develop them, and our
sales and consulting associates are highly specialized. We believe this
specialization makes it difficult for competitors to break into our
market. Although we sometimes compete with much larger enterprise
solution providers who have more resources at their disposal, we
generally believe that our enhanced solutions capabilities and track
record for delivery will protect our market leadership.
- We will continue to develop our Collaborative Solutions business segment.
The collaborative solutions market is still emerging. JDA has established
an early leadership position and we believe that this market could grow
to become a substantial portion of our business. There is significant
opportunity as we market our JDA Portfolio software solutions to
approximately 3,200 retailers and 26,000 suppliers to the retail industry
worldwide with annual sales of $100 million or more.
PRODUCTS
MERCHANDISE MANAGEMENT SYSTEMS
- PORTFOLIO MERCHANDISE MANAGEMENT ("PMM") is an open/client server
merchandise management system that is designed to operate with Oracle
relational database management systems running on the most popular UNIX
platforms and with Windows NT/2000/XP. PMM, which consists of functional
modules that can be selected and configured to fit multiple processing
requirements, provides retailers with applications for core inventory
control, cost and price management, purchase order management,
promotional planning, automated replenishment, expert pricing, vendor
submissions, rebate management and a business process level online help
system. PMM supports the information requirements of international and
multi-format retail organizations including multiple concurrent languages
and currencies, user-specific terminology, and user-defined data
structures. PMM also includes functionality specific to the inventory
management requirements of the grocery industry for perishable products
and prepared foods. We have a strategic alliance with Manhattan
Associates under which we have and will work with mutual and prospective
customers to develop, maintain, and support a standard tool set to ensure
ease of integration between PMM and Manhattan Associates' PkMS(R)
warehouse management application. We feel this strategic alliance will
enable us to more effectively pursue larger customers that require an
advanced warehouse management system and extended supply chain execution
solution.
- PORTFOLIO MERCHANDISE MANAGEMENT SYSTEM-I ("MMS") is a merchandising
management system designed for the IBM iSeries environment that we
believe is one of the most installed merchandise management systems in
the world. MMS consists of functional modules, similar to those offered
for PMM, which can be selected by a retailer and configured to fit their
unique requirements. MMS also features enhanced functionality for apparel
clients and international retailers, and a JAVA-based graphical user
interface ("GUI") that incorporates technology licensed from third
parties.
IN-STORE SYSTEMS
- WIN/DSS is a Windows based in-store system that provides register
operations in store, as well as back office processes such as sales
orders, receiving, store inventory, and returns, and real-time hand-held
6
radio frequency-based data collection and processing. WIN/DSS is also
integrated with our STORE PORTAL and PORTFOLIO CUSTOMER RELATIONSHIP
MANAGEMENT offerings to provide enterprise-wide inventory and customer
management.
- PORTFOLIO POINT OF SALES ("PPOS") is a Java-based in-store system based
on intellectual property we acquired from J -- Commerce Inc. in April
2002. Commercially released in 2003, PPOS features a modular architecture
that provides advanced point-of-sale and cash register management which,
when combined with Store Portal, offers a complementary product strategy
with WIN/DSS for larger customers with annual sales of $5 billion and/or
a large number of stores/or registers per store.
- STORE PORTAL is a web-based interface that provides retailers with
real-time access to enterprise information on their merchandise
management systems, via the Internet. STORE PORTAL enables retailers to
immediately initiate associated store level processes such as shipment
inquiries, transfer requests, store orders, purchase orders and return to
vendor rather than waiting for a nightly polling process, and to provide
for greater visibility into enterprise merchandising information at the
store level.
- PORTFOLIO PERVASIVE STORE SYSTEM FOR WIN/DSS ("PPS")Iformerly PRISMJ is
an automated data collection and processing system that enables
store-level personnel to execute procedures from anywhere in the store
using a hand-held radio frequency device. With PPS, store-level personnel
can handle item ticketing while receiving merchandise, handle point of
sale functions and print receipts. We have also developed PDA PORTAL, a
browser-based application with functionality similar to PPS, that
operates on a personal digital assistant (PDA) device.
- PORTFOLIO WORKFORCE MANAGEMENT ("PWM") is the Enterprise Workforce
Management solution acquired from Timera Retail Solutions on January 29,
2004. PWM provides web-based functionality for the retail and consumer
goods industry in the areas of labor scheduling and budgeting, time and
attendance, demand forecasting, labor tracking, and other key processes
for proactive store level labor management.
STRATEGIC MERCHANDISE MANAGEMENT SOLUTIONS
DEMAND CHAIN SOLUTIONS:
- PORTFOLIO ADVANCED REPLENISHMENT SOLUTIONS BY E3 ("PORTFOLIO
REPLENISHMENT") is an inventory optimization suite acquired from E3
Corporation in September 2001 that utilizes sophisticated algorithms to
enable warehouses, distribution centers, and retailers to more
effectively forecast and replenish inventory, and manage the movement of
goods from supplier to store. PORTFOLIO REPLENISHMENT includes Advanced
Warehouse Replenishment by E3 ("AWR"), a warehouse and distribution
center forecasting and replenishment solution, Advanced Store
Replenishment by E3 ("ASR"), a store level forecasting and replenishment
solution, Network Optimization by E3, an application that automatically
synchronizes and analyzes inventory data between stores and distribution
centers, and Vendor Managed Inventory by E3 ("VMI"), a collaborative
solution that facilitates joint management of forecasting and ordering by
providing trading partners with access and visibility to a retailer's
orders and forecasts.
PLANNING AND FORECASTING SOLUTIONS:
- PORTFOLIO PLANNING SOLUTIONS BY ARTHUR ("PORTFOLIO PLANNING") is a set of
integrated decision support applications based on technology acquired
from Comshare, Incorporated in June 1998. PORTFOLIO PLANNING is a
three-tier application that is currently available for end user/client
applications on Windows 95/98 or NT/2000, for application servers on
NT/2000, and for database servers on NT/2000, AIX, HP UX, and Sun
Solaris. PORTFOLIO PLANNING is comprised of five core components:
Merchandise Planning by Arthur, an application for strategic and channel
merchandise planning; Advanced Allocation by Arthur, an application for
product and store allocation decision making; Assortment Planning by
Arthur, a product assortment planning application for seasonal
merchandise (typically own brand); Arthur Knowledge Base ("AKB"), a
database that allows for central organiza-
7
tion of data and applications; and Performance Analysis by Arthur, a web
based analytical tool designed to support the analysis of planning and
actual performance information using the AKB operating on Unix/Oracle.
PORTFOLIO SOLUTIONS also include Rapid Packages by Arthur, a deployment
template that provides retailers with the industry's best practice
implementation methodology.
- PORTFOLIO SPACE MANAGEMENT SOLUTIONS BY INTACTIX ("PORTFOLIO SPACE
MANAGEMENT") is a set of space management applications acquired from
Intactix International, Inc. in April 2000. PORTFOLIO SPACE MANAGEMENT,
which enables retailers to collaborate with their suppliers to ensure
optimal product mix and shelf positioning, is comprised of four core
components: Space Planning by Intactix, a next generation planogramming
solution used by both retailers and their suppliers, that allows users to
build, analyze, and distribute graphical diagrams for space management,
store layout planning and shelf assortment analysis; Floor Planning by
Intactix, a floor planning tool that enables retailers and their
suppliers to merge store design efforts with category and space planning;
Efficient Item Assortment by Intactix ("EIA"), a tool providing product
assortment planning for branded merchandise; and Intactix Knowledge Base,
an enterprise level relational database supporting the Space Planning and
Floor Planning applications, as well as all product and fixture
information for an entire store system. PORTFOLIO SPACE MANAGEMENT also
includes applications for streamlining day-to-day space management
business processes including Web Publisher by Intactix that enables
retailers and manufacturers to distribute planograms and floor plan data
via the internet; Space Automation by Intactix that utilizes a
business-level scripting tool to automate day-to-day activities performed
within the Space Planning, Floor Planning and Intactix Knowledge Base
applications; and Planogram Converter by Intactix that facilitates the
conversion and migration of planogram data available on competing
systems.
CUSTOMER RELATIONSHIP MANAGEMENT SOLUTIONS:
- PORTFOLIO CUSTOMER RELATIONSHIP MANAGEMENT ("PORTFOLIO CRM")Iformerly
AFFINITYJ is a customer relationship management solution that enables
retailers to support and proactively manage customer information from
multiple channels and targeted e-mail and mail campaigns. PORTFOLIO CRM
currently consists of three modular, open/client server applications: the
Base Customer Data module provides retailers with a single point for
collecting, querying, analyzing and managing basic customer data such as
name and address, as well as transaction history tracking and multiple
customer attributes, including number of visits, products purchased and
returned, sizes and demographic information; the Target Marketing module
enables retailers to identify targeted lists of customers that are most
likely to respond to a given promotional event, and the Customer
Scorecard module provides a retailer's sales associates with quick access
to customer transaction history that enables them to guide customers to
merchandise matching their preferences and recommends opportunities for
additional products related to previous purchases. Customer Loyalty,
scheduled for commercial release in 2004, will enable retailers to define
and maintain a marketing strategy that rewards repeat or volume customers
with financial incentives.
- CUSTOMER ORDER MANAGEMENT-I ("CUSTOMER ORDERING")Iformerly MMS
MULTI-CHANNEL ORDER PROCESSINGJ is an integrated e-commerce software
application that works in tandem with MMS and provides retailers with an
Internet-based sales and delivery system. CUSTOMER ORDERING integrates
all back-end processing and allows retailers to automate their product
catalogs, manage inventory and prices, interface with credit providers,
fulfill and ship orders, track customer information and process returns.
REVENUE MANAGEMENT SOLUTIONS:
- VENDOR INCENTIVE MANAGEMENT ("VIM") is a software application acquired
from Zapotec Software, Inc. in February 2001. VIM enables retailers,
suppliers and distributors to manage their trade allowance and
promotional programs by automating the contract fulfillment, claim
generation and accounts receivable process.
8
- MARKETING EXPENSE MANAGEMENT ("MEM") is a solution that enables
retailers, wholesalers and manufacturers to automate advertising and
promotional practices to maximize efficiencies and bottom line benefits.
With MEM, users can easily manage multiple budgets, accruals and actual
expenses on a single solution. MEM also automates the entire media
procurement process, including issuing purchase orders and insertion
orders, as well as tracking invoices and revisions, to increase accuracy
and associate productivity.
- VISTA CPG is a web-based software application acquired from Vista
Software Solutions, Inc. in April 2003. VISTA CPG contains a series of
modules that enable consumer goods manufacturers to manage trade
promotions, minimize trade deductions costs and more accurately forecast
product demand.
- ENGAGE FOR RETAILERS is a series of enterprise advertising, marketing and
promotion software applications acquired from Engage, Inc. in August
2003. The advance digital asset, content management and ad layout
capabilities of these applications improve a retailer's promotional
planning process and their delivery of marketing and advertising content,
and streamlines the communication and collaboration among a retailer's
merchandising, promotions, production and store operation teams. Versions
of these applications are also available for advertising agencies,
newspaper, and marketing organizations.
SHARED TECHNOLOGY COMPONENTS:
- INTELLECT is a series of advanced analytic modules that are designed to
optimize specific business problems through the use of data mining,
analytic and clustering techniques. The current series of INTELLECT
modules include: Demand Planning by Intellect, which enables retailers to
create accurate pre-season demand forecasts for planning purposes and the
ability to create in-season forecasts that utilize the current season
trend, sales to date and a planned inventory position; Seasonal Profiling
by Intellect, which allows retailers to optimize their creation and
management of seasonal replenishment profiles using clustering
techniques; Channel Clustering by Intellect, which enables retailers to
group stores together for planning and assortment planning purposes, or
allocation and replenishment modeling, using detailed sales level data to
indicate customer preference patterns by department, category, product,
price points and brands; and Size Scaling by Intellect, which is targeted
primarily to fashion retailers and will determine a best-fit size
template for ordering, allocation and replenishment by style, class or
department. We anticipate the development of an Event Lift Forecasting by
Intellect module that will use sophisticated INTELLECT data mining
engines to provide forecasts of promotional sales uplifts.
- PERFORMANCE ANALYSIS BY IDEAS ("IDEAS") is a data warehouse system
developed jointly with Silvon Software, Inc. that provides a
comprehensive set of tools for analyzing business results, monitoring
strategic plans and enabling tactical decisions. IDEAS is currently
available on the IBM iSeries, Windows NT/2000/XP, and Unix/Oracle
platforms. IDEAS is designed as a packaged offering that enables
retailers to monitor vendor performance, promotional effectiveness and
distribution center productivity, and to analyze financial measurements
related to sales and inventory, margins and profitability, merchandise
categories, open and suggested orders, and promotional and pricing
events. We also offer a Performance Analysis by IDEAS, Distribution Model
("DISTRIBUTION IDEAS") application that provides access to current
information on key performance indicators such as inventory position,
service levels, vendor performance, forecasts and shipments.
- PORTFOLIO KNOWLEDGE BASE ("PKB") offers real-time configurable access to
historical, enterprise data such as sales and inventory movement. PKB
provides mechanisms to load, unload, structure, maintain and administer
analytical data cubes, relational summary tables and a meta data
environment.
- PORTFOLIO REGISTRY, as designed, will provide a single graphical user
interface, and a single set of input programs and screens for use by all
JDA Portfolio applications. It will be the source for all of a company's
descriptive data as well as provide a gateway to synchronize with third
party sources and catalogs (i.e., UCCnet, EAN, etc.).
9
COLLABORATIVE SPECIFIC SOLUTIONS:
- JDAMARKETPLACE.COM is a portal that enables trading partners to easily
navigate to collaborative solutions and partners via the Internet. In
addition, JDAMARKETPLACE.COM provides educational insights and recent
news for those interested in the collaborative space.
- MARKETPLACE REPLENISHMENT is a web based solution designed to deliver
collaborative planning, forecasting and replenishment between retailers
and their suppliers. As of December 31, 2003, there were approximately
200 trading partners worldwide live and operational on our MARKETPLACE
REPLENISHMENT CPFR solution that provides web-based portal access to the
Advanced Warehouse Replenishment by E3 and Advanced Store Replenishment
by E3 applications and enables the creation of a single, shared demand
forecast that retailers and their suppliers can use to lower distribution
and freight costs, increase annual sales, improve forecast accuracy,
lower inventory requirements, and increase human productivity.
- ELECTRONIC DYNAMIC AGREEMENT ("EDA") is a web-based solution designed to
support extended vendor management of the replenishment process by
transferring control of the buying decision to the vendor.
- ITEM SYNCHRONIZATION, as designed, is a web-based software application
based on technology acquired from Vista Software Solutions, Inc. in April
2003, that will provide data synchronization using UCCnet as a datapool.
PORTFOLIO CUSTOMER SUPPORT
We offer PORTFOLIO CUSTOMER SUPPORT services that include product
maintenance, on-line support, and access to our Solution Centers via telephone
and web interfaces. Our standard maintenance services agreement entitles
customers to receive unspecified new product releases (exclusive of those which
introduce significant new functionality), access to our Solution Centers, and
comprehensive error diagnosis and correction. Customers have the option of
choosing service programs that extend hours of coverage, incorporate support for
custom configurations, or provide special attention through periods of high
activity or upgrade processing. We also offer enhanced support services that
provide customers with difficult to find technical skills, such as database
administration or with an outsource alternative to help desk and other
information technology services. The vast majority of our customers have
typically participated in one or more of our PORTFOLIO CUSTOMER SUPPORT
programs.
PORTFOLIO CUSTOMER SERVICES
- CONSULTING. Our consulting services group consists of business
consultants, systems analysts and technical personnel with extensive
retail, manufacturing, and wholesale industry experience. The consulting
services group assists our customers in all phases of systems
implementation, including systems planning and design, customer-specific
configuration of application modules, and on-site implementation or
conversion from existing systems. We also offer a variety of
post-implementation services designed to maximize our customers' return
on software investment, which include enhanced utilization reviews,
business process optimization and executive "how to" sessions. The "how
to" sessions empower executives to access key management reports online
instead of referring to spreadsheets. Consulting services are billed
primarily on an hourly basis and from time to time under fixed price
contracts. In addition, we augment our services on large-scale
implementations and extensive business process re-engineering projects
with third-party alliances, consulting firms and systems integrators. Our
consulting engagements have typically taken between three months and one
year for Retail Enterprise Systems, between four and eight months for
In-Store Systems, and 30 to 90 days for Collaborative Solutions. Since
2001, we believe retailers have changed their buying behavior and that
this has resulted in a fundamental shift in the mix of demand for the
various types of products we sell from the longer, high dollar
infrastructure type projects typically associated with our MERCHANDISE
MANAGEMENT SYSTEMS and IN-STORE SYSTEMS, to our STRATEGIC MERCHANDISE
MANAGEMENT SOLUTIONS that are less disruptive, have a higher ROI and
shorter implementation timeframes.
10
We also believe the implementation time frames for our software products
have shortened as a result of the increased expertise, training, and
efficiency of our consulting services group, and as a result of more than
$178 million in internal product development expenditures over the past
five years that have improved the stability, scalability, integration,
ease of installation and overall quality of our products
- TRAINING. We offer a comprehensive education and training program for
our customers, associates and business partners through our BUSINESS
MANAGEMENT INSTITUTE ("BMI"). BMI features a curriculum for each of our
software solutions, prepaid training packages, and a full-time staff
consisting of professional instructors and course developers. The BMI
curriculum includes more than 120 courses that range from basic
overviews, implementation and technical/developer classes to business
process education and key topics and techniques for the supply chain.
Courses are offered primarily at our in-house classroom facilities in
Scottsdale, Atlanta, Dallas, Chicago, London and Singapore, and through
customized on-site classes. In addition, during 2003 we introduced
JDALEARN, a web-based education alternative, which offers online learning
in areas such as category management, space planning, replenishment, data
mining, analysis tools and store systems. More than 6,000 individuals
attended BMI classes during 2003.
CUSTOMERS
Our customers include approximately 4,500 of the world's leading retail,
CPG manufacturers and wholesalers. We believe we have the largest retail
customer installed base among our direct competitors, with more than 1,200
retail customers in over 60 countries that own at least one of our products. JDA
serves a diverse client base from specialty powerhouse chains with more than
5,000 retail stores and multi format food chains, to global consumer packaged
goods manufacturers and hard goods distributors. Our software is capable of
supporting our clients' multi-channel operations, which may include
brick-and-mortar stores, Internet, e-commerce, catalog and wholesale
distribution. We market our software solutions to approximately 3,200 retailers
worldwide with annual sales of $100 million or more. Our acquisitions of Arthur,
Intactix, E3 and Vista expanded our client base to include nearly 3,300
suppliers to the retail industry and added software applications that enable
business-to-business CPFR and promotion management between retailers and their
suppliers. These acquisitions, together with the investments we've made over the
past five years to increase the scalability of our products, have enabled us to
pursue emerging growth opportunities in the retail supply chain and further
expand our target markets to include larger multi-national retail organizations
and approximately 26,000 suppliers to the retail industry worldwide with annual
sales of $100 million or more.
SALES AND MARKETING
We market our products and services almost exclusively through our direct
sales force. Our Americas direct sales force is based in Scottsdale, Arizona
with 15 regional sales and support offices across the United States, Canada and
Latin America. We also have international sales representatives located in 19
sales and support offices in major cities throughout Europe, Asia, Australia,
and Japan.
Sales to new customers have historically required between three and nine
months from generation of the sales lead to the execution of a software license
agreement. Sales cycles are typically longer for larger dollar projects, large,
multi-national retail organizations and retailers in certain geographic regions.
During 2003, we noted an increase in CEO and board approval requirements for
larger dollar contracts that increased the traditional time from lead generation
to the execution of a software agreement. In addition, our strategy of offering
a comprehensive portfolio of integrated software applications, that can be
installed independently or as a complete solution, has created increased
back-selling opportunities to existing customers. These sales typically require
shorter sales cycles and are less competitive. As of December 31, 2003, our
sales and marketing organization consisted of 99 employees in the Americas, 54
in Europe and 14 in Asia/Pacific. These totals include 46, 27 and 8 direct sales
representatives, respectively.
11
COMPETITION
We encounter competitive products from a different set of vendors in each
of our primary product categories. We believe that while our markets are still
subject to intense competition, the number of significant competitors in many of
our application markets has diminished over the past five years. We believe the
principal competitive factors in our markets are feature and functionality,
product reputation and reference accounts, vendor viability, retail and supply
chain industry expertise, total solution cost and quality of customer support.
Our Retail Enterprise Systems compete primarily with internally developed
systems and other third-party developers such as AC Nielsen Corporation, Aldata
Solutions, Alphameric PLC (formerly Compass Software Group PLC), Connect3
Systems, Inc., Island Pacific, Inc. (formerly SVI Holdings, Inc., Marketmax,
Inc. (recently acquired by SAS), Micro Strategies Incorporated, Evant, Inc.
(formerly Nonstop Solutions), Lawson Software, NSB Retail Systems PLC, Retek,
Inc., and SAP AG. 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
competition for our Retail Enterprise Systems. We compete primarily with small
point-of-sale focused companies such as CRS Business Computers, Kronos
Incorporated, MICRO Systems, Inc. (formerly Datavantage, Inc.), Radiant Systems,
Inc., 360 Commerce, Tomax Technologies and Triversity, Inc. We also compete with
other broad solution set providers such as NSB Retail Systems PLC, Retek, Inc.,
and SAP AG (Campbell Software Division).
Our current Collaborative Solutions compete primarily with products from
Marketmax, Inc. (recently acquired by SAS), Evant Inc. (formerly Nonstop
Solutions), AC Nielsen Corporation, i2 Technologies, Manugistics Group, Inc.,
Information Resources, Inc., and Synchra Systems.
In the market for consulting services, we have pursued a strategy of
forming informal working relationships with leading retail systems integrators
such as IBM Global Services, Cap Gemini Ernst & Young, Kurt Salmon Associates
and Lakewest Consulting. These integrators, as well as independent consulting
firms such as Accenture, AIG Netplex, CFT Consulting, SPL and ID Applications,
also represent competition to our consulting services group. Moreover, because
many of these consulting firms are involved in advising our prospective
customers in the software selection process, they may successfully encourage a
prospective customer to select software from a software company with whom they
have a relationship. Examples of such relationships between consulting firms and
software companies include the relationships between Retek, Inc. and Accenture.
As we continue to develop or acquire e-commerce products and expand our
business in the Collaborative Solutions area, we expect to face potential
competition from business-to-business e-commerce application providers,
including Ariba, Commerce One, Commercialware, i2 Technologies, Manugistics
Group, Inc., Microsoft, Inc., Retek, Inc., SAP AG, Synchra Systems, Ecometry
Corporation, and others.
A few 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. In addition, we could face competition from
large, multi-industry technology companies that have historically not offered an
enterprise solution set to the retail supply chain market. We cannot guarantee
that we will be able to compete successfully against our current or future
competitors, or that competition will not have a material adverse effect on our
business, operating results and financial condition.
PROPRIETARY RIGHTS
Our success and competitive position is dependent in part upon our ability
to develop and maintain the proprietary aspect of our technology. The reverse
engineering, unauthorized copying, or other misappropriation of our technology
could enable third parties to benefit from our technology without paying for it.
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
12
and other written materials under trade secret and copyright laws. To date, we
have not protected our technology with issued patents. 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 certain of our
software products. For example, we license the Uniface client/server application
development technology from Compuware, Inc. for use in PMM, certain applications
from Silvon Software, Inc. for use in IDEAS, IBM's Net.commerce merchant server
software for use in CUSTOMER ORDERING, and the Syncsort application for use in
the Arthur Knowledge Base component of PORTFOLIO PLANNING. Our third party
licenses generally require us to pay royalties and fulfill confidentiality
obligations. If we are unable to continue to license any of this third party
software, or if the third party licensors do not adequately maintain or update
their products, we would face delays in the releases of our software until
equivalent technology can be identified, licensed or developed, and integrated
into our software products. These delays, if they occur, could harm 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, or infringes
another parties intellectual property rights.
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 our current or potential future
software solutions infringe 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. Moreover, as software patents become more common, the
likelihood increases that a patent holder will bring an infringement action
against us, or against our customers, to whom we have indemnification
obligations. 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. Since we also resell hardware we may also become
subject to claims from third parties that the hardware, or the combination of
hardware and software, infringe their intellectual property. Although we may
disclaim certain intellectual property representations to our customers, these
disclaimers may not be sufficient to fully protect us against such claims. We
may be more vulnerable to patent claims since we do not have any patents that we
can assert defensively against a patent infringement claim. 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.
Our standard software license agreements contain an infringement indemnity
clause under which we agree to indemnify and hold harmless our customers and
business partners against liability and damages arising from claims of various
copyright or other intellectual property infringement by our products. These
terms constitute a form of guarantee that is subject to the disclosure
requirements, but not the initial recognition or measurement provisions of
Financial Accounting Standards Board issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of the Indebtedness of Others." We have never lost an
infringement claim and our costs to defend such lawsuits have been
insignificant. Although it is possible that in the future third parties may
claim that our current or potential future software solutions or we infringe on
their intellectual property, we do not currently expect a significant impact on
our business, operating results, or financial condition.
EMPLOYEES
As of December 31, 2003, we had 1,291 employees: 978 based in the Americas,
211 based in Europe, and 102 based in Asia/Pacific. Of the total, 167 were
engaged in sales and marketing, 430 were in consulting services, 159 were
engaged in client support services, 394 were in product development, and 141
were in
13
administrative functions. We believe that our relations with our employees are
good. We have never had a work stoppage and none of our employees are subject to
a collective bargaining agreement.
Our future operating results depend significantly upon the continued
service of our key technical and senior management personnel, and our continuing
ability to attract and retain highly qualified technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that we will retain our key managerial or technical personnel or that
we can attract, assimilate and retain such personnel in the future. We have at
times experienced difficulty recruiting qualified personnel, and there can be no
assurance that we will not experience such difficulties in the future. If we are
unable to hire and retain qualified personnel in the future, or if we are unable
to assimilate the employees from any acquired businesses, such inability could
have a material adverse effect on our business, operating results and financial
condition.
AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those filed or furnished pursuant to
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are
available free of charge from our website at www.jda.com, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission.
ITEM 2. PROPERTIES
Our corporate office is located in Scottsdale, Arizona, where we currently
occupy approximately 121,000 square feet of a 136,000 square foot facility and
have expansion rights on the remaining space. The corporate office is also used
for certain of our sales, marketing, consulting, customer support, training, and
product development functions. The lease on the corporate office, which
commenced in April 1999, had an initial term of ten years and a scheduled
monthly rate of approximately $135,000 that was effective through March 2004. In
June 2003, we agreed to take the remaining 15,000 square feet, effective
November 2004, and extended the term of lease through December 2014. Subsequent
to December 31, 2003, we purchased our corporate office facility for
approximately $23.8 million in cash. This transaction closed on February 5,
2004. The purchase includes the corporate office building, a new two-story
parking garage, and approximately 8.8 acres of land upon which these structures
are located. We believe this purchase will result in a $1.2 million to $1.5
million net reduction in our annual operating costs.
We also own approximately 15,000 square feet of office space in the United
Kingdom, and lease office space in the Americas for 15 regional sales and
support offices across the United States, Canada and Latin America, and for 18
international sales and support offices located in major cities throughout
Europe, Asia, Australia, and Japan. The leases are primarily noncancellable
operating leases and expire at various dates through the year 2014. Certain of
the leases contain renewal options. We expect that in the normal course of
business some or all of these leases will be renewed or that suitable additional
or alternative space will be available on commercially reasonable terms as
needed. In April 2003, we sold a freestanding 5,000 square foot office facility
in the United Kingdom for approximately $1.6 million and realized a gain of
$639,000. We believe our existing facilities are adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
We are involved in legal proceedings and claims arising in the ordinary
course of business. Although there can be no assurance, management does not
believe that the disposition of these matters will have a material adverse
effect on our business, financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during fourth
quarter 2003.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the NASDAQ Stock Market ("NASDAQ") under the
symbol "JDAS." The following table sets forth, for the periods indicated, the
high and low sales prices per share of our common stock for the two most recent
fiscal years as reported on NASDAQ.
<Table>
<Caption>
YEAR ENDED 2003 HIGH LOW
- --------------- ------ -----
1st Quarter................................................. $12.90 $8.77
2nd Quarter................................................. 15.10 8.35
3rd Quarter................................................. 18.17 10.78
4th Quarter................................................. 22.36 14.81
</Table>
<Table>
<Caption>
YEAR ENDED 2002 HIGH LOW
- --------------- ------ ------
1st Quarter................................................. $32.82 $20.13
2nd Quarter................................................. 35.89 20.90
3rd Quarter................................................. 28.40 6.37
4th Quarter................................................. 12.22 5.10
</Table>
On March 5, 2004, the closing sale price for our common stock was $16.10
per share. On this date, there were approximately 260 holders of record of our
common stock. This figure does not reflect what we believe are approximately
4,000 beneficial stockholders whose shares are held in nominee names by brokers
and other institutions. We have never declared or paid any cash dividend on our
common stock. Since we presently intend to retain future earnings to finance the
growth and development of our business, we do not anticipate paying cash
dividends on our common stock in the foreseeable future.
The market price of our common stock has experienced large fluctuations and
may continue to be volatile in the future. Factors such as future announcements
concerning us or our competitors, quarterly variations in operating results,
announcements of technological innovations, the introduction of new products or
changes in product pricing policies by us or our competitors, proprietary rights
or other litigation, changes in our growth prospects, changes in earnings
estimates by analysts or other factors could cause the market price of our
common stock to fluctuate substantially. Further, the stock market has from time
to time experienced extreme price and volume fluctuations that have affected the
market price for many high technology companies and which, on occasion, have
been unrelated to the operating performance of those companies. These
fluctuations, as well as the general economic, market and political conditions
both domestically and internationally, including recessions, military conflicts
including the threat of war with Iraq, or acts of terrorism such as the
September 11 attack, may materially and adversely affect the market price of our
common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The selected consolidated financial data presented
below under the captions "Consolidated Statement of Income Data" and
"Consolidated Balance Sheet Data" for, and as of the end of, each of the years
in the five-year period ended December 31, 2003, are derived from the
consolidated financial statements of JDA Software Group, Inc. The consolidated
financial statements as of December 31, 2003 and 2002, and for each of the years
in the three-year period ended December 31, 2003, and the independent auditors'
report thereon, are included elsewhere herein.
15
CONSOLIDATED STATEMENT OF INCOME DATA:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUES:
Software licenses..................... $ 59,283 $ 66,625 $ 71,220 $ 62,640 $ 36,798
Maintenance services.................. 71,111 57,570 40,568 30,380 18,924
-------- -------- -------- -------- --------
Product revenues................... 130,394 124,195 111,788 93,020 55,722
Consulting services................... 70,167 87,608 95,124 78,709 86,941
Reimbursed expenses................... 6,858 7,652 6,904 6,970 3,736
-------- -------- -------- -------- --------
Service revenues................... 77,025 95,260 102,028 85,679 90,677
Total revenues..................... 207,419 219,455 213,816 178,699 146,399
-------- -------- -------- -------- --------
COST OF REVENUES:
Cost of software licenses............. 1,315 2,035 2,376 2,947 1,955
Amortization of acquired software
technology......................... 4,518 4,247 2,971 1,834 779
Cost of maintenance services.......... 17,373 14,292 11,159 7,655 6,245
-------- -------- -------- -------- --------
Cost of product revenues........... 23,206 20,574 16,506 12,436 8,979
Cost of consulting services........... 58,233 63,837 69,953 64,965 64,362
Reimbursed expenses................... 6,858 7,652 6,904 6,970 3,736
-------- -------- -------- -------- --------
Cost of service revenues........... 65,091 71,489 76,857 71,935 68,098
Total cost of revenues............. 88,297 92,063 93,363 84,371 77,077
-------- -------- -------- -------- --------
GROSS PROFIT............................ 119,122 127,392 120,453 94,328 69,322
OPERATING EXPENSES:
Product development................... 48,529 41,819 34,406 28,840 25,000
Sales and marketing................... 41,612 39,941 37,998 28,770 24,639
General and administrative............ 23,473 26,978 27,099 20,761 17,195
Amortization of intangibles........... 3,067 2,849 5,526 4,708 3,630
Relocation costs to consolidate
development and support
activities......................... 1,794 452 -- -- --
Restructuring, asset disposition and
other merger related charges....... -- 6,287 985 828 2,111
Purchased in-process research and
development........................ -- 800 2,361 200 --
Gain on sale of office facility....... (639) -- -- -- --
-------- -------- -------- -------- --------
Total operating expense............ 117,836 119,126 108,375 84,107 72,575
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS)................. 1,286 8,266 12,078 10,221 (3,253)
Other income, net.................. 1,347 1,700 2,671 4,246 3,814
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES.............. 2,633 9,966 14,749 14,467 561
Income tax (benefit) provision..... (17) 1,036 5,101 5,599 224
-------- -------- -------- -------- --------
NET INCOME.............................. $ 2,650 $ 8,930 $ 9,648 $ 8,868 $ 337
======== ======== ======== ======== ========
BASIC EARNINGS PER SHARE................ $ .09 $ .32 $ .38 $ .36 $ .01
======== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE.............. $ .09 $ .31 $ .37 $ .35 $ .01
======== ======== ======== ======== ========
SHARES USED TO COMPUTE:
Basic earnings per share.............. 28,645 28,047 25,316 24,315 23,758
Diluted earnings per share............ 29,104 29,074 25,757 25,431 23,758
</Table>
16
CONSOLIDATED BALANCE SHEET DATA:
<Table>
<Caption>
DECEMBER 31,
----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
Cash and cash equivalents............... $ 77,464 $ 71,065 $ 51,865 $ 60,794 $ 58,283
Marketable securities(1)................ 37,266 30,790 12,140 15,800 35,245
Working capital......................... 126,045 120,956 93,094 112,752 108,486
Total assets............................ 320,625 315,054 288,642 218,472 197,045
Long-term liabilities(2)................ -- 4,980 10,810 - -
Stockholders' equity(3)................. 269,789 256,766 224,450 186,265 174,863
</Table>
- ---------------
(1) The 1999 totals include $4,822,000 of non-current marketable securities.
(2) Deferred tax liability.
(3) We have never declared or paid any cash dividend on our common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading provider of sophisticated software solutions designed
specifically to address the demand and supply chain management, business
process, decision support, e-commerce, inventory optimization, and collaborative
planning and forecasting requirements of the retail industry and its suppliers.
Our collaborative specific solutions enable retailers and their suppliers to
optimize the sharing of plans, information and supply chain decisions between
trading partners in such areas of inventory replenishment, marketing/promotions,
sales planning/execution and category management. We also offer maintenance
services to our software customers, and enhance and support our software
business by offering implementation and other services that are designed to
enable our clients to rapidly achieve the benefits of our solutions. These
services include project management, system planning, system design and
implementation, custom configurations, and training services. Demand for our
implementation services is driven by, and often trails, sales of our software
products. Consulting services revenues are generally more predictable but
generate significantly lower gross margins than software license revenues. Our
maintenance services revenue stream is the most predictable portion of our
business and has grown in excess of 23% in each of the last three years. During
2003 our retention rate for maintenance customers was more than 93%.
SIGNIFICANT TRENDS AND DEVELOPMENTS IN OUR BUSINESS
Outlook for 2004. We see signs of recovery in North America and currently
have a strong domestic software sales pipeline. However, we see no broad signs
of economic recovery in Europe or Asia/Pacific. Our results in the European
region have also been impacted by operational issues and the departure of the
regional vice president in fourth quarter 2003. We believe this situation may
have an adverse impact on the sales effort in Europe during the first half of
2004. We believe there are a significant number of sales opportunities that will
support a sustained level of activity; however, we do not anticipate a
substantial increase in software license revenues during 2004. We also believe
at this time there are a limited number of outstanding prospects in the
transaction system market for MERCHANDISE MANAGEMENT SYSTEMS and IN-STORE
SYSTEMS. The preponderance of the business in the near term software sales
pipeline continues to be for STRATEGIC MERCHANDISE MANAGEMENT SOLUTIONS.
We currently anticipate sequential increases in maintenance services
revenues throughout 2004, and we believe this revenue stream will increasingly
dominate our total revenue and profitability. We also anticipate a sequential
increase in consulting service revenues in first quarter 2004 compared to fourth
quarter 2003 due to the seasonal impact of the holidays on fourth quarter 2003
results. We have taken various actions to address the profitability of our
consulting services business. We believe these changes will result in gradually
improving service margins during 2004. (see "Service Revenues Continue to
Decline and We Have Taken
17
Steps to Improve Our Service Margins"). Other than a minor reduction in costs
resulting from the changes we've made to the incentive compensation programs of
our consultants, we expect total costs and expenses for first quarter 2004 to be
comparable with fourth quarter 2003. We expect to invest approximately $13.0
million per quarter in product development in the first half of 2004 to complete
our .Net launch initiatives. We may adjust this spending rate in the second half
of 2004 depending upon the outlook for IT spending and other product specific
delivery requirements. We have reviewed the cost structure in each geographic
region and are making appropriate adjustments to better match costs with
anticipated revenue results during the quarter ending March 31, 2004. We expect
to record a restructuring charge of $2.6 million to $3.0 million in first
quarter 2004 for a workforce reduction and office closure costs. The workforce
reductions associated with this charge will be made by March 31, 2004 and will
include approximately 55 full-time consulting, sales and product development
employees in the Americas, Europe and Asia/Pacific. Office closure costs pertain
to certain US, Canadian and European offices that were used primarily by
consulting services personnel.
We purchased our corporate office facility on February 5, 2004 for
approximately $23.8 million in cash. The purchase includes the corporate office
building, a new two-story parking garage, and approximately 8.8 acres of land
upon which these structures are located. We believe this purchase will result in
a $1.2 million to $1.5 million net reduction in our annual operating costs.
Economic Conditions Continue to Impact our Operating Results. Our
operating results continue to be impacted by weak economic conditions in our
international regions and the continued weakness in the retail industry. We
believe economic conditions in the Americas region may have begun to recover, as
our customers appear to have improved confidence and willingness to make capital
expenditures for information technology. However, the outlook for the other
regions of the world remains inconsistent and we see no broad signs of
improvement in Europe or Asia/Pacific.
The retail industry continues to exercise significant due diligence prior
to making large capital outlays, and the decision-making process for investments
in information technology remains highly susceptible to deferral. As a result,
our sales cycles remain elongated and we continue to experience uncertainty
predicting the size and timing of individual contracts. For example, we signed
no large software licenses ($1.0 million or greater) in fourth quarter 2003, as
compared to four during both third and second quarter 2003, none during first
quarter 2003, and three in fourth quarter 2002. Although orders for certain of
our products can be taken over the telephone, the average sales cycle for larger
software license contracts can range from six months to over one year. We
continue to believe that delays in the decision-making process have been, and
may continue to be, the most significant issue affecting our software license
revenue results.
Economic conditions have negatively impacted the demand for our MERCHANDISE
MANAGEMENT SYSTEMS and IN-STORE SYSTEMS over the past two years and we believe
there is still no evidence to support a sustained return to the historical
levels of activity in the transaction systems market in the near term. We did,
however, sign three new MERCHANDISE MANAGEMENT SYSTEMS licenses in fourth
quarter 2003 and five in third quarter 2003, compared to seven and three in the
fourth and third quarters of 2002, respectively. We believe the next drivers for
growth in the transaction systems market will be sustained economic improvement,
the introduction and acceptance of PORTFOLIO POINT OF SALES ("PPOS"), our
Java-based In-Store System that was commercially released in second quarter
2003, and the .Net Platform version of our MERCHANDISE MANAGEMENT SYSTEMS, which
is still under development, that we believe will provide our customers easier
implementation of software applications in a modular format and lower total cost
of ownership (see "We Continue to Invest in New Product Development and Have
Expanded Our Markets"). Industry surveys indicate that point-of-sales systems
are becoming an increased priority for retailers. We believe the long-term
prospects for our new PPOS product and In-Store Systems sales are promising, in
part because we are positioned to take advantage of any replacement cycle for
point-of-sales systems driven by a shift to new technology platforms.
Our Competitive Environment is Changing. The pace of consolidation in our
industry continues to accelerate and we believe there is a continuing trend
towards fewer, larger software vendors. As a result of this consolidation, we
could face competition from large, multi-industry technology companies that have
historically not offered an enterprise solution set to the retail supply chain
market. We believe the JDA Portfolio provides a competitive advantage as it
offers the broadest integrated enterprise solution set in the
18
retail supply chain market today and the deepest functionality in any individual
solution area, particularly in those functional areas that are of greatest
interest to retailers in the current economic environment. Since 2001, the
majority of our software license revenues have been associated with our
STRATEGIC MERCHANDISE MANAGEMENT SOLUTIONS that are less disruptive, have a
higher ROI and shorter implementation timeframes. None of our competitors have a
comprehensive solution set equivalent to our STRATEGIC MERCHANDISE MANAGEMENT
SOLUTIONS. We also believe existing and potential customers are exhibiting an
increased desire to purchase solutions from a single vendor that provides an
integrated enterprise solution set rather than dealing with multiple smaller
point solution vendors.
We believe decisions to purchase information technology are currently being
driven by the competitive nature of the retail industry. As a result, we believe
retailers may be taking the opportunity now to invest in technologies that will
differentiate them from their competitors and position them for improved
performance without significant increases in market share. We also believe that
many of our customers now view JDA as a long-term solution provider with the
ability to provide the kind of business solutions partnership for which they're
looking. In 2003, 70% of our software license revenues came from existing
customers compared to 64% in 2002.
We believe this trend will continue and that this metric is a direct result
of our large customer base, principally amassed through our acquisition
activities in 2000 and 2001, and the focus we have and will continue to place on
back-selling opportunities for JDA Portfolio products to existing customers
through our Customer Value Program. Over the past three years, the addition of
STRATEGIC MERCHANDISE MANAGEMENT SOLUTIONS such as PORTFOLIO SPACE MANAGEMENT BY
INTACTIX and PORTFOLIO REPLENISHMENT BY E3 to the JDA Portfolio have provided
significant back-selling opportunities in our customer base. The majority of our
customers still only own one JDA product.
Our Business Segment Revenue Mix is Changing. The In-Store Systems
business segment provided 7% of our total revenues in 2003 compared to 12% in
2002. PPOS, our Java-based In-Store System, was commercially released in second
quarter 2003 and we are in the early adopter phase for this new platform. We do
not believe the In-Store Systems business segment will grow until early adopters
of the PPOS application complete their implementations and become
reference-able. Industry surveys indicate that point-of-sales systems are
becoming an increased priority for retailers. We believe the long-term prospects
for our new PPOS product and In-Store Systems sales are promising, in part
because we are positioned to take advantage of any replacement cycle for
point-of-sales systems driven by a shift to new technology platforms. In
addition, we have recently supplemented this business segment with the
acquisition of Timera Retail Solutions on January 29, 2004. Timera provides work
force management and labor scheduling applications for retailers that will
enhance our ability to provide efficiencies in the store environment. Scott D.
Hines, our Senior Vice President, Chief Technology Officer, has assumed
additional responsibilities and will focus on the development of the In-Store
Systems business segment during 2004.
The Collaborative Solutions business segment, which includes sales of
software licenses and services to customers outside our traditional retail
market, provided 23% of our total revenues in 2003 compared to 20% in 2002. Our
collaborative specific solutions enable retailers and their suppliers to
optimize the sharing of plans, information and supply chain decisions between
trading partners in such areas of inventory replenishment, marketing/promotions,
sales planning/execution and category management. As of December 31, 2003, there
were approximately 200 trading partners worldwide live and operational on our
MARKETPLACE REPLENISHMENT CPFR solution that enables manufacturers, distributors
and retailers to work from a single, shared demand forecast. Beginning in
mid-2002, licenses on the MARKETPLACE REPLENISHMENT CPFR solution have been sold
on a subscription basis. We have identified the Collaborative Solutions business
segment as a growth area and will add a Senior Vice President position in 2004
specifically focused on developing this business.
Service Revenues Continue to Decline and We Have Taken Steps to Improve Our
Service Margins. Service revenues, which include consulting services, training
revenues and reimbursed expenses, decreased 19% in 2003 compared to 2002,
primarily due to a decrease in demand for the implementation of MERCHANDISE
MANAGEMENT SYSTEMS and IN-STORE SYSTEMS. We believe retailers have changed their
buying behavior and that this has resulted in a fundamental shift in the mix of
demand for the various types of products we sell
19
from longer, high dollar infrastructure type projects typically associated with
our MERCHANDISE MANAGEMENT SYSTEMS and IN-STORE SYSTEMS, to our STRATEGIC
MERCHANDISE MANAGEMENT SOLUTIONS that are less disruptive, have a higher ROI,
shorter implementation timeframes and a lower total cost of ownership. We also
believe the average implementation times for our software products have
shortened due to increased training and expertise in our consulting
organization, and as a direct result of the investments we have made over the
past few years to increase the functionality, stability, scalability,
integration and ease of implementation of the products in the JDA Portfolio.
Furthermore, since 2001 the majority of our product demand has been associated
with our STRATEGIC MERCHANDISE MANAGEMENT SOLUTIONS that require lower levels of
services to implement, and as a result, it is harder to attain optimum
productivity from our consulting staff. The preponderance of the business in the
near term software sales pipeline continues to be for STRATEGIC MERCHANDISE
MANAGEMENT SOLUTIONS. We believe implementation timeframes will continue to
shorten and as a result, our service organization will need to become more
efficient while being deployed on multiple short projects instead of more
focused longer-term engagements.
Service revenue margins were 15% in 2003 compared to 25% in 2002. The
decrease resulted from decreased utilization and the resulting lower service
revenues, as well as a change in our incentive compensation programs for
services personnel to be related in part to software license revenue sales. The
effect of lower service revenues and higher incentive compensation on our
service margins was offset in part by a 17% decrease in average consulting
services headcount, a $3.2 million decrease in employee costs in 2003 compared
to 2002 related to consulting services employees who were used to supplement new
product development and quality assurance activities, and to assist with
business development and client support activities under the Customer Value
Program, and a $1.3 million decrease in occupancy costs.
We have taken various actions to address the profitability of our
consulting services business. We believe these changes will result in gradually
improving service margins during 2004. Specifically, we have implemented changes
in the incentive compensation programs of our consultants, increased billing
rates on new consulting engagements, and are in the process of restructuring the
way we deliver services. The 2003 incentive compensation program for our
consultants contained annual software revenue accelerators that resulted in a
higher rate of variable compensation being earned during the last half of 2003.
The accelerators in 2004 compensation model are tied to quarterly rather than
annual software revenue results. This will avoid a mismatch between consulting
revenues and related costs as the year progresses. In addition, beginning in
fourth quarter 2003, we increased billing rates on new consulting engagements.
We expect our realized rates to trend upward during 2004 as we complete work
under existing customer billing rate commitments. Finally, we are in the process
of restructuring the way we deliver our consulting services in order to leverage
web-based technology. This will allow our consultants to provide more services
without the need to travel to the customer's site. We believe this will allow
customers to benefit from a reduction in their overall expenses, and reduce the
disruptive aspects of today's shorter consulting projects by enabling our
consultants to switch from one project to the next with less downtime.
The Implementation of the Customer Value Program Impacted Our Operating
Results. We reorganized the Company in fourth quarter 2002 in connection with
the implementation of the Customer Value Program ("CVP") effective January 1,
2003. Implementation of the CVP caused initial disruptions in our sales,
services and training functions that negatively impacted our revenues and
operating results in the early months of 2003. The most significant negative
impact of the CVP implementation is behind us and we believe the transition has
been completed. CVP was designed to (i) refocus the organization on delivering
value to our existing customer base, (ii) strengthen our competitive position,
(iii) improve the quality, satisfaction and efficiency of our customers'
experience with JDA, (iv) increase revenues, (v) better align our cost
structure, and (vi) improve our operating results. We believe many of these
goals are being met, and that the CVP may have resulted in various invitations
from customers in recent quarters to participate in their strategic business
development activities. The next phase of the CVP will focus on the execution of
back-selling opportunities in our customer base since the majority of our
customers still only own one JDA product.
We recorded a $5.0 million restructuring charge in fourth quarter 2002 for
the workforce reduction and office closure costs to reorganize the Company in
connection with the implementation of the CVP. In addition, we have incurred
$2.2 million in relocation costs through December 31, 2003, including $1.8
million
20
and $452,000 in 2003 and 2002, respectively, to consolidate our development and
client support activities at our corporate headquarters. The relocation costs
have been reported in income from continuing operations as incurred.
We Continue to Invest in New Product Development and Have Expanded Our
Markets. We invested $56.0 million in 2003, and approximately $292.0 million
from 1998 to 2002 in new product development and the acquisition of
complementary products. The acquisitions of Intactix, Zapotec, NeoVista Decision
Series, E3, Vista, Engage and Timera have expanded our product offerings, and
provided us with collaborative applications that address new vertical market
opportunities with the manufacturers and wholesalers who supply our traditional
retail customers. We believe our strategy of expanding our product portfolio and
increasing the scalability of our products has been the key element in
attracting larger retail customers, and we believe that it has resulted in a
steady pattern of new customers licensing multiple products, as well as enhanced
back-selling opportunities in our customer base.
We are developing a series of enhancements to the JDA Portfolio products,
based upon the Microsoft .Net technology platform (".Net Platform") and the Java
platform, that we believe will position us uniquely in the retail and
collaborative solutions markets. Our goals are to ensure that our solutions
offer: (i) increased ease of use, (ii) increased integration of business
processes, (iii) reduced cost of ownership, (iv) faster implementation, and (v)
faster return on investment. We believe our next generation technology will
enhance our competitive position since we will be able to offer significant
features and functionality using an advanced technology platform. Our goal is to
begin delivering applications on the .Net Platform in third quarter 2004,
starting with PORTFOLIO REPLENISHMENT BY E3, followed by PORTFOLIO PLANNING BY
ARTHUR, and certain of our INTELLECT applications. This is a significant
investment by the Company as we are building our next generation of products,
while at the same time, we continue development efforts on our existing products
and complete the integration of acquired products. In addition, we announced the
commercial availability of PPOS, our Java-based In-Store System in second
quarter 2003 and currently plan to deliver JDA Portfolio 2004, a fully
synchronized, integrated release of all our existing products, in first quarter
2004.
During second quarter 2003 we announced a JDA PORTFOLIO INVESTMENT
PROTECTION PROGRAM that provides existing customers with an upgrade path to the
new .Net Platform, if and when available, at no additional license fee under the
following conditions: (i) licensee is a current maintenance paying customer on
their existing JDA applications, (ii) licensee is not in breach of any terms of
their agreements, (iii) the version of the product that will run on the .Net
platform has no more than minimal differences in price, features, and
functionality from the licensee's existing JDA applications, and (iv) the
licensee relinquishes all rights to use previously licensed software under the
terms of the platform transfer right following a reasonable transition period.
If, however, the version of the product that will run on the .Net platform has
more than minimal differences in price, features, and functionality, licensee
may still exercise this right provided they agree to pay an additional fee equal
to the price that would be charged to other existing users of licensee's current
products to migrate to the new .Net Platform. Customers will pay any required
third party charges associated with the new platform.
We expect to invest approximately $13.0 million per quarter in product
development in the first half of 2004 to complete our .Net launch initiatives.
We may adjust this spending rate in the second half of 2004 depending upon the
outlook for IT spending and other product specific delivery requirements.
We Continue to Grow Our Business Through Acquisitions. We believe there
are opportunities to grow our business through the acquisition of complementary
and synergistic companies, products and technologies. We look for acquisitions
that can be readily integrated and accretive to earnings, although we may pursue
smaller non-accretive acquisitions that will shorten our time to market with new
technologies. We are primarily interested in acquiring solutions that will
increase the breadth of our JDA Portfolio offerings in the In-Store Systems and
Collaborative Solutions business segments, and believe the general size of cash
acquisitions we would currently consider to be in the $5 million to $20 million
range.
In April 2003 we acquired substantially all the intellectual property of
Vista Software Solutions, Inc. ("Vista"), and Vista's active customer agreements
for a total cost of $4.6 million, which includes the purchase price of $3.8
million plus $780,000 in direct costs of the acquisition. Vista is a provider of
collaborative
21
business-to-business software solutions that enable retailers and consumer goods
manufacturers to more efficiently synchronize and integrate data, including
product descriptions, product images, pricing and promotion information
throughout their supply and demand chains. Vista's solutions also enable
consumer goods manufacturers to manage trade promotions, minimize trade
deductions costs and more accurately forecast product demand. With this
acquisition, we have expanded the JDA Portfolio with complementary software
products that leverage the Microsoft .Net Platform and address the critical need
for server-to-server data synchronization in Internet-based collaborative
commerce. The acquisition was accounted for as a purchase, and accordingly, the
operating results of Vista have been included in our consolidated financial
statements from the date of acquisition. In connection with the Vista
acquisition, we added 13 new employees, primarily in product development, and
recorded $229,000 of goodwill in our Retail Enterprise Systems reporting unit,
$2.1 million of goodwill in our Collaborative Solutions reporting unit, $1.1
million in software technology, and $1.2 million for customer lists and other
intangibles. Vista contributed $1.2 million in total revenues during 2003,
including $275,000 in software license revenues and $752,000 in maintenance
services revenue, and added $1.5 million in expense. Pro forma operating results
have not been presented, as the acquisition is not material to our consolidated
financial statements.
In August 2003 we acquired substantially all the remaining assets of
Engage, Inc. ("Engage") for a total cost of $3.5 million, which includes the
cash purchase price of $3.0 million plus $468,000 in direct costs of the
acquisition. Engage is a provider of enterprise advertising, marketing and
promotion software solutions that improve a retailer's promotion planning
process and their delivery of marketing and advertising content. Engage's
advanced digital asset, content management and ad layout capabilities will merge
with our existing PORTFOLIO REVENUE MANAGEMENT and PORTFOLIO KNOWLEDGE BASE
applications to further expand our JDA Portfolio with functionality that
streamlines the communication and collaboration among a retailer's
merchandising, promotions, production and store operation teams. The acquisition
was accounted for as a purchase, and accordingly, the operating results of
Engage have been included in our consolidated financial statements from the date
of acquisition. In connection with the Engage acquisition, we added 31 new
employees, approximately half of which are in product development, and recorded
$306,000 of goodwill in our Retail Enterprise Systems reporting unit, $2.2
million in software technology, and $2.1 million for customer lists. Engage
contributed over $2.1 million in total revenues during 2003, including $908,000
in maintenance services revenues and $1.1 million in service revenues, and added
$2.2 million in expense. Pro forma operating results have not been presented, as
the acquisition is not material to our consolidated financial statements.
On January 29, 2004 we acquired the intellectual property and certain other
assets of Timera Retail Solutions ("Timera"), for a total cost of $14.2 million,
which includes the purchase price of $13.0 million plus $1.2 million in direct
costs of the acquisition. Timera is a provider of integrated workforce
management solutions for the retail and consumer goods industry. Timera's
Enterprise Workforce Management product suite will expand our JDA Portfolio and
complement our existing IN-STORE SYSTEMS with web-based functionality for labor
scheduling and budgeting, time and attendance, demand forecasting, labor
tracking, and other key processes for proactive store level labor management.
The acquisition will be accounted for as a purchase, and accordingly, the
operating results of Timera will be included in our consolidated financial
statements from the date of acquisition. In connection with the Timera
acquisition, we have extended employment offers to 51 former Timera employees,
approximately two-thirds of which are in product development. The final purchase
price allocation has not been completed, however we currently expect to record
approximately $9.0 million of goodwill in our In-Store Systems reporting unit,
$4.6 million in software technology, and $1.1 million for customer lists. Pro
forma operating results will not be presented as the acquisition is not material
to our consolidated financial statements.
Our Financial Position is Strong and We Have Positive Operating Cash
Flow. We continue to maintain a strong financial position during the difficult
economic cycle of the last few years. As of December 31, 2003, we had $115
million in cash, cash equivalents and marketable securities, and no debt. In
addition, during 2003 we generated $20.8 million in positive cash flow from
operations. Subsequent to December 31, 2003, we purchased our corporate office
facility for $23.8 million in cash. This transaction closed on February 5, 2004.
We believe this purchase will result in a $1.2 million to $1.5 million net
reduction in our annual operating
22
costs. We also utilized $13.0 million in cash to purchase Timera (see above). We
believe our cash position is sufficient to meet our operating needs for the next
twelve months.
Management Changes. Hamish N. J. Brewer was promoted to Chief Executive
Officer on August 4, 2003 having served as our President since April 2001 and as
a senior officer of the Company since 1996. He succeeds James D. Armstrong who
will continue as Chairman of the Board. As Chairman, Mr. Armstrong will retain
his active leadership role, focusing on strategic planning, merger and
acquisition opportunities, major product decisions and key customer
relationships. Scott D. Hines, our Senior Vice President, Chief Technology
Officer, has assumed additional responsibility and will focus on the development
of the In-Store Systems business segment during 2004. Christopher J. Moore was
promoted to Senior Vice President, Customer Support Systems in January 2004
having served in various positions with the Company for over 12 years including
Vice President, US Consulting Services from August 1999 to December 2003. David
R. King joined the Company in January 2004 as our Senior Vice President, Product
Development (see "Item 10. Directors and Executive Officers of the Registrant").
We have identified the Collaborative Solutions business segment as a growth area
and will add a Senior Vice President position in 2004 specifically focused on
developing this business.
23
RESULTS OF OPERATIONS
The following table sets forth certain selected financial information
expressed as a percentage of total revenues for the periods indicated and
certain gross margin data expressed as a percentage of software licenses,
maintenance services, product revenues or consulting services, as appropriate:
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------
2003 2002 2001
---- ---- ----
REVENUES:
Software licenses......................................... 29% 31% 33%
Maintenance services...................................... 34 26 19
--- --- ---
Product revenues....................................... 63 57 52
Consulting services....................................... 34 40 45
Reimbursed expenses....................................... 3 3 3
--- --- ---
Service revenues....................................... 37 43 48
Total revenues......................................... 100 100 100
--- --- ---
COST OF REVENUES:
Cost of software licenses................................. 1 1 1
Amortization of acquired software technology.............. 2 2 2
Cost of maintenance services.............................. 8 7 5
--- --- ---
Cost of product revenues............................... 11 10 8
Cost of consulting services............................... 28 29 33
Reimbursed expenses....................................... 3 3 3
--- --- ---
Cost of service revenues............................... 31 32 36
Total cost of revenues................................. 42 42 44
--- --- ---
GROSS PROFIT................................................ 58 58 56
OPERATING EXPENSES:
Product development....................................... 25 19 16
Sales and marketing....................................... 20 18 18
General and administrative................................ 11 12 13
Amortization of intangibles............................... 1 2 2
Relocation costs to consolidate development and support
activities............................................. 1 -- --
Restructuring, asset disposition and other merger related
charges................................................ -- 3 --
Purchased in-process research and development............. -- -- 1
Gain on sale of office facility........................... -- -- --
--- --- ---
Total operating expenses............................... 58 54 50
--- --- ---
OPERATING INCOME............................................ -- 4 6
Other income, net......................................... 1 1 1
--- --- ---
INCOME BEFORE INCOME TAXES.................................. 1 5 7
Income tax (benefit) provision............................ -- 1 2
--- --- ---
NET INCOME.................................................. 1% 4% 5%
=== === ===
Gross margin on software licenses........................... 98% 97% 97%
Gross margin on maintenance services........................ 76% 75% 72%
Gross margin on product revenues............................ 82% 83% 85%
Gross margin on service revenues............................ 15% 25% 25%
</Table>
24
The following tables set forth selected comparative financial information
on our Business Segments and geographical revenues, expressed as a percentage
change between years, for the years ended December 31, 2003 and 2002, and for
the years ended December 31, 2002 and 2001:
<Table>
<Caption>
RETAIL ENTERPRISE SYSTEMS IN-STORE SYSTEMS COLLABORATIVE SOLUTIONS
--------------------------- --------------------------- ---------------------------
2003 VS 2002 2002 VS 2001 2003 VS 2002 2002 VS 2001 2003 VS 2002 2002 VS 2001
------------ ------------ ------------ ------------ ------------ ------------
Software licenses..... (3)% (16)% (68)% (24)% (13)% 45%
Maintenance
services............ 16% 38% (5)% 10% 48% 65%
--- --- ---- --- --- ---
Product revenues.... 6% 3% (41)% (13)% 16% 53%
Service revenues...... (14)% (16)% (50)% (2)% (5)% 241%
--- --- ---- --- --- ---
Total revenues...... (3)% (7)% (47)% (6)% 11% 75%
Product development... 16% 11% (25)% 12% 44% 92%
Sales and marketing... 15% (14)% (12)% (9)% (14)% 83%
Operating income...... (39)% (15)% (108)% (3)% 7% 37%
</Table>
<Table>
<Caption>
THE AMERICAS EUROPE ASIA/PACIFIC
--------------------------- --------------------------- ---------------------------
2003 VS 2002 2002 VS 2001 2003 VS 2002 2002 VS 2001 2003 VS 2002 2002 VS 2001
------------ ------------ ------------ ------------ ------------ ------------
Software licenses..... 4% (20)% (43)% 42% (7)% (7)%
Maintenance
services............ 29% 45% 47% 43% 30% 53%
--- --- ---- --- --- ---
Product revenues.... 16% 3% (2)% 42% 6% 7%
Service revenues...... (32)% (5)% (7)% 7% 8% (26)%
--- --- ---- --- --- ---
Total revenues...... (5)% (1)% (4)% 26% 7% (14)%
</Table>
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues consist of product revenues and services revenue, which
represented 63% and 37%, respectively, of total revenues in 2003 compared to 57%
and 43%, respectively in 2002. Total revenues for 2003 were $207.4 million, a
decrease of $12.0 million, or 5%, from the $219.4 million reported in 2002.
The Retail Enterprise Systems, In-Store Systems, and Collaborative
Solutions business segments represented 70%, 7%, and 23%, respectively of total
revenues in 2003, compared to 69%, 12%, and 19%, respectively in 2002.
PRODUCT REVENUES
Software Licenses. Software license revenues for 2003 decreased 11% to
$59.3 million from $66.6 million in 2002.
Retail Enterprise Systems software license revenues decreased 3% in 2003
compared to 2002. We believe this business segment was negatively impacted in
the first half of 2003 by the disruption caused by our reorganization under the
CVP, the elongation of sales cycles due to heightened risk aversion by retailers
for larger IT expenditures, and worldwide concerns about the economy and the war
in Iraq which disrupted IT spending patterns. Some of these factors have
diminished, and software license sales in the Retail Enterprise Systems business
segment increased 45% in the second half of 2003 compared to the second half of
2002.
25
In-Store Systems software license revenues decreased 68% in 2003 compared
to 2002. We believe this business segment has been negatively impacted by a
major platform transition, as market demand moves from Window-based
point-of-sale applications to Java-based point-of-sale applications. We
commercially released our PPOS Java-based point-of-sale application in second
quarter 2003 and we are currently in the early adopter phase for this new
platform. We believe the long-term prospects for this business segment are
promising, in part because we are positioned to take advantage of any
replacement cycle for point-of-sales systems driven by a shift to new technology
platforms. In addition, we have recently supplemented this business segment with
the acquisition of Timera Retail Solutions on January 29, 2004. Timera provides
work force management and labor scheduling applications for retailers that will
enhance our ability to provide efficiencies in the store environment.
Collaborative Solutions software license revenues decreased 13% in 2003
compared to 2002. Although we experienced a decline in initial license fees in
this business segment in 2003, we began selling subscriptions on certain of our
CPFR solutions and our subscription customer base increased to approximately 200
trading partners at December 31, 2003 compared to 136 at December 31, 2002. We
believe the long-term prospects for this business segment will be enhanced by
the additional collaborative applications acquired from Vista and the
introduction of merchandise planning and category management solutions for
suppliers to retail.
Software license revenues in the Americas increased 4% to $42.0 million in
2003 compared to $40.4 million in 2002, as a 20% increase in Retail Enterprise
Systems software license revenues was offset by decreases in software license
revenues related to In-Store Systems and Collaborative Solutions applications of
58% and 15%, respectively. The pipeline for software licenses in the Americas is
strong and the buying cycles of customers appear to have stabilized. Software
license revenues in Europe decreased 43% to $11.2 million in 2003 compared to
$19.7 million in 2002 due to decreases in software license revenues related to
Retail Enterprise Systems, In-Store Systems, and Collaborative Solutions
applications of 48%, 89%, and 6%, respectively. Our results in the European
region have been impacted by weak economic conditions, operational issues and
the departure of the regional vice president in fourth quarter 2003. Software
license revenues in Asia/Pacific decreased 7% to $6.1 million in 2003 compared
to $6.6 million in 2002 due to decreases in software license revenues related to
In-Store Systems and Collaborative Solutions applications of 57% and 6%,
respectively, offset in part by a 4% increase in Retail Enterprise Systems
software license revenues. This Asia/ Pacific region has been impacted by a slow
economic recovery and the SARS outbreak in early 2003.
Maintenance Services. Maintenance services revenue increased 24% to $71.1
million in 2003 from $57.6 million in 2002, primarily due to increases in the
customer base for STRATEGIC MERCHANDISE MANAGEMENT SOLUTIONS. In addition, the
increase includes $752,000 and $908,000 in incremental maintenance services
revenue from the Vista and Engage acquisitions, respectively. Maintenance
services revenue increased in our Retail Enterprise Systems and Collaborative
Solutions business segments due to continued increases in our install base.
Maintenance services revenue decreased in our In-Store Systems business segment
due to attrition that we believe results from the transitional period
surrounding the introduction and acceptance of PPOS, our Java-based In-Store
System. Many of our In-Store Systems customers have developed their own internal
support teams. We believe a portion of these customers have opted to discontinue
maintenance and remain on their existing systems in the near term, rather than
incur potentially large system upgrade, training and hardware costs at this
time.
SERVICE REVENUES
Service revenues, which include consulting services, training revenues, and
reimbursed expenses, decreased 19% to $77.0 million in 2003 compared to $95.3
million in 2002, primarily due to a decrease in demand for the implementation of
MERCHANDISE MANAGEMENT SYSTEMS and IN-STORE SYSTEMS which typically have higher
implementation requirements than our STRATEGIC MERCHANDISE MANAGEMENT SOLUTIONS.
We believe that service revenues will continue to decline as a percentage of our
overall revenues, due in part to our transition to the new technology platforms
that utilize component-based architecture and allow for quicker implementation
on most products that we sell.
26
Fixed bid consulting services work represented 14% of total consulting
services revenue in 2003, compared to 13% in 2002.
COST OF PRODUCT REVENUES
Cost of Software Licenses. Cost of software licenses was $1.3 million, or
2% of software license revenues in 2003 compared to $2.0 million, or 3% of
software license revenues in 2002. The decrease in cost of software licenses
results from the lower volume of software products sold in 2003 that incorporate
functionality from third party software providers and require the payment of
royalties.
Amortization of Acquired Software Technology. Amortization of acquired
software technology was $4.5 million in 2003 compared to $4.2 million in 2002.
The increase results from the amortization of software technology acquired in
the acquisitions of Vista in second quarter 2003 and Engage in third quarter
2003.
Cost of Maintenance Services. Cost of maintenance services increased 22%
to $17.4 million, or 24% of maintenance services revenue, in 2003 from $14.3
million, or 25% of maintenance services revenue, in 2002. The increase results
primarily from a 7% increase in average maintenance services headcount to
support our growing customer base, and increased salaries, benefits and
incentive compensation, travel and training costs per employee.
COST OF SERVICE REVENUES
Cost of service revenues decreased 9% to $65.1 million in 2003 from $71.5
million in 2002. This decrease results primarily from a 17% decrease in average
consulting services headcount, a $3.2 million decrease in employee costs in 2003
compared 2002 related to consulting services employees who were used to
supplement new product development and quality assurance activities, and to
assist with business development and client support activities under the CVP,
and a $1.3 million decrease in occupancy costs. These decreases were offset in
part by salary increases, and higher benefits and incentive compensation.
GROSS PROFIT
Gross profit decreased 6% to $119.1 million, or 57% of total revenues in
2003, from $127.4 million, or 58% of total revenues in 2002. The decrease in
gross profit dollars and gross margin percentage results primarily from
decreases in software license and service revenues of 11% and 19%, respectively,
offset in part by a 24% increase in maintenance services revenue. Software
licenses and maintenance services revenue have substantially higher margins than
service revenues.
Service revenue margins were 15% in 2003 compared to 25% in 2002. The
decrease resulted from decreased utilization and the resulting lower service
revenues, as well as a change in our incentive compensation programs for
services personnel to be related in part to software license revenue sales. The
effect of lower service revenues and higher incentive compensation on our
service margins was offset in part by a 17% decrease in average consulting
services headcount, a $3.2 million decrease in employee costs in 2003 compared
2002 related to consulting services employees who were used to supplement new
product development and quality assurance activities, and to assist with
business development and client support activities under the CVP, and a $1.3
million decrease in occupancy costs. We have taken steps to improve our service
revenue margins in 2004, including revisions to the incentive compensation
programs, increased billing rates on new consulting engagements, and
restructuring the way we deliver our consulting services in order to leverage
web-based technology and enhance productivity. We believe these changes will
result in gradually improving service margins during 2004.
OPERATING EXPENSES
Operating expenses, excluding amortization of intangibles, relocation costs
to consolidate development and support activities, restructuring, asset
disposition and other merger related charges, purchased in-process research and
development, and gain on sale of office facility, increased 4% to $113.6
million, or 55% of total revenues, in 2003, compared to $108.7 million, or 50%
of total revenues in 2002. Operating expenses increased
27
primarily as a result of our investment in product development related to the
acquisitions of Vista and Engage and to migrate the JDA Portfolio to the .Net
Platform and to introduce our PPOS Java-based store system. In addition, we
incurred increases in salaries, health insurance benefit costs and incentive
compensation per employee in 2003, and $1.1 million higher D&O insurance
premiums. These increases were offset in part by a $2.4 million lower provision
for doubtful accounts, a $1.1 million favorable swing in customer dispute
activity and decreases in occupancy, marketing, legal, accounting and investor
relation costs.
Product Development. Product development expenses for 2003 increased 16%
to $48.5 million from $41.8 million in 2002. Product development expense, as a
percentage of product revenues, was 37% in 2003 compared to 34% in 2002. The
increase in product development during 2003 includes increases in average
headcount, annual salary increases, and higher incentive compensation costs for
full-time employees involved in the ongoing development of a series of
enhancements to the JDA Portfolio products based upon the .Net Platform, higher
outside contractor costs, and product development employees added through the
acquisitions of Vista and Engage. The migration of the JDA Portfolio to the .Net
Platform is a significant investment by the Company as we are building our next
generation of products, while at the same time, we continue development efforts
on our existing products and complete the integration of acquired products. In
addition, product development expenses increased $1.3 million during 2003
compared to 2002 for the use of consulting services employees to supplement the
new product development and quality assurance activities of our internal
developers.
Sales and Marketing. Sales and marketing expenses for 2003 increased 4% to
$41.6 million from $39.9 million in 2002. Sales and marketing expense, as a
percentage of total revenues, was 20% in 2003 compared to 18% in 2002. Sales and
marketing expenses increased in 2003 as a result of higher commissions and a
$1.6 million increase in costs for consulting services employees who assisted
with business development activities under the CVP, offset in part by a decrease
in marketing costs.
General and Administrative. General and administrative expenses for 2003
decreased 13% to $23.5 million from $27.0 million in 2002. General and
administrative expense, as a percentage of total revenues, was 11% in 2003
compared to 12% in 2002. The decrease in general and administrative expenses
results primarily from a $2.4 million lower provision for doubtful accounts,
decreases in legal, accounting and investor relation costs, and a $1.1 million
favorable swing in customer dispute activity, offset in part by higher D&O
insurance premiums, and increases in annual salaries, benefits and incentive
compensation.
Amortization of Intangibles. Amortization of intangibles was $3.1 million
in 2003 compared to $2.8 million in 2002. The increase results from the
amortization of customer list intangibles acquired in the acquisitions of Vista
in second quarter 2003 and Engage in third quarter 2003.
Relocation Costs to Consolidate Development and Client Support
Activities. Approximately 150 people were offered the opportunity to relocate
as part of the CVP initiative to consolidate our development and client support
activities at our corporate headquarters. As of December 31, 2003, a total of 50
employees have relocated. We negotiated temporary retention arrangements ranging
from nine months to two years with 42 employees who have chosen not to relocate
in order to facilitate a smooth transition. We have subsequently offered
indefinite full-time employment to 19 of these employees, who we believe are
strategic to our current development efforts, and rescinded their retention
arrangements. We have incurred $2.2 million in relocation costs through December
31, 2003, including $1.8 million and $452,000 in 2003 and 2002, respectively, to
consolidate our development and client support activities at our corporate
headquarters. The relocation costs have been reported in income from continuing
operations as incurred.
Restructuring, Office Closure Costs and Other Charges. We recorded a $1.3
million restructuring charge in second quarter 2002. The restructuring
initiatives involved a workforce reduction of 53 full-time employees, primarily
in the consulting services function in the United States, Europe, Canada and
Latin America. All workforce reductions associated with this charge were made on
or before June 30, 2002. In fourth quarter 2002, we recorded another
restructuring charge of $5.0 million for termination and office closure costs
associated with the reorganization of the Company to implement the CVP
initiative. All employees potentially impacted by this reorganization initiative
were notified of the plan of termination and the related benefits on or
28
before December 31, 2002. Office closure costs pertain to certain US, Latin
America, and European offices that were either under-performing or became
redundant with the relocation initiatives.
Purchased In-process Research and Development. We expensed $800,000 of
purchased in-process research and development in 2002 in connection with the
acquisition of J -- Commerce in April 2002.
Gain on Sale of Office Facility. We realized a $639,000 gain in second
quarter 2003 on the sale of an excess office facility in the United Kingdom.
OPERATING INCOME
Operating income was $1.3 million in 2003 compared to operating income of
$8.3 million in 2002. The decrease in operating income results primarily from
decreases in software licenses and service revenues of 11% and 19%, respectively
in 2003 compared to 2002, a $6.7 million increase in product development costs,
and higher incentive compensation, offset in part by a 24% increase in
maintenance services revenues, a $2.4 million lower bad debt provision, 115 or
8% fewer average full-time employees, $4.9 million lower restructuring and
relocation costs, and a $639,000 gain on the sale of an excess office facility.
Operating income in our Retail Enterprise Systems business segment
decreased 39% to $18.2 million in 2003 from $29.8 million in 2002. The decrease
results primarily from a decrease in software license revenues, lower service
revenues and margins, an increase in product development costs due to
development activities on the .Net Platform and new releases of our STRATEGIC
MERCHANDISE MANAGEMENT SOLUTIONS, and an increase in sales and marketing costs,
primarily as a result of higher commissions, offset in part by an increase in
maintenance services revenue.
We incurred an operating loss of $405,000 in our In-Store Systems business
segment in 2003 compared to operating income of $5.3 million in 2002. The
decrease results from lower product and services revenues in this business
segment in 2003 compared to 2002, offset in part by headcount reductions in
consulting services, a reduced investment in product development, and lower
sales commissions.
Operating income in our Collaborative Solutions business segment increased
7% to $11.2 million in 2003 from $10.5 million in 2002. The increase results
primarily from an increase in maintenance services revenues due to an increased
customer base, and a decrease in sales and marketing costs, offset in part by
lower software licenses and service revenues, and an increase in product
development headcount to support the development activities on the .Net platform
and new product initiatives for the future growth of this business segment.
PROVISION FOR INCOME TAXES
We recorded an income tax benefit of $17,000, or 1% of the reported income
before income taxes in 2003 compared to a provision for income taxes of $1.0
million, or 10.4% of income before income taxes in 2002. The income tax benefit
for 2003 includes a one-time tax benefit of $938,000. In 2002, we established a
valuation allowance of $3.5 million for foreign tax credit carryovers due to our
excess credit position. We subsequently elected in third quarter 2003 to
capitalize a significant portion of our research and development costs in the
2002 federal income tax return, which allowed us to more fully utilize certain
tax credits that could not previously be realized. With this election, we
reversed $2.3 million of the previously recorded valuation allowance, which
resulted in the one-time tax benefit of $938,000, an increase to additional paid
in capital of $1.1 million, and an increase in income taxes payable of $262,000.
The effective income tax rate for 2003, excluding the effect of the $938,000
one-time tax benefit, is 35%.
The provision for income taxes in 2002 includes $1.9 million in one-time
tax benefits related primarily to the resolution of an audit by the Inland
Revenue of our United Kingdom subsidiaries for the years 1997 through 2000, and
the settlement in the United States of an income tax examination by the Internal
Revenue Service of our 1998 and 1999 federal income tax returns. Under the
settlement, the Internal Revenue Service has agreed to allow the Company to take
a research and development expense tax credit for most of the qualifying
expenses originally reported in the 1998 and 1999 federal income tax returns.
However, the Internal Revenue Service has advised that they cannot issue a
refund check until they complete a subsequent audit of our 2000 and 2001 federal
income tax returns. This audit is expected to be completed within six months of
29
December 31, 2003 and no material adjustments are anticipated. The effective
income tax rate for 2002, excluding the effect of the $1.9 million one-time tax
benefits, is 35.5%.
The provisions for 2003 and 2002 take into account the source of taxable
income, domestically by state and internationally by country, and available
income tax credits. The provisions for 2003 and 2002 do not include the tax
benefits realized from the employee stock options exercised during these years
of $777,000 and $5.8 million (net of a $1.0 million valuation allowance),
respectively. These tax benefits reduce our income tax liabilities and are
included as an increase to additional paid-in capital.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Product revenues and services revenue represented 57% and 43%,
respectively, of total revenues in 2002 compared to 52% and 48%, respectively in
2001. Total revenues for 2002 were $219.5 million, an increase of $5.6 million,
or 3%, over the $213.8 million reported in 2001. Excluding the impact of owning
E3 for eight more months in 2002 than in 2001, product revenues, consulting
services revenues, and total revenues decreased 8%, 15% and 11%, respectively in
2002 compared to 2001.
PRODUCT REVENUES
Software Licenses. Software license revenues for 2002 decreased 6% to
$66.6 million from $71.2 million in 2001. Excluding the impact of owning E3 for
eight more months in 2002 than in 2001, software license revenues decreased 23%
in 2002 compared to 2001. The retail industry appeared to remain cautious with
their level of investment in information technology during the difficult
economic cycle we experienced in 2002, perhaps due to poor macroeconomic
conditions, and uncertainty related to the threat of future terrorist attacks
and a US war with Iraq. In addition, subsequent to the September 11 attack and
the ensuing deterioration in economic conditions, we believe retailers changed
their buying behavior and this resulted in a fundamental shift in the mix of
demand for the various types of products we sell away from high dollar projects
toward lower cost point solutions. Software license revenues in the Retail
Enterprise Systems business segment, excluding the impact of owning E3 for eight
more months in 2002 than in 2001, decreased 28% in 2002 compared to 2001.
In-Store Systems software license revenues decreased 24% in 2002 compared to
2001. Collaborative Solutions software license revenues, excluding the impact of
owning E3 for eight more months in 2002 than in 2001, decreased 2% in 2002
compared to 2001.
Software license revenues in the Americas decreased 20% in 2002 compared to
2001. Excluding the impact of owning E3 for eight more months in 2002 than in
2001, software license revenues in the Americas decreased 35% in 2002 compared
to 2001. This decrease resulted primarily from a 44% decrease in software
license revenues related to Retail Enterprise Systems and a 57% decrease in
In-Store Systems applications, offset in part by a 37% increase in software
license revenues from our Collaborative Solutions products. Software license
revenues in Europe increased 42% in 2002 compared to 2001. Excluding the impact
of owning E3 for eight more months in 2002 than in 2001, software license
revenues in Europe increased 14% in 2002 compared to 2001. Software license
revenues in Asia/Pacific decreased 7% in 2002 compared to 2001. Excluding the
impact of owning E3 for eight more months in 2002 than in 2001, software license
revenues in Asia/Pacific decreased 10% in 2002 compared to 2001.
Maintenance Services. Maintenance services revenue for 2002 increased 42%
to $57.6 million from $40.6 million in 2001. Excluding the impact of owning E3
for eight more months in 2002 than in 2001, maintenance services revenue
increased 19% in 2002 compared to 2001 due to increases in the install base for
our other product lines.
CONSULTING SERVICES
Consulting services revenue, including the reclassification of reimbursed
expenses, decreased 7% in 2002 to $95.3 million from $102.0 million in 2001.
Excluding the impact of owning E3 for eight more months in 2002 than in 2001,
consulting services revenue decreased 15% in 2002 compared to 2001, primarily
due to a decrease in demand for the implementation of MERCHANDISE MANAGEMENT
SYSTEMS and other large projects. Consulting services revenue typically lags the
sale of software licenses by as much as one year. In addition, we
30
believe the average implementation times for our software products declined due
to increased training and expertise in our consulting organization, and as a
direct result of the investments we made over the past few years to increase the
functionality, stability, scalability, integration and ease of implementation of
the products in the JDA Portfolio. Furthermore, in 2002 more of the demand for
our products was associated with our analytic and optimization products that
require lower levels of services to implement. As a result of these changes in
our business and product revenue mix, our consulting services revenue declined
sequentially in each of the four fiscal quarters of 2002.
BUSINESS SEGMENT REVENUES
Total revenues in our Retail Enterprise Systems business segment decreased
7% to $151.1 million in 2002 from $162.3 million in 2001. Excluding the impact
of owning E3 for eight more months in 2002 than in 2001, total revenues in this
business segment decreased 17% in 2002 compared to 2001, primarily due to a
decline in demand for MERCHANDISE MANAGEMENT SYSTEMS. Sales of MERCHANDISE
MANAGEMENT SYSTEMS tend to be more heavily impacted during slow economic
periods, as retailers are often reluctant to make substantial investments due to
the slower expected return on investment. In addition, these products typically
have longer implementation time frames and our services group often performs the
implementation services. As a result, the decline in software sales for these
products also had a negative impact on our consulting services revenue. The
Retail Enterprise Systems business segment represented 69% of our total revenues
in 2002 compared to 76% in 2001.
Total revenues in our In-Store Systems business segment decreased 6% to
$25.5 million in 2002 from $27.1 million in 2001, primarily due to a 9% decrease
in WIN/DSS revenues, offset in part by a 64% increase in revenues from the STORE
PORTAL application. In-Store Systems such as WIN/DSS tend to be heavily impacted
during slower economic periods, as the implementation of a new point-of-sale
system usually requires a substantial hardware investment. The In-Store Systems
business segment represented 12% of total revenues in 2002 compared to 13% in
2001.
Total revenues in our Collaborative Solutions business segment increased
75% to $42.9 million in 2002 from $24.5 million 2001. Excluding the impact of
owning E3 for eight more months in 2002 than in 2001, total revenues in this
business segment increased 24% in 2002 compared to 2001 primarily due to an
increase in PORTFOLIO SPACE MANAGEMENT revenues from non-retail customers. The
Collaborative Solutions business segment represented 19% of total revenues in
2002 compared to 11% in 2001.
GEOGRAPHIC REVENUES
Total revenues in the Americas decreased 1% to $142.2 million in 2002 from
$143.7 million in 2001. Excluding the impact of owning E3 for eight more months
in 2002 than in 2001, total revenues in this region decreased 15% in 2002
compared to 2001, due to a 35% decrease in software license revenues and a 13%
decrease in consulting services revenues, offset in part by an 18% increase in
maintenance services revenue.
Total revenues in Europe increased 26% to $59.6 million in 2002 from $47.3
million in 2001. Excluding the impact of owning E3 for eight more months in 2002
than in 2001, total revenues in this region increased 7% in 2002 compared to
2001 due to a 14% increase in software license revenues and a 14% increase in
maintenance services revenue, offset in part by a 2% decrease in consulting
services revenue.
Total revenues in Asia/Pacific decreased 14% to $21.4 million in 2002 from
$24.8 million in 2001. Excluding the impact of owning E3 for eight more months
in 2002 compared to 2001, total revenues in this region decreased 15% in 2002
compared to 2001 due to a 10% decrease in software license revenues and a 26%
decrease in consulting services revenue primarily due to decreases in revenues
from certain large projects in Australia and Japan, offset in part by a 47%
increase in maintenance services revenue.
COST OF PRODUCT REVENUES
Cost of Software Licenses. Cost of software licenses was $2.0 million, or
3% of software license revenues in 2002 compared to $2.4 million, or 3% of
software license revenues in 2001. The decrease in cost of software
31
licenses dollars resulted from the lower volume of software products sold in
2002 that incorporate functionality from third party software providers and
require the payment of royalties.
Amortization of Acquired Software Technology. Amortization of acquired
software technology was $4.2 million in 2002 compared to $3.0 million in 2002.
The increase resulted primarily from eight more months of amortization in 2002
of software technology acquired with E3 in September 2001.
Cost of Maintenance Services. Cost of maintenance services increased 28%
to $14.3 million, or 25% of maintenance services revenue, in 2002 from $11.2
million, or 27% of maintenance services revenue, in 2001. The increase resulted
primarily from the acquisition of E3 in September 2001 and the additional
headcount in the customer support function to support our growing installed
client base, offset in part by lower incentive compensation costs. At December
31, 2002, we had 132 employees in the customer support function.
COST OF SERVICES
Cost of services decreased 7% to $71.5 million in 2002 from $76.9 million
in 2001. This decrease resulted primarily from a 7% decrease in average
consulting services headcount and lower incentive compensation costs in 2002
compared to 2001, offset in part by higher travel and training costs. At
December 31, 2002, we had 468 employees in the consulting services function.
GROSS PROFIT
Gross profit for 2002 increased 6% to $127.4 million, or 58% of total
revenues, from $120.5 million, or 56% of total revenues in 2001. The increase in
gross profit dollars and gross margin percentage resulted primarily from the 3%
increase in total revenues and the higher mix of product revenues as a
percentage of total revenues in 2002 compared to 2001. Software licenses and
maintenance services revenue have higher margins than service revenues.
Consulting services margins, which include the reclassification of reimbursed
expenses in both service revenues and cost of service revenues, remained flat at
25% in 2002 compared to 2001 as the impact of the decrease in average consulting
services headcount, lower incentive compensation costs and higher average
billing rates in 2002 compared to 2001 were offset by lower utilization rates.
The lower utilization rates in 2002 resulted from deteriorating economic
conditions that decreased the demand for our services, particularly from
MERCHANDISE MANAGEMENT SYSTEMS implementations and other large projects,
together with improved integration and shorter implementation timeframes of the
products in the JDA Portfolio. During second quarter 2002 we reduced our
consulting services headcount by approximately 10% in order to stem the decline
in our utilization rates, consulting margins and overall profitability with the
lower consulting services revenue outlook for 2002. During fourth quarter 2002
we reduced our consulting services headcount by another 10% in connection with
our reorganization and restructuring of the Company (See "The Implementation of
the Customer Value Program Has Impacted Our Operating Results").
OPERATING EXPENSES
Operating expenses, excluding amortization of intangibles, purchased
in-process research and development, restructuring, asset disposition, and other
merger related charges, and relocation costs increased 9% to $108.7 million, or
50% of total revenues, in 2002 from $99.5 million, or 47% of total revenues in
2001. Overall, our cost structure increased in 2002 compared to 2001 due to an
11% increase in average headcount and a $2.6 million increase in
employee-related costs, due primarily to the full-time employees added in
connection with the acquisitions of E3 in September 2001, NeoVista in June 2001,
and J -- Commerce in April 2002; $2.5 million in higher travel costs due to
increasing airfares and more full-time employees; and $2.8 million in higher
occupancy costs due to increased space from the E3, NeoVista and J -- Commerce
acquisitions.
Product Development. Product development expenses for 2002 increased 22%
to $41.8 million from $34.4 million in 2001. Product development expense as a
percentage of product revenues was 34% in 2002 compared to 31% in 2001. The
increase in product development expense resulted primarily from the cost of
full-time employees added in connection with the acquisitions of E3 in September
2001, NeoVista in June 2001, and J -- Commerce in April 2002, and the addition
of full-time employees involved in the ongoing enhancement of the JDA Portfolio
and the development of further CPFR applications, offset in part by lower
32
incentive compensation costs. We also believe development of our software is
essentially completed concurrent with the establishment of technological
feasibility, and accordingly, no costs have been capitalized. At December 31,
2002, we had 351 employees in the product development function.
Sales and Marketing. Sales and marketing expenses for 2002 increased 5% to
$39.9 million from $38 million in 2001. Sales and marketing expense as a
percentage of total revenues was 18% in 2002, which is comparable to 2001. The
increase in sales and marketing expenses resulted from an increase in quota
carrying sales representatives, due primarily to the acquisition of E3 in
September 2001, and higher marketing and travel costs, offset in part by lower
commissions and related benefits. At December 31, 2002, we had 143 employees in
the sales and marketing function.
General and Administrative. General and administrative expenses for 2002
were $27 million, which is flat compared to 2001. General and administrative
expense, as a percentage of total revenues, was 12% in 2002 compared to 13% in
2001. General and administrative expense dollars remained flat year over year
due to increases that resulted from the acquisition of E3 in September 2001,
additional full-time employees and outside contractors involved in the
development and maintenance of our internal information systems, and higher
legal, accounting, insurance and travel costs due to prevailing economic
conditions, offset by lower incentive compensation costs and a $2.0 million
lower bad debt expense.
Amortization of Intangibles. Amortization of intangibles was $2.8 million
in 2002 compared to $5.5 million in 2001. The non-amortization provisions of
SFAS No. 142 for goodwill and trademarks with indefinite useful lives reduced
amortization expense by approximately $3.8 million in 2002, however, this was
offset in part by new amortization related to the acquisitions of NeoVista in
June 2001 and E3 in September 2001.
Purchased In-process Research and Development. We expensed $800,000 of
purchased in-process research and development in 2002 in connection with the
acquisition of J -- Commerce in April 2002. We expensed $2.4 million of
purchased in-process research and development in 2001 in connection with the
acquisitions of Zapotec in February 2001 ($161,000) and E3 in September 2001
($2.2 million).
Restructuring, Asset Disposition and Other Merger Related Charges. We
consistently monitor the impact of the economic environment on the outlook for
demand for our products and services, and make adjustments to our workforce as
necessary to maintain overall profitability. In second quarter 2002, we recorded
a $1.3 million restructuring charge for a workforce reduction of 53 full-time
employees, primarily in the consulting services function in the Americas and
Europe. All employees potentially impacted by this restructuring were notified
of the plan of termination and the related benefits on or before June 30, 2002.
In fourth quarter 2002, we recorded another restructuring charge of $5.0 million
for termination and office closure costs associated with the reorganization of
the Company to implement the CVP initiative. All employees potentially impacted
by this reorganization initiative were notified of the plan of termination and
the related benefits on or before December 31, 2002. Office closure costs
pertain to certain US, Latin America, and European offices that were either
under-performing or became redundant with the relocation initiatives.
We recorded restructuring, asset disposition and other merger related
charges of $749,000 in first quarter 2001 and an additional $236,000 in fourth
quarter 2001 for JDA employees made redundant in the E3 acquisition. These
restructuring initiatives involved a workforce reduction of 41 full-time
employees in certain implementation service groups, product development
activities, sales and marketing, and administrative functions in the United
States, Europe, Canada and Latin America. All workforce reductions associated
with these charges were made on or before March 31, 2001 or December 31, 2001,
as appropriate. The first quarter 2001 charges also include other merger related
charges of $208,000 for the write-off of certain merger and acquisition costs
related to a potential acquisition that was abandoned.
Relocation Costs to Consolidate Development and Support Activities. We
incurred $452,000 in costs through December 31, 2002, in connection with CVP, to
relocate certain product development and client support services employees based
in offices around the United States and the United Kingdom to our corporate
headquarters.
33
OPERATING INCOME
Operating income decreased 32% to $8.3 million in 2002 from $12.1 million
in 2001. The decrease in operating income resulted from decreases in software
licenses and service revenues of 6% and 7%, respectively in 2002 compared to
2001, a $5.3 million increase in restructuring charges, and a $9.2 million, or
9% increase in operating expenses, excluding amortization of intangibles,
purchased in-process research and development, restructuring charges, asset
disposition and other merger related charges, and relocation costs, offset in
part by a 42% increase in maintenance services revenue, a $1.4 million decrease
in amortization of acquired software technology and other intangibles, and a
$1.6 million decrease in purchased in-process research and development costs.
Operating income in our Retail Enterprise Systems business segment
decreased 15% to $29.8 million in 2002 from $34.9 million in 2001. The decrease
resulted from lower total software and services revenues and increases in
product development costs and costs of maintenance services in this business
segment in 2002 compared to 2001, offset in part by higher maintenance services
revenue and decreases in sales and marketing costs and costs of consulting
services due to reduced headcounts and lower incentive compensation.
Operating income in our In-Store Systems business segment decreased 3% to
$5.3 million in 2002 from $5.5 million in 2001. The decrease resulted from lower
software and services revenues, and increases in product development costs and
costs of maintenance services in this business segment in 2002 compared to 2001,
offset in part by higher maintenance services revenue and decreases sales and
marketing costs and costs of services due to reduced headcounts and lower
incentive compensation.
Operating income in our Collaborative Solutions business segment increased
37% to $10.5 million in 2002 from $7.6 million in 2001. The increase resulted
primarily from increases in software license sales, maintenance services and
consulting services revenues, offset in part by increases in sales and marketing
and product development costs to support our new CPFR initiatives.
PROVISION FOR INCOME TAXES
The provision for income taxes was $1.0 million, or 10.4% of income before
income taxes in 2002 compared to $5.1 million, or 34.6% in 2001. The provision
for income taxes for 2002 includes $1.9 million in one-time tax benefits related
primarily to the resolution of an audit by the Inland Revenue of our United
Kingdom subsidiaries for the years 1997 through 2000, and the settlement in the
United States of an income tax examination by the Internal Revenue Service of
our 1998 and 1999 federal income tax returns. Under the settlement, the Internal
Revenue Service agreed to allow the Company to take a research and development
expense tax credit for most of the qualifying expenses originally reported in
the Company's corporate income tax returns for those years. Our effective income
tax rate takes into account the source of taxable income, domestically by state
and internationally by country, and available income tax credits. The provisions
for income taxes for 2002 and 2001 do not include the tax benefits realized from
employee stock options exercised during these years of $5.8 million (net of a
$1.0 million valuation allowance), and $907,000, respectively. These tax
benefits reduce our income tax liabilities and are included as an increase to
additional paid-in capital.
During 2002, we established a valuation allowance of $3.5 million on
foreign tax credit carryovers because we had been operating in an excess credit
position. We charged $1.0 million of this valuation allowance to additional
paid-in capital due to the potential loss of foreign tax credits from the
exercise of employee stock options. We feel it is more likely than not that
foreign tax credits will not be realized. If, in the future, the Company
determines that it is able to utilize the foreign tax credits, a portion of the
valuation allowance reversal will be recorded to additional paid-in capital.
LIQUIDITY AND CAPITAL RESOURCES
We had working capital of $126.0 million at December 31, 2003 compared with
$121.0 million at December 31, 2002. Cash and marketable securities at December
31, 2003 were $114.7 million, an increase of $12.8 million over the $101.9
million reported at December 31, 2002. Cash and marketable securities balances
34
increased in 2003 primarily as a result of cash provided by operating activities
and the cash received from the issuance of common stock under our stock option
and employee stock purchase plans. Working capital remained flat at December 31,
2003 compared to December 31, 2002 primarily as a result of the increase in cash
and marketable securities, an increase in the current portion of a promissory
note receivable, and a reduction in accrued expenses and other liabilities,
offset by a decrease in accounts receivable and income tax receivable, and an
increase in deferred revenue. Our net accounts receivable were $40.2 million, or
65 days sales outstanding ("DSOs") at December 31, 2003 compared to $47.1
million, or 79 DSOs at December 31, 2002. DSOs may fluctuate significantly on a
quarterly basis due to a number of factors including seasonality, shifts in
customer buying patterns, the timing of annual maintenance renewals, lengthened
contractual payment terms in response to competitive pressures, the underlying
mix of products and services, and the geographic concentration of revenues. The
significant decrease in accounts receivable balances is due primarily to lower
revenues in 2003 compared to 2002. However, collection of accounts receivable
continues to be an area of focus and the amounts outstanding greater than 90
days have decreased more than $7.0 million since December 31, 2002.
Operating activities provided cash of $20.8 million in 2003 and $41.5
million in 2002. The decrease in cash provided from operating activities results
primarily from (i) a 5% decrease in total revenues that resulted in a $6.3
million decrease in net income in 2003 compared to 2002; (ii) a $5.0 million
decrease in the income tax benefits from the exercise of stock options and
shares purchased under the employee stock purchase plan as the average market
price of our stock was lower in 2003 compared to 2002 which resulted in fewer
options being exercised; (iii) a $267,000 decrease in deferred revenue in 2003
compared to a $6.0 million increase in 2002 which resulted primarily from the
first full year billing of maintenance on products acquired from E3; (iv) a $4.8
million smaller decrease in accounts receivable which resulted from lower total
revenues and improved collections; (v) a $3.6 million decrease in accrued
expenses and other liabilities compared to a $1.2 million increase in 2002; and
(vi) a $2.4 million lower provision for doubtful accounts. These decreases in
cash flow were partially offset by (i) a $5.0 million decrease in income tax
receivable in 2003 compared to a $2.5 million increase in 2002; (ii) a $1.0
million decrease in prepaid expenses and other current assets in 2003 compared
to a $2.2 million increase in 2002; and (iii) a $700,000 smaller decrease in
deferred income taxes due primarily to our election to capitalize a significant
portion of our research and development costs for 2002 on our federal income tax
return.
Investing activities utilized cash of $22.8 million in 2003 and $38.9
million in 2002. Cash utilized by investing activities in 2003 results primarily
from $10.4 million in capital expenditures which includes approximately $2.2
million in costs related to the implementation of a new enterprise-wide customer
support system, the net purchase of $6.5 million of marketable securities due to
our investment of cash in excess of current operating requirements, $4.0 million
in cash expended to acquire Vista and pay direct costs related to the
acquisition, and $3.3 million in cash expended to acquire Engage and pay direct
costs related to the acquisition, offset in part by $2.0 million in proceeds
from the disposal of property and equipment, primarily from the sale of an
excess office facility in the United Kingdom. Cash utilized by investing
activities in 2002 includes the net purchase of $18.6 million of marketable
securities, the payment of $8.6 million in direct costs related to the
acquisition of E3, $4.2 million in cash expended to acquire J -- Commerce, and
$8.3 million in capital expenditures.
Financing activities provided cash of $6.8 million in 2003 and $15.4
million in 2002. The activity in both periods includes proceeds from the
issuance of common stock under our stock option and employee stock purchase
plans. Proceeds from the issuance of common stock under our stock option plans
decreased $8.9 million in 2003 as the average market price of our stock was
lower in 2003 compared to 2002, which resulted in fewer options being exercised.
We received approximately $4.1 million in proceeds from the issuance of stock
under our 1999 Employee Stock Purchase Plan ("1999 Purchase Plan") in both 2003
and 2002. This source of cash will not recur in 2004 as we terminated the 1999
Purchase Plan in August 2003. In addition, in July 2002 our Board of Directors
authorized the repurchase of up to two million shares of our outstanding common
stock on the open market at prevailing market prices during a one-year period
ended July 22, 2003. We repurchased a total of 175,000 shares of our common
stock for $1.8 million under this program, including 75,000 shares for $757,000
in 2003 and 100,000 shares for $1.1 million in 2002.
35
Changes in the currency exchange rates of our foreign operations had the
effect of increasing cash by $1.6 million in 2003 and $1.2 million in 2002 due
to the continued weakness of the US Dollar against major foreign currencies
including the Euro and the British Pound. We currently use derivative financial
instruments, primarily forward exchange contracts, to manage a majority of the
short-term foreign currency exchange exposure associated with foreign currency
denominated assets and liabilities which exist as part of our ongoing business
operations. We do not enter into derivative financial instruments for trading or
speculative purposes. The forward exchange contracts generally have maturities
of less than 90 days, and are not designated as hedging instruments under SFAS
No. 133. Forward exchange contracts are marked-to-market at the end of each
reporting period, with gains and losses recognized in other income, net, offset
by the gains or losses resulting from the settlement of the underlying foreign
currency denominated receivables and payables.
We believe there are opportunities to grow our business through the
acquisition of complementary and synergistic companies, products and
technologies. We look for acquisitions that can be readily integrated and
accretive to earnings, although we may pursue smaller non-accretive acquisitions
that will shorten our time to market with new technologies. We are primarily
interested in acquiring solutions that will increase the breadth of our JDA
Portfolio offerings in the In-Store Systems and Collaborative Solutions business
segments, and believe the general size of cash acquisitions we would currently
consider to be in the $5 million to $20 million range. Any material acquisition
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 or synergistic companies, products or technologies
could require that we obtain additional equity financing. There can be no
assurance that such additional financing will be available or that, if
available, such financing will be obtained on terms favorable to us and would
not result in additional dilution to our stockholders.
On January 29, 2004 we acquired the intellectual property and certain other
assets of Timera Retail Solutions ("Timera"), for a total cost of $14.2 million,
which includes the purchase price of $13.0 million plus $1.2 million in direct
costs of the acquisition. The acquisition will be accounted for as a purchase,
and accordingly, the operating results of Timera will be included in our
consolidated financial statements from the date of acquisition. In connection
with the Timera acquisition, we have extended employment offers to 51 former
Timera employees, approximately two-thirds of which are in product development.
The final purchase price allocation has not been completed, however we currently
expect to record approximately $9.0 million of goodwill, $4.6 million in
software technology, and $1.1 million for customer lists. Pro forma operating
results will not be presented as the acquisition is not material to our
consolidated financial statements.
Subsequent to December 31, 2003, we purchased our corporate office facility
for approximately $23.8 million in cash. This transaction closed on February 5,
2004. The purchase includes the corporate office building, a new two-story
parking garage, and approximately 8.8 acres of land upon which these structures
are located. We believe this purchase will result in a $1.2 million to $1.5
million net reduction in our annual operating costs.
The purchase of our corporate office facility, together with the
acquisition of Timera, utilized $36.8 million, or approximately 32% of our
December 31, 2003 cash and cash equivalents, and investments in marketable
securities balances.
The following summarizes known contractual obligations under capital and
operating leases as of December 31, 2003:
<Table>
<Caption>
PAYMENT DUE BY PERIOD
-------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL <1 YEAR 1 TO 3 YEARS 3 TO 5 YEARS >5 YEARS
- ----------------------- ------- --------- ------------ ------------ ---------
(IN THOUSANDS)
Capital lease obligations......... $ 82 $ 82 $ -- $ -- $ --
Operating lease obligations....... 20,179 5,717 7,768 2,866 3,828
------- ------ ------ ------ ------
$20,261 $5,799 $7,768 $2,866 $3,828
======= ====== ====== ====== ======
</Table>
36
Capital lease obligations are included in accrued expenses and other
liabilities. Operating lease obligations represent future minimum lease payments
under noncancellable operating leases with minimum or remaining lease terms in
excess of one year at December 31, 2003, and excludes $22.9 million in scheduled
minimum lease payments on our corporate office facility that we purchased on
February 5, 2004.
We believe our cash and cash equivalents, investments in marketable
securities, and net cash provided from operations will provide adequate
liquidity to meet our normal operating requirements for at least the next twelve
months. A major component of our positive cash flow is the collection of
accounts receivable. The collection of accounts receivable continues to be an
area of focus and we have tightened up our credit authorization procedures.
Further, we invest our excess cash in short-term, interest-bearing instruments
that have a low risk of capital loss, such as U.S. government securities,
commercial paper and corporate bonds, and money market securities. Commercial
paper must be rated "1" by 2 of the 5 nationally recognized statistical rating
organizations. Corporate bonds must be rated Aa2 or AA or better by Moody's and
S&P, respectively.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. The preparation of this Annual Report on Form 10-K requires
us to make estimates and assumptions that affect the reported amount of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
our financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
- Revenue recognition. Our revenue recognition policy is significant
because our revenue is a key component of our results of operations. In
addition, our revenue recognition determines the timing of certain
expenses such as commissions and royalties. We follow specific and
detailed guidelines in measuring revenue; however, certain judgments
affect the application of our revenue policy.
We license software under non-cancelable agreements and provide related
services, including consulting, training and customer support. We
recognize revenue in accordance with Statement of Position 97-2 ("SOP
97-2"), Software Revenue Recognition, as amended and interpreted by
Statement of Position 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with respect to certain transactions, as well as Technical
Practice Aids issued from time to time by the American Institute of
Certified Public Accountants, and Staff Accounting Bulletin No. 101 ("SAB
101"), Revenue Recognition in Financial Statements, that provides further
interpretive guidance for public companies on the recognition,
presentation, and disclosure of revenue in financial statements.
Software license revenue is recognized when a license agreement has been
signed, the software product has been delivered, there are no
uncertainties surrounding product acceptance, the fees are fixed and
determinable, and collection is considered probable. If a software
license contains an undelivered element, the vendor-specific objective
evidence ("VSOE") of fair value of the undelivered element is deferred
and the revenue recognized once the element is delivered. The undelivered
elements are primarily training, consulting and maintenance services.
VSOE of fair value for training and consulting services is based upon
hourly rates charged when those services are sold separately. VSOE of
fair value for maintenance is the price the customer will be required to
pay when it is sold separately (that is, the renewal rate). In addition,
if a software license contains customer acceptance criteria or a
cancellation right, the software revenue is recognized upon the earlier
of customer acceptance or the expiration of the acceptance period or
cancellation right. Payments for our software licenses are typically due
in installments within twelve months from the date of delivery. Although
infrequent, where software license agreements call for payment terms of
twelve months or more from the date of delivery, revenue is recognized as
payments become due and all other conditions for revenue recognition have
been satisfied.
37
Consulting and training services are separately priced, are generally
available from a number of suppliers, and are not essential to the
functionality of our software products. Consulting services, which
include project management, system planning, design and implementation,
customer configurations, and training are billed on both an hourly basis
and under fixed price contracts. Consulting services revenue billed on an
hourly basis is recognized as the work is performed. Training revenues
are recognized when the training is provided and is included in
consulting revenues in the Company's consolidated statements of income.
Under fixed price contracts, consulting services revenue is recognized
using the percentage of completion method of accounting by relating hours
incurred to date to total estimated hours at completion.
We have from time to time provided software and consulting services under
fixed price contracts that require the achievement of certain milestones,
and the payment terms in these contracts are generally tied to customer
acceptance of the milestones. The revenue under such arrangements is
recognized as the milestones are achieved or upon customer acceptance. We
believe that milestones are a proper measure of progress under these
contracts, as the milestones approximate the percentage of completion
method of accounting.
Customer support services include post contract support and the rights to
unspecified upgrades and enhancements. Maintenance revenues from ongoing
customer support services are billed on a monthly basis and recorded as
revenue in the applicable month, or on an annual basis with the revenue
being deferred and recognized ratably over the maintenance period.
If an arrangement includes multiple elements, the fees are allocated to
the various elements based upon VSOE of fair value, as described above.
- Accounts Receivable. Consistent with industry practice and to be
competitive in the retail software marketplace, we typically provide
installment payment terms on most software license sales. Software
licenses are generally due in installments within twelve months from the
date of delivery. All significant customers are reviewed for
creditworthiness before the Company licenses its software and we do not
sell our software or recognize any license revenue unless we believe that
collection is probable in accordance with the requirements of paragraph 8
in SOP 97-2. We have a history of collecting software payments when they
come due without providing refunds or concessions. Consulting services
are generally billed bi-weekly and maintenance services are billed
annually or monthly. If a customer becomes significantly delinquent or
its credit deteriorates, we put the accounts on hold and do not recognize
any further services revenue (and in most cases we withdraw support
and/or our implementation staff) until the situation has been resolved.
We do not have significant billing or collection problems. We review each
past due account and provide specific reserves based upon the information
we gather from various sources including our customers, subsequent cash
receipts, consulting services project teams, members of each region's
management, and credit rating services such as Dun and Bradstreet.
Although infrequent and unpredictable, from time to time certain of our
customers have filed bankruptcy and we have been required to refund the
pre-petition amounts collected and settle for less than the face value of
their remaining receivable pursuant to a bankruptcy court order. In these
situations, as soon as it becomes probable that the net realizable value
of the receivable is impaired, we provide reserves on the receivable. In
addition, we monitor economic conditions in the various geographic
regions in which we operate to determine if general reserves or
adjustments to our credit policy in a region are appropriate for
deteriorating conditions that may impact the net realizable value of our
receivables.
- Intangible Assets. Our business combinations typically result in
goodwill and other intangible assets, which affects the amount of future
period amortization expense and possible impairment expense that we will
incur. The determination of the value of such intangible assets and the
annual impairment tests require management to make estimates of future
revenues, customer retention rates and other assumptions that affect our
consolidated financial statements.
38
- Product Development. The costs to develop new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. We consider technological
feasibility to have occurred when all planning, designing, coding and
testing have been completed according to design specifications. Once
technological feasibility is established, any additional costs would be
capitalized. We believe our current process for developing software is
essentially completed concurrent with the establishment of technological
feasibility, and accordingly, no costs have been capitalized
- Income Taxes. Our income tax policy records the estimated future tax
effects of temporary differences between the tax basis of assets and
liabilities and amounts reported in the consolidated balance sheets, as
well as operating loss and tax credit carry-forwards. We follow specific
and detailed guidelines regarding the recoverability of any tax assets
recorded on the balance sheet and provide any necessary allowances as
required.
- Stock-Based Compensation. We do not record compensation expense for
options granted to our employees as all options granted under our stock
option plans have an exercise price equal to the market value of the
underlying common stock on the date of grant. In addition, we do not
record compensation expense for shares issued under our employee stock
purchase plan. As permitted under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"), we have elected to continue to apply the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and provide pro forma disclosure on a quarterly and annual
basis of net income (loss) and net income (loss) per common share for
employee stock option grants made, and shares issued under our employee
stock purchase plan, as if the fair-value method defined in SFAS No. 123
had been applied. We terminated our 1999 Purchase Plan in August 2003.
The following table presents pro forma disclosure of net income (loss) and
basic and diluted earnings (loss) per share as if stock-based compensation
expense had been recognized during the three-year period ended December 31,
2003. The compensation expense for these periods has been determined under the
fair value method using the Black-Scholes pricing model, and assumes graded
vesting.
<Table>
<Caption>
2003 2002 2001
------------------- ----------- -----------
Net income as reported................... $ 2,650 $ 8,930 $ 9,648
Less: stock-based compensation expense,
net of related tax effects............. (6,121) (9,356) (7,167)
-------- -------- --------
Pro forma net income (loss).............. (3,471) (426) 2,481
Basic earnings per share -- as
reported............................... .09 .32 .38
Diluted earnings per share -- as
reported............................... .09 .31 .37
Basic earnings (loss) per share -- pro
forma.................................. (.12) (.02) .10
Diluted earnings (loss) per share -- pro
forma.................................. (.12) (.02) .10
ASSUMPTIONS:
Expected dividend yield.................. 0% 0% 0%
Expected stock price volatility.......... 90% 93% 81%
Risk-free interest rate.................. 2.25% 2.25% 3.85%
Expected life of option.................. 2.63 to 3.17 years 2.96 years 3.13 years
</Table>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS No. 146"). The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. SFAS No. 146 was adopted effective January 1, 2003. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF No. 94-3. Under
39
SFAS No. 146, the liability for costs associated with exit or disposal
activities is recognized and measured initially at fair value only when the
liability is incurred, rather than at the date the Company committed to the exit
plan. All exit or disposal activities that have occurred since January 1, 2003
have been accounted for in accordance with SFAS No. 146.
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure ("SFAS No. 148") which is effective
for fiscal years ending after December 15, 2002. SFAS No. 148 amends SFAS No.
123 to provide alternative methods of transition to SFAS No. 123's fair value
method of accounting for stock-based employee compensation if a company elects
to account for its equity awards under this method. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in both annual and interim financial statements.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,"
which was subsequently revised in December 2003. Variable interest entities are
defined as entities with a level of invested equity that is not sufficient to
fund future activities to permit it to operate on a stand-alone basis. We do not
participate in variable interest entities.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities ("SFAS No. 149"). The provisions of SFAS No.
149 amend and clarify the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have
a significant impact on our financial statements.
We did not engage in any material foreign currency hedging transactions
during 2002; however, during fourth quarter 2003 we began using derivative
financial instruments, primarily forward exchange contracts, to manage a
majority of the foreign currency exchange exposure associated with the net
short-term foreign denominated assets and liabilities which exist as part of our
ongoing business operations. The exposures relate primarily to the gain or loss
recognized in earnings from the revaluation or settlement of current foreign
denominated assets and liabilities. We do not enter into derivative financial
instruments for trading or speculative purposes. The forward exchange contracts
generally have maturities of less than 90 days, and are not designated as
hedging instruments under SFAS No. 133. Forward exchange contracts are
marked-to-market at the end of each reporting period, with gains and losses
recognized in other income, net, offset by the gains or losses resulting from
the settlement of the underlying foreign denominated assets and liabilities.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS No.
150"). SFAS No. 150 requires certain financial instruments that embody
obligations of the issuer, and which have characteristics of both liabilities
and equity, to be classified as liabilities. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003. We do not
have any financial instruments, as defined in SFAS No. 150, that have
characteristics of both liabilities and equity.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS OR THE MARKET PRICE OF OUR STOCK
We operate in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The following section describes some, but not
all, of these risks and uncertainties that we believe may adversely affect our
business, financial condition or results of operations. This section should be
read in conjunction with the Audited Consolidated Financial Statements and Notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 2003 and for the year then ended
contained elsewhere in this Form 10-K.
40
REGIONAL AND/OR GLOBAL CHANGES IN ECONOMIC, POLITICAL AND MARKET CONDITIONS
COULD CAUSE DECREASES IN DEMAND FOR OUR SOFTWARE AND RELATED SERVICES WHICH
COULD NEGATIVELY AFFECT OUR REVENUE AND OPERATING RESULTS AND THE MARKET PRICE
OF OUR STOCK.
Our revenue and profitability depend on the overall demand for our software
and related services. A regional and/or global change in the economy and
financial markets could result in delay or cancellation of customer purchases.
We and most of our competitors recently announced that current economic
conditions have negatively impacted financial results. In addition, recent
developments associated with terrorist attacks on United States' interests, the
US war and continued violence in Iraq, and the Severe Acute Respiratory Syndrome
("SARS") have resulted in economic, political and other uncertainties, which
could further adversely affect our revenue growth and operating results. If
demand for our software and related services decrease, our revenues would
decrease and our operating results would be adversely affected. Our inability to
license software products to new customers may cause our stock price to fall.
OUR QUARTERLY 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 management's
or analysts' expectations, the price of our stock could decline. Many factors
may cause these fluctuations, including:
- Demand for our software products and services, including the size and
timing of individual contracts and our ability to recognize revenue 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 and the competitive success or failure on
significant transactions;
- Customer order deferrals resulting from the anticipation of new products,
economic uncertainty, disappointing operating results by the customer, or
otherwise;
- The timing of new software product and technology introductions and
enhancements to our software products or those of our competitors, and
market acceptance of our new software products and technology;
- Changes in our operating expenses;
- Changes in the mix of domestic and international revenues, or expansion
or contraction of international operations;
- Our ability to complete fixed price consulting contracts within budget;
- Foreign currency exchange rate fluctuations;
- Operational issues resulting from corporate reorganizations; and
- Lower-than-anticipated utilization in our consulting services group as a
result of reduced levels of software sales, reduced implementation times
for our products, changes in the mix of demand for our software products,
or other reasons.
OUR STOCK PRICE HAS BEEN AND MAY REMAIN VOLATILE.
The trading price of our common stock has in the past and may in the future
be subject to wide fluctuations. Examples of factors that we believe have caused
fluctuations in our stock price in the past include the following:
- Cancelled or delayed purchasing decisions related to the September 11
terrorist attack and the uncertainty related to potential future
terrorist attacks and the war with and continued violence in Iraq;
- The millennium change;
41
- Conversion to the Euro currency;
- External and internal marketing issues;
- Our announcement of our reduced visibility and increased uncertainty
concerning future demand for our products;
- Increased competition;
- Elongated sales cycles;
- A limited number of reference accounts with implementations in the early
years of product release;
- Certain design and stability issues in early versions of our products;
and
- Lack of desired features and functionality.
In addition, fluctuations in the price of our common stock may expose us to
the risk of securities class action lawsuits. Defending against such lawsuits
could result in substantial costs and divert management's attention and
resources. Furthermore, any settlement or adverse determination of these
lawsuits could subject us to significant liabilities.
OUR GROSS MARGINS MAY VARY SIGNIFICANTLY OR DECLINE.
Because the gross margins on product revenues (software licenses and
maintenance services) are significantly greater than the gross margins on
consulting services revenue, our combined gross margin has fluctuated from
quarter to quarter, and it may continue to fluctuate significantly based on
revenue mix. As a result of the economic downturn, we believe retailers have
changed their buying behavior and that this has resulted in a fundamental shift
in the mix of demand for the various types of products we sell. Demand for our
MERCHANDISE MANAGEMENT SYSTEMS and IN-STORE SYSTEMS has declined. We believe
retailers have changed their buying behavior and that this has resulted in a
fundamental shift in the mix of demand for the various types of products we sell
from longer, high dollar infrastructure type projects typically associated with
our MERCHANDISE MANAGEMENT SYSTEMS and IN-STORE SYSTEMS, to our STRATEGIC
MERCHANDISE MANAGEMENT SOLUTIONS that are less disruptive, have a higher ROI,
shorter implementation timeframes and a lower total cost of ownership. The
decline in software sales of MERCHANDISE MANAGEMENT SYSTEMS and IN-STORE SYSTEMS
is having a corollary negative impact on our service revenues as consulting
services revenue typically lags the performance of software revenues by as much
as one year. In addition, our gross margins on consulting services revenue vary
significantly with the rates at which we utilize our consulting personnel, and
as a result, our overall gross margins will be adversely affected when there is
not enough work to keep our consultants busy. We may face some constraints on
our ability to adjust consulting service headcount and expense to meet demand,
due in part to our need to retain consulting personnel with sufficient skill
sets to implement and maintain our full set of products.
WE MAY MISJUDGE WHEN SOFTWARE SALES WILL BE REALIZED.
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 accurately predict software license revenues.
Because of the timing of our sales, we typically recognize the substantial
majority of our software license revenues in the last weeks or days of the
quarter, and we may derive a significant portion of our quarterly software
license revenues from a small number of relatively large sales. In addition, it
is difficult to forecast the timing of large individual software license sales
with a high degree of certainty due to the extended length of the sales cycle
and the generally more complex contractual terms that may be associated with
such licenses that could result in the deferral of some or all of the revenue to
future periods. Accordingly, large individual sales have sometimes occurred in
quarters subsequent to when we anticipated. We expect these aspects of our
business to 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 the economy may make it more
42
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.
WE MAY NOT BE ABLE TO REDUCE EXPENSE LEVELS IF OUR REVENUES DECLINE.
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 license revenues
fall short of our expectations, or if we are unable to fully utilize our service
personnel, our operating results are likely to decline because a significant
portion of our expenses cannot be quickly reduced to respond to any unexpected
revenue shortfall.
WE ARE DEPENDENT UPON THE RETAIL INDUSTRY.
Historically, we have derived 80% or more of our revenues from the license
of software products and the performance of related services to retail
customers. Although the acquisitions of Arthur, Intactix, Zapotec, NeoVista
Decision Series, E3, Vista and Engage have expanded our product offerings to
provide collaborative applications that address new vertical market
opportunities with the manufacturers and wholesalers who supply our traditional
retail customers, our future growth is critically dependent on increased sales
to retail customers. 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 licensing of certain of our software products
involves a large capital expenditure, which is often accompanied by large-scale
hardware purchases or other capital commitments. As a result, demand for our
products and services could decline in the event of instability or potential
downturns.
We believe the retail industry remains cautious with their level of
investment in information technology during the difficult economic cycle of the
last few years, and uncertainty related to the threat of future terrorist
attacks and any continued violence in Iraq. We remain concerned about weak and
uncertain economic conditions, consolidations and the disappointing results of
retailers in certain of our geographic regions. The retail industry will be
negatively impacted if weak economic conditions or fear of additional
terrorists' attacks and wars persist for an extended period of time. Weak and
uncertain economic conditions have in the past, and may in the future,
negatively impact our revenues, including a potential deterioration of our
maintenance revenue base as customers look to reduce their costs, elongate our
selling cycles, and delay, suspend or reduce the demand for our products. As a
result, it is difficult in the current economic environment to predict exactly
when specific software licenses will close within a six to nine month time
frame. In addition, weak and uncertain economic conditions could impair our
customers' ability to pay for our products or services. Any of these factors
could adversely impact our business, quarterly or annual operating results and
financial condition.
We also believe that the retail industry may be consolidating, and that the
industry is currently experiencing increased competition in certain geographical
regions that could negatively impact the industry and our customers' ability to
pay for our products and services. Such consolidation has 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.
THERE MAY BE AN INCREASE IN CUSTOMER BANKRUPTCIES DUE TO WEAK ECONOMIC
CONDITIONS.
We have in the past and may in the future be impacted by customer
bankruptcies that occur in periods subsequent to the software license sale.
During weak economic conditions, such as those currently being experienced in
our international regions, there is an increased risk that certain of our
customers will file bankruptcy. When our customers file bankruptcy, we may be
required to forego collection of pre-petition amounts owed and to repay amounts
remitted to us during the 90-day preference period preceding the filing.
Accounts receivable balances related to pre-petition amounts may in certain of
these instances be large due to extended payment terms for software license
fees, and significant billings for consulting and implementation services on
large projects. The bankruptcy laws, as well as the specific circumstances of
each bankruptcy, may
43
severely limit our ability to collect pre-petition amounts, and may force us to
disgorge payments made during the 90-day preference period. We also face risk
from international customers that file for bankruptcy protection in foreign
jurisdictions, in that the application of foreign bankruptcy laws may be more
difficult to predict. Although we believe that we have sufficient reserves to
cover anticipated customer bankruptcies, there can be no assurance that such
reserves will be adequate, and if they are not adequate, our business, operating
results and financial condition would be adversely affected.
WE MAY HAVE DIFFICULTY ATTRACTING AND RETAINING SKILLED PERSONNEL.
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 competitive. For
example, it may be particularly difficult to attract and retain product
development personnel experienced in the Microsoft .Net Platform since the .Net
Platform is a new and evolving technology. Given the critical roles of our
sales, product development and consulting staffs, our inability to recruit
successfully or any significant loss of key personnel would hurt us. A high
level of employee mobility and aggressive recruiting of skilled personnel
characterize the software industry. We cannot guarantee that we will be able to
retain our current personnel, attract and retain other highly qualified
technical and managerial personnel in the future, or be able to assimilate the
employees from any acquired businesses. We will continue to adjust the size and
composition of the workforce in our services organization to match the different
product and geographic demand cycles. If we were 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, AND
HAVE NOT YET DEPLOYED SOME SOFTWARE PRODUCTS THAT ARE IMPORTANT TO OUR FUTURE
GROWTH.
Certain of our software products, including CUSTOMER ORDERING, STORE
PORTAL, PORTFOLIO POINT OF SALES, and certain modules of PORTFOLIO CRM and
INTELLECT, have been commercially released within the last two years. Other
modules of PORTFOLIO CRM and INTELLECT are still in beta or under development.
In addition, we have only recently announced our intentions to develop or
acquire a series of business-to-business e-commerce solutions, including
products in furtherance of our pursuit of the market for Collaborative
Solutions. The markets for these products are new and evolving, and we believe
that retailers and their suppliers 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 or
unwillingness to deploy sufficient internal personnel and computing resources
for a successful implementation. In addition, we must overcome significant
obstacles to successfully market our newer products, including limited
experience of our sales and consulting personnel. If the markets for our newer
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 ARE INVESTING HEAVILY IN RE-WRITING MANY OF OUR PRODUCTS FOR THE MICROSOFT
..NET PLATFORM.
We are developing a series of enhancements to the JDA Portfolio products,
based upon the Microsoft .Net technology platform (".Net Platform"), that we
believe will position us uniquely in the retail and collaborative solutions
markets. Our goals are to ensure that our solutions offer: (i) increased ease of
use, (ii) increased integration of business processes, (iii) reduced cost of
ownership, (iv) faster implementation, and (v) faster return on investment. We
believe our next generation technology will enhance our competitive position
since we will be able to offer significant features and functionality using an
advanced technology platform. Our goal is to begin delivering applications on
the .Net Platform in third quarter 2004, starting with PORTFOLIO REPLENISHMENT
BY E3, followed by PORTFOLIO PLANNING BY ARTHUR, and certain of our INTELLECT
44
applications. This is a significant investment by the Company as we are building
our next generation of products, while at the same time, we continue development
efforts on our existing products and complete the integration of acquired
products. We also plan to develop new products as well as shared code components
using the .Net Platform. The risks of our commitment to the .Net Platform
include, but are not limited to, the following:
- The possibility that it may be more difficult than we currently
anticipate to develop our products for the .Net Platform, and we could
incur costs in excess of our projections to complete the planned
transition of our product suite;
- The possibility that prospective customers will refrain from purchasing
the current versions of products to be re-written because they are
waiting for the .Net Platform versions;
- The possibility that our .Net Platform beta customers will not become
favorable reference sites;
- Adequate scalability of the .Net Platform for our largest customers;
- The possibility we may not complete the transition to the .Net Platform
in the time frame we currently expect;
- The ability of our development staff to learn how to efficiently and
effectively develop products using the .Net Platform;
- Our ability to transition our customer base onto the .Net Platform when
it is available;
- Microsoft's ability to achieve market acceptance of the .Net platform;
and
- Microsoft's continued commitment to enhancing and marketing the .Net
platform.
Despite efforts to mitigate the risks of the .Net Platform project, there
can be no assurances that our efforts to re-write many of our current products
and to develop new products using the .Net Platform will be successful. If the
..Net Platform project is not successful, it likely will have a material adverse
effect on our business, operating results and financial condition. Moreover, we
cannot assure you that, even if we successfully re-write our products on the
..Net Platform, our re-written products will achieve market acceptance.
WE MAY INTRODUCE NEW LINES OF BUSINESS WHERE WE ARE LESS EXPERIENCED.
We may introduce new lines of business that are outside our traditional
focus on software licenses and related maintenance and implementation services.
Introducing new lines of business involves a number of uncertainties, including
a lack of internal resources and expertise to operate and grow such new lines of
business, immature internal processes and controls, inexperience predicting
revenues and expenses for the new lines of business, and the possibility that
such new lines of business will divert management attention and resources from
our traditional business. The inability of management to effectively develop and
operate these new lines of business could have a material adverse effect on our
business, operating results and financial condition. Moreover, we may not be
able gain acceptance of any new lines of business in our markets, penetrate new
markets successfully, or obtain the anticipated or desired benefits of such new
lines of business.
THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.
Our international revenues represented 44% of total revenues in the year
ended December 31, 2003 as compared to 43% and 44% in the years ended December
31, 2002 and 2001, respectively. If our international operations grow, we must
recruit and hire a number of new consulting, sales and marketing and support
personnel in the countries in which 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. If we are less successful in a new
market than we expect, we may
45
not be able to realize an adequate return on our initial investment and our
operating results could suffer. If we have to downsize certain international
operations, the costs to do so are typically much higher than downsizing costs
in the United States, particularly in Europe. We cannot guarantee that the
countries in which we operate will have a sufficient pool of qualified personnel
from which to hire, that we will be successful at hiring, training or retaining
such personnel, or that we can expand or contract our international operations
in a timely, cost effective manner.
Our international business operations are subject to risks associated with
international activities, including:
- Currency fluctuations;
- Higher operating costs due to local laws or regulations;
- Unexpected changes in employment and other 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;
- Ability to negotiate and have enforced favorable contract provisions;
- Repatriation of earnings;
- The burdens of complying with a wide variety of foreign laws;
- Anti-American sentiment due to the war with Iraq, and other American
policies that may be unpopular in certain regions;
- The effects of regional and global infectious diseases such as SARS; and
- General economic conditions in international markets.
Consulting services in support of certain 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 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 from time to time by entering into forward foreign currency
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.
WE MAY FACE DIFFICULTIES IN OUR HIGHLY COMPETITIVE MARKETS, PARTICULARLY IF THE
CURRENT WEAK ECONOMIC CONDITIONS PERSIST.
We encounter competitive products from a different set of vendors in each
of our primary product categories. We believe that while our markets are still
subject to intense competition, the number of significant competitors in many of
our application markets has diminished over the past five years. We believe the
principal competitive factors in our markets are feature and functionality,
product reputation and reference accounts, vendor viability, retail and supply
chain industry expertise, total solution cost and quality of customer support.
46
Our Retail Enterprise Systems compete primarily with internally developed
systems and other third-party developers such as AC Nielsen Corporation, Aldata
Solutions, Alphameric PLC (formerly Compass Software Group PLC), Connect3
Systems, Inc., Island Pacific, Inc. (formerly SVI Holdings, Inc., Marketmax,
Inc. (recently acquired by SAS), Micro Strategies Incorporated, Evant, Inc.
(formerly Nonstop Solutions), Lawson Software, NSB Retail Systems PLC, Retek,
Inc., and SAP AG. 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
competition for our Retail Enterprise Systems. We compete primarily with small
point-of-sale focused companies such as CRS Business Computers, Kronos
Incorporated, MICRO Systems, Inc. (formerly Datavantage, Inc.), Radiant Systems,
Inc., 360 Commerce, Tomax Technologies and Triversity, Inc. We also compete with
other broad solution set providers such as NSB Retail Systems PLC, Retek, Inc.,
and SAP AG (Campbell Software Division).
Our current Collaborative Solutions compete primarily with products from
Marketmax, Inc. (recently acquired by SAS), Evant Inc. (formerly Nonstop
Solutions), AC Nielsen Corporation, i2 Technologies, Manugistics Group, Inc.,
Information Resources, Inc., and Synchra Systems.
In the market for consulting services, we have pursued a strategy of
forming informal working relationships with leading retail systems integrators
such as IBM Global Services, Cap Gemini Ernst & Young, Kurt Salmon Associates
and Lakewest Consulting. These integrators, as well as independent consulting
firms such as Accenture, AIG Netplex, CFT Consulting, SPL and ID Applications,
also represent competition to our consulting services group. Moreover, because
many of these consulting firms are involved in advising our prospective
customers in the software selection process, they may successfully encourage a
prospective customer to select software from a software company with whom they
have a relationship. Examples of such relationships between consulting firms and
software companies include the relationships between Retek, Inc. and Accenture.
As we continue to develop or acquire e-commerce products and expand our
business in the Collaborative Solutions area, we expect to face potential
competition from business-to-business e-commerce application providers,
including Ariba, Commerce One, Commercialware, i2 Technologies, Manugistics
Group, Inc., Microsoft, Inc., Retek, Inc., SAP AG, Synchra Systems, Ecometry
Corporation, and others.
A few 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. In addition, we could face competition from
large, multi-industry technology companies that have historically not offered an
enterprise solution set to the retail supply chain market. We cannot guarantee
that we will be able to compete successfully against our current or future
competitors, or that competition will not have a material adverse effect on our
business, operating results and financial condition.
IT MAY BE DIFFICULT TO IDENTIFY, ADOPT AND DEVELOP PRODUCT ARCHITECTURE THAT IS
COMPATIBLE WITH EMERGING INDUSTRY STANDARDS.
The markets for our software products are characterized by rapid
technological change, evolving industry standards, changes in customer
requirements and frequent new product introductions and enhancements. We
continuously evaluate new technologies and implement into our products advanced
technology such as our current .Net effort. However, if we fail in our product
development efforts to accurately address in a timely manner, evolving industry
standards, new technology advancements or important third-party interfaces or
product architectures, sales of our products and services will suffer.
Our software products can be licensed with a variety of popular industry
standard platforms, and are authored in various development environments using
different programming languages and underlying databases and architectures.
There may be future or existing platforms that achieve popularity in the
marketplace that may not be compatible with our software product design.
Developing and maintaining consistent software product performance across
various technology platforms could place a significant strain on our resources
and software product release schedules, which could adversely affect our results
of operations.
47
WE MAY HAVE DIFFICULTY IMPLEMENTING OUR PRODUCTS.
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. Although
average implementation times have recently declined, we believe the
implementation of the UNIX/Oracle 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 deployment options and other
configuration choices, and (iv) may 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 our business
partners or us, may result in client dissatisfaction, disputes with our
customers, or damage to our reputation. Significant problems implementing our
software therefore, can cause delays or prevent us from collecting license fees
for our software and can damage our ability to get new business.
OUR FIXED-PRICE SERVICE CONTRACTS MAY RESULT IN LOSSES.
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, which link services payments, and occasionally
software payments, to implementation milestones. We believe fixed-price service
contracts may increasingly be offered by our competitors to differentiate their
product and service offerings. As a result, we may need to 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.
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. The reverse
engineering, unauthorized copying, or other misappropriation of our technology
could enable third parties to benefit from our technology without paying for it.
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. To date, we have not
protected our technology with issued patents. 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.
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 our current or potential future
software solutions or we 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. Moreover, as software patents become more
common, the likelihood increases that a patent holder will bring an infringement
action against us, or against our customers, to whom we have indemnification
obligations. 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. Since we now resell hardware we may also become
subject to claims from third parties that the hardware, or the combination of
hardware and software, infringe their intellectual property. Although we may
disclaim certain intellectual property representations to our customers, these
disclaimers may not be sufficient to fully protect us against
48
such claims. We may be more vulnerable to patent claims since we do not have any
patents that we can assert defensively against a patent infringement claim. 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.
IF WE LOSE ACCESS TO CRITICAL THIRD-PARTY SOFTWARE OR TECHNOLOGY, OUR COSTS
COULD INCREASE AND THE INTRODUCTION OF NEW PRODUCTS AND PRODUCT ENHANCEMENTS
COULD BE DELAYED, POTENTIALLY HURTING OUR COMPETITIVE POSITION.
We license and integrate technology from third parties in certain of our
software products. For example, we license the Uniface client/server application
development technology from Compuware, Inc. for use in PMM, certain applications
from Silvon Software, Inc. for use in IDEAS, IBM's Net.commerce merchant server
software for use in CUSTOMER ORDERING, and the Syncsort application for use in
PORTFOLIO PLANNING BY ARTHUR. These third party licenses generally require us to
pay royalties and fulfill confidentiality obligations. If we are unable to
continue to license any of this third party software, or if the third party
licensors do not adequately maintain or update their products, we would face
delays in the releases of our software until equivalent technology can be
identified, licensed or developed, and integrated into our software products.
These delays, if they occur, could harm 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.
WE MAY FACE LIABILITY IF OUR PRODUCTS ARE DEFECTIVE OR IF WE MAKE ERRORS
IMPLEMENTING OUR PRODUCTS.
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 third parties or us, and may involve
integration with systems developed by third parties. In particular, it is common
for complex software programs, such as our UNIX/Oracle 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 certain defects or errors in
our products or custom configurations only after our software products have been
used by many clients. For example, we will likely experience undetected errors
in our .Net applications as we begin to implement them for the first time at
customer sites. 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 existing products through internal development and strategic
partnering, internally develop new products which leverage both our existing
customers and sales force, and strategically acquire complementary retail point
and collaborative solutions that add functionality for specific business
processes to an enterprise-wide system. 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 market reputation could suffer, and we could be subject to
claims for significant damages. Although our customer agreements contain
limitation of liability clauses and exclude consequential damages, there can be
no assurances that such contract provisions will be enforced. Any such damages
claim could impair our market reputation and could have a material adverse
affect on our business, operating results and financial condition.
49
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 Chairman and Hamish N. J. Brewer our Chief
Executive Officer. Mr. Brewer was promoted to Chief Executive Officer on August
4, 2003 having served as our President since April 2001 and as a senior officer
of the Company since 1996. He succeeds Mr. Armstrong who continues as Chairman
of the Board. As Chairman, Mr. Armstrong retains his active leadership role,
focusing on strategic planning, merger and acquisition opportunities, major
product decisions and key customer relationships. We do not have in place "key
person" life insurance policies on any of our employees. The loss of the
services of Mr. Armstrong, Mr. Brewer, or other key executive officers or
employees without a successor in place, or any difficulties associated with our
succession, could negatively affect our financial performance.
WE MAY HAVE DIFFICULTY INTEGRATING ACQUISITIONS.
We continually evaluate potential acquisitions of complementary businesses,
products and technologies, including those that are significant in size and
scope. In pursuit of our strategy to acquire complementary products, we
completed the acquisition of the assets of Zapotec Software, Inc. in February
2001, the NeoVista Decision Series from Accrue Software, Inc. in June 2001, the
acquisition of all the common stock of E3 in September 2001, the acquisition of
certain intellectual property from J -- Commerce in April 2002, and the
acquisition of certain intellectual property from Vista Software Solutions, Inc.
in April 2003, the acquisition of substantially all remaining intellectual
property and certain other assets of Engage, Inc in August 2003, and the
acquisition of substantially all the assets of Timera Retail Solutions on
January 29, 2004. The E3 acquisition was our largest to date, and involved the
integration of E3's products and operations in 12 countries. The risks we
commonly encounter in acquisitions include:
- We may have difficulty assimilating the operations and personnel of the
acquired company;
- We may have difficulty effectively integrating the acquired technologies
or products with our current products and technologies;
- Our ongoing business may be disrupted by transition and integration
issues;
- We may not be able to retain key technical and managerial personnel from
the acquired business;
- We may be unable to achieve the financial and strategic goals for the
acquired and combined businesses;
- We may have difficulty in maintaining controls, procedures and policies
during the transition and integration;
- Our relationships with partner companies or third-party providers of
technology or products could be adversely affected;
- Our relationships with employees and customers could be impaired;
- Our due diligence process may fail to identify significant issues with
product quality, product architecture, legal contingencies, and product
development, among other things;
- We may be subject to as a successor, certain liabilities of our
acquisition targets; and
- We may be required to sustain significant exit charges if products
acquired in business combinations are unsuccessful.
IT MAY BECOME INCREASINGLY EXPENSIVE TO OBTAIN AND MAINTAIN LIABILITY INSURANCE
AT CURRENT LEVELS.
We contract for insurance to cover a variety of potential risks and
liabilities. In the current market, insurance coverage is becoming more
restrictive and expensive, and when certain insurance coverage is offered, the
deductible for which we are responsible is larger. In light of these
circumstances, it may become more difficult to maintain insurance coverage at
historical levels, or if such coverage is available, the cost to
50
obtain or maintain it may increase substantially. This may result in our being
forced to bear the burden of an increased portion of risks for which we have
traditionally been covered by insurance, which could negatively impact the
Company's results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 44% of total revenues in the year ended December 31, 2003
as compared to 43% and 44% in the years ended December 31, 2002 and 2001,
respectively. In addition, the identifiable net assets of our foreign operations
totaled 20% of consolidated net assets at December 31, 2003 and 2002. 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
gains of $1.6 million and $1.9 million in 2003 and 2002, respectively.
We did not engage in any material foreign currency hedging transactions
during 2002; however, during fourth quarter 2003 we began using derivative
financial instruments, primarily forward exchange contracts, to manage a
majority of the foreign currency exchange exposure associated with net
short-term foreign denominated assets and liabilities which exist as part of our
ongoing business operations. The exposures relate primarily to the gain or loss
recognized in earnings from the revaluation or settlement of current foreign
denominated assets and liabilities. We no not enter into derivative financial
instruments for trading or speculative purposes. The forward exchange contracts
generally have maturities of less than 90 days, and are not designated as
hedging instruments under SFAS No. 133. Forward exchange contracts are
marked-to-market at the end of each reporting period, with gains and losses
recognized in other income, net, offset by the gains or losses resulting from
the settlement of the underlying foreign denominated assets and liabilities.
At December 31, 2003, we had forward exchange contracts with a notional
value of $10.3 million and an associated net forward contract liability of
$147,000, which is included in accrued expenses and other liabilities. At
December 31, 2002, we had forward exchange contracts with a notional value of
$1.0 million and an insignificant forward contract liability. The notional value
represents the amount of foreign currencies to be purchased or sold at maturity
and does not represent our exposure on these contracts. We do not anticipate any
material adverse impact to our financial statements as a result of these forward
exchange contracts.
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 working capital as of December 31,
2003 to assess the impact of hypothetical changes in foreign currency rates.
Based upon the results of these analyses, a 10% adverse change in all foreign
currency rates from the December 31, 2003 rates would result in a currency
translation loss of $1.7 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
51
overseas are operating balances and are invested in short-term deposits of the
local operating bank. Interest income earned on our investments is reflected in
our financial statements under the caption "Other income, net." Investments in
both fixed rate and floating rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due to
these factors, our future investment income may fall short of expectations due
to changes in interest rates, or we may suffer losses in principal if forced to
sell securities that have suffered 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 December 31, 2003 was $37.3
million, which is approximately the same as amortized cost, with interest rates
generally ranging between 1% and 2%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements as of December 31, 2003 and 2002, and
for each of the three years in the period ended December 31, 2003, together with
the independent auditors' report of Deloitte & Touche LLP, are included in this
Form 10-K as listed in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
During and subsequent to the reporting period, and under the supervision
and with the participation of our management, including our principal executive
officer and principal financial and accounting officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that were in effect at the end of the period
covered by this report. Based on their evaluation, our principal executive
officer and principal financial and accounting officer have concluded that our
disclosure controls and procedures that were in effect on December 31, 2003 were
effective to ensure that information required to be disclosed in our reports to
be filed under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Other than the steps we took during 2003 to remediate certain
weaknesses in our IT area with respect to access security and change control,
there have been no significant changes in our internal controls over financial
reporting, or to our knowledge, in other factors that could significantly affect
these controls subsequent to December 31, 2003. While we have not identified any
material weakness or condition in our disclosure controls and procedures that
would cause us to consider them ineffective for their intended purpose, we
nevertheless have identified certain manual accounting procedures related to the
consolidation of our financial position that resulted in immaterial,
inappropriate classifications of the foreign currency translation adjustment in
our consolidated balance sheet. We have dedicated resources to correct this
issue and are in the process of implementing the necessary corrections. These
deficiencies did not have a material impact on the quality or accuracy of our
financial statements.
52
PART III
Certain information required by Part III is omitted from this Form 10-K, as
we intend to file our Proxy Statement pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this Form 10-K, and certain
information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our directors and executive officers, and their ages as of March 15, 2004,
are as follows:
<Table>
<Caption>
NAME AGE TITLE
- ---- --- -----
James D. Armstrong............ 53 Chairman
J. Michael Gullard (1), (3)... 59 Director
William C. Keiper (1)......... 53 Director
Douglas G. Marlin (1), (2), 56 Director
(3).........................
Jock Patton (1), (2), (3)..... 58 Director
Hamish N. J. Brewer........... 41 President and Chief Executive Officer
Kristen L. Magnuson........... 47 Executive Vice President and Chief Financial Officer
Peter J. Charness............. 49 Senior Vice President, Global Marketing and Chief Product Officer
Scott D. Hines................ 40 Senior Vice President, Chief Technology Officer and Global In-Store Systems
David R. King................. 59 Senior Vice President, Product Development
Christopher J. Moore.......... 41 Senior Vice President, Customer Support Solutions
David J. Tidmarsh............. 52 Senior Vice President, Customer Success
Wayne J. Usie................. 37 Senior Vice President of the Americas
</Table>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating and Governance Committee
DIRECTORS:
James D. Armstrong has been a Director since co-founding our Company in
1985 and currently serves as Chairman of the Board. Mr. Armstrong also served as
Co-Chairman of the Board from January 1999 to August 2000. Mr. Armstrong served
as our Chief Executive Officer from July 1999 to July 2003, as Co-Chief
Executive Officer from January 1999 to July 1999, and as Chief Executive Officer
from 1985 to October 1997. Mr. Armstrong founded JDA Software Services, Ltd., a
Canadian software development company, in 1978 and served as its President until
1987. Mr. Armstrong studied engineering at Ryerson Polytechnic Institute in
Toronto, Ontario.
J. Michael Gullard has been a Director since January 1999. Mr. Gullard has
been the General Partner of Cornerstone Management, a venture capital and
consulting firm specializing in software and data communications companies since
1984. Mr. Gullard has also served as Chairman of Merant PLC (formerly Micro
Focus Group Ltd.), a publicly-held corporation headquartered in England with
extensive operations in the United States, that specializes in change management
software tools since 1996, and as Chairman of NetSolve, Incorporated, a
publicly-held corporation which provides IT infrastructure management services
on an out-sourced basis since 1992. Mr. Gullard is also a director of Celeritek
Inc., a publicly-held company which designs and manufactures gallium arsenide
(GaAs) semiconductor components and GaAs-based subsystems used in defense
electronics and commercial communication networks. Mr. Gullard has previously
served as Chief Executive Officer and Chief Financial Officer of
Telecommunications Technology, Inc. from 1979 to
53
1984, and held a variety of financial and operational management positions at
Intel Corporation from 1972 to 1979. Mr. Gullard currently serves as Chairman of
Mainsoft Corp., a private company and has formerly served as a Director of other
technology companies. Mr. Gullard attended Stanford University where he received
a Bachelor of Arts Degree in Economics and a Masters Degree from the Graduate
School of Business.
William C. Keiper has been a Director since April 1998. Mr. Keiper has
served as Chairman and Chief Executive Officer of Arrange Technology LLC, a
software development services outsourcing company since 2002 and as Managing
Partner of Black Diamond Group LLC, a management consulting firm since 2003.
From 1998 to 2002, Mr. Keiper served as President of Martin Wolf Securities LLC,
a mergers and acquisitions firm serving middle market IT services, consulting
and e-commerce companies. From 1997 to 1998, Mr. Keiper served as Managing
Director of Software Equity Group, LLC, a software and Internet technology
mergers, acquisitions and strategic consulting firm. Mr. Keiper was an officer
and member of the Board of Directors of Artisoft, Inc., a publicly-held software
company that develops and markets computer telephony and communications software
from 1993 to 1997, serving as Chief Executive Officer from 1993 to 1997, and as
Chairman of the Board from 1995 to 1997. From 1986 to 1993, Mr. Keiper held
variety of executive positions with MicroAge, Inc., a publicly-held distributor
and integrator of information technology products and services, including
President and Chief Operating Officer. MicroAge, Inc. was a Fortune Services 500
company. Mr. Keiper currently serves on the Board of Directors of several
technology companies, including Hypercom Corporation, a NYSE company that
provides point-of-sale card payment systems; Zones, Inc., a direct catalog
marketer of PC-related products and software; and Smith Micro Software, Inc., a
provider of application software and wireless solutions. Mr. Keiper received a
Bachelor of Science Degree in Business (finance major) from Eastern Illinois
University, a Juris Doctorate Degree from Arizona State University and a Masters
Degree in International Management from the Thunderbird American Graduate School
of International Management.
Douglas G. Marlin has been a Director since May 31, 2001. Mr. Marlin served
as President and principal owner of Marlin Ventures, Inc., a Canadian-based
consulting firm, from 1997 to 2000. From 1987 to 1996, Mr. Marlin served as
President of JDA Software Services, Ltd., and from 1981 to 1987 as its Vice
President. Prior to that, Mr. Marlin served in a variety of technical and
development positions with IBM from 1973 to 1981. Mr. Marlin currently serves on
the Board of Directors of Zed I Solutions, a Canadian technology company that
develops hardware and software for real time industrial process monitoring, and
Aero-Mechanical Services Ltd, a Canadian technology company providing
Internet-based aircraft monitoring services. Mr. Marlin also serves as a
Director for various privately-held companies including Firetrace USA, LLP, a
fire suppression technology company. Mr. Marlin attended the University of
Calgary where he received a Bachelor of Science Degree in Mathematics.
Jock Patton has been a Director since January 26, 1999. Mr. Patton is a
private investor and serves as Lead Trustee, Valuation Committee Chair and
Executive Committee member of the ING Funds, a $30 billion mutual fund complex.
Mr. Patton previously served as Chief Executive Officer of Rainbow Multimedia
Group, Inc., a producer of digital entertainment, from 1999 to 2001. From 1992
to 1997, Mr. Patton served as a Director and President of StockVal, Inc., an SEC
registered investment advisor providing securities analysis software and
proprietary data to mutual funds, major money managers and brokerage firms
worldwide. Prior to 1992, Mr. Patton was a Partner and Director in the law firm
of Streich Lang where he founded and headed the Corporate/Securities Practice
Group. Mr. Patton currently serves as the Lead Director of Hypercom Corporation,
a NYSE company that provides point-of-sale card payment systems. Mr. Patton has
previously served on the Board of Directors of various public and private
companies, including America West Airlines, Inc. Mr. Patton holds an A.B. Degree
in Political Science and Juris Doctorate, both from the University of
California.
OTHER EXECUTIVE OFFICERS:
Hamish N. J. Brewer has served as our President and Chief Executive Officer
since August 2003. Mr. Brewer previously served as President from March 2001 to
July 2003, as Senior Vice President, Sales from 2000 to March 2001, as Senior
Vice President, Enterprise Systems, from 1999 to 2000, as Senior Vice President,
International during 1998 to 1999, as Director of our European, Middle East and
African operations
54
from 1996 to 1998, and as a Marketing Representative from 1994 to 1996. Prior to
that, Mr. Brewer served as a Retail Marketing Specialist with IBM from 1986 to
1990, and in various operational positions with a privately-held retail sales
organization located in England. Mr. Brewer received a Bachelor of Science and a
Bachelor of Commerce Degree from the University of Birmingham in England.
Kristen L. Magnuson has served as our Executive Vice President and Chief
Financial Officer since March 2001. Ms. Magnuson previously served as Senior
Vice President and Chief Financial Officer from September 1997 to March 2001.
Prior to that, Ms. Magnuson served as Vice President of Finance and Planning for
Michaels Stores, Inc., a publicly-held arts and craft retailer from 1990 to
1997, as Senior Vice President and Controller of MeraBank FSB, an $8 billion
financial institution, from 1987 to 1990, and various positions including Audit
Principal in the audit department of Ernst & Young from 1978 to 1987. Ms.
Magnuson is a Certified Public Accountant and received a Bachelor of Business
Administration Degree in Accounting from the University of Washington.
Peter J. Charness has served as our Senior Vice President, Global Marketing
and Chief Product Officer since March 1999. Mr. Charness previously served as
our Vice President of Marketing and Strategy for the JDA Arthur Division from
1998 to 1999. Prior to that, Mr. Charness served as Vice President and General
Manager of the Retail Division of Comshare, Inc, a publicly-held software
company, from 1996 to 1998, as Vice President, Professional Services of Mitech
Computer Systems, Inc., a publicly-held software company, from 1995 to 1996, and
in various management positions including Vice President Logistics and
Technology of Dylex Ltd., a publicly-held Canadian retail sales company, from
1984 to 1995. Mr. Charness' education includes a CEGEP Diploma from McGill
University in Montreal, Quebec, a Bachelor of Arts Degree from York University
in Toronto, Ontario, and a Master of Business Administration Degree from the
University of Western Ontario.
Scott D. Hines has served as our Senior Vice President, Chief Technology
Officer and Global In-Store Systems since January 2004. Mr. Hines previously
served as our Senior Vice President, Chief Technology Officer from 1999 to 2003,
as Vice President of In-store Systems from 1997 to 1998, as Director of Store
Systems Product Development from 1996 to 1997, and as Associate Director of
Store Systems Product Development from 1993 to 1996. Prior to that, Mr. Hines
served as Director of MIS for US Hosiery Corporation, a privately-held textile
manufacturing company, from 1991 to 1993, and as President of DataWorks, Inc., a
privately-held software development company, from 1987 to 1991. Mr. Hines
attended Carnegie Mellon University and received a Bachelor of Science Degree in
Molecular Biology.
David R. King has served as our Senior Vice President, Product Development
since January 2004. Mr. King served as Vice President Product Planning of Geac
Computer Corp. Ltd, a publicly-held Canadian software company, from August 2003
to December 2003, as Sr. Vice President of Product Development and Chief
Technology Officer of Comshare, Inc., a publicly-held software company, from
1997 to 2003, and as its Director of Applied Technology and Research from 1991
to 1997, and in various management positions including Director, Advanced
Product Design and Development of Execucom Systems Corporation, a privately-held
provider of decision and executive support systems, from 1983 to 1991. Prior to
that, Mr. King was a full-time faculty member responsible for teaching
undergraduate and graduate courses in statistics, research methods, mathematical
and computer modeling at Old Dominion University, the University of Maryland,
and the University of South Carolina, from 1969 to 1982. Mr. King currently
serves on the advisory boards for MIS at the University of Georgia and the
International Academy of Advanced Decision Support at the Peter Kiewit Institute
of Technology. In addition, Mr. King has written over 50 articles and books in
the areas of decision support and business intelligence. Mr. King's education
includes a Bachelor of Sociology Degree, a Master of Sociology Degree, and a
Ph.D. in Sociology with a minor in Mathematical Statistics from the University
of North Carolina.
Christopher J. Moore has served as our Senior Vice President, Customer
Support Solutions since January 2004. Mr. Moore previously served as our Vice
President, US Consulting Services from 1999 to 2003, as Vice President, CSG
Operations in 1999, as a Regional Director, CSG from 1997 to 1998, as Associate
Consulting Director from 1995 to 1997, as Senior Implementation Manager from
1994 to 1995, and in various other programmer, analyst and consulting positions
from 1991 to 1993. Prior to that, Mr. Moore served in various
55
management positions with Vormittag Associates, Inc. a privately-held software
and consulting services distributor, from 1990 to 1991, Sunrise Software
Systems, a privately-held POS hardware and software distributor, from 1989 to
1990, and Computer Generated Solutions, a privately-held consulting company,
from 1987 to 1989. Mr. Moore attended Polytechnic University and received a
Bachelor of Science degree in Computer Science.
David J. Tidmarsh has served as our Senior Vice President, Customer Success
since January 2004. Mr. Tidmarsh previously served as our Senior Vice President,
Client Services from January 1999 to December 2003. Prior to that, Mr. Tidmarsh
served as Vice President of Business Development with HNC Retek, a business unit
of HNC Software Inc., a publicly-held software solutions provider, from 1997 to
1998, as Chief Information Officer and Vice President of Logistics with Wilsons
The Leather Experts, a retail sales company, from 1993 to 1997, as Chief
Operating Officer of Page-Com, a publicly-held direct mail marketer of
communication equipment, and as Vice President of Merchandise Planning,
Allocation and Logistics with Pier One Imports, a specialty retail company, from
1987 to 1992. Mr. Tidmarsh attended Marquette University and received a Bachelor
of Arts Degree in Philosophy.
Wayne J. Usie has served as our Senior Vice President of the Americas since
January 2003. Mr. Usie previously served as our Senior Vice President, Product
Development from January 2001 to December 2002. Prior to that, Mr. Usie served
as Vice President -- Information Technology for Family Dollar Stores, Inc., a
publicly-held mass merchant discount retailer from 1997 to 2000, as Vice
President -- Chief Financial Officer and Chief Information Officer of Campo
Electronics, Appliances, and Computers, Inc., a publicly-held consumer
electronics retailer, from 1996 to 1997, as President and Chief Executive
Officer of International Networking & Computer Consultants, Inc., a
privately-held software integration consulting firm, from 1992 to 1996, and in
various management positions in the regional accounting firm of Broussard,
Poche, Lewis & Breaux from 1988 to 1992. Mr. Usie attended Louisiana State
University and received a Bachelor of Science Degree in Business
Administration -- Accounting.
In addition, we are actively recruiting from outside the Company to fill a
new position, Senior Vice President, Collaborative Solutions.
Information relating to the designation of our Audit Committee Financial
Expert, beneficial ownership reporting compliance under Section 16(a) of the
Exchange Act, and the adoption of a Code of Ethics, is incorporated by reference
to the proxy statement under the captions "Corporate Governance -- Committees of
our Board of Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance," "Report of the Audit Committee," and "Corporate Governance -- Code
of Business Conduct and Ethics."
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated by
reference to the Proxy Statement under the captions "Compensation of Directors,"
"Executive Compensation -- Summary Compensation Table," "Employment and Change
of Control Arrangements," "Option Grants in Last Fiscal Year," "Aggregate Option
Exercises During Fiscal 2003 and Year End Option Values," "Ten-Year Option
Repricing," "Compensation Committee Interlocks and Insider Participation,"
"Report of The Compensation Committee on Executive Compensation," and "Stock
Performance Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information relating to security ownership of certain beneficial owners
and management and related stockholder matters is incorporated by reference to
the Proxy Statement under the captions "Security Ownership of Certain Beneficial
Owners and Management," and "Securities Authorized for Issuance Under Equity
Compensation Plans."
56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated by reference to the Proxy Statement under the caption "Certain
Transactions."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information relating to principal accountant fees and services is
incorporated by reference to the Proxy Statement under the captions "Report of
the Audit Committee," "Adoption of Policy for Approving Audit and Permitted
Non-Audit Services of the Independent Auditor," and "Principal Accounting Firm
Fees."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets -- December 31, 2003 and 2002
Consolidated Statements of Income -- Three Years Ended December 31,
2003
Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) -- Three Years Ended December 31, 2003
Consolidated Statements of Cash Flows -- Three Years Ended December
31, 2003
Notes to Consolidated Financial Statements -- Three Years Ended
December 31, 2003
2. EXHIBITS -- SEE EXHIBIT INDEX.
B. REPORTS ON FORM 8-K:
We filed a Form 8-K dated October 20, 2003 with the Securities and Exchange
Commission on October 20, 2003 to furnish a copy of our October 20, 2003 press
release announcing financial results for the quarter ended September 30, 2003.
In addition, the Form 8-K included a discussion of the non-GAAP financial
measures of operating income, operating income as a percentage of revenues, and
earnings per share provided in the October 20, 2003 press release.
The information provided in this report on Form 8-K and the Exhibits
attached thereto was furnished under "Item 12. Disclosure of Results of
Operations and Financial Condition." The information shall not be deemed "filed"
for purposes of Section 18 of the Exchange Act or otherwise subject to the
liabilities of that section, nor shall this report be deemed incorporated by
reference in any filing under the Securities Act of 1933 or the Exchange Act,
except as expressly set forth by specific reference in such filing.
57
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
JDA Software Group, Inc.
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheets of JDA
Software Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of JDA Software Group, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 and Note 7 to the consolidated financial statements,
the Company changed its method of accounting for goodwill and intangibles with
indefinite lives as required by Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," which was effective January 1,
2002.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 12, 2004
58
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
---------------------
2003 2002
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 77,464 $ 71,065
Marketable securities..................................... 37,266 30,790
-------- --------
114,730 101,855
Accounts receivable, net.................................. 40,162 47,077
Income tax receivable..................................... 2,447 7,479
Deferred tax asset........................................ 4,863 5,564
Prepaid expenses and other current assets................. 11,768 12,289
Promissory note receivable................................ 2,911 --
-------- --------
Total current assets................................. 176,881 174,264
Property and Equipment, net................................. 21,944 21,337
Goodwill.................................................... 62,397 59,801
Other Intangibles, net...................................... 55,640 56,635
Promissory Note Receivable.................................. -- 3,017
Deferred Tax Asset.......................................... 3,763 --
-------- --------
Total assets...................................... $320,625 $315,054
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,568 $ 3,020
Accrued expenses and other liabilities.................... 23,034 26,957
Deferred revenue.......................................... 25,234 23,331
-------- --------
Total current liabilities......................... 50,836 53,308
Deferred Tax Liability...................................... -- 4,980
Commitments and Contingencies (Notes 12 and 13)
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 29,429,747 and 28,696,688 shares,
respectively........................................... 294 287
Additional paid-in capital................................ 246,716 237,120
Retained earnings......................................... 30,003 27,353
Accumulated other comprehensive loss...................... (2,672) (4,199)
-------- --------
274,341 260,561
Less treasury stock, at cost, 414,702 and 339,702 shares,
respectively........................................... (4,552) (3,795)
-------- --------
Total stockholders' equity............................. 269,789 256,766
-------- --------
Total liabilities and stockholders' equity........ $320,625 $315,054
======== ========
</Table>
See notes to consolidated financial statements.
59
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Software licenses......................................... $ 59,283 $ 66,625 $ 71,220
Maintenance services...................................... 71,111 57,570 40,568
-------- -------- --------
Product revenues....................................... 130,394 124,195 111,788
Consulting services....................................... 70,167 87,608 95,124
Reimbursed expenses....................................... 6,858 7,652 6,904
-------- -------- --------
Service revenues....................................... 77,025 95,260 102,028
Total revenues......................................... 207,419 219,455 213,816
-------- -------- --------
COST OF REVENUES:
Cost of software licenses................................. 1,315 2,035 2,376
Amortization of acquired software technology.............. 4,518 4,247 2,971
Cost of maintenance services.............................. 17,373 14,292 11,159
-------- -------- --------
Cost of product revenues............................... 23,206 20,574 16,506
Cost of consulting services............................... 58,233 63,837 69,953
Reimbursed expenses....................................... 6,858 7,652 6,904
-------- -------- --------
Cost of service revenues............................... 65,091 71,489 76,857
Total cost of revenues................................. 88,297 92,063 93,363
-------- -------- --------
GROSS PROFIT................................................ 119,122 127,392 120,453
OPERATING EXPENSES:
Product development....................................... 48,529 41,819 34,406
Sales and marketing....................................... 41,612 39,941 37,998
General and administrative................................ 23,473 26,978 27,099
Amortization of intangibles............................... 3,067 2,849 5,526
Relocation costs to consolidate development and support
activities............................................. 1,794 452 --
Restructuring, asset disposition and other merger related
charges................................................ -- 6,287 985
Purchased in-process research and development............. -- 800 2,361
Gain on sale of office facility........................... (639) -- --
-------- -------- --------
Total operating expenses............................... 117,836 119,126 108,375
-------- -------- --------
OPERATING INCOME............................................ 1,286 8,266 12,078
Other income, net......................................... 1,347 1,700 2,671
-------- -------- --------
INCOME BEFORE INCOME TAXES.................................. 2,633 9,966 14,749
Income tax (benefit) provision............................ (17) 1,036 5,101
-------- -------- --------
NET INCOME.................................................. $ 2,650 $ 8,930 $ 9,648
======== ======== ========
BASIC EARNINGS PER SHARE.................................... $ .09 $ .32 $ .38
======== ======== ========
DILUTED EARNINGS PER SHARE.................................. $ .09 $ .31 $ .37
======== ======== ========
SHARES USED TO COMPUTE:
Basic earnings per share.................................. 28,645 28,047 25,316
======== ======== ========
Diluted earnings per share................................ 29,104 29,074 25,757
======== ======== ========
</Table>
See notes to consolidated financial statements.
60
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
<Table>
<Caption>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL EARNINGS LOSS STOCK TOTAL
---------- ------ ---------- -------- ------------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance, January 1, 2001............ 24,610,967 $246 $181,861 $ 8,775 $(2,798) $(1,819) $186,265
Issuance of common stock:
Stock issued in acquisition....... 1,600,080 16 24,199 24,215
Stock options exercised........... 433,286 4 4,226 4,230
Employee stock purchase plan...... 391,602 4 3,396 3,400
Tax benefit -- stock
compensation.................... 907 907
Purchase of treasury stock.......... (875) (875)
Comprehensive income (loss):
Net income........................ 9,648 9,648
Unrealized gain on marketable
securities available-for-sale,
net............................. 22 22
Foreign translation adjustment.... (3,362) (3,362)
--------
Comprehensive income............ 6,308
---------- ---- -------- ------- ------- ------- --------
Balance, December 31, 2001.......... 27,035,935 270 214,589 18,423 (6,138) (2,694) 224,450
Issuance of common stock:
Stock options exercised........... 1,324,768 13 12,615 12,628
Employee stock purchase plan...... 335,985 4 4,146 4,150
Tax benefit -- stock
compensation.................... 5,770 5,770
Purchase of treasury stock.......... (1,101) (1,101)
Comprehensive income (loss):
Net income........................ 8,930 8,930
Unrealized gain on marketable
securities available-for-sale,
net............................. 26 26
Foreign translation adjustment.... 1,913 1,913
--------
Comprehensive income............ 10,869
---------- ---- -------- ------- ------- ------- --------
Balance, December 31, 2002.......... 28,696,688 287 237,120 27,353 (4,199) (3,795) 256,766
Issuance of common stock:
Stock options exercised........... 348,056 3 3,728 3,731
Employee stock purchase plan...... 385,003 4 4,067 4,071
Tax benefit -- stock
compensation.................... 777 777
Reversal of tax valuation
allowance....................... 1,024 1,024
Purchase of treasury stock.......... (757) (757)
Comprehensive income (loss):
Net income........................ 2,650 2,650
Unrealized loss on marketable
securities available-for-sale,
net............................. (3) (3)
Foreign translation adjustment.... 1,530 1,530
--------
Comprehensive income............ 4,177
---------- ---- -------- ------- ------- ------- --------
Balance, December 31, 2003.......... 29,429,747 $294 $246,716 $30,003 $(2,672) $(4,552) $269,789
========== ==== ======== ======= ======= ======= ========
</Table>
See notes to consolidated financial statements.
61
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................................. $ 2,650 $ 8,930 $ 9,648
Adjustments to reconcile net income to net cash provided
By Operating activities:
Depreciation and amortization........................... 16,285 15,448 16,702
Provision for doubtful accounts......................... 500 2,900 4,884
Tax benefit -- stock options and employee stock purchase
plan................................................... 777 5,770 907
Net gain on disposal of property and equipment.......... (595) 15 130
Write-off of purchased in-process research and
development............................................ -- 800 2,361
Deferred income taxes................................... (7,018) (6,271) 1,159
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable....................................... 6,558 11,334 (7,099)
Income tax receivable..................................... 5,017 (2,537) 91
Prepaid expenses and other current assets................. 1,018 (2,211) (2,729)
Accounts payable.......................................... (453) 171 (2,640)
Accrued expenses and other liabilities.................... (3,629) 1,207 3,858
Deferred revenue.......................................... (267) 5,961 2,107
-------- -------- --------
Net cash provided by operating activities............... 20,843 41,517 29,379
-------- -------- --------
INVESTING ACTIVITIES:
Purchase of marketable securities........................... (58,363) (46,767) (12,242)
Sales of marketable securities.............................. 100 9,701 2,500
Maturities of marketable securities......................... 51,784 18,443 13,424
Purchase of Engage, Inc..................................... (3,349) -- --
Purchase of Vista Software Solutions, Inc................... (4,006) -- --
Purchase of J -- Commerce, Inc.............................. -- (4,170) --
Purchase of E3 Corporation, net of cash acquired............ -- -- (18,348)
Purchase of Neo Vista Decision Series....................... -- -- (4,938)
Purchase of Zapotec Software, Inc........................... -- -- (1,250)
Payment of direct costs related to the acquisition of E3
Corporation............................................... (708) (8,583) (6,048)
Issuance of promissory note receivable...................... -- -- (3,500)
Payments received on promissory note receivable............. 106 337 146
Purchase of property and equipment.......................... (10,395) (8,262) (6,815)
Proceeds from disposal of property and equipment............ 2,022 448 1,478
-------- -------- --------
Net cash used in investing activities................... (22,809) (38,853) (35,593)
-------- -------- --------
FINANCING ACTIVITIES:
Issuance of common stock -- stock option plans.............. 3,731 12,628 4,230
Issuance of common stock -- employee stock purchase plan.... 4,071 4,150 3,400
Purchase of treasury stock.................................. (757) (1,101) (875)
Payments on capital leases.................................. (255) (320) (196)
Payments on line of credit, notes payable, and long-term
debt assumed in the E3 Corporation acquisition............ -- -- (8,166)
-------- -------- --------
Net cash provided by (used in) financing activities..... 6,790 15,357 (1,607)
-------- -------- --------
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS....... 1,575 1,179 (1,108)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 6,399 19,200 (8,929)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 71,065 51,865 60,794
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 77,464 $ 71,065 $ 51,865
======== ======== ========
</Table>
62
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2003 2002 2001
-------- -------- --------
(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes................................ $ 3,802 $ 4,115 $ 3,501
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
Acquisition of Engage, Inc.:
Fair value of fixed assets acquired....................... $ (350)
Software technology....................................... (2,200)
Customer lists............................................ (2,100)
Goodwill.................................................. (306)
Deferred revenue.......................................... 1,488
--------
Total acquisition cost of Engage, Inc................... (3,468)
Accruals for direct costs related to the transaction...... 119
--------
Total cash expended to acquire Engage, Inc.............. $ (3,349)
========
Acquisition of Vista Software Solutions, Inc.:
Fair value of current assets acquired..................... $ (662)
Software technology....................................... (1,100)
Customer lists............................................ (1,110)
Other intangible assets................................... (80)
Goodwill.................................................. (2,290)
Deferred revenue.......................................... 681
--------
Total acquisition cost of Vista Software Solutions,
Inc.................................................... (4,561)
Accruals for direct costs related to the transaction...... 555
--------
Total cash expended to acquire Vista Software Solutions,
Inc.................................................... $ (4,006)
========
Acquisition of J -- Commerce, Inc.:
Software technology....................................... $ (2,060)
In-process research and development....................... (800)
Goodwill.................................................. (1,325)
--------
Total acquisition cost of J -- Commerce, Inc............ (4,185)
Accruals for direct costs related to the transaction...... 15
--------
Total cash expended to acquire J -- Commerce, Inc....... $ (4,170)
========
Acquisition of E3 Corporation:
Fair value of current assets acquired..................... $(14,036)
Fair value of fixed assets acquired....................... (2,402)
Goodwill.................................................. (35,350)
Software technology....................................... (12,600)
Customer lists............................................ (22,100)
Trademarks................................................ (3,300)
In-process research and development....................... (2,200)
Fair value of current liabilities assumed................. 12,906
Deferred revenue.......................................... 2,205
Fair value of long-term debt assumed...................... 1,627
Deferred tax liability, net............................... 15,164
--------
Total acquisition cost of E3 Corporation................ (60,086)
Reserves for direct costs related to the transaction...... 15,871
Issuance of common stock.................................. 24,215
Cash acquired............................................. 1,652
--------
Cash used to purchase E3 Corporation.................... $(18,348)
========
Acquisition of Neo Vista Decision Series:
Fair value of fixed assets acquired....................... $ (5)
Developed software and other intangibles.................. (2,956)
Goodwill.................................................. (2,727)
Fair value of current liabilities assumed................. 750
--------
Cash used to purchase Neo Vista Decision Series......... $ (4,938)
========
Acquisition of Zapotec Software, Inc.:
Fair value of current assets acquired..................... $ (14)
Developed software and other intangibles.................. (1,293)
In-process research and development....................... (161)
Fair value of current liabilities assumed................. 218
--------
Cash used to purchase Zapotec Software, Inc............. $ (1,250)
========
</Table>
See notes to consolidated financial statements.
63
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT PERCENTAGES, SHARES, PER SHARE AMOUNTS OR AS OTHERWISE
STATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business. We are a leading provider of sophisticated software
solutions designed specifically to address the demand and supply chain
management, business process, decision support, e-commerce, inventory
optimization, and collaborative planning and forecasting requirements of the
retail industry and suppliers to the retail industry. Our solutions enable
customers to manage and optimize their inventory flows throughout the demand
chain to the consumer, and provide optimized labor scheduling for retail store
operations. Our customers include approximately 4,500 of the world's leading
retail, consumer package goods ("CPG") manufacturers and wholesalers. We have
organized our business segments around the distinct requirements of retail
enterprises, retail stores, and suppliers to the retail industry. We employ
nearly 1,300 associates and conduct business from 35 offices in three geographic
regions: the Americas (includes the United States, Canada, and Latin America),
Europe (includes the Middle East and South Africa), and Asia/ Pacific. Our
corporate offices are located in Scottsdale, Arizona.
Principles of Consolidation and Basis of Presentation. The consolidated
financial statements include the accounts of JDA Software Group, Inc. and our
subsidiaries, all of which are wholly owned. All significant intercompany
balances and transactions have been eliminated in consolidation. The
consolidated financial statements are stated in U.S. dollars and are prepared
under accounting principles generally accepted in the United States.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Significant estimates include the
allowance for doubtful accounts, which is based upon an evaluation of our
customers' ability to pay and general economic conditions; the useful lives of
property and equipment, the useful lives of intangible assets, which are based
upon valuation reports prepared by independent third party valuation
specialists; the recoverability or impairment of intangible asset values;
deferred revenue; reserves for the direct costs of acquisitions, and our
effective income tax rate and deferred tax assets which are based upon our
expectations of future taxable income, allowable deductions, and projected tax
credits. Actual results could differ from these estimates.
Foreign Currency Translation. The financial statements of our
international subsidiaries are translated into U.S. dollars using the exchange
rate at each balance sheet date for assets and liabilities and at an average
exchange rate for the revenues and expenses reported in each fiscal period. We
have determined that the functional currency of each foreign subsidiary is the
local currency and as such, foreign currency translation adjustments are
recorded as a separate component of stockholders' equity. Transaction gains and
losses, and unrealized gains and losses on short-term intercompany receivables
and payables and foreign denominated receivables, are included in results of
operations as incurred.
Cash and Cash Equivalents and Marketable Securities. Cash and cash
equivalents consist of cash held in bank demand deposits, money market
securities, and highly liquid investments with remaining maturities of three
months or less at the date of purchase. Marketable securities include U.S.
Government securities, commercial paper and corporate bonds. Management
determines the appropriate classification of debt and equity securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. All marketable securities are recorded at market value and have been
classified as available-for-sale at December 31, 2003 and 2002. Unrealized
holding gains and losses, net of the related income tax effect, are excluded
from earnings and are reported as a separate component of stockholders' equity
until realized. Dividend and interest income are recognized when earned.
Realized gains and losses for securities classified as available-for-sale are
determined using the specific identification method.
64
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts Receivable. We typically provide installment payment terms on
most software license sales. Software licenses are generally due in installments
within twelve months from the date of delivery. All significant customers are
reviewed for creditworthiness before the Company licenses its software and we do
not sell our software or recognize any license revenue unless we believe that
collection is probable in accordance with the requirements of paragraph 8 in
Statement of Position 97-2, Software Revenue Recognition, as amended. We have a
history of collecting software payments when they come due without providing
refunds or concessions. Consulting services are generally billed bi-weekly and
maintenance services are billed annually or monthly. If a customer becomes
significantly delinquent or its credit deteriorates, we put the accounts on hold
and do not recognize any further services revenue (and in most cases we withdraw
support and/or our implementation staff) until the situation has been resolved.
We do not have significant billing or collection problems. We review each
past due account and provide specific reserves based upon the information we
gather from various sources including our customers, subsequent cash receipts,
consulting services project teams, members of each region's management, and
credit rating services such as Dun and Bradstreet. Although infrequent and
unpredictable, from time to time certain of our customers have filed bankruptcy
and we have been required to refund the pre-petition amounts collected and
settle for less than the face value of its remaining receivable pursuant to a
bankruptcy court order. In these situations, as soon as it becomes probable that
the net realizable value of the receivable is impaired, we provide reserves on
the receivable. In addition, we monitor economic conditions in the various
geographic regions in which we operate to determine if general reserves or
adjustments to our credit policy in a region are appropriate for deteriorating
conditions that may impact the net realizable value of our receivables.
Derivative Instruments and Hedging Activities. We adopted Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments and
Hedging Activities ("SFAS No. 133"), effective January 1, 2001. SFAS No. 133
requires companies to value derivative financial instruments, including those
used for hedging foreign currency exposures, at current market value. In April
2003, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities ("SFAS No. 149"). The provisions of SFAS No.
149 amend and clarify the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003. The adoption of SFAS No. 133 and SFAS No.
149 did not have a significant impact on our financial statements.
We did not engage in any material foreign currency hedging transactions
during 2002; however, during fourth quarter 2003 we began using derivative
financial instruments, primarily forward exchange contracts, to manage a
majority of the foreign currency exchange exposure associated with net
short-term foreign denominated assets and liabilities which exist as part of our
ongoing business operations. The exposures relate primarily to the gain or loss
recognized in earnings from the revaluation or settlement of current foreign
denominated assets and liabilities. We do not enter into derivative financial
instruments for trading or speculative purposes. The forward exchange contracts
generally have maturities of less than 90 days, and are not designated as
hedging instruments under SFAS No. 133. Forward exchange contracts are
marked-to-market at the end of each reporting period, with gains and losses
recognized in other income, net, offset by the gains or losses resulting from
the settlement of the underlying foreign denominated assets and liabilities.
At December 31, 2003, we had forward exchange contracts with a notional
value of $10.3 million and an associated net forward contract liability of
$147,000, which is included in accrued expenses and other liabilities. At
December 31, 2002, we had forward exchange contracts with a notional value of
$1.0 million and an insignificant forward contract liability. The notional value
represents the amount of foreign currencies to be purchased or sold at maturity
and does not represent our exposure on these contracts. Gains and losses
resulting from foreign currency transactions were not significant in the years
ended December 31, 2003 and 2002.
65
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment and Long-Lived Assets. Property and equipment are
stated at cost less accumulated depreciation and amortization. Property and
equipment are depreciated on a straight-line basis over the following estimated
useful lives: computers, furniture, and fixtures -- two to seven years;
buildings -- twenty-five to forty years; automobiles -- three years; leasehold
improvements -- the shorter of the lease term or the estimated useful life of
the asset.
Goodwill. Goodwill represents the excess of the purchase price over the
net assets acquired in our business combinations. We adopted Statement of
Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"), effective January 1, 2002. SFAS No. 142 addresses how
intangible assets should be accounted for after they have been initially
recognized in the financial statements. SFAS No. 142 also requires that goodwill
and certain other intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually. Upon
adoption, we ceased amortization of goodwill and certain other intangible assets
we recorded in business combinations prior to June 30, 2001 (see Note 7).
Goodwill recorded in business combinations prior to June 30, 2001 was amortized
on a straight-line basis through December 31, 2001 over useful lives ranging
from 10 to 15 years.
Intangible Assets. Intangible assets consist of the values allocated to
software technology, customer lists and trademarks in connection with various
business combinations. Software technology is capitalized if the related
software product under development has reached technological feasibility or if
there are alternative future uses for the purchased software. Amortization of
software technology is reported as a cost of product revenues in accordance with
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed ("SFAS No. 86"). Software
technology is amortized on a product-by-product basis and is determined as the
amount for each product that is the greater of the amount computed using (a) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future revenue for that product, or (b) the straight-line method
over the remaining estimated economic life of the product including the period
being reported on. The estimated economic lives of our software technology
products range from 6 to 15 years.
Amortization of customer lists is computed on a straight-line basis over
estimated useful lives ranging from 5 to 13 years. These intangible assets were
all acquired in business combinations over the last five years. Our valuation
process during the acquisitions, and the third party appraisals we obtained to
support our allocation of the purchase price to these assets, were based upon
the projected economic life of the customer base, using historical turnover
rates and discussions with the management of the acquired companies. The
historical life experiences of the acquired companies that were utilized in the
valuations support the economic lives used, as does the Company's historical
experience with similar customer accounts for products that have been developed
internally. The Company reviews the customer attrition rates for each
significant acquired customer group on a regular basis to ensure the rate of
attrition is not increasing and that revisions to our estimates of life
expectancy are not required.
Substantially all of our capitalized trademarks were acquired in connection
with the acquisition of E3 Corporation (see Note 2). Beginning January 1, 2002,
we assigned indefinite useful lives to our trademarks, and ceased amortization,
as we believe there are no legal, regulatory, contractual, competitive,
economic, or other factors that would limit the useful lives of our trademarks.
We intend to indefinitely develop next generation products under our capitalized
trademarks, and expect these trademarks to contribute to our cash flows
indefinitely. Trademarks with indefinite useful lives are not subject to
amortization. However, in accordance with SFAS No. 142, the Company tests
trademarks for impairment annually or more frequently if events or changes in
circumstances indicate that the asset might be impaired (see Note 7).
Restructuring, Asset Disposition and Other Merger Related Charges. We
recorded restructuring, asset disposition and other merger related charges
during the second and fourth quarters of 2002, and in 2001, using the
authoritative guidance in Emerging Issues Task Force Issue No. 94-3 ("EITF No.
94-3"), Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including
66
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain Costs Incurred in a Restructuring). In June 2002, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
No. 146"). The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. SFAS No. 146 was adopted
effective January 1, 2003. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF No. 94-3. Under SFAS No. 146, the liability for costs associated with exit
or disposal activities is recognized and measured initially at fair value only
when the liability is incurred, rather than at the date the Company committed to
the exit plan.
Revenue Recognition. We license software under non-cancelable agreements
and provide related services, including consulting, training and customer
support. We recognize revenue in accordance with Statement of Position 97-2
("SOP 97-2"), Software Revenue Recognition, as amended and interpreted by
Statement of Position 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with respect to certain transactions, as well as Technical Practice
Aids issued from time to time by the American Institute of Certified Public
Accountants, and Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue
Recognition in Financial Statements, that provides further interpretive guidance
for public companies on the recognition, presentation, and disclosure of revenue
in financial statements.
Software license revenue is recognized when a license agreement has been
signed, the software product has been delivered, there are no uncertainties
surrounding product acceptance, the fees are fixed and determinable, and
collection is considered probable. If a software license contains an undelivered
element, the vendor-specific objective evidence ("VSOE") of fair value of the
undelivered element is deferred and the revenue recognized once the element is
delivered. The undelivered elements are primarily training, consulting and
maintenance services. VSOE of fair value for training and consulting services is
based upon hourly rates charged when those services are sold separately. VSOE of
fair value for maintenance is the price the customer will be required to pay
when it is sold separately (that is, the renewal rate). In addition, if a
software license contains customer acceptance criteria or a cancellation right,
the software revenue is recognized upon the earlier of customer acceptance or
the expiration of the acceptance period or cancellation right. Payments for our
software licenses are typically due in installments within twelve months from
the date of delivery. Although infrequent, where software license agreements
call for payment terms of twelve months or more from the date of delivery,
revenue is recognized as payments become due and all other conditions for
revenue recognition have been satisfied.
Consulting and training services are separately priced, are generally
available from a number of suppliers, and are not essential to the functionality
of our software products. Consulting services, which include project management,
system planning, design and implementation, customer configurations, and
training are billed on both an hourly basis and under fixed price contracts.
Consulting services revenue billed on an hourly basis is recognized as the work
is performed. Training revenues are recognized when the training is provided and
is included in consulting revenues in the Company's consolidated statements of
income. Under fixed price contracts, consulting services revenue is recognized
using the percentage of completion method of accounting by relating hours
incurred to date to total estimated hours at completion.
We have from time to time provided software and consulting services under
fixed price contracts that require the achievement of certain milestones.
Payment terms in these contracts are generally tied to customer acceptance of
the milestones. The revenue under such arrangements is recognized as the
milestones are achieved or upon customer acceptance. We believe that milestones
are a proper measure of progress under these contracts, as the milestones
approximate the percentage of completion method of accounting.
Customer support services include post contract support and the rights to
unspecified upgrades and enhancements. Maintenance revenues from ongoing
customer support services are billed on a monthly basis and recorded as revenue
in the applicable month, or on an annual basis with the revenue being deferred
and recognized ratably over the maintenance period.
67
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If an arrangement includes multiple elements, the fees are allocated to the
various elements based upon VSOE of fair value, as described above.
Reimbursable Out-of-Pocket Expenses. We adopted Financial Accounting
Standards Board Emerging Issues Task Force Issue No. 01-14 ("EITF No. 01-14"),
Income Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred effective January 1, 2002. EITF No. 01-14 requires the
reclassification of reimbursed expenses in both service revenues and cost of
service revenues in our consolidated statements of income.
Business Combinations. The purchase method of accounting has been followed
on all of our business combinations and accordingly, the total purchase price of
each acquired company was allocated to the acquired assets and liabilities based
on their fair values (See Note 2). We adopted Statement of Financial Accounting
Standards No. 141, Business Combinations ("SFAS No. 141") effective January 1,
2002. SFAS No. 141 requires that the purchase method of accounting to be used
for all business combinations initiated after June 30, 2001 and prohibits the
use of the pooling-of-interest method. In addition, SFAS No. 141 provides
guidance on the initial recognition and measurement of goodwill arising from
business combinations initiated after June 30, 2001, and identifies the types of
acquired intangible assets that are to be recognized and reported separate from
goodwill.
In-Process Research and Development. In business combinations accounted
for using the purchase method of accounting, the amount of purchase price
allocated to in-process research and development ("IPR&D") is expensed at the
date of acquisition in accordance with FASB Interpretation No. 4, Applicability
of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method, an Interpretation of SFAS No. 2 (See Note 2). IPR&D consists of products
or technologies in the development stage for which technological feasibility has
not been established and which we believe have no alternative use. Amounts
allocated to IPR&D are shown as a separate line item in the consolidated
statements of income.
Product Development. The costs to develop new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. We consider technological
feasibility to have occurred when all planning, designing, coding and testing
have been completed according to design specifications. Once technological
feasibility is established, any additional costs would be capitalized. We
believe our current process for developing software is essentially completed
concurrent with the establishment of technological feasibility, and accordingly,
no costs have been capitalized.
Income Taxes. Deferred tax assets and liabilities are recorded for the
estimated future tax effects of temporary differences between the tax basis of
assets and liabilities and amounts reported in the accompanying consolidated
balance sheets. We have reviewed projected future taxable income, other than the
reversal of temporary differences, and determined that a portion of our current
deferred tax asset at December 31, 2003 requires a valuation allowance as we
believe it is more likely than not that the deferred tax asset will not be
realized (see Note 16).
Earnings per Share. Basic earnings per share ("EPS") excludes the dilutive
effect of common stock equivalents and is computed by dividing net income or
loss by the weighted-average number of shares outstanding during the period.
Diluted EPS includes the effect of common stock equivalents, which consist of
stock options, and is computed using the weighted-average number of common and
common equivalent shares outstanding during the period. The weighted average
shares for fiscal 2003, 2002 and 2001 are reflected net of treasury shares (See
Notes 14 and 17).
Stock-Based Compensation. We do not record compensation expense for
options granted to our employees as all options granted under our stock option
plans have an exercise price equal to the market value of the underlying common
stock on the date of grant. In addition, we do not record compensation expense
for shares issued under our employee stock purchase plan. As permitted under
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"), we have elected to
68
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
continue to apply the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25") and provide pro forma
disclosure on an annual basis of net income (loss) and net income (loss) per
common share for employee stock option grants made as if the fair-value method
defined in SFAS No. 123 had been applied. We terminated our 1999 Employee Stock
Purchase Plan ("1999 Purchase Plan") in August 2003 (See Note 14).
In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure ("SFAS No. 148) which is effective for
fiscal years ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123 to
provide alternative methods of transition to SFAS No. 123's fair value method of
accounting for stock-based employee compensation if a company elects to account
for its equity awards under this method. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting,
to require disclosure of the effects of an entity's accounting policy with
respect to stock-based employee compensation on reported net income and earnings
per share in both annual and interim financial statements.
The following table presents pro forma disclosures required by SFAS No. 123
and SFAS No. 148 of net income (loss) and basic and diluted earnings (loss) per
share as if stock-based compensation expense had been recognized during the
three-year period ended December 31, 2003. The compensation expense for these
periods has been determined under the fair value method using the Black-Scholes
pricing model, and assumes graded vesting. The weighted average Black-Scholes
value per option granted in 2003, 2002 and 2001 was $8.83, $9.10 and $7.50,
respectively.
<Table>
<Caption>
2003 2002 2001
------------------- ----------- -----------
Net income as reported................... $ 2,650 $ 8,930 $ 9,648
Less: stock-based compensation expense,
net of related tax effects............. (6,121) (9,356) (7,167)
------------------- ----------- -----------
Pro forma net income (loss).............. $ (3,471) $ (426) $ 2,481
Basic earnings per share -- as
reported............................... $ .09 $ .32 $ .38
Diluted earnings per share -- as
reported............................... $ .09 $ .31 $ .37
Basic earnings (loss) per share -- pro
forma.................................. $ (.12) $ (.02) $ .10
Diluted earnings (loss) per share -- pro
forma.................................. $ (.12) $ (.02) $ .10
ASSUMPTIONS:
Expected dividend yield.................. 0% 0% 0%
Expected stock price volatility.......... 90% 93% 81%
Risk-free interest rate.................. 2.25% 2.25% 3.85%
Expected life of option.................. 2.63 to 3.17 years 2.96 years 3.13 years
</Table>
No expense has been recognized for stock-based compensation in the three
years ended December 31, 2003 as the underlying stock options were granted at
current market prices.
Other New Accounting Pronouncements. In January 2003, the Financial
Accounting Standards Board issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which was subsequently revised in
December 2003. Variable interest entities are defined as entities with a level
of invested equity that is not sufficient to fund future activities to permit it
to operate on a stand alone basis. We do not participate in variable interest
entities.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS No.
150"). SFAS No. 150 requires certain financial instruments that embody
obligations of
69
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the issuer, and which have characteristics of both liabilities and equity, to be
classified as liabilities. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003. We do not have any financial
instruments, as defined in SFAS No. 150, that have characteristics of both
liabilities and equity.
2. ACQUISITIONS
Engage, Inc. In August 2003, we acquired substantially all the remaining
assets of Engage, Inc. ("Engage") for a total cost of $3.5 million, which
includes the cash purchase price of $3.0 million plus $468,000 in direct costs
of the acquisition. Engage is a provider of enterprise advertising, marketing
and promotion software solutions that improve a retailer's promotion planning
process and their delivery of marketing and advertising content. Engage's
advanced digital asset, content management and ad layout capabilities will merge
with our existing PORTFOLIO REVENUE MANAGEMENT and PORTFOLIO KNOWLEDGE BASE
applications to further expand our JDA Portfolio with functionality that
streamlines the communication and collaboration among a retailer's
merchandising, promotions, production and store operation teams. The acquisition
was accounted for as a purchase, and accordingly, the operating results of
Engage have been included in our consolidated financial statements from the date
of acquisition. Pro forma operating results have not been presented as the
acquisition is not material to our consolidated financial statements. In
connection with the Engage acquisition, we recorded approximately $306,000 of
goodwill in our Retail Enterprise Systems reporting unit. The following
summarizes the fair values of the assets acquired and liabilities assumed at the
date of acquisition.
<Table>
Fair value of fixed assets acquired......................... $ 350
Software technology......................................... 2,200
Customer lists.............................................. 2,100
Goodwill.................................................... 306
Deferred revenue............................................ (1,488)
-------
Total acquisition cost of Engage, Inc..................... 3,468
Accruals for direct costs related to the acquisition........ (119)
-------
Total cash expended to acquire Engage, Inc................ $ 3,349
=======
</Table>
Vista Software Solutions, Inc. In April 2003, we acquired substantially
all the intellectual property of Vista Software Solutions, Inc. ("Vista"), and
Vista's active customer agreements for a total cost of $4.6 million, which
includes the cash purchase price of $3.8 million plus $780,000 in direct costs
of the acquisition. Vista is a provider of collaborative business-to-business
software solutions that enable retailers and consumer goods manufacturers to
more efficiently synchronize and integrate data, including product descriptions,
product images, pricing and promotion information throughout their supply and
demand chains. Vista's solutions also enable consumer goods manufacturers to
manage trade promotions, minimize trade deductions costs and more accurately
forecast product demand. With this acquisition, we have expanded the JDA
Portfolio with complementary software products that leverage the Microsoft .Net
Platform and address the critical need for server-to-server data synchronization
in Internet-based collaborative commerce. The acquisition was accounted for as a
purchase, and accordingly, the operating results of Vista have been included in
our consolidated financial statements from the date of acquisition. Pro forma
operating results have not been presented as the acquisition is not material to
our consolidated financial statements. In connection with the Vista acquisition,
we recorded approximately $229,000 of goodwill in our Retail Enterprise Systems
70
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reporting unit and approximately $2.1 million of goodwill in our Collaborative
Solutions reporting unit. The following summarizes the fair values of the assets
acquired and liabilities assumed at the date of acquisition.
<Table>
Fair value of current assets acquired....................... $ 662
Software technology......................................... 1,100
Customer lists.............................................. 1,110
Other intangible assets..................................... 80
Goodwill.................................................... 2,290
Deferred revenue............................................ (681)
------
Total acquisition cost of Vista Software Solutions,
Inc. .................................................. 4,561
Accruals for direct costs related to the acquisition........ (555)
------
Total cash expended to acquire Vista Software Solutions,
Inc. .................................................. $4,006
======
</Table>
J -- Commerce Inc. In April 2002, we acquired certain intellectual
property of J -- Commerce Inc. ("J -- Commerce"), a privately held Canadian
corporation, for a total cost of $4.2 million, which includes the purchase price
of $4.0 million plus $185,000 in direct costs of the acquisition. J -- Commerce
developed point-of-sale software solutions based on Java(TM) technology. We have
subsequently developed a Portfolio Point of Sales application ("PPOS") that
combines the J -- Commerce point-of-sale software technology with our
Internet-based Store Portal application to provide a complementary product
strategy with Win/DSS for larger retail customers that have annual sales in
excess of $5 billion and/or a large number of stores and/or registers per store.
The acquisition was accounted for as a purchase and accordingly, the operating
results of J -- Commerce have been included in our consolidated financial
statements from the date of acquisition. Pro forma operating results have not
been presented as the acquisition is not material to our consolidated financial
statements. In connection with the J -- Commerce acquisition, we expensed
$800,000 of purchased in-process research and development at the date of
acquisition, and recorded approximately $1.3 million of goodwill in our In-Store
Systems reporting unit. The following summarizes the fair values of the assets
acquired and liabilities assumed at the date of acquisition.
<Table>
Software technology......................................... $2,060
In-process research and development......................... 800
Goodwill.................................................... 1,325
------
Total acquisition cost of Engage, Inc..................... 4,185
Accruals for direct costs related to the acquisition........ (15)
------
Total cash expended to acquire Engage, Inc................ $4,170
======
</Table>
E3 Corporation. In September 2001, we completed the acquisition of E3
Corporation ("E3") for a total cost of $60.1 million, which includes $20 million
in cash and the exchange of 1,600,080 shares of our unregistered common stock
for all of the outstanding stock of E3 held by the former shareholders of E3, as
well as $5.4 million in fees and direct costs associated with the acquisition
and $10.5 million in restructuring costs to exit certain activities of E3. The
measurement date for the acquisition was September 4, 2001. That is the date
that the significant terms of the transaction were agreed to, including the
amount of consideration to be exchanged, and the number of shares to be issued
was known and would not change. In accordance with paragraph 4 of Financial
Accounting Standards Board Emerging Issues Task Force Issue No. 99-12 ("EITF No.
95-12"), Accounting for Formula Arrangements under Issue No. 95-19, the stock
consideration was valued at $17.86833 per share, which represents the average
stock price for the three trading days prior to the measurement date (August
29-31, 2001) and three trading days after the measurement date (September 4-6,
2001). September 1-3, 2001 fell over the Labor Day Holiday weekend and were not
trading days. The shares
71
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
issued to acquire E3 were issued in a private transaction and were not subject
to immediate registration rights. The former E3 shareholders received
contractual rights to cause us to register up to 800,040, or 50% of the
unregistered shares beginning December 8, 2001, subject to certain limitations.
The per share consideration for these restricted shares was reduced by a 30%
valuation adjustment for the trading restrictions attached to the stock. The
former E3 shareholders also received the right to include their shares in any
registration initiated by us. The acquisition was accounted for as a purchase,
and accordingly, the operating results of E3 have been included in our
consolidated financial statements from the date of acquisition.
The E3 product suite included inventory optimization systems such as
E3Trim, a warehouse and distribution center forecasting and replenishment
solution we now market as Advanced Warehouse Replenishment by E3, and E3Slim, a
store level forecasting and replenishment solution we now market as Advanced
Store Replenishment by E3; advanced analytic solutions such as Consumer
Outlook!, a data mining application for consumer behavior patterns, and Pin
Point!, an application that refines seasonal profile assignments which have
subsequently been incorporated in our INTELLECT series of advanced analytic
modules; and certain collaborative planning, forecasting and replenishment
("CPFR") solutions which we now market as MARKETPLACE REPLENISHMENT. As of
December 31, 2003, there were approximately 200 trading partners worldwide live
and operational on our MARKETPLACE REPLENISHMENT CPFR solution that enables
manufacturers, distributors and retailers to work from a single, shared demand
forecast. We believe that due to the acquisition of E3, we are now the leading
provider of inventory replenishment solutions to retailers and their suppliers.
Importantly, nearly 80% of E3's acquired customer base was non-retail and as a
result, we have accelerated our CPFR initiatives by gaining an immediate
presence in the wholesale and distribution industries that we had already
targeted for growth.
In connection with the E3 acquisition, we expensed $2.2 million of
purchased in-process research and development at the date of acquisition, and
recorded approximately $24.1 million of goodwill in our Retail Enterprise
Systems reporting unit and approximately $11.3 million of goodwill in our
Collaborative Solutions reporting unit. The total acquisition cost of $60.1
million was allocated to the acquired assets and liabilities based on their fair
values.
The following summarizes the fair values of the assets acquired and
liabilities assumed at the date of acquisition.
<Table>
Current assets acquired..................................... $ 14,036
Fixed assets acquired....................................... 2,402
Software technology......................................... 12,600
Customer lists.............................................. 22,100
Trademarks.................................................. 3,300
In-process research and development......................... 2,200
Goodwill.................................................... 35,350
--------
Total assets acquired..................................... 91,988
Current liabilities assumed................................. (12,906)
Deferred revenue............................................ (2,205)
Long-term debt assumed...................................... (1,627)
Deferred tax liability, net................................. (15,164)
--------
Total liabilities assumed................................. (31,902)
--------
Net assets acquired.................................... $ 60,086
========
</Table>
72
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The trademarks recorded in this transaction have indefinite useful lives
that extend beyond the foreseeable future. The values allocated to goodwill and
trademarks will not be amortized but are subject to annual impairment tests (see
Note 7).
In conjunction with the E3 acquisition, we recorded initial acquisition
reserves of approximately $14.6 million for restructuring costs to exit the
activities of E3 and other direct costs associated with the acquisition. These
costs related primarily to facility closures, employee severance, investment
banker fees, and legal and accounting costs. We subsequently increased the
purchase price and the E3 acquisition reserves by $1.3 million during 2002 based
on our revised estimates of the restructuring costs to exit the activities of E3
and the other direct costs of the acquisition. In third quarter 2003, we reduced
our estimate of employee severance and termination benefits costs by $172,000
based upon the final settlement with certain international employees and accrued
an additional $190,000 for facility termination and sublease costs based on our
revised estimate of the time required to sublease the vacated office space in
the current economic environment. Both adjustments were made through the income
statement. The unused portion of the acquisition reserves, which are included in
accrued expenses and other liabilities on the balance sheet, were approximately
$525,000 and $1.2 million at December 31, 2003 and 2002, respectively.
A summary of the charges and adjustments recorded against the reserves is
as follows:
<Table>
<Caption>
BALANCE BALANCE
INITIAL CASH ADJ TO DECEMBER 31, CASH NON-CASH ADJ TO DECEMBER 31,
DESCRIPTION OF CHARGE RESERVE CHARGES RESERVES 2002 CHARGES CHARGES RESERVES 2003
- --------------------- ------- -------- -------- ------------ ------- -------- -------- ------------
RESTRUCTURING CHARGES UNDER EITF 95-3:
Facility termination
and sublease costs... $ 4,689 $ (5,040) $1,129 $ 778 $(418) $(25) $ 190 $525
Employee severance and
termination
benefits............. 4,351 (4,115) 184 420 (248) (172) --
Termination payments to
distributors......... 500 (100) (400) -- -- -- -- --
E3 user group and trade
show cancellation
fees................. 84 (72) (12) -- -- -- -- --
DIRECT COSTS UNDER SFAS NO. 141:
Legal and accounting
costs................ 2,344 (2,709) 407 42 (42) -- -- --
Investment banker
fees................. 2,119 (2,119) -- -- -- -- -- --
Due diligence fees and
expenses............. 350 (376) 26 -- -- -- -- --
Filing fees, appraisal
services and transfer
taxes................ 110 (100) (10) -- -- -- -- --
------- -------- ------ ------ ----- ---- ----- ----
Total................ $14,547 $(14,631) $1,324 $1,240 $(708) $(25) $ 18 $525
======= ======== ====== ====== ===== ==== ===== ====
</Table>
The facility termination and sublease costs are costs of a plan to exit an
activity of an acquired company as described in Financial Accounting Standards
Board Emerging Issues Task Force Issue No. 95-3 ("EITF No. 95-3"), Recognition
of Liabilities in Connection with a Purchase Business Combination, and include
the estimated costs of management's plan to shut down nine offices of E3 shortly
after the acquisition date. These costs have no future economic benefit to the
Company and are incremental to the other costs incurred by the Company or E3.
Immediately following the consummation of the E3 acquisition, the Company
engaged real estate advisers and began the necessary activities to shut down the
offices and sublet the locations or negotiate early termination agreements with
the various landlords. The most significant E3 facility (the former Corporate
Headquarters) was difficult to sublet and in July 2002 we settled with the
landlord by paying a $3.4 million lease termination fee. This resulted in a
$950,000 adjustment to the facility termination and
73
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sublease costs acquisition reserve. The remaining amounts in this reserve are
being paid out as the leases and any related subleases run through their
remaining terms.
Employee severance and termination benefits are costs resulting from a plan
to involuntarily terminate employees from an acquired company as described in
EITF No. 95-3. As of the consummation date of the acquisition, executive
management approved a plan to involuntarily terminate approximately 31% of the
338 full time employees of E3. In the first three months following the
consummation of the E3 acquisition, management completed the assessment of which
employees would be involuntarily terminated and communicated the termination
arrangements to the affected employees in accordance with statutory requirements
of the local jurisdictions in which the employees were located. As of December
31, 2003, all employee severance and termination benefits have been paid.
The following pro forma consolidated results of operations for the year
ended December 31, 2001 assume the E3 acquisition occurred as of January 1st of
that 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 the period presented, nor are they necessarily indicative of future
consolidated results.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2001
------------
Total revenues.............................................. $224,782
Net income (loss)........................................... $ (2,679)
Basic earnings (loss) per share............................. $ (.11)
Diluted earnings (loss) per share........................... $ (.11)
</Table>
NeoVista Decision Series. In June 2001, we acquired certain assets of
Accrue Software, Inc. ("Accrue") for $4.9 million in cash. The acquired assets
include the NeoVista Decision Series ("Decision Series"), a comprehensive,
enterprise-level data mining toolset that enables retailers to design and build
applications that identify buying patterns and predictive relationships in their
business activity, and which are now marketed as modules of Intellect. In
addition to Decision Series, we acquired the RDS-Assort and RDS-Profile
products, which are now marketed as Channel Clustering by Intellect, and
Seasonal Profiling by Intellect, respectively. The acquisition was accounted for
as a purchase, and accordingly, the operating results of the acquired assets
have been included in our consolidated financial statements from the date of
acquisition. Pro forma operating results have not been presented, as the effect
of the acquisition is not material to our consolidated financial statements. The
following summarizes the fair values of the assets acquired and liabilities
assumed at the date of acquisition.
<Table>
Fixed assets acquired....................................... $ 5
Software technology......................................... 2,500
Customer lists.............................................. 200
Assembled workforce......................................... 256
Goodwill.................................................... 2,727
------
Total assets acquired..................................... 5,688
Current liabilities assumed................................. (750)
------
Total liabilities assumed................................. (750)
------
Net assets acquired.................................... $4,938
======
</Table>
Amortization of goodwill and the assembled workforce intangible recorded in
this transaction ceased on December 31, 2001. The unamortized balance of
$213,000 on the assembled workforce intangible was reclassified to goodwill in
2002.
74
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Zapotec Software, Inc. In February 2001, we acquired certain assets of
Zapotec Software, Inc. ("Zapotec") for $1.2 million in cash, and assumed certain
trade and other liabilities, and specific acquisition related liabilities for
consulting and maintenance obligations under assumed contracts. Zapotec's
primary product, ProMax, was a software solution that enabled retailers,
suppliers and distributors to manage their trade allowance and promotional
programs by automating the contract fulfillment, claim generation and accounts
receivable process. We now market the ProMax functionality as VENDOR INCENTIVE
MANAGEMENT ("VIM"). In addition to ProMax, we acquired the Ad Plan application.
The Ad Plan technology was the basis for the development of our MARKETING
EXPENSE MANAGEMENT ("MEM") application. The acquisition was accounted for as a
purchase, and accordingly, the operating results of Zapotec have been included
in our consolidated financial statements from the date of acquisition. The
following summarizes the fair values of the assets acquired and liabilities
assumed at the date of acquisition.
<Table>
Current assets acquired..................................... $ 14
Software technology......................................... 1,143
Customer lists.............................................. 55
Assembled workforce......................................... 85
Trademarks.................................................. 10
In-process research and development......................... 161
------
Total assets acquired..................................... 1,468
Current liabilities assumed................................. (218)
------
Total liabilities assumed................................. (218)
------
Net assets acquired.................................... $1,250
======
</Table>
The allocated value for IPR&D of $161,000 was expensed at the date of
acquisition. Amortization on the assembled workforce intangible recorded in this
transaction ceased on December 31, 2001 and the unamortized balance of $58,000
was reclassified to goodwill in 2002.
The following pro forma consolidated results of operations for the year
ended December 31, 2001 assume the Zapotec acquisition occurred as of January
1st of that 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 the period presented, nor are they necessarily indicative of
future consolidated results.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
2001
------------
Total revenues.............................................. $206,923
Net income.................................................. $ 9,532
Basic earnings per share.................................... $ .38
Diluted earnings per share.................................. $ .37
</Table>
3. SUBSEQUENT EVENT -- ACQUISITION OF TIMERA RETAIL SOLUTIONS
On January 29, 2004 we acquired the intellectual property and certain other
assets of Timera Retail Solutions ("Timera"), for a total cost of $14.2 million,
which includes the purchase price of $13.0 million plus $1.2 million in direct
costs of the acquisition. Timera is a provider of integrated workforce
management solutions for the retail and consumer goods industry. Timera's
Enterprise Workforce Management product suite will expand our JDA Portfolio and
complement our existing IN-STORE SYSTEMS with web-based functionality for labor
scheduling and budgeting, time and attendance, demand forecasting, labor
tracking, and other key processes for proactive store level labor management.
The acquisition will be accounted for as a
75
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase, and accordingly, the operating results of Timera will be included in
our consolidated financial statements from the date of acquisition. In
connection with the Timera acquisition, we have extended employment offers to 51
former Timera employees, approximately two-thirds of which are in product
development. The final purchase price allocation has not been completed, however
we currently expect to record approximately $9.0 million of goodwill in our
In-Store Systems reporting unit, $4.6 million in software technology, and $1.1
million for customer lists. Pro forma operating results will not be presented as
the acquisition is not material to our consolidated financial statements.
4. MARKETABLE SECURITIES
We invest our excess cash in short-term, interest-bearing instruments that
have a low risk of capital loss, such as U.S. government securities, commercial
paper and corporate bonds, and money market securities. Commercial paper must be
rated "1" by 2 of the 5 nationally recognized statistical rating organizations.
Corporate bonds must be rated Aa2 or AA or better by Moody's and S&P,
respectively. All marketable securities held at December 31, 2003 have
contractual maturities of one year or less. Expected maturities could differ
from contractual maturities as borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. The amortized cost,
gross unrealized gains and losses and fair value of marketable securities at
December 31, 2003 and 2002 are as follows:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
2003
U.S. Government agencies.................... $30,676 $48 $-- $30,724
Corporate................................... 6,544 1 3 6,542
------- --- --- -------
Marketable securities..................... $37,220 $49 $ 3 $37,266
======= === === =======
2002
U.S. Government agencies.................... $18,881 $66 $-- $18,947
Corporate................................... 11,858 7 22 11,843
------- --- --- -------
Marketable securities..................... $30,739 $73 $22 $30,790
======= === === =======
</Table>
5. ACCOUNTS RECEIVABLE, NET
At December 31, 2003 and 2002 accounts receivable consist of the following:
<Table>
<Caption>
2003 2002
------- -------
Trade receivables........................................... $43,154 $53,077
Less allowance for doubtful accounts........................ (2,992) (6,000)
------- -------
Total..................................................... $40,162 $47,077
======= =======
</Table>
A summary of changes in the allowance for doubtful accounts for the
three-year period ended December 31, 2003 is as follows:
<Table>
<Caption>
2003 2002 2001
------- ------- -------
Balance at beginning of period.......................... $ 6,000 $ 4,971 $ 5,954
Provision for doubtful accounts......................... 500 2,900 4,884
Deductions, net......................................... (3,508) (1,871) (5,867)
------- ------- -------
Balance at end of period................................ $ 2,992 $ 6,000 $ 4,971
======= ======= =======
</Table>
76
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for doubtful accounts recorded in 2002 and 2001 includes
amounts related to large bankruptcy filings. Delays typically occur between the
periods in which we record a provision for doubtful accounts related to a large
bankruptcy filing, and the period in which the actual uncollectible receivable
balances are written-off. This results from our policy of waiting until final
settlement of the bankruptcy proceeding, or until there is a negotiated
settlement of the pre-petition balances, before charging the uncollectible
receivable balances against the allowance for doubtful accounts.
6. PROPERTY AND EQUIPMENT, NET
At December 31, 2003 and 2002 property and equipment consist of the
following:
<Table>
<Caption>
2003 2002
-------- --------
Computers, furniture & fixtures............................. $ 59,136 $ 52,116
Land and buildings.......................................... 2,294 3,058
Automobiles................................................. 131 248
Leasehold improvements...................................... 5,979 6,088
-------- --------
67,540 61,510
Less accumulated depreciation and amortization.............. (45,596) (40,173)
-------- --------
$ 21,944 $ 21,337
======== ========
</Table>
In April 2003, we sold a freestanding 5,000 square foot office facility in
the United Kingdom for approximately $1.6 million and recognized a gain of
$639,000. Subsequent to December 31, 2003, we purchased our corporate office
facility for approximately $23.8 million in cash. This transaction closed on
February 5, 2004. The purchase includes the corporate office building, a new
two-story parking garage, and approximately 8.8 acres of land upon which these
structures are located.
Depreciation expense for the three years ended December 31, 2003 was $8.7
million, $8.3 million, and $8.2 million, respectively.
7. GOODWILL AND OTHER INTANGIBLES, NET
At December 31, 2003 and 2002 goodwill and other intangible assets consist
of the following:
<Table>
<Caption>
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Goodwill.......................... $ 62,397 $ -- $ 59,801 $ --
-------- -------- -------- --------
Other intangibles:
Amortized intangible assets
Customer Lists.................. 39,598 (8,964) 36,348 (5,897)
Software technology............. 35,060 (13,754) 31,721 (9,237)
Unamortized intangible assets
Trademarks...................... 3,700 -- 3,700 --
-------- -------- -------- --------
78,358 (22,718) 71,769 (15,134)
-------- -------- -------- --------
$140,755 $(22,718) $131,570 $(15,134)
======== ======== ======== ========
</Table>
During the year ended December 31, 2003, we recorded approximately $306,000
in goodwill in connection with our acquisition of certain assets of Engage,
Inc., and approximately $2.3 million in connection with our acquisition of
certain intellectual property of Vista Software Solutions, Inc. During the year
ended
77
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2002, we recorded $1.3 million in goodwill in connection with our
acquisition of certain intellectual property of J -- Commerce Inc. We also
recorded an additional $3.3 million in goodwill during 2002 as a result of
certain adjustments made to the estimated fair values of assets and liabilities
assumed in the acquisition of E3 and a reduction in the amount of deferred tax
asset recorded on this transaction to reflect our revised estimate of the
anticipated future tax benefits from acquisition costs incurred and research and
development credits. No goodwill was impaired or written-off during the years
ended December 31, 2003 or 2002. As of December 31, 2003, goodwill has been
allocated to our reporting units as follows: $42.6 million to Retail Enterprise
Systems, $1.3 million to In-Store Systems, and $18.5 million to Collaborative
Solutions.
Pursuant to SFAS No. 142, we performed an initial test for goodwill
impairment as of January 1, 2002, and an initial test for trademark impairment
during the three months ended March 31, 2002. In addition, we have completed our
required annual tests for goodwill and trademark impairment during the fourth
quarters of 2003 and 2002. We have found no indication of impairment of the
goodwill or trademarks allocated to our reporting units. Accordingly, absent
future indications of impairment, the next annual impairment tests will be
performed in fourth quarter 2004.
We reviewed the customer attrition rates for each significant acquired
customer group in fourth quarter 2003 to ensure that the rate of attrition is
not increasing and our estimates of life expectancy for our customer lists are
appropriate. There were no adjustments required.
Amortization expense for the three years ended December 31, 2003 was $7.6
million, $7.1 million and $8.5 million, respectively, and is shown as separate
line items in the consolidated statements of income within cost of revenues and
operating expenses. We expect amortization expense for the next five years to be
as follows:
<Table>
2004........................................................ $8,043
2005........................................................ $7,793
2006........................................................ $7,605
2007........................................................ $6,440
2008........................................................ $5,325
</Table>
The following table reconciles net income and earnings per share as
reported for years ended December 31, 2003, 2002 and 2001 to net income and
earnings per share as adjusted to exclude amortization expense, net of taxes,
related to goodwill and other intangible assets that are no longer being
amortized.
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
RECONCILIATION OF REPORTED NET INCOME:
Reported net income................................... $ 2,650 $ 8,930 $ 9,648
Pro forma amortization adjustments:
Goodwill........................................... -- -- 1,970
Assembled workforce................................ -- -- 513
Trademarks......................................... -- -- 31
------- ------- -------
Adjusted net income................................ $ 2,650 $ 8,930 $12,162
======= ======= =======
</Table>
78
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
BASIC EARNINGS PER SHARE:
Reported net income................................... $ .09 $ .32 $ .38
Pro forma amortization adjustments:
Goodwill........................................... -- -- .08
Assembled workforce................................ -- -- .02
Trademarks......................................... -- -- --
------- ------- -------
Adjusted net income................................ $ .09 $ .32 $ .48
======= ======= =======
DILUTED EARNINGS PER SHARE:
Reported net income................................... $ .09 $ .31 $ .37
Pro forma amortization adjustments:
Goodwill........................................... -- -- .08
Assembled workforce................................ -- -- .02
Trademarks......................................... -- -- --
------- ------- -------
Adjusted net income................................ $ .09 $ .31 $ .47
======= ======= =======
SHARES USED TO COMPUTE:
Basic earnings per share.............................. 28,645 28,047 25,316
Diluted earnings per share............................ 29,104 29,074 25,757
</Table>
8. PROMISSORY NOTE RECEIVABLE
In May 2001, we entered into a secured promissory note agreement with
Silvon Software, Inc. ("Silvon") under which we agreed to loan Silvon $3.5
million. We license certain applications from Silvon for use in our IDEAS
product. The loan is collateralized by a first priority security interest in all
of Silvon's intellectual property and a subordinated security interest in
accounts receivable and all other assets. The promissory note bears interest at
prime plus 1.5 percentage points, which is payable monthly. The agreement
provides for periodic payments towards the principal balance through the
retention of a portion of the royalties we owe Silvon from sales of the IDEAS
product, with any remaining accrued and unpaid interest and principal due and
payable on May 8, 2004. As of December 31, 2003 the entire promissory note
receivable has been classified as a current asset. We considered the entire
promissory note receivable balance long-term as of December 31, 2002 as the only
principal payments required to be made during 2003 were contingent upon future
sales of the IDEAS product which were not assured.
9. ACCRUED EXPENSES AND OTHER LIABILITIES
At December 31, 2003 and 2002, accrued expenses and other liabilities
consist of the following:
<Table>
<Caption>
2003 2002
------- -------
Accrued compensation and benefits........................... $13,138 $13,127
Restructuring and asset disposition charges................. 718 3,577
Accrued sales, VAT and property taxes....................... 2,104 2,771
Acquisition related reserves................................ 1,133 1,240
Other accrued expenses...................................... 5,941 6,242
------- -------
Total..................................................... $23,034 $26,957
======= =======
</Table>
79
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RESTRUCTURING, ASSET DISPOSITION AND OTHER MERGER RELATED CHARGES AND
RELOCATION COSTS TO CONSOLIDATE DEVELOPMENT AND SUPPORT ACTIVITIES
We recorded a $1.3 million restructuring charge in second quarter 2002 for
a workforce reduction of 53 full-time employees ("FTE"), primarily in the
consulting services function in the Americas and Europe. All workforce
reductions associated with this charge were made on or before June 30, 2002. All
employees potentially impacted by this restructuring were notified of the plan
of termination and the related benefits on or before June 30, 2002.
We recorded a restructuring charge of $5.0 million in fourth quarter 2002
for the workforce reduction and office closure costs to reorganize the Company
in connection with the implementation of the Customer Value Program ("CVP"), a
worldwide initiative designed to (i) refocus the organization on delivering
value to our existing customer base, (ii) strengthen our competitive position,
(iii) improve the quality, satisfaction and efficiency of our customers'
experience with JDA, (iv) increase revenue, (v) better align our cost structure,
and (vi) improve our operating results.
Implementation of the CVP included adjustments to our workforce and a
reallocation of our resources in response to a fundamental shift in the way we
develop product and bring it to market, as well as to changes in the demand for
the various types of products we sell, the length of implementation efforts
required and associated skill requirements. The workforce reduction enabled us
to better align our cost structure during the recent economic downturn, which
has adversely impacted our revenues, elongated our selling cycles, and delayed,
suspended or reduced the demand for certain of our products. The reorganization
resulted in the consolidation of nearly all product development and client
support activities at our corporate headquarters, a workforce reduction of
approximately 204 FTE and certain office closures. The workforce reduction
included certain employees involved in product development (55 FTE) and client
support services (22 FTE) who chose not to relocate, and reductions in
consulting services personnel (62 FTE), sales and marketing personnel (37 FTE),
and administrative functions (28 FTE). We have hired, expect to hire, or have
transferred from other departments within the Company, approximately 45 FTE in
product development and client support services to replace those individuals who
have chosen not to relocate to our corporate headquarters. All employees
potentially impacted by this reorganization were notified of the plan of
termination and the related benefits on or before December 31, 2002. Office
closure costs pertain to certain US, Latin American, and European offices that
were either under-performing or became redundant with the reorganization.
Approximately 150 people were offered the opportunity to relocate as part
of the CVP initiative to consolidate our development and client support
activities at our corporate headquarters. As of December 31, 2003, a total of 50
employees have relocated. We negotiated temporary retention arrangements ranging
from nine months to two years with 42 employees who have chosen not to relocate
in order to facilitate a smooth transition. We have subsequently offered
indefinite full-time employment to 19 of these employees, who we believe are
strategic to our current development efforts, and rescinded their retention
arrangements. We have incurred $2.2 million in relocation costs through December
31, 2003, including $1.8 million and $452,000 in 2003 and 2002, respectively, to
consolidate our development and client support activities at our corporate
headquarters. The relocation costs have been reported in income from continuing
operations as incurred. Accordingly, there were no accrued liabilities
associated with these charges at December 31, 2003 or 2002.
80
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the 2002 restructuring and office closure charges included in
accrued expenses and other liabilities is as follows:
<Table>
<Caption>
BALANCE BALANCE
LOSS ON AT LOSS ON AT
INITIAL CASH DISPOSAL DEC 31, CASH DISPOSAL ADJUSTMENTS DEC 31,
DESCRIPTION OF THE CHARGE RESERVE CHARGES OF ASSETS 2002 CHARGES OF ASSETS TO RESERVE 2003
- ------------------------- ------- ------- --------- ------- ------- --------- ----------- -------
Severance, benefits and legal
costs......................... $5,204 $(2,635) $ -- $2,569 $(2,211) $ -- $(197) $161
Office closure costs............ 1,083 (28) (47) 1,008 (570) (77) 196 557
------ ------- ---- ------ ------- ---- ----- ----
Total......................... $6,287 $(2,663) $(47) $3,577 $(2,781) $(77) $ (1) $718
====== ======= ==== ====== ======= ==== ===== ====
</Table>
During 2003, we reduced our estimate of severance, benefits and legal costs
by $197,000, primarily as a result of our decision to offer indefinite full-time
employment to certain employees previously subject to temporary retention
arrangements, and accrued an additional $196,000 for office closure costs based
on our revised estimate of the time required to sublease the vacated office
space in the current economic environment. Both adjustments were made through
the income statement. The remaining balance for severance, benefits and legal
costs represents the unpaid amounts under a disputed termination agreement with
a foreign employee. The remaining balance for office closure costs is being paid
out as the leases and any related subleases run through their remaining terms.
During 2001, we recorded restructuring, asset disposition and other merger
related charges of $749,000 in first quarter 2001 and an additional $236,000 in
fourth quarter 2001. The restructuring initiatives involved a workforce
reduction of 41 FTE including certain employees involved in implementation and
maintenance services (17 FTE), product development activities (7 FTE), sales and
marketing (10 FTE), and administrative functions (7 FTE), related in part to the
acquisition of E3. All workforce reductions associated with these charges were
made on or before March 31, 2001 or December 31, 2001, as appropriate. Office
closure costs pertain to certain European offices that became redundant after
the E3 acquisition (See Note 2). Other charges consist of the write-off of
certain merger and acquisition costs related to a potential acquisition that was
abandoned. A summary of the 2001 restructuring, asset disposition and other
merger related charges is as follows:
<Table>
<Caption>
INITIAL CASH NON-CASH BALANCE AT
DESCRIPTION OF THE CHARGE RESERVE CHARGES CHARGES DECEMBER 31, 2002
- ------------------------- ------- ------- -------- -----------------
Severance, benefits and related legal
costs..................................... $727 $(727) $-- $ --
Office closure costs...................... 50 (46) (4) --
Other Charges............................. 208 (208) -- --
---- ----- --- -----
Total................................... $985 $(981) $(4) $ --
==== ===== === =====
</Table>
11. DEFERRED REVENUE
At December 31, 2003 and 2002, deferred revenue consists of deferrals for
software license fees, maintenance, consulting and training and other services
as follows:
<Table>
<Caption>
2003 2002
------- -------
Software.................................................... $ 1,141 $ 1,124
Maintenance................................................. 21,658 19,060
Consulting.................................................. 1,842 2,335
Training and other.......................................... 593 812
------- -------
$25,234 $23,331
======= =======
</Table>
81
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. LEASE COMMITMENTS
Our corporate office is located in Scottsdale, Arizona, where we currently
occupy approximately 121,000 square feet of a 136,000 square foot facility and
have expansion rights on the remaining space. The corporate office is also used
for certain of our sales, marketing, consulting, customer support, training, and
product development functions. The lease on the corporate office, which
commenced in April 1999, has an initial term of ten years and a scheduled
monthly rate of approximately $135,000 that is effective through March 2004. In
June 2003, we agreed to take the remaining 15,000 square feet, effective
November 2004, and extended the term of lease through December 2014. Subsequent
to December 31, 2003, we purchased our corporate office facility for
approximately $23.8 million in cash. This transaction closed on February 5,
2004. The purchase includes the corporate office building, a new two-story
parking garage, and approximately 8.8 acres of land upon which these structures
are located.
We lease office space in the Americas for 15 regional sales and support
offices across the United States, Canada and Latin America, and for 18
international sales and support offices located in major cities throughout
Europe, Asia, Australia, and Japan. The leases are primarily noncancellable
operating leases and expire at various dates through the year 2014. Certain of
the leases contain renewal options. We expect that in the normal course of
business some or all of these leases will be renewed or that suitable additional
or alternative space will be available on commercially reasonable terms as
needed. In addition, we lease various computers, telephone systems, automobiles,
and office equipment under noncancellable leases with terms generally ranging
from 36 to 60 months. Certain of the equipment leases contain renewal options
and we expect that in the normal course of business some or all of these leases
will be renewed or replaced by other leases.
Rental expense under operating leases was $6.8 million in 2003, $7.7
million in 2002, and $6.8 million in 2001. The following summarizes future
minimum lease payments under noncancellable operating leases with minimum or
remaining lease terms in excess of one year at December 31, 2003, and excludes
$22.9 million in scheduled minimum lease payments on our corporate office
facility that we purchased on February 5, 2004.
<Table>
2004....................................................... $ 5,717
2005....................................................... 4,747
2006....................................................... 3,021
2007....................................................... 1,574
2008....................................................... 1,292
Thereafter................................................. 3,828
-------
Total future minimum lease payments...................... $20,179
=======
</Table>
In connection with the acquisition of E3 we provided reserves for direct
costs related to certain sublease obligations on redundant facilities. At of
December 31, 2003, these reserves represent $525,000 of the total minimum lease
payments shown above (See Note 2).
13. LEGAL PROCEEDINGS
We are involved in legal proceedings and claims arising in the ordinary
course of business. Although there can be no assurance, management does not
believe that the disposition of these matters will have a material adverse
effect on our business, financial position, results of operations or cash flows.
82
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. STOCKHOLDERS' EQUITY
Preferred Stock Purchase Rights Plan. We adopted a Preferred Stock
Purchase Rights Plan (the "Rights Plan") in October 1998 designed to deter
coercive or unfair takeover tactics and to prevent a person or a group from
gaining control of our Company without offering a fair price to all
stockholders.
Under the terms of the Rights Plan, a dividend distribution of one
Preferred Stock Purchase Right ("Right") for each outstanding share of our
common stock was made to holders of record on October 20, 1998. These Rights
entitle the holder to purchase one one-hundredth of a share of our Series A
Preferred Stock ("Preferred Stock") at an exercise price of $100. The Rights
become exercisable (a) 10 days after a public announcement that a person or
group has acquired shares representing 15% or more of the outstanding shares of
common stock, or (b) 10 business days following commencement of a tender or
exchange offer for 15% or more of such outstanding shares of common stock.
We can redeem the Rights for $0.001 per Right at any time prior to their
becoming exercisable. The Rights expire on October 1, 2008, unless we redeem
them earlier or they are exchanged for common stock. Under certain
circumstances, if a person or group acquires 15% or more of our common stock,
the Rights permit stockholders other than the acquirer to purchase common stock
having a market value of twice the exercise price of the Rights, in lieu of the
Preferred Stock. In addition, in the event of certain business combinations, the
Rights permit stockholders to purchase the common stock of an acquirer at a 50%
discount. Rights held by the acquirer will become null and void in both cases.
Treasury Stock Repurchase Program. In July 2002, our Board of Directors
authorized a repurchase of up to two million shares of our outstanding common
stock on the open market at prevailing market prices during a one-year period
ended July 22, 2003. We repurchased a total of 175,000 shares of our common
stock for $1.8 million under this program, including 75,000 shares for $757,000
in 2003 and 100,000 shares for $1.1 million in 2002.
In October 2000, our Board of Directors authorized a repurchase of up to
two million shares of our outstanding common stock on the open market at
prevailing market prices during a one-year period ended October 21, 2001. We
repurchased a total of 239,000 shares of our common stock for $2.7 million under
this program.
Stock Option Plans.
Our 1995 Stock Option Plan (the "1995 Option Plan") was approved by
stockholders and provided for the issuance of up to 2,025,000 shares of common
stock to employees under incentive and nonstatutory stock option grants.
Incentive and nonstatutory stock options were granted under the 1995 Option Plan
at prices not less than the fair market value of the common stock at the date of
grant. The options generally became exercisable over periods ranging from 18 to
48 months, commencing at the date of grant, and expire in ten years. The 1995
Option Plan was terminated effective April 24, 2001 except for those provisions
necessary to the administration of any outstanding options at the time of
termination. No further grants will be made under the 1995 Option Plan.
Accordingly, in 2001 we reduced the number of reserved shares under our stock
option plans by the 169,883 unissued shares that expired upon termination of the
1995 Option Plan.
Our 1996 Stock Option Plan (the "1996 Option Plan") was approved by
stockholders and currently provides for the issuance of up to 8,200,000 shares
of common stock to employees, consultants and directors under incentive and
nonstatutory stock option grants. The 1996 Option Plan contains certain grant
restrictions and limitations that prohibit us from (i) granting more than
1,200,000 shares common stock subject to new options in any 12-month period
(commencing May 25, 2000), subject to any stock split, re-capitalization,
dividend or related events, (ii) re-pricing any options granted under the 1996
Option Plan, and (iii) granting any options under the 1996 Option Plan with an
exercise price below fair market value of the common stock at the date of grant.
The options granted under the 1996 Option Plan generally vest over a three or
four-year
83
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period, commencing at the date of grant, and expire in ten years. Certain
options granted to executive officers during the year ended December 31, 2002
have shorter vesting periods and provide for accelerated vesting upon a change
of control in the Company's ownership. Beginning in January 2003, the standard
form of option agreement was modified to provide for a contractual term on new
grants equal to the vesting period of the option plus three years. The 1996
Option Plan has no scheduled termination date.
Our 1996 Outside Director Stock Option Plan (the "1996 Directors Plan") was
approved by stockholders and provides for the issuance of up to 225,000 shares
of common stock to eligible participants under nonstatutory stock option grants.
Under the 1996 Directors Plan, outside directors receive a one-time grant to
purchase 18,750 shares upon appointment to the Board of Directors, and an annual
option grant to purchase 6,000 shares for each year of service thereafter. The
nonstatutory stock options may be granted at a price not less than the fair
market value of the common stock at the date of grant. The options generally
vest over a three-year period commencing at the date of grant, and expire in ten
years. The 1996 Directors Plan has no scheduled termination date.
Our 1998 Nonstatutory Stock Option Plan (the "1998 Option Plan") has not
been approved by stockholders. The 1998 Option Plan currently provides for the
issuance of up to 762,500 shares of common stock to employees under nonstatutory
stock option grants and permits option grants to executive officers under
certain conditions. The 1998 Option Plan was amended in October 2001 to increase
the number of shares of common stock reserved for issuance from 412,500 to
762,500. The nonstatutory stock options may be granted at a price not less than
the fair market of our common stock on the date of grant. Options granted under
the 1998 Option Plan during the three-year period ended December 31, 2003
generally vest over a three to four-year period commencing at the date of grant
and expire over periods ranging from five years to ten years. Beginning in
January 2003, the standard form of option agreement was modified to provide for
a contractual term on new grants equal to the vesting period of the option plus
three years. Certain options granted to executive officers during the year ended
December 31, 2002 have shorter vesting periods and provide for accelerated
vesting upon a change of control in the Company's ownership. The 1998 Option
Plan has no scheduled termination date.
84
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the combined stock option activity during the
three-year period ended December 31, 2003:
<Table>
<Caption>
OPTIONS OUTSTANDING
-----------------------------
OPTIONS AVAILABLE EXERCISE PRICE
FOR GRANT SHARES PER SHARE
----------------- ---------- ----------------
Balance, January 1, 2001................. 2,996,591 4,248,127 $ 2.33 to $37.25
Increase in reserved shares............ 350,000 -- --
Plan shares expired.................... (169,883) -- --
Granted................................ (1,429,063) 1,429,063 $ 9.31 to $16.89
Cancelled.............................. 213,879 (213,879) $ 7.88 to $17.19
Exercised.............................. -- (474,418) $ 2.33 to $14.63
---------- ----------
Balance, December 31, 2001............... 1,961,524 4,988,893 $ 2.33 to $37.25
Increase in reserved shares............ -- -- --
Granted................................ (2,116,200) 2,116,200 $ 8.50 to $28.20
Cancelled.............................. 501,268 (501,268) $ 8.56 to $21.01
Exercised.............................. -- (1,324,768) $ 2.83 to $26.96
---------- ----------
Balance, December 31, 2002............... 346,592 5,279,057 $ 2.33 to $37.25
Increase in reserved shares............ 1,200,000 -- --
Granted................................ (451,350) 451,350 $10.33 to $17.00
Cancelled.............................. 268,085 (268,085) $ 8.56 to $26.96
Exercised.............................. -- (348,056) $ 6.44 to $16.89
---------- ----------
Balance, December 31, 2003............... 1,363,327 5,114,266 $ 2.33 to $37.25
========== ==========
</Table>
The following summarizes certain weighted average information on options
outstanding at December 31, 2003:
<Table>
<Caption>
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------- ------------ -------- ----------- --------
$2.33 to $2.83.................. 7,502 1.75 $ 2.83 7,500 $ 2.83
$6.44 to $9.69.................. 783,036 5.43 $ 8.62 775,128 $ 8.62
$10.00 to $15.75................ 2,857,471 7.46 $12.30 1,784,984 $12.57
$16.00 to $23.85................ 1,302,539 6.65 $19.74 685,197 $20.93
$24.47 to $37.25................ 163,718 5.73 $28.16 122,816 $28.51
--------- ---------
5,114,266 3,375,625
========= =========
</Table>
Employee Stock Purchase Plan.
Our 1999 Employee Stock Purchase Plan ("1999 Purchase Plan") was approved
by stockholders. The 1999 Purchase Plan provides eligible employees the ability
to purchase our common stock semi-annually at 85% of the lesser of (1) the fair
market value on the first day of the 24-month offering period, or (2) the fair
market value on the last day of each semi-annual purchase period. The 1999
Purchase Plan provides for the initial issuance of 750,000 shares with an
automatic annual increase, beginning August 1, 2000 through August 1, 2009,
equal to the lesser of 750,000 shares or such lesser amount of shares as
determined by the
85
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Board. The shares reserved for issuance under the 1999 Purchase Plan were
increased by 750,000 shares in both August 2001 and August 2002. We terminated
the 1999 Purchase Plan in August 2003. During 2001, 391,602 shares were
purchased at prices ranging from $8.02 to $11.05. During 2002, 335,985 shares
were purchased at prices ranging from $10.64 to $17.40. During 2003, 385,003
shares were purchased at prices ranging from $10.57 to $10.58.
In January 2002 the Securities and Exchange Commission adopted new rules
for the disclosure of equity compensation plans. The purpose of the new rules is
to summarize the potential dilution that could occur from past and future equity
grants under all equity compensation plans. The following provides tabular
disclosure of the number of securities to be issued upon the exercise of
outstanding options, the weighted average exercise price of outstanding options,
and the number of securities remaining available for future issuance under
equity compensation plans, aggregated into two categories -- plans that have
been approved by stockholders and plans that have not:
<Table>
<Caption>
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES REMAINING
BE ISSUED UPON EXERCISE EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE UNDER
EQUITY COMPENSATION PLANS OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS EQUITY COMPENSATION PLANS
- ------------------------- ----------------------- ------------------- -----------------------------------
Approved by stockholders:
1995 Option Plan....... 7,502 $2.833 --
1996 Option Plan....... 4,506,372 $14.01 1,234,162
1996 Directors Plan.... 139,480 $18.64 45,417
1999 Purchase Plan..... -- -- --
--------- ------ ---------
4,653,354 $14.13 1,279,579
Not approved by stockholders:
1998 Option Plan....... 460,912 $14.04 83,748
--------- ------ ---------
5,114,266 $14.12 1,363,327
========= ====== =========
</Table>
During the three years ended December 31, 2003, certain employees exercised
options or sold stock acquired under the stock purchase plan in disqualifying
dispositions that resulted in deductions for income tax purposes. Our tax
liability for 2003, 2002, and 2001 was reduced by $777,000, $5,770,000 and
$907,000, respectively, to give effect to these dispositions with an offsetting
credit to additional paid-in capital.
15. EMPLOYEE BENEFIT PLANS
We maintain a defined 401(k) contribution plan (401(k) Plan) for the
benefit of our employees. Participant contributions vest immediately and are
subject to the limits established from time-to-time by the Internal Revenue
Service. We provide discretionary matching contributions to the 401(k) Plan on
an annual basis. Our matching contributions, which vest over a five-year graded
vesting schedule, were 12% per year for the three years ended December 31, 2003.
Beginning January 1, 2004, we increased our matching contribution to 25% and now
provide 100% vesting after 2 years of service. Our matching contributions to the
401(k) Plan were $486,000, $489,000, and $362,000 in 2003, 2002 and 2001,
respectively.
86
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. INCOME TAXES
The provision for income taxes includes income taxes currently payable and
those deferred due to temporary differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future. The components of the provision for income taxes included
in the Consolidated Statements of Income are as follows:
<Table>
<Caption>
2003 2002 2001
------- ------- ------
Current taxes:
Federal and state...................................... $ 4,550 $ 5,534 $2,440
Foreign................................................ 2,451 1,773 1,502
------- ------- ------
Total current taxes................................. 7,001 7,307 3,942
Deferred taxes........................................... (7,018) (6,271) 1,159
------- ------- ------
Income tax provision (benefit).................... $ (17) $ 1,036 $5,101
======= ======= ======
</Table>
The deferred tax benefit in 2003 results primarily from the capitalization,
for income tax purposes, of certain research and development costs. The deferred
tax benefit in 2002 results from the transfer of our research and development
credit carryforwards from current income tax receivables to a long-term deferred
tax asset.
The provision for income taxes differed from the amounts computed by
applying the statutory U.S. federal income tax rate of 34% in 2003, and 35% in
2002 and 2001 to income before income taxes as a result of the following:
<Table>
<Caption>
2003 2002 2001
----- ------- -------
Federal statutory rate.................................... $ 896 $ 3,489 $ 5,162
Research and development credit........................... (712) (1,104) (1,025)
Meals, entertainment, goodwill amortization and other non-
deductible expenses..................................... 147 129 923
State income taxes........................................ 86 194 289
Foreign rate differential................................. 464 (2,023) 140
Income tax audit resolution............................... -- (1,919) (365)
Change in deferred tax valuation allowance................ (976) 2,456 --
Other..................................................... 78 (186) (23)
----- ------- -------
Income tax provision (benefit)....................... $ (17) $ 1,036 $ 5,101
===== ======= =======
</Table>
87
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax effects of temporary differences that give rise to our
deferred income tax assets and liabilities are as follows:
<Table>
<Caption>
2003 2002
--------------------- ---------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------- ----------- ------- -----------
Deferred tax asset:
Accruals and reserves..................... $3,043 $ -- $3,906 $ --
Deferred revenue.......................... 826 -- 932 --
Foreign deferred and NOL.................. 1,010 920 744 --
Tax credit carryforwards.................. -- 4,215 -- 7,900
R&D Expenses Capitalized.................. -- 7,931
AMT Credit Carryforward................... -- 223
Other..................................... -- -- -- 42
------ ------- ------ -------
Deferred tax asset..................... 4,879 13,289 5,582 7,942
Valuation allowance on deferred tax asset... -- (1,481) -- (3,481)
------ ------- ------ -------
Deferred tax liability:
Property and equipment.................... -- (144) -- (982)
Goodwill and other intangibles............ -- (7,901) -- (8,428)
Other..................................... (16) -- (18) (31)
------ ------- ------ -------
Deferred tax liability................. (16) (8,045) (18) (9,441)
Total................................ $4,863 $ 3,763 $5,564 $(4,980)
====== ======= ====== =======
</Table>
Residual United States income taxes have not been provided on undistributed
earnings of our foreign subsidiaries. These earnings are considered to be
indefinitely reinvested and, accordingly, no provision for United States federal
and state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both United States income taxes and withholding taxes payable to various foreign
countries less an adjustment for foreign tax credits. It is not practicable to
estimate the amount of additional tax that might be payable on the foreign
earnings. The Company has incurred net operating losses in certain foreign
jurisdictions that will be carried forward to future years.
From time to time, we may be subject to audit by federal, state and/or
foreign taxing authorities. During 2002, we recognized a benefit of $1.9 million
that related primarily to the resolution of an audit by the Inland Revenue of
our United Kingdom subsidiaries for the years 1997 through 2000, and a tentative
settlement in the United States of an income tax examination by the Internal
Revenue Service of our 1998 and 1999 federal income tax returns. Under the
settlement, the Internal Revenue Service agreed to allow the Company to take a
research and development expense tax credit for most of the qualifying expenses
originally reported in the Company's corporate income tax returns for those
years.
At December 31, 2003, we had approximately $2.7 million of federal research
and development tax credit carryforwards that expire at various dates through
2023. We also had approximately $1.5 million of foreign tax credit carryforwards
that expire beginning in 2004. In 2002, we established a valuation allowance of
$3.5 million for foreign tax credit carryovers due to our excess credit
position. We subsequently elected in third quarter 2003 to capitalize a
significant portion of our research and development costs in the 2002 federal
income tax return, which allowed us to more fully utilize certain tax credits
that could not previously be realized. With this election, we reversed $2.3
million of the previously recorded valuation allowance, which resulted in a
one-time tax benefit of approximately $1.0 million, and an increase to
additional paid in capital of
88
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1.0 million. At December 31, 2003 the valuation allowance was $1.5 million
because we believe that it is more likely than not that the foreign tax credits
carryforwards will not be realized.
17. EARNINGS PER SHARE
Earnings per share for the three years ended December 31, 2003 is
calculated as follows:
<Table>
<Caption>
2003 2002 2001
------- ------- -------
Net income.............................................. $ 2,650 $ 8,930 $ 9,648
------- ------- -------
Shares -- Basic earnings per share...................... 28,645 28,047 25,316
Common stock equivalents................................ 459 1,027 441
------- ------- -------
Shares -- Diluted earnings per share.................... 29,104 29,074 25,757
======= ======= =======
Basic earnings per share................................ $ .09 $ .32 $ .38
======= ======= =======
Diluted earnings per share.............................. $ .09 $ .31 $ .37
======= ======= =======
</Table>
18. BUSINESS SEGMENTS, GEOGRAPHIC DATA AND MAJOR CUSTOMERS
We are a leading provider of sophisticated software solutions designed
specifically to address the demand and supply chain management, business
process, decision support, e-commerce, inventory optimization and collaborative
planning and forecasting requirements of the retail industry and its suppliers.
Our solutions enable our customers to collect, manage, organize and analyze
information throughout their retail enterprise, and to collaborate with
suppliers and customers over the Internet at multiple levels within their
organizations. We conduct business in three geographic regions that have
separate management teams and reporting structures: the Americas, Europe, and
Asia/Pacific. 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 geographical region.
The accounting policies of each region are the same as those described in Note 1
of the Notes to Consolidated Financial Statements. The geographic distribution
of our revenues and identifiable assets for the three-year period ended December
31, 2003 is as follows:
<Table>
<Caption>
2003 2002 2001
-------- -------- --------
REVENUES:
Americas........................................... $134,974 $142,247 $143,737
Europe............................................. 57,291 59,577 47,321
Asia/Pacific....................................... 22,916 21,424 24,787
-------- -------- --------
215,181 223,248 215,845
Sales and transfers among regions.................. (7,762) (3,793) (2,029)
-------- -------- --------
Total revenues.................................. $207,419 $219,455 $213,816
======== ======== ========
IDENTIFIABLE ASSETS:
Americas........................................... $267,834 $260,502 $230,345
Europe............................................. 40,023 43,446 48,336
Asia/Pacific....................................... 12,768 11,106 9,961
-------- -------- --------
Total identifiable assets....................... $320,625 $315,054 $288,642
======== ======== ========
</Table>
89
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No customer accounted for more than 10% of our revenues during the three
years ended December 31, 2003.
We have organized our business segments around the distinct requirements of
retail enterprises, retail stores, and suppliers to the retail industry:
- Retail Enterprise Systems include corporate level merchandise management
systems ("MERCHANDISE MANAGEMENT SYSTEMS") that enable retailers to
manage their inventory, product mix, pricing and promotional execution,
and enhance the productivity and accuracy of warehouse processes. In
addition, Retail Enterprise Systems include a comprehensive set of tools
for planning inventory and in-store space decisions throughout the demand
chain, analyzing business results and trends, automating demand
forecasting and replenishment, tracking customer shopping patterns,
optimizing revenues through trade allowance and promotional program
management ("STRATEGIC MERCHANDISE MANAGEMENT SOLUTIONS").
- In-Store Systems include point-of-sale, labor scheduling and back office
applications that enable retailers to capture, analyze and transmit
certain sales, store inventory and other operational information to
corporate level merchandise management and payroll systems using
hand-held, radio frequency devices, point-of-sale workstations or via the
Internet. In-Store Systems now include a workforce management solution to
optimize the scheduling of in-store labor which typically represents the
next largest operational cost for a retail after inventory.
- Collaborative Solutions provide applications that enable
business-to-business collaborative activities such as collaborative
planning, forecasting and replenishment ("CPFR"), collaborative category
management including collaborative space and assortment planning, and
collaborative revenue management through trade funds management programs.
Our Collaborative Solutions offerings leverage existing solutions
deployed to retailers within our Retail Enterprise Systems business
segment.
90
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the revenues, operating income (loss), and depreciation
attributable to each of these business segments for the three years ended
December 31, 2003 is as follows:
<Table>
<Caption>
2003 2002 2001
-------- -------- --------
REVENUES:
Retail Enterprise Systems.......................... $146,266 $151,113 $162,251
In-Store Systems................................... 13,568 25,475 27,073
Collaborative Solutions............................ 47,585 42,867 24,492
-------- -------- --------
$207,419 $219,455 $213,816
======== ======== ========
OPERATING INCOME (LOSS)
Retail Enterprise Systems.......................... $ 18,191 $ 29,825 $ 34,929
In-Store Systems................................... (405) 5,337 5,484
Collaborative Solutions............................ 11,195 10,470 7,636
Other (see below).................................. (27,695) (37,366) (35,971)
-------- -------- --------
$ 1,286 $ 8,266 $ 12,078
======== ======== ========
DEPRECIATION
Retail Enterprise systems.......................... $ 6,260 $ 5,937 $ 6,401
In-Store systems................................... 843 1,270 1,385
Collaborative Solutions............................ 1,597 1,146 419
-------- -------- --------
$ 8,700 $ 8,353 $ 8,205
======== ======== ========
OTHER:
General and administrative expenses................ $ 23,473 $ 26,978 $ 27,099
Amortization of intangible assets.................. 3,067 2,849 5,526
Relocation costs to consolidate development and
customer support activities..................... 1,794 452 --
In-process research and development charge (see
Note 2)......................................... -- 800 2,361
Restructuring, asset disposition and other merger
related charges (see Note 9).................... -- 6,287 985
Gain of sale of office facility.................... (639) -- --
-------- -------- --------
$ 27,695 $ 37,366 $ 35,971
======== ======== ========
</Table>
Operating income in the Retail Enterprise Systems, In-Store Systems and
Collaborative Solutions business segments includes direct expenses for software
licenses, maintenance services, service revenues, amortization of acquired
software technology, sales and marketing expenses, product development expenses,
as well as allocations for occupancy costs and depreciation expense. The "Other"
caption includes general and administrative expenses and other charges that are
not directly identified with a particular business segment and which management
does not consider in evaluating the operating income of the business segment.
91
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY DATA (UNAUDITED)
The following table presents selected unaudited quarterly operating results
for the two-year period ended December 31, 2003. We believe that all necessary
adjustments have been included in the amounts shown below to present fairly the
related quarterly results.
CONSOLIDATED STATEMENT OF INCOME DATA:
<Table>
<Caption>
2003
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
Revenues............................ $41,255 $52,965 $57,951 $55,248 $207,419
Income (loss) from operations....... (3,988) 1,607 3,531 136 1,286
Net income (loss)................... (2,238) 1,291 3,374 223 2,650
Basic earnings (loss) per share..... $ (.08) $ .05 $ .12 $ .01 $ .09
Diluted earnings (loss) per share... $ (.08) $ .05 $ .11 $ .01 $ .09
</Table>
<Table>
<Caption>
2002
------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- --------
Revenues............................ $59,150 $57,584 $49,412 $53,309 $219,455
Income (loss) from operations....... 6,462 3,728 833 (2,757) 8,266
Net income.......................... 4,545 2,677 758 950 8,930
Basic earnings per share............ $ .17 $ .10 $ .03 $ .03 $ .32
Diluted earnings per share.......... $ .16 $ .09 $ .03 $ .03 $ .31
</Table>
Income from operations for 2003 includes $1.8 million in relocation costs
to consolidate development and support activities including $682,000, $578,000,
$458,000 and $76,000 recorded in the first, second, third and fourth quarters of
2003, respectively, and a $639,000 gain on the sale of an office facility in
second quarter 2003. Income from operations for 2002 includes restructuring and
asset disposition charges of $1.3 million and $5.0 million that were recorded
during the second and fourth quarters of 2002, respectively, an $800,000 charge
for IPR&D in connection with the acquisition of J-Commerce in second quarter
2002, and $452,000 in relocation costs to consolidate development and support
activities.
92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JDA SOFTWARE GROUP, INC.
By: /s/ HAMISH N. J. BREWER
------------------------------------
Hamish N. J. Brewer
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 12, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 12, 2004 by the following persons in the
capacities indicated.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ JAMES D. ARMSTRONG Chairman of the Board
- --------------------------------------
James D. Armstrong
/s/ HAMISH N. J. BREWER President and Chief Executive Officer
- -------------------------------------- (Principal Executive Officer)
Hamish N. J. Brewer
/s/ KRISTEN L. MAGNUSON Executive Vice President and Chief Financial
- -------------------------------------- Officer (Principal Financial and Accounting
Kristen L. Magnuson Officer)
/s/ J. MICHAEL GULLARD Director
- --------------------------------------
J. Michael Gullard
/s/ WILLIAM C. KEIPER Director
- --------------------------------------
William C. Keiper
/s/ DOUGLAS G. MARLIN Director
- --------------------------------------
Douglas G. Marlin
/s/ JOCK PATTON Director
- --------------------------------------
Jock Patton
</Table>
93
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NO. 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.
2.3### -- Agreement and Plan of Reorganization dated as of September
7, 2001, by and among JDA Software Group, Inc., E3
Acquisition Corp., E3 Corporation and certain shareholders
of E3 Corporation.
3.1#### -- Third Restated Certificate of Incorporation of the Company
together with Certificate of Amendment dated July 23, 2002.
3.2*** -- First Amended and Restated Bylaws.
4.1* -- Specimen Common Stock certificate.
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 on March 28, 2003.
10.4*(1) -- 1996 Outside Directors Stock Option Plan and forms of
agreement thereunder.
10.5(1) -- Executive Employment Agreement between James D. Armstrong
and JDA Software Group, Inc. dated July 23, 2002, together
with Amendment No. 1 effective August 1, 2003.
10.6(1) -- Executive Employment Agreement between Hamish N. Brewer and
JDA Software Group, Inc. dated January 22, 2003, together
with Amendment No. 1 effective August 1, 2003.
10.7(1)#### -- Executive Employment Agreement between Kristen L. Magnuson
and JDA Software Group, Inc. dated July 23, 2002.
10.8(1) -- 1998 Nonstatutory Stock Option Plan, as amended on March 28,
2003.
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, Second Amendment dated
November 23, 1998, revised and restated Third Amendment
dated October 20, 1999, Fourth Amendment dated May 30, 2001,
Fifth Amendment dated May 31, 2001, Sixth Amendment dated
August 2001, Seventh Amendment dated June 30 2003, and
Letter Agreement dated June 30, 2003.
10.12** -- Software License Agreement dated as of June 4, 1998 by and
between Comshare, Incorporated and JDA Software, Inc.
10.13 -- Purchase Agreement between Opus Real Estate Arizona II,
L.L.C. and JDA Software Group, Inc. dated February 5, 2004.
10.14(2) -- Value-Added Reseller License Agreement for Uniface Software
between Compuware Corporation and JDA Software Group, Inc.
dated April 1, 2000, together with Product Schedule No. One
dated June 23, 2000, Product Schedule No. Two dated
September 28, 2001, and Amendment to Product Schedule No.
Two dated December 23, 2003.
10.15(1) -- JDA Software, Inc. 401(k) Profit Sharing Plan, adopted as
amended effective January 1, 2004.
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.
</Table>
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
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).
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.
10.20S(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.
10.21S(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.
10.22S(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.
10.23S(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.
10.24S(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.
10.25SS -- Secured Loan Agreement between JDA Software Group, Inc. and
Silvon Software, Inc. dated May 8, 2001, together with
Secured Promissory Note and Security Agreement.
14.1 -- Code of Business Conduct and Ethics
21.1 -- Subsidiaries of Registrant
23.1 -- Consent of Independent Auditors
31.1 -- Rule 13a-14(a) Certification of Chief Executive Officer
31.2 -- Rule 13a-14(a) Certification of Chief Financial Officer
32.1 -- Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</Table>
- ---------------
* 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 Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2003, as filed on August 13,
2003.
# 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 Current Report on Form 8-K
dated February 24, 2000, as filed on March 1, 2000.
### Incorporated by reference to the Company's Current Report on Form 8-K dated
September 7, 2001, as filed on September 21, 2001.
#### Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2002, as filed on November 12,
2002.
S 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.
SS Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2001, as filed on August 14, 2001.
(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.
(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 and Kristen L. Magnuson.