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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Three Months Ended March 31, 1996 Commission File Number 0-27876
JDA SOFTWARE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0787377
(State of incorporation) (I.R.S. Employer Identification No.)
11811 NORTH TATUM BLVD., SUITE 2000, PHOENIX, AZ 85028
(Address of principal executive offices)
(602) 404-5500
(Registrant's telephone number, including area code)
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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 No x
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 15, 1996
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Common Stock, $.01 par value 12,182,866
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JDA SOFTWARE GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Interim Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income
for the three months ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Interim Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
Mar. 31, Dec. 31,
1996 1995
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(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,875 $ 498
Restricted investments -- 14,649
Accounts receivable - net 10,422 9,835
Prepaid expenses and other current assets 553 277
Deferred tax asset 460 426
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Total current assets 26,310 25,685
Property and equipment, net 2,716 2,410
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Total assets $ 29,026 $ 28,095
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit -- $ 575
Amounts payable to stockholders -- 19,913
Accounts payable $ 878 881
Income taxes payable 774 300
Accrued and other liabilities 2,485 2,642
Deferred revenue 2,297 767
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Total current liabilities 6,434 25,078
Other liabilities 274 309
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Total liabilities 6,708 25,387
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Series A redeemable convertible preferred stock -- 15,000
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value 122 72
Additional paid-in capital 38,831 5,652
Retained earnings (deficit) (16,602) (18,029)
Foreign translation adjustment (33) 13
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Total stockholders' equity 22,318 (12,292)
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Total liabilities and stockholders' equity $ 29,026 $ 28,095
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The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
Three Months Ended
March 31,
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1996 1995
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REVENUES:
Software licenses $ 5,013 $ 2,714
Consulting, maintenance and other services 4,391 3,289
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Total revenues 9,404 6,003
COST OF REVENUES:
Software licenses 25 14
Consulting, maintenance and other services 2,958 2,059
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Total cost of revenues 2,983 2,073
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GROSS PROFIT 6,421 3,930
OPERATING EXPENSES:
Product development 1,220 636
Sales and marketing 1,628 1,012
General and administrative 1,140 780
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Total operating expenses 3,988 2,428
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INCOME FROM OPERATIONS 2,433 1,502
Interest expense - net 65 57
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INCOME BEFORE INCOME TAXES 2,368 1,445
Provision for income taxes 941 18
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NET INCOME $ 1,427 $ 1,427
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NET INCOME PER SHARE $ 0.13
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PRO FORMA:
Income before income taxes $ 1,445
Provision for income taxes 545
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Pro forma net income $ 900
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Supplemental pro forma net income per share $ 0.08
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WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES:
Net income 11,182
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Supplemental pro forma 10,952
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The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
Three Months Ended
March 31,
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1996 1995
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OPERATING ACTIVITIES:
Net income $ 1,427 $ 1,427
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 186 175
Allowance for doubtful accounts 207 (8)
Deferred income taxes and other (80) 31
Changes in assets and liabilities:
Accounts receivable (794) 604
Prepaid expenses and other current assets (276) (359)
Accounts payable and accrued and other liabilities (160) (59)
Income taxes payable 474 20
Deferred revenue 1,530 196
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Net cash provided by operating activities 2,514 2,027
INVESTING ACTIVITIES:
Purchase of investments (13,999)
Redemption of investments 14,649
Purchase of equipment and leasehold improvements (492) (226)
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Net cash provided (used) in investing activities 14,157 (14,225)
FINANCING ACTIVITIES:
Initial public offering transactions:
Issuance of common stock 25,729
Redemption of preferred stock (7,500)
Payments on notes and interest payable to stockholders (5,264)
Reorganization transactions:
Issuance of preferred stock - net 14,792
Reorganization distribution (2,294)
Dividends to S Corporation stockholders (3,897)
Payments on notes and interest payable to stockholders (14,649)
Net borrowings (payments) on bank line of credit (575) 1,300
Capital lease payments and other (35) (98)
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Net cash provided by (used in) financing activities (2,294) 9,803
NET INCREASE (DECREASE) IN CASH 14,377 (2,395)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 498 2,913
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,875 $ 518
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 887 $ 61
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Income taxes $ 363 $ 12
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Net issuance of common stock against additional paid-in capital $ 66
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Distributions to stockholders paid with a note payable $ 17,690
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Conversion of Series A preferred stock $ 7,500
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The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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JDA SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements include
the accounts of JDA Software Group, Inc. and its wholly owned subsidiaries.
Significant intercompany balances and transactions have been eliminated.
Prior to March 30, 1995, the business currently conducted by the company was
conducted by five affiliated companies: JDA Software Services, Inc., JDA
International, Ltd., JDA Software, Inc., JDA Worldwide, Inc., and JDA Asia Pte
Ltd., (together, the "Predecessor Companies"). Effective March 30, 1995, the
Predecessor Companies were consolidated under JDA Software Group, Inc. in a
holding company structure (the "Reorganization") in connection with an
investment in the Company by six investment funds.
The accompanying unaudited condensed consolidated interim financial
statements have been prepared in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of the Company, all material adjustments and
disclosures necessary to fairly present the results for the interim periods
presented have been made. Certain information and footnote disclosures normally
included in financial statements have been condensed or omitted pursuant to such
rules and regulations. These condensed consolidated interim financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's registration statement on Form S-1 which
was declared effective March 14, 1996.
2. STOCKHOLDERS' EQUITY
In March, 1996, the Company successfully completed its initial public
offering of common stock. The Company sold 2,182,866 shares of common stock in
this offering for $25,729,000 net of issuance costs of $662,000.
In March, 1996, subsequent to the initial public offering, all outstanding
shares of the Series A Redeemable Convertible Preferred Stock were converted
into (1) 2,800,000 shares of common stock and (2) 1,250,004 shares of Series B
Redeemable Preferred Stock. The Series B Redeemable Preferred Stock was then
redeemed for $7,500,000 in cash.
3. PRO FORMA DATA
Prior to March 30, 1995, certain Predecessor Companies elected S Corporation
status. The Company's historical statements of operations data, therefore, do
not include a provision for U.S. federal income taxes for periods prior to March
30, 1995. Pro forma net income includes a pro forma provision for income taxes
at statutory rates.
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4. LEGAL MATTERS
In February 1996, one of the Company's customers contacted the Company
expressing dissatisfaction with the implementation of their MMS system and
asserting that certain MMS modules have either not been delivered, or as
delivered, lack expected functionality and performance. The customer also has
asserted a right to return the MMS system in exchange for a full refund of
license and consulting fees paid by the customer to date. The Company recently
initiated arbitration proceedings against the customer in an effort to collect
remaining amounts payable pursuant to its contract with the customer. The
customer has counterclaimed for refund of amounts paid and the Company is
vigorously defending such counterclaim. This dispute is in an early stage, no
discovery has been conducted and, given the unpredictable nature of legal
proceedings, no assurance can be given with respect to the results of this
proceeding. Based on information currently available to the management of the
Company, it does not believe that the ultimate outcome of this proceeding will
have a material adverse effect on the Company.
In May 1996, an arbitration proceeding was instituted against one of the
Company's subsidiaries. The arbitration claim is for a finder's fee in
connection with an investment in the Company by certain investment funds in
March 1995. The Company's management has consulted with its legal counsel, and,
based on the information currently available, the Company intends to vigorously
defend this claim. This dispute is in an extremely early stage, no discovery has
been conducted and, given the unpredictable nature of legal proceedings, no
assurance can be given regarding the outcome of this claim. Management does not
believe that the ultimate outcome of this proceeding will have a material
adverse effect on the Company.
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JDA SOFTWARE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
JDA is an international provider of comprehensive enterprise-wide software
solutions that address the mission-critical business information requirements of
retailing organizations. Prior to the Company's formation in connection with the
Reorganization in March 1995, the Company's operations were conducted by the
Predecessor Companies, the first of which was formed in November 1985. Certain
of these Predecessor Companies operated as S Corporations for tax purposes prior
to the Reorganization. Thus, for periods prior to the Reorganization, the
Company's historical statements of operations do not include a provision for
U.S. federal income taxes.
In 1986 the Company introduced MMS, its first enterprise retail information
solution. The Company's development efforts through 1993 were focused
exclusively on enhancements, revisions and upgrades to MMS, which is currently
in its fourth generation release. In 1994, the Company acquired DSS, an in-store
system, from JDA Software Services Ltd., an unaffiliated Canadian company, in
exchange for a perpetual, exclusive license to market DSS in Canada, royalty
payments and certain rights to product enhancements. Since 1994 the Company has
significantly increased its product development expenditures to develop products
for emerging, open platforms. In 1995 the Company began limited beta
installations of ODBMS, an open, client/server enterprise system, and began
development of WinSTORE, a Windows-based in-store system scheduled for initial
beta installation in 1996.
The Company has derived substantially all of its revenues from software
licenses and consulting, maintenance and other services relating to MMS. The
Company expects that revenues related to MMS, which accounted for 93%, 95%, 91%
and 90% of total revenues in 1993, 1994, 1995 and the first quarter of 1996,
respectively, will continue to account for the substantial majority of the
Company's total revenues for the foreseeable future. International revenues from
MMS have grown in recent periods primarily as a result of the company's
increased international presence. However, the Company believes MMS is a
maturing product line in the United States, and in 1995 experienced a decline in
domestic MMS license revenues due in part to competitive pricing pressures. The
Company expects that ODBMS and WinSTORE will account for an increasing
percentage of total revenues in future periods. The Company also expects that
revenues attributable to the license fee of enterprise systems will continue to
comprise the substantial majority of software licenses revenues for the
foreseeable future.
Consulting, maintenance and other services revenues are derived from a range
of services, including system design and implementation and, to a lesser extent,
software maintenance and support, and training. Historically, the level of
consulting, maintenance and other services revenues has approximated on an
annual basis the level of software license revenues. Consulting, maintenance and
other services revenues were 53% of total revenues in 1993, 49% of total
revenues in each of 1994 and 1995, and 47% of total revenues in the first
quarter of 1996. Gross margin on consulting, maintenance and other services has
historically been significantly lower than gross margin on software licenses and
the Company expects this relationship to continue. Consulting, maintenance and
other services in support of international licenses typically have lower gross
margins than those achieved domestically due to generally lower prevailing
billing rates in certain of the Company's international markets. Therefore,
planned growth in the Company's international operations may result in further
declines in gross margin on consulting, maintenance and other services.
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The Company is pursuing a strategy of addressing international markets by
developing localized versions of its products and establishing international
subsidiaries with direct sales and consulting capabilities. International
revenues, which include revenues from international subsidiaries and export
sales, comprised 31%, 28%, 39% and 35%, respectively, of total revenues in each
of 1993, 1994, 1995 and the first quarter of 1996. The Company has established
operations in the U.K., Singapore, Germany, Mexico and Chile and plans to
continue to expand internationally. The Company anticipates that international
revenues will continue to increase as a percentage of total revenues. However,
there can be no assurance that the Company's international expansion will be
successful. In addition, the opening of new offices by the Company typically
results in initial recruiting and training expenses and reduced labor
efficiencies associated with the introduction of products to a new customer
base. Other risks inherent in the Company's international business activities
include changes in regulatory requirements, tariffs and other trade barriers,
costs and risks of localizing products, longer accounts receivable payment
cycles, potentially adverse tax consequences, currency fluctuations,
repatriation of earnings and burdens of complying with a wide variety of local
laws.
To the extent the Company's international operations expand, the Company
expects that an increasing portion of its international license and consulting,
maintenance and other services revenues will be denominated in foreign
currencies, subjecting the company to fluctuations in foreign currency exchange
rates. Historically, the Company has conducted a substantial majority of
business in currencies which have been relatively stable, and exposure to
fluctuations in such currencies has been considered minimal. Accordingly, the
Company does not currently engage in foreign currency hedging transactions.
However, as the Company continues to expand its international operations,
exposures to gains and losses on foreign currency transactions may increase. The
Company may choose to limit such exposure by the purchase of forward foreign
exchange contracts or similar hedging strategies. There can be no assurance
that any currency exchange strategy would be successful in avoiding
exchange-related losses.
The Company's revenues are derived from license fees for its software
products and from fees for services complimentary to its products, including
software, consulting, maintenance and training. The Company recognizes revenues
in accordance with the provisions of American Institute of Certified Public
Accountants Statement of Position No. 91-1, Software Revenue Recognition.
Accordingly, software license revenue is recognized upon the shipment of a
product to the customer if collection is probable and the Company's remaining
obligations under the license agreement are insignificant. License revenues for
licenses with remaining significant obligations are deferred until the Company's
related obligations become insignificant. Consulting, maintenance and other
services are performed and billed under separate agreements related to the
implementation of the Company's software products, and such revenues generally
are recorded when the services are performed. Maintenance revenues from ongoing
customer support and product upgrades are billed on a monthly basis and are
recorded as revenue in the applicable month.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995 and 1996
Revenues
Total revenues were $6.0 million in 1995 and $9.4 million in 1996,
representing an increase of 57%. International revenues comprised 23% and 35% of
total revenues in 1995 and 1996, respectively. The increase in international
revenues as a percentage of total revenues was primarily attributable to
increased revenues in Latin America and Asia resulting from the Company's
expanded sales and marketing efforts in those markets.
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Software Licenses. Software license revenues increased by 85% from $2.7
million in 1995 to $5.0 million in 1996. The increase was primarily due to
increased license revenues in Latin America and Asia combined with a 33%
increase in domestic license revenues, resulting from expanded sales and
marketing efforts in those markets.
Consulting, Maintenance and Other Services. Consulting, maintenance and
other services revenues increased by 34% from $3.3 million in 1995 to $4.4
million in 1996. The increase was primarily attributable to increased software
license revenues and associated implementations both domestically and
internationally.
Cost of Revenues
Cost of Consulting, Maintenance and Other Services. Cost of consulting,
maintenance and other services consists primarily of consultant salaries and
other personnel related expenses incurred in system implementation projects and
software support services. These costs increased by 44% from $2.1 million in
1995 to $3.0 million in 1996. These costs represented 63% and 67%, respectively,
of consulting, maintenance and other services revenues in 1995 and 1996. The
increase in 1996 was primarily due to expenditures associated with the Company's
international expansion.
Gross Profit
Gross profit increased by 63%, from $3.9 million in 1995 to $6.4 million in
1996. Gross profit as a percentage of total revenues increased from 65% in 1995
to 68% in 1996. The increase was primarily attributable to a higher mix of
software license revenues, which increased from 45% of total revenues to 53% of
total revenues.
Operating Expenses
Product Development. Product development expenses increased by 92%, from
$636,000 in 1995 to $1.2 million in 1996, representing 11% and 13% of total
revenues, respectively. The increase in product development expenses was
primarily a result of an increase in the number of product development personnel
from 27 as of March 31, 1995 to 56 as of March 31, 1996. Significant product
development efforts in 1996 included the continued development of ODBMS,
WinSTORE, and continued enhancements to MMS. The Company believes that a
continued commitment to product development will be required for the Company to
remain competitive. Accordingly, the Company intends to continue to allocate
substantial resources to product development. Product development costs
subsequent to the achievement of technological feasibility have not been
significant during these periods and, accordingly, all such costs have been
expensed as incurred.
Sales and Marketing. Sales and marketing expenses increased by 61%, from
$1.0 million in 1995 to $1.6 million in 1996, representing 17% of total revenues
in both years. The increase is due to the addition of sales and marketing
personnel and related expenses to implement the Company's strategy to increase
its presence in international and domestic markets.
General and Administrative. General and administrative expenses increased by
46%, from $780,000 in 1995 to $1.1 million in 1996, representing 13% and 12% of
total revenues, respectively. The increase was primarily due to increased bad
debt allowance, increased legal and accounting expenses, and the addition of
administrative personnel to support the Company's growth. The Company
anticipates that general and administrative expenses may continue to increase in
absolute dollars as the Company expands its operations.
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Provision for Income Taxes. Substantially all U.S. federal taxable income
through March 30, 1995 was attributed to Predecessor Companies' stockholders,
reflecting the prior S Corporation status of certain Predecessor Companies.
Accordingly, the Company's tax provisions do not include U.S. federal income
taxes through that date. The income tax provisions include tax provisions for
U.S. federal income taxes and reflect effective tax rates of 38% in 1995 and 40%
in 1996. Such tax rates approximate statutory federal, state and foreign tax
rates after a reduction for U.S. research and development expense tax credits.
LIQUIDITY AND CAPITAL RESOURCES.
Since its inception, the Company has financed its operations primarily
through cash generated from operations, and, to a lesser extent, borrowings
under its bank line of credit. In addition, the Company's initial public
offering in March, 1996 provided net cash of $25.7 million. As of
March 31, 1996, the Company had $14.9 million in cash and cash equivalents and
$2.5 million available under its bank line of credit.
The Company's operating activities provided cash of $2.0 million and $2.5
million in 1995 and 1996, respectively. Cash from operating activities arose
principally from the Company's profitable operations and was utilized for
working capital purposes, primarily increases in accounts receivable and prepaid
and other current assets.
Cash used in investing activities in 1995 was $14.2 million, and cash of
$14.2 million was provided by investing activities in 1996, both of which were
primarily comprised of certain transactions from the Company's reorganization
which was effective March 30, 1995. Investing activities in 1995 consisted
primarily of the acquisition of $14.0 million of restricted short-term
investments used for the repayment of stockholder notes. In 1996, these
investments were redeemed and the notes were repaid.
Cash provided by financing activities was $9.8 million in 1995 and cash of
$2.3 million was used in financing activities in 1996. Financing activities in
1995 consisted primarily of reorganization transactions, which provided net cash
of approximately $8.6 million and was comprised of the sale of Series A
preferred stock, dividends to S Corporation stockholders, and other
distributions made to the Predecessor Companies' stockholders, and $1.3 million
in borrowings under the bank line of credit. Financing activities in 1996
consisted primarily of the initial public offering transactions, which provided
net cash of approximately $13.0 million and was comprised of the issuance of
common stock, redemption of preferred stock, and repayment of notes and interest
payable to stockholders. The remaining 1996 activities were the completion of
reorganization transactions which was a $14.6 million use of cash and was
comprised of the repayment of notes and interest payable to stockholders, and
$575,000 in repayment of borrowings under the bank line of credit.
At March 31, 1996, the Company had cash and cash equivalents of $14.9
million and a $2.5 million secured line of credit with Bank of America Arizona,
and no borrowings were outstanding under the line of credit. Borrowings under
the line of credit bear interest based upon the bank's publicly announced
reference rate. This line of credit expires July 1, 1996 and the company expects
to seek renewal at that time.
Capital expenditures were approximately $226,000 and $492,000 in 1995 and
1996, respectively. These expenditures were for property and equipment,
primarily computer hardware and furniture and fixtures. The Company does not
anticipate significant capital expenditures in the near term.
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The Company believes that the net proceeds from its initial public offering,
its bank line of credit and funds generated from operations will provide
adequate liquidity to meet the Company's planned capital and operating
requirements for at least the next twelve months. Thereafter, if the Company's
spending plans change, the Company may find it necessary to seek to obtain
additional sources of financing to support its capital needs, but there can be
no assurance that such financing will be available on commercially reasonable
terms, if at all.
RISK FACTORS
The Company's business is subject to a number of risks, a number of which
are described below. The reader is urged to consider the more comprehensive
summary of such risks found in the Company's registration statement on Form S-1
which was declared effective on March 14, 1996.
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have varied and are expected to vary significantly in the
future. These fluctuations may be caused by many factors, including, among
others: the size and timing of individual orders; competitive pricing pressures;
customer order deferrals in anticipation of new products; variation of
consulting, maintenance and other services as a percentage of total revenues;
timing of introduction or enhancement of products by the Company or its
competitors; market acceptance of new products; technological changes in
platforms supporting the Company's products; changes in networking, or
communication technology; changes in the Company's operating expenses; personnel
changes; foreign currency exchange rates; fluctuations in the level of warranty
claims; and general industry and economic conditions.
The Company's business has experienced and is expected to continue to
experience some degree of seasonality due in large part to its retail customers'
buying cycles, with license revenues typically higher in the fourth quarter and
consulting revenues typically higher in the first quarter. Further, software
license gross margin is significantly greater than consulting, maintenance and
other services gross margin. As a result, overall gross margin has fluctuated
significantly based on revenue mix, and the Company expects this trend to
continue.
Historically, a significant portion of the Company's quarterly revenues have
been derived from relatively large licenses to a limited number of customers,
and the Company currently anticipates that this trend will continue. Any
significant cancellation or deferral of anticipated customer orders could have a
material adverse effect on the Company's operating results in any particular
quarter.
The Company's expense levels are based, in part, on its expectations as to
future revenues and to a large extent are fixed. Licenses of the Company's
products are typically accompanied by a significant amount of systems
implementation consulting. The Company's consulting resources must be managed to
meet future sales, and additional consulting personnel must be hired and trained
in advance of anticipated license revenues. The Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall
and, accordingly, any significant shortfall of demand in relation to the
Company's expectations or any material delay of customer orders would have an
almost immediate adverse effect on the Company's operating results.
As a result of the foregoing and other factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Fluctuations in operating results may also result in volatility in the price of
the shares of the Company's Common Stock.
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Dependence on Retail Industry. The Company has derived substantially all of
its revenues to date from the license of software products and related services
to the retail industry, and its future growth is critically dependent on
increased sales to the retail industry. The success of the Company's customers
is intrinsically 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, the Company believes the license of its
products is relatively discretionary and generally involves a significant
commitment of capital, because the Company's products are often accompanied by
large scale hardware purchases or commitments. As a result, although the Company
believes its products can assist retailers in a competitive environment, demand
for the Company's products and services could be disproportionately affected by
instability or downturns in the retail industry which may cause customers to
exit the industry or delay, cancel or reduce any planned expenditures for
information management systems and software products. There can be no assurance
that the Company will be able to continue its revenue growth or sustain its
profitability on a quarterly or annual basis or that its results of operations
will not be adversely affected by continuing or future downturns in the retail
industry.
Management of Growth. The growth in the size and complexity of the Company's
business and expansion of its product lines and its customer base have placed
and are expected to continue to place a significant strain on the Company's
management and operations. The Company anticipates that continued growth, if
any, will require it to recruit and hire a substantial number of new employees,
including consulting and product development personnel, both domestically and
abroad. There can be no assurance that qualified personnel could be located or
retained in a timely manner. In the event the Company is unable to increase
sufficiently its consulting capacity, the Company may be required to forego
licensing opportunities or become increasingly dependent on systems integrators
and professional consulting firms to provide implementation services for its
products. The Company's ability to undertake new projects and increase license
revenues is substantially dependent on the availability of the Company's
consulting personnel to assist in the licensing and implementation of the
Company's solutions. The Company currently is attempting to increase consulting
capacity in anticipation of future sales. To the extent such sales fail to
materialize, the Company's operating results would be adversely affected. The
Company believes that supporting greater-than-anticipated growth in product
licensing would require the Company to rapidly hire skilled additional personnel
for the Company's consulting services group. There can be no assurance that the
Company will be able to manage or continue to manage its recent or any future
growth, and any failure to do so would have a material adverse effect on the
Company's business, operating results and financial condition.
Product Concentration. The Company has derived substantially all of its
revenues from the license of a limited number of information management software
applications for the retail industry and consulting and maintenance services
related to such applications. Software licenses and related consulting,
maintenance and other services revenues from the Company's MMS product line
represented over 90% of the Company's revenues in each of the three most recent
fiscal years, and in the quarter ended March 31, 1996. The Company expects that
revenues related to this product will continue to account for a majority of the
Company's total revenues for the foreseeable future. The life cycle of the MMS
product line is difficult to estimate due in large measure to the potential
effect of new products, applications and product enhancements, including those
introduced by the Company, changes in the retail industry and future
competition. The Company believes MMS is a maturing product line in the U.S.,
and in fiscal year 1995 experienced a decline in domestic MMS license revenues
due in part to competitive pricing pressures. Any continued decline, to the
extent not offset by increases in international revenues or licenses of other
products, would have a material adverse effect on the Company's business,
operating results and financial condition.
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Uncertain Market for ODBMS and WinSTORE. The Company has recently released
ODBMS and WinSTORE in limited beta installations, both of which are next
generation open, client/server solutions. The retail industry has only recently
begun limited adoption of open, client/server information systems. The Company
believes that retailers in general may be relatively cautious in adopting new
technologies. In addition, many retailers do not have the personnel or staff
required to implement, operate and maintain an open, client/server system, and
the difficulties associated with implementing new technology may slow or prevent
adoption of the Company's new products. Because the market for these products is
new and evolving, it is difficult to assess or predict with any assurance the
growth rate, if any, and size of this market. There also can be no assurance
that the market for ODBMS or WinSTORE will develop, or that either of these
products or related services will be adopted or utilized. If the market fails to
develop, develops more slowly than expected or becomes saturated with
competitors, or if the Company's products do not achieve market acceptance, the
Company's business, operating results and financial condition will be materially
adversely affected.
The Company is directing a significant amount of its product development
expenditures to the on-going development of ODBMS and WinSTORE and plans to
devote a significant amount of its future sales and marketing resources to the
full commercial introduction of ODBMS and WinSTORE. A significant effort is
still required to develop and release additional application modules for these
products. The Company has limited experience in developing and marketing
products for open system applications, and ODBMS and WinSTORE have not yet been
fully implemented in customers' environments. As a result, there can be no
assurance that ODBMS and WinSTORE will not require substantial software
enhancements or modifications to satisfy performance requirements of customers
or to fix design defects or previously undetected errors. It is common for
complex software programs such as ODBMS and WinSTORE to contain undetected
errors when first released, which are discovered only after the product has been
used over time with different computer systems and in varying applications and
environments. While the Company is not aware of any significant technical
problems with these products, there can be no assurance that errors will not be
discovered, or if discovered, that they will successfully corrected on a timely
basis, if at all. The Company's future business growth is substantially
dependent on the development, introduction and market acceptance of ODBMS and
WinSTORE. Should the Company fail to release a fully commercial version of ODBMS
and WinSTORE, if customers experience significant problems with implementation
of the software or are otherwise dissatisfied with the functionality or
performance of ODBMS or WinSTORE, or if either of these products fails to
achieve market acceptance for any reason, the Company's business, operating
results and financial condition will be materially adversely affected.
Technological Change; Market Acceptance of Evolving Standards. The computer
software industry is subject to rapid technological change, changing customer
requirements, frequent new product introductions and evolving industry standards
that may render existing products and services obsolete. The Company strives to
achieve compatibility between the Company's products and retailing systems
platforms the Company believes are or will become popular and widely adopted.
The Company invests substantial resources in development efforts aimed at
achieving such compatibility. Any failure by the Company to anticipate or
respond adequately to technology or market developments could result in a loss
of competitiveness or revenue.
International Operations. In 1993, 1994, 1995, and the first quarter of
1996, international revenues, which include revenues from international
subsidiaries and export sales, comprised approximately 31%, 28%, 39% and 35%,
respectively, of the Company's revenues. The Company expects that international
revenues will continue to account for a significant percentage of the Company's
revenues for the foreseeable future, and the Company's intends to expand its
international operations. The Company has only limited experience in developing
localized versions of its products and in marketing and distributing
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its products internationally. International roll-out of the Company's products
requires significant investment by the Company in advance of anticipated future
revenues. The opening of new offices by the Company typically results in initial
recruiting and training expenses and reduced labor efficiencies associated with
the introduction of products into a new market. There can be no assurance that
the countries in which the Company operates will have a sufficient pool of
qualified personnel for the Company to hire from, or that the Company will be
successful at hiring, training or retaining such personnel. The inability of the
Company to successfully expand its international operations in a timely manner
could materially adversely effect the Company's business, operating results and
financial condition.
Competition. The market for retail information systems software is intensely
competitive. The Company believes the principal competitive factors in such
market are product quality, reliability, performance and price, vendor and
product reputation, financial stability, features and functions, ease of use and
quality of support. A number of companies offer competitive products addressing
certain of the Company's target markets. In the enterprise systems market, the
Company competes with in-house systems developed by the Company's targeted
customers and with third-party developers such as Intrepid, Island Pacific,
Radius PLC, Retek, and STS Systems, among others. In addition, the Company
believes that new market entrants may attempt to develop fully integrated
enterprise-level systems targeting the retail industry. In the in-store systems
market, which is more fragmented than the enterprise market, the Company
competes with major systems manufacturers such as AT&T/NCR, IBM and ICL, as well
as software companies such as Applied Intelligence Group, CRS Business
Computers, Inc., Post Software International and STS, among others. In the
market for consulting services, the Company competes with major systems
integrators such as Andersen Consulting, Deloitte & Touche, LLP, Ernst & Young
LLP and Price Waterhouse's Management Horizons Division, as well as independent
consulting firms such as the ISSC Division of IBM. Many of the Company's
existing competitors, as well as a number of potential new competitors, have
significantly greater financial, technical and marketing resources than the
Company. There can be no assurance that the Company will be able to compete
successfully against its current or future competitors or that competition will
not have a material adverse effect on the Company's business, results and
financial condition.
Product Defects; Product Liability; Risk of Integration Difficulties. The
Company's software products are highly complex and sophisticated and could, from
time to time, contain design defects or software errors that could be difficult
to detect and correct. In addition, implementation of the Company's products
generally involves a significant amount of customer-specific customization, and
may involve integration with systems developed by third parties. Despite
extensive testing, the Company from time to time has discovered defects or
errors in its products or custom modifications only after its systems have been
used by many customers. The Company has also experienced delays in shipment of
products during the period required to correct such errors. In addition, the
Company or its customers may from time to time experience difficulties relating
to the integration of the Company's products with other hardware or software in
the customer's environment that are unrelated to defects in the Company's
products. There can be no assurance that such defects, errors or difficulties
will not 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 the Company's products. Since
the Company's products may be used by its customers to perform mission-critical
functions, design defects, software errors, misuse of the Company's products,
incorrect data from external sources or other potential problems within or out
of the Company's control that may arise from the use of the Company's products
could result in financial or other damages to the Company's customers. The
Company does not maintain product liability insurance. Although the Company's
license agreements with its customers typically contain provisions designed to
limit the Company's exposure to potential claims as well as any liabilities
arising from such claims, such provisions may not effectively protect the
Company against such claims
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and the liability and costs associated therewith. Accordingly, any such claim
could have a material adverse effect upon the Company's business, operating
results and financial condition. The Company provides warranties for its
products for a period of time (usually 6 or 12 months) after the software is
installed and, if applicable, accepted by the licensee. The Company's license
agreements generally do not permit product returns by the customer, and product
returns and warranty expense for 1993, 1994, 1995 and the first quarter of 1996
represented less than two percent of total revenues during each of such periods.
However, no assurance can be given that product returns will not increase as a
percentage of total revenues in future periods.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See Exhibit Index.
(b) REPORTS ON FORM 8-K
None.
JDA SOFTWARE GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JDA SOFTWARE GROUP, INC.
Date: May 15, 1996 By: /s/ Thomas M. Proud
-----------------------------------------------
Thomas M. Proud
Vice President, Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1* Second Restated Certificate of Incorporation of the Company.
3.2* Bylaws.
4.2* Stock Redemption Agreement among the Company, James D. Armstrong and
Frederick M. Pakis dated March 30, 1995.
4.3* Stockholders' Agreement among the Company, James D. Armstrong,
Frederick M. Pakis, James L. Smith and the purchasers of the Series
A Preferred Stock dated March 30, 1995.
10.1* Form of Indemnification Agreement.
10.2* 1995 Stock Option Plan, as amended, and form of agreement thereunder.
10.3* 1996 Stock Option Plan and forms of agreements thereunder.
10.4* 1996 Employee Stock Purchase Plan and form of agreements thereunder.
10.5* 1996 Outside Directors Stock Option Plan and forms of agreements
thereunder.
10.6* Employment Agreement between James D. Armstrong and JDA Software,
Inc. dated March 30, 1995, as amended.
10.7* Employment Agreement between Frederick M. Pakis and JDA Software,
Inc. dated March 30, 1995, as amended.
10.8* Employment Agreement between James L. Smith and JDA Software, Inc.
dated March 30, 1995, as amended.
10.9* Employment Agreement between Thomas M. Proud and JDA Software, Inc.
dated November 13, 1995.
10.10* Employment Agreement between Geoffrey J. Finlay and JDA Software,
Inc. dated January 1, 1996.
10.11* Series A Preferred Stock and Common Stock Exchange Agreement among
the Company, James D. Armstrong, Frederick M. Pakis, James L. Smith
and the purchasers named therein dated March 30, 1995.
10.12* Assignment and Assumption Agreement regarding Master Lease between
Pacific Atlantic Systems Leasing, Inc. and JDA Software, Inc. and
Consent of Paradise Partners Limited Partnership to Assignment,
dated March 17, 1995 (Phoenix, Arizona).
10.13* Lease Agreement between Pakis-Armstrong Venture and JDA Software,
Inc. dated January 1, 1996 (Scottsdale, Arizona).
10.14* Lease Agreement between Holly Pond Associates Limited Partnership
and JDA Software, Inc. dated June 16, 1993 (Stamford, Connecticut).
10.15* Lease Agreement between Woodhill Associates and JDA Software, Inc.
dated July 10, 1992 and First Lease Amendment between Metropolitan
Life Insurance Company, successor in interest to Woodhill
Associates, and JDA Software, Inc. dated May 16, 1995 (Norcross,
Georgia).
10.16* Lease Agreement between The Port of Singapore Authority and JDA Asia
Pte Ltd. dated September 12, 1995 (Singapore).
10.17* Lease Agreements between Skanda Developments Limited and JDA Software
Services Ltd. (predecessor to JDA International Ltd.) dated June 25,
1991 (England).
10.18* Lease Agreement between BBS Business -- und Buroservice in
Niederrad GmbH and JDA Software GmbH dated July 4, 1995 (Germany).
10.19*+ License Agreement between Uniface Corporation and JDA Software, Inc.
dated February 9, 1994.
10.20*+ Standard Value-Added Reseller Agreement between Uniface Corporation
and JDA Software, Inc. dated February 9, 1994.
10.21*+ Omnibus Software Licensing and Distribution Agreement between JDA
Software Services Ltd. and the Company dated November 1, 1994.
10.22* Promissory Notes of the Company payable to James D. Armstrong,
Frederick M. Pakis and James L. Smith dated March 30, 1995.
10.23* Promissory Notes of JDA Software, Inc. payable to James D. Armstrong
and Frederick M. Pakis, guaranteed by the Company, dated
March 29, 1995.
10.24* Promissory Notes of JDA Worldwide, Inc. payable to James D.
Armstrong and Frederick M. Pakis, guaranteed by the Company,
dated March 29, 1995.
10.25* JDA Software, Inc. 401(k) Profit Sharing Plan, adopted as amended
effective January 1, 1995.
11.1* Statement regarding computation of earnings per share.
27 Financial Data Schedule
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form S-1
(No. 333-748), declared effective on March 14, 1996.
+ Confidential treatment has been granted as to part of this exhibit.