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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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)
DELAWARE 86-0787377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11811 NORTH TATUM BLVD., SUITE 2000
PHOENIX, ARIZONA 85028
(602) 404-5500
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the Registrant's Common Stock, $0.01 par
value, was 12,221,311 as of August 14, 1996.
This report consists of 19 pages. The exhibit index is located on page 19.
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JDA SOFTWARE GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Balance Sheets as of 3
June 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Income 4
for the Three Months Ended June 30, 1996 and 1995
and the Six Months Ended June 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows for 5
the Three Months Ended June 30, 1996 and 1995 and the
Six Months Ended June 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 6: Exhibits and Reports on Form 8-K 18
Signature 19
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PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
June 30, December 31,
1996 1995
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,667 $ 498
Restricted investments -- 14,649
Accounts receivable - net 11,724 9,835
Prepaid expenses and other current assets 808 277
Deferred tax asset 460 426
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Total Current Assets 27,659 25,685
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Property and equipment, net 3,282 2,410
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TOTAL $ 30,941 $ 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 $ 673 881
Income taxes payable 373 300
Accrued and other liabilities 4,034 2,642
Deferred revenue 2,099 767
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Total current liabilities 7,179 25,078
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Other liabilities 238 309
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Total liabilities 7,417 25,387
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Series A redeemable convertible preferred stock -- 15,000
Total stockholders' equity (deficit) 23,524 (12,292)
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TOTAL $ 30,941 $ 28,095
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data; unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
REVENUES:
Software licenses $ 5,042 $ 2,628 $ 10,055 $ 5,342
Consulting, maintenance and other services 5,394 3,974 9,785 7,263
-------- -------- -------- --------
Total revenues 10,436 6,602 19,840 12,605
COST OF REVENUES:
Software licenses 220 70 245 84
Consulting, maintenance and other services 3,563 2,384 6,521 4,443
-------- -------- -------- --------
Total cost of revenues 3,783 2,454 6,766 4,527
-------- -------- -------- --------
GROSS PROFIT 6,653 4,148 13,074 8,078
-------- -------- -------- --------
OPERATING EXPENSES:
Product development 1,645 733 2,865 1,369
Sales and marketing 1,525 1,136 3,153 2,148
General and administrative 1,055 756 2,195 1,536
-------- -------- -------- --------
Total operating expenses 4,225 2,625 8,213 5,053
-------- -------- -------- --------
INCOME FROM OPERATIONS 2,428 1,523 4,861 3,025
Interest (income) expense - net (169) 135 (104) 192
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,597 1,388 4,965 2,833
Provision for income taxes 1,038 351 1,979 369
-------- -------- -------- --------
NET INCOME $ 1,559 $ 1,037 $ 2,986 $ 2,464
======== ======== ======== ========
NET INCOME PER SHARE $ 0.13 $ 0.26
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PRO FORMA:
Income before income taxes $ 1,388 $ 2,833
Provision for income taxes 524 1,069
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Pro forma net income $ 864 $ 1,764
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Supplemental pro forma net income per share $ 0.08 $ 0.16
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WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES:
Net Income 12,183 11,682
======== ========
Supplemental pro forma 10,952 10,952
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Six Months Ended
----------------
June 30, June 30,
1996 1995
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OPERATING ACTIVITIES:
Net income $ 2,986 $ 2,464
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 424 331
Allowance for doubtful accounts 384 (28)
Deferred income taxes and other (34) (108)
Changes in assets and liabilities:
Accounts receivable (2,273) 1,265
Prepaid expenses and other current assets (531) (200)
Accounts payable (208) (91)
Accrued and other liabilities 1,392 (327)
Income taxes payable 73 338
Deferred revenue 1,332 275
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Net cash provided by operating activities 3,545 3,919
INVESTING ACTIVITIES:
Purchase of investments (14,216)
Redemption of investments 14,649
Purchase of equipment and leasehold improvements (1,296) (681)
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Net cash provided (used) in investing activities 13,353 (14,897)
FINANCING ACTIVITIES:
Initial public offering transactions:
Issuance of common stock 25,322
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) (161)
Net borrowings (payments) on bank line of credit (575) 995
Capital lease payments and other (63) 53
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Net cash provided by (used in)
financing activities (2,729) 9,488
NET INCREASE (DECREASE) IN CASH 14,169 (1,490)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 498 2,913
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,667 $ 1,423
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 887 $ 171
======== ========
Income taxes $ 1,263
========
Net issuance of common stock against additional
paid-in capital $ 38
========
Distributions to stockholders paid with a note payable $ 66
========
Conversion of Series A preferred stock $ 7,500 $ 17,690
======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements
include the accounts of JDA Software Group, Inc. and its wholly owned
subsidiaries (collectively, the "Company"). 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. (collectively, 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 (No.
333-748), which was declared effective on 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 $25,322,000 net of issuance costs of $1,069,000.
In March 1996, subsequent to the initial public offering, all
outstanding shares of Series A Redeemable Convertible Preferred Stock of the
Company were converted into (i) 2,800,000 shares of Common Stock of the Company
and (ii) 1,250,004 shares of Series B Redeemable Preferred Stock of the Company.
The Series B Redeemable Preferred Stock was subsequently 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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ITEM 2: 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 WinDSS, 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 91% of total revenues in 1993, 1994 and 1995 and the first six months 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 the Company experienced
a decline in domestic MMS license revenues, due in part to competitive pricing
pressures. The Company expects that ODBMS and WinDSS 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 and 49% of total
revenues in each of 1994, 1995 and the first six months 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
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Company's international operations may result in further declines in gross
margin on consulting, maintenance and other services.
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 37%, respectively, of total revenues in each
of 1993, 1994, 1995 and the first six months 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. The availability of skilled personnel overseas is
limited. There can be no assurance the Company will be able to hire, train and
retain sufficient technical, sales or marketing personnel to support planned
international growth. 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.
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 JUNE 30, 1995 AND 1996
Revenues
Total revenues were $6.6 million in the three months ended
June 30, 1995 and $10.4 million in the three months ended June 30, 1996,
representing an increase of 58%. International revenues comprised 49% and 39% of
total revenues in the three months ended June 30, 1995 and 1996, respectively.
The decrease in international revenues as a percentage of total revenues was
primarily attributable to domestic revenue growth of 89% resulting from expanded
domestic sales and marketing efforts, compared to international revenue growth
of 25%.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Software Licenses. Software license revenues increased by 92%
from $2.6 million in the three months ended June 30, 1995 to $5.0 million in the
three months ended June 30, 1996. The increase was primarily due to a 228%
increase in domestic license revenues resulting from expanded domestic sales and
marketing efforts combined with a 40% increase in international license
revenues.
Consulting, Maintenance and Other Services. Consulting,
maintenance and other services revenues increased by 36% from $4.0 million in
the three months ended June 30, 1995 to $5.4 million in the three months ended
June 30, 1996. The increase was primarily attributable to increased software
license revenues and associated implementations, both domestically and
internationally.
Cost of Revenues
Cost of Software Licenses. Cost of software licenses consists
primarily of royalties payable for licensing of third-party software
incorporated in the Company's products and commissions payable to third parties
on sales of the Company's products. Cost of software licenses increased by 214%
from $70,000 in the three months ended June 30, 1995 to $220,000 in the three
months ended June 30, 1996, representing 3% and 4% of software license revenues,
respectively. The net increase is due to an increase in commissions payable to
third parties, offset partially by a decrease in royalties payable to third
parties.
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 50% from $2.4
million in the three months ended June 30, 1995 to $3.6 million in the three
months ended June 30, 1996. These costs represented 60% and 66%, respectively,
of consulting, maintenance and other services revenues in the three months ended
June 30, 1995 and 1996. The increase in 1996 was primarily due to expenditures
associated with the Company's international growth and expansion.
Gross Profit
Gross profit increased by 61%, from $4.1 million in the three
months ended June 30, 1995 to $6.7 million in the three months ended June 30,
1996. Gross profit as a percentage of total revenues increased from 63% in the
three months ended June 30, 1995 to 64% in the three months ended June 30, 1996.
The increase was primarily attributable to a higher mix of software license
revenues, which increased from 40% of total revenues to 48% of total revenues,
offset partially by higher expenditures on consulting, maintenance and other
services associated with the Company's international expansion.
Operating Expenses
Product Development. Product development expenses increased by
124%, from $733,000 in the three months ended June 30, 1995 to $1.6 million in
the three months ended June 30, 1996, representing 11% and 16% of total
revenues, respectively. The increase in
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
product development expenses was primarily a result of an increase in the number
of product development personnel from 31 as of June 30, 1995 to 71 as of June
30, 1996. Significant product development efforts in 1996 included the continued
development of ODBMS and WinDSS 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
34%, from $1.1 million in the three months ended June 30, 1995 to $1.5 million
in the three months ended June 30, 1996, representing 17% and 15% of total
revenues, respectively. 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 40%, from $756,000 in the three months ended June 30, 1995
to $1.1 million in the three months ended June 30, 1996, representing 12% and
10% of total revenues, respectively. The increase was primarily due to 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.
Provision for Income Taxes. The income tax provisions include
tax provisions for U.S. federal income taxes and reflect effective tax rates of
38% in the three months ended June 30, 1995 and 40% in the three months ended
June 30, 1996. Such tax rates approximate statutory federal, state and foreign
tax rates after a reduction for U.S. research and development expense tax
credits.
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Revenues
Total revenues were $12.6 million in the first six months of
1995 and $19.8 million in the first six months of 1996, representing an increase
of 57%. International revenues comprised 37% of total revenues in both years.
The increase is primarily due to increases in software licenses resulting from
expanded sales and marketing efforts both domestically and internationally,
combined with increases in consulting, maintenance and other services from
associated implementations.
Software Licenses. Software license revenues increased by 88%
from $5.3 million in the first six months of 1995 to $10.1 million in the first
six months of 1996. The increase resulted from expanded domestic sales and
marketing efforts in all markets, and was comprised of increases in software
license revenues of 81% domestically and 97% internationally.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Consulting, Maintenance and Other Services. Consulting,
maintenance and other services revenues increased by 35% from $7.3 million in
the first six months of 1995 to $9.8 million in the first six months of 1996.
The increase was primarily attributable to increased software license revenues
and associated implementations both domestically and internationally.
Cost of Revenues
Cost of Software Licenses. Cost of software licenses consists
primarily of royalties payable for licensing of third-party software
incorporated in the Company's products and commissions payable to third parties
on sales of the Company's products. Cost of software licenses increased by 192%
from $84,000 in the first six months of 1995 to $245,000 in the first six months
of 1996, representing 2% of software license revenues in both years. The net
increase is due to an increase in commissions payable to third parties, offset
partially by a decrease in royalties payable to third parties.
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 47% from $4.4
million in the first six months of 1995 to $6.5 million in the first six months
of 1996. These costs represented 61% and 67%, respectively, of consulting,
maintenance and other services revenues in the first six months of 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 62%, from $8.1 million in the first
six months of 1995 to $13.1 million in the first six months of 1996. Gross
profit as a percentage of total revenues increased from 64% in the first six
months of 1995 to 66% in the first six months of 1996. The increase was
primarily attributable to a higher mix of software license revenues, which
increased from 42% of total revenues to 51% of total revenues, offset partially
by higher expenditures on consulting, maintenance and other services associated
with the Company's international expansion.
Operating Expenses
Product Development. Product development expenses increased by
109%, from $1.4 million in the first six months of 1995 to $2.9 million in the
first six months of 1996, representing 11% and 14% 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 31 as
of June 30, 1995 to 71 as of June 30, 1996. Significant product development
efforts in 1996 included the continued development of ODBMS and WinDSS 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
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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
47%, from $2.1 million in the first six months of 1995 to $3.2 million in the
first six months of 1996, representing 17% and 16% of total revenues,
respectively. 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 43%, from $1.5 million in the first six months of 1995 to
$2.2 million in the first six months of 1996, representing 12% and 11% of total
revenues, respectively. The increase was primarily due to increased bad debt
expense, 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.
Provision for Income Taxes. Substantially all U.S. federal
income through March 30, 1995 was attributed to the stockholders of the
Predecessor Companies, 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. Pro forma income tax provisions
have been presented for 1995 in order to indicate the tax provision that would
have been recorded had all income been taxable to the Company. The income tax
provisions include tax provisions for U.S. federal income taxes and reflect
effective tax rates of 38% in the first six months of 1995 and 40% in the first
six months of 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 $25.3 million. As of June 30, 1996,
the Company had $14.7 million in cash and cash equivalents.
The Company's operating activities provided cash of $3.9 million and
$3.5 million in the six months ended June 30, 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 the six months ended June 30, 1995
was $14.9 million, and cash of $13.4 million was provided by investing
activities in the six months ended June 30, 1996, both of which were primarily
comprised of certain transactions from the Company's Reorganization, which was
effective March 30, 1995. Investing activities in the six months ended June 30,
1995 consisted primarily of the acquisition of $14.2 million of restricted
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short-term investments used for the repayment of stockholder notes. In the six
months ended June 30, 1996, these investments were redeemed and the notes were
repaid.
Cash provided by financing activities was $9.5 million in the six
months ended June 30, 1995 and cash of $2.8 million was used in financing
activities in the six months ended June 30, 1996. Financing activities in the
six months ended June 30, 1995 consisted primarily of Reorganization
transactions, which provided net cash of approximately $8.4 million and were
comprised of the sale of Series A Preferred Stock, dividends to S Corporation
stockholders, other distributions made to the Predecessor Companies'
stockholders, and $1.0 million in borrowings under the Company's bank line of
credit. Financing activities in the six months ended June 30, 1996 consisted
primarily of the initial public offering transactions, which provided net cash
of approximately $12.6 million and were comprised of the issuance of Common
Stock, redemption of Preferred Stock, and repayment of notes and interest
payable to stockholders. The remaining activities during the six months ended
June 30, 1996 were the completion of Reorganization transactions which used
$14.6 million of cash and were comprised of the repayment of notes and interest
payable to stockholders and $575,000 in repayment of borrowings under the
Company's bank line of credit.
At June 30, 1996, the Company had cash and cash equivalents of $14.7
million and was engaged in negotiations to secure a $5.0 million secured line of
credit with Bank of America Arizona. The Company anticipates that borrowings
under the line of credit will bear interest based upon the bank's publicly
announced reference rate and that the line of credit will expire July 1, 1998,
at which time the Company expects to seek renewal.
Capital expenditures were approximately $681,000 and $1.3 million in
the six months ended June 30, 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.
The Company believes that the net proceeds from its initial public
offering, the bank line of credit referenced above 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 plans change, the Company may find it necessary to seek 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, several 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 (No. 333-748), 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;
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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;
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 affect 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.
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
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 the 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 hire the necessary personnel to support planned growth, or 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 were approximately 90% of the Company's revenues in the six
months ended June 30, 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.
Uncertain Market for ODBMS and WinDSS. The Company has recently
released ODBMS and WinDSS, its next generation open, client/server solutions, in
limited beta installations. 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
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 WinDSS 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 WinDSS and
plans to devote a significant amount of its future sales and marketing resources
to the full commercial introduction of ODBMS and WinDSS. 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 WinDSS have not yet been
fully implemented in customers' environments. As a result, there can be no
assurance that ODBMS and WinDSS 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 WinDSS 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
WinDSS. Should the Company fail to release a fully commercial version of ODBMS
and WinDSS, if customers experience significant problems with implementation of
the software or are otherwise dissatisfied with the functionality or performance
of ODBMS or WinDSS, 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.
International Operations. In 1993, 1994, 1995 and the first six months
of 1996, international revenues, which include revenues from international
subsidiaries and export sales, comprised approximately 31%, 28%, 39% and 37%,
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 intends to expand its
international operations. The Company has only limited experience in developing
localized versions of its products and in marketing and distributing 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
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17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
personnel. The inability of the Company to successfully expand its international
operations in a timely manner could materially adversely affect 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
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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 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 six months 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.
PART II: OTHER INFORMATION
Item 1: Legal Proceedings:
In February 1996, a dispute arose with one of the Company's customers.
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 counterclaimed for refund of amounts paid and the Company
is vigorously defending such counterclaim. While the arbitration proceedings
remain ongoing, the parties are engaged in settlement negotiations. While
management believes, based upon information currently available, that a
settlement can be reached upon terms acceptable to the Company, there can be no
assurance that such will be the case or that any settlement can be reached in
this matter. The Company does not believe that the ultimate outcome of this
proceeding will have a material adverse effect on the Company.
In May 1996, Niederhoffer and Niederhoffer, Inc. ("Neiderhoffer") filed
a demand for arbitration (the "Demand") with the American Arbitration
Association in New York, New York asserting a claim for a finder's fee against
JDA Software Services, Inc., a wholly owned subsidiary of the Company.
Neiderhoffer's claim relates to an investment in the Company in March, 1995 by
six investment funds advised by TA Associates, Inc. and its affiliates, and the
related establishment of the Company and reorganization of the Company's wholly
owned subsidiaries into their current organizational structure. In the Demand,
Neiderhoffer claims damages of approximately $770,000 and asserts a right to
504,000 shares of the Company's Common Stock. The Company believes it has
meritorious defenses to Neiderhoffer's claims and intends to defend the
arbitration vigorously. Because the arbitration is in an early stage and
discovery has not yet been conducted, the Company cannot determine the total
expense or possible damages, if any, that may be incurred in the arbitration
proceedings or as a result of a settlement or an arbitration award. After
consideration of the claims and information available to management regarding
the arbitration, and after consultation with legal counsel, management believes
that the resolution of this matter will not have a material adverse effect on
the Company's operating results and financial condition. However, the results of
arbitration proceedings are inherently unpredictable, and no assurance can be
given that the arbitration will not have a material adverse effect on the
Company's business, operating results and financial condition.
Item 6: Exhibits and Reports on Form 8-K:
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter ended
June 30, 1996.
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19
JDA SOFTWARE GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JDA SOFTWARE GROUP, INC.
Dated: August 14, 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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20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1* Second Restated Certificate of Incorporation of the Company.
3.2* Bylaws.
4.1* Stock Redemption Agreement among the Company, James D. Armstrong and
Frederick M. Pakis dated March 30, 1995.
10.1* Employment Agreement between James D. Armstrong and JDA Software, Inc.
dated March 30, 1995, as amended.
10.2* Employment Agreement between Frederick M. Pakis and JDA Software, Inc.
dated March 30, 1995, as amended.
10.3* Employment Agreement between James L. Smith and JDA Software, Inc.
dated March 30, 1995, as amended.
10.4 Second Amendment to Employment Agreement between James D. Armstrong
and JDA Software, Inc. dated April 23, 1996.
10.5 Second Amendment to Employment Agreement between Frederick M. Pakis
and JDA Software, Inc. dated April 23, 1996.
10.6 Second Amendment to Employment Agreement between James L. Smith and
JDA Software, Inc. dated April 23, 1996.
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.
20