1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 0-27876
JDA SOFTWARE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0787377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 13,150,496 as of October 31, 1997.
2
JDA SOFTWARE GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income
for the Three Months and Nine Months Ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1997 and 1996 5
Notes to Interim Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
2
3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
SEPTEMBER 30, DECEMBER 31,
1997 1996
----- ----
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $26,096 $30,986
Accounts receivable, net 28,778 16,954
Prepaid income taxes 2,446 0
Deferred tax asset 1,032 786
Prepaid expenses and other current assets 1,995 881
------- -------
Total current assets 60,347 49,607
------- -------
PROPERTY AND EQUIPMENT, NET 13,127 7,752
GOODWILL, NET 3,382 1,697
------- -------
Total assets $76,856 $59,056
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,273 $1,886
Accrued expenses and other liabilities 7,653 5,447
Income taxes payable 1,400 639
Deferred revenue 2,502 1,747
Current portion of capital lease obligations 51 56
------- -------
Total current liabilities 13,879 9,775
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 58 106
DEFERRED TAX LIABILITY 222 514
------- -------
Total liabilities 14,159 10,395
------- -------
STOCKHOLDERS' EQUITY:
Common stock 132 130
Additional paid in capital 64,913 58,442
Accumulated deficit (2,187) (10,349)
Foreign currency translation adjustment (161) 438
------- -------
Total stockholders' equity 62,697 48,661
------- -------
Total liabilities and stockholders' equity $76,856 $59,056
======= =======
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
4
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
REVENUES:
Software licenses $ 10,066 $ 6,098 $27,489 $16,153
Consulting, maintenance and other services 13,609 6,416 34,127 16,201
-------- ------- ------- -------
Total revenues 23,675 12,514 61,616 32,354
COST OF REVENUES:
Software licenses 258 21 691 266
Consulting, maintenance and other services 10,207 4,633 26,004 11,154
-------- ------- ------- -------
Total cost of revenues 10,465 4,654 26,695 11,420
-------- ------- ------- -------
GROSS PROFIT 13,210 7,860 34,921 20,934
-------- ------- ------- -------
OPERATING EXPENSES:
Product development 2,747 1,728 7,333 4,593
Sales and marketing 3,235 1,630 8,811 4,783
General and administrative 2,119 1,191 6,216 3,386
-------- ------- ------- -------
Total operating expenses 8,101 4,549 22,360 12,762
-------- ------- ------- -------
INCOME FROM OPERATIONS 5,109 3,311 12,561 8,172
Other income 321 173 1,042 277
-------- ------- ------- -------
INCOME BEFORE INCOME TAXES 5,430 3,484 13,603 8,449
Provision for income taxes 2,171 1,396 5,441 3,375
-------- ------- ------- -------
NET INCOME $ 3,259 $ 2,088 $ 8,162 $ 5,074
======== ======== ======== =======
NET INCOME PER SHARE $ 0.25 $ 0.17 $ 0.63 $ 0.43
======== ======== ======== =======
SHARES USED IN PER SHARE CALCULATION
13,160 12,283 13,038 11,884
======== ======== ======== =======
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
5
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Nine Months Ended
September 30
------------
1997 1996
----- ----
OPERATING ACTIVITIES:
Net income $ 8,162 $ 5,074
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,680 802
Provision for doubtful accounts 716 349
Deferred income taxes and other (292) 269
Changes in assets and liabilities:
Accounts receivable (12,386) (5,788)
Prepaid income taxes (2,446) 0
Prepaid expenses and other current assets (1,049) (36)
Accounts payable 331 (325)
Accrued and other liabilities 1,424 1,098
Income taxes payable 761 363
Deferred revenue 755 1,049
-------- --------
Net cash (used in) provided by operating activities (2,344) 2,855
INVESTING ACTIVITIES:
Purchase of property and equipment (6,761) (2,154)
Purchase of LIOCS Corporation, net of cash acquired (1,588) 0
Redemption of investments 0 14,649
Cash acquired in purchase of JDA Canada 0 214
-------- --------
Net cash (used in) provided by investing activities (8,349) 12,709
-------- --------
FINANCING ACTIVITIES:
Initial public offering transactions:
Issuance of common stock 25,301
Redemption of preferred stock (7,500)
Payments on notes and interest payable to stockholders (4,881)
Stockholder transactions:
Payments on notes and interest payable to stockholders (14,300)
Net payments on bank line of credit (575)
Issuance of common stock - employee stock purchase plan 1,585 425
Issuance of common stock - stock option plan 1,346 0
Tax benefit - employee stock options 4,041 0
Payments on capital lease obligations (71) (78)
Other (499) (74)
-------- --------
Net cash provided by (used in) financing activities 6,402 (1,682)
-------- --------
Effect of exchange rates on cash (599) 31
-------- --------
Net (decrease) increase in cash and cash equivalents (4,890) 13,913
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 30,986 498
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $26,096 $14,411
======== ========
5
6
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Nine Months Ended
September 30
------------
1997 1996
----- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 3 $ 1,302
========= ==========
Income taxes $ 2,634 $ 2,878
========= ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Conversion of Series A preferred stock $ 7,500
==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquisition of LIOCS Corporation:
Fair value of assets acquired, other than cash $ (622)
Goodwill (1,822)
Liabilities assumed 166
Notes payable 690
Net cash used to purchase LIOCS Corporation $ (1,588)
=========
Acquisition of JDA Canada:
Fair value of assets acquired, other than cash (1,149)
Goodwill (1,678)
Liabilities assumed 499
Common stock issued 2,542
----------
Cash acquired in purchase $ 214
==========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
7
JDA SOFTWARE GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
applicable to interim financial statements. Accordingly, they do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments and reclassifications considered necessary for a fair and comparable
presentation have been included and are of a normal recurring nature. Operating
results for the three and nine months ended September 30, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
2. ACQUISITION OF LIOCS CORPORATION
On April 21, 1997, the Company acquired all of the outstanding stock of
LIOCS Corporation ("LIOCS") for $2.3 million. LIOCS is a leading provider of
advanced distribution and warehouse management solutions. The Company paid $1.4
million of the purchase price in cash at closing, deposited $.2 million in cash
in an escrow account, and recorded a payable for the remaining balance of $.7
million. The escrow account and the remaining balance of $.7 million will be
paid in four uneven installments over an 18 month period. Certain of these
installments are contingent upon LIOCS' product offerings achieving specific
testing and performance milestones. Failure to meet such milestones will release
the Company from the related payment obligations and reduce the purchase price.
The results of LIOCS' operations have been combined with those of the Company
starting at the date of acquisition.
The acquisition has been accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price was allocated to the
net assets acquired based on their estimated fair values. The excess of the
purchase price over the fair value of the net assets acquired was recorded as
goodwill and is being amortized on a straight-line basis over a 15-year period.
Consolidated pro forma revenues, assuming the acquisition had taken place at the
beginning of the fiscal 1996, would have been $51.0 million for fiscal 1996, and
$62.4 million for the nine months ended September 30, 1997. Consolidated pro
forma net income and net income per share would not have been materially
different than the reported amounts for these two periods. The pro forma amounts
are not necessarily indicative of the actual results that would have occurred
had the acquisition been consummated at the beginning of fiscal 1996, or of the
future operations of the combined companies.
3. REVENUE RECOGNITION
The Company recognizes revenues in accordance with the provisions of
American Institute of Certified Public Accountants ("AICPA") Statement of
Position No. 91-1, Software Revenue Recognition. ("SOP 91-1") Under SOP 91-1,
software license revenue is recognized upon the shipment of the product if
collection is probable and the Company's remaining obligations under the license
agreement are insignificant. Consulting services are billed on an hourly basis
and revenues are recognized as the work is performed. Maintenance revenues from
ongoing customer support are billed on a monthly basis and recorded as revenue
in the applicable month. The AICPA has recently adopted a new statement of
position that supersedes SOP 91-1 and becomes effective for years beginning
after December 15, 1997. The Company does not believe that this new
pronouncement will have a significant impact on its financial statements.
7
8
4. NET INCOME PER SHARE
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share ("SFAS No. 128") in February
1997. The Company is required to implement SFAS No. 128 for interim and annual
periods ending after December 15, 1997. SFAS No. 128 prescribes a presentation
of basic net income per share, which is calculated utilizing only weighted
average common shares outstanding, and a net income per share - assuming
dilution. After the effective date, all prior period earnings per share data
must be restated to conform with SFAS No. 128. Basic net income per share and
net income per share - assuming dilution for the three months ended September
30, 1997 and 1996 would have been $.25 and $.25, and $.17 and $.17,
respectively. For the nine month periods ended September 30, 1997 and 1996, the
results would have been $.63 and $.62, and $.43 and $.43, respectively.
5. OTHER RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
No. 130"), and No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS No. 131"). Both of these standards are effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 changes the reporting of
certain items currently reported in the common stock equity section of the
balance sheet. SFAS No. 131 requires public companies to report certain
information about operating segments in their financial statements. SFAS No. 131
also establishes related disclosures about products and services, geographic
areas, and major customers. The Company is currently evaluating what impact
these standards will have on its financial statements and related disclosures.
8
9
PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section of the Report contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Discussion containing such forward-looking statements may be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the captions "Overview," "Three Months Ended September 30, 1997
vs. Three Months Ended September 30, 1996," "Nine Months Ended September 30,
1997 vs. Nine Months Ended September 30, 1996," "Liquidity and Capital
Resources," and "Risk Factors." Actual results for future periods could differ
materially from those discussed in this section as a result of the various risks
and uncertainties discussed herein.
OVERVIEW
JDA Software Group, Inc. ("JDA") is an international provider of
comprehensive enterprise-wide software solutions that address the
mission-critical business information requirements of retailing organizations.
JDA is headquartered in Phoenix, Arizona and has offices in major cities across
the United States and international offices in Canada, the United Kingdom,
Germany, Mexico, Chile, Singapore, and Australia. JDA's retail applications
include the Open DataBase Merchandising System(TM) ("ODBMS"(R)), designed for
open, client/server environments; the AS/400-based Merchandise Management
System(TM) ("MMS"(R)); a DOS and Windows(R) based in-store management system
("DSS"(TM) and "Win/DSS"(TM), respectively); RetailIDEAS(TM), a data analysis
application; and Warehouse Control Center ("WCC"(TM)), an advanced distribution
and warehouse management solution. JDA also offers a full array of support
services that range from planning and design to training and implementation.
JDA has grown from a distributor of a single product line in 1985,
MMS(R), to the six distinct product offerings noted above in pursuit of the
Company's strategy to provide solutions to the entire retail supply chain. In
addition, JDA has positioned itself to be a "one-stop" provider of software and
consulting services to a global retail industry. The Company has rapidly
expanded its service offerings and infrastructure to support this movement,
particularly in the international markets. These strategies have resulted in
certain shifts in the Company's business and revenue mix over the past 18
months:
DOMESTIC VS. INTERNATIONAL SALES. Domestic and international revenues
represented 43% and 57%, respectively of JDA's total revenues for the three
months ended September 30, 1997 as compared with 48% and 52%, respectively in
the comparable prior year quarter. In absolute dollars, international revenues
increased $7.1 million, or 110% between the comparable quarterly periods. By
comparison, domestic revenues increased $4.1 million, or 67% compared to the
prior year quarter. International revenues represented 51% of total revenues in
each of the first two quarters of 1997. Increased international revenues during
the third quarter resulted from the Company's on-going strategy to expand
international markets by developing localized versions of its products and
establishing international subsidiaries with direct sales and consulting
capabilities. JDA's ability to provide local consulting services has enhanced
the marketing of software licenses to international customers, who in some
instances require the Company to offer such services as a condition to the sale
of the license.
SOFTWARE LICENSE REVENUE VS. CONSULTING, MAINTENANCE AND OTHER REVENUES
("CMO"). Software license revenue and CMO revenues represented 43% and 57%,
respectively of JDA's total revenues for the three months ended September 30,
1997 as compared with 49% and 51%, respectively in the comparable prior year
quarter. CMO revenues are derived from a range of services, including system
design and implementation and, to a lesser extent, software maintenance and
support and training. During the past 18 months, the Company has accelerated the
growth of its service business in anticipation of an increased mix of CMO
revenues in both domestic and international markets, and continued market
acceptance of its newer client/server product lines, which tend to be more
complex and require greater vendor support. Additionally, the Company believes
its ability to offer CMO services is an increasingly important factor in its
ability to sale software licenses. CMO revenues generally carry a lower gross
profit than software licenses. CMO costs will also tend to be higher during a
period of rapid expansion, particularly with the opening of new international
offices where initial recruiting costs, training and other start-up expenses
must be incurred in advance of anticipated revenues, and as a result of the
reduced labor efficiencies associated with the introduction of products to a new
customer base.
9
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
PRODUCT LINES. JDA has historically derived the majority of its
revenues from software licenses and consulting, maintenance and other services
relating to MMS(R). Total revenues from the MMS(R) product line represented 57%
of total revenues for the three months ended September 30, 1997 as compared with
80% in the comparable prior year quarter. The Company expects MMS(R) revenues to
comprise a significant portion of total revenues for the foreseeable future;
however, the Company expects that MMS(R) revenues as a percentage of total
revenues will continue to decline as a result of the increased revenues
attributable to the Company's newer product lines, particularly ODBMS(R),
Win/DSS(TM) and RetailIDEAS(TM).
The Company recognizes revenues in accordance with the provisions of
American Institute of Certified Public Accountants ("AICPA") Statement of
Position No. 91-1, Software Revenue Recognition. ("SOP 91-1") Under SOP 91-1,
software license revenue is recognized upon the shipment of the product if
collection is probable and the Company's remaining obligations under the license
agreement are insignificant. Consulting services are billed on an hourly basis
and revenues are recognized as the work is performed. Maintenance revenues from
ongoing customer support are billed on a monthly basis and recorded as revenue
in the applicable month. The AICPA has recently adopted a new statement of
position that supersedes SOP 91-1 and becomes effective for years beginning
after December 15, 1997. The Company does not believe that this pronouncement
will have a significant impact on its financial statements.
On April 21, 1997, the Company acquired all of the outstanding stock of
LIOCS Corporation ("LIOCS") for $2.3 million. LIOCS is a leading provider of
advanced distribution and warehouse management solutions including the WCC(TM)
product line. The Company paid $1.4 million of the purchase price in cash at
closing, deposited $.2 million in cash in an escrow account, and recorded a
payable for the remaining balance of $.7 million. The escrow account and the
remaining balance of $.7 million will be paid in four uneven installments over
an 18 month period. Certain of these installments are contingent upon LIOCS'
product offerings achieving specific testing and performance milestones. Failure
to meet such milestones will release the Company from the related payment
obligations and reduce the purchase price. The Company anticipates that all
testing and performance milestones will be met. The acquisition has been
accounted for using the purchase method of accounting and the results of LIOCS'
operations have been combined with those of the Company starting at the date of
acquisition. Such results have an immaterial effect on Company's reported
financial results for the three months ended September 30, 1997. The Company
recorded $1.8 million in goodwill on this transaction and is amortizing the
balance on a straight-line basis over 15 years.
THREE MONTHS ENDED SEPTEMBER 30, 1997 VS. THREE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES
Total revenues for the three months ended September 30, 1997 were $23.7
million, an increase of $11.2 million, or 89%, over the $12.5 million reported
in the prior year quarter. Revenues consist of SOFTWARE LICENSES and CONSULTING,
MAINTENANCE AND OTHER SERVICES, which represented 43% and 57%, respectively of
total revenues during the third quarter of 1997, and 49% and 51%, respectively
in the comparable prior year quarter.
SOFTWARE LICENSE revenues for the three months ended September 30, 1997
were $10.1 million, an increase of $4.0 million, or 65%, over the $6.1 million
reported in the prior year quarter. Both domestic and international software
license revenues increased 65% over the comparable prior year quarter. These
increases resulted from the Company's expanded sales and marketing efforts
worldwide and the incremental sales of the Company's newer product lines such as
ODBMS(R) during the current quarter, compared to negligible sales of these new
products in the comparable prior year quarter. CONSULTING, MAINTENANCE AND OTHER
SERVICE revenues for the three months ended September 30, 1997 were $13.6
million, an increase of $7.2 million, or 112%, over the $6.4 million reported in
the prior year quarter. Although domestic service revenues increased by 68%
quarter-over-quarter, nearly two-thirds of the absolute dollar growth occurred
in the Company's international markets where the comparative increase was 175%.
10
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
COST OF REVENUES
The 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. CMO costs for
the three months ended September 30, 1997 were $10.2 million, an increase of
$5.6 million, or 120%, over the $4.6 million reported in the prior year quarter.
The Company has expanded its consulting and customer support organizations as a
result of increased sales of new software licenses and increased demand from the
existing client base for additional support and professional services. The
Company increased the size of its consulting and service organization by 105%
quarter-over-quarter, and currently has nearly 400 employees involved in these
functions. As of September 30, 1997, 64% of all JDA employees were directly
involved in consulting or customer support.
GROSS PROFIT
GROSS PROFIT for the three months ended September 30, 1997 was $13.2
million, an increase of $5.3 million, or 68%, over the $7.9 million reported in
prior year quarter. Gross profit as a percentage of total revenues decreased
from 63% in the third quarter of 1996 to 56% in the second and third quarters of
1997. This decrease is attributable to the lower mix of software license
revenues between quarters and the rapid expansion of the consulting and customer
support organizations which lowered CMO margins from 28% in the third quarter of
1996 to 25% in third quarter of 1997. Reduced CMO margins were a result of costs
associated with rapid expansion of the consulting infrastructure, including high
front-end recruiting, training and downtime costs. The Company's third quarter
CMO margin of 25% is nearly 4 percentage points higher than the CMO margin
achieved during the second quarter of 1997. An additional 58 consultants were
hired during the quarter and management believes the Company is beginning to
reap the benefits of achieving improved utilization and economies of scale.
OPERATING EXPENSES
PRODUCT DEVELOPMENT expenses for the three months ended September 30,
1997 were $2.7 million, an increase of $1.0 million, or 59%, over the $1.7
million reported in the prior year quarter. Product development expenses as a
percentage of total revenues decreased from 14% to 12% between the comparable
quarters. The increase in absolute dollars quarter-over-quarter results from
increases in the Company's product development staff to continue development
efforts on ODBMS(R), Win/DSS(TM), RetailIDEAS (TM)and the WCC(TM) product
acquired from LIOCS, and to make further enhancements to the MMS(R) product
line. The Company believes that a strong commitment to product development will
be required in order to remain competitive. Accordingly, the Company will
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 expenses for the three months ended September 30,
1997 were $3.2 million, an increase of $1.6 million, or 100%, over the $1.6
million reported in the prior year quarter. Sales and marketing expenses as a
percentage of total revenues increased from 13% to 14% between the comparable
quarters. The increase in absolute dollars resulted from the Company's strategy
to increase its sales and marketing presence in both domestic and international
markets.
GENERAL AND ADMINISTRATIVE expenses for the three months ended
September 30, 1997 were $2.1 million, an increase of $.9 million, or 78%, over
the $1.2 million reported in the prior year quarter. General and administrative
expenses as a percentage of total revenues decreased from 10% to 9% between the
comparable quarters. The increase in absolute dollars results from the addition
of administrative personnel to support the Company's domestic and international
growth and from an increase to the allowance for bad debt. The Company
anticipates that general and administrative expenses may continue to increase in
absolute dollars as the Company expands its operations.
INCOME TAXES
INCOME TAXES include provisions for state and federal income taxes. An
effective tax rate of 40% has been recorded in both quarters to approximate
statutory federal, state and foreign tax rates after a reduction for U.S.
research and development expense tax credits.
11
12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
NET INCOME
NET INCOME for the three months ended September 30, 1997 was $3.3
million, or $.25 per share, an increase of 56% over the net income of $2.1
million, or $.17 per share reported in the comparable prior year quarter.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VS. NINE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES
Total revenues for the nine months ended September 30, 1997 were $61.6
million, an increase of $29.3 million, or 90%, over the $32.3 million reported
for the nine months ended September 30, 1996. Revenues consist of SOFTWARE
LICENSES and CONSULTING, MAINTENANCE AND OTHER SERVICES, which represented 45%
and 55%, respectively of total revenues for the first nine months of 1997, and
50% and 50%, respectively in the first nine months of 1996.
SOFTWARE LICENSE revenues for the nine months ended September 30, 1997
were $27.5 million, an increase of $11.3 million, or 70%, over the $16.2 million
reported in the comparable prior year period. International software license
revenues increased 86% over the comparable prior year period while revenues from
sales of domestic licenses increased 52% between the comparable periods. These
increases resulted from the Company's expanded sales and marketing efforts
worldwide and the incremental sales of ODBMS(R) and Win/DSS(TM) licenses during
the current period, compared to negligible sales of these new products in the
comparable prior year period. CONSULTING, MAINTENANCE AND OTHER SERVICE revenues
for the nine months ended September 30, 1997 were $34.1 million, an increase of
$17.9 million, or 111%, over the $16.2 million reported in the comparable prior
year period. Although domestic service revenues increased by 57% between
periods, nearly two-thirds of absolute dollar growth occurred in the Company's
international markets where the comparative increase was 222%.
COST OF REVENUES
CONSULTING, MAINTENANCE AND OTHER SERVICE costs for the nine months
ended September 30, 1997 were $26.0 million, an increase of $14.8 million, or
133%, over the $11.2 million reported in the comparable prior year period. The
Company has expanded its consulting and customer support organizations as a
result of increased sales of new software licenses and the increased demand from
the existing client base for additional support and professional services.
GROSS PROFIT
GROSS PROFIT for the nine months ended September 30, 1997 was $34.9
million, an increase of $14.0 million, or 67%, over the $20.9 million reported
in the comparable prior year period. Gross profit as a percentage of total
revenues decreased from 65% to 57% between the periods as a result of the lower
mix of software license revenues, and the rapid expansion of the consulting and
customer support organizations which lowered CMO margins from 31% to 24%.
Reduced CMO margins were a result of costs associated with rapid expansion of
the consulting infrastructure, including high front-end recruiting, training and
downtime costs.
OPERATING EXPENSES
PRODUCT DEVELOPMENT expenses for the nine months ended September 30,
1997 were $7.3 million, an increase of $2.7 million, or 60%, over the $4.6
million reported in the comparable prior year period. Product development
expenses as a percentage of total revenues decreased from 14% to 12% between
periods. The increase in absolute dollars reflects the growth in the product
development staff for the continued development of ODBMS(R), Win/DSS(TM),
RetailIDEAS(TM), and WCC(TM), and for enhancements to the MMS(R) product line.
SALES AND MARKETING expenses for the current period were $8.8 million, an
increase of $4.0 million, or 84%, over the $4.8 million reported in the prior
period. Sales and marketing expenses decreased from 15% to 14% between periods.
GENERAL AND ADMINISTRATIVE expenses for the current period were $6.2 million, an
increase of $2.8 million, or 84%, over the $3.4 million reported in the prior
period. General and administrative expenses represented 10% of total revenues in
each of these periods.
12
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
INCOME TAXES
INCOME TAXES include provisions for state and federal income taxes. An
effective tax rate of 40% has been recorded in both periods to approximate
statutory federal, state, and foreign tax rates after a reduction for U.S.
research and development expense tax credits.
NET INCOME
NET INCOME for the nine months ended September 30, 1997 was $8.2
million, or $.63 per share, an increase of 61% over net income of $5.1 million,
or $.43 per share reported in the comparable prior year period.
LIQUIDITY AND CAPITAL RESOURCES
JDA had working capital of $46.5 million at September 30, 1997 compared
with $39.8 million at December 31, 1996. The current ratios at these dates were
4.3:1 and 5.1:1, respectively. Cash and cash equivalents at September 30, 1997
were $26.1 million, a decrease of $4.9 million from the $31.0 million reported
at December 31, 1996.
The Company's operating activities utilized cash of $2.3 million during
the nine months ended September 30, 1997 and provided cash of $2.9 million
during the nine months ended September 30, 1996. Cash generated from profitable
operations during the current period was used to fund the Company's growth and a
$12.4 million increase in receivable balances.
The Company's investing activities utilized cash of $8.3 million during
the nine months ended September 30, 1997 and provided cash of $12.7 million
during the nine months ended September 30, 1996. The 1997 activity includes $6.8
million in capital expenditures to support the Company's growth and an initial
payment of $1.6 million for the purchase of LIOCS. The 1996 activity includes
the redemption of $14.7 million in restricted short-term investments acquired
during 1995 and capital expenditures of $2.2 million.
The Company's financing activities provided cash of $6.4 million during
the nine months ended September 30, 1997 and utilized cash of $1.7 million
during the nine months ended September 30, 1996. The 1997 activity includes $7.0
million in proceeds from the issuance of stock and related tax benefits. The
1996 activity includes the issuance of 2,182,866 shares of the Company's common
stock in an initial public offering on March 20, 1996, the net proceeds of which
were offset by the repayment of stockholder notes and the redemption of
preferred stock.
At September 30, 1997, the Company had no outstanding borrowings under
its existing $5.0 million bank line of credit. This line of credit expires on
July 1, 1998, and the Company intends to seek renewal at that time. The Company
believes that its cash and cash equivalents, bank line of credit and funds
generated from operations will provide adequate liquidity to meet the Company's
planned capital and operating requirements during the next twelve months.
RISK FACTORS
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have varied and are expected to continue to vary in the
future. These fluctuations may be caused by many factors, including: 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; and general industry and economic conditions.
13
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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, the gross
profit on software licenses is significantly greater than the gross profit on
consulting, maintenance and other services. As a result, the Company's overall
gross profit has fluctuated significantly based on revenue mix, and management
expects this trend to continue.
Historically, a significant portion of the Company's quarterly revenues
has been derived from relatively large licenses to a limited number of
customers. In addition, the Company's business in recent quarters has been
increasingly concentrated in the final weeks of the quarter. The Company
currently anticipates that both these trends will continue. Any significant
cancellation or deferral of customer orders, or the Company's inability to
conclude license negotiations in the compressed time frame at the end of a
fiscal quarter, may have a material adverse effect on the operating results
reported 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.
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, which is 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. The Company also believes
that the retail industry is experiencing a period of increased consolidation,
which has in the past and may in the future affect the demand for the Company's
products. Recent results in the overall retail industry have been disappointing,
and the Company anticipates that existing or prospective customers may be
experiencing or may in the future experience severe financial hardship. 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. Any resulting decline in demand for the Company's
products and services would have a material adverse effect on the Company's
business, results of operations and financial condition.
Management of Growth. The growth of the Company's business, together
with the expansion and increasing complexity of its product lines has placed and
is 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. In particular, 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 will not be able to continue to increase
its business at historical rates without adding significant numbers of trained
consulting personnel. Accordingly, the Company continues to significantly
increase consulting capacity in anticipation of future revenues. In their first
year of employment by the Company, new consulting personnel typically spend
between two to ten weeks in training, during which period they do not generate
revenues. Further, the addition of significant numbers of new personnel
14
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
requires the Company to incur additional start-up expenses, including
procurement of office space and equipment. Start-up expenses incurred as a
result of the rapid expansion of the Company's CMO services business contributed
to a decline in CMO gross profit margins from 34% in the quarter ended September
30, 1996, to 25% in the most recent quarter. The current quarter results do
however, represent nearly a 4 percentage point improvement over the CMO margins
achieved in the second quarter of 1997. An additional 58 consultants were hired
during the third quarter of 1997 and management believes the Company is
beginning to reap the benefits of achieving improved utilization and economies
of scale. The Company will continue its efforts to closely manage CMO gross
profit margins, however, there can be no assurance such efforts will be
successful, or that anticipated continued growth in the Company's CMO business
will not cause further reductions in CMO gross profit margins. To the extent
anticipated revenues fail to materialize following the hiring and training of
new personnel, the Company's operating results would be adversely affected.
There can be no assurance that qualified personnel will be located, retained or
trained in a timely manner. In the event the Company is unable to sufficiently
increase 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 compete effectively and to manage future
growth, if any, also will depend on its ability to continue to implement and
improve operational, financial and management information systems on a timely
basis and to expand, train, motivate and manage its work force. Accordingly, the
Company's future operating results will depend on the ability of its management
group and other key employees to continue to implement and improve its systems
for operations, financial control and information management; to recruit, train
and manage its employee base, in particular its direct sales force and
consulting services organization; and to deal effectively with third-party
systems integrators and consultants. 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.
Ability to Attract and Retain Technical Personnel. The Company is
heavily dependent upon its ability to attract, retain and motivate skilled
technical and managerial personnel, especially highly skilled engineers involved
in ongoing product development and consulting personnel who assist in the
license and implementation of the Company's solutions. In particular, the
Company's ability to install, maintain and enhance its enterprise products is
substantially dependent upon its ability to locate, hire and train qualified
software engineers. The market for such individuals is intensely competitive,
particularly in foreign markets. In this regard the Company, as part of its
strategy, plans to significantly increase the number of consulting personnel in
connection with the roll-out of its ODBMS(R) and Win/DSS(TM) products and to
support continued development and implementation of its MMS(R) product line.
Given the critical role of the Company's product development and consulting
staffs, the inability to recruit successfully or the loss of a significant part
of its product development or consulting staffs would have a material adverse
effect on the Company. The software industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. There can be
no assurance that the Company will be able to retain its current personnel, or
that it will be able to attract and retain other highly qualified technical and
managerial personnel in the future. The inability to attract and retain the
necessary technical and managerial personnel could have a material adverse
effect upon the Company's business, operating results and financial condition.
Uncertain Market for ODBMS(R) and Win/DSS(TM). The Company released the
ODBMS(R) and Win/DSS(TM) product lines during the past 18 months. Both products
are 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. 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(R) or Win/DSS(TM) will continue to develop. 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 ongoing development of ODBMS(R) and Win/DSS(TM)
and a significant amount of its sales and marketing resources to the full
commercial introduction of ODBMS(R) and Win/DSS(TM). A significant effort is
still required to develop and release additional application modules for these
products. The Company has limited experience in developing and
15
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
marketing products for open system applications. As a result, there can be no
assurance that ODBMS(R) and Win/DSS(TM) 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(R) and Win/DSS(TM) 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 be successfully corrected on a
timely basis, if at all. The Company's future business growth is substantially
dependent on the continued development, introduction and market acceptance of
ODBMS(R) and Win/DSS(TM). If customers experience significant problems with
implementation of ODBMS(R) and Win/DSS(TM) or are otherwise dissatisfied with
the functionality or performance of ODBMS(R) or Win/DSS(TM), 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.
Product Concentration. The Company has historically derived the
majority of its revenues from software licenses and consulting, maintenance and
other services related to MMS(R). The Company expects that revenues related to
MMS(R) will continue to account for a substantial but reduced percentage of
total revenues as market acceptance of the Company's newer products increases.
The life cycle of the MMS(R) 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 expects that revenues attributable
to its MMS(R) and ODBMS(R) enterprise products will comprise the substantial
majority of software license revenues for the foreseeable future. Any decline in
MMS(R) revenues, to the extent not offset by increases in revenues from other
products, would have a material adverse effect on the Company's business,
operating results and financial condition.
International Operations. 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 continue
expansion of its international infrastructure. Although the Company maintains
offices in Canada, the United Kingdom, Germany, Mexico, Chile, Singapore, and
Australia, and is currently investing significant resources in its international
operations, there can be no assurance that the Company will be successful in
expanding its international operations. The Company anticipates that continued
growth of its international operations will require the Company to recruit and
hire a number of new consulting, sales and marketing and support personnel in
the countries in which the Company has established or will establish offices. In
addition, the Company has only limited experience in developing localized
versions of its products and in marketing and distributing its products
internationally. International rollout 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 to a new market. In particular, successful
introduction of the Company's product into new markets requires the Company to
locate and hire qualified local sales and consulting personnel and train them in
the operation of the Company's products. 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. In addition, there can be no
assurance that the Company will be able to successfully localize, market, sell
and deliver its products internationally. 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.
There are a number of other risks inherent in the Company's
international business activities, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, longer accounts receivable payment cycles,
potentially adverse tax consequences, currency fluctuations, repatriation of
earnings and the burdens of complying with a wide variety of foreign laws. In
addition, consulting, maintenance and other services in support of international
licenses typically have lower gross margins than those achieved domestically due
to lower prevailing billing rates in certain of the Company's international
markets. Therefore, planned growth in the Company's continued operations may
result in further declines in gross margin on consulting, maintenance and other
services. 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. The Company does not currently engage in foreign currency
hedging transactions.
16
17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 entering into forward foreign
exchange contracts or engaging in similar hedging strategies. There can be no
assurance that any currency exchange strategy would be successful in avoiding
exchange-related losses. In addition, revenues of the Company earned in various
countries where the Company does business may be subject to taxation by more
than one jurisdiction, thereby adversely affecting the Company's earnings.
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 (a subsidiary of HNC Software, Inc.), STS Systems and Richter
Management Services, 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 particular, SAP Aktiengesellschaft announced
in mid-1997 the availability of an integrated client/server enterprise system
competitive with the Company's products. In January 1997, Intrepid announced the
formation of a joint development and marketing relationship with, and a minority
equity investment by, PeopleSoft, a provider of enterprise applications
software. At that time, the parties projected the availability of products
expected to compete directly with the Company's ODBMS(R) enterprise product in
the second half of 1997. In the in-store systems market, which is more
fragmented than the enterprise market, the Company competes with major systems
manufacturers such as NCR, IBM and Fujitsu/ICL, as well as software companies
such as Applied Intelligence Group, CRS Business Computers, Inc., Post Software
International, STS Systems, GERS Retail Systems and Gateway Data Sciences
Corporation. In the distribution and warehouse management systems market, the
Company's WCC(TM) product completes with products from Catalyst International,
Inc., Dallas Systems Corporation and McHugh Freeman. The RetailIDEAS(TM) product
completes with products from MicroStategy and Intrepid. In the market for
consulting services, the Company is pursuing a strategy of forming informal
working relationships with leading retail systems consulting groups such as
Andersen Consulting, Ernst & Young LLP, Price Waterhouse's Management Horizons
Division and other similar major systems integrators. However, these
integrators, as well as independent consulting firms such as the Global Services
Division of IBM, also represent potential competition to the Company's
consulting services group. 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, operating results and financial condition.
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. As a result,
the Company's position in its existing market or other markets that it may enter
could be eroded rapidly by technological advancements not embraced by the
Company. The life cycles of the Company's products are difficult to estimate.
The products must keep pace with technological developments, conform to evolving
industry standards and address increasingly sophisticated customer needs. In
particular, the Company believes that it must continue to respond quickly to
users' needs for broad functionality and multi-platform support and to advances
in hardware and operating systems. Introduction of new products embodying new
technologies and the emergence of new industry standards could render the
Company's products obsolete and unmarketable. There can be no assurance that the
Company will not experience future difficulties that could delay or prevent the
successful development, introduction and marketing of new products, or that new
products and product enhancements will meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable to develop and introduce
products in a timely manner in response to changing market conditions or
customer requirements, the Company's business, operating results and financial
condition would be materially adversely affected.
In addition, the Company strives to achieve compatibility between those
products and retailing systems platforms which management 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.
17
18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Dependence on Key Personnel. The Company's performance is substantially
dependent on the performance of its executive officers and key employees. In
particular, the services of James D. Armstrong and Frederick M. Pakis,
co-chairman of the Company's Board of Directors, and Brent W. Lippman, the
Company's Chief Executive Officer, would be difficult to replace. The Company
does not have in place "key person" life insurance policies on any of its
employees. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the business, operating
results and financial condition of the Company.
Dependence on Proprietary Technology. The Company's success and ability
to compete is dependent in part upon its proprietary technology, including its
software source code. The Company relies on a combination of trade secret,
nondisclosure and copyright law, which may afford only limited protection. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. The Company presently has no patents or
patent applications pending. There can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties, including customers who receive listings of the source code for the
Company's products pursuant to the terms of their license agreements with the
Company, may attempt to reverse engineer or copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. As a result, there can be no assurance that unauthorized use of the
Company's technology may not occur.
Certain technology used by the Company's products is licensed from
third parties, generally on a non-exclusive basis. The termination of any such
licenses, or the failure of the third-party licensors to adequately maintain or
update their products, could result in delay in the Company's ability to ship
certain of its products while it seeks to implement technology offered by
alternative sources, and any required replacement licenses could prove costly.
While it may be necessary or desirable in the future to obtain other licenses
relating to one or more of the Company's products or relating to current or
future technologies, there can be no assurance that the Company will be able to
do so on commercially reasonable terms or at all.
In the future the Company may receive notices claiming that it is
infringing the proprietary rights of third parties, and there can be no
assurance that the Company will not become the subject of infringement claims or
legal proceedings by third parties with respect to current or future products.
In addition, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Any such claim could be time
consuming, result in costly litigation, cause product shipment delays or force
the Company to enter into royalty or license agreements rather than dispute the
merits of such claims and could have a material adverse effect on the Company's
business, operating 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. Prior to 1997, the Company did 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 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.
18
19
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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.
Currently, there is significant uncertainty within the software
industry and among software users regarding the impact of installed software
that has been programmed to accept only two digit entries in the date code field
and use such two digit entries in the software's calculation and report
generation features. Software modifications or upgrades will be required to
enable such software to distinguish between 21st and 20thcentury dates ("Year
2000 Compliant"). Current offered versions of the Company's products are
designed to be Year 2000 Compliant, and the Company has received verification to
that effect from the Information Technology Association of America as of October
23, 1997. The Company is also in the process of determining the extent to which
the older software products in its installed customer base are Year 2000
Compliant, as well as the impact of any non-compliance on the Company and its
customers. The Company does not currently believe that the effects of any Year
2000 non-compliance in the Company's installed base of software will result in
any material adverse impact on the Company's business or financial condition.
However, the Company's investigation is in its preliminary stages, and no
assurance can be given that the Company will not be exposed to potential claims
resulting from system problems associated with the century change.
Possible Volatility. Since the Company's initial public offering in
March 1996, the price of the Company's Common Stock has experienced large
fluctuations. Future announcements concerning the Company or its competitors,
quarterly variations in operating results, announcements of technological
innovations, the introduction of new products or changes in product pricing
policies by the Company or its competitors, proprietary rights or other
litigation, changes in earnings estimates by analysts or other factors could
cause the market price of the Common Stock to fluctuate substantially. In
addition, stock prices for many technology companies fluctuate widely for
reasons which may be unrelated to operating results. These fluctuations, as well
as general economic, market and political conditions such as recessions or
military conflicts, may materially and adversely affect the market price of the
Company's Common Stock.
19
20
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
Legal proceedings settled during the nine months ended September 30,
1997 are discussed in the quarterly report on Form 10-Q for the period ended
June 30, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters submitted to a vote of security holders during the quarter
ended September 30, 1997.
ITEM 5. OTHER INFORMATION:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated 10/24/97 with the
Commission to announce the resignation of James D. Armstrong as its Chief
Executive Officer and Frederick M. Pakis as President in connection with their
appointment to the newly created offices of Co-Chairmen of the Board of
Directors. In addition, the Company announced the promotion of Brent W. Lippman
to the position of Chief Executive Officer and his election as a member of the
Board of Directors.
20
21
JDA SOFTWARE GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JDA SOFTWARE GROUP, INC.
Dated: November 10, 1997 By: /s/ Kristen L. Magnuson
------------------------
Kristen L. Magnuson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1* Second Restated Certificate of Incorporation of the Company.
3.2* Bylaws.
4.1* Stock Redemption Agreement by and among the Company, James D.
Armstrong and Frederick M. Pakis dated March 30, 1995.
11.1 Statement regarding computation of net income per share.
27.1 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.
22