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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
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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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 404-5500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the registrant's common stock
held by nonaffiliates of the registrant (based on the closing sales price of
such stock as reported in the Nasdaq Stock Market) on March 20, 1998 was
$512,183,349. Excludes shares of common stock held by directors, officers and
each person who holds 5% or more of the registrant's common stock.
Number of shares of common stock, $0.01 par value per share, outstanding as
of March 20, 1998 was 13,311,251.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS FORM 10-K REFERENCE
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Portions of the Proxy Statement for the registrant's 1998 Items 10, 11, 12 and 13 of Part III
Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K.
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This Report on Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Securities Act of 1934, as amended. Discussion
containing such forward-looking statements may be found in Part I, Item 1.
Business under the captions "Industry Background," "JDA Solution," "Company
Strategy," "Products," "Consulting, Maintenance and Other Services,"
"Customers," "Sales and Marketing," "Product Development and JDA Technology,"
"Competition," "Proprietary Rights," and "Employees," and in Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the captions "Overview," "Results of Operations -- Year Ended
December 31, 1997 Compared to Year Ended December 31, 1996," "Liquidity and
Capital Resources," "Year 2000 Compliance," and "Certain Risks." Actual results
for future periods could differ materially from those discussed in this Report
on Form 10-K as a result of the various risks and uncertainties discussed
herein.
PART I
ITEM 1. BUSINESS
JDA Software Group, Inc. ("JDA" or the "Company") is a leading
international provider of integrated enterprise-wide software products and
services that address mission-critical management information needs of the
retail supply chain. The Company offers a broad array of software products
designed to provide integrated technology solutions for the collection,
organization, distribution, and analysis of data throughout a retail
organization. The Company's products include: merchandising, financial and
decision support systems at the corporate level; point-of-sale, back office and
distributed processing applications at the store level; and warehouse management
and logistics systems at the distribution level. The Company offers products
that operate on the IBM AS/400- and DOS-based platforms, as well as products
that operate in the UNIX and Windows NT open client/server environments. JDA
also offers a wide range of professional services through its consulting and
customer support organizations including: project management, system planning,
design and implementation, custom modifications, training and support services.
The Company's products and services are marketed and sold primarily through
JDA's direct sales force and through cooperative relationships with sales
agents, distributors and other vendors, including IBM and Siemens Nixdorf. The
Company's solutions have been licensed to more than 300 retail enterprises
worldwide and address a wide variety of retail markets, including hard and soft
lines retailers, warehouse operations, department stores and grocery stores. The
Company's customers include many of the world's leading specialty retailers such
as Bed, Bath and Beyond, Inc., CompUSA, Inc., Gucci SpA, LensCrafters, Inc.,
Office Depot International, Oshman's Sporting Goods, Inc., PETCO Animal
Supplies, Inc., Planet Hollywood International, Royal Duty Free Shop, Inc.,
Sears Clothing Ltd., Staples, Inc., Stride Rite Children's Group, Inc., Virgin
Entertainment Group, Inc. and Williams-Sonoma, Inc.
INDUSTRY BACKGROUND
The retailing industry is experiencing rapid change, driven primarily by
changing consumer preferences, intensifying competition and increasing
globalization. Consumers' purchase patterns have shifted, with today's consumer
choosing value, in the form of lower prices and improved convenience and
personal service, over brand and retailer loyalty. The result for many retailers
has been increased pressure on operating profits as they try to lower prices and
increase marketing and promotions to increase traffic in stores in order to
increase sales. In addition, new retail formats, such as the "category killer"
format employed by retailers such as Staples and PETCO, have enjoyed broad
market acceptance and are setting the standards for lower prices and improved
customer service. To exploit international growth opportunities a number of
retailers are seeking to apply their concepts outside their domestic markets.
Despite the significant challenges in the retail industry, many retailers have
successfully achieved efficiencies and reduced operating costs by improving
inventory management, decentralizing the decision making process while
centralizing purchasing and other administrative functions, deploying state of
the art information technology and pursuing aggressive roll-out strategies to
achieve economies of scale.
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To respond to today's competitive challenges, retailers must accelerate the
rate at which they identify and respond to changing business conditions and
consumer requirements. A retail organization's agility and ultimate success are
dependent upon its ability to rapidly and cost-effectively collect, organize and
analyze data, and disseminate information throughout the enterprise to
facilitate effective business decisions. Such information provides a basis for
critical product, marketing, inventory, pricing and human resource decisions. In
addition, inventory management has become more complicated as retailers seek to
reduce costs and improve margins while replenishing inventory on a just-in-time
basis. Accordingly, retailers are demanding more sophisticated purchasing,
inventory management and merchandising tools that enable them to distribute and
manage goods efficiently. Retailers are also increasingly restructuring existing
operations so that consumers interact effectively with the entire enterprise
from a single store location. This requires store level personnel and decision
makers throughout an enterprise to have a common base of readily available sales
and inventory information and that in-store personnel have the ability to more
rapidly respond to consumers' needs. To meet their increasing requirements for
information, retailers seek information systems that are adept at handling large
volumes of transactions, possess a high degree of reliability, accommodate peak
load and seasonal requirements and rapidly capture and analyze data and
distribute information throughout the geographically dispersed parts of the
enterprise. Moreover, global retailers require applications that support the
specialized requirements of international business, including local language
support, multiple currencies, import/export costing and foreign tax and
regulatory requirements. Retailers are also seeking solutions that address
emerging technical and business issues, such as Year 2000 compliance and the
increased prevalence of electronic commerce.
Historically, information technology in the retail supply chain has
consisted largely of separate legacy applications at the corporate, store and
distribution levels. These legacy applications have primarily been host-centric
systems that operate on mainframe or mid-range computers. These systems,
developed and modified internally over many years or licensed from third
parties, represent considerable investments by retailers and have provided
benefits within their distinct roles. However, they generally do not have the
flexibility to support diverse and changing operations within a customer's
business or to respond effectively to changing technologies. Additionally, these
solutions have only targeted distinct levels of the retail supply chain such as
the corporate or in-store levels, and have not generally provided the full
benefits of integration, which allows information to be distributed effectively
throughout the retail enterprise. Despite these limitations, many host-centric
systems are still being widely deployed for retail applications because of their
strengths in particular segments, as well as to preserve significant hardware
and software investments. Furthermore, retailers have historically been cautious
in adopting new technologies due to the real-time, transaction-intensive nature
of retailing and the economic consequences of disruptions to their operations.
Despite their reservations, retailers are recognizing the strategic
imperative of employing technology to cut costs, reduce inefficiencies and
enhance sales in an increasingly competitive environment dominated by
value-conscious consumers. The development of distributed client/server
computing has created a technological framework for software applications that
are adaptable, integrated and tailored for the retail supply chain.
Additionally, improved hardware price/performance and database capabilities on
platforms such as the IBM AS/400 have improved the capabilities of the
information systems that can leverage retailers' existing hardware investments.
As a result, retailers are demanding highly functional, easy to use and
scaleable software applications that can be economically and rapidly implemented
and adapted for changes in their mission critical business functions. The
Company believes that the adoption of new information technologies by retailers
will accelerate as competitive pressures increasingly necessitate the ability to
change business practices quickly and to empower employees with the information
and tools to respond to consumer requirements.
JDA SOLUTION
JDA is a leading international provider of integrated enterprise-wide
software products and related services that address mission-critical management
information needs throughout the retail supply chain. The Company's product
suite is designed to provide integrated technology solutions for the collection,
organization, distribution and analysis of data throughout a retail
organization. At the corporate level, the Company
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offers two merchandise management systems, Merchandise Management System ("MMS")
for the IBM AS/400 platform, and Open Database Merchandising System ("ODBMS")
for open client/server environments, that distribute data throughout the retail
enterprise and enable management to make more informed and timely decisions,
respond more rapidly to changes in the competitive environment, monitor
store-level activity and achieve greater operating efficiencies. The Company's
in-store systems, Distributed Store System ("DSS") and Windows-based Win/DSS,
register transactions at the point-of-sale, capture individual consumer profiles
and demographic information, and leverage enterprise-wide information such as
stock availability, pricing and inventory replenishment by bringing it to the
store level. The Company also offers Warehouse Control Center ("WCC") for
management of the storage and flow of inventory within the warehouse or
distribution center. The Company also offers Retail IDEAS, a multi-platform
client/server data warehouse system that provides retailers with powerful
application tools for analyzing their business, monitoring strategic plans and
supporting tactical actions. Finally, the Company provides a wide range of
professional services designed to enable customers to rapidly achieve the
benefits of the Company's software products. These services, known as Optimum
Pathways, include project management, system planning, design and
implementation, custom modifications, training and support services.
The Company's solutions are designed to provide the following benefits to
retailers:
Enhanced Decision Making Capabilities. The Company's products are designed
to identify and highlight the most relevant information from large volumes of
transaction and work-flow data. By collecting and distributing valuable
enterprise-wide information, the Company's solutions enable retailers to make
more informed and timely decisions, to quickly adapt their products and
operations to changes in competition and consumer preferences, and to maximize
operational efficiencies.
Fully Integrated Adaptable Solutions. JDA offers an integrated suite of
software products that enables retailers to respond to consumer demand at the
point-of-sale and distribute that information throughout the enterprise. These
products link point-of-sale level information with the centralized merchandising
and financial functions that ultimately affect decisions with suppliers and
vendors. JDA's integrated corporate, in-store and distribution products operate
a range of applications and function seamlessly with each other's databases,
enabling greater speed, data integrity and ease of modification. The Company's
newer products, ODBMS and Win/DSS, are designed to be adaptable and easily
configured by customers to meet their specialized and evolving needs.
Improved Inventory Planning and Distribution Logistics. The Company's
enterprise-wide solutions are designed to help retailers achieve operating
efficiencies by automating the collection and analysis of data from key
functions, such as the management of inventory, distribution and merchandising,
and providing decision makers with access to critical supply chain information.
JDA provides retailers with tools for vendor analysis, stock status monitoring,
sales capture and analysis, merchandise allocation and replenishment, purchase
order management, distribution center management and other important activities
that enable retailers to improve gross margins and return on inventory
investment through increased inventory turnover, reduced inventory investment,
reduced clearance mark-downs and more efficient management of ordering and
distribution.
Increased Responsiveness to Consumer Needs. The Company's solutions help
retailers better understand and fulfill consumer needs. With the Company's
enterprise systems, retailers can explore "what if" merchandising plans, track
and analyze performance, and adjust quickly to market changes and consumer
purchase patterns, all to help ensure that the appropriate pricing and
merchandise mix is available to the consumer at the point-of-sale. The Company's
in-store software products provide enterprise information at the point-of-sale
enabling store level personnel to track the preferences of individual consumers
and provide a higher level of personalized service.
Ease of Implementation. The Company's products are specifically designed
to meet the needs of the retail industry, and the Company's consulting,
maintenance and other services organization is primarily comprised of
individuals who are trained for and experienced with system implementations in
the retail environment. The Company's newer products, ODBMS and Win/DSS, are
designed to be easily configured by customers to meet their specialized and
evolving needs. As a result, the Company believes it offers rapid, low cost
implementations, which are generally accomplished within three to twelve months.
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COMPANY STRATEGY
JDA's objective is to strengthen its position by providing a comprehensive
suite of software solutions that address the mission-critical management
information needs of the retail supply chain. Key elements of the Company's
strategy to achieve this objective are as follows:
Leverage Retail Application Knowledge Base. The Company intends to
continue to leverage its retail industry knowledge base to provide comprehensive
integrated solutions to retailers. The Company believes its in-depth
understanding of retailers' requirements accumulated from its twelve-year
history and over 300 retail customers differentiates it from competitors and
provides a significant advantage in securing new customers. The Company further
augments its knowledge through ongoing customer consulting engagements and
interaction with its user group.
Expand Product Sales to Existing Customers. The Company's products are
designed to meet the enterprise-wide needs of the retail supply chain. Although
most organizations initially deploy one or more of the Company's products in an
organization, the Company believes that initial customer success can lead to
opportunities for additional sales of products to other parts of the
organization. The Company has a significant installed base of customers from its
twelve-year history to which it intends to market and sell additional products
and services. In addition, the Company believes that references from its
installed base will also provide assistance in making additional sales to new
customers.
Provide High Quality Professional Services. The Company believes that its
high-quality consulting, implementation, support and training services enable
the Company to achieve a high level of customer satisfaction, strong customer
references and long-term relationships as well as facilitate software
improvements based on customer feedback. With the release of its new
client/server products, the Company intends to continue to invest in its
professional services organization to provide better service to its customers.
The Company also plans to continue to provide innovative offerings such as
Direct Path, a streamlined approach for implementing MMS within three months in
order to help respond to customers' Year 2000 requirements well into 1999. In
addition, the Company plans to leverage its cooperative relationships with IBM's
Global Services Division and Siemens Nixdorf to compliment its internal
professional services organization in international markets.
Expand Presence in International Markets. The Company intends to expand
its international presence by continuing to develop localized versions of its
products and investing directly in strategic markets by establishing additional
international operations with local direct sales and consulting personnel, and
through cooperative relationships with companies with established international
presence, such as IBM and Siemens Nixdorf. To date, the Company has established
international offices in Australia, Canada, Chile, France, Germany, Mexico,
Singapore, South Africa and the United Kingdom, and plans to continue to expand
its worldwide infrastructure in order to provide additional localized products
and implementation services.
Enhance Solutions for Evolving Customer Needs. The Company will continue
to develop and offer products and services that address emerging technological
and financial issues confronting retailers such as Year 2000 compliance,
adoption of a common Eurocurrency, and the growth of electronic commerce. JDA's
Direct Path implementation methodology for MMS is designed to quickly address
the requirements of retailers whose systems are not yet Year 2000 compliant.
Eurocurrency functionality has been incorporated into the Company's open
client/server products and the Company currently plans to add Eurocurrency
functionality to its IBM AS/400 products. JDA is implementing a development
strategy to Web-enable ODBMS, MMS and Retail IDEAS. The Company continues to
work on adding additional features and functionality to its product suite.
Further Develop and Leverage Strategic Relationships. JDA intends to
continue to establish strategic business relationships for the development of
products that complement the Company's current software solutions or enhance the
delivery of professional services. The Company has a number of cooperative
relationships with system integrators, other software vendors and retail systems
consulting groups, including, among others, IBM, Siemens Nixdorf, Lawson
Software ("Lawson"), Ernst & Young and Andersen Consult-
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ing. The Company believes these relationships can provide the Company with
greater access to international markets, greater market presence and a greater
opportunity to increase its customer base and sales.
Acquire Complementary Businesses, Products and Technologies. The Company
intends to pursue acquisition opportunities for complementary businesses,
products and technologies in order to add to its current product offerings and
increase its market share. The Company believes that such acquisitions will also
assist its efforts to leverage its installed base.
PRODUCTS
The Company offers a suite of software products which collects, organizes
and analyzes data and distributes information throughout a retail organization.
The Company's products are designed to provide an end-to-end supply chain
solution for the mission, critical components of retailing operations -- from
the planning and purchasing functions through the distribution and final sale of
goods. The Company offers merchandising, financial and decision support systems
at the corporate level, point-of-sale, back office and distributed processing
applications at the store level, and warehouse management and logistics systems
at the distribution level. The Company also offers a data warehouse system for
the analysis of information throughout the retail supply chain.
The following table summarizes certain key functions of the retail
enterprise addressed by the Company's products:
Chart
IN-STORE SYSTEMS MERCHANDISE MANAGEMENT SYSTEMS WAREHOUSE AND LOGISTICS SYSTEM
DSS For DOS Win/DSS For IBM MMS For ODBMS For MMS Distribution WCC For
Client/Server IBM AS/400 Client/Server Modules for IBM AS/400 Client/Server
- Point-of-Sale Processing -Inventory Control -Receiving
- Cash Register -Cost and Price Management -Putaway
- Price Lookup -Purchase Order Management -Picking
- Tendering and Sales Audit -Automated Replenishment -Shipping
- Back Office -Merchandise Planning -Allocation
- Sales and Productivity Indicators -Transfer Management and Allocation
- Customer Analyzer
Data Warehouse Systems
RETAIL IDEAS
- -Sales and Inventory Analysis -Marketing and Promotional Analysis -P.O.S. Loss Prevention Analysis
Merchandise Management Systems
The Company's merchandise management systems process high volumes of
information to provide decision support for inventory control, cost and price
management, purchase order management, automated replenishment, merchandise
planning, transfer management and allocation. Merchandise management systems
distribute data throughout the retail enterprise and enable management to make
more informed and
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timely decisions, respond more rapidly to changes in the competitive
environment, monitor store-level activity and achieve greater operating
efficiencies. The Company's merchandise management systems can be integrated
with in-store, warehouse and logistics products designed by the Company or by
third parties. The Company offers two merchandise management systems: MMS for
the IBM AS/400 platform and ODBMS for open client/server environments. Both
systems are comprised of functional modules that are selected by the customer
and can be configured to fit the customer's unique requirements.
MMS was first introduced in 1986 and was specifically designed to take
advantage of the IBM AS/400 database and operating environment. MMS can be
configured by the retailer to adapt to changing strategies and prevailing
competitive conditions by performing product price analyses based upon key data
such as gross margin, sales velocity and competitive prices. The product can
then recommend and automate price changes based on the retailer's specifically
defined pricing strategies. To date, the Company has performed over 250 MMS
implementations worldwide. The Company has continued to invest in the
development and enhancement of MMS to address the requirements of a broad
spectrum of retailing formats and processes.
ODBMS, which was commercially released in September 1996, offers the same
core functionality of MMS, excluding the general ledger, accounts payable and
accounts receivable modules of MMS's retail sales accounting system, and also
offers, through its open client/server architecture, enhanced adaptability and
scaleability. ODBMS is capable of operating with Oracle and Informix relational
database management systems running on Windows NT and the most popular UNIX
platforms. ODBMS is designed to support the information requirements of
international, multi-format retail organizations and features support for
multiple concurrent languages and currencies, user-specific nomenclature and
user-defined data structures and hierarchies. Thus, an international retailer
can centrally establish a product margin objective and apply it to local market
rules, including currency conversions, applicable taxation and rounding
algorithms, to determine final pricing at each location. The Company is party to
a co-marketing agreement with Lawson to develop interfaces between ODBMS and
Lawson's client/server business applications, which provide financial, human
resource, procurement and supply-chain management for the retail industry, and
which are Web-deployable.
License fees for the Company's merchandise management systems vary
depending upon a number of factors, including the size and complexity of the
retail operation and the modules chosen. License fees have generally ranged from
$250,000 to $750,000 for MMS, and from $500,000 to in excess of $1.0 million for
ODBMS.
In-Store Systems
The Company offers two in-store systems: DSS for DOS-based platforms and
Win/DSS for the Windows environment. The Company's in-store systems are designed
to enable a retailer to capture and analyze in-store operations information and
transmit such information to corporate-level systems for sales and other
analysis. These systems also allow store level personnel to access valuable
enterprise-wide information to better serve the consumer at the point-of-sale.
DSS and Win/DSS are comprised of functional modules that are selected by the
customer and can be configured to fit the customer's unique requirements.
DSS can be licensed independently and utilized with a customer's existing
merchandise management system, or it can work in concert with the Company's MMS
merchandise management system, to provide the retailer the ability to manage
information through a wide range of retail operations. A typical installation of
DSS enables the retailer to perform a number of individual store-level functions
and support back office, store inventory and point-of-sale operations. For
example, store managers can use DSS to measure the results of a store
promotional event. In addition, DSS enables retailers to track the preferences
of individual consumers and provide a higher level of personalized service.
Win/DSS incorporates the core functionality of DSS with the enhanced
capabilities of the Windows platforms. Win/DSS incorporates an object-oriented
software design that is capable of arranging retail business processes to adapt
to a retailer's specialized and evolving requirements. For example, a retailer
can utilize the Win/DSS multi-tasking capabilities by configuring its
point-of-sale systems to simultaneously run credit authorizations, process
transactions and update store inventory records. In addition, to reflect a more
service-oriented workflow, the customer service desk in the same store can be
configured to provide ready
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access to personal information and purchase histories of individual consumers.
Business information process flows can be adapted to reflect changing store
strategies during special promotions or periods of peak consumer traffic.
License fees for the Company's in-store systems vary depending upon a
variety of factors, including the size and complexity of the retail operation
and the modules chosen, and generally have ranged from $50,000 to in excess of
$600,000.
Warehouse and Logistics Systems
The Company offers warehouse and logistics systems for client/server and
IBM AS/400 environments. WCC is a client/server system that combines the latest
automation tools, bar coding and radio frequency technologies with the benefits
of a client/server architecture. The product was acquired from LIOCS Corporation
in April 1997 and became commercially available in December 1997. WCC is a
stand-alone system that can be integrated with ODBMS or software supplied by
third-party vendors. WCC provides a variety of functions including receipt
scheduling, license plate labeling, system-directed put-away, and lot and serial
number tracking. For IBM AS/400 platforms, the Company offers warehouse
management, merchandise receiving and wholesale order entry modules as part of
its MMS merchandise product. License fees for these modules have generally
ranged from $50,000 to $230,000.
Data Warehouse System
Retail IDEAS is a data warehouse system developed jointly with Silvon
Software, Inc. ("Silvon") that provides a comprehensive set of tools for
analyzing business results, monitoring strategic plans and enabling tactical
decisions. Retail IDEAS is currently available on the IBM AS/400 and Windows NT
platforms, and is under development for UNIX platforms. Retail IDEAS is designed
as a packaged offering that enables retailers to monitor vendor performance,
promotional effectiveness and distribution center productivity, and to analyze
financial measurements related to sales and inventory, margins and
profitability, merchandise categories and items, open and suggested orders, and
promotional and pricing events. The product integrates with the Company's MMS
and ODBMS products and may also be used with non-JDA transactional systems.
CONSULTING, MAINTENANCE AND OTHER SERVICES
The Company provides a wide range of professional services designed to
enable customers to rapidly achieve the benefits of the Company's software
products. These services, known as Optimum Pathways, include project management,
system planning, design and implementation, custom modifications, training and
support services. The Company believes that its Optimum Pathways consulting
services facilitate a customer's early success with its products, strengthen its
relationship with the customer, and add to the Company's industry-specific
knowledge base for use in future implementation and product development efforts.
Although the Company's service offerings are optional, the Company has found
that substantially all of its customers utilize some or all of its services to
some degree in connection with the implementation and ongoing support of the
Company's software products. The Company believes its ability to provide these
services provides a competitive advantage, which is expected to be enhanced by a
developing cooperative relationship with IBM Global Services Division to jointly
support, distribute and implement ODBMS. As of December 31, 1997, the Company
had 430 employees in its consulting, maintenance and other services
organization. The Company is pursuing a strategy to increasingly utilize
third-party consultants, such as those from major systems integrators, to assist
in certain large-scale implementations and for extensive business process
re-engineering projects.
Consulting Services
The Company's consulting services group consists of business consultants,
systems analysts and technical personnel with extensive retail industry
experience that are devoted to assisting retailers in all phases of systems
development, including systems planning and design, customer-specific
configuration of application modules, and on-site implementation or conversion
from existing systems. Consulting services are generally
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billed on a time and expenses basis. The Company's consulting engagements have
typically taken between six months and one year for merchandise management
systems, between three and six months for in-store systems, between three and
six months for warehouse and logistic systems, and between two and three months
for data warehouse systems. Given the complexity of platforms on which the
Company's ODBMS and Win/DSS systems operate and the increased ability of the
customer to configure these new products to its work flows and processes, the
implementation of such systems generally requires increased levels of consulting
services, as well as longer periods of time. In order to satisfy the demands of
both existing and future customers, the Company plans to substantially increase
its consulting services personnel to support anticipated growth in product
implementations. To the extent anticipated revenues fail to materialize
following the hiring and training of such personnel, the Company's operating
results would be adversely affected.
Education and Training
The Company offers comprehensive education and training programs to its
customers, associates and business partners. The Company initiated JDA
University in 1997, as a formal education program that combines lectures,
demonstrations and hands-on exercise sessions for each of JDA's software
solutions. JDA University features a curriculum for each JDA system, and a
full-time administration consisting of professional instructors and course
developers. The JDA University curriculum ranges from introductory to advanced
levels and includes application training on JDA systems, technical courses on
design and data models for such systems, and developer courses for programmers
and designers. Classes are offered at in-house facilities as well as at customer
locations. More than 2,700 individuals attended JDA University during 1997.
Customer Support Services
The Company believes that providing business solutions along with a high
level of on-going support to its customers is a critical element in establishing
long-term relationships and maintaining a high level of customer satisfaction.
The Company offers a comprehensive support program that includes maintenance,
on-line support and help desk services. The standard maintenance support program
includes new releases and unspecified upgrades of products. Standard support
programs have historically been purchased by the majority of the Company's
customers and are generally annual contracts that are paid on a monthly basis.
For clients who have licensed DSS or Win/DSS, the Company offers a program,
known as Optimum Store Support, that features help desk services, 24 hours a
day, 7 days per week, and field upgrade support.
CUSTOMERS
The Company has licensed its software products to more than 300 retail
customers worldwide in a wide variety of retail markets, including hard and soft
lines retailers, warehouse operations, department stores and grocery stores. The
Company generally targets customers having from 50 to over 500 store locations,
with annual sales in excess of $100 million.
The following is a partial list of the Company's customers that have
purchased at least $500,000 of the Company's products or services through
December 31, 1997:
APPAREL
Bally Management Ltd.
(Switzerland)
Big M, Inc.
Casual Corner Group, Inc.
CHANEL, Inc.
Columbia Sportswear Company (Chile)
Daisy & Tom Ltd. (UK)
Filenes Basement Corp.
Footstar, Inc.
Foschini Group (Pty) Ltd.
(South Africa)
Gucci SpA (Italy)
Guess?, Inc.
InWear Group A/S (Denmark)
Johnson's S.A. (Chile)
Moregro Retail Group, Ltd.
(South Africa)
Mothercare, U.K., Ltd. (UK)
Sainsbury's Savacentro, Ltd. (UK)
Sears Clothing Ltd. (UK)
Stride Rite Children's
Group, Inc.
Today's Man
Wilsons The Leather Experts
AUTOMOTIVE
Auto Palace
Chief Auto Parts, Inc.
CSK Auto, Inc.
The Retail Operations Division
of Bridestone/ Firestone, Inc.
Western Auto Supply Company
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CONVENIENCE STORES
Fina Plc. (UK)
Petro-Canada (Canada)
CRAFTS & TOYS
Frank's Nursery & Crafts, Inc.
Lewiscraft (Canada)
DEPARTMENT STORES
Almacenes Paris Commercial S.A.
(Chile)
Beijing Wang Fu Jing Retail
Management Co. Ltd.
(China)
Cativen (Venezuela)
Royal Duty Free Shop, Inc. (Philippines)
Shoemart, Inc. (Philippines)
Specialty Department Stores, Inc.
DRUG & COSMETICS
A.S. Watson & Co. Limited
(Hong Kong)
Bath & Body Works (The Limited)
Beauty Brands, Inc.
Farmatodo, C.A. (Venezuela)
MedMax, Inc.
FOOD
Calgary Co-operative Assoc. Ltd. (Canada)
Chedraui (Mexico)
Laura Secord, Inc. (Canada)
Provigo, Inc. (Canada)
Santa Isabel (Chile)
Starbucks Corporation
Whole Foods Market, Inc.
Wild Oats Markets, Inc.
FURNITURE, APPLIANCES &
ELECTRONICS
ABC Carpet & Home, Inc.
British Gas Energy
Centres, Ltd. (UK)
CompUSA, Inc.
Grupo Elektra (Mexico)
Heilig-Meyers Company
Onking Chain-Store Co. Ltd. (Taiwan)
Sun Television & Appliances, Inc.
Tandy Corporation
GENERAL MERCHANDISE
PETCO Animal Supplies, Inc.
Sky Connection Limited
(Hong Kong)
Woolworths Plc. (UK)
HOME IMPROVEMENT
Eagle Hardware & Garden, Inc.
Great Mills (Retail) Ltd. (UK)
Intergamma BV (Netherlands)
Sodimac Chile (Chile)
Westlake ACE Hardware, Inc.
Wolohan Lumber, Inc.
HOUSEWARES
Bed, Bath & Beyond, Inc.
Lechters, Inc.
Robert Dyas Ltd. (UK)
Williams-Sonoma, Inc.
JEWELRY & CATALOG SHOWROOMS
Asprey Plc. (UK)
Carlyle & Co. Jewelers
Helzberg Diamonds, Inc.
LUGGAGE, CARDS & GIFTS
Birthdays Ltd. (UK)
Carlton Retail, Inc.
Factory Card Outlet Corp.
Party City Corporation
MUSIC, BOOKS, VIDEOS &
SOFTWARE
Books-A-Million, Inc.
Guitar Center, Inc.
HMV Group (UK)
P.T. Disc Tara (Indonesia)
Rogers Video
Virgin Entertainment
Group, Inc.
OFFICE PRODUCTS
Maxi-Papier-Market GMBH
(Staples-Germany)
Office Depot International
Staples, Inc. (UK and US)
OPTICAL & CAMERA
Black Photo Corporation (Canada)
LensCrafters, Inc.
Sunglass Hut International, Inc.
Vantios Group (UK)
Wolf Camera & Video
SPORTING GOODS
Gart Sports
JumboSports, Inc.
Mountain Equipment Co-op (Canada)
Oshman's Sporting Goods, Inc.
West Marine, Inc.
THEME RETAIL
MCA/Universal Studios
MGM Grand, Inc.
Planet Hollywood International
SALES AND MARKETING
The Company's worldwide sales effort is conducted primarily through a
direct sales force located in Phoenix, Arizona and through international
operations in Australia, Brazil, Canada, Chile, France, Germany, Mexico,
Singapore and the United Kingdom. Internationally, in addition to its direct
sales force, the Company leverages its cooperative relationships with sales
agents, distributors, and other vendors, including IBM in China, Columbia,
India, the Middle East and Scandinavia. Additional relationships with system
integrators, other major hardware vendors and the retail systems consulting
groups of major accounting firms are also components of the Company's sales and
marketing strategy. The Company believes these relationships provide important
product endorsements and valuable feedback as well as sales referrals.
While the sales cycle varies substantially from customer to customer, it
typically requires six to nine months from generation of the sales lead to
execution of a license agreement. Because of the complexity and
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technical nature of the Company's systems, consulting and product development
employees often participate directly in the sales cycle and educate prospective
customers on the advantages of using the Company's solutions.
The Company's marketing activities are directed at increasing market
awareness of the Company's products and services and identifying prospective
customers. The execution of major agreements with customers, when agreed to by
the customer, are accompanied by press announcements and public relations
activities. The Company combines attendance at key trade shows with a limited
amount of focused advertising and direct mail campaigns to generate prospects.
In addition to these activities, the Company's marketing personnel provide
extensive support to the sales organization, including responding to requests
for proposals, conducting product demonstrations and determining hardware
specifications. The marketing organization is also responsible for corporate
communications and development of sales tools and marketing materials. As of
December 31, 1997, the Company's sales and marketing organization consisted of
37 sales and marketing personnel in the United States and 36 sales and marketing
personnel in the rest of the world.
PRODUCT DEVELOPMENT AND JDA TECHNOLOGY
The Company has invested and expects to continue to invest substantial
resources in research and development. The Company believes that its future
performance will depend in large part on its ability to maintain and enhance its
current products, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. The Company intends to continue development efforts towards new
products, such as its recently released ODBMS product, and enhancements that
address emerging requirements for highly adaptable applications utilizing the
advantages of client/server technologies across multiple platforms. In addition,
the Company continues to devote significant resources to modify its MMS product
line to take advantage of recent client/server enhancements to the IBM AS/400
platform.
The Company's software design philosophy is to develop products with broad,
enterprise-wide retailing functionality that is applicable to the majority of
retailers' needs. At the same time, the Company's objective is to design
products that are easily tailored to the specific work flows and business
processes of the individual retailer and are readily adapted to changing
conditions, reducing the amount of software modification required.
The Company has established a design framework, known as the Advanced
Retail Architecture ("ARA"), based on the principles of open systems and
object-oriented technologies, for developing new products and modules. This
architecture is designed to protect the Company's investment in product
development, as well as its customers' software investment, from changes in
underlying technology and front-end interfaces. The Company believes products
designed to ARA specifications can support multiple platforms and accommodate
platform changes or new platforms generally without significant modification to
the JDA application. The Company's products designed within the ARA framework
are ODBMS, Win/DSS and WCC. The Company intends to apply ARA to the development
of new products and the enhancement of existing products to the extent feasible.
However, the Company's ability to take advantage of the full scope of ARA design
objectives is limited by the proprietary nature of the IBM AS/400 and DOS-based
platforms upon which MMS and DSS operate.
As of December 31, 1997, there were 119 employees on the Company's product
development staff. The Company's product development expenditures in 1997, 1996
and 1995 were $11.4 million, $6.5 million and $3.5 million, and represented 12%,
14% and 12% of revenues, respectively. The Company currently expects product
development expenses in 1998 to be between $18 million and $19 million. The
Company's ongoing product development efforts include projects related to
shortening the implementation cycle and facilitating the integration of its
products.
The Company's newer software products, ODBMS, Win/DSS, Retail IDEAS and
WCC, which are designed for open client/server environments, have all been
commercially released within the last 18 months. To date, only a limited number
of customers have licensed or implemented the Company's client/server products.
The market for these products is new and evolving, and the Company believes that
retailers may generally be more cautious than other businesses in adopting
client/server technologies. Consequently, it is
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difficult to assess or predict with any assurance the growth rate, if any, and
size of the market for the Company's client/server products, and there can be no
assurance that this market will continue to develop. Potential and existing
customers may find it difficult, or be unable, to successfully implement the
Company's client/server products, or may not purchase such products for a
variety of reasons, including: the customer's inability to obtain hardware,
software, networking infrastructure, or sufficient internal staff required to
implement, operate and maintain an open client/server solution; the generally
longer time periods and greater cost required to implement such products as
compared to IBM AS/400-based products; and limited implementation experience
with such products by the Company's service personnel or third-party
implementation providers. Furthermore, the Company must overcome significant
obstacles to successfully market its client/server solutions, including limited
experience of the Company's sales and consulting personnel in the client/server
market and limited existing reference accounts in this market. If the market for
the Company's client/server products 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 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 markets 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.
COMPETITION
The markets for retail information systems are highly competitive. The
Company believes the principal competitive factors in such markets are product
quality, reliability, performance and price, vendor and product reputation,
retail industry expertise, 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 Systems
("Intrepid"), Island Pacific, Radius PLC, Retek (a subsidiary of HNC Software,
Inc.), STS Systems and Richter Management Services. 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 AG
has announced the availability of an integrated client/server enterprise system
competitive with the Company's products, and Intrepid has announced the
formation of a joint development and marketing relationship with PeopleSoft,
Inc., a provider of enterprise applications software, to develop products that
are expected to compete directly with ODBMS.
In the in-store systems market, which is more fragmented than the
enterprise market, the Company competes with major hardware original equipment
manufacturers such as ICL, NCR, and IBM, as well as software companies such as
CRS Business Computers, Datavantage, STS Systems, Trimax and GERS Retail
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Systems. In the distribution and warehouse management systems market, the
Company's WCC product competes with products from Catalyst International, Inc.,
EXE and McHugh Freeman. The Retail IDEAS product competes with products from
Microstrategy and Intrepid, among other vendors. In the market for consulting
services, the Company is pursuing a strategy of forming informal working
relationships with leading retail systems integrators such as Andersen
Consulting and Ernst & Young LLP, and other similar major systems integrators.
These integrators, as well as independent consulting firms such as IBM Global
Services Division, 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, marketing and other resources than the Company, each of which could
provide them with a significant competitive advantage over the Company.
Many of the Company's existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical,
marketing and other resources than the Company, each of which could provide them
with a significant competitive advantage over 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 would not have a material
adverse effect on the Company's business, operating results and financial
condition.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology, including its software source code. To protect its
proprietary technology, 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. The source code for the Company's proprietary
software is protected both as a trade secret and as a copyrighted work. Although
the Company relies on the limited protection afforded by such intellectual
property laws, it also believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable maintenance are also essential to
establishing and maintaining a technology leadership position. The Company
generally enters into confidentiality or license agreements with its employees,
consultants and customers, and generally controls access to and distribution of
its software, documentation and other proprietary information. The terms of the
Company's license agreements with its customers often require the Company to
provide the customer with a listing of the product source code. Although the
license agreements place restrictions on the use by the customer of the
Company's source code and do not permit the re-sale, sublicense or other
transfer of such source code, there can be no assurance that unauthorized use of
the Company's technology will not occur.
Despite the measures taken by the Company to protect its proprietary
rights, unauthorized parties 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. Policing unauthorized use of the Company's products is
difficult. In addition, litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.
Certain technology used by the Company's products is licensed from third
parties, generally on a non-exclusive basis. These licenses generally require
the Company to pay royalties and fulfill confidentiality obligations. The
Company believes that alternative resources exist for each of the material
components of technology licensed by the Company from third parties. However,
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. Any required replacement
licenses could prove costly. Also, any such delay, to the extent it becomes
extended or occurs at or near the end of a fiscal quarter, could result in a
material adverse effect on the Company's results of operations. While it may be
necessary or desirable in the future to obtain other licenses
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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, if 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. Moreover, an adverse outcome in litigation or similar
adversarial proceedings could subject the Company to significant liabilities to
third parties, require the expenditure of significant resources to develop
non-infringing technology, require disputed rights to be licensed from others,
or require the Company to cease the marketing or use of certain products, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition. To the extent the Company desires or is
required to obtain licenses to patents or proprietary rights of others, there
can be no assurance that any such licenses will be made available on terms
acceptable to the Company, if at all. As the number of software products in the
industry increases and the functionality of these products further overlaps, the
Company believes the software developers may become increasingly subject to
infringement claims. Any such claims against the Company, with or without merit,
as well as claims initiated by the Company against third parties, could be time
consuming and expensive to defend, prosecute or resolve.
EMPLOYEES
As of December 31, 1997, the Company had 683 employees, of which 386 were
located in the United States. The Company has never had a work stoppage and none
of its employees are represented by a collective bargaining agreement. The
Company believes its relations with its employees are good.
The Company's future operating results depend in significant part upon the
continued service of its key technical and senior management personnel. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will retain
its key managerial or technical personnel or that it can attract, assimilate and
retain such personnel in the future. The Company has at times experienced, and
continues to experience, difficulty recruiting qualified personnel, and there
can be no assurance that the Company will not experience such difficulties in
the future. The Company actively recruits qualified product development,
consulting, sales and marketing personnel. If the Company is unable to hire and
retain qualified personnel in the future, such inability could have a material
adverse effect on the Company's business, operating results and financial
condition.
ITEM 2. PROPERTIES
The Company's principal corporate offices are located in approximately
56,000 square feet of leased space in Phoenix, Arizona. This facility is also
used for certain of the Company's sales, consulting, customer support, and
product development functions. The lease extends through March 31, 1999. The
Company also leases an office suite and a training facility in Scottsdale,
Arizona, and six sales and support offices in major cities across the United
States.
The Company owns approximately 20,000 square feet of office space in the
United Kingdom, and leases other international office space in Frankfurt, Paris,
Cape Town, Calgary, Toronto, Montreal, Singapore, Melbourne, Sidney, Santiago,
and Mexico City. The Company believes that its existing facilities are adequate
for its current needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms as needed.
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ITEM 3. LEGAL PROCEEDINGS
JDA is periodically involved in legal proceedings and claims arising in the
ordinary course of business. Although there can be no assurance, management does
not believe that the disposition of these matters will have a material adverse
effect on the Company's financial position or results of operations.
In May 1996, Niederhoffer and Niederhoffer, Inc. ("Niederhoffer") filed a
demand for arbitration asserting a claim against JDA Software Services, Inc., a
wholly-owned subsidiary of the Company. Niederhoffer's claims are based upon an
agreement between it and JDA Software Services, Inc. dated April 6, 1990.
Niederhoffer alleged entitlement to a finder's fee in connection with the
purchase of convertible preferred stock in the Company in March 1995 by six
investment funds advised by TA Associates, Inc. and its affiliates, and a claim
for JDA common stock arising from the related establishment of the Company and
reorganization of the Company's wholly-owned subsidiaries pursuant to which JDA
common stock was issued to such subsidiaries' stockholders. In the arbitration,
Niederhoffer claimed damages of approximately $770,000 and asserted a right to
504,000 shares of JDA's common stock. The Company received notice in June 1997
that the arbitration council awarded Niederhoffer $482,000 in full settlement of
all claims and counterclaims submitted in arbitration. Such amount was charged
to additional paid-in capital as a cost of the TA investment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
JDA's common stock trades on the Nasdaq Stock Market ("NASDAQ") under the
symbol "JDAS." The following table sets forth, for the periods indicated, the
high and low sales prices per share of the common stock for the two most recent
fiscal years as reported on NASDAQ.
YEAR ENDED 1997 HIGH LOW
--------------- ---- ---
1st Quarter................................................. $30 5/8 $19
2nd Quarter................................................. 34 5/8 17 1/4
3rd Quarter................................................. 38 3/4 28 3/4
4th Quarter................................................. 45 7/8 28 5/8
YEAR ENDED 1996 HIGH LOW
--------------- ---- ---
1st Quarter (from March 15, 1996)........................... $13 1/4 $11 1/4
2nd Quarter................................................. 26 11 1/4
3rd Quarter................................................. 29 14 1/4
4th Quarter................................................. 39 3/8 26 1/2
On March 20, 1998, the closing sale price for JDA's common stock was
$46 3/16 per share. On this date, there were 106 holders of record of JDA's
common stock. This figure does not reflect approximately 3,300 beneficial
stockholders whose shares are held in nominee names. JDA presently intends to
retain future earnings to finance the growth and development of the business,
and as such, does not anticipate paying cash dividends on its common stock in
the foreseeable future. Certain of JDA's predecessor companies did, however, pay
dividends to their S Corporation stockholders. See Note 2 of Notes to
Consolidated Financial Statements.
Since JDA's initial public offering on March 15, 1996, the market price of
its common stock has experienced large fluctuations and may continue to be
volatile in the future. Factors such as 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
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by analysts or other factors could cause the market price of JDA's common stock
to fluctuate substantially. Further, the stock market has from time to time
experienced extreme price and volume fluctuations which have affected the market
price for many high technology companies and which, on occasion, have been
unrelated to the operating performance of those companies. These fluctuations,
as well as the general economic, market and political conditions both
domestically and internationally, including recessions or military conflicts,
may materially and adversely affect the market price of the Company's common
stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
JDA's consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The selected consolidated financial data presented
below under the captions "Statement of Income Data" and "Balance Sheet Data"
for, and as of the end of, each of the years in the five-year period ended
December 31, 1997, are derived from the consolidated financial statements of JDA
Software Group, Inc. The consolidated financial statements as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31, 1997, and the independent auditors' report thereon, are included elsewhere
herein.
STATEMENT OF INCOME DATA:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Revenues:
Software licenses...................... $42,041 $24,296 $15,253 $12,221 $ 9,620
Consulting, maintenance and other
services............................ 49,730 23,544 14,831 11,608 10,701
------- ------- ------- ------- -------
Total revenues...................... 91,771 47,840 30,084 23,829 20,321
------- ------- ------- ------- -------
Cost of revenues:
Software licenses...................... 1,145 438 159 57 305
Consulting, maintenance and other
services............................ 37,727 16,416 9,781 6,870 6,780
------- ------- ------- ------- -------
Total cost of revenues.............. 38,872 16,854 9,940 6,927 7,085
------- ------- ------- ------- -------
Gross profit............................. 52,899 30,986 20,144 16,902 13,236
------- ------- ------- ------- -------
Operating expenses
Product development.................... 11,364 6,478 3,512 1,923 1,345
Sales and marketing.................... 12,633 7,242 5,199 3,228 2,404
General and administrative............. 9,532 4,989 3,929 2,529 2,466
Tax related compensation to S
Corporation Stockholders(1)......... -- -- -- -- 7,422
------- ------- ------- ------- -------
Total operating expenses............ 33,529 18,709 12,640 7,680 13,637
------- ------- ------- ------- -------
Income (loss) from operations............ 19,370 12,277 7,504 9,222 (401)
Other income (expense) -- net............ 1,407 519 (434) (221) (172)
------- ------- ------- ------- -------
Income (loss) before income taxes........ 20,777 12,796 7,070 9,001 (573)
Provision for income taxes(1)............ 8,311 5,116 1,497 500 865
------- ------- ------- ------- -------
Net income (loss)(1)..................... $12,466 $ 7,680 $ 5,573 $ 8,501 $(1,438)
======= ======= ======= ======= =======
Basic earnings per share................. $ 0.95 $ 0.64
======= =======
Diluted earnings per share............... $ 0.95 $ 0.64
======= =======
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YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
PRO FORMA STATEMENT OF INCOME DATA(2):
Pro forma net income................... $ 4,401 $ 5,564 $ 4,313
======= ======= =======
Pro forma basic and diluted earnings
per share........................... $ 0.42 $ 0.49 $ 0.38
======= ======= =======
Shares used to compute basic earnings
per share........................... 13,078 12,010
======= =======
Shares used to compute diluted earnings
per share........................... 13,109 12,010
======= =======
Shares used to compute pro forma basic
and diluted earnings per share(3)... 10,952 11,250 11,250
======= ======= =======
BALANCE SHEET DATA:
DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- ------- ------
(IN THOUSANDS)
Cash and cash equivalents................ $27,304 $30,986 $ 498 $ 2,913 $ 216
Working capital.......................... 48,384 39,832 607 7,232 2,088
Total assets............................. 83,202 59,056 27,795 11,557 6,854
Long-term liabilities.................... 267 620 309 2,607 2,513
Redeemable convertible preferred stock... -- -- 15,000 -- --
Stockholders' equity (deficit)........... 67,910 48,661 (12,292) 6,228 864
- ---------------
(1) Prior to March 30, 1995, certain of JDA's predecessor companies elected S
Corporation status, and as a result, the historical statement of income data
does not include a provision for U.S. federal income taxes for periods prior
to March 30, 1995. In addition, through 1993, these same companies charged
to expense compensation paid to their founding stockholders in lieu
Corporation dividends, in order to reduce state income tax liability. See
Note 2 of Notes to Consolidated Financial Statements.
(2) Pro forma net income includes a pro forma provision for income taxes at
statutory rates and for 1993, excludes tax related compensation.
(3) Pro forma basic and diluted earnings per share includes common and
equivalent shares outstanding subsequent to the Company's reorganization.
See Note 2 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
JDA Software Group, Inc. ("JDA" or the "Company") is a leading
international provider of integrated enterprise-wide software products and
services that address mission-critical management information needs of the
retail supply chain. The Company's products include: merchandising, financial
and decision support systems at the corporate level; point-of-sale, back office
and distributed processing applications at the store level; and warehouse
management and logistics systems at the distribution level. JDA also offers a
wide range of professional services through its consulting and customer support
organizations, including: project management, system planning, design and
implementation, custom modifications, training and support services.
In 1986, the Company introduced MMS, its first enterprise retail
information solution, based on the IBM AS/400 platform. 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. ("JDA Canada"), a then
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unaffiliated Canadian company. Since 1994, the Company has significantly
increased its product development expenditures to develop products for open
platforms. As a result of these efforts, the Company commercially released
ODBMS, an open client/server enterprise system, in September 1996, and Win/DSS,
a Windows based in-store system, in January 1997. The Company also released
Retail IDEAS, a data warehouse system, in January 1997 and acquired WCC, a
client/server warehouse automation and management system, in connection with the
acquisition of LIOCS Corporation ("LIOCS") in April 1997.
JDA has historically derived the majority of its revenues from software
licenses and consulting, maintenance and other services relating to MMS. Total
revenues from the MMS product line represented 56% of the Company's total
revenues during 1997, as compared with 80% and 91% in 1996 and 1995,
respectively. Although the Company expects MMS revenues to continue to represent
a significant portion of total revenues for the foreseeable future, MMS revenues
as a percentage of total revenues may continue to decline as a result of the
increased revenues attributable to the Company's newer product lines,
particularly ODBMS and Win/DSS.
Software license revenues and consulting, maintenance and other services
revenues represented 46% and 54%, respectively, of JDA's total revenues during
1997, as compared with 51% and 49%, respectively, in both 1996 and 1995.
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. During the past two years, the
Company has accelerated the growth of its services organization in anticipation
of an increased mix of consulting, maintenance and other services revenues in
both domestic and international markets, and continued market acceptance of its
newer client/server product lines, which require longer implementation cycles.
The Company believes its ability to offer a wide range of professional services
provides it with a competitive advantage as well as additional revenue streams.
Consulting, maintenance and other services revenues are generally more
predictable and generate significantly lower gross margins than software
revenues. In addition, consulting, maintenance and other services costs tend to
be higher during periods 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.
The Company has pursued 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, represented 55%, 43% and 39% of total revenues in 1997, 1996 and 1995,
respectively. Consulting, maintenance and other services in support of
international software licenses typically have lower gross margins than those
achieved domestically due to generally lower prevailing billing rates and/or
higher costs in certain of the Company's international markets. Therefore,
significant growth in the Company's international operations may result in
further declines in gross margins on consulting, maintenance and other services.
The Asia/Pacific region encountered unstable local economies and
significant devaluation in its currencies during the last six months of 1997 and
continuing into 1998. The economic situation in the region has resulted in
slower payment of outstanding receivable balances and various requests for
extended or modified payment terms. This region represented less than 10% of the
Company's 1997 revenues and less than 2% of income from operations. Asia/Pacific
receivables, net of reserves, were approximately 10% of the Company's total net
receivables at December 31, 1997. To the extent the Asia/Pacific region grows in
importance to the Company, or that the factors affecting the region begin to
adversely affect retailers in other geographic locations, the Company's
business, operating results and financial condition could be adversely affected.
To the extent the Company's international operations expand, the Company
expects that an increasing portion of its international license and consulting,
maintenance and other services revenues will be denominated in foreign
currencies, subjecting the Company to fluctuations in foreign currency exchange
rates. Historically, the Company's operations have not been materially adversely
affected by fluctuations in foreign currency exchange rates, and the Company has
not engaged in foreign currency hedging transactions. However, as the Company
continues to expand its international operations, exposures to gains and losses
on
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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.
Prior to 1998, the Company recognized revenue in accordance with the
provisions of the 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 generally
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
Statement of Position No. 97-2, Software Revenue Recognition ("SOP 97-2"), that
supersedes SOP 91-1 and becomes effective for fiscal years beginning after
December 15, 1997. Although the Company does not believe that SOP 97-2 will have
a significant impact on its financial statements, there can be no assurance that
application and subsequent interpretations of this pronouncement by the
Company's independent auditors or the Securities Exchange Commission will not
modify the Company's revenue recognition policies, or that such modifications
would not have a material adverse effect on the operating results reported in
any particular quarter. There can be no assurance that the Company will not be
required to adopt changes in its licensing or services practices to conform to
SOP 97-2, or that such changes, will not result in delays or cancellations of
potential sales of the Company's products.
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RESULTS OF OPERATIONS
The following table sets forth certain selected financial information
expressed as a percentage of total revenues for the periods indicated and
certain gross margin data expressed as a percentage of software licenses or
consulting, maintenance and other services revenues, as appropriate:
YEARS ENDED
DECEMBER 31,
--------------------
1997 1996 1995
---- ---- ----
Revenues:
Software licenses......................................... 46% 51% 51%
Consulting, maintenance and other services................ 54 49 49
--- --- ---
Total revenues......................................... 100 100 100
--- --- ---
Cost of revenues:
Software licenses......................................... 1 1 1
Consulting, maintenance and other services................ 41 34 32
--- --- ---
Total cost of revenues................................. 42 35 33
--- --- ---
Gross profit................................................ 58 65 67
--- --- ---
Operating expenses:
Product development....................................... 12 14 12
Sales and marketing....................................... 14 15 17
General and administrative................................ 11 10 13
--- --- ---
Total operating expenses............................... 37 39 42
--- --- ---
Income from operations...................................... 21 26 25
Other income (expense) -- net............................... 2 1 (1)
--- --- ---
Income before income taxes.................................. 23 27 24
Provision for income taxes.................................. 9 11 5
--- --- ---
Net income.................................................. 14% 16% 19%
=== === ===
Pro Forma Statement of Income Data:
Historical net income....................................... 19%
Pro forma adjustment to adjust income tax provision......... (4)
---
Pro forma net income........................................ 15%
===
Gross margin on software licenses........................... 97% 98% 99%
Gross margin on consulting, maintenance and other
services.................................................. 24% 30% 34%
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Total revenues for 1997 were $91.8 million, an increase of 92% over the
$47.8 million reported in 1996. Revenues consist of software licenses and
consulting, maintenance and other services, which represented 46% and 54%,
respectively, of total revenues during 1997, and 51% and 49%, respectively in
1996.
Software Licenses. Software license revenues for 1997 were $42.0 million,
an increase of 73% over the $24.3 million reported in 1996. Domestic and
international software license revenues for 1997 increased 44% and 101%,
respectively, over 1996. These increases resulted primarily from the Company's
expanded sales and marketing efforts worldwide, the incremental sales of the
Company's newer product lines such as ODBMS, Win/DSS and Retail IDEAS over the
prior year, and an increase in average transaction size.
Consulting, Maintenance and Other Services. Consulting, maintenance and
other services revenues for 1997 were $49.7 million, an increase of 111% over
the $23.5 million reported in 1996. This increase results from increased
software license sales and the introduction of client/server products that
require longer installation cycles. Although domestic consulting, maintenance
and other services revenues increased 62%
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between the comparable years, nearly two-thirds of this revenue growth occurred
in the Company's international markets where the comparative increase was 197%.
Cost of Revenues
Cost of software licenses was $1.1 million and $438,000 in 1997 and 1996,
respectively, representing 3% and 2% of software license revenues in the
respective periods. Consulting, maintenance and other services costs for 1997
were $37.7 million, an increase of 130% over the $16.4 million reported in 1996.
The Company has expanded its consulting and customer support organizations as a
result, and in anticipation 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 number of personnel in its
consulting, maintenance and other services organization by 98% during 1997, and
as of December 31, 1997 the Company had 430 employees involved in these
functions. The Company anticipates that the dollar amount of consulting,
maintenance and other services will continue to increase as the Company expands
its operations.
Gross Profit
Gross profit for 1997 was $52.9 million, an increase of 71% over the $31.0
million reported in 1996. Gross profit as a percentage of total revenue
decreased from 65% in 1996 to 58% in 1997. This decrease was primarily
attributable to an increase in consulting, maintenance and other services
revenues as a percentage of total revenues in 1997. In addition, the Company's
gross margin on consulting, maintenance and other services revenues decreased
from 30% in 1996 to 24% in 1997 as a result of the rapid expansion of the
consulting infrastructure, including high front-end recruiting, training and
downtime costs associated with the hiring of 213 consultants during 1997.
Consulting, maintenance and other services margins were also reduced by the
higher costs associated with the Company's use of up to 65 outside contractors
in the United Kingdom during the second half of 1997 to service the increased
demand for installation work in that market. The Company's objective is to
improve its consulting, maintenance and other services margins during 1998 by
gradually replacing these contractors with full-time staff and improving
utilization rates and economies of scale, particularly with respect to the
installation of the ODBMS client/server product. There can be no assurance that
the Company will successfully improve consulting, maintenance and other services
margins, and such margins could be materially, adversely affected if revenues
were to fall short of expectations, or if other factors were to significantly
affect the utilization rates of the service personnel. The Company currently
anticipates that consulting, maintenance and other services revenues as a
percentage of total revenues will increase in 1998 compared to 1997, and
accordingly, that overall gross profit as a percentage of total revenues will be
reduced as a result of the significantly lower gross margins associated with
consulting, maintenance and other services as compared to software licenses.
Operating Expenses
Product Development. Product development expenses for 1997 were $11.4
million, an increase of 75% over the $6.5 million reported in 1996. Product
development expenses as a percentage of total revenues decreased from 14% in
1996 to 12% in 1997. The increase in absolute dollars resulted from increases in
the Company's product development staff to continue development efforts on
ODBMS, Win/DSS, Retail IDEAS, and WCC, and to make further enhancements to the
MMS product line. The Company believes that a strong commitment to product
development will be required in order to remain competitive. JDA has identified
certain functions and design features in connection with early installations of
ODBMS that it plans to add to the base code in order to shorten the deployment
cycle and increase customer satisfaction. The Company currently expects product
development expenses in 1998 to be between $18.0 million and $19.0 million as it
incorporates these features into the ODBMS product and adds similar improvements
to Win/DSS and other product lines. The Company believes its current process for
developing software is essentially completed concurrent with the establishment
of technological feasibility, and accordingly, no costs have been capitalized.
Sales and Marketing. Sales and marketing expenses for 1997 were $12.6
million, an increase of 74% over the $7.2 million reported in 1996. Sales and
marketing expenses as a percentage of total revenues decreased from 15% in 1996
to 14% in 1997. The increase in absolute dollars results from the Company's
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increased sales and marketing presence in both domestic and international
markets. The Company increased its sales and marketing staff from 49 at December
31, 1996 to 73 at December 31, 1997. The Company anticipates that sales and
marketing expenses may continue to increase in dollar amount as the Company
expands its operations.
General and Administrative. General and administrative expenses for 1997
were $9.5 million, an increase of 91% over the $5.0 million reported in 1996.
General and administrative expenses as a percentage of total revenues were 11%
and 10% in 1997 and 1996, respectively. The increase in absolute dollars results
from the addition of administrative personnel to support the Company's domestic
and international growth and from a $2.0 million increase in the allowance for
doubtful accounts during 1997, including $1.0 million in specific reserves for
receivables originating in the Asia/Pacific region. The Company anticipates that
general and administrative expenses may continue to increase in dollar amount as
the Company expands its operations.
Provision for Income Taxes
The Company's effective income tax rate was 40% for both 1997 and 1996.
This rate reflects statutory federal, state and foreign tax rates, partially
offset by a reduction for research and development expense tax credits.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues
Total revenues for 1996 were $47.8 million, an increase of 59% over the
$30.1 million in 1995. The increase in total revenues was 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. To a
lesser extent, the increase in total revenues in 1996 was also the result of the
software license revenues generated by the Company's commercial release of its
ODBMS software in September 1996 and revenues generated by JDA Canada which was
acquired by the Company in August 1996.
International revenues comprised 43% and 39% of total revenues in 1996 and
1995, respectively. This increase in international revenues as a percentage of
total revenues was primarily attributable to increased revenues in Latin
America, the Pacific Rim and Europe resulting from the Company's expanded sales
and marketing efforts in those markets, including efforts in new geographic
locations within those markets. The increase in international revenues in 1996
was also the result of the acquisition of JDA Canada in August 1996 and the
related increase in revenues in Canada.
Software Licenses. Software license revenues increased 59% to $24.3
million in 1996 from $15.3 million in 1995. The increase was primarily
attributable to the expansion of the Company's sales and marketing efforts in
all markets and, to a lesser extent, to the commercial release of ODBMS in
September 1996 and the acquisition of JDA Canada in August 1996.
Consulting Maintenance and Other Services. Consulting, maintenance and
other services revenues increased 59% to $23.5 million in 1996 from $14.8
million in 1995. The increase was primarily attributable to increased software
license revenues and associated implementations both domestically and
internationally.
Cost of Revenues
Cost of software licenses was $438,000 and $159,000 in 1996 and 1995,
respectively, representing 2% and 1% of software license revenues in the
respective periods. Cost of consulting, maintenance and other services was $16.4
million and $9.8 million, representing 70% and 66% of consulting, maintenance
and other services revenues, in 1996 and 1995, respectively. The increase in
these costs as a percentage of consulting, maintenance and other services
revenues was primarily due to the increased percentage of consulting,
maintenance and other service revenues attributable to international
installations, which typically generate lower gross margins than those achieved
domestically due to generally lower prevailing billing rates in certain of the
Company's international markets.
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Gross Profit
Gross profit for 1996 was $31.0 million, an increase of 54% over the $20.1
million reported in 1995. Gross profit as a percentage of total revenues
decreased from 67% in 1995 to 65% in 1996. This decrease resulted primarily from
the higher mix of international consulting, maintenance and other services
revenues, which typically have lower gross margins than those achieved
domestically.
Operating Expenses
Product Development. Product development expenses increased by 84% from
$3.5 million in 1995 to $6.5 million in 1996, representing 14% and 12%,
respectively, of total revenues in those periods. Increased product development
expenses were primarily a result of an increase in the number of product
development personnel from 48 at December 31, 1995 to 90 at December 31, 1996.
Significant product development efforts in 1995 included the continued
development and initial beta release of ODBMS, continued enhancements to MMS and
initial development of Win/DSS. Significant product development efforts in 1996
included the continued development of ODBMS and Win/DSS and continued
enhancements to MMS.
Sales and Marketing. Sales and marketing expenses increased 39% to $7.2
million in 1996 from $5.2 million in 1995, representing 15% and 17% of total
revenues in those respective periods. Sales and marketing expenses increased in
absolute dollars in 1996 due to continued additions to sales and marketing
personnel and related expenses, but decreased as a percentage of total revenues
due to the significant increase in total revenues.
General and Administrative. General and administrative expenses increased
by 27% to $5.0 million in 1996 from $3.9 million in 1995, representing 10% and
13% of total revenues in those periods, respectively. The increase in absolute
dollars of general and administrative expenses in 1996 was primarily due to the
continued addition of personnel and increased legal and accounting expenses.
Provision for Income Taxes
The Company's effective income tax rate was 40% in 1996. The effective rate
reflects statutory federal, state and foreign tax rates, partially offset by a
reduction for research and development expense tax credits. Prior to March 30,
1995, certain of JDA's predecessor companies elected S Corporation status. As a
result, the Company's statement of income for the first quarter of 1995 does not
contain a provision for federal income taxes. The 1995 Consolidated Statement of
Income reflects a pro forma adjustment for federal income taxes and an effective
rate of 38%.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through cash generated from operations and public sales of equity securities
and, to a lesser extent, borrowings under its bank line of credit. The Company
had working capital of $48.4 million at December 31, 1997 compared with $39.8
million at December 31, 1996. Cash and cash equivalents at December 31, 1997
were $27.3 million, a decrease of $3.7 million from the $31.0 million reported
at December 31, 1996.
Operating activities provided cash of $2.1 million, $6.1 million, and $5.5
million in 1997, 1996, and 1995, respectively. Cash provided by operating
activities decreased in 1997 primarily due to a $17.3 million increase in
accounts receivable, partially offset by a $4.8 million increase in net income.
The Company had net accounts receivable of $32.4 million at December 31, 1997
which represented 99 days of sales outstanding ("DSOs"). DSOs have historically
been higher in the second and third quarters of each fiscal year, as a result,
the Company believes, of the seasonal cash flow requirements of its retail
customers. DSOs may fluctuate significantly on a quarterly basis due to a number
of factors including seasonality, shifts in customer buying patterns, the
underlying mix of products and services, and the geographic concentration of
revenues.
Investing activities utilized cash of $12.4 million during 1997, provided
cash of $8.6 million in 1996, and utilized cash of $16.1 million in 1995. The
1997 activity includes $10.8 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
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activity includes the redemption of $14.6 million in restricted short-term
investments acquired during 1995 and capital expenditures of $6.2 million.
Financing activities provided cash of $7.4 million, $15.4 million, and $8.2
million during 1997, 1996, and 1995, respectively. The 1997 activity includes
$8.0 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 for $25.3 million 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; and the issuance of 600,000 shares of common
stock by the Company for $15.5 million in a secondary offering on November 26,
1996.
Changes in the currency exchange rates of the Company's foreign operations
had the effect of reducing cash by $743,000 in 1997. The Company did not enter
into any foreign exchange contracts or engage in similar hedging strategies
during 1997.
The Company may in the future pursue additional acquisitions of businesses,
products and technologies, or enter into joint venture arrangements, that could
complement or expand the Company's business. Any material acquisition or joint
venture could result in a decrease to the Company's working capital depending on
the amount, timing and nature of the consideration to be paid.
The Company maintains a $5.0 million line of credit with a commercial bank.
The line of credit is collateralized by property and equipment, receivables, and
intangibles; accrues interest at the bank's reference rate, which approximates
prime; and requires the Company to maintain certain current ratios and tangible
net worth. The line of credit matures on July 1, 1998, and the Company intends
to seek renewal at that time. There were no amounts outstanding on the line of
credit at December 31, 1997.
The Company believes that its cash and cash equivalents, available
borrowings under the bank line of credit and funds generated from operations
will provide adequate liquidity to meet the Company's normal operating
requirements for at least the next twelve months. However, any material
acquisitions of complementary businesses, products or technologies could require
the Company to obtain additional equity or debt financing. There can be no
assurance that such financing will be available on acceptable terms, if at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, in less than two years,
computer systems and/or software used by many companies in a very wide variety
of applications will experience operating difficulties unless they are modified
or upgraded to adequately process information involving, related to or dependent
upon the century change. Significant uncertainty exists in the software and
other industries concerning the scope and magnitude of problems associated with
the century change. The Company recognizes the need to ensure its operations
will not be adversely impacted by Year 2000 software failures and has
established a project team to assess Year 2000 risks. The project team will
coordinate the identification and implementation of changes to computer hardware
and software applications that will ensure availability and integrity of the
Company's financial systems and the reliability of its operational systems. The
Company is also assessing the potential overall impact of the impending century
change on the Company's business, operating results and financial condition.
Based on the Company's assessment to date, the Company believes its current
versions of its software products and services are "Year 2000 compliant;" that
is, they are capable of adequately distinguishing 21st century dates from 20th
century dates. However, the Company believes some of the Company's customers are
running earlier versions of the Company's software products that are not Year
2000 compliant, and the Company has been encouraging such customers to migrate
to current product versions. Moreover, the Company's products are generally
integrated into enterprise systems involving complicated software products
developed by other vendors. The Company may in the future be subject to claims
based on Year 2000 problems in others' products, custom modifications made by
third parties to the Company's products, or issues arising from the integration
of multiple products within an overall system. Although the Company has not been
a party to any litigation or arbitration proceeding to date involving its
products or services and related to Year 2000 compliance issues, there can be no
assurance that the Company will not in the future be required to
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defend its products or services in such proceedings, or to negotiate resolutions
of claims based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, and any liability of the Company for Year 2000-related
damages, including consequential damages, could have a material adverse effect
on the Company's business, operating results and financial condition.
The Company is currently reviewing its internal management information and
other systems in order to identify and modify those products, services or
systems that are not Year 2000 compliant. The total cost of these Year 2000
compliance activities has not been, and is not anticipated to be, material to
the Company's financial condition or its operating results. These costs and the
timing in which the Company plans to complete its Year 2000 modification and
testing processes are based on management's best estimates. However, there can
be no assurance that the Company will timely identify and remediate all
significant Year 2000 problems, that remedial efforts will not involve
significant time and expense, or that such problems will not have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company also faces risk to the extent that suppliers of products,
services and systems purchased by the Company and others with whom the Company
transacts business on a worldwide basis do not comply with Year 2000
requirements. In the event any such third parties cannot timely provide the
Company with products, services or systems that meet the Year 2000 requirements
on a timely basis, or in the event Year 2000 issues prevent such third parties
from timely delivery of products or services required by the Company, the
Company's operating results could be materially adversely affected. Also, no
assurance can be given that Year 2000 problems within the Company's prospective
customer base of retail organizations will not result in the deferral or
cancellation of such organizations' decisions to license and implement
information systems such as those offered by the Company. To the extent Year
2000 issues cause significant delays in, or cancellation of, decisions to
purchase the Company's products or services, the Company's business, operating
results and financial condition would be materially adversely affected.
CERTAIN RISKS
Variability 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: demand for
the Company's products and services; the size and timing of individual sales;
the lengthening of the Company's sales cycle; competitive pricing pressures;
customer order deferrals in anticipation of new products; changes in the mix of
products and services sold; the timing of introductions and enhancements of
products by the Company or its competitors; market acceptance of new products;
technological changes in platforms supporting the Company's products; changes in
the Company's operating expenses; changes in the mix of domestic and
international revenues; the Company's ability to complete fixed-price consulting
contracts within budget; personnel changes; foreign currency exchange rate
fluctuations; expansion of international operations; changes in the Company's
strategies; 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.
Specifically, software license revenues have been higher in the fourth quarter
of each fiscal year. Further, the gross margin on software licenses is
significantly greater than the gross margin on consulting, maintenance and other
services. As a result, the Company's gross margin has fluctuated from quarter to
quarter and, management expects, may continue to fluctuate significantly based
on revenue mix and seasonality.
The Company's software products typically ship when contracts are signed.
Consequently, license backlog at the beginning of any quarter has represented
only a small portion of that quarter's expected revenues. As a result, software
license revenues in any quarter are difficult to forecast because such revenues
are substantially dependent on agreements executed and the related shipment of
software in that quarter. Moreover, the Company typically recognizes a
substantial amount of its revenues in the last weeks or days of the quarter. The
Company generally derives a significant portion of its quarterly software
license revenues from a small number of relatively large sales. The timing of
large individual sales is difficult to predict, and in some cases, large
individual sales have occurred in quarters subsequent to those originally
anticipated by the Company. The Company anticipates that the foregoing 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
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the end of a fiscal quarter may have a material adverse effect on its operating
results reported in any particular quarter.
Further, the Company's expense levels are based on its expectations of
future revenues. Since sales of software licenses are typically accompanied by a
significant amount of consulting, implementation and support services, the
Company's consulting and support resources must be managed to meet anticipated
license revenues. As a result, service personnel are generally hired and trained
in advance of anticipated license revenues. If revenues were to fall short of
expectations, or if other factors were to significantly affect the utilization
rates of service personnel, the operating results reported in any particular
quarter are likely to be adversely affected because a significant portion of the
Company's expenses are not variable in the short-term, and cannot be quickly
reduced to respond to any unexpected revenue shortfall.
Prior to 1998, the Company recognized revenue in accordance with the
provisions of the American Institute of Certified Public Accountants ("AICPA")
Statement of Position No. 91-1, Software Revenue Recognition ("SOP 91-1"). The
AICPA has recently adopted Statement of Position No. 97-2, Software Revenue
Recognition ("SOP 97-2"), that supersedes SOP 91-1 and becomes effective for
fiscal years beginning after December 15, 1997. Although the Company does not
believe that SOP 97-2 will have a significant impact on its financial
statements, there can be no assurance that application and subsequent
interpretations of this pronouncement by the Company's independent auditors or
the Securities Exchange Commission will not modify the Company's revenue
recognition policies, or that such modifications would not have a material
adverse effect on the operating results reported in any particular quarter.
There can be no assurance that the Company will not be required to adopt changes
in its licensing or services practices to conform to SOP 97-2, or that such
changes, if adopted, would not result in delays or cancellations of potential
sales of the Company's products.
Based on all of the foregoing, the Company believes that future revenues,
expenses and operating results are likely to vary significantly from quarter to
quarter. As a result, quarter to quarter comparisons of operating results are
not necessarily meaningful or indicative of future performance. Furthermore, the
Company believes it is likely that in some future quarter the Company's
operating results may be below the expectations of public market analysts or
investors. In such event, or in the event that adverse conditions prevail, or
are perceived to prevail, with respect to the Company's business, or generally,
the market price of the Company's common stock would likely be materially
adversely affected.
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 software 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 adversely 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. 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 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,
operating results and financial condition.
Management of Growth. The Company's business has grown rapidly in recent
years, with revenues increasing from $30.0 million in 1995 to $47.8 million in
1996 to $91.8 million in 1997. The Company's recent expansion has resulted in
substantial growth in the number of its employees, the scope of its operating
systems and the geographic distribution of its operations and customers. This
recent rapid growth has placed, and if
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continued will continue to place, a significant strain on the Company's
management and operations. The Company's ability to compete effectively and to
manage future growth, if any, will depend on its ability to continue to
implement and improve operational, financial and management information systems
on a timely basis, to expand, train, motivate and manage its work force, in
particular its direct sales force and consulting services organization, and to
deal effectively with third-party systems integrators and consultants. Several
of the Company's executive management personnel have only recently joined the
Company. In addition, Brent W. Lippman has only recently assumed the role of
Chief Executive Officer. The Company's future growth and success depends in
significant part upon the ability of the Company's executive management team to
effectively manage the expansion of the Company's operations. There can be no
assurance that the Company will be able 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.
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. The Company's
ability to undertake new projects and increase revenues is substantially
dependent on the availability of consulting personnel to assist in the design,
planning and implementation of the Company's solutions. Consequently, the
Company will not be able to continue to increase its business at historical
rates without adding significant numbers of trained consulting personnel.
Moreover, 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. Therefore, in anticipation of increasing its business the Company
continues to significantly increase its consulting capacity. However, 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. The addition of significant numbers of new personnel requires the
Company to incur significant start-up expenses, including procurement of office
space and equipment, initial training costs and low utilization rates of new
personnel. Such start-up expenses have in the past contributed, and may in the
future contribute, to significant reductions in gross margin on consulting,
maintenance and other services revenues and on overall gross margin. There can
be no assurance that start-up expenses incurred in connection with the hiring of
additional technical personnel would not result in a material adverse impact on
the Company's future operating results.
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 design, planning
and implementation of the Company's solutions. In particular, the Company's
ability to install, maintain and enhance its products is substantially dependent
upon its ability to locate, hire, train and retain qualified software engineers.
The market for such individuals is intensely competitive, particularly in
international markets. In this regard, as part of its strategy, the Company
plans to significantly increase the number of consulting personnel in connection
with the continuing roll-out of its client/server products and to support
further development and implementation of MMS. Given the critical roles 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.
Limited Deployment of and Uncertain Market for New Software Products. The
Company's newer software products, ODBMS, Win/DSS, Retail IDEAS and WCC, which
are designed for open client/server environments, have all been commercially
released within the last 18 months. To date, only a limited number of customers
have licensed or implemented the Company's client/server products. The market
for these products is new and evolving, and the Company believes that retailers
may generally be more cautious than other businesses in adopting client/server
technologies. Consequently, it is difficult to assess or predict with
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any assurance the growth rate, if any, and size of the market for the Company's
client/server products and there can be no assurance that this market will
continue to develop. Potential and existing customers may find it difficult, or
be unable, to successfully implement the Company's client/server products, or
may not purchase such products for a variety of reasons, including: the
customer's inability to obtain hardware, software, networking infrastructure, or
sufficient internal staff required to implement, operate and maintain an open
client/server solution; the generally longer time periods and greater cost
required to implement such products as compared to IBM AS/400-based products;
and limited implementation experience with such products by the Company's
service personnel or third-party implementation providers. Furthermore, the
Company must overcome significant obstacles to successfully market its
client/server solutions, including limited experience of the Company's sales and
consulting personnel in the client/server market and limited existing reference
accounts in this market. If the market for the Company's client/server products
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.
Product Concentration. The Company has historically derived the majority
of its revenues from software licenses and consulting, maintenance and other
services related to MMS. MMS revenues are in part dependent on continued
vitality of and support by IBM of its AS/400 platform. Although the Company
expects MMS revenues to continue to represent a significant portion of total
revenues for the foreseeable future, MMS revenues as a percentage of total
revenues may continue to decline as a result of the increased revenues
attributable to the Company's newer software products, particularly ODBMS and
Win/DSS. The life cycle of the MMS product line is difficult to estimate due
largely 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. Any decline in MMS revenues, as a result of
competition, technological change, a decline in the market for or support of the
IBM AS/400 platform, or other factors, 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. There can be no
assurance that prospective purchasers of the Company's IBM AS/400 based products
will respond favorably to the Company's future or enhanced software products or
that the Company will continue to be successful in selling its software products
or services in the IBM AS/400 market.
International Operations. The Company's international revenues, which
include revenues from international subsidiaries and export sales, represented
55%, 43% and 39% of total revenues in 1997, 1996 and 1995, respectively. The
Company expects that international revenues will continue to account for a
significant percentage of the Company's revenues for the foreseeable future. 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 introductions of the
Company's products often require 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. There can be no assurance that the countries in which the Company
operates will have a sufficient pool of qualified personnel from which the
Company may hire, 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.
The Company's international business operations are subject to risks
inherent in international activities, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, longer accounts receivable payment cycles in
certain countries, potentially adverse tax consequences, difficulties in
staffing and managing geographically disparate operations, greater difficulty in
safeguarding intellectual property, licensing and other trade restrictions,
currency
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fluctuations, repatriation of earnings, the burdens of complying with a wide
variety of foreign laws, and general economic conditions in international
markets. In addition, consulting, 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 and/or higher costs
in certain of the Company's international markets. Accordingly, any planned
growth in the Company's international operations may result in further declines
in gross margins 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. 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.
The Asia/Pacific region encountered unstable local economies and
significant devaluation in its currencies during the last six months of 1997 and
continuing into 1998. The economic situation in the region has resulted in
slower payments of outstanding receivable balances and various requests for
extended or modified payment terms. To date, this region has not represented a
significant portion of the Company's revenues. However, to the extent the
Asia/Pacific region grows in importance to the Company, or that the factors
affecting the region begin to adversely affect retailers in other geographic
locations, the Company's business, operating results and financial condition
could be materially adversely affected.
Competition. The markets for retail information systems are highly
competitive. The Company believes the principal competitive factors in such
markets are product quality, reliability, performance and price, vendor and
product reputation, retail industry expertise, 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 internally developed
systems 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. 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 AG has announced the availability of an
integrated client/server enterprise system competitive with the Company's
products. In addition, Intrepid has announced the formation of a joint
development and marketing relationship with PeopleSoft, Inc., a provider of
enterprise applications software, to develop products that are expected to
compete directly with ODBMS.
In the in-store systems market, which is more fragmented than the
enterprise systems market, the Company competes with major hardware original
equipment manufacturers such as ICL, NCR, and IBM, as well as software companies
such as CRS Business Computers, Datavantage, STS Systems, Trimax and GERS Retail
Systems. In the distribution and warehouse management systems market, the
Company's WCC product competes with products from Catalyst International, Inc.,
EXE and McHugh Freeman. The Retail IDEAS product competes with products from
Microstrategy and Intrepid, among other vendors. In the market for consulting
services, the Company is pursuing a strategy of forming informal working
relationships with leading retail systems integrators such as Andersen
Consulting and Ernst & Young LLP. These integrators, as well as independent
consulting firms such as IBM Global Services Division, 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,
marketing and other resources than the Company, each of which could provide them
with a significant competitive advantage over 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 would not have a material
adverse effect on the Company's business, operating results and financial
condition.
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30
Risks Associated with Strategic Relationships. The Company has from time
to time established formal and informal relationships with other companies,
including IBM and Silvon, Inc., involving collaboration in areas such as product
development, marketing and distribution. The maintenance of these relationships
and the development of other such relationships is a meaningful part of the
Company's business strategy. Currently, the Company's relationship with IBM is
cooperative in that there is no written agreement defining the parties'
obligations. There can be no assurance that the Company's current informal
relationships will be beneficial to the Company, that such relationships will be
sustained, or that the Company will be able to enter into successful new
strategic relationships in the future.
Lengthy Implementation Process; Fixed-Price Service Contracts. The
Company's software products are complex and perform or directly affect
business-critical functions across many different functional and geographic
areas of the enterprise. Consequently, implementation of the Company's software
is a complex, lengthy process that involves a significant commitment of
resources by the Company's customers and that is subject to a number of
significant risks over which the Company has little or no control. The Company
expects that implementation of the client/server versions of its products is
likely to be more complex and requires more time than implementation of its DOS-
and IBM AS/400-based products. In addition, the Company's lack of experience in
implementing its client/server-based products may contribute to the length of
the implementation process. Delays in the completion of implementations of any
of its software products whether by the Company or its business partners, may
result in customer dissatisfaction or damage to the Company's reputation and
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company offers a combination of software products, implementation and
support services to its customers. Typically, the Company enters into service
agreements with its customers that provide for consulting and implementation
services on a "time and expenses" basis. Certain customers have asked for, and
the Company has from time to time entered into, fixed-price service contracts.
These contracts specify certain milestones to be met by the Company regardless
of actual costs incurred by the Company in fulfilling those obligations. The
Company believes that fixed-price service contracts may increasingly be offered
by its competitors to differentiate their product and service offerings. As
result, the Company may enter into more fixed-price contracts in the future.
There can be no assurance that the Company can successfully complete these
contracts on budget, and the Company's inability to do so could have a material
adverse effect on its business, operating results and financial condition.
Technological Change and 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 markets, 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.
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. To protect its proprietary technology, 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. The source
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31
code for the Company's proprietary software is protected both as a trade secret
and as a copyrighted work. Although the Company relies on the limited protection
afforded by such intellectual property laws, it also believes that factors such
as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
maintenance are also essential to establishing and maintaining a technology
leadership position. The Company generally enters into confidentiality or
license agreements with its employees, consultants and customers, and generally
controls access to and distribution of its software, documentation and other
proprietary information. The terms of the Company's license agreements with its
customers often require the Company to provide the customer with a listing of
the product source code. Although the license agreements place restrictions on
the use by the customer of the Company's source code and do not permit the
re-sale, sublicense or other transfer of such source code, there can be no
assurance that unauthorized use of the Company's technology will not occur.
Despite the measures taken by the Company to protect its proprietary
rights, unauthorized parties 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. Policing unauthorized use of the Company's products is
difficult. In addition, litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.
Certain technology used by the Company's products is licensed from third
parties, generally on a non-exclusive basis. These licenses generally require
the Company to pay royalties and fulfill confidentiality obligations. The
Company believes that alternative resources exist for each of the material
components of technology licensed by the Company from third parties. However,
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 sell certain of its products while it seeks to
implement technology offered by alternative sources. Any required replacement
licenses could prove costly. Also, any such delay, to the extent it becomes
extended or occurs at or near the end of a fiscal quarter, could result in a
material adverse effect on the Company's results of operations. 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, if 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. Moreover, an adverse outcome in litigation or similar
adversarial proceedings could subject the Company to significant liabilities to
third parties, require the expenditure of significant resources to develop
non-infringing technology, require disputed rights to be licensed from others or
require the Company to cease the marketing or use of certain products, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition. To the extent the Company desires or is
required to obtain licenses to patents or proprietary rights of others, there
can be no assurance that any such licenses will be made available on terms
acceptable to the Company, if at all. As the number of software products in the
industry increases and the functionality of these products further overlaps, the
Company believes the software developers may become increasingly subject to
infringement claims. Any such claims against the Company, with or without merit,
as well as claims initiated by the Company against third parties, could be time
consuming and expensive to defend, prosecute or resolve.
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
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developed by third parties. In particular, it is common for complex software
programs, such as the Company's newer, client/server software products, to
contain undetected errors when first released which are discovered only after
the product has been implemented and used over time with different computer
systems and in a variety of applications and environments. Despite extensive
testing, 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. In addition, the Company or its customers may from time to time
experience difficulties integrating 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 errors in the Company's
software products will not be discovered or, if discovered, that they will be
successfully be corrected on a timely basis, if at all. Further, 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. The Company's future business growth
is substantially dependent on the continued development of market acceptance of
its newer, client/server products. If customers experience significant problems
with implementation of the Company's client/server products or are otherwise
dissatisfied with the functionality or performance of such products, or if such
products fail to achieve market acceptance for any reason, the Company's
business, operating results and financial condition would be materially
adversely affected.
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.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the continued performance of its executive officers and other key
employees, particularly the performance and services of Brent W. Lippman, the
Company's Chief Executive Officer. The Company does not have in place "key
person" life insurance policies on any of its employees. The loss of the
services of Mr. Lippman or other key executive officers or employees could have
a material adverse effect on the business, operating results and financial
condition of the Company.
Volatility of Market Price. The market price of the Company's Common Stock
has experienced large fluctuations which may be expected to continue. Future
announcements concerning the Company or its competitors, quarterly variations in
operating results, accounts receivable balances or aging, 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 Company's common stock to fluctuate
substantially. In addition, stock prices for many technology companies have
fluctuated widely for reasons, which have often been unrelated to the operating
results of such companies. 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.
Potential Future Acquisitions. One of the Company's strategies is to
pursue acquisitions of businesses, products and technologies, or enter into
joint venture arrangements that could complement or expand the Company's
business. The negotiation of potential acquisitions or joint ventures as well as
the integration of an acquired business, product or technology could cause
diversion of management's time and resources. Future acquisitions by the Company
could also result in potentially dilutive issuances of equity securities, the
incurrence by the Company of debt and contingent liabilities, amortization of
goodwill and other intangibles, research and development write-offs and other
acquisition-related expenses. No assurances can be given that any acquired
business will be successfully integrated with the Company's operations, or that
the Company will
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receive the intended benefits of such acquisition. Future acquisitions, whether
or not consummated, could have a material adverse effect on the Company's
business, operating results and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The independent auditors' report of Deloitte & Touche, LLP and the
consolidated financial statements of JDA as of December 31, 1997 and 1996, and
for each of the three years in the period ended December 31, 1997, are included
in this Form 10-K as listed in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report, in
that the Company intends to file its Proxy Statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Report,
and certain information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors of the Company is incorporated by
reference to the Company's Proxy Statement filed in connection with the
Company's 1998 Annual Meeting of Stockholders (the "Proxy Statement") as set
forth under the caption "General Information -- Board of Directors." Information
relating to the executive officers of the Company is incorporated by reference
to the Proxy Statement under the caption "Executive Officers of the Registrant."
Information with respect to delinquent filings pursuant to Item 405 of
Regulation S-K is incorporated by reference to the Proxy Statement as set forth
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated by
reference to the Proxy Statement under the caption "Executive Compensation and
Other Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to ownership of equity securities of the Company
by certain beneficial owners and management is incorporated by reference to the
Proxy Statement as set forth under the caption "General Information -- Stock
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated by reference to the Proxy Statement under the captions "Certain
Transactions" and "Compensation Committee Interlocks and Insider Participation."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets -- Years Ended December 31, 1997 and 1996
Consolidated Statements of Income -- Three Years Ended December 31, 1997
Consolidated Statements of Stockholders' Equity (Deficit) --
Three Years Ended December 31, 1997
Consolidated Statements of Cash Flows -- Three Years Ended December 31,
1997
Notes to Consolidated Financial Statements -- Three Years Ended
December 31, 1997
2. EXHIBITS
See Exhibit Index.
b. REPORTS ON FORM 8-K.
The registrant did not file any Reports on Form 8-K during the fourth
quarter of fiscal 1997.
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INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
JDA Software Group, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of JDA
Software Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity (deficit), and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of JDA Software
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
January 28, 1998
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JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $27,304 $30,986
Accounts receivable, net.................................. 32,444 16,954
Deferred tax asset........................................ 1,190 786
Other current assets...................................... 2,471 881
------- -------
Total current assets................................... 63,409 49,607
------- -------
Property and Equipment, net................................. 16,071 7,752
Goodwill, net............................................... 3,722 1,697
------- -------
Total assets...................................... $83,202 $59,056
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 3,076 $ 1,886
Accrued expenses and other liabilities.................... 8,181 5,447
Income taxes payable...................................... 668 639
Deferred revenue.......................................... 3,058 1,747
Current portion of capital lease obligations.............. 42 56
------- -------
Total current liabilities.............................. 15,025 9,775
Capital Lease Obligations, less current portion............. 45 106
Deferred Tax Liability...................................... 222 514
------- -------
Total liabilities...................................... 15,292 10,395
------- -------
Stockholders' Equity:
Preferred stock, $.01 par value. Authorized 2,000,000
shares; None issued or outstanding.....................
Common stock, $.01 par value. Authorized, 18,000,000
shares; Issued and outstanding, 13,151,246 and
12,965,237 shares, respectively........................ 132 130
Additional paid in capital................................ 65,966 58,442
Retained earnings (deficit)............................... 2,117 (10,349)
Foreign currency translation adjustment................... (305) 438
------- -------
Total stockholders' equity............................. 67,910 48,661
------- -------
Total liabilities and stockholders' equity........ $83,202 $59,056
======= =======
See notes to consolidated financial statements.
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JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Software licenses......................................... $42,041 $24,296 $15,253
Consulting, maintenance and other services................ 49,730 23,544 14,831
------- ------- -------
Total revenues......................................... 91,771 47,840 30,084
------- ------- -------
Cost of Revenues:
Software licenses......................................... 1,145 438 159
Consulting, maintenance and other services................ 37,727 16,416 9,781
------- ------- -------
Total cost of revenues................................. 38,872 16,854 9,940
------- ------- -------
Gross Profit................................................ 52,899 30,986 20,144
------- ------- -------
Operating Expenses:
Product development....................................... 11,364 6,478 3,512
Sales and marketing....................................... 12,633 7,242 5,199
General and administrative................................ 9,532 4,989 3,929
------- ------- -------
Total operating expenses............................... 33,529 18,709 12,640
------- ------- -------
Income From Operations...................................... 19,370 12,277 7,504
Other income (expense), net............................... 1,407 519 (434)
------- ------- -------
Income Before Income Taxes.................................. 20,777 12,796 7,070
Provision for income taxes................................ 8,311 5,116 1,497
------- ------- -------
Net Income.................................................. $12,466 $ 7,680 $ 5,573
------- ------- -------
Basic Earnings Per Share.................................... $ .95 $ .64
------- -------
Diluted Earnings Per Share ................................. $ .95 $ .64
------- -------
Pro Forma Statement of Income Data:
Historical net income..................................... $ 5,573
Pro forma adjustment to adjust income taxes............... (1,172)
-------
Pro forma net income................................... $ 4,401
-------
Pro Forma Basic and Diluted Earnings Per Share.............. $ .42
-------
Shares used to compute basic earnings per share............. 13,078 12,010
------- -------
Shares used to compute diluted earnings per share........... 13,109 12,010
------- -------
Shares used to compute pro forma basic and diluted earnings
per share................................................. 10,952
-------
See notes to consolidated financial statements.
37
38
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOREIGN
COMMON STOCK ADDITIONAL RETAINED CURRENCY
------------------- PAID-IN EARNINGS TRANSLATION
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT TOTAL
---------- ------ ---------- --------- ----------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance, January 1, 1995........... 5,583 $ 6 $ 5,254 $ 953 $ 16 $ 6,229
Issuance of common stock:
Reorganization and issuance of
convertible preferred
stock....................... 7,194,417 66 (274) (19,985) (20,193)
Stock options exercised....... 673 (673)
Dividends........................ (3,897) (3,897)
Foreign translation adjustment... (3) (3)
Net income....................... 5,573 5,573
---------- ---- ------- -------- ----- --------
Balance, December 31, 1995......... 7,200,000 72 5,653 (18,029) 13 (12,291)
Issuance of common stock:
Initial public offering....... 2,182,866 22 25,279 25,301
Conversion of preferred
stock....................... 2,800,000 28 7,472 7,500
Secondary stock offering...... 600,000 6 15,536 15,542
Acquisition of JDA Canada..... 143,926 1 2,541 2,542
Tax benefit -- stock
options..................... 1,537 1,537
Employee stock purchase
plan........................ 38,445 1 424 425
Foreign translation adjustment... 425 425
Net income....................... 7,680 7,680
---------- ---- ------- -------- ----- --------
Balance, December 31, 1996......... 12,965,237 130 58,442 (10,349) 438 48,661
Issuance of common stock:
Stock options exercised....... 56,348 1 1,579 1,580
Employee stock purchase
plan........................ 129,661 1 1,585 1,586
Tax benefit -- stock options
and employee stock purchase
plan........................ 4,859 4,859
Other......................... (499) (499)
Foreign translation adjustment..... (743) (743)
Net income......................... 12,466 12,466
---------- ---- ------- -------- ----- --------
Balance, December 31, 1997......... 13,151,246 $132 $65,966 $ 2,117 $(305) $ 67,910
========== ==== ======= ======== ===== ========
See notes to consolidated financial statements.
38
39
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................................. $ 12,466 $ 7,680 $ 5,573
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,908 1,163 637
Provision for doubtful accounts........................... 1,980 818 627
Deferred income taxes..................................... (453) 45 (317)
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable....................................... (17,316) (7,586) (3,453)
Prepaid expenses and other current assets................. (1,752) (342) 46
Accounts payable.......................................... 1,134 945 394
Accrued expenses and other liabilities.................... 1,752 2,050 1,418
Income taxes payable...................................... 29 280 (78)
Deferred revenue.......................................... 1,311 1,000 651
-------- -------- --------
Net cash provided by operating activities.............. 2,059 6,053 5,498
-------- -------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (10,843) (6,225) (1,422)
Purchase of LIOCS Corporation, net of cash acquired......... (1,588) -- --
Redemption (purchase) of investments........................ -- 14,649 (14,649)
Cash acquired from purchase of JDA Canada................... -- 214 --
-------- -------- --------
Net cash (used in) provided by investing activities.... (12,431) 8,638 (16,071)
-------- -------- --------
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:
Issuance of redeemable preferred stock, net............... 14,792
Reorganization distribution............................... (2,295)
Payment of dividends...................................... (3,897)
Payments on notes and interest payable to stockholders.... (14,300) (922)
Issuance of common stock from secondary offering............ 15,542
Net borrowings (payments) on bank line of credit............ (575) 575
Issuance of common stock -- employee stock purchase plan.... 1,586 425
Issuance of common stock -- stock option plan............... 1,580
Tax benefit -- stock options and employee stock purchase
plan...................................................... 4,859 1,537
Payments on capital lease obligations....................... (93) (92) (92)
Other....................................................... (499) (85)
-------- -------- --------
Net cash provided by financing activities.............. 7,433 15,372 8,161
-------- -------- --------
Effect of exchange rates on cash and cash equivalents....... (743) 425 (3)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents........ (3,682) 30,488 (2,415)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 30,986 498 2,913
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 27,304 $ 30,986 $ 498
======== ======== ========
See notes to consolidated financial statements.
39
40
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest.................................................. $ 13 $ 876 $ 367
------- ------- -------
Income taxes.............................................. $ 2,762 $ 2,949 $ 1,828
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Conversion of Series A preferred stock...................... $ 7,500
-------
Distributions to stockholders paid with a note payable...... $17,690
-------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
Acquisition of LIOCS Corporation:
Fair value of assets acquired, other than cash............ $ (622)
Goodwill.................................................. (2,022)
Liabilities assumed....................................... 366
Notes payable............................................. 690
-------
Net cash used to purchase LIOCS Corporation............ $(1,588)
=======
Acquisition of JDA Canada:
Fair value of assets acquired, other than cash............ $(1,150)
Goodwill.................................................. (1,967)
Liabilities assumed....................................... 789
Common stock issued....................................... 2,542
-------
Cash acquired in purchase.............................. $ 214
=======
See notes to consolidated financial statements.
40
41
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PERCENTAGES, SHARES, PER SHARE AMOUNTS OR AS OTHERWISE
STATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Consolidation. JDA Software Group,
Inc. and subsidiaries ("JDA" or the "Company") is a leading international
provider of integrated enterprise-wide software products and services that
address mission-critical management information needs of the retail supply
chain. The Company offers a broad array of software products designed to provide
integrated technology solutions for the collection, organization, distribution,
and analysis of data throughout a retail organization. The Company's products
include: merchandising, financial and decision support systems at the corporate
level; point-of-sale, back office and distributed processing applications at the
store level; and warehouse management and logistics systems at the distribution
level. The Company offers products that operate on the IBM AS/400- and DOS-
based platforms, as well as products that operate in the UNIX and Windows NT
open client/server environments. JDA also offers a wide range of professional
services through its consulting and customer support organizations including:
project management, system planning, design and implementation, custom
modifications, training and support services. JDA is based in Phoenix, Arizona
and has offices in major cities in the United States, and international offices
in Canada, the United Kingdom, France, Germany, Mexico, Chile, South Africa,
Singapore, and Australia.
The consolidated financial statements include the accounts of JDA and its
subsidiaries, all of which are wholly owned. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
these estimates.
Revenue Recognition. JDA recognizes revenues in accordance with the
provisions of the American Institute of Certified Public Accountants ("AICPA")
Statement of Position 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 generally 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 recently adopted
Statement of Position 97-2, Software Revenue Recognition("SOP 97-2") 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.
Cash and Cash Equivalents. Cash and cash equivalents include cash and
highly liquid investments with original maturities of not more than three
months.
Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Equipment held under capital lease is
stated at the lower of the present value of minimum lease payments or fair value
at the inception of the lease. Property and equipment are depreciated on a
straight-line basis over the following estimated useful lives:
buildings -- twenty-five years; furniture, fixtures, computer equipment and
automobiles -- three to seven years; equipment held under capital lease and
leasehold improvements -- the shorter of the lease term or the estimated useful
life of the asset.
Goodwill. Goodwill is amortized on a straight-line basis over 15 years.
The Company reviews goodwill for possible impairment of value whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.
Product Development. The costs to develop new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. The Company considers
technological feasibility to have occurred when all planning, designing, coding
and testing have been
41
42
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
completed according to design specifications. Once technological feasibility is
established, any additional costs would be capitalized. The Company believes its
current process for developing software is essentially completed concurrent with
the establishment of technological feasibility, and accordingly, no costs have
been capitalized.
Income taxes. The Company provides for income taxes in accordance with
Statement of Financial Standards No. 109, Accounting for Income Taxes. Income
taxes for 1997 and 1996 include provisions for state and federal income taxes.
An effective rate of 40% was used during these years to approximate statutory
federal, state and foreign tax rates after a reduction for U.S. research and
development expense tax credits. Prior to March 30, 1995, certain of JDA's
predecessor companies elected S Corporation status. As a result, the Company's
statement of income for the first quarter of 1995 does not contain a provision
for federal income taxes. The 1995 Consolidated Statement of Income reflects a
pro forma adjustment for federal income taxes which results in an effective tax
rate of 38%.
Earnings per Share. The Company presents earnings per share in accordance
with Statement of Financial Standards No. 128, Earnings per Share ("SFAS No.
128"). SFAS No. 128 prescribes a presentation of basic earnings per share, which
is calculated utilizing only weighted average common shares outstanding, and a
diluted earnings per share which gives effect to all dilutive potential common
shares outstanding during the reporting periods. Earnings per share for 1996 has
been restated in accordance with SFAS No. 128. Pro forma basic and diluted
earnings per share is presented for 1995 which reflects the number of common and
equivalent shares outstanding subsequent to the Company's reorganization These
shares include the common shares issued upon the conversion of Series A
redeemable preferred stock plus an estimate of the additional shares that would
need to be issued at the initial public offering price in order to repay certain
shareholder notes and redeem the Series B redeemable preferred stock. See Note
2.
Foreign Currency Translation. The financial statements of international
subsidiaries are translated into U.S. dollars using the exchange rate at each
balance sheet date for assets and liabilities and an average exchange rate for
the revenues and expenses reported in each fiscal period. Foreign currency
translation adjustments are recorded as a separate component of stockholders'
equity.
Stock-Based Compensation. Prior to January 1, 1996, the Company accounted
for its stock option plans in accordance with the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
No. 25"). As such, compensation expense would be recorded on the date of grant
if the current market price of the underlying stock exceeded the exercise price.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123")
which encourages entities to recognize as expense, over the vesting period, the
fair value of all stock-based compensation on the date of grant. Alternatively,
SFAS No. 123 also allows entities to continue to apply the provisions of APB No.
25 and provide pro forma disclosure of net income(loss) and net income(loss) per
common share for employee stock option grants made in 1995 and future years as
if the fair-value method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB No. 25 and provide
separate pro forma disclosures. See Note 11.
Reclassifications. Certain reclassifications were made to the 1996 and
1995 financial statements to conform to the 1997 presentation.
New Accounting Standards. In June 1997, the Financial Accounting Standards
Board 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
stockholders' equity section of the balance sheet and requires that
comprehensive income and its components be prominently displayed in the
financial statements. SFAS No. 131 requires public companies to report certain
information about operating segments in their
42
43
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements, and establishes related disclosures about products and
services, geographic areas and major customers. The Company will implement the
interim and annual disclosures required under these standards during 1998.
2. REORGANIZATION AND COMMON STOCK OFFERINGS
Reorganization JDA was formed in March 1995 through the reorganization of
six commonly held predecessor companies. The transaction was accounted for as a
combination of companies under common control in a manner similar to a pooling
of interests. Under the terms of the reorganization, the predecessor companies
were contributed to a common holding company, JDA Software Group, Inc., in
exchange for all of JDA's then outstanding common stock (7,200,000 shares), $2.3
million in cash and $17.7 million in promissory notes due on various dates
through the year 2000. Simultaneous with this exchange, JDA issued 2,800,000
shares of Series A redeemable preferred stock for $15.0 million. This cash was
invested in restricted short-term investments that were later used for the
payment of $14.0 million on the promissory notes. The issuance of the Series A
redeemable preferred stock and the distribution of cash and promissory notes
were accounted for as dividends, and additional paid-in capital was charged for
$66 to reflect the new par value of the common stock and for expenses of $208
related to the reorganization. The Company paid interest on the promissory notes
of $0, $130, and $1,046 during 1997, 1996 and 1995, respectively.
Initial Public Offering. The Company sold 2,182,866 shares of common stock
on March 15, 1996 for $25.3 million, net of issuance costs of $1.1 million.
Subsequent to the initial public offering, the outstanding shares of the Series
A redeemable preferred stock were converted into 2,800,000 shares of common
stock and 1,250,004 shares of Series B redeemable preferred stock. The Series B
redeemable preferred stock was then redeemed for $7.5 million in cash. In
addition, the remaining $3.7 million in promissory notes were paid from the
proceeds of the initial public offering.
Secondary Public Offering. The Company completed a secondary public
offering of 2,472,500 shares of common stock on November 26, 1996. The Company
sold 600,000 of these shares for $15.5 million, net of issuance costs of $418,
with the remaining 1,872,500 shares being sold by certain selling stockholders.
3. ACQUISITIONS
LIOCS Corporation. On April 21, 1997, the Company acquired all of the
outstanding common 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 in cash at closing,
deposited $230 in an escrow account, and recorded a payable for the remaining
balance of $690. The escrow agreement provides that 50% of the escrow deposit be
released 12 months after the closing date, with the remaining 50% released 18
months after the closing date. The $690 payment was contingent upon LIOCS'
product offerings achieving specific testing and performance milestones. These
milestones were met during 1997 and the payment was made prior to December 31,
1997. The acquisition was accounted for as a purchase, and, accordingly, the
operating results of LIOCS have been included in the Company's consolidated
financial statements since the date of acquisition. The Company recorded $2.0
million in goodwill on this transaction and is amortizing the balance on a
straight-line basis over 15 years. Pro forma operating results for 1997 and 1996
are not presented as the effect of the acquisition is not material.
JDA Software Services Ltd. On August 15, 1996, the Company acquired all of
the outstanding common stock of JDA Software Services Ltd. ("JDA Canada") for
143,926 shares of JDA stock valued at $2.5 million. JDA Canada, a provider of
technology solutions for the retail industry, was previously an affiliate of the
Company, however, it had been independently owned since 1987. The acquisition
was accounted for as a purchase, and, accordingly, the operating results of JDA
Canada have been included in the Company's consolidated financial statements
since the date of acquisition. The Company recorded $2.0 million in goodwill
43
44
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on this transaction and is amortizing the balance on a straight-line basis over
15 years. Pro forma operating results for 1996 and 1995 are not presented as the
effect of the acquisition is not material.
4. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
1997 1996
------- -------
Trade receivables........................................ $34,765 $18,078
Less allowance for doubtful accounts..................... (2,321) (1,124)
------- -------
Total.......................................... $32,444 $16,954
======= =======
The Asia/Pacific region has encountered unstable local economies and
significant devaluation in its currencies during the last six months of 1997,
continuing into 1998. This region represented less than 10% of the Company's
1997 revenues and less than 2% of operating income. In addition, Asia/Pacific
receivables, net of reserves were $3.3 million, or 10% of the Company's total
receivables at December 31, 1997. The economic situation in the region has
resulted in slower payment of outstanding balances and various requests for
extended or modified payment terms. The Company provided specific receivable
reserves of $1.0 million during 1997 to recognize the potential exposure in
receivables from Asia/Pacific customers. Although the Company is unable to
predict when the current economic situation will improve, management believes
the Asia/Pacific region will be a viable market in the future and plans to
maintain a continuing presence.
A summary of changes in the allowance for doubtful accounts for the
three-year period ended December 31, 1997 is as follows:
1997 1996 1995
------ ------ ----
Balance at beginning of period..................... $1,124 $ 651 $113
Provision for doubtful accounts.................... 1,980 818 627
Deductions......................................... (783) (345) (89)
------ ------ ----
Balance at end of period........................... $2,321 $1,124 $651
====== ====== ====
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
1997 1996
------- -------
Computers, furniture & fixtures.......................... $14,103 $ 7,844
Land and buildings....................................... 3,137 2,192
Automobiles.............................................. 2,764 1,134
Leasehold improvements................................... 1,255 234
------- -------
21,259 11,404
Less accumulated depreciation and amortization........... (5,188) (3,652)
------- -------
$16,071 $ 7,752
======= =======
6. LINE OF CREDIT
The Company maintains a $5.0 million line of credit with a commercial bank.
The line of credit is collateralized by property and equipment, receivables, and
intangibles; accrues interest at the bank's reference rate, which approximates
prime; and requires the Company to maintain certain current ratios and tangible
net
44
45
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
worth. The line of credit matures on July 1, 1998 and the Company intends to
seek renewal at that time. There were no amounts outstanding on the line of
credit at December 31, 1997 or 1996.
7. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
1997 1996
------ ------
Accrued compensation and benefits.......................... $3,982 $2,773
Sales, value added and property taxes...................... 1,061 638
Other accrued expenses..................................... 3,138 2,036
------ ------
Total............................................ $8,181 $5,447
====== ======
8. DEFERRED REVENUE
Deferred revenue consists of the following:
1997 1996
------ ------
Software................................................... $1,264 $1,339
Consulting, maintenance and other services................. 1,794 408
------ ------
$3,058 $1,747
====== ======
9. LEASE COMMITMENTS
The Company leases office space and various equipment under noncancellable
operating leases that expire at various dates through the year 2002. Certain of
the leases contain renewal options. Rental expense under operating leases was
$1,618 in 1997, $1,216 in 1996 and $707 in 1995. The rental expense figures
include $68, $68 and $50, respectively in payments to related parties for office
space. Future minimum lease payments under noncancellable operating leases (with
minimum or remaining lease terms in excess of one year) at December 31, 1997 are
as follows:
1998........................................................ $2,052
1999........................................................ 1,347
2000........................................................ 720
2001........................................................ 365
2002........................................................ 175
------
Total minimum lease payments................................ $4,659
======
10. LEGAL PROCEEDINGS
JDA is periodically involved in legal proceedings and claims arising in the
ordinary course of business. Management does not believe that the disposition of
these matters will have a material adverse effect on the Company's financial
position or results of operations.
In May 1996, Niederhoffer and Niederhoffer, Inc. ("Niederhoffer") filed a
demand for arbitration asserting a claim against JDA Software Services, Inc., a
wholly owned subsidiary of the Company. Niederhoffer's claims are based upon an
agreement between it and JDA Software Services, Inc. dated April 6, 1990.
Niederhoffer alleged entitlement to a finder's fee in connection with the
purchase of convertible preferred stock in the Company in March 1995 by six
investment funds advised by TA Associates, Inc. and its affiliates, and a claim
for common stock arising from the related establishment of the Company and
45
46
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reorganization of the Company's wholly owned subsidiaries pursuant to which
Company common stock was issued to such subsidiaries' stockholders. In the
arbitration, Niederhoffer claimed damages of approximately $770 and asserted a
right to 504,000 shares of the Company's common stock. The Company received
notice in June 1997 that the arbitration council awarded Niederhoffer $482 in
full settlement of all claims and counterclaims submitted in arbitration. Such
amount was charged to additional paid-in capital as a cost of the TA Investment.
11. STOCKHOLDERS' EQUITY
Capital Stock. The Company's authorized capital stock consists of
2,000,000 shares of preferred stock, $.01 par value, and 18,000,000 shares of
common stock, $.01 par value. There were 13,151,246 and 12,965,237 shares of
common stock issued and outstanding at December 31, 1997 and 1996, respectively.
There were no shares of preferred stock issued or outstanding at either date. On
January 27, 1998, the Board of Directors approved an increase in the number of
authorized shares of capital stock from 18,000,000 to 50,000,000, pending
shareholder approval at the 1998 Annual Meeting of Stockholders.
Stock Option Plans. The Company maintains various stock option plans for
employees, consultants and non-employee directors as follows:
JDA adopted a stock option plan in 1995 (the "1995 Option Plan") that
provides for the issuance of up to 1,350,000 shares of common stock to employees
under incentive and nonstatuatory stock option grants. Incentive and
nonstatuatory stock options may be granted at a price not less than the fair
market value of the common stock at the date of grant. The options generally
become exercisable over periods ranging from 18 to 48 months, commencing at the
date of grant, and expire in ten years. The 1995 Option Plan terminates in March
2005. At December 31, 1997, there were 196,592 options outstanding and 96,750
options available for grants under the 1995 Option Plan.
Certain stockholders of JDA's predecessor companies (see Note 2) entered
into a stock redemption agreement with the Company under which they have agreed
that upon (1) the exercise of the first 850,000 options granted to employees
under the 1995 Option Plan, they will sell an equivalent number of their common
shares to JDA at the exercise price specified on the options; and (2) upon the
exercise of the next 500,000 options granted under the 1995 Option Plan, they
will sell an equivalent number of their common shares to JDA at $.01 per share.
As a result, options exercised under the 1995 Option Plan will not increase the
number of outstanding shares of the Company's common stock.
JDA adopted a stock option plan in 1996 (the "1996 Option Plan") that
provides for the issuance of up to 1,250,000 shares of common stock to
employees, consultants and directors under incentive and nonstatuatory stock
option grants. Incentive and nonstatuatory stock options may be granted at a
price not less than the fair market value of the common stock at the date of
grant. The options generally become exercisable over a four-year period,
commencing at the date of grant, and expire in ten years. The 1996 Option Plan
has no scheduled termination date. At December 31, 1997, there were 926,852
options outstanding and 266,800 options available for grant under the 1996
Option Plan. On January 27, 1998, the Board of Directors approved an amendment
to the 1996 Option Plan, pending shareholder approval at the 1998 Annual Meeting
of Stockholders, which increased the number of shares authorized for issuance
under the 1996 Option Plan from 1,250,000 to 3,000,000.
JDA adopted an outside director stock option plan in 1996 that provides for
the issuance of up to 150,000 shares of common stock to eligible participants
under nonstatuatory stock option grants (the "Directors Plan"). Under the
Directors Plan, outside directors receive a one-time grant to purchase shares
upon appointment to the Board of Directors, and an annual grant for each year of
service thereafter. The nonstatuatory stock options may be granted at a price
not less than the fair market value of the common stock at the date of grant.
The options generally become exercisable over a three year period commencing at
the
46
47
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of grant, and expire in ten years. The Directors Plan has no scheduled
termination date. At December 31, 1997, there were 8,000 options outstanding and
142,000 options available for grant under the Directors Plan.
On January 27, 1998, the Board of Directors approved a stock option plan
(the "1998 Option Plan") that provides for the issuance of up to 125,000 shares
of common stock to employees under nonstatutory stock option grants. The
nonstatutory stock options may be granted at a price not less than the fair
market value of the common stock at the date of grant. Options granted under the
1998 Option Plan are fully vested and immediately exercisable, and expire in ten
years. The 1998 Option Plan has no scheduled termination date.
The following summarizes the combined stock option activity during the
three-year period ended December 31, 1997:
OPTIONS OUTSTANDING
-----------------------------
OPTIONS AVAILABLE EXERCISE PRICE
FOR GRANT SHARES PER SHARE
----------------- --------- ----------------
Balance, January 1, 1995........................ -- -- --
Increase in reserved shares................... 1,350,000 -- --
Granted....................................... (1,300,000) 1,300,000 $ 3.50 to $5.25
Cancelled..................................... -- -- --
Exercised..................................... -- (192,862) $ 3.50
---------- ---------
Balance, December 31, 1995...................... 50,000 1,107,138 $ 3.50 to $5.25
Increase in reserved shares................... 1,400,000 -- --
Granted....................................... (305,000) 305,000 $ 9.60 to $19.75
Cancelled..................................... -- -- --
Exercised..................................... -- (450,613) $ 3.50 to $5.25
---------- ---------
Balance, December 31, 1996...................... 1,145,000 961,525 $ 3.50 to $19.75
Granted....................................... (738,450) 738,450
Cancelled..................................... 99,000 (99,000) $ 4.25 to $27.00
Exercised..................................... -- (469,531) $ 3.50 to $19.75
---------- ---------
Balance, December 31, 1997...................... 505,550 1,131,444 $ 3.50 to $33.75
========== =========
The following summarizes certain weighted average information on options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING
------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ----------------- ----------- ------------ -------- ----------- --------
$3.50 to $9.60 236,592 7.92 $ 5.25 167,342 $ 4.84
$13.00 to $21.88 504,852 8.90 $20.20 12,731 $19.34
$26.38 to $33.75 390,000 9.64 $31.14 -- --
--------- -------
1,131,444 180,073
========= =======
The following pro forma information presents net income and basic earnings
per share as if compensation expense had been recognized for stock options
granted in the three year period ended December 31, 1997, as determined under
the fair value method used in the Black-Scholes options pricing model, and to
include the effect of shares issued under the employee stock purchase plan. The
weighted average Black-Scholes value per
47
48
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
option granted in 1997, 1996 and 1995 was $17.29, $7.48 and $1.06, respectively.
The net income and basic earnings per share -- as reported for 1995 give effect
to the Company's reorganization. See Note 2.
1997 1996 1995
----------- -------- --------
Net income as reported..................... $ 12,466 $ 7,680 $ 4,401
Pro forma net income....................... $ 3,241 $ 6,926 $ 3,957
Basic and diluted earnings per share -- as
reported................................. $ .95 $ .64 $ .42
Basic and diluted earnings per share -- pro
forma.................................... $ .25 $ .58 $ .38
ASSUMPTIONS:
Expected dividend yield.................... 0% 0% 0%
Expected stock price volatility............ 95% 65% 65%
Risk-free interest rate.................... 5.25% 5.25% 5.25%
Expected life of option.................... 1.04 years .4 years .4 years
No expense has been recognized for stock-based compensation in the three
years ended December 31, 1997 as the underlying stock options were granted at
current market price.
Employee Stock Purchase Plan. JDA adopted an employee stock purchase plan
in 1996 ("Stock Purchase Plan") that provides for the purchase of up 200,000
shares of common stock during a 24-month offering beginning August 9, 1996.
Under the Stock Purchase Plan, eligible employees may purchase common stock
semi-annually at 85% of the lesser of (1) the fair market value on the first day
of the 24-month offering period or (2) the fair market value on the last day of
each semi-annual purchase period. During 1997, 129,661 shares were purchased at
prices ranging from $11.05 to 29.64. During 1996, 38,445 shares were purchased
at $11.05. At December 31, 1997 there were 31,894 shares of common stock
available for issuance under the Stock Purchase Plan. On January 27, 1998, the
Board of Directors approved the formation of a new employee stock purchase plan,
pending shareholder approval at the 1998 Annual Meeting of Shareholders, which
will provide for the issuance of 300,000 shares of common stock at terms similar
to the existing Stock Purchase Plan.
During 1997 and 1996, certain employees exercised options or sold stock
acquired under the Stock Purchase Plan, in disqualifying dispositions that
resulted in deductions for income tax purposes. The Company's tax liability for
1997 and 1996 was reduced by $4,859 and $1,537, respectively, to give effect to
these dispositions with an offsetting credit to additional paid-in capital.
12. EMPLOYEE BENEFIT PLANS.
JDA has adopted a defined contribution plan under Section 401(k) of the
Internal Revenue Code covering all eligible employees ("401(k) Plan"). Eligible
participants may contribute up to 20% of their total compensation. The Company
provides matching contributions to the 401(k) Plan in amounts determined by the
Board of Directors. Participants will be immediately vested in their personal
contributions and over a six year graded schedule for amounts contributed by the
Company. The Company made matching contributions to the 401(k) Plan of $137, $86
and $57 in 1997, 1996 and 1995, respectively.
13. INCOME TAXES
The provision for income taxes includes income taxes currently payable and
those deferred due to temporary differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future. Prior to March 30, 1995, certain of JDA's predecessor
companies elected S Corporation status. As a result, the Company's statement of
income for the first quarter of 1995 does not contain a provision for federal
income taxes. Pro forma income tax provisions have been provided for 1995
48
49
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to present the tax provision that would have been recorded had all income been
taxable to JDA. The components of the income tax provision included in the
consolidated statements of operation are as follows:
1995
1997 1996 -------------------
ACTUAL ACTUAL ACTUAL PRO FORMA
------ ------ ------ ---------
Current:
Federal............................. $5,185 $3,152 $1,354 $2,410
State............................... 1,539 750 320 362
Foreign............................. 2,040 1,169 140 140
------ ------ ------ ------
Total current.................... 8,764 5,071 1,814 2,912
------ ------ ------ ------
Deferred:
Federal............................. (378) (184) (299) (236)
State............................... (75) (41) (53) (42)
Foreign............................. -- 270 35
------ ------ ------ ------
Total deferred................... (453) 45 (317) (243)
------ ------ ------ ------
Total provisions............ $8,311 $5,116 $1,497 $2,669
====== ====== ====== ======
Income tax expense differed from the amounts computed by applying the
statutory U.S. federal income tax rate of 34% to income before income taxes as a
result of the following:
1995
1997 1996 -------------------
ACTUAL ACTUAL ACTUAL PRO FORMA
------ ------ ------ ---------
Federal statutory rate................ $7,272 $4,351 $2,404 $2,404
Research and development credit....... -- (30) (30) (30)
Record deferred income taxes.......... -- -- (260) --
Foreign and state income taxes........ 990 800 274 384
S Corporation benefit................. -- -- (802) --
Other................................. 49 (5) (89) (89)
------ ------ ------ ------
Total....................... $8,311 $5,116 $1,497 $2,669
====== ====== ====== ======
49
50
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax effects of temporary differences that give rise to the
Company's deferred income tax assets and liabilities are as follows:
1997 1996
---------------------- ----------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------- ----------- ------- -----------
Deferred tax asset:
Non-deductible accruals and reserves........... $ 541 $ -- $558 $ --
Deferred revenue............................... 595 -- 203 --
Carryovers..................................... -- 91 -- --
Foreign translation adjustment................. -- 203 -- --
Other.......................................... 54 -- 83 18
------ ------ ---- ------
Total.................................. 1,190 294 844 18
Deferred tax liability:
Tax over book depreciation..................... -- (492) -- (240)
Foreign translation adjustment................. -- -- -- (292)
Other.......................................... -- (24) (58) --
------ ------ ---- ------
Total.................................. $1,190 $ (222) $786 $ (514)
====== ====== ==== ======
14. EARNINGS PER SHARE
Earnings per share is calculated as follows:
1997 1996 1995
------- ------- -------
Net income.................................... $12,466 $ 7,680 $ 4,401
------- ------- -------
Shares -- Basic earnings per share............ 13,078 12,010 10,952
Dilutive effect of common stock equivalents... 31 -- --
------- ------- -------
Shares -- Diluted earnings per share.......... 13,109 12,010 10,952
======= ======= =======
Basic earnings per share...................... $ .95 $ .64 $ .42
======= ======= =======
Diluted earnings per share.................... $ .95 $ .64 $ .42
======= ======= =======
The net income and per share data shown for 1995 give effect to the
Company's reorganization. See Note 2.
15. BUSINESS SEGMENTS, GEOGRAPHIC DATA AND MAJOR CUSTOMERS
The Company operates exclusively in one industry segment, providing global
enterprise-wide software applications and support services to retail sales
organizations. The Company operates in five geographic
50
51
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
regions, the United States, Europe, Asia, Canada and Latin America. The
following is a summary of local operations by geographic area for the three-year
period ended December 31, 1997:
1997 1996 1995
------- ------- -------
Revenues:
United States............................... $50,697 $30,310 $20,923
Europe...................................... 26,937 8,643 7,298
Asia........................................ 8,796 3,923 2,072
Canada...................................... 7,842 3,455 --
Latin America............................... 6,561 4,777 2,435
Sales and Transfers between regions......... (9,062) (3,268) (2,644)
------- ------- -------
Total revenues...................... $91,771 $47,840 $30,084
======= ======= =======
Income from operations:
United States............................... $10,786 $ 7,346 $ 5,213
Europe...................................... 3,448 414 521
Asia........................................ 320 113 7
Canada...................................... 1,839 1,416 --
Latin America............................... 2,977 2,988 1,763
------- ------- -------
Total income from operations........ $19,370 $12,277 $ 7,504
======= ======= =======
No individual customer accounted for more than 10% of the Company's
revenues in the three years ended December 31, 1997. Product development
expenses for the three years ended December 31, 1997 of $11,364, $6,478 and
$3,512, respectively, are reflected in the United States results.
1997 1996 1995
------- ------- -------
Identifiable assets:
United States .............................. $50,981 $43,296 $22,272
Europe...................................... 26,097 11,275 4,771
Asia........................................ 3,124 1,343 752
Canada...................................... 2,718 3,076 --
Latin America............................... 282 66 --
------- ------- -------
Total identifiable assets........... $83,202 $59,056 $27,795
======= ======= =======
16. QUARTERLY DATA (UNAUDITED)
The following table presents selected unaudited quarterly operating results
for the two-year period ended December 31, 1997. JDA believes that all necessary
adjustments have been included in the amounts shown below to present fairly the
related quarterly results.
1997
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
Revenues................................. $16,844 $21,097 $23,675 $30,155 $91,771
Income from operations................... 3,499 3,954 5,109 6,808 19,370
Net income............................... 2,313 2,590 3,259 4,304 12,466
Basic earnings per share................. $ .18 $ .20 $ .25 $ .33 $ .95
Diluted earnings per share............... $ .18 $ .20 $ .25 $ .33 $ .95
51
52
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
Revenues................................. $ 9,404 $10,436 $12,514 $15,486 $47,840
Income from operations................... 2,433 2,428 3,311 4,105 12,277
Net income............................... 1,427 1,559 2,088 2,606 7,680
Basic earnings per share................. $ .13 $ .13 $ .17 $ .21 $ .64
Diluted earnings per share............... $ .13 $ .13 $ .17 $ .21 $ .64
52
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JDA SOFTWARE GROUP, INC.
By: /s/ BRENT W. LIPPMAN
------------------------------------
Brent W. Lippman
Chief Executive Officer
(Principal Executive Officer)
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 30, 1998 by the following persons in the
capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ BRENT W. LIPPMAN Chief Executive Officer and Director
- ----------------------------------------------------- (Principal Executive Officer)
Brent W. Lippman
/s/ KRISTEN L. MAGNUSON Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer (Principal Financial and Accounting
Kristen L. Magnuson Officer)
/s/ JAMES D. ARMSTRONG Co-Chairman of the Board
- -----------------------------------------------------
James D. Armstrong
/s/ FREDERICK M. PAKIS Co-Chairman of the Board
- -----------------------------------------------------
Frederick M. Pakis
/s/ KURT R. JAGGERS Director
- -----------------------------------------------------
Kurt R. Jaggers
/s/ CRAWFORD L. COLE Director
- -----------------------------------------------------
Crawford L. Cole
53
54
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1* -- Second Restated Certificate of Incorporation of the Company.
3.2* -- Bylaws.
4.1* -- Specimen Common Stock certificate.
4.2*(1) -- Stock Redemption Agreement among the Company, James D.
Armstrong and Frederick M. Pakis dated March 30, 1995.
10.1*(1) -- Form of Indemnification Agreement.
10.2*(1) -- 1995 Stock Option Plan, as amended, and form of agreement
thereunder.
10.3*(1) -- 1996 Stock Option Plan and forms of agreement thereunder.
10.4+(1) -- 1996 Employee Stock Purchase Plan, as amended, and form of
agreement thereunder.
10.5*(1) -- 1996 Outside Directors Stock Option Plan and forms of
agreement thereunder.
10.6*(1) -- Employment Agreement between James D. Armstrong and JDA
Software, Inc. dated March 30, 1995, as amended.
10.7*(1) -- Employment Agreement between Frederick M. Pakis and JDA
Software, Inc. dated March 30, 1995, as amended.
10.8* -- Employment Agreement between James L. Smith and JDA
Software, Inc. dated March 30, 1995, as amended.
10.9*(1) -- Employment Agreement between Thomas M. Proud and JDA
Software, Inc. dated November 13, 1995.
10.10+ -- Lease Agreement between The Manufacturers Life Insurance
Company and JDA Software Canada Ltd. (formerly known as JDA
Software Services Ltd.) dated December 6, 1995 (North York,
Ontario).
10.11*(1) -- Series A Preferred Stock and Common Stock Exchange Agreement
among the Company, James D. Armstrong, Frederick M. Pakis,
James L. Smith and the purchasers named therein dated March
30, 1995.
10.12* -- Assignment and Assumption Agreement regarding Master Lease
between Pacific Atlantic Systems Leasing, Inc. and JDA
Software, Inc. and Consent of Paradise Partners Limited
Partnership to Assignment, dated March 17, 1995 (Phoenix,
Arizona).
10.13*(1) -- Lease Agreement between Pakis-Armstrong Venture and JDA
Software, Inc. dated January 1, 1996 (Scottsdale, Arizona).
10.14* -- Lease Agreement between Holly Pond Associates Limited
Partnership and JDA Software, Inc. dated June 16, 1993
(Stamford, Connecticut).
10.15* -- Lease Agreement between Woodhill Associates and JDA
Software, Inc. dated July 10, 1992 and First Lease Amendment
between Metropolitan Life Insurance Company, successor in
interest to Woodhill Associates, and JDA Software, Inc.
dated May 16, 1995 (Norcross, Georgia).
10.16* -- Lease Agreement between The Port of Singapore Authority and
JDA Asia Pte Ltd. dated September 12, 1995 (Singapore).
10.17* -- Lease Agreements between Skanda Developments Limited and JDA
Software Services Ltd. (predecessor to JDA International
Ltd.) dated June 25, 1991 (England).
10.18* -- Lease Agreement between BBS Business -- Fund Buroservice in
Niederrad GmbH and JDA Software GmbH dated July 4, 1995
(Germany).
10.19*# -- License Agreement between Uniface Corporation and JDA
Software, Inc. dated February 9, 1994.
10.20*# -- Standard Value-Added Reseller Agreement between Uniface
Corporation and JDA Software, Inc. dated February 9, 1994
10.21*** -- Acquisition and Exchange Agreement among the Company and the
Shareholders of JDA Software Services Ltd. dated August 15,
1996.
10.22*(1) -- Promissory Notes of the Company payable to James D.
Armstrong, Frederick M. Pakis and James L. Smith dated March
30, 1995.
10.23*(1) -- Promissory Notes of JDA Software, Inc. payable to James D.
Armstrong and Frederick M. Pakis, guaranteed by the Company,
dated March 29, 1995.
54
55
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.24*(1) -- Promissory Notes of JDA Worldwide, Inc. payable to James D.
Armstrong and Frederick M. Pakis, guaranteed by the Company,
dated March 29, 1995.
10.25*(1) -- JDA Software, Inc. 401(k) Profit Sharing Plan, adopted as
amended effective January 1, 1995.
10.26+ -- Business Loan Agreement between Bank of America Arizona and
JDA Software, Inc. dated June 17, 1996.
10.27**(1) -- Second Amendment to Employment Agreement between James D.
Armstrong and JDA Software, Inc. dated April 23, 1996.
10.28**(1) -- Second Amendment to Employment Agreement between Frederick
M. Pakis and JDA Software, Inc. dated April 23, 1996.
10.29** -- Second Amendment to Employment Agreement between James L.
Smith and JDA Software, Inc. dated April 23, 1996.
10.30+ -- Lease Agreement between Oxford Development Group, Inc. and
JDA Software Canada Ltd. (formerly known as JDA Software
Services Ltd.) dated July 11, 1994 (Calgary, Alberta).
10.31++ -- Sale and Purchase Agreement between Skanda Developments
Limited and JDA International Ltd. dated November 12, 1996.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Independent Auditors.
27.1 -- Financial Data Schedule -- Fiscal Year End 1997.
27.2 -- Financial Data Schedule -- Quarters 1, 2 and 3 of 1997.
27.3 -- Financial Data Schedule -- Fiscal Year End 1996 and Quarters
1, 2 and 3 of 1996.
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-748), declared effective on March 14, 1996.
** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996, as filed on August 14, 1996.
*** Incorporated by reference to the Company's Current Report on Form 8-K dated
August 15, 1996, as filed on August 30, 1996.
+ Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-15659), declared effective on November 21, 1996.
++ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, as filed on March 31, 1997.
# Confidential treatment has been granted as to part of this exhibit.
(1) Management contracts or compensatory plans or arrangements covering
executive officers or directors of the Company.
55