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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 0-27876
JDA SOFTWARE GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 86-0787377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14400 NORTH 87TH STREET
SCOTTSDALE, ARIZONA 85260
(602) 404-5500
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
The number of shares outstanding of the Registrant's Common Stock, $0.01 par
value, was 23,724,783 as of April 30, 1999.
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JDA SOFTWARE GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income
for the Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1999 and 1998 6
Notes to Interim Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
ASSETS
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 33,153 $ 42,376
Marketable securities 38,189 36,316
Accounts receivable, net 39,923 40,570
Deferred tax asset 3,001 2,121
Prepaid expenses and other current assets 5,076 5,003
--------- ---------
Total current assets 119,342 126,386
PROPERTY AND EQUIPMENT, NET 25,089 23,890
GOODWILL AND OTHER INTANGIBLES, NET 34,926 36,039
DEFERRED TAX ASSET 6,549 6,549
MARKETABLE SECURITIES 10,760 6,697
--------- ---------
Total assets $ 196,666 $ 199,561
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,608 $ 4,834
Accrued expenses and other liabilities 15,546 16,336
Income taxes payable 211 --
Deferred revenue 7,002 6,894
--------- ---------
Total current liabilities 25,367 28,064
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized 2,000,000
shares; None issued or outstanding -- --
Common stock, $.01 par value. Authorized 50,000,000
shares; Issued and outstanding 23,679,783 and 23,419,808,
respectively 237 234
Additional paid-in capital 174,114 172,417
Retained earnings (deficit) (1,699) (430)
Accumulated other comprehensive income (loss) (1,353) (724)
--------- ---------
Total stockholders' equity 171,299 171,497
--------- ---------
Total liabilities and stockholders' equity $ 196,666 $ 199,561
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
-------- --------
REVENUES:
Software licenses $ 7,424 $ 12,049
Consulting, maintenance and other services 27,762 18,844
-------- --------
Total revenues 35,186 30,893
-------- --------
COST OF REVENUES:
Software licenses 484 505
Consulting, maintenance and other services 18,326 13,844
-------- --------
Total cost of revenues 18,810 14,349
-------- --------
GROSS PROFIT 16,376 16,544
-------- --------
OPERATING EXPENSES:
Product development 5,614 4,279
Sales and marketing 6,493 3,896
General and administrative 4,075 3,059
Amortization of intangibles 1,122 64
Restructuring and asset disposition charge 2,111 --
-------- --------
Total operating expenses 19,415 11,298
-------- --------
INCOME (LOSS) FROM OPERATIONS (3,039) 5,246
Other income, net 923 329
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (2,116) 5,575
Income tax (benefit) provision (847) 2,091
-------- --------
NET INCOME (LOSS) $ (1,269) $ 3,484
======== ========
BASIC EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.18
======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.17
======== ========
SHARES USED TO COMPUTE:
Basic earnings (loss) per share 23,547 19,854
======== ========
Diluted earnings (loss) per share 23,547 20,368
======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
------- -------
NET INCOME (LOSS) $(1,269) $ 3,484
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment (629) 205
------- -------
COMPREHENSIVE INCOME (LOSS) $(1,898) $ 3,689
======= =======
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
-------- --------
OPERATING ACTIVITIES:
Net income (loss) $ (1,269) $ 3,484
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,660 1,152
Provision for doubtful accounts 621 49
Deferred income taxes (880) --
Changes in assets and liabilities:
Accounts receivable 26 (1,326)
Prepaid expenses and other current assets (73) (359)
Accounts payable (2,226) 1,386
Accrued and other liabilities (767) (1,239)
Income taxes payable 211 155
Deferred revenue 108 (1,012)
-------- --------
Net cash (used in) provided by operating activities (1,589) 2,290
INVESTING ACTIVITIES:
Purchase of marketable securities (62,311) --
Sales of marketable securities 9,300 --
Maturities of marketable securities 47,075 --
Purchase of property and equipment, net of minor disposals (2,746) (3,859)
-------- --------
Net cash used in investing activities (8,682) (3,859)
-------- --------
FINANCING ACTIVITIES:
Issuance of common stock - stock option plan 126 3,780
Issuance of common stock - employee stock purchase plan 1,574 434
Tax benefit - stock options and employee stock purchase plan -- 1,751
Payments on capital lease obligations (23) (8)
-------- --------
Net cash provided by financing activities 1,677 5,957
-------- --------
Effect of exchange rates on cash (629) 205
-------- --------
Net (decrease) increase in cash and cash equivalents (9,223) 4,593
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 42,376 27,304
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,153 $ 31,897
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 755 $ 71
======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
applicable to interim financial statements. Accordingly, they do not include all
of the information and notes required for complete financial statements. In the
opinion of management, all adjustments and reclassifications considered
necessary for a fair and comparable presentation have been included and are of a
normal recurring nature. Operating results for the three months ended March 31,
1999, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
2. EARNINGS PER SHARE
Shares used in the earnings per share calculation are as follows.
Common stock equivalents have been excluded from the earnings (loss) per share
calculation for the three months ended March 31, 1999 as their effect would be
antidilutive:
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
------ ------
Shares - Basic earnings (loss) per share ......... 23,547 19,854
Dilutive common stock equivalents ................ -- 514
------ ------
Shares - Diluted earnings (loss) per share ....... 23,547 20,368
====== ======
3. SEGMENT DISCLOSURES
The Company provides enterprise-wide software products and a full-range
of consulting and support services exclusively to the retail industry. The
Company conducts business in five geographic regions that have separate
management teams and reporting infrastructures: the United States, EMEA (Europe,
Middle East and Africa), Asia/Pacific, Canada and Latin America. Similar
products and services are offered in each geographic region and local management
is evaluated primarily based on total revenues and operating income. The Company
has previously disclosed segmental revenues, income (loss) from operations, and
identifiable assets based on these geographic regions.
Beginning in 1999, the Company implemented an organizational structure
to manage its business along three primary product categories (the "Operating
Segments"): Enterprise Systems that distribute data throughout a retail
enterprise and provide decision support for inventory control, cost and price
management, purchase order management, automated replenishment, merchandise
planning and allocation; In-store Systems that enable a retailer to capture and
analyze operational information and transmit such information to corporate-level
systems for sales and other analysis; and Analytic Applications that provide a
comprehensive set of tools for analyzing business results and trends, monitoring
strategic plans and enabling tactical decisions. A summary of the Company's
revenues and operating income (loss) by Operating Segments for the three-months
ended March 31, 1999 and 1998 is as follows.
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
------- -------
Revenues:
Enterprise Systems ................... $22,920 $24,721
In-store Systems ..................... 4,954 5,169
Analytic Applications ................ 7,312 1,003
------- -------
Total revenues .................... $35,186 $30,893
======= =======
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THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
------- -------
Operating income (loss):
Enterprise Systems ......................... $ 1,481 $ 6,793
In-store Systems ........................... 873 1,298
Analytic Applications ...................... 501 267
Other ...................................... (5,894) (3,112)
------- -------
Total income (loss) from operations ..... $(3,039) $ 5,246
======= =======
The operating income (loss) shown for Enterprise Systems, In-store
Systems and Analytic Applications include allocations for occupancy costs,
depreciation expense, and amortization of related intangibles. All other
non-allocated expenses that are not directly identified with a particular
Operating Segment are reported under the caption "other" including the $2.1
million restructuring and asset disposition charge that was recorded during the
three months ended March 31, 1999. The Company continues to identify assets
according to geographic region. There were no material changes in identifiable
assets among geographic regions during the three-months ended March 31, 1999
The geographic distribution of the Company's revenues for the
three-months ended March 31, 1999 and 1998 is as follows:
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
-------- --------
United States .............................. $ 20,350 $ 18,238
-------- --------
EMEA ....................................... 10,365 9,643
Asia/Pacific ............................... 2,228 1,388
Canada ..................................... 3,081 2,714
Latin America .............................. 1,535 1,458
-------- --------
Total international .................... 17,209 15,203
-------- --------
Sales and transfers between regions ........ (2,373) (2,548)
-------- --------
Total revenues .................... $ 35,186 $ 30,893
======== ========
4. RESTRUCTURING AND ASSET DISPOSITION CHARGE
The Company recorded a $2.1 million restructuring and asset disposition
charge during the first quarter of 1999. The restructuring initiatives involved
a workforce reduction of over 50 full-time employees in the United States and
Europe ($1.4 million), the closure of three unprofitable locations in Germany,
France and South Africa ($226,000), the disposal of property and equipment
related to the closure of these locations and the consolidation of the Company's
corporate operations into one facility ($507,000), and the release of over 80
subcontractors worldwide. All workforce reductions were made on or before March
31, 1999. As of March 31, 1999, the Company had utilized $876,000 of the related
reserve and anticipates that substantially all of the remaining reserve will be
utilized during 1999.
5. EMPLOYEE STOCK PURCHASE PLAN
On March 4, 1999, the Board of Directors approved the formation of a
new employee stock purchase plan, pending shareholder approval at the 1999
Annual Meeting of Stockholders (the "1999 Purchase Plan"). The 1999 Purchase
Plan provides for an initial share reserve of 750,000 shares of common stock,
which amounts will be increased on August 1st of each year by an amount equal to
the lesser of 750,000 shares or an amount determined by the Board of Directors.
The 1999 Purchase Plan will be implemented in six-month offering periods
commencing August 16th 1999. Eligible employees may purchase common stock
semi-annually under the 1999 Purchase Plan at 85% of the lesser of (1) the fair
market value on the first day of the offering period, or (2) the fair market
value on the last day of the offering period.
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6. LEGAL PROCEEDINGS
Bernat v. JDA Software Group, Inc., et al., Dist. of Arizona No.
CIV'99-0065 PHX RGS and related cases.
On January 13, 1999, Rod Bernat, an alleged shareholder of JDA Software
Group, Inc., filed a securities class action lawsuit against the Company, its
Co-Chief Executive Officers, Frederick M. Pakis and James D. Armstrong, its
former Senior Vice President of Research and Development, Kenneth Desmarchais,
and its former Chief Executive Officer, Brent W. Lippman, in U.S. District Court
for the District of Arizona. The complaint filed in the lawsuit alleges that
during the alleged class period, January 29, 1998 through January 5, 1999, the
Company misrepresented its business, financial statements and business prospects
to investors. The complaint further alleges that certain officers of the Company
sold significant quantities of the Company's common stock during the alleged
class period while the market price of the common stock was artificially
inflated by the alleged misrepresentations. The plaintiffs seek designation of
the action as a class action and damages for violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder by the Securities and Exchange Commission ("SEC"). Following the
filing of the Bernat action, lawsuits were filed by Norman Wiss, Theodore J.
Bloukos, Gwen Werboski, Elmer S. Martin, Linda May, Ivan Sommer, David Hesrick
and Michael J. Corn all purporting to act on behalf of the same class of
shareholders for the same class period, making substantially similar
allegations. These actions are currently in the process of being consolidated
into one action by the U. S. District Court. Management believes that the
actions are without merit and intends to defend them vigorously.
7. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"), which is effective for fiscal years
beginning after June 15, 1999. The Company has not completed the process of
evaluating the impact that will result from the adoption of SFAS No. 133;
however, on a preliminary basis, management does not believe that eventual
adoption will have a significant impact on the Company's financial statements.
8. RECLASSIFICATIONS
Certain reclassifications were made to the 1998 financial statements to
conform to the March 31, 1999 presentation.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements. Such
statements generally concern future operating results, capital expenditures,
product development and enhancements, numbers of personnel, strategic
relationships with third parties, liquidity and strategy. The forward-looking
statements are generally accompanied by words such as "plan," "estimate,"
"expect," "believe," "should," "would," "could," "anticipate" or other words
that convey uncertainty of future events or outcomes. We have based such
forward-looking statements on our current plans, intentions, expectations,
estimates and assumptions, which are subject to risks and uncertainties that
could cause our actual results to differ materially from those projected in this
document. Discussion containing such forward-looking statements may be found in
Notes 4 and 7 of Notes to Interim Condensed Consolidated Financial Statements
and in Management's Discussion and Analysis of Financial Condition and Results
of Operations under the captions "Overview," "Recent Developments," "Three
Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998,"
"Liquidity and Capital Resources," "Year 2000 Compliance," "Euro Currency," and
"Certain Risks." Investors are encouraged to consider carefully these risks in
evaluating us and before purchasing our stock.
OVERVIEW
JDA is a global provider of integrated enterprise-wide software products and
services that address the mission-critical and valued-added management
information needs of the entire retail supply chain. The Company's software
products include Enterprise Systems, In-store Systems, and Analytic
Applications. 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 has historically derived a significant portion of its revenues from
software licenses and consulting, maintenance and other services relating to its
IBM AS/400-based Merchandise Management System ("MMS").
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Total revenues from the MMS product line represented 45% of the Company's total
revenues during the three months ended March 31, 1999 as compared with 45% in
fiscal 1998 and 50% in fiscal 1997. 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 decline
as a result of reduced demand for MMS and/or increased revenues attributable to
the Company's other product lines.
Software license revenues and consulting, maintenance and other services
revenues represented 21% and 79%, respectively, of JDA's total revenues during
the three months ended March 31, 1999, as compared with 31% and 69%,
respectively in fiscal 1998 and 46% and 54%, respectively, in fiscal 1997. JDA's
overall revenue mix has been affected by lower than anticipated software license
revenues during fiscal 1998 and the three months ended March 31, 1999. The
decline in software license revenues occurred first in the Company's
international markets during the second and third quarters of 1998, and then in
both international and domestic markets in the fourth quarter of 1998 and first
quarter of 1999. The following table sets forth a quarterly comparison of 1997,
1998 and first quarter 1999 domestic and international software license
revenues:
1997 1998
-------------------------- -----------------------------------------------------
% CHANGE % CHANGE
QUARTER ENDED DOMESTIC INTERNATIONAL DOMESTIC VS. 1997 INTERNATIONAL VS. 1997
- ------------- -------- ------------- -------- -------- ------------- --------
March 31, $ 3,456 $ 4,409 $ 7,123 106% $ 4,926 12%
June 30, 4,357 5,201 8,302 91% 4,011 (23)%
September 30, 3,730 6,336 8,581 130% 3,774 (40)%
December 31, 5,793 8,759 3,204 (45)% 3,421 (61)%
-------- -------- -------- --------
$ 17,336 $ 24,705 $ 27,210 57% $ 16,132 (35)%
======== ======== ======== ========
1998 1999
------------------------- -----------------------------------------------------
% CHANGE % CHANGE
QUARTER ENDED DOMESTIC INTERNATIONAL DOMESTIC VS. 1998 INTERNATIONAL VS. 1998
- ------------- -------- ------------- -------- -------- ------------- --------
March 31, $ 7,123 $ 4,926 $ 3,538 (50)% $ 3,886 (21)%
The Company believes it has experienced and is continuing to experience a
decline in overall demand for the Company's Enterprise Systems and In-store
Systems. In particular, sales of the Company's ODBMS product have failed to meet
the Company's expectations to date. The Company believes that sales of ODBMS
have been affected by external and internal marketing issues, increased
competition and a limited number of referenceable implementations. The precise
nature of the decline in demand for the Company's other products cannot be
determined. However, the Company believes it may result from a combination of
deferred purchasing decisions caused by uncertainty related to the millennium
change, elongated sales cycles, ongoing weakness in international economies and
increased competition. The Company believes that software license results were
also adversely impacted in the second and third quarters of 1998 by vacancies in
senior management positions in Europe and Latin America.
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. Consulting, maintenance and other
services revenues are generally more predictable but generate significantly
lower gross margins than software revenues. The Company has increased the size
of its services organization over the past two years 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. In the
past, the Company has experienced some seasonality in the mix of service
revenues in relation to total revenues as a result, the Company believes, of
retailers' preferred implementation timing and the Company's expansion,
particularly in international markets. In light of the current uncertainty
regarding demand for the Company's Enterprise and In-store Systems, and recent
declines in software license revenues, the Company currently anticipates that
consulting, maintenance and other services revenues may continue to increase as
a percentage of total revenues. However, the Company expects only modest growth,
if any, in the size of its services organization during 1999. In Europe, where
the demand for services has been adversely impacted due to the decline in
software revenues, the Company has reduced its consulting services workforce and
eliminated the subcontractors it was using to supplement its implementation
staff.
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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 offices and export sales,
represented 46% of total revenues for the three months ended March 31, 1999, as
compared with 45% in fiscal 1998 and 55% in fiscal 1997. Consulting, maintenance
and other services in support of international software licenses typically have
lower gross margins than those achieved domestically due to higher costs or
generally lower prevailing billing rates in certain of the Company's
international markets. Therefore, significant growth in the Company's
international operations may result in declines in gross margins on consulting,
maintenance and other services.
Unstable economic conditions continue to effect the Asia/Pacific region and
the March 31, 1999 receivable balances for the region have shown no improvement
since December 31, 1998. Further, certain of the macro-economic factors
affecting the Asia/Pacific region, including significant devaluation of
currencies, began to appear in the Latin American region. Although the Company
experienced slowing payment trends in the EMEA region during the second half of
1998, past due receivables in the Asia/Pacific, Latin American and EMEA regions
have decreased 20% since December 31, 1998 with all of the improvement coming
from payment of receivables that originated in the EMEA region. The
Asia/Pacific, Latin American and EMEA regions represented 6%, 4% and 28%,
respectively, of the Company's revenues during the three months ended March 31,
1999.
The Company remains cautious about its expectations regarding international
and domestic operations in the near term. The Company expects its operating
results to continue to be less predictable in the future then was the case
historically as a result of uncertainties in certain geographic regions and
weakness in demand for its software products, possibly related, in part to the
millennium change. Management believes these economic conditions and
uncertainties could adversely impact the Company's business, operating results
and financial condition for an indefinite period of time.
To the extent the Company's international operations expand or represent an
increasing percentage of the Company's overall business, the Company expects
that an increasing portion of its international software license and consulting,
maintenance and other services revenues will be denominated in foreign
currencies, subjecting the Company to risks related 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, if the Company expands 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 or reducing
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.
RECENT DEVELOPMENTS
On January 5, 1999, the JDA's co-founders, James D. Armstrong and Frederick
M. Pakis returned to the Company on a full-time basis in the capacity of
Co-Chief Executive Officers. Since their return, the Company has reorganized its
senior management by business units (Enterprise Systems, In-store Systems and
Analytic Applications) and implemented a matrix organization that provides each
of the Company's geographic regions (the United States, EMEA, Asia/Pacific,
Canada and Latin America) with full responsibility for direct sales, consulting
services and operations. All management positions within this new organizational
structure have been filled as of March 31, 1999 including promotions from within
the Company to fill the open positions of Vice President - EMEA, Senior Vice
President, Client Services and Senior Vice President, Technology, and the newly
created position of Senior Vice President, Marketing.
The Company recorded a $2.1 million restructuring and asset disposition
charge during the first quarter of 1999. The restructuring initiatives involved
a workforce reduction of over 50 full-time employees in the United States and
Europe ($1.4 million), the closure of three unprofitable locations in Germany,
France and South Africa ($226,000), the disposal of property and equipment
related to the closure of these locations and the consolidation of the Company's
corporate operations into one facility ($507,000), and the release of over 80
subcontractors worldwide. All workforce reductions were made on or before March
31, 1999. As of March 31, 1999, the Company had utilized $876,000 of the related
reserve and anticipates that substantially all of the remaining reserve will be
utilized during 1999.
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Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenues
Total revenues for three months ended March 31, 1999 were $35.2 million, an
increase of 14% over the $30.9 million reported in the comparable period of
1998. Revenues consisted of software licenses and consulting, maintenance and
other services, which represented 21% and 79%, respectively, of total revenues
during the three months ended March 31, 1999, and 39% and 61%, respectively in
the comparable period of 1998. Software license revenues decreased in both
domestic and international markets between the comparable periods, however,
consulting, maintenance and other services increased in all markets between
periods.
Software Licenses. Software license revenues for the three months ended
March 31, 1999 were $7.4 million, a decrease of 38% from the $12.0 million
reported in the comparable period of 1998. This resulted from decreases in
software license sales of Enterprise systems and In-store systems of 64% and
51%, respectively between periods, off-set in part by an increase of 204% in
sales of Analytic Applications software licenses. The increase in Analytic
Applications includes incremental sales from the Arthur Suite that was acquired
by the Company in June 1998.
Consulting, Maintenance and Other Services. Consulting, maintenance and
other services revenues for the three months ended March 31, 1999 were $27.8
million, an increase of 47% over the $18.8 reported in the comparable period of
1998. This increase reflects an increase in the Company's core consulting
services business of 24% between periods, improved utilization and rate
increases, and the incremental consulting and maintenance revenues related to
the Arthur Suite. Domestic and international consulting, maintenance and other
services revenues increased 72% and 25%, respectively between the comparable
periods. The Company anticipates modest sequential increases in consulting,
maintenance and other services revenues in each of the remaining quarters of
1999.
Cost of Revenues
Cost of software license revenues was $484,000 for the three months ended
March 31, 1999 as compared to $505,000 in the comparable period of 1998. Cost of
software licenses represented 7% and 4% of software license revenues in the
respective periods. The higher costs in the current period resulted from the
Company's increased sales of products that incorporate software technology
licensed from third party suppliers. Consulting, maintenance and other services
costs for the three months ended March 31, 1999 were $18.3 million, an increase
of 32% over the $13.8 million reported in the comparable period of 1998. The
Company expanded its consulting and customer support organizations between
periods as a result, and in anticipation, of continued 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
28% between periods, and as of March 31, 1999, there were 641 employees involved
in these functions worldwide. The Company anticipates modest expansion in the
size of its services organization over the remaining quarters of 1999.
Gross Profit
Gross profit for the three months ended March 31, 1999 was $16.4 million, a
decrease of 1% from the $16.5 million reported in the comparable period of 1998.
Gross profit, as a percentage of total revenues, decreased from 54% to 47%
between the comparable periods. This decrease is attributable to the higher mix
of consulting, maintenance and other services revenues as a percentage of total
revenues during the three months ended March 31, 1999. The Company's service
margins increased between periods from 27% to 34%. This improvement reflects the
favorable impact of increases in the Company's maintenance base, both from the
Arthur Retail acquisition and core JDA products, improved utilization and higher
average billing rates in the Company's consulting practice, and the elimination
of outside contractors in Europe.
Operating Expenses
Product Development. Product development expenses for the three months ended
March 31, 1999 were $5.6 million, an increase of 31% over the $4.3 million
reported in the comparable period of 1998. Product development expenses as a
percentage of total revenues increased between the comparable periods from 14%
in the first quarter of 1998 to 16% in first quarter of 1999. The Company
increased its product development staff by 42% between the comparable periods
and as of March 31, 1999, there were nearly 200 employees involved in the
product development function. The Company expects product development expenses
for 1999 to be between $25.0 million and $30.0 million and will focus its near
term development efforts on enhancements to existing products that address the
requirements for utilization with emerging standard operating platforms such as
Microsoft's ActiveStore
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initiative, increased systems interoperability, international issues such as the
adoption of the Euro, and the formation of an e-commerce division to deliver
intranet, extranet and Internet business solutions that integrate industry
standard e-commerce software into the Company's current and future e-commerce
products. 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. The Company
anticipates product development expenses will increase sequentially in each of
the remaining quarters of 1999.
Sales and Marketing. Sales and marketing expenses for the three months ended
March 31, 1999 were $6.5 million, an increase of 67% over the $3.9 million
reported in the comparable period of 1998. Sales and marketing expenses, as a
percentage of total revenues, increased between the comparable periods from 13%
in the first quarter of 1998 to 18% in the first quarter of 1999. The Company
increased its worldwide sales and marketing staff by 53% between the comparable
periods and as of March 31, 1999, there were nearly 120 employees involved in
this function. The increase results from the acquisition of Arthur Retail in
June 1998 and the expansion of both the domestic and international sales and
marketing staffs. The Company anticipates modest sequential expansion of its
worldwide sales and marketing staff in each of the remaining quarters of 1999.
General and Administrative. General and administrative expenses for the
three months ended March 31, 1999 were $4.1 million, an increase of 33% over the
$3.1 million reported in the comparable period of 1998. General and
administrative expense, as a percentage of total revenues, increased between
years from 10% in the first quarter of 1998 to 12% in the first quarter of 1999.
The increase results from additional administrative personnel in the Company's
domestic and international operations, depreciation on purchases of property and
equipment related to the Company's expansion, the incremental costs of Arthur
Retail, and additional provisions for bad debt. The Company anticipates general
and administrative expenses to remain at the current quarterly level for the
remainder of 1999.
Amortization of Intangibles. Amortization of intangibles consists primarily
of amortization on goodwill and other intangibles recorded in connection with
the acquisition of Arthur Retail.
Restructuring and Asset Disposition Charge. The Company recorded a $2.1
million restructuring and asset disposition charge during the first quarter of
1999. The restructuring initiatives involved a workforce reduction of over 50
full-time employees in the United States and Europe ($1.4 million), the closure
of three unprofitable locations in Germany, France and South Africa ($226,000),
the disposal of property and equipment related to the closure of these locations
and the consolidation of the Company's corporate operations into one facility
($507,000), and the release of over 80 subcontractors worldwide. All workforce
reductions were made on or before March 31, 1999.
Provision for Income Taxes
The Company's effective income tax rate reflects statutory federal, state
and foreign tax rates, partially offset by reductions for research and
development expense tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through cash generated from operations and public sales of equity securities
and, to a lesser extent, borrowings under its bank line of credit. The Company
had working capital of $94.0 million at March 31, 1999 compared with $98.3
million at December 31, 1998. Cash and cash equivalents at March 31, 1999 were
$33.2 million, a decrease of $9.2 million from the $42.4 million reported at
December 31, 1998. The Company also had $48.9 million in marketable securities
at March 31, 1999, an increase of $5.9 million from the $43.0 million reported
at December 31, 1998.
Operating activities utilized cash of $1.6 million for the three months
ended March 31, 1999 and provided cash of $2.3 million for the three months
ended March 31, 1998. Cash utilized in operating activities during the three
months ended March 31, 1999 resulted primarily from a net loss of $1.3 million
and a reduction of $3.0 million in accounts payable and accrued expenses, offset
in part by $2.7 million of depreciation and amortization. The Company had net
accounts receivable of $39.9 million at March 31, 1999, which represented 102
days of sales outstanding ("DSOs") compared to 113 days at December 31, 1998.
DSOs may fluctuate significantly on a quarterly basis due to a number of factors
including seasonality, shifts in customer buying patterns, contractual payment
terms, the underlying mix of products and services, and the geographic
concentration of revenues.
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Investing activities utilized cash of $8.7 million and $3.9 million in the
three months ended March 31, 1999 and 1998, respectively. The 1999 activity
includes the net purchase of $5.9 million of marketable securities and $2.7
million in capital expenditures primarily related to the Company's corporate
office relocation. The 1998 activity includes $3.9 million in capital
expenditures.
Financing activities provided cash of $1.7 million and $6.0 million during
the three months ended March 31, 1999 and 1998, respectively. The activity in
both periods consists primarily of proceeds from the issuance of common stock
and related tax benefits under the Company's stock option and employee stock
purchase plans.
Changes in the currency exchange rates of the Company's foreign operations
had the effect of reducing cash by $629,000 in the three months ended March 31,
1999 and increasing cash by $205,000 in the three months ended March 31, 1998.
The Company did not enter into any foreign exchange contracts or engage in
similar hedging strategies during either of periods.
The Company maintains a $5.0 million revolving 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) less .25 percentage points; and requires the Company
to maintain certain current ratios and tangible net worth. The line of credit
matures on July 1, 2000. There were no amounts outstanding on the line of credit
at March 31, 1999. The Company believes that its cash and cash equivalents,
investments in marketable securities, 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.
YEAR 2000 COMPLIANCE
The Company has designated a continuing project team to assess the Year 2000
compliance of its software products. Based on the Company's assessment to date,
the Company believes the current versions of its software products are "Year
2000 compliant," that is, they are capable of adequately distinguishing 21st
century dates from 20th century dates. However, the Company is aware that some
of its customers are running earlier versions of the Company's software products
that are not Year 2000 compliant. The Company has contacted and encouraged 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 most reasonably likely worst
case scenario is that 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 defend its
products or services in such proceedings, or to negotiate resolutions of claims
based upon 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 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 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. The Company's plan for the Year 2000 has
included compliance verification of financial institutions, investment advisors,
independent payroll service providers, external vendors supplying software and
information systems to the Company and communication with significant suppliers
to determine the readiness of third parties' remediation of their own Year 2000
issues. As part of its Year 2000 contingency plan, the Company maintains its
cash and marketable securities with multiple financial institutions and
investment advisors.
The Company is also subject to risk that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources and reduce available funds to correct or
patch their current software systems for Year 2000 compliance. As a result, no
assurance can be given that Year 2000 problems within the Company's existing or
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
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condition would be materially adversely affected. The Company believes that
reduced year over year demand may be partially attributable to year 2000
issues. The Company's ability to deliver consulting services depends in part on
the mobility of its consulting services personnel. To the extent that the
domestic or international travel infrastructure is significantly affected by
the century change, the Company's ability to deliver consulting services would
be affected and the Company's business and operating results could be adversely
impacted.
The Company recognizes the need to ensure its internal operations will not
be adversely impacted by Year 2000 software failures, and has established a
project team to assess Year 2000 risks regarding the ability of the Company's
internal systems to operate after December 31, 1999. The project team has
identified and implemented changes to the Company's computer hardware and
software applications to ensure availability and integrity of the Company's
financial systems and the reliability of its operational systems. The Company
converted its existing legacy accounting software to a Year 2000 compliant
version in December 1998. This conversion was performed entirely by the
Company's internal IS staff and the costs of modifying this software have been
expensed as incurred. During September 1998, the Company selected a new time and
billing system from an independent third party distributor. This system will
replace an existing legacy system and will be used to accumulate and track
billable hours incurred by the Company's consulting and customer support staff.
The current project plan calls for this system to be fully implemented by
September 1999, however, as part of its contingency plan, the Company modified
its existing legacy system to be Year 2000 compliant in order to provide a
safeguard against any potential movement in the implementation time frame of the
new system. The conversion of the existing time and billing system was completed
in April 1999. The Company has incurred approximately $50,000 to date on Year
2000 compliance activities and expects to incur no more than $40,000 to complete
its Year 2000 compliance activities. These costs and the timing in which the
Company plans to complete its Year 2000 modification and testing procedures 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, or that any such remedial efforts will not have a material adverse
effect on the Company's business, operating results and financial condition.
EURO CURRENCY
The participating member countries of the European Union agreed to adopt the
Euro as the common legal currency beginning January 1, 1999. On that same date
they established Fixed Conversion Rates between their existing sovereign
currencies and the Euro. The Euro will be implemented in phases over a
transition period that extends through December 31, 2001. Although the Company's
products currently comply with the requirements of the initial phase-in of the
Euro, they are not fully "Euro Compliant." The Company has defined Euro
Compliant to mean that its products are capable of processing and reporting any
data denominated in the Euro in the same manner as processing and reporting data
denominated in the national currency units that comprise the currencies of those
member states that adopt the Euro (the "NCUs") without any loss of functionality
or interoperability or degradation in performance of volume capacity and,
without prejudice to the generality of the foregoing, has the ability to provide
all the following functions:
(1) Conversion of NCUs to Euro (and vice versa) at the Fixed Conversion
Rates and conversion of NCUs to NCUs using the Fixed Conversion Rates
between the relevant NCUs and the Euro and, in each case, rounding of
such amounts in accordance with applicable laws and regulations from
time to time.
(2) Rounding of amounts denominated in Euro to the nearest "Euro cent" and
of amounts denominated in NCUs to the nearest sub-unit applicable to the
relevant NCUs and use in data of the Euro symbol.
(3) Making and receiving payment of amounts denominated in Euro and in
different denominations of the Euro and/or in NCUs.
(4) All functions and reporting, including regulatory reporting, in both
Euro and NCUs.
The Company is incorporating all required Euro Compliant functionality into
the next version of each of its products that are scheduled for commercial
release at various times during 1999. To the extent the development and release
of fully Euro Compliant versions does not occur in a timely manner, the Company
could experience significant delays in, or cancellation of, decisions to
purchase its products or services, and as a result, the Company's business,
operating results and financial condition would be materially adversely
impacted.
CERTAIN RISKS
Our Operating Results May Fluctuate Significantly. Our quarterly operating
results have varied and are expected to continue to vary in the future. Many
factors may cause these fluctuations, including: demand for our products and
services; the size and timing of individual orders, particularly with respect to
our larger customers; the
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lengthening of our sales cycle; competitive pricing pressures; customer order
deferrals in anticipation of new products; changes in the mix of software
license revenues; changes in the mix of software license revenues compared to
consulting, maintenance and other services revenues; the timing of introductions
and enhancements of our products or those of our competitors; market acceptance
of new products; technological changes in platforms supporting our products;
changes in our operating expenses; changes in the mix of domestic and
international revenues; our ability to complete fixed price consulting contracts
within budget; employee hiring and retention; foreign currency exchange rate
fluctuations; expansion of international operations; changes in our strategies;
and general industry and economic conditions. In addition, we believe we have
experienced and are continuing to experience a decline in overall demand for our
Enterprise Systems and In-store Systems. In particular, sales of our ODBMS
product have failed to meet our expectations to date. We believe that sales of
ODBMS have been negatively impacted by external and internal marketing issues,
increased competition and a limited number of referenceable implementations. We
have not been able to determine the exact cause of the decline in demand for our
other products, but we believe that it may result from deferred purchasing
decisions. These deferred purchasing decisions may stem from uncertainty related
to the millenium change, longer sales cycles, continued weakness in global
economies and increased competition. We believe that the prevailing business
reasons for purchasing merchandising systems and the other software products
offered by the Company still exist. However, you should not rely on historic
growth rates for our Enterprise Systems and In-store Systems as an indication of
their future performance. Because the gross margin on software licenses is
significantly greater than the gross margins on consulting, maintenance and
other services, our combined gross margin has fluctuated from quarter to
quarter, and we expect that it will continue to fluctuate significantly based on
revenue mix and seasonality.
We typically ship our software products when contracts are signed.
Consequently, our software 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 depend in large part upon
contracts signed and the related shipment of software in that quarter. It is
therefore difficult for us to predict revenues. Because of the timing of our
sales, we typically recognize a substantial amount of our revenues in the last
weeks or days of the quarter, and we generally derive a significant portion of
our quarterly software license revenues from a small number of relatively large
sales. It is difficult to forecast the timing of large individual sales with
certainty. Accordingly, large individual sales have sometimes occurred in
quarters subsequent to when we anticipated. We expect that the foregoing trends
will continue. If we receive any significant cancellation or deferral of
customer orders, or we are unable to conclude license negotiations by the end of
a fiscal quarter, our operating results may be lower than anticipated. In
addition, weakening international economies may make it more difficult for us to
predict quarterly results in the future, and could negatively impact our
business, operating results and financial condition for an indefinite period of
time.
Our expense levels are based on our expectations of future revenues. Since
software license sales are typically accompanied by a significant amount of
consulting, implementation and support services, our consulting and support
resources must be managed to meet our anticipated software license revenues. As
a result, we hire and train service personnel and incur research and development
costs in advance of anticipated software license revenues. If such revenues fall
short of our expectations, or if we are unable to fully utilize our service
personnel, our operating results are likely to decline because a significant
portion of our expenses cannot be quickly reduced to respond to any unexpected
revenue shortfall.
Based on all of the foregoing, we believe 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. Furthermore, it is likely that in some future quarter our operating
results may be below the expectations of public market analysts or investors. If
that happens, or if adverse conditions prevail, or are perceived to prevail,
with respect to our business or generally, the price of our common stock may
decline.
A Significant Portion of Our Revenue Is Derived from the Retail Industry. We
have derived substantially all of our revenues to date from the license of
software products and the performance of related services to the retail
industry. Our future growth is critically dependent on increased sales to the
retail industry. The success of our customers is directly linked to economic
conditions in the retail industry, which in turn are subject to intense
competitive pressures and are affected by overall economic conditions. In
addition, we believe that the license of our software products generally
involves a large capital expenditure, which is often accompanied by large-scale
hardware purchases or commitments. As a result, demand for our products and
services could decline in the event of instability or downturns in the retail
industry. Such downturns may cause customers to exit the industry or delay,
cancel or reduce any planned expenditure for information management systems and
software products. We believe that the retail industry is consolidating. Such
consolidation has in the past and may in the future reduce the demand for our
products. Any resulting decline in demand for our products and services would
negatively impact our
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business, operating results and financial condition.
We May Not be Able to Manage Our Growth. Our business has grown rapidly in
recent years, with revenues increasing from $47.8 million in 1996, to $91.8
million in 1997 and to $138.5 million in 1998. Our expansion resulted in
substantial growth in our number of employees, the scope of our operating
systems and the geographic distribution of our operations and customers during
these periods. The rapid growth placed, and continues to place, a significant
strain on our management and operations. For example, we believe that management
realignments in connection with our international operations and the acquisition
of Arthur Retail in June 1998 may have reduced the effectiveness of our sales
efforts in Europe and Latin America during 1998. Our ability to compete
effectively and to manage future growth, if any, will depend on our ability to
continue to implement and improve operational, financial and management
information systems on a timely basis; to expand, train, motivate and manage our
work force, in particular our direct sales force and consulting services
organization; and to deal effectively with third-party systems integrators and
consultants. We reorganized our senior management in January 1999 by business
units (Enterprise Systems, In-store Systems and Analytic Applications) and
implemented a matrix organization that provides each of our geographic regions
(the United States, EMEA, Asia/Pacific, Canada and Latin America) with full
responsibility for direct sales, consulting services and operations. All
management positions within this new organizational structure have been filled
as of March 31, 1999 including promotions from within the Company to fill the
open positions of Vice President - EMEA, Senior Vice President, Client Services,
Senior Vice President, Technology, and the newly created position of Senior Vice
President, Marketing. All members of the executive management Team have served
in their current positions for less than two years. Our future growth and
success depends in large part upon the ability of our executive management team
to effectively manage expansion of our operations. We cannot guarantee that we
will be able to manage our recent or any future growth, and any failure to do so
would negatively effect our business, operating results and financial condition.
If we resume our historical growth levels, we will have to recruit and hire
a substantial number of other new employees, including consulting and product
development personnel, both domestically and abroad. Our 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 our products and services. Consequently, we would not be able
to grow our business at historical rates without adding significant numbers of
trained consulting personnel. Moreover, if unable to adequately increase our
consulting capacity, we would have to forego licensing opportunities or become
more dependent on systems integrators and professional consulting firms to
provide implementation services for our products. Due to the present uncertainty
surrounding demand for our Enterprise and In-store Systems and recent declines
in our software license revenues, we expect that consulting, maintenance and
other services revenues may continue to increase as a percentage of total
revenues. However, we expect only modest growth, if any, in the size of our
services organization during 1999. If revenues fail to meet expectations
following the hiring and training of new personnel, our operating results will
decline. Due to the addition of significant numbers of new personnel, we have
from time to time incurred significant start-up expenses, including leasing 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. We cannot
guarantee that start-up expenses incurred in connection with the hiring of
additional technical personnel will not reduce future operating results.
Ability to Attract and Retain Technical Personnel Is Important to Our
Growth. Our success is heavily dependent upon our 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 our products and services.
In particular, our ability to install, maintain and enhance our products is
substantially dependent upon our 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, we
dramatically increased the number of consulting personnel during 1997 and 1998
in connection with the continuing development and roll-out of our client/server
products, and to support further development and implementation of MMS. Given
the critical roles of our product development and consulting staffs, our
inability to recruit successfully or the loss of our product development or
consulting staffs would hurt us. The software industry is characterized by a
high level of employee mobility and aggressive recruiting of skilled personnel.
We cannot guarantee that we will be able to retain our current personnel, or
that we will be able to attract and retain other highly qualified technical and
managerial personnel in the future. Our inability to attract and retain the
necessary technical and managerial personnel would hurt our business, operating
results and financial condition.
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We Have Only Deployed Our New Software Products On a Limited Basis. Our
newer software products, ODBMS, Win/DSS, Retail IDEAS, WCC, and the Arthur
Suite, which are designed for open, client/server environments, have all been
commercially released within the last three years. To date, only a limited
number of customers have licensed or implemented them. The market for these
products is new and evolving, and we believe that retailers may be more cautious
than other businesses in adopting client/server technologies. Consequently, we
cannot predict the growth rate, if any, and size of the market for our
client/server products or that this market will continue to develop. Potential
and existing customers may find it difficult, or be unable, to successfully
implement our client/server products, or may not purchase our products for a
variety of reasons, including: their 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
or third-party implementation providers. In addition, we must overcome
significant obstacles to successfully market our client/server products,
including limited experience of our sales and consulting personnel in the
client/server market and a limited market size. Sales of our ODBMS product have
failed to meet our expectations to date. We believe that sales of ODBMS have
been affected by external and internal marketing issues, increased competition,
and a limited number of referenceable implementations. If the market for our
client/server products fails to develop, develops more slowly than expected or
becomes saturated with competitors, or if our products are not accepted in the
marketplace, our business, operating results and financial condition will
decline.
Our Products Are Concentrated In One Area. We have historically derived a
significant portion of our revenues from software licenses and consulting,
maintenance and other services related to MMS. MMS revenues are partially
dependent on the continued vitality in and support by IBM of its AS/400
platform. Although we expect 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 our newer software products, particularly
ODBMS, Win/DSS, Retail IDEAS, WCC, and the Arthur Suite. The lifecycle of the
MMS product line is difficult to estimate due largely to the potential effect of
new products, applications and product enhancements, including our own 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, which are not offset by
increases in revenues from other products, will cause our business, operating
results and financial condition to decline. We cannot guarantee that prospective
purchasers of our IBM AS/400-based products will respond favorably to our future
or enhanced software products or that we will continue to be successful in
selling our software products or services in the IBM AS/400 market.
There Are Many Risks Associated with International Operations. Our
international revenues, which include revenues from international subsidiaries
and export sales, represented 46% of total revenues in the three months ended
March 31, 1999 as compared with 45% and 55% of total revenues in fiscal 1998 and
1997, respectively. Although, we expect that international revenues will
continue to account for a significant portion of our revenues for the
foreseeable future, we remain cautious about our expectations regarding
international operations in the near term. If our international operations grow,
we must recruit and hire a number of new consulting, sales and marketing and
support personnel in the countries we have or will establish offices. We have
limited experience in developing localized versions of our products and in
marketing and distributing our products internationally. International
introductions of the Company's products often require a significant investment
in advance of anticipated future revenues. The opening of our new offices
typically results in initial recruiting and training expenses and reduced labor
efficiencies associated with the introduction of products to a new market. We
cannot guarantee that the countries in which we operate will have a sufficient
pool of qualified personnel from which to hire, or that we will be successful at
hiring, training or retaining such personnel. In addition, we cannot assure you
that we will be able to successfully expand our international operations in a
timely manner which could negatively impact our business, operating results and
financial condition.
Our international business operations are subject to risks associated with
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 negative tax consequences, difficulties in
staffing and managing geographically disparate operations, greater difficulty in
safeguarding intellectual property, licensing and other trade restrictions,
currency 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 software licenses typically have lower gross margins than those
achieved domestically due to generally lower billing rates and/or higher costs
in certain of our international markets. Accordingly, any significant growth in
our international operations may result in further declines in gross margins on
consulting, maintenance and other services. We expect
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that an increasing portion of our international software license and consulting,
maintenance and other services revenues will be denominated in foreign
currencies, subjecting us fluctuations in foreign currency exchange rates. As we
continue to expand our international operations, exposures to gains and losses
on foreign currency transactions may increase. We may choose to limit such
exposure by entering into forward foreign exchange contracts or engaging in
similar hedging strategies. We cannot guarantee that any currency exchange
strategy would be successful in avoiding exchange-related losses. In addition,
revenues earned in various countries where we do business may be subject to
taxation by more than one jurisdiction, which would reduce our earnings.
Unstable economic conditions continue to effect the Asia/Pacific region and
the March 31, 1999 receivable balances for the region have shown no improvement
since December 31, 1998. Further, certain of the macro-economic factors
affecting the Asia/Pacific region, including significant devaluation of
currencies, began to appear in the Latin American region. Although we
experienced slowing payment trends in the EMEA region during the second half of
1998, past due receivables in the Asia/Pacific, Latin American and EMEA regions
have decreased 20% since December 31, 1998 with all of the improvement coming
from payment of receivables that originated in the EMEA region. The
Asia/Pacific, Latin American and EMEA regions represented 6%, 4% and 28%,
respectively, of our revenues during the three months ended March 31, 1999. To
the extent economic conditions in other geographic locations are adversely
affected, our business, operating results and financial condition would decline.
Our Markets Are Highly Competitive. The markets for retail information
systems are highly competitive. We believe 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 our target markets. In the Enterprise
Systems market, for example, we compete with internally developed systems and
with third-party developers such as GERS Retail Systems, Island Pacific, Radius
PLC, Retek (a subsidiary of HNC Software, Inc.), Richter Management Services,
SAP AG, and STS Systems. Our WCC product competes with warehouse and logistic
systems from Catalyst International, Inc., EXE and McHugh Freeman. In addition,
new market entrants may offer fully integrated merchandising level systems
targeting the retail industry.
In the In-store Systems market, which is more fragmented than the Enterprise
Systems market, we compete with major hardware equipment manufacturers such as
ICL, NCR and IBM, as well as software companies such as CRS Business Computers,
Datavantage, Inc., STS Systems, and Trimax. In the Analytic Application markets,
the Arthur Suite competes with products from STS Systems and Mitech Computer
Systems, Inc., and IBM's Makaro product line. The Retail IDEAS product competes
with products from vendors such as Microstrategy and Intrepid. In the market for
consulting services, we are pursuing a strategy of forming informal working
relationships with leading retail systems integrators such as Andersen
Consulting and PriceWaterhouseCoopers. These integrators, as well as independent
consulting firms such as IBM's Global Services Division, also represent
potential competition to our consulting services group.
Some of our existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical, marketing and
other resources than we do, which could provide them with a significant
competitive advantage over us. We cannot guarantee that we will be able to
compete successfully against our current or future competitors or that
competition will not have a material adverse effect on our business, operating
results and financial condition.
There are Risks Associated with Our Strategic Relationships. We have from
time to time established formal and informal relationships with other companies,
including Baan, IBM, Microsoft and Silvon, Inc., to collaborate in areas such as
product development, marketing and distribution. The maintenance of these
relationships and the development of other similar relationships is a meaningful
part of our business strategy. Currently, our relationships with IBM and
Microsoft are cooperative, and there is no written agreement defining the
parties' obligations. We cannot assure you that our current informal
relationships with IBM, Microsoft or other companies will be beneficial to us,
that such relationships can be maintained, or that we will be able to enter into
successful new strategic relationships in the future.
Implementation of Our Products Is A Lengthy Process; Our Fixed-Price Service
Contracts May Result In Losses. Our software products are complex and perform or
directly affect mission-critical functions across many different functional and
geographic areas of the enterprise. Consequently, implementation of our software
is a complex, lengthy process and commitment of resources by our customers is
subject to a number of significant risks over which we have little or no
control. We believe that the complicated nature and increased flexibility of the
client/server versions of our products may contribute to the length of the
implementation process. Delays in the
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implementations of any of our software products, whether by us or our business
partners, may result in customer dissatisfaction or damage to our reputation and
a decline in our business, operating results and financial condition.
We offer a combination of software products, implementation and support
services to our customers. Typically, we enter into service agreements with our
customers that provide for consulting and implementation services on a "time and
expenses" basis. Certain customers have asked for, and we have from time to time
entered into, fixed-price service contracts. These contracts specify certain
milestones to be met regardless of our actual costs incurred in fulfilling our
obligations. We believe that fixed-price service contracts may increasingly be
offered by our competitors to differentiate their product and service offerings.
As a result, we may enter into more fixed-price contracts in the future. We
cannot guarantee we can successfully complete these contracts on budget, and our
inability to do so could negatively impact our business, operating results and
financial condition.
We Must Keep Pace With Technological Change To Remain Competitive. 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,
our position in our existing markets, or other markets that we may enter, could
be eroded rapidly by technological advancements not adopted by us, or through
our failure to develop products and services and maintain strategic
relationships that are compatible with industry standards. The lifecycles of our
products are difficult to estimate. The products must keep pace with
technological developments, conform to evolving industry standards and address
increasingly sophisticated customer needs. We believe that we 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 our products obsolete and unmarketable. We may 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 we are unable to develop and introduce products in a timely
manner in response to changing market conditions or customer requirements, our
business, operating results and financial condition will be hurt.
Our Success Depends Upon Our Proprietary Technology. Our success and ability
to compete is dependent in part upon our proprietary technology, including our
software source code. To protect our proprietary technology, we rely on a
combination of trade secret, nondisclosure and copyright laws, which may afford
only limited protection. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. We have
no patents or patent applications pending. The source code for our proprietary
software is protected both as a trade secret and as a copyrighted work. Although
we rely on the limited protection afforded by such intellectual property laws,
we also believe that factors such as the technological and creative skills of
our personnel, new product developments, frequent product enhancements, name
recognition and reliable maintenance are also essential to establishing and
maintaining a technology leadership position. We generally enter into
confidentiality or license agreements with our employees, consultants and
customers, and generally control access to and distribution of our software,
documentation and other proprietary information. The terms of our license
agreements with our customers often require us 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 our source code and do not permit the
re-sale, sublicense or other transfer of such source code, we cannot assure you
that unauthorized use of our technology will not occur.
Despite the measures we have taken to protect our proprietary rights,
unauthorized parties may attempt to reverse engineer or copy aspects of our
products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult. In addition, litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our 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 hurt our business, operating results and financial
condition.
Our products use technology licensed from third parties, generally on a
non-exclusive basis. These licenses generally require us to pay royalties and
fulfill confidentiality obligations. We believe that alternative resources exist
for each of the material components of technology licensed 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
delays in our ability to sell our products while seeking substitute technology.
Any required replacement licenses could prove costly. Also, any such delay,
which becomes extended or occurs at or near the end of a fiscal quarter, could
result in a decline in our operating results. While it may be necessary or
desirable in the future to obtain other licenses relating to one or more of our
products or relating to current or future technologies, we cannot guarantee
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that we will be able to do so on commercially reasonable terms, if at all.
In the future, we may receive notices claiming that we are infringing the
proprietary rights of third parties, we cannot guarantee that we will not become
the subject of infringement claims or legal proceedings by third parties with
respect to current or future products. In addition, we may initiate claims or
litigation against third parties for infringement or to establish the validity
of our proprietary rights. Any such claim could be time consuming, result in
costly litigation, cause product shipment delays or force us 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 us 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 us to cease the
marketing or use of certain products, any of which could hurt our business,
operating results and financial condition. If we desire or are required to
obtain licenses to patents or proprietary rights of others, such licenses may be
made available on terms unacceptable to us, if at all. As the number of software
products in the industry increases and the functionality of these products
further overlaps, we believe that software developers may become increasingly
subject to infringement claims. Any such claims against us, with or without
merit as well as claims we initiate against third parties, could be time
consuming and expensive to defend, prosecute or resolve.
There Are Risks Related To Product Defects, Product Liability, and
Integration Difficulties. Our software products are highly complex and
sophisticated. As a result, they may occasionally contain design defects or
software errors that could be difficult to detect and correct. In addition,
implementation of our products may involve customer-specific customization, and
may involve integration with systems developed by third parties. In particular,
it is common for complex software programs, such as our newer, client/server
software products, to contain undetected errors when first released. They are
discovered only after the product has been implemented and used over time with
different computer systems and in a variety of applications and environments.
Despite extensive testing, we have in the past discovered defects or errors in
our products or custom modifications only after our systems have been used by
many customers. In addition, our customers may occasionally experience
difficulties integrating our products with other hardware or software in the
customer's environment that are unrelated to defects in our products. Such
defects, errors or difficulties may cause future delays in product introductions
and shipments, result in increased costs and diversion of development resources,
require design modifications or impair customer satisfaction with our products.
Our future business growth depends largely on the continued development and
market acceptance of our newer, client/server products. If customers experience
significant problems with implementation of those products or are otherwise
dissatisfied with their functionality or performance or if they fail to achieve
market acceptance for any reason, our business, operating results and financial
condition would be negatively impacted.
Our products may be used by our customers to perform mission-critical
functions. Consequently, design defects, software errors, misuse of our
products, incorrect data from external sources or other potential problems
arising from the use of our products could result in financial or other damages
to our customers. Prior to 1998, we did not maintain product liability
insurance. Our license agreements with our customers typically contain
provisions designed to limit our exposure to potential claims as well as any
liabilities arising from such claims. However, such provisions may not
effectively protect us against such claims and the associated liability and
costs.
We Are Dependent on Key Personnel. Our performance depends in large part on
the continued performance of our executive officers and other key employees,
particularly the performance and services of James D. Armstrong and Frederick M.
Pakis, our Co-Chief Executive Officers. We do not have in place "key person"
life insurance policies on any of our employees. The loss of the services of
Messrs. Armstrong or Pakis or other key executive officers or employees could
negatively affect our financial performance.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
Bernat v. JDA Software Group, Inc., et al., Dist. of Arizona No.
CIV'99-0065 PHX RGS and related cases.
On January 13, 1999, Rod Bernat, an alleged shareholder of JDA Software
Group, Inc., filed a securities class action lawsuit against the Company, its
Co-Chief Executive Officers, Frederick M. Pakis and James D. Armstrong, its
former Senior Vice President of Research and Development, Kenneth Desmarchais,
and its former Chief Executive Officer, Brent W. Lippman, in U.S. District Court
for the District of Arizona. The complaint filed in the lawsuit alleges that
during the alleged class period, January 29, 1998 through January 5, 1999, the
Company misrepresented its business, financial statements and business prospects
to investors. The complaint further alleges that certain officers of the Company
sold significant quantities of the Company's common stock during the alleged
class period while the market price of the common stock was artificially
inflated by the alleged misrepresentations. The plaintiffs seek designation of
the action as a class action and damages for violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder by the Securities and Exchange Commission ("SEC"). Following the
filing of the Bernat action, lawsuits were filed by Norman Wiss, Theodore J.
Bloukos, Gwen Werboski, Elmer S. Martin, Linda May, Ivan Sommer, David Hesrick
and Michael J. Corn all purporting to act on behalf of the same class of
shareholders for the same class period, making substantially similar
allegations. These actions are currently in the process of being consolidated
into one action by the U. S. District Court. Management believes that the
actions are without merit and intends to defend them vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters submitted to a vote of security holders during the quarter
ended March 31, 1999.
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
A Form 8-K dated January 11, 1999 was filed with the Securities and
Exchange Commission on January 12, 1999 to announce (1) preliminary financial
results for the year ended December 31, 1998 and for the fiscal quarter ended
December 31, 1998; (2) the Company's intent to restate the second and third
quarter operating results based upon guidance from the Securities and Exchange
Commission regarding appropriate valuation methodologies for in-process research
and development write-offs, which guidance is applicable to the Company's
acquisition on June 4, 1998 of the Arthur Retail Division of Comshare, Inc.; (3)
the resignation of Brent W. Lippman as Chief Executive Officer and Director of
the Company; (4) the return of James D. Armstrong and Frederick M. Pakis,
co-founders and Co-Chairman of the Board, on a full-time basis to serve in the
capacities of Co-Chief Executive Officers; and (5) the decision of the Company
and Baan Company to not form a separate entity joint venture for developing
Baan/JDA Retail business, and instead develop an alternative marketing
arrangement to sell and support their combined solutions to vertically
integrated retailers.
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JDA SOFTWARE GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JDA SOFTWARE GROUP, INC.
Dated: May 14, 1999 By: /s/ Kristen L. Magnuson
-----------------------------------
Kristen L. Magnuson
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
2.1** -- Asset Purchase Agreement dated as of June 4, 1998 by
and among JDA Software Group, Inc., JDA Software,
Inc. and Comshare, Incorporated.
3.1*** -- Second Restated Certificate of Incorporation of the
Company together with Certificate of Amendment dated
June 12, 1998.
3.2*** -- First Amended and Restated 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, as amended.
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 January 1, 1998.
10.7***(1) -- Employment Agreement between Frederick M. Pakis and
JDA Software, Inc. dated January 1, 1998.
10.8#(1) -- 1998 Nonstatutory Stock Option Plan.
10.9#(1) -- 1998 Employee Stock Purchase Plan.
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*** -- Lease Agreement between Opus West Corporation and JDA
Software Group, Inc. dated April 30, 1998, together
with First Amendment dated June 30, 1998.
10.12*** -- Real Estate Option Agreement and Escrow Instructions
between Mall at the Crossroads, Inc. and JDA Software
Group, Inc. dated June 8, 1998.
10.13* -- Lease Agreement between Holly Pond Associates Limited
Partnership and JDA Software, Inc. dated June 16,
1993 (Stamford, Connecticut).
10.14+ -- 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)
10.15** -- Software License Agreement dated as of June 4, 1998
by and between Comshare, Incorporated and JDA
Software, Inc.
10.16*(2) -- License Agreement between Uniface Corporation and JDA
Software, Inc. dated February 9, 1994.
10.17*(2) -- Standard Value-Added Reseller Agreement between
Uniface Corporation and JDA Software, Inc. dated
February 9, 1994.
10.18*(1) -- JDA Software, Inc. 401(k) Profit Sharing Plan,
adopted as amended effective January 1, 1995.
10.19# -- Business Loan Agreement between Bank of America
Arizona and JDA Software, Inc. dated September 30,
1998.
10.20***(1) -- Form of Amendment of Stock Option Agreement between
JDA Software Group, Inc. and Kristen L. Magnuson,
amending certain stock options granted to Ms.
Magnuson pursuant to the JDA Software Group, Inc.
1996 Stock Option Plan on September 11, 1997 and
January 27, 1998.
10.21++(1) -- Form of Rights Agreement between the Company and
ChaseMellon Shareholder Services, as Rights Agent
(including as Exhibit A the Form of Certificate of
Designation, Preferences and Rights of the Terms of
the Series A Preferred Stock, as Exhibit B the Form
of Right Certificate, and as Exhibit C the Summary of
Terms and Rights Agreement
10.22+++(1) -- Form of Incentive Stock Option Agreement between JDA
Software Group, Inc. and Kristen L. Magnuson to be
used in connection with stock option grants to Ms.
Magnuson pursuant to the JDA Software Group, Inc.
1996 Stock Option Plan.
27.1 -- Financial Data Schedule
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* Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-748), declared effective on March 14, 1996.
** Incorporated by reference to the Company's Current Report on Form 8-K
dated June 4, 1998, as filed on June 19, 1998.
*** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998, as filed on August
14, 1998.
+ Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-15659), declared effective on November 21, 1996.
++ Incorporated by reference to the Company's Current Report on Form 8-K
dated October 2, 1998, as filed on October 28, 1998.
+++ Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1998, as filed on
November 13, 1998.
# Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, as filed on March 31, 1999.
(1) Management contracts or compensatory plans or arrangements covering
executive officers or directors of the Company.
(2) Confidential treatment has been granted as to part of this exhibit.
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