1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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) had 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 23,725,572 as of July 31, 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
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 ..... 3
Condensed Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1999 and June 30, 1998 ............................... 4
Condensed Consolidated Statements of Comprehensive Income for the Three and Six
Months ended June 30, 1999 and June 30, 1998 ............................... 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and June 30, 1998 ............................................ 6
Notes to Interim Condensed Consolidated Financial Statements ........................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................... 11
PART II: OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders ................................. 27
Item 5. Other Information ................................................................... 28
Item 6. Exhibits and Reports on Form 8-K .................................................... 28
Signature ................................................................................... 29
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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)
JUNE 30, DECEMBER 31,
1999 1998
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 31,723 $ 42,376
Marketable securities 39,786 36,316
Accounts receivable, net 39,802 40,570
Income tax receivable 777 --
Deferred tax asset 2,268 2,121
Prepaid expenses and other current assets 5,151 5,003
--------- --------
Total current assets 119,507 126,386
PROPERTY AND EQUIPMENT, NET 25,414 23,890
GOODWILL AND OTHER INTANGIBLES, NET 33,821 36,039
DEFERRED TAX ASSET 6,328 6,549
MARKETABLE SECURITIES 12,729 6,697
--------- --------
Total assets $ 197,799 $199,561
========= ========
CURRENT LIABILITIES:
Accounts payable $ 3,229 $ 4,834
Accrued expenses and other liabilities 15,358 16,336
Deferred revenue 6,922 6,894
--------- --------
Total current liabilities 25,509 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 23,725,572 and 23,419,808, respectively 237 234
Additional paid in capital 174,409 172,417
Accumulated deficit (920) (430)
Accumulated other comprehensive loss (1,436) (724)
--------- --------
Total stockholders' equity 172,290 171,497
--------- --------
Total liabilities and stockholders' equity $ 197,799 $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 SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
Software licenses $ 10,669 $ 12,312 $ 18,093 $ 24,361
Consulting, maintenance and other services 26,507 23,374 54,269 42,218
-------- -------- -------- --------
Total revenues 37,176 35,686 72,362 66,579
-------- -------- -------- --------
COST OF REVENUES:
Software licenses 529 603 1,013 1,108
Consulting, maintenance and other services 17,355 16,045 35,681 29,889
-------- -------- -------- --------
Total cost of revenues 17,884 16,648 36,694 30,997
-------- -------- -------- --------
GROSS PROFIT 19,292 19,038 35,668 35,582
-------- -------- -------- --------
OPERATING EXPENSES:
Product development 6,180 4,753 11,794 9,032
Sales and marketing 6,385 4,600 12,878 8,496
General and administrative 5,240 3,254 9,315 6,313
Amortization of intangibles 1,103 163 2,225 227
Purchased in-process research and development -- 17,000 -- 17,000
Restructuring and asset disposition charge -- -- 2,111 --
-------- -------- -------- --------
Total operating expenses 18,908 29,770 38,323 41,068
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS 384 (10,732) (2,655) (5,486)
Other income, net 916 846 1,839 1,175
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 1,300 (9,886) (816) (4,311)
Income tax provision (benefit) 520 (4,228) (326) (2,137)
-------- -------- -------- --------
NET INCOME (LOSS) $ 780 $ (5,658) $ (490) $ (2,174)
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ .03 $ (.26) $ (.02) $ (.10)
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ .03 $ (.26) $ (.02) $ (.10)
======== ======== ======== ========
SHARES USED TO COMPUTE:
Basic earnings per share 23,724 22,108 23,636 20,987
======== ======== ======== ========
Diluted earnings per share 23,724 22,108 23,636 20,987
======== ======== ======== ========
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
NET INCOME (LOSS) $ 780 $(5,658) $ (490) $(2,174)
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustment (83) (429) (712) (224)
------- ------- ------- -------
COMPREHENSIVE INCOME (LOSS) $ 697 $(6,087) $(1,202) $(2,398)
------- ------- ------- -------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
--------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net loss $ (490) $ (2,174)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,888 2,451
Provision for doubtful accounts 1,950 301
Net loss on disposal of property and equipment 218 --
Write-off of purchased in-process research and development -- 17,000
Deferred income taxes 74 (6,896)
Changes in assets and liabilities:
Accounts receivable (1,182) (9,922)
Income tax receivable (777) --
Prepaid expenses and other current assets (148) (4,107)
Accounts payable (1,605) 576
Accrued expenses and other liabilities (932) 981
Income taxes payable -- 2,672
Deferred revenue 28 2,685
--------- ---------
Net cash provided by operating activities 3,024 3,567
--------- ---------
INVESTING ACTIVITIES:
Purchase of marketable securities (105,396) (224,411)
Sales of marketable securities 14,349 3,006
Maturities of marketable securities 81,545 205,369
Purchase of Arthur Retail Business Unit -- (44,000)
Purchase of property and equipment (6,649) (7,461)
Proceeds from disposal of property and equipment 1,237 --
--------- ---------
Net cash used in investing activities (14,914) (67,497)
--------- ---------
FINANCING ACTIVITIES:
Issuance of common stock - secondary offering -- 99,634
Issuance of common stock - stock option plan 421 4,008
Issuance of common stock - employee stock purchase plan 1,574 434
Tax benefit - stock options and employee stock purchase plan -- 1,914
Payments on capital lease obligations (46) (22)
--------- ---------
Net cash provided by financing activities 1,949 105,968
--------- ---------
Effect of exchange rates on cash (712) (224)
--------- ---------
Net (decrease) increase in cash and cash equivalents (10,653) 41,814
--------- ---------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 42,376 27,304
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,723 $ 69,118
========= =========
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
--------------
1999 1998
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 26 $ 6
======= ==========
Income taxes $ 1,288 $ 311
======= ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Acquisition of the Arthur Retail Business Unit:
In-process research and development $ (17,000)
Developed software and other intangibles (7,700)
Goodwill (24,840)
Liabilities assumed 5,540
---------
Net cash used to purchase the Arthur Retail Business Unit $ (44,000)
=========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PERCENTAGES, SHARES,
PER SHARE AMOUNTS, OR AS OTHERWISE STATED)
(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 and six months ended
June 30, 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 and six months ended June 30, 1999 and 1998 as their
effect is not dilutive:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Shares--Basic earnings per share.............. 23,724 22,108 23,636 20,987
Dilutive common stock equivalents............. -- -- -- --
------ ------ ------ ------
Shares--Diluted earnings per share............ 23,724 22,108 23,636 20,987
====== ====== ====== ======
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. Through the
year ended December 31, 1998, the Company disclosed segmental revenues, income
(loss) from operations, and identifiable assets based on these geographic
regions. The geographic distribution of the Company's revenues for the three and
six-months ended June 30, 1999 and 1998 is as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
United States $ 22,652 $ 21,472 $43,002 $39,710
EMEA 11,531 10,854 21,896 20,497
Asia/Pacific 1,551 1,487 3,779 2,875
Canada 2,299 2,733 5,380 5,447
Latin America 3,288 1,261 4,823 2,719
--------- -------- ------- -------
Total International 18,669 16,335 35,878 31,538
--------- -------- ------- -------
Sales and transfers among regions. (4,145) (2,121) (6,518) (4,669)
--------- -------- ------- -------
Total revenues $ 37,176 $ 35,686 $72,362 $66,579
========= ======== ======= =======
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Beginning in 1999, the Company also 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 and six-months ended June 30, 1999 and 1998 is as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Enterprise Systems $ 21,261 $ 24,966 $ 44,181 $ 49,687
In-store Systems 6,072 6,810 11,026 11,979
Analytic Applications 9,843 3,910 17,155 4,913
---------- -------- -------- ---------
Total revenues $ 37,176 $ 35,686 $ 72,362 $ 66,579
========== ======== ======== =========
THREE MONTHS SIX MONTHS
------------ ----------
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
Operating income (loss):
Enterprise Systems $ 975 $ 5,406 $ 2,456 $ 12,199
In-store Systems 1,646 2,451 2,519 3,749
Analytic Applications 2,070 (15,027) 2,571 (14,760)
Other (4,307) (3,562) (10,201) (6,674)
-------- --------- -------- ---------
Total income (loss) from operations $ 384 $ (10,732) $ (2,655) $ (5,486)
======== ========= ======== =========
The operating incomes (losses) 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 operating loss shown for Analytical
Applications for the three and six months ended June 30, 1998 includes $17.0
million of purchased in-process research and development that was expensed in
connection with the acquisition of the Arthur Retail Business Unit in June 1998.
The Company continues to identify assets according to geographic region. There
were no material changes in identifiable assets among geographic regions during
the three and six-months ended June 30, 1999.
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 June 30, 1999, the Company had utilized approximately $1.7
million of the related reserve and anticipates that substantially all of the
remaining reserve will be utilized during 1999.
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5. EMPLOYEE STOCK PURCHASE PLAN
On March 4, 1999, the Board of Directors approved the formation of a
new employee stock purchase plan, that was subsequently approved by the
shareholders 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 amount will be increased on August 1st of each
year (beginning August 1, 2000 and ending August 1, 2009) 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 16, 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 date of purchase.
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 connection with the lawsuit
alleged 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 alleged 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. 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. On March 25, 1999, the District Court consolidated these lawsuits
into one case. On May 5, 1999, pursuant to the Private Securities Litigation
Reform Act of 1995, the District Court appointed as lead plaintiffs in the
consolidated case M. Broenner, A. Gruss, Jerald Politzer, Far West Partners,
L.P., Marc Trandel, Sam Pallin and Ben R. Wilson. On July 23, 1999, Marc
Trandel, Sam Pallin, M. Broenner, A. Gruss and Jerald Politzer, allegedly as
lead plaintiffs, filed a Consolidated and Amended Class Action Complaint
("Consolidated Complaint"). The Consolidated Complaint alleges a new class
period of December 1, 1997 through July 30, 1998, which is substantially shorter
than the class period alleged in the original complaints. The Consolidated
Complaint alleges that during the new class period, JDA and the individual
defendants failed to disclose alleged difficulties JDA was allegedly having with
the development of the ODBMS product. The Consolidated Complaint does not allege
that the Company made any misrepresentations in its financial statements. Also
on July 23, 1999, Jerald Politzer and Donald Seligman filed a separate complaint
in this litigation alleging claims under Sections 11, 12(2) and 15 of the
Securities Act of 1933. They allege that the Company failed to disclose in its
prospectus and registration statement for its secondary offering of securities
on May 5, 1998, alleged difficulties JDA was allegedly having with the
development of the ODBMS product. 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 ("FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133") that is effective for fiscal
years beginning after June 15, 1999. The FASB subsequently delayed the effective
date of SFAS No. 133 for one year, to fiscal years beginning after June 15,
2000. The delay, published as Statement of Financial Accounting Standards No.
137, applies to quarterly and annual financial statements. 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.
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8. RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 financial
statements to conform to the June 30, 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 June 30, 1999 Compared to Three Months Ended June 30, 1998," "Six
Months Ended June 30, 1999 Compared to Six Months Ended June 30, 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 are organized along three business units: Enterprise Systems, In-store
Systems, and Analytic Applications. The Company 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"). Total revenues from the
MMS product line represented 40% and 43% of the Company's total revenues during
the three and six months ended June 30, 1999, respectively, versus 45% in fiscal
1998 and 56% 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 continue
to 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 29% and 71%, respectively, of JDA's total revenues during
the three months ended June 30, 1999, versus 31% and 69%, respectively in fiscal
1998, and 46% and 54%, respectively, in fiscal 1997. JDA's overall revenue mix
was affected during fiscal 1998 by lower than anticipated software license
revenues in its international markets during the second and third quarters of
1998, and then in both international and domestic markets in the fourth quarter
of 1998. Software license revenues from the Company's international markets have
shown improvement during the first half of 1999; however, the overall software
mix continues to be impacted by a downturn in demand for domestic software
licenses. While the Company believes its software license pipeline for the
second half of 1999 is somewhat stronger than the first half of 1999, management
remains very cautious about the possibility of a lock-down on all new major
capital expenditures by retailers as the millenium change nears. The following
table sets forth a quarterly comparison of 1997, 1998 and 1999 domestic and
international software license revenues:
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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% 4,010 (23)%
September 30, 3,730 6,336 8,581 130% 3,775 (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)%
June 30, 8,302 4,010 2,847 (66)% 7,822 95%
-------- -------- -------- --------
$ 15,425 $ 8,936 $ 6,385 (59)% $ 11,708 31%
======== ======== ======== ========
Software license revenues in each of the Company's product line business
units, including Enterprise Systems, increased sequentially during the second
quarter of 1999. However, with the exception of Analytic Applications, the
Company continues to experience a downturn in overall demand versus 1998 for its
product lines (Enterprise Systems and In-Store Systems). In particular, sales of
the Company's ODBMS product have failed to meet the Company's expectations. The
Company believes that sales of ODBMS have been affected by a significant
drop-off in demand related to the millennium change, external and internal
marketing issues, increased competition, and a limited number of referenceable
implementations. Moreover, the ODBMS product is highly complex and
sophisticated. As the Company believes is typical of client/server software
products, the Company has detected and is attempting to address certain design
and stability problems in early versions of the ODBMS product. Since
implementation of ODBMS generally involves customer-specific customization and
integration with a variety of hardware and software systems developed by third
parties, each version of the product may contain undetected errors when first
released. The Company has only discovered and evaluated certain of these
problems after the ODBMS product has been implemented and used by the customer
with live data over time, with different computer systems and in a variety of
applications and environments.
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.
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, 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, the Company
currently anticipates that consulting, maintenance and other services revenues
may continue to increase as a percentage of total revenues. As a result of
declining new software sales in Europe, the Company took specific actions in the
fourth quarter of 1998 and first quarter of 1999 to reduce the consulting
services workforce in that region and eliminate the subcontractors that were
being used to supplement the implementation staff. Further, in response to the
decreased demand for new software licenses, the Company is focusing on the
replacement of implementation and other service revenues associated with new
software sales, with sales of new and expanded services to its existing customer
base. These services will include a global 24-hour customer support service
centralized in the Company's corporate offices and optimum
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service offerings for point-of-sale customers. The Company expects only modest
growth, if any, in the overall size of its services organization over the
remaining quarters of 1999.
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 represented 52% and 49% of total revenues for the three months and six
months ended June 30, 1999, as compared with 45% and 55% in the fiscal years
ended December 31, 1998 and 1997, respectively. Consulting, maintenance and
other services in support of international software licenses typically have had
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.
The Company had net receivables of $39.8 million, or 97 days sales
outstanding ("DSOs") at June 30, 1999, compared to $40.6 million, or 113 DSOs at
December 31, 1998. The Company provided additional bad debt reserves of $1.3
million during the second quarter of 1999. This increase resulted primarily from
two large bankruptcies during the second quarter; increased delinquencies in the
domestic receivables and an increase in the Company's general reserve. The
Company believes that the bankruptcies are isolated instances in highly
competitive retail situations. There was no significant improvement in
delinquent Asia/Pacific receivables during the second quarter of 1999; however,
the composition of the receivables in the region is improving, shifting away
from Indonesia, Hong Kong, and Malaysia to more favorable economic environments
such as Japan and Australia.
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
millenium change. Management believes these economic conditions and
uncertainties could continue to adversely impact the Company's business,
operating results and financial condition for an indefinite period of time. So
long as software license revenues remain at reduced levels due to deferred
purchasing decisions or budgetary lock-downs caused by uncertainty related to
the millenium change, the Company will attempt to moderate its operating
expenses to remain at break-even to slightly profitable operating levels.
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 July 28, 1999, the Company announced that Co-Chairman and Co-Chief
Executive Officer Frederick M. Pakis resigned as Co-Chief Executive Officer and
would continue in his capacity as Co-Chairman effective immediately. James D.
Armstrong will serve as the Company's sole Chief Executive Officer while
continuing to share Co-Chairman responsibilities with Mr. Pakis.
On June 10, 1999, the Company announced the availability of MMS.com, an
e-commerce merchandizing solution designed to enable retailers to establish a
secure, integrated virtual store on the Internet. MMS.com, which is also
referred to as JDA Webstore, is based on IBM's Net.Commerce merchant server
software and is designed to deliver a scalable and dynamic online commerce
engine that supports a wide variety of buying processes and transaction types
including virtual shopping carts, online catalogs, sales promotions, shipping
options and customer-controlled order checking.
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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 June 30, 1999, the Company had utilized approximately $1.7
million of the related reserve and anticipates that substantially all of the
remaining reserve will be utilized during 1999.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues
Total revenues for three months ended June 30, 1999 were $37.2 million, an
increase of 4% over the $35.7 million reported in the comparable quarter of
1998. Revenues consisted of software licenses and consulting, maintenance and
other services, which represented 29% and 71%, respectively, of total revenues
during the three months ended June 30, 1999, and 35% and 65%, respectively in
the comparable quarter of 1998.
Software Licenses. Software license revenues for the three months ended June
30, 1999 were $10.7 million, a decrease of 13% from the $12.3 million reported
in the comparable quarter of 1998. Domestic software license revenues decreased
66% between the comparable quarters, offset in part by a 95% increase in
international software license revenues. The international software license
results include increases in each of the EMEA (46%) and Asia/Pacific (149%)
regions, and $1.8 million in license revenues from the Latin America region
versus none in the prior year quarter. Enterprise Systems and In-Store Systems
software license revenues decreased 37% and 47%, respectively between quarters.
Analytic Applications software license revenues increased 80% between quarters
primarily as a result of additional software license revenues from the Arthur
Retail Business Unit that was acquired by the Company in June 1998. While the
Company believes its software license pipeline for the second half of 1999 is
somewhat stronger than the first half of 1999, management remains very cautious
about the possibility of a lock-down on all new major capital expenditures by
retailers as the millenium change nears.
Consulting, Maintenance and Other Services. Consulting, maintenance and
other services revenues for the three months ended June 30, 1999 were $26.5
million, an increase of 13% over the $23.4 million reported in the comparable
quarter of 1998. This increase results primarily from the additional consulting
and maintenance revenues related to the Arthur Retail Business Unit. Domestic
consulting, maintenance and other services revenues increased 32% between the
comparable quarters, offset in part by a 4% decrease in international
consulting, maintenance and other services revenues. The Company anticipates
that consulting, maintenance and other services revenues will continue at the
current run rate during the remainder of 1999. In response to the decreased
demand for new software licenses, the Company is focusing on the replacement of
implementation and other service revenues associated with new software sales,
with sales of new and expanded services to its existing customer base. These
services include a global 24-hour customer support service centralized in the
Company's corporate office and an optimum service offering for point-of-sale
customers.
Cost of Revenues
Cost of software license revenues was $529,000 for the three months ended
June 30, 1999 as compared to $603,000 in the comparable quarter of 1998. Cost of
software licenses represented 5% of software license revenues in each of these
periods. Consulting, maintenance and other services costs for the three months
ended June 30, 1999 were $17.4 million, an increase of 8% over the $16.0 million
reported in the comparable quarter of 1998. The consulting, maintenance and
other services organization increased by 6% between periods, and as of June 30,
1999, there were 652 employees involved in these functions worldwide. The
Company expects only modest growth, if any, in the overall size of its services
organization over the remaining quarters of 1999.
Gross Profit
Gross profit for the three months ended June 30, 1999 was $19.3 million, an
increase of 1% over the $19.0 million reported in the comparable quarter of
1998. Gross profit, as a percentage of total revenues, decreased from 53% to 52%
between the comparable quarters. 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 June 30,
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1999. The Company's service margins increased between the comparable quarters
from 31% to 35%. This improvement reflects the favorable impact of increases in
the Company's maintenance base, both from the Arthur Retail acquisition and core
JDA products, higher average billing rates in the Company's consulting practice,
and the elimination of outside contractors in Europe.
The Company anticipates that service margins will be lower during the
remaining quarters of 1999 as two new programs will be implemented. The first
involves the centralization of post implementation support services to provide
24-hour global support from the Company's corporate offices. During the
transition period the Company will incur certain redundant costs. Second, in
response to the rapid growth of the services organization over the past two
years, the Company plans to make a renewed investment in the training of its
associates by requiring successful completion of certification programs for each
product line. Although this program will result in slightly lower utilization
rates during the remaining quarters of 1999, the Company anticipates that the
initiative will enable it to achieve improved margins in the future.
Operating Expenses
Product Development. Product development expenses for the three months ended
June 30, 1999 were $6.2 million, an increase of 30% over the $4.8 million
reported in the comparable quarter of 1998. Product development expenses as a
percentage of total revenues increased between the comparable quarters from 13%
to 17%. This increase results primarily from development activities associated
with new product initiatives including Active DSS, the next versions of the
Arthur Suite, the MMS.com e-commerce strategy, and experimental work with the
Microsoft sequel server 7.0 engine. In addition, the Company continues to focus
on the feature, functionality and stability of all its product lines including
ODBMS and Win/DSS. The Company increased its product development staff by 9%
between the comparable quarters and as of June 30, 1999, there were 203
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. The development efforts will focus on enhancements to existing products
that address product quality and the requirements for utilization with emerging
standard operating platforms such as Microsoft's ActiveStore initiative,
increased systems interoperability, international issues such as the adoption of
the Euro, and continued enhancement of the MMS.com product and other intranet,
extranet and Internet business solutions that integrate industry standard
e-commerce software into 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
June 30, 1999 were $6.4 million, an increase of 39% over the $4.6 million
reported in the comparable quarter of 1998. Sales and marketing expenses, as a
percentage of total revenues, increased between the comparable quarters from 13%
to 17%. The Company's worldwide sales and marketing staff was static between the
comparable quarters and as of June 30, 1999, there were 105 employees involved
in this function. The Company will continue to realign its sales force to match
the demands within product lines and geographic region, and anticipates only
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 June 30, 1999 were $5.2 million, an increase of 61% over the
$3.3 million reported in the comparable quarter of 1998. General and
administrative expense, as a percentage of total revenues, increased between the
comparable quarters from 9% to 14%. 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, and the incremental costs of Arthur Retail Business Unit. In
addition, general and administrative expenses increased $1.1 million
sequentially over the first quarter of 1999 as a result of two events: (1)
Duplicate rent and other non-recurring charges of approximately $400,000 related
to the consolidation and relocation of the Company's corporate offices, and (2)
a $700,000 increase in the bad debt provision associated with two large domestic
bankruptcies. The Company anticipates that its quarterly general and
administrative expenses will return to first quarter 1999 levels 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 Business Unit in June 1998.
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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. From time to time, the Company may be subject
to audit by federal, state and/or foreign taxing authorities. The Company is
currently undergoing an audit of its fiscal 1996 and 1997 Federal Income Tax
Returns. The Company has received preliminary correspondence from the Internal
Revenue Service challenging the determination of the Company's 1996 and 1997
research and development expense tax credits. A final report on the audit has
not yet been issued, and accordingly, management is unable to determine the
impact of the audit at this time.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues
Total revenues for six months ended June 30, 1999 were $72.4 million, an
increase of 9% over the $66.6 million reported in the comparable period of 1998.
Revenues consisted of software licenses and consulting, maintenance and other
services, which represented 25% and 75%, respectively, of total revenues during
the six months ended June 30, 1999, and 37% and 63%, respectively in the
comparable period of 1998.
Software Licenses. Software license revenues for the six months ended June
30, 1999 were $18.1 million, a decrease of 26% from the $24.4 million reported
in the comparable period of 1998. Domestic software license revenues decreased
59% between the comparable periods, offset in part by a 31% increase in
international software license revenues. The international software license
results include increases in each of the EMEA (20%) Asia/Pacific (90%) and Latin
America (326%) regions. Enterprise Systems and In-Store Systems software license
revenues decreased 51% and 49%, respectively between periods. Analytic
Applications software license revenues increased 112% between periods primarily
as a result of additional software license revenues from the Arthure Retail
Business Unit that was acquired by the Company in June 1998.
Consulting, Maintenance and Other Services. Consulting, maintenance and
other services revenues for the six months ended June 30, 1999 were $54.3
million, an increase of 29% over the $42.2 million reported in the comparable
period of 1998. Although the Company experienced increases in service revenues
from each product line, the overall increase results primarily from the
additional consulting and maintenance revenues related to the Arthur Retail
Business Unit. Domestic and international consulting, maintenance and other
services revenues increased 49% and 9%, respectively, between the comparable
periods.
Cost of Revenues
Cost of software license revenues was $1.0 million for the six months ended
June 30, 1999 compared to $1.1 million in the comparable period of 1998. Cost of
software licenses represented 6% and 5% of software license revenues in the
respective periods. The higher cost in the six-month period ended June 30,
1999 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 six months ended June 30, 1999 were $35.7
million, an increase of 19% over the $29.9 million reported in the comparable
period of 1998. The consulting, maintenance and other services organization
increased by 6% between periods, and as of June 30, 1999, there were 652
employees involved in these functions worldwide.
Gross Profit
Gross profit for the six months ended June 30, 1999 was $35.7 million, an
increase of less than 1% over the $35.6 million reported in the comparable
period of 1998. Gross profit, as a percentage of total revenues, decreased from
53% to 49% 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 six months ended June 30, 1999. The
Company's service margins increased between the comparable periods from 29% 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, higher average billing rates in the Company's consulting practice, and
the elimination of outside contractors in Europe.
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Operating Expenses
Product Development. Product development expenses for the six months ended
June 30, 1999 were $11.8 million, an increase of 31% over the $9.0 million
reported in the comparable period of 1998. Product development expenses as a
percentage of total revenues increased between the comparable periods from 14%
to 16%. This increase results primarily from development activities associated
with new product initiatives including Active DSS, the next versions of the
Arthur Suite, MMS.com, and experimental work with the Microsoft sequel server
7.0 engine.
Sales and Marketing. Sales and marketing expenses for the six months ended
June 30, 1999 were $12.9 million, an increase of 52% over the $8.5 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%
to 18%.
General and Administrative. General and administrative expenses for the six
months ended June 30, 1999 were $9.3 million, an increase of 48% over the $6.3
million reported in the comparable period of 1998. General and administrative
expense, as a percentage of total revenues, increased between the comparable
periods from 9% to 13%. This 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, and
the incremental costs of Arthur Retail Business Unit. In addition, general and
administrative expenses for the six months ended June 30, 1999 include $1.1
million in expenses resulting from two events: (1) Duplicate rent and other
non-recurring charges of approximately $400,000 related to the consolidation and
relocation of the Company's corporate offices, and (2) a $700,000 increase in
the bad debt provision associated with two large domestic bankruptcies.
Amortization of Intangibles. Amortization of intangibles consists primarily
of amortization on goodwill and other intangibles recorded in connection with
the acquisition of Arthur Retail Business Unit in June 1998.
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. From time to time, the Company may be subject
to audit by federal, state and/or foreign taxing authorities. The Company is
currently undergoing an audit of its fiscal 1996 and 1997 Federal Income Tax
Returns. The Company has received preliminary correspondence from the Internal
Revenue Service challenging the determination of the Company's 1996 and 1997
research and development expense tax credits. A final report on the audit has
not yet been issued, and accordingly, management is unable to determine the
impact of the audit at this time.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through cash generated from operations, 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 June 30, 1999 compared with $98.3 million at
December 31, 1998. Cash and cash equivalents at June 30, 1999 were $31.7
million, a decrease of $10.7 million from the $42.4 million reported at December
31, 1998. The Company also had $52.5 million in marketable securities at June
30, 1999, an increase of $9.5 million from the $43.0 million reported at
December 31, 1998.
Operating activities provided cash of $3.0 and $3.6 million for the six
months ended June 30, 1999 and 1998, respectively. Cash provided from operating
activities during the six months ended June 30, 1999 resulted primarily
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from $5.9 million of depreciation and amortization and $2.0 million in provision
for doubtful accounts, offset in part by a $1.2 million increase in accounts
receivable and a $2.5 million decrease in accounts payable and accrued expenses.
Cash provided from operating activities for the six months ended June 30, 1998
resulted primarily from net income of $7.9 million, excluding the one-time
charge for purchased in-process research and development and related tax
benefit, $2.4 million of depreciation and amortization, a $2.7 increase in
income taxes payable and a $2.7 million increase in deferred revenue, offset in
part by a $9.9 million increase in accounts receivable and a $4.1 increase in
prepaid expenses and other current assets. The Company had net accounts
receivable of $39.8 million, or 97 days sales outstanding ("DSOs") at June 30,
1999, compared to $40.6 million, or 113 DSOs 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.
Investing activities utilized cash of $14.9 million and $67.5 million in the
six months ended June 30, 1999 and 1998, respectively. The 1999 activity
includes the net purchase of $9.5 million of marketable securities and $6.6
million in capital expenditures which includes over $3.6 million related to the
Company's corporate office relocation. The 1998 activity includes the net
purchase of $16.0 million of marketable securities, $7.5 million in capital
expenditures, and a $44.0 million cash payment for the acquisition of the Arthur
Retail Business Unit.
Financing activities provided cash of $1.9 million and $106.0 million during
the six months ended June 30, 1999 and 1998, respectively. The activity in both
periods includes proceeds from the issuance of common stock and related tax
benefits under the Company's stock option and employee stock purchase plans. In
addition, the 1998 activity includes net proceeds of $99.6 million from the
issuance of 3,450,000 shares of common stock in a secondary public offering.
Changes in the currency exchange rates of the Company's foreign operations
had the effect of reducing cash by $712,000 and $224,000 in the six months ended
June 30, 1999 and 1998, respectively. 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 June 30, 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. The Company has not been a party to
any litigation or arbitration proceeding to date involving its products or
services as related to Year 2000 compliance issues. However, the Company from
time to time is involved in payment disputes and may be subject to Year 2000
counter claims. 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.
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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 in order 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 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 continues to implement 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 June
2000. Accordingly, as part of its contingency plan, the Company has modified its
existing time and billing system to be Year 2000 compliant. 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:
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(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 versions 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 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. We
believe that sales of ODBMS have been affected by a significant drop-off in
demand related to the millenium change, external and internal marketing issues,
increased competition, a limited number of referenceable implementations, and
certain design and stability issues in earlier versions of the ODBMS product.
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
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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, any weakening or uncertainty in
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. In addition, the Internet is dramatically impacting the
retail industry. The traditional retailers that we serve now often face
substantial competition from Internet-based retailers that may negatively impact
their ability to purchase our products. Moreover, our one product that is
targeted primarily to meet the needs of Internet-based business, MMS.com, was
only recently announced and has not yet been installed at a customer location.
Our ability to sell our products to traditional retailers attempting to add
Internet business, or to sell our products to Internet-only retailers may be
negatively impacted if our current or future Internet-based products do not keep
pace with technological change or achieve market acceptance. Finally, we believe
that the retail industry may be 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
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. 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
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for direct sales, consulting services and operations. All management positions
within this new organizational structure were 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 Systems 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. Since a significant portion of our
consulting, maintenance and other services revenues are derived from the
implementation of our software products, any further decline in demand for our
software products or if our software revenues do not fully return to historical
levels, would cause our consulting, maintenance and other services revenues to
decline. 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.
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
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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. We believe
that sales of ODBMS have been affected by a significant drop-off in demand
related to the millenium change, external and internal marketing issues,
increased competition, a limited number of referenceable implementations, and
certain design and stability issues in earlier versions of the ODBMS product. 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 reduced
demand for MMS and/or increased revenues attributable to the Company's other
product lines. 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 represented 49% of total revenues in the six months ended
June 30, 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. Our entry
into new international markets typically requires the establishment of new
marketing and distribution channels as well as the development and subsequent
support of localized versions of our software. 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
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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 that an increasing portion of our international software license and
consulting, maintenance and other services revenues will be denominated in
foreign currencies, subjecting us to 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, devaluation of currencies and slowing payment
trends continue to effect the collection of receivables in the Asia/Pacific,
EMEA and Latin America regions. The mix of past due receivables has improved
during the six months ended June 30, 1999 as a result of increased new software
license sales activity; however, the total amount of past due balances has
increased 5% since December 31, 1998. The Asia/Pacific, EMEA and Latin America
regions represented 7%, 29%, and 6%, respectively, of our revenues during the
six months ended June 30, 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 (a
subsidiary of SVI Holdings, Inc.), 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., Riva Group PLC, 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, or attempted to establish, 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
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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 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
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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 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 are typically 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 our Chief
Executive Officer. We do not have in place "key person" life insurance policies
on any of our employees. The loss of the services of Mr. Armstrong 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 connection with the lawsuit
alleged 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 alleged 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. 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. On March 25, 1999, the District Court consolidated these lawsuits
into one case. On May 5, 1999, pursuant to the Private Securities Litigation
Reform Act of 1995, the District Court appointed as lead plaintiffs in the
consolidated case M. Broenner, A. Gruss, Jerald Politzer, Far West Partners,
L.P., Marc Trandel, Sam Pallin and Ben R. Wilson. On July 23, 1999, Marc
Trandel, Sam Pallin, M. Broenner, A. Gruss and Jerald Politzer, allegedly as
lead plaintiffs, filed a Consolidated and Amended Class Action Complaint
("Consolidated Complaint"). The Consolidated Complaint alleges a new class
period of December 1, 1997 through July 30, 1998, which is substantially shorter
than the class period alleged in the original complaints. The Consolidated
Complaint alleges that during the new class period, JDA and the individual
defendants failed to disclose alleged difficulties JDA was allegedly having with
the development of the ODBMS product. The Consolidated Complaint does not allege
that the Company made any misrepresentations in its financial statements. Also
on July 23, 1999, Jerald Politzer and Donald Seligman filed a separate complaint
in this litigation alleging claims under Sections 11, 12(2) and 15 of the
Securities Act of 1933. They allege that the Company failed to disclose in its
prospectus and registration statement for its secondary offering of securities
on May 5, 1998, alleged difficulties JDA was allegedly having with the
development of the ODBMS product. 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:
The Company held its Annual Meeting of Stockholders on May 20, 1999 to vote on
the following matters.
1. The election of Messrs. James D. Armstrong and Frederick M. Pakis to
serve on the Board of Directors for a three-year term. There were
19,535,409 votes cast in favor of Mr. Armstrong's election with
1,812,882 withheld. There were 19,533,409 votes cast in favor of Mr.
Pakis' election with 1,814,882 withheld. Four additional directors, J.
Michael Gullard, William C. Keiper, Stephen A. McConnell and Jock
Patton will continue to serve their existing terms through 2000
(Messrs. Gullard and Keiper) or 2001 (Messrs.
McConnell and Patton).
2. To approve adoption of the 1999 Employee Stock Purchase Plan which
provides for the issuance of up to 750,000 shares of common stock
annually to employees of the Company. There were 18,020,031 votes cast
in favor of the adoption with 2,418,008 against and 910,252
abstentions.
3. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent public accountants for the year ending December 31, 1999.
There were 21,288,602 votes cast in favor of the ratification with
35,955 against and 23,734 abstentions.
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ITEM 5. OTHER INFORMATION:
On July 28, 1999, the Company announced that Co-Chairman and Co-Chief
Executive Officer Frederick M. Pakis resigned as Co-Chief Executive
Officer and would resume his former post of Co-Chairman effective
immediately. James D. Armstrong will now serve as the Company's sole
Chief Executive Officer while continuing to share Co-Chairman
responsibilities with Mr. Pakis.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits: See Exhibit Index
(b) Reports on Form 8-K:
None
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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: August 13, 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 -- 1999 Employee Stock Purchase Plan.
10.11+ -- 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).
10.12*** -- Lease Agreement between Opus West Corporation and
JDA Software Group, Inc. dated April 30, 1998,
together with First Amendment dated June 30, 1998.
10.13*** -- Real Estate Option Agreement and Escrow Instructions between Mall at the
Crossroads, Inc. and JDA Software Group, Inc. dated June 8, 1998.
10.14* -- Lease Agreement between Holly Pond Associates Limited Partnership and JDA
Software, Inc. dated June 16, 1993 (Stamford, Connecticut).
10.15+ -- Lease Agreement between Oxford Development Group, Inc. and JDA Software Canada
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Ltd. (formerly known as JDA Software Services Ltd.) dated July 11, 1994 (Calgary, Alberta)
10.16** -- Software License Agreement dated as of June 4, 1998 by and between Comshare,
Incorporated and JDA Software, Inc.
10.17*(2) -- License Agreement between Uniface Corporation and JDA Software, Inc. dated
February 9, 1994.
10.18*(2) -- Standard Value-Added Reseller Agreement between Uniface Corporation and JDA
Software, Inc. dated February 9, 1994.
10.19*(1) -- JDA Software, Inc. 401(k) Profit Sharing Plan, adopted as amended effective January 1,
1995.
10.20# -- Business Loan Agreement between Bank of America Arizona and JDA Software, Inc.
dated September 30, 1998.
10.21***(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.
10.22++(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
10.23+++(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
- ----------
* 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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