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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 23,915,649 as of October 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 September 30, 1999 and December 31, 1998....... 3
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and September 30, 1998............................ 4
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine
Months ended September 30, 1999 and September 30, 1998............................ 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and September 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 5. Other Information.......................................................................... 27
Item 6. Exhibits and Reports on Form 8-K........................................................... 27
Signature........................................................................................... 28
2
3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 46,717 $ 42,376
Marketable securities 35,212 36,316
Accounts receivable, net 36,164 40,570
Income tax receivable 912 --
Deferred tax asset 2,268 2,121
Prepaid expenses and other current assets 5,016 5,003
--------- ---------
Total current assets 126,289 126,386
PROPERTY AND EQUIPMENT, NET 25,018 23,890
GOODWILL AND OTHER INTANGIBLES, NET 32,728 36,039
DEFERRED TAX ASSET 6,222 6,549
MARKETABLE SECURITIES 7,060 6,697
--------- ---------
Total assets $ 197,317 $ 199,561
========= =========
CURRENT LIABILITIES:
Accounts payable $ 3,284 $ 4,834
Accrued expenses and other liabilities 12,662 16,336
Deferred revenue 7,331 6,894
--------- ---------
Total current liabilities 23,277 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 23,915,649 and 23,419,808, respectively 239 234
Additional paid in capital 175,558 172,417
Accumulated deficit (744) (430)
Accumulated other comprehensive loss (1,013) (724)
--------- ---------
Total stockholders' equity 174,040 171,497
--------- ---------
Total liabilities and stockholders' equity $ 197,317 $ 199,561
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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4
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ------------------------
1999 1998 1999 1998
-------- ------- --------- ---------
REVENUES:
Software licenses $ 8,662 $12,355 $ 26,755 $ 36,717
Consulting, maintenance and other services 26,661 26,507 80,930 68,724
-------- ------- --------- ---------
Total revenues 35,323 38,862 107,685 105,441
-------- ------- --------- ---------
COST OF REVENUES:
Software licenses 539 455 1,552 1,564
Consulting, maintenance and other services 18,081 17,064 53,762 46,952
-------- ------- --------- ---------
Total cost of revenues 18,620 17,519 55,314 48,516
-------- ------- --------- ---------
GROSS PROFIT 16,703 21,343 52,371 56,925
-------- ------- --------- ---------
OPERATING EXPENSES:
Product development 6,181 5,879 17,975 14,911
Sales and marketing 5,547 6,099 18,425 14,595
General and administrative 4,491 3,687 13,806 9,999
Amortization of intangibles 1,092 951 3,317 1,178
Purchased in-process research and development -- -- -- 17,000
Restructuring and asset disposition charge -- -- 2,111 --
-------- ------- --------- ---------
Total operating expenses 17,311 16,616 55,634 57,683
-------- ------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (608) 4,727 (3,263) (758)
Other income, net 901 1,153 2,740 2,327
-------- ------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 293 5,880 (523) 1,569
Income tax provision (benefit) 117 2,439 (209) 301
-------- ------- --------- ---------
NET INCOME (LOSS) $ 176 $ 3,441 $ (314) $ 1,268
======== ======= ========= =========
BASIC EARNINGS (LOSS) PER SHARE $ .01 $ .15 $ (.01) $ .06
======== ======= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE $ .01 $ .15 $ (.01) $ .06
======== ======= ========= =========
SHARES USED TO COMPUTE:
Basic earnings per share 23,821 23,418 23,689 21,781
======== ======= ========= =========
Diluted earnings per share 23,821 23,418 23,689 21,794
======== ======= ========= =========
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- ---------------------
1999 1998 1999 1998
---- ------- ----- -------
NET INCOME (LOSS) $176 $ 3,441 $(314) $ 1,268
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment 422 (131) (289) (355)
---- ------- ----- -------
COMPREHENSIVE INCOME (LOSS) $598 $ 3,310 $(603) $ (913)
==== ======= ===== =======
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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6
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net income (loss) $ (314) $ 1,268
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,997 5,138
Provision for doubtful accounts 3,072 472
Net loss on disposal of property and equipment 238 --
Write-off of purchased in-process research and development -- 17,000
Deferred income taxes 180 (7,533)
Changes in assets and liabilities:
Accounts receivable 1,334 (13,033)
Income tax receivable (912) --
Prepaid expenses and other current assets (13) (5,604)
Accounts payable (1,550) 430
Accrued expenses and other liabilities (3,614) 2,403
Income taxes payable -- 3,052
Deferred revenue 437 2,601
--------- ---------
Net cash provided by operating activities 7,855 6,194
--------- ---------
INVESTING ACTIVITIES:
Purchase of marketable securities (218,736) (327,338)
Sales of marketable securities 33,999 268,862
Maturities of marketable securities 185,478 17,800
Purchase of Arthur Retail Business Unit -- (44,000)
Purchase of property and equipment (9,205) (10,833)
Proceeds from disposal of property and equipment 2,153 --
--------- ---------
Net cash used in investing activities (6,311) (95,509)
--------- ---------
FINANCING ACTIVITIES:
Issuance of common stock - secondary offering -- 99,628
Issuance of common stock - stock option plan 421 4,187
Issuance of common stock - employee stock purchase plan 2,725 434
Tax benefit - stock options and employee stock purchase plan -- 2,366
Payments on capital lease obligations (60) (39)
--------- ---------
Net cash provided by financing activities 3,086 106,576
--------- ---------
Effect of exchange rates on cash (289) (355)
--------- ---------
Net increase in cash and cash equivalents 4,341 16,906
--------- ---------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 42,376 27,304
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 46,717 $ 44,210
========= =========
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1999 1998
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 33 $ 11
======== ========
Income taxes $ 1,436 $ 2,531
======== ========
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 (26,154)
Liabilities assumed 6,854
--------
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 nine months ended
September 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 months ended September 30, 1999 and 1998, and the nine
months ended September 30, 1999 as their effect is not dilutive:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
Shares--Basic earnings per share ....... 23,821 23,418 23,689 21,781
Dilutive common stock equivalents -- -- -- 13
Shares--Diluted earnings per share ..... 23,821 23,418 23,689 21,794
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
nine-months ended September 30, 1999 and 1998 is as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
United States $ 19,943 $ 22,808 $ 58,280 $ 62,518
EMEA 9,353 11,316 30,493 31,813
Asia/Pacific 3,436 1,477 8,832 4,352
Canada 1,237 2,991 6,493 8,438
Latin America 2,110 1,231 6,715 3,950
-------- -------- --------- ---------
Total International 16,136 17,015 52,533 48,553
-------- -------- --------- ---------
Sales and transfers among regions (756) (961) (3,128) (5,630)
-------- -------- --------- ---------
Total revenues $ 35,323 $ 38,862 $ 107,685 $ 105,441
======== ======== ========= =========
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
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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 nine-months ended September 30, 1999 and
1998 is as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- ---------------------
1999 1998 1999 1998
------- ------- -------- --------
Revenues:
Enterprise Systems $21,814 $23,671 $ 65,995 $ 73,358
In-store Systems 4,791 7,738 15,817 19,717
Analytic Applications 8,718 7,453 25,873 12,366
------- ------- -------- --------
Total revenues $35,323 $38,862 $107,685 $105,441
======= ======= ======== ========
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1999 1998 1999 1998
------- ------- -------- --------
Operating income (loss):
Enterprise Systems $ 2,764 $ 3,142 $ 5,220 $ 15,341
In-store Systems (26) 3,006 2,493 6,755
Analytic Applications 2,031 1,987 4,602 (12,773)
Other (5,377) (3,408) (15,578) (10,081)
------- ------- -------- --------
Total income (loss) from operations $ (608) $ 4,727 $ (3,263) $ (758)
======= ======= ======== ========
The operating income (loss) shown for Enterprise Systems, In-store
Systems and Analytic Applications include allocations for occupancy costs,
depreciation expense, and amortization of related intangibles. All other
non-allocated expenses that are not directly identified with a particular
Operating Segment are reported under the caption "Other" including the $2.1
million restructuring and asset disposition charge that was recorded during the
three months ended March 31, 1999. The operating loss shown for Analytical
Applications for the nine months ended September 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 geographic distribution of our identifiable assets as of September
30, 1999 and December 31, 1998 is as follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
United States $153,849 $156,197
EMEA 24,742 28,504
Asia/Pacific 9,453 7,193
Canada 4,247 5,471
Latin America 5,026 2,196
-------- --------
Total International 43,468 43,364
-------- --------
Total identifiable assets $197,317 $199,561
======== ========
Changes in identifiable assets between geographic regions result
primarily from the relative sales activity during the nine months ended
September 30, 1999 and the collection of outstanding receivable balances.
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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 included in the restructuring
charge were made on or before March 31, 1999. As of September 30, 1999, the
Company had utilized approximately $1.9 million of the related reserve and
anticipates that substantially all of the remaining reserve will be utilized
during 1999.
5. 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, an alleged shareholder of the Company, filed a
securities class action lawsuit against the Company, its Chief Executive Officer
and Co-Chairman of the Board, James D. Armstrong, its former Co-Chief Executive
Officer and current Co-Chairman of the Board, Frederick M. Pakis, 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 alleged that during the 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. Following the filing of the action,
lawsuits were filed by others making substantially similar allegations. The
District Court consolidated these lawsuits and appointed lead plaintiffs in the
consolidated case On July 23, 1999, the 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. It also alleges that during the new class period, the Company and
the individual defendants failed to disclose alleged difficulties the Company
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, certain plaintiffs filed a separate
complaint alleging that the Company, Mr. Armstrong, Mr. Pakis and Mr. Lippman
failed to disclose in the prospectus and registration statement for the
Company's secondary offering of securities on May 5, 1998, alleged difficulties
the Company was having with the development of the ODBMS product. The Company
intends to move to dismiss both complaints. Management believes that the actions
are without merit and intends to defend them vigorously.
6. 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, 2000. 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.
7. RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 financial
statements to conform to the September 30, 1999 presentation.
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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 6 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 September 30, 1999 Compared to Three Months Ended September 30,
1998," "Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 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. Our software products are
organized along three business units: Enterprise Systems, In-store Systems, and
Analytic Applications. We offer a wide range of professional services through
our consulting and customer support organizations, including project management,
system planning, design and implementation, custom modifications, training and
support services.
We have historically derived a significant portion of our revenues from
software licenses and consulting, maintenance and other services relating to our
IBM AS/400-based Merchandise Management System ("MMS"). Total revenues from the
MMS product line represented 39% and 41% of our total revenues during the three
and nine months ended September 30, 1999, respectively, versus 45% in fiscal
1998 and 56% in fiscal 1997. 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 increased revenues attributable to our other product lines and/or
reduced demand for MMS.
Software license revenues and consulting, maintenance and other services
revenues represented 25% and 75%, respectively, of our total revenues during the
three and nine months ended September 30, 1999, versus 31% and 69%, respectively
in fiscal 1998, and 46% and 54%, respectively, in fiscal 1997. The revenue mix
for fiscal 1998 was primarily affected by lower than anticipated software
license revenues in our international markets, while our quarterly and
year-to-date results for 1999 have been impacted by a downturn in demand for
domestic software licenses. We continue to be cautious about our near-term
expectations for software licenses due to the uncertainties surrounding the
millenium change and the impact it has had on the length and predictability of
the selling cycles for some deals. As we get closer to the actual millenium
crossover, we believe contingency plans for Year 2000 compliance and the
corollary budget constraints may increasingly distract our clients. This
disruption could continue into early 2000 and we cannot predict when, if ever,
normal selling cycles will resume.
A significant portion of our business is conducted internationally. The
following tables set forth a quarterly comparison of 1997, 1998 and 1999
domestic and international software license revenues:
1997 1998
------------------------ ------------------------------------------
% CHANGE % CHANGE
QUARTER ENDED DOMESTIC INTERNATIONAL DOMESTIC VS. 1997 INTERNATIONAL VS. 1997
- ------------- -------- ------------- -------- -------- ------------- --------
March 31, $ 3,456 $ 4,409 $ 7,123 106% $ 4,926 12%
June 30, 4,357 5,201 8,302 91% 4,010 (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)%
======= ======= ======= ========
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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%
September 30, 8,581 3,775 4,117 (52)% 4,545 20%
------- ------- -------- -------
$24,006 $12,711 $ 10,502 (56)% $16,253 28%
======= ======= ======== =======
On a product line basis, software licenses in our Enterprise Systems
business unit increased sequentially over the second quarter of 1999 and between
the year-over-year quarters. In addition, most of the deferrals in our sales
pipeline in the third quarter of 1999 were for Enterprise Systems. With respect
to the ODBMS product, four new customers were signed during the third quarter of
1999 compared to two last quarter and only one in the third quarter of 1998.
Although recent sales of the ODBMS product have shown improvement, overall sales
of this product have historically failed to meet our expectations. We continue
to believe 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. As
we believe is typical with client/server products that are highly complex and
sophisticated, we have detected and are attempting to address certain design and
stability problems in early versions of our 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. We
have only discovered and evaluated certain of these problems after the ODBMS
product has been implemented and used by our customers with live data over time,
with different computer systems and in a variety of applications and
environments.
Software licenses in our Analytic Applications business unit were down
sequentially from the second quarter of 1999 and between the year-over-year
quarters. The second quarter of 1999 was a particularly strong quarter for
Analytic Applications and the third quarter of 1998 included recognition of over
$500,000 in deferred revenues related to the initial release of the Arthur
Assortment Planning software. Software licenses in our In-store Systems business
unit were off substantially from the second quarter of 1999 and between the
year-over-year quarters. We believe the decline in demand for our In-store
Systems results from deferred purchasing decisions that may stem from
uncertainty related to the millenium change, longer sales cycles, continued
weakness in global economies, increased competition and/or lack of desired
feature and functionality. We plan to reorganize our sales force for this
product line and address increased competition in this business segment by
refocusing some of our research and development investment on new feature and
functionality. We cannot guarantee that these actions will increase the demand
for this product line and any failure to do so could negatively impact our
business, operating results and financial condition.
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. Our service business continues to be
an important source of stable operating income and an important competitive
strength as we position ourselves as a total solution provider for retailers.
Consulting, maintenance and other services revenues remain flat compared to the
second quarter of 1999 and the third quarter of 1998. We expect these revenues
to be slightly lower in the fourth quarter of 1999 due to the holiday season and
the increased participation in training and product certification programs by
our consulting associates. We do not expect consulting, maintenance and other
services to increase until we begin to experience an increased demand in our
software license sales. We are, however, focusing on the replacement of
implementation and other service revenues associated with new software sales,
with sales of new and expanded services to our existing customer base. These
services include a global 24-hour customer support service centralized in our
corporate offices and optimum service offerings for point-of-sale customers. We
will continue to adjust the size and composition of the workforce in our
services organization to match the different product and geographical demand
cycles.
We have pursued a strategy of addressing international markets by developing
localized versions of our products and establishing international subsidiaries
with direct sales and consulting capabilities. Our international revenues
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represented 46% and 48% of total revenues for the three months and nine months
ended September 30, 1999, as compared with 45% and 55% in the fiscal years ended
December 31, 1998 and 1997, respectively.
We remain cautious about our expectations regarding domestic and
international operations in the near term. We expect our operating results to
continue to be less predictable in the future than was the case historically as
a result of uncertainties in certain geographic regions and weakness in demand
for our software products, possibly related, in part, to the millenium change.
We believe these economic conditions and uncertainties could continue to
adversely impact our business, operating results and financial condition for an
indefinite period of time. We will continue to try to moderate our operating
expenses in the future to remain at breakeven to slightly profitable operating
levels while software licenses remain at reduced levels due to deferred
purchasing decisions or budgetary lock-downs caused by uncertainty related to
the millenium change.
To the extent our international operations expand or represent an increasing
percentage of our overall business, we would expect that an increasing portion
of our international software license and consulting, maintenance and other
services revenues will be denominated in foreign currencies, which subjects us
to risks related to fluctuations in foreign currency exchange rates.
Historically, our operations have not been materially adversely affected by
fluctuations in foreign currency exchange rates, and we have not engaged in
foreign currency hedging transactions. However, if our international operations
expand, 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. There can be no
assurance that any currency exchange strategy would be successful in avoiding or
reducing exchange-related losses. In addition, revenues earned in various
countries where we do business may be subject to taxation by more than one
jurisdiction, thereby adversely affecting our earnings.
We had net receivables of $36.2 million, or 94 days sales outstanding
("DSOs") at September 30, 1999, compared to $39.8 million, or 97 DSOs at June
30, 1999 and $40.6 million, or 113 DSOs at December 31, 1998. Although we have
placed significant focus and made steady progress on our collections, we found
it necessary to provide additional bad debt reserves of $1.1 million during the
third quarter of 1999 primarily as a result of three new domestic bankruptcy
filings.
RECENT DEVELOPMENTS
- - We completed benchmark testing of the ODBMS product in the Apparel and Home
Division of a large tier one retailer during the third quarter of 1999. The
successful completion of these benchmark tests resulted in the signing of a
separate ODBMS license by another division of this retailer during the
third quarter of 1999.
- - Our first MMS.com client went live on this e-commerce solution within four
months of contract signing. We also signed our first Latin American MMS.com
client. MMS.com, which is based on IBM's Net.Commerce merchant server
software, is an e-commerce merchandizing solution that is designed to
deliver a scalable and dynamic online commerce engine and that enables
retailers to establish a secure, integrated virtual store on the Internet.
MMS.com 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.
- - We established business operations in Japan.
- - We announced the resignation of Frederick M. Pakis as Co-Chief Executive
Officer during the third quarter of 1999. Mr. Pakis will continue to serve
in his capacity as Co-Chairman. James D. Armstrong now serves as our sole
Chief Executive Officer and continues to share Co-Chairman responsibilities
with Mr.
Pakis.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenues
Total revenues for three months ended September 30, 1999 were $35.3 million,
a decrease of 9% over the $38.9 million reported in the comparable quarter of
1998. Revenues consist of software licenses and consulting, maintenance and
other services, which represented 25% and 75%, respectively, of total revenues
during the three months ended September 30, 1999, and 32% and 68%, respectively
in the comparable quarter of 1998.
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Software Licenses. Software license revenues for the three months ended
September 30, 1999 were $8.7 million, a decrease of 30% from the $12.4 million
reported in the comparable quarter of 1998. Domestic software license revenues
decreased 52% between the comparable quarters, offset in part by a 20% increase
in international software license revenues. The international results include
increases in each of the EMEA (24%), Asia/Pacific (112%) and Latin American
(570%) regions and an 80% decrease in Canada. Enterprise Systems software
license revenues increased 8% between the comparable quarters primarily as a
result of increased sales of the ODBMS product. Analytic Applications and
In-store Systems software license revenues decreased 10% and 92%, respectively
between quarters. The Analytic Applications results for the third quarter of
1998 include recognition of over $500,000 in deferred revenues related to the
initial release of the Arthur Assortment Planning software. We plan to
reorganize our In-store Systems sales force and address increased competition in
this business segment by refocusing some of our research and development
investment on new feature and functionality. We continue to be cautious about
our near-term expectations for software licenses due to the uncertainties
surrounding the millenium change and the impact it has had on the length and
predictability of the selling cycles for some deals. As we get closer to the
actual millenium crossover, we believe contingency plans for Year 2000
compliance and the corollary budget constraints may increasingly distract our
clients. This disruption could continue into early 2000 and we cannot predict
when, if ever, normal selling cycles will resume.
Consulting, Maintenance and Other Services. Consulting, maintenance and
other services revenues for the three months ended September 30, 1999 were $26.7
million versus $26.5 million in the comparable quarter of 1998. Domestic
consulting, maintenance and other services revenues increased 8% between the
comparable quarters while international consulting, maintenance and other
services revenues decreased 8% during these same periods. We expect consulting,
maintenance and other services revenues to be slightly lower in the fourth
quarter of 1999 due to the holiday season and the increased participation in
training and product certification programs by our consulting associates. We do
not expect consulting, maintenance and other services to increase until we begin
to experience an increased demand in our software license sales. We are however,
focusing on the replacement of implementation and other services associated with
the new software sales, with sales of new and expanded services to our existing
customer base. These services include a global 24-hour customer support service
centralized in our corporate office and an optimum service offering for
point-of-sale customers.
Cost of Revenues
Cost of software license revenues was $539,000, or 6% of software license
revenues, for the three months ended September 30, 1999 as compared to $455,000,
or 4%, in the comparable quarter of 1998. The higher costs in the current
quarter result from the higher mix of products that incorporate software
technology licensed from third party suppliers. Consulting, maintenance and
other services costs for the three months ended September 30, 1999 were $18.1
million, an increase of 6% over the $17.1 million reported in the comparable
quarter of 1998. The consulting, maintenance and other services organization
headcount increased by 2% between periods, and as of September 30, 1999, there
were 664 employees involved in these functions worldwide. We expect only modest
growth, if any, in the overall size of our services organization during the
fourth quarter of 1999. We will continue to adjust the size and composition of
the workforce in our service organization to match the different geographical
demand cycles.
Gross Profit
Gross profit for the three months ended September 30, 1999 was $16.7
million, a decrease of 22% from the $21.3 million reported in the comparable
quarter of 1998. Gross profit, as a percentage of total revenues, decreased from
55% to 47% between the comparable quarters. This decrease results primarily from
the higher mix of consulting, maintenance and other services revenues as a
percentage of total revenues during the three months ended September 30, 1999.
Our service margins decreased between the comparable quarters from 36% to 32%.
Service margins were adversely impacted during the current quarter by decreased
utilization in our consulting services group, the transition costs associated
with the centralization of global support in our corporate office and increased
training costs. We will attempt to maintain our service margins at the current
run rate of 32% into next year as we continue our centralization and training
effort.
Operating Expenses
Product Development. Product development expenses for the three months ended
September 30, 1999 were $6.2 million, an increase of 5% over the $5.9 million
reported in the comparable quarter of 1998. Product development
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expenses as a percentage of total revenues increased between the comparable
quarters from 15% 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, we
continue to focus on the feature, functionality, stability, and scalability of
all our product lines including ODBMS and Win/DSS. We increased our product
development staff by 8% between the comparable quarters and as of September 30,
1999, there were 215 employees involved in the product development function. We
currently plan to increase our quarterly investment in product development next
quarter. Our development efforts will focus on the timely release of ODBMS
version 4.1, enhancements that add feature and functionality to existing
In-store Systems and Analytic Applications products, 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. We believe our current process for
developing software is essentially completed concurrent with the establishment
of technological feasibility, and accordingly, no costs have been capitalized.
Sales and Marketing. Sales and marketing expenses for the three months ended
September 30, 1999 were $5.5 million, a decrease of 9% from the $6.1 million
reported in the comparable quarter of 1998. We incurred lower commissions due to
the decreased volume of software license sales between the comparable quarters;
however, our sales and marketing expenses, as a percentage of total revenues,
remained static at 16% in both quarters. Our worldwide sales and marketing staff
decreased by 2% between the comparable quarters and as of September 30, 1999,
there were 109 employees involved in this function. We will continue to realign
our sales force to match the demands among product lines and geographic regions,
and anticipate only modest sequential expansion of our worldwide sales and
marketing staff during the fourth quarter of 1999.
General and Administrative. General and administrative expenses for the
three months ended September 30, 1999 were $4.5 million, an increase of 22% over
the $3.7 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 13%. The increase in general and administrative
expenses is due primarily to an increase in bad debt reserves of $1.1 million
during the third quarter of 1999, which primarily resulted from three new
domestic bankruptcy filings, compared to $172,000 in the comparable prior year
quarter. We anticipate that our quarterly general and administrative expenses
will go down in the fourth quarter of 1999 and return to the lower levels
achieved in the first quarter of this year.
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.
Provision for Income Taxes
Our 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, we may be subject to audit by federal, state
and/or foreign taxing authorities. We are currently undergoing an audit of our
fiscal 1996 and 1997 Federal Income Tax Returns. In connection with the audit,
we have received proposed adjustments from the Internal Revenue Service ("IRS")
reducing our 1996 and 1997 research and development expense tax credits. The
Company and its tax advisors disagree with the adjustments proposed by the IRS
and intend to vigorously appeal them. Accordingly, we are unable to determine
the financial impact of the audit at this time. However, we do not believe that
the IRS adjustments, even as currently proposed, will have a material impact on
our business, operating results and financial condition.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Revenues
Total revenues for nine months ended September 30, 1999 were $107.7 million,
an increase of 2% over the $105.4 million reported in the comparable period of
1998. Revenues consist of software licenses and consulting, maintenance and
other services, which represented 25% and 75%, respectively, of total revenues
during the nine months ended September 30, 1999, and 35% and 65%, respectively
in the comparable period of 1998.
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Software Licenses. Software license revenues for the nine months ended
September 30, 1999 were $26.8 million, a decrease of 27% from the $36.7 million
reported in the comparable period of 1998. Domestic software license revenues
decreased 56% between the comparable periods, offset in part by a 28% increase
in international software license revenues. The international results include
increases in each of the EMEA (21%) Asia/Pacific (98%) and Latin America (349%)
regions, and a 70% decrease in Canada. Enterprise Systems and In-store Systems
software license revenues decreased 38% and 67%, respectively between periods.
Analytic Applications software license revenues increased 48% between periods
primarily as a result of additional software license revenues from the Arthur
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 nine months ended September 30, 1999 were $80.9
million, an increase of 18% over the $68.7 million reported in the comparable
period of 1998. Although we experienced increases in service revenues from each
of our product lines, 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 33% and 3%, respectively, between the comparable periods.
Cost of Revenues
Cost of software license revenues was $1.6 million for the nine months ended
September 30, 1999 compared to $1.6 million in the comparable period of 1998.
Cost of software licenses represented 6% and 4% of software license revenues in
the respective periods. The higher costs in the nine-month period ended
September 30, 1999 result from the higher mix of products that incorporate
software technology licensed from third party suppliers. Consulting, maintenance
and other services costs for the nine months ended September 30, 1999 were $53.8
million, an increase of 15% over the $47.0 million reported in the comparable
period of 1998. The consulting, maintenance and other services organization
headcount increased by 2% between periods, and as of September 30, 1999, there
were 664 employees involved in these functions worldwide.
Gross Profit
Gross profit for the nine months ended September 30, 1999 was $52.4 million,
a decrease of 8% from the $56.9 million reported in the comparable period of
1998. Gross profit, as a percentage of total revenues, decreased from 54% 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 nine months ended September 30, 1999. Our service margins
increased between the comparable periods from 32% to 34%. This improvement
reflects the favorable impact of increases in our maintenance base, both from
the Arthur Retail acquisition and core JDA products, higher average billing
rates in our consulting practice, and the elimination of outside contractors in
Europe.
Operating Expenses
Product Development. Product development expenses for the nine months ended
September 30, 1999 were $18.0 million, an increase of 21% over the $14.9 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 17%. This increase results primarily from continuing development activities
associated with ODBMS and 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 nine months ended
September 30, 1999 were $18.4 million, an increase of 26% over the $14.6 million
reported in the comparable period of 1998. Sales and marketing expenses, as a
percentage of total revenues, increased between the comparable periods from 14%
to 17%. This increase results primarily from the incremental costs of the Arthur
Retail Business Unit and the initial sales and marketing costs incurred
connection with the establishment of business operations in Japan.
General and Administrative. General and administrative expenses for the nine
months ended September 30, 1999 were $13.8 million, an increase of 38% over the
$10.0 million reported in the comparable period of 1998. General and
administrative expenses, as a percentage of total revenues, increased between
the comparable periods
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from 9% to 13%. The increase in general and administrative expenses is primarily
due to an increase in bad debt reserves of $3.1 million during the nine months
ended September 30, 1999 versus $472,000 in the comparable prior year period,
additional administrative personnel in our domestic and international
operations, depreciation on purchases of property and equipment related to our
expansion, duplicate rent and other non-recurring charges of approximately
$400,000 related to the consolidation and relocation of our corporate offices,
and the incremental costs of Arthur Retail Business Unit.
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. We 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 our corporate operations into one facility ($507,000), and
the release of over 80 subcontractors worldwide. All workforce reductions
included in the restructuring charge were made on or before March 31, 1999.
Provision for Income Taxes
Our 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, we may be subject to audit by federal, state
and/or foreign taxing authorities. We are currently undergoing an audit of our
fiscal 1996 and 1997 Federal Income Tax Returns. In connection with the audit,
we have received proposed adjustments from the IRS reducing our 1996 and 1997
research and development expense tax credits. The Company and its tax advisors
disagree with the adjustments proposed by the IRS and intend to vigorously
appeal them. Accordingly, we are unable to determine the financial impact of the
audit at this time. However, we do not believe that the IRS adjustments, even as
currently proposed, will have a material impact on our business, operating
results and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through cash
generated from operations and public sales of equity securities. The Company had
working capital of $103.0 million at September 30, 1999 compared with $98.3
million at December 31, 1998. Cash and cash equivalents at September 30, 1999
were $46.7 million, an increase of $4.3 million from the $42.4 million reported
at December 31, 1998. We also had $42.3 million in marketable securities at
September 30, 1999, a decrease of $700,000 from the $43.0 million reported at
December 31, 1998.
Operating activities provided cash of $7.9 and $6.2 million during the nine
months ended September 30, 1999 and 1998, respectively. Cash provided from
operating activities during the nine months ended September 30, 1999 resulted
primarily from $9.0 million of depreciation and amortization, $3.1 million in
provision for doubtful accounts, and a $1.3 million decrease in accounts
receivable, offset in part by a $912,000 increase in income tax receivable and a
$5.2 million decrease in accounts payable and accrued expenses. Cash provided
from operating activities for the nine months ended September 30, 1998 resulted
primarily from net income of $11.4 million, excluding the one-time charge for
purchased in-process research and development and related tax benefit, $5.1
million of depreciation and amortization, a $3.1 increase in income taxes
payable, a $2.8 million increase in accounts payable and accrued expenses, and a
$2.6 million increase in deferred revenue, offset in part by a $13.0 million
increase in accounts receivable and a $5.6 increase in prepaid expenses and
other current assets. We had net accounts receivable of $36.2 million, or 94
days sales outstanding ("DSOs") at September 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 $6.3 million and $95.5 million during
the nine months ended September 30, 1999 and 1998, respectively. The 1999
activity includes $9.2 million in capital expenditures, including over $3.6
million related to our corporate office relocation, offset in part by the net
maturity of $741,000 of marketable
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securities. The 1998 activity includes the net purchase of $40.7 million of
marketable securities, $10.8 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 $3.1 million and $106.6 million during
the nine months ended September 30, 1999 and 1998, respectively. The activity in
both periods includes proceeds from the issuance of common stock and related tax
benefits under our 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 our foreign operations had the
effect of reducing cash by $289,000 and $355,000 in the nine months ended
September 30, 1999 and 1998, respectively. We did not enter into any foreign
exchange contracts or engage in similar hedging strategies during either of the
periods.
We maintain 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 that we 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 September 30, 1999. We
believe that our 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 our normal
operating requirements for at least the next twelve months.
YEAR 2000 COMPLIANCE
We have designated a continuing project team to assess the Year 2000
compliance of our software products. Based on our assessment to date, we believe
the current versions of our software products are "Year 2000 compliant," that
is, they are capable of adequately distinguishing 21st century dates from 20th
century dates. However, we are aware that some of our customers are running
earlier versions of our software products that are not Year 2000 compliant. We
have contacted and encouraged such customers to migrate to current product
versions. Moreover, our products are generally integrated into enterprise
systems involving complicated software products developed by other vendors. The
most probable worst case scenario is that we may in the future be subject to
claims based on Year 2000 problems in others' products, custom modifications
made by us or third parties to our products, or issues arising from the
integration of multiple products within an overall system. We have not been a
party to any litigation or arbitration proceeding to date alleging that our
products or services are not Year 2000 compliant. However, we are from time to
time involved in payment disputes and may be subject to Year 2000 counter
claims. There can be no assurance that we will not in the future be required to
defend our 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 we may incur for Year 2000-related
damages, including consequential damages, could have a material adverse effect
on our business, operating results and financial condition.
We face a risk to the extent that suppliers of products, services and
systems purchased by us and others with whom we transact business on a worldwide
basis do not comply with Year 2000 requirements. In the event any such third
parties cannot provide us 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 the we require,
our operating results could be materially adversely affected. Our plan for the
Year 2000 has included compliance verification of financial institutions,
investment advisors, independent payroll service providers, external vendors who
have supplied software and information systems to us and communication with
significant suppliers to determine the readiness of third parties' remediation
of their own Year 2000 issues. As part of our Year 2000 contingency plan, we
maintain our cash and marketable securities with multiple financial institutions
and investment advisors.
We are 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. These disruptions could
continue into early 2000 and we cannot predict when, if ever, normal purchasing
cycles of our customers or potential customers will resume. As a result, no
assurance can be given that Year 2000 problems within our 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 we offer. To the extent Year 2000
issues cause significant delays in, or
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cancellation of, decisions to purchase our products or services, our business,
operating results and financial condition would be materially adversely
affected. We believe that the reduced year over year demand for our software
licenses may be partially attributable to Year 2000 issues. Our ability to
deliver consulting services depends in part on the mobility of our consulting
services personnel. To the extent that the domestic or international travel
infrastructure is significantly affected by the century change, our ability to
deliver consulting services would be affected and our business and operating
results could be adversely impacted.
We recognize the need to ensure our internal operations will not be
adversely impacted by Year 2000 software failures, and have established a
project team to assess Year 2000 risks regarding the ability of our internal
systems to operate after December 31, 1999. The project team has identified and
continues to implement changes to our computer hardware and software
applications to ensure availability and integrity of our financial systems and
the reliability of our operational systems. We converted our existing legacy
accounting software to a Year 2000 compliant version in December 1998. This
conversion was performed entirely by our internal IS staff and the costs of
modifying this software have been expensed as incurred. We have modified our
existing time and billing system to be Year 2000 compliant. The conversion of
the existing time and billing system was completed in April 1999. We have
incurred approximately $70,000 to date on Year 2000 compliance activities and
expect to incur no more than $20,000 to complete our Year 2000 compliance
activities. These costs and the timing in which we plan to complete our Year
2000 modification and testing procedures are based on our best estimates.
However, there can be no assurance that we will timely identify and remediate
all significant Year 2000 problems, or that any such remedial efforts will not
have a material adverse effect on our 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 our products
currently comply with the requirements of the initial phase-in of the Euro, they
are not fully "Euro Compliant." We have defined Euro Compliant to mean that our
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, have the ability to provide all of
the following functions:
(1) Conversion of NCUs to Euro (and vice versa) at the Fixed Conversion
Rates and conversion of NCUs to NCUs using the Fixed Conversion Rates
between the relevant NCUs and the Euro and, in each case, rounding of
such amounts in accordance with the current applicable laws and
regulations.
(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.
We will incorporate additional Euro Compliant functionality, as necessary,
into the future versions of each of our products. To the extent the development
and release of fully Euro Compliant versions does not occur in a timely manner,
we could experience significant delays in, or cancellation of, decisions to
purchase its products or services, and as a result, our 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
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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, although recent sales of the ODBMS product have shown improvement,
sales of our ODBMS product have historically 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 In-store Systems 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, increased competition and/or lack of desired
feature and functionality. We plan to reorganize our sales force for this
product line and address increased competition in this business segment by
refocusing some of our research and development investment on new feature and
functionality. We cannot guarantee that these actions will increase the demand
for this product line and any failure to do so could negatively impact our
business, operating results and financial condition.
In the third quarter of 1999, we experienced a decline in sales of
our Analytic Applications products. While we do not foresee a significant
decline in demand for such products, we cannot guarantee that the demand for our
Analytic Applications products will continue, and any decrease in demand for
this product line could negatively impact our business, operating results and
financial condition.
We believe that the prevailing business reasons for purchasing merchandising
systems and the other software products that we offer still exist. However, you
should not rely on the current performance or historic growth rates for our
Enterprise Systems, In-store Systems, and Analytic Applications 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. Moreover, since the majority of our consulting
maintenance and other services revenues are derived from new software sales, any
extended decline in demand for our software license products could negatively
impact our consulting, maintenance and other services revenues.
We typically ship our software products when contracts are signed.
Consequently, our software license backlog at the beginning of any quarter has
represented only a small portion of that quarter's expected revenues. As a
result, software license revenues in any quarter depend in large part upon
contracts signed and the related shipment of software in that quarter. It is
therefore difficult for us to predict revenues. Because of the timing of our
sales, we typically recognize a substantial amount of our revenues in the last
weeks or days of the quarter, and we generally derive a significant portion of
our quarterly software license revenues from a small number of relatively large
sales. It is difficult to forecast the timing of large individual sales with
certainty. Accordingly, large individual sales have sometimes occurred in
quarters subsequent to when we anticipated. We expect that the foregoing trends
will continue. If we receive any significant cancellation or deferral of
customer orders, or we are unable to conclude license negotiations by the end of
a fiscal quarter, our operating results may be lower than anticipated. In
addition, 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.
We continue to be cautious about our near-term expectations for software
licenses due to the uncertainties surrounding the millenium change and the
impact it has had on the length and predictability of selling cycles for
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some deals. As we get closer to the actual millenium crossover, we believe
contingency plans for Year 2000 compliance and the corollary budget constraints
may increasingly distract our clients. This disruption could continue into early
2000. Further, we do not expect consulting, maintenance and other service
revenues to increase until we begin to experience an increased demand in our
software products. 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 only been installed at one 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. We also believe
that the retail industry may be consolidating and that the industry is from
time-to-time subject to increased competition and weakening economic conditions
that could negatively impact the industry, our customers' ability to pay for our
products and services and potentially lead to an increased number of bankruptcy
filings. Such consolidation and weakening economic conditions have in the past,
and may in the future, negatively impact our revenues, reduce the demand for our
products and may negatively impact our business, operating results and financial
condition.
We May Not be Able to Manage Our Growth. Our business grew rapidly from 1996
to 1998, with revenues increasing from $47.8 million in 1996, to $91.8 million
in 1997 and to $138.5 million in 1998. This 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 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. Most 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 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 we are unable to adequately increase our consulting
capacity, we would have to forego licensing opportunities or become
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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. 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 failure of
software revenues to fully return to historical levels, would cause our
consulting, maintenance and other services revenues to decline. We do not expect
consulting, maintenance and other service revenues to increase until we begin to
experience an increased demand in our software products. 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. We expect only modest growth, if any, in the size of our
services organization during the remainder of 1999. We will continue to adjust
the size and composition of the workforce in our services organization to match
the different product and geographic demand cycles.
Ability to Attract and Retain Skilled Personnel Is Important to Our Growth.
Our success is heavily dependent upon our ability to attract, hire, train,
retain and motivate skilled personnel, including sales and marketing
representatives, qualified software engineers involved in ongoing product
development, and consulting personnel who assist in the implementation of our
products and services. The market for such individuals is intensely competitive,
particularly in international markets. In this regard, we dramatically increased
the number of associates involved in these functions during 1997 and 1998 in
connection with the continuing development and rollout of our client/server
products, and to support further development and implementation of MMS. Given
the critical roles of our sales, product development and consulting staffs, our
inability to recruit successfully or any significant loss of key personnel in
our sales, 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 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.
Although recent sales of our ODBMS product have shown improvement, sales of
our ODBMS product have historically 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.
The Company announced the commercial availability of the MMS.com e-commerce
product during the third quarter of 1999 and to date only one customer has gone
live with this product. The market for e-commerce products is new and quickly
evolving. As a result, we cannot predict the growth rate or size for this market
nor the impact
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this emerging form of commerce will have on the brick and mortar retail
operations traditionally served by our other software products. If the market
for our MMS.com product or other future web-enabled products fails to develop,
develops more slowly than expected or becomes saturated with competitors, or if
our e-commerce products are not accepted in the marketplace or are
technologically flawed, our business, operating results and financial condition
could be negatively impacted.
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 our 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 48% of total revenues in the nine months
ended September 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
our products often require a significant investment in advance of anticipated
future revenues. The opening of our new offices typically results in initial
recruiting and training expenses and reduced labor efficiencies associated with
the introduction of products to a new market. We cannot guarantee that the
countries in which we operate will have a sufficient pool of qualified personnel
from which to hire or that we will be successful at hiring, training or
retaining such personnel. In addition, we cannot assure you that we will be able
to successfully expand our international operations in a timely manner which
could negatively impact our business, operating results and financial condition.
Our international business operations are subject to risks associated with
international activities, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, longer accounts receivable payment cycles in
certain countries, potentially negative tax consequences, difficulties in
staffing and managing geographically disparate operations, greater difficulty in
safeguarding intellectual property, licensing and other trade restrictions,
currency fluctuations, repatriation of earnings, the burdens of complying with a
wide variety of foreign laws, and general economic conditions in international
markets. In addition, consulting, maintenance and other services in support of
international software licenses typically have lower gross margins than those
achieved domestically due to generally lower billing rates and/or higher costs
in certain of our international markets. Accordingly, any significant growth in
our international operations may result in further declines in gross margins on
consulting, maintenance and other services. We expect 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.
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
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developers such as 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, and Trimax. In the Analytic Applications
markets, the Arthur Suite competes primarily with Marketmax, 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 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
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development, introduction and marketing of new products, or that new products
and product enhancements will meet the requirements of the marketplace and
achieve market acceptance. If we are unable to develop and introduce products in
a timely manner in response to changing market conditions or customer
requirements, our business, operating results and financial condition will be
hurt.
Our Success Depends Upon Our Proprietary Technology. Our success and ability
to compete is dependent in part upon our proprietary technology, including our
software source code. To protect our proprietary technology, we rely on a
combination of trade secret, nondisclosure and copyright laws, which may afford
only limited protection. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. We have
no patents or patent applications pending. The source code for our proprietary
software is protected both as a trade secret and as a copyrighted work. Although
we rely on the limited protection afforded by such intellectual property laws,
we also believe that factors such as the technological and creative skills of
our personnel, new product developments, frequent product enhancements, name
recognition and reliable maintenance are also essential to establishing and
maintaining a technology leadership position. We generally enter into
confidentiality or license agreements with our employees, consultants and
customers, and generally control access to and distribution of our software,
documentation and other proprietary information. The terms of our license
agreements with our customers often require us to provide the customer with a
listing of the product source code. Although the license agreements place
restrictions on the use by the customer of our source code and do not permit the
re-sale, sublicense or other transfer of such source code, we cannot assure you
that unauthorized use of our technology will not occur.
Despite the measures we have taken to protect our proprietary rights,
unauthorized parties may attempt to reverse engineer or copy aspects of our
products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult. In addition, litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could hurt our business, operating results and financial
condition.
Our products use technology licensed from third parties, generally on a
non-exclusive basis. These licenses generally require us to pay royalties and
fulfill confidentiality obligations. We believe that alternative resources exist
for each of the material components of technology licensed from third parties.
However, the termination of any such licenses, or the failure of the third-party
licensors to adequately maintain or update their products, could result in
delays in our ability to sell our products while seeking substitute technology.
Any required replacement licenses could prove costly. Also, any such delay,
which becomes extended or occurs at or near the end of a fiscal quarter, could
result in a decline in our operating results. While it may be necessary or
desirable in the future to obtain other licenses relating to one or more of our
products or relating to current or future technologies, we cannot guarantee 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 by us
or third parties, 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 and E-Commerce software products, to contain undetected
errors when first released. They are discovered only after the product has been
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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.
There are Risks Associated With Acquisitions. We continually evaluate
potential acquisitions of complementary businesses, products and technologies,
including those which are significant in size and scope. Acquisitions involve a
number of special risks. Those risks include diversion of management's attention
to assimilate the operations and personnel of acquired businesses and the
integration of the acquired businesses' products and technologies into our own.
Whether we achieve the anticipated benefits of any acquisition will depend, in
part, upon whether integration of the acquired business, products or technology
is accomplished in an efficient and effective manner. The difficulties of such
integration may be increased by the necessity of coordinating geographically
disparate organizations, the complexity of the technologies being integrated,
and the necessity of integrating personnel with disparate business backgrounds
and combining different corporate cultures. The inability of management to
successfully integrate any acquisition which we may pursue, and any related
diversion of management's attention, may negatively affect our financial
performance. Moreover, we cannot guarantee that any products acquired will gain
acceptance in our markets, or that we will obtain the anticipated or desired
benefits of such acquisitions. Any acquisition which we pursue or consummate
could result in a potentially dilutive issuance of equity securities, the
incurrence of debt and contingent liabilities, amortization of goodwill and
other intangibles, purchased research and development expense, other
acquisition-related expenses and the loss of key employees, any of which 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, an alleged shareholder of the Company, filed a
securities class action lawsuit against the Company, its Chief Executive Officer
and Co-Chairman of the Board, James D. Armstrong, its former Co-Chief Executive
Officer and current Co-Chairman of the Board, Frederick M. Pakis, 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 alleged that during the 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. Following the filing of the action,
lawsuits were filed by others making substantially similar allegations. The
District Court consolidated these lawsuits and appointed lead plaintiffs in the
consolidated case On July 23, 1999, the 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. It also alleges that during the new class period, the Company and
the individual defendants failed to disclose alleged difficulties the Company
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, certain plaintiffs filed a separate
complaint alleging that the Company, Mr. Armstrong, Mr. Pakis and Mr. Lippman
failed to disclose in the prospectus and registration statement for the
Company's secondary offering of securities on May 5, 1998, alleged difficulties
the Company was having with the development of the ODBMS product. The Company
intends to move to dismiss both complaints. Management believes that the actions
are without merit and intends to defend them vigorously.
ITEM 5. OTHER INFORMATION:
On July 28, 1999, the Company announced the resignation of Co-Chief
Executive Officer Frederick M. Pakis. Mr. Pakis will continue to serve in his
capacity as Co-Chairman. James D. Armstrong now serves as the Company's sole
Chief Executive Officer and continues 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: November 11, 1999 By: /s/ Kristen L. Magnuson
-----------------------------------------
Kristen L. Magnuson
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION OF DOCUMENT
NUMBER
------
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 Outside Directors Stock Option Plan and forms of
agreement thereunder.
10.5***(1) -- Employment Agreement between James D. Armstrong and
JDA Software, Inc. dated January 1, 1998.
10.6***(1) -- Employment Agreement between Frederick M. Pakis and
JDA Software, Inc. dated January 1, 1998.
10.7(1) -- Employment Agreement among Frederick M. Pakis, JDA
Software Group, Inc, and JDA Software, Inc. effective
as of July 31, 1999.
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 Opus West Corporation and JDA
Software Group, Inc. dated April 30, 1998, together
with First Amendment dated June 30, 1998.
10.12** -- Software License Agreement dated as of June 4, 1998
by and between Comshare, Incorporated and JDA
Software, Inc.
10.13*(2) -- License Agreement between Uniface Corporation and JDA
Software, Inc. dated February 9, 1994.
10.14*(2) -- Standard Value-Added Reseller Agreement between
Uniface Corporation and JDA Software, Inc. dated
February 9, 1994.
30
10.15*(1) -- JDA Software, Inc. 401(k) Profit Sharing Plan,
adopted as amended effective January 1, 1995.
10.16# -- Business Loan Agreement between Bank of America
Arizona and JDA Software, Inc. dated September 30,
1998.
10.17***(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.
10.18++(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
10.19+++(1) -- Form of Incentive Stock Option Agreement between JDA
Software Group, Inc. and Kristen L. Magnuson to be
used in connection with stock option grants to Ms.
Magnuson pursuant to the JDA Software Group, Inc.
1996 Stock Option Plan.
27.1 -- Financial Data Schedule
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* Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-748), declared effective on March 14, 1996.
** Incorporated by reference to the Company's Current Report on Form 8-K
dated June 4, 1998, as filed on June 19, 1998.
*** Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1998, as filed on August
14, 1998.
+ Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1999, as filed on August
19, 1999.
++ 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.