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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27876
JDA SOFTWARE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 86-0787377
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11811 NORTH TATUM BLVD., SUITE 2000
PHOENIX, ARIZONA 85028
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 404-5500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the registrant's common stock
held by nonaffiliates of the registrant (based on the closing sales price of
such stock as reported by the Nasdaq Stock Market) on March 19, 1999 was
$130,219,597. Excludes shares of common stock held by directors, officers and
each person who holds 5% or more of the registrant's common stock. Number of
shares of common stock, $0.01 par value per share, outstanding as of March 19,
1999 was 23,679,783.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS FORM 10-K REFERENCE
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Portions of the Proxy Statement for the registrant's 1999 Items 10, 11, 12 and 13 of Part III
Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K
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This report on Form 10-K contains forward-looking statements. 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. Factors that could cause or contribute to disparities between our
forward-looking statements and our actual results are discussed throughout this
document, including the section entitled "Business" under the captions "Industry
Background," "JDA Solution," "Company Strategy," "Products," "Consulting,
Maintenance and Other Services," "Customers," "Sales and Marketing," "Product
Development and JDA Technology," "Competition," "Proprietary Rights," and
"Employees," the sections entitled "Properties," "Legal Proceedings," and
"Market for Registrant's Common Equity and Related Stockholder Matters," and the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" under the captions "Overview," "Restatement of
Quarterly Financial Statements," "Year Ended December 31, 1998 Compared to Year
Ended December 31, 1997," "Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996," "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.
PART I
ITEM 1. BUSINESS
JDA Software Group, Inc. ("JDA" or the "Company") is a global provider of
integrated retail software products and professional services. Designed to
optimize the retail enterprise, the Company's solutions address the requirements
for the entire retail supply chain including Enterprise Systems for
merchandising, warehouse management and logistic applications, In-store Systems
for point of sale and back office applications, and Analytic Applications for
merchandise planning and allocation, and decision support. The Company offers
products that operate on IBM AS/400-based and DOS-based platforms, as well as
products that operate in the UNIX and Windows NT open client/server
environments. JDA also offers a wide range of professional services through its
consulting and customer support organizations including: project management,
system planning, design and implementation, custom modifications, training and
support services.
The Company's products and services are marketed and sold primarily through
JDA's direct sales force and through cooperative relationships with sales
agents, distributors and other vendors, including the Beacon Group, ID
Application a.s, SPL Systems (Pty.) Ltd., IBM and Siemens Nixdorf. The Company's
solutions have been licensed to more than 600 retail enterprises worldwide and
address a wide variety of retail markets, including hard and soft lines
retailers, warehouse operations, department stores and grocery stores. The
Company's customers include many of the world's leading specialty retailers such
as Bed, Bath and Beyond, Inc., Bombay Company, Inc., C & J Clark International,
CRIS Group, Gucci SpA, LensCrafters, Inc., Office Depot International, PETCO
Animal Supplies, Inc., Pier 1 Imports, Inc., Ross Stores, Inc., Royal Duty Free
Shop, Inc., RSC Commercial Services, Sears Clothing Ltd., Staples, Inc.,
Sunglass Hut International, Virgin Entertainment Group, Inc. and
Williams-Sonoma, Inc.
INDUSTRY BACKGROUND
The retail industry is experiencing rapid change, driven primarily by
changing consumer preferences, intensifying competition and increasing
globalization. Many retailers have experienced increased pressure on operating
profits as they try to lower prices and increase marketing and promotions to
increase traffic in stores in order to increase sales. In addition, newer retail
formats, such as the "category killer" format employed by retailers such as
Staples and PETCO, have enjoyed broad market acceptance and are setting the
standards for lower prices and improved customer service. To exploit
international growth opportunities a number of retailers are seeking to apply
their concepts outside their domestic markets. Despite the significant
challenges
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in the retail industry, many retailers have successfully achieved efficiencies
and reduced operating costs by improving inventory management, decentralizing
the decision making process while centralizing purchasing and other
administrative functions, deploying state of the art information technology and
pursuing aggressive roll-out strategies to achieve economies of scale.
To respond to today's competitive challenges, retailers must accelerate the
rate at which they identify and respond to changing business conditions and
consumer requirements. A retail organization's agility and ultimate success are
dependent upon its ability to rapidly and cost-effectively collect, organize and
analyze data, and disseminate information throughout the enterprise to
facilitate effective business decisions. Such information provides a basis for
critical product, marketing, inventory, pricing and human resource decisions. In
addition, inventory management has become more complicated as retailers seek to
reduce costs and improve margins while replenishing inventory on a just-in-time
basis. Accordingly, retailers are demanding more sophisticated purchasing,
inventory management and merchandising tools that enable them to distribute and
manage goods efficiently. Retailers are also increasingly restructuring existing
operations so that consumers interact effectively with the entire enterprise
from a single store location or through the Internet. This requires store level
personnel and decision makers throughout an enterprise to have a common base of
readily available sales and inventory information and that in-store personnel
have the ability to more rapidly respond to consumers' needs. To meet their
increasing requirements for information, retailers seek information systems that
are adept at handling large volumes of transactions, possess a high degree of
reliability, accommodate peak load and seasonal requirements and rapidly capture
and analyze data and distribute information throughout the geographically
dispersed parts of the enterprise. Moreover, global retailers require
applications that support the specialized requirements of international
business, including local language support, multiple currencies, the adoption of
the European Currency Unit ("Euro"), import/export costing and foreign tax and
regulatory requirements. Retailers are also seeking solutions that address
emerging technical and business issues, such as Year 2000 compliance and the
increased prevalence of electronic commerce.
Historically, information technology in the retail supply chain has
consisted largely of separate legacy applications at the corporate, store and
distribution levels. These legacy applications have primarily been host-centric
systems that operate on mainframe or mid-range computers. These systems,
developed and modified internally over many years or licensed from third
parties, represent considerable investments by retailers and have provided
benefits within their distinct roles. However, they generally do not have the
flexibility to support diverse and changing operations within a customer's
business or to respond effectively to changing technologies. Additionally, these
solutions have only targeted distinct levels of the retail supply chain such as
the corporate or in-store levels, and have not generally provided the full
benefits of integration, which allows information to be distributed effectively
throughout the retail enterprise. Despite these limitations, many host-centric
systems are still being widely deployed for retail applications because of their
strengths in particular segments, as well as to preserve significant hardware
and software investments. Furthermore, retailers have historically been cautious
in adopting new technologies due to the real-time, transaction-intensive nature
of retailing and the economic consequences of disruptions to their operations.
In addition, some retailers currently appear to be deferring system purchase
decisions, possibly as a result of uncertainty surrounding the effects of the
millenium change.
The development of distributed client/server computing has created a
technological framework for software applications that are adaptable, integrated
and tailored for the retail supply chain. Additionally, improved hardware
price/performance and database capabilities on platforms such as the IBM AS/400
have improved the capabilities of the information systems that can leverage
retailers' existing hardware investments. As a result, retailers are demanding
highly functional, easy to use and scaleable software applications that can be
economically and rapidly implemented and adapted for changes in their mission
critical business functions. The Company believes that the adoption of new
information technologies by retailers will continue as competitive pressures
necessitate the ability to change business practices quickly and to empower
employees with the information and tools to respond to consumer requirements.
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JDA SOLUTION
The Company's product suite is designed to provide integrated technology
solutions for the collection, organization, distribution and analysis of data
throughout a retail organization. The Company's Enterprise Systems include two
merchandise management systems, Merchandise Management System ("MMS") for the
IBM AS/400 platform, and Open Database Merchandising System ("ODBMS") for open
client/server environments, that distribute data throughout the retail
enterprise and enable management to make more informed and timely decisions,
respond more rapidly to changes in the competitive environment, monitor
store-level activity and achieve greater operating efficiencies. The Company's
Enterprise Systems offerings also include Warehouse Control Center ("WCC"), a
warehouse and logistics system for open, client/server environments that is
designed to work in tandem with ODBMS. The Company's In-store Systems, DOS-based
Distributed Store System ("DSS") and Windows-based Win/DSS, register
transactions at the point-of-sale, capture individual consumer profiles and
demographic information, and leverage enterprise-wide information such as stock
availability, pricing and inventory replenishment by bringing it to the store
level. The Company also offers Analytic Applications, including the Arthur
Enterprise Suite ("Arthur Suite") and Retail IDEAS, that provide retailers with
powerful application tools for analyzing their business results and trends,
resource planning and allocation, monitoring strategic plans and supporting
tactical actions. Finally, the Company provides a wide range of professional
services designed to enable customers to rapidly achieve the benefits of the
Company's software products. These services, known as Optimum Pathways, include
project management, system planning, design and implementation, custom
modifications, training and support services.
The Company's solutions are designed to provide the following benefits to
retailers:
Enhanced Decision Making Capabilities. The Company's products are designed
to identify and highlight the most relevant information from large volumes of
transaction and work-flow data. By collecting and distributing valuable
enterprise-wide information, the Company's solutions enable retailers to make
more informed and timely decisions, to quickly adapt their products and
operations to changes in competition and consumer preferences, and to maximize
operational efficiencies.
Fully Integrated Adaptable Solutions. The Company offers an integrated
suite of software products that enables retailers to respond to consumer demand
at the point-of-sale and distribute that information throughout the enterprise.
These products link point-of-sale level information with the centralized
merchandising, planning and financial functions that ultimately affect decisions
with suppliers and vendors. The Company's integrated Enterprise Systems,
In-store Systems and Analytic Applications are designed to function seamlessly
with each other's databases, enabling greater speed, data integrity and ease of
modification. The Company's newer products, including ODBMS, Win/DSS, and the
Arthur Suite are designed to be adaptable and easily configured by customers to
meet their specialized and evolving needs.
Improved Inventory Planning and Distribution Logistics. The Company's
enterprise-wide solutions are designed to help retailers achieve operating
efficiencies by automating the collection and analysis of data from key
functions, such as the management of inventory, distribution and merchandising,
and providing decision makers with access to critical supply chain information.
JDA provides retailers with tools for vendor analysis, stock status monitoring,
sales capture and analysis, merchandise allocation and replenishment, purchase
order management, distribution center management and other important activities
that enable retailers to improve gross margins and return on inventory
investment through increased inventory turnover, reduced inventory investment,
reduced clearance mark-downs and more efficient management of ordering and
distribution.
Increased Responsiveness to Consumer Needs. The Company's solutions help
retailers better understand and fulfill consumer needs. The Company's Enterprise
Systems and Analytic Applications enable retailers to explore "what if"
merchandising plans, track and analyze performance, business results and trends,
monitor strategic plans, and adjust quickly to market changes and consumer
purchase patterns, all to help ensure that the appropriate pricing and
merchandise mix is available to the consumer at the point-of-sale. The Company's
In-store Systems enable a retailer to track the preferences of individual
consumers at the point-of-sale and provide a higher level of personalized
service.
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Ease of Implementation. The Company's products are specifically designed
to meet the needs of the retail industry, and the Company's consulting,
maintenance and other services organization is primarily comprised of
individuals who are trained for and experienced with system implementations in
the retail environment. The Company's newer products, including ODBMS, Win/DSS,
and the Arthur Suite are designed to be easily configured by customers to meet
their specialized and evolving needs. As a result, the Company believes it
offers rapid, low cost implementations, which are generally accomplished within
six months to one year.
COMPANY STRATEGY
JDA's objective is to strengthen its position by providing a comprehensive
suite of software solutions that address the mission-critical and value-added
management information needs of the retail supply chain. Key elements of the
Company's strategy to achieve this objective are as follows:
Leverage Retail Application Knowledge Base. The Company intends to
continue to leverage its retail industry knowledge base to provide comprehensive
integrated solutions to retailers. The Company believes its in-depth
understanding of retailers' requirements accumulated from its nearly
fourteen-year history and over 600 retail customers differentiates it from
competitors and provides a significant advantage in securing new customers. The
Company further augments its knowledge through ongoing customer consulting
engagements and interaction with its user group.
Expand Product Sales to Existing Customers. The Company's products are
designed to meet the enterprise-wide needs of the retail supply chain. Although
most organizations initially deploy one or more of the Company's products in an
organization, the Company believes that initial customer success can lead to
opportunities for additional sales of products to other parts of the
organization. The Company has a significant installed base of customers from its
nearly fourteen-year history to which it intends to market and sell additional
products and services. In addition, the Company believes that references from
its installed base will also provide assistance in making additional sales to
new customers.
Provide High Quality Professional Services. The Company believes that its
high-quality consulting, implementation, support and training services enable
the Company to achieve a high level of customer satisfaction, strong customer
references and long-term relationships as well as facilitate software
improvements based on customer feedback. With the release of its newer
client/server products, the Company has continued to invest in its professional
services organization to provide better service to its customers. The Company
plans to continue to provide innovative offerings such as Direct Path, a
streamlined approach for implementing MMS within three months in order to help
respond to customers' Year 2000 requirements well into 1999. In addition, the
Company plans to leverage its cooperative relationships with service providers
such as IBM's Global Services Division and Siemens Nixdorf to complement its
internal professional services organization in international markets.
Enhance Solutions for Evolving Customer Needs. The Company continues to
develop additional features and functionality for its product suite, and offers
products and services that address emerging technological and financial issues
confronting retailers such as Year 2000 compliance, adoption of the Euro, and
the growth of electronic commerce. JDA's Direct Path implementation methodology
for MMS is designed to quickly address the requirements of retailers whose
systems are not yet Year 2000 compliant. The Company's products currently comply
with the requirements of the initial phase-in of the Euro and the Company is
incorporating the functionality required for full Euro compliance into the next
version of each of its products that are scheduled for commercial release at
various times during 1999. The Company has finalized a deployment strategy to
utilize third party software products to Web-enable ODBMS, MMS and Retail IDEAS.
Further Develop and Leverage Strategic Relationships. The Company intends
to continue to establish strategic business relationships for the development of
products that complement the Company's current software solutions or enhance the
delivery of professional services. The Company has a number of cooperative
relationships with system integrators, other software vendors and retail systems
consulting groups, including, among others, Microsoft, IBM, Siemens Nixdorf,
Andersen Consulting, PriceWaterhouseCoopers, Applied
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Technology Ventures, Inc., Retail Store Systems, Inc. and SYSTECH, Inc. The
Company believes these relationships can provide the Company with greater access
to international markets, greater market presence and a greater opportunity to
increase its customer base and sales.
PRODUCTS
The Company offers a suite of software products which collects, organizes
and analyzes data and distributes information throughout a retail organization.
The Company's products are designed to provide an end-to-end supply chain
solution for the mission critical components of a retail operation -- from the
planning and purchasing functions through the distribution and final sale of
goods. The Company offers Enterprise Systems for merchandising, warehouse
management and logistic applications, In-store Systems for point of sale and
back office applications, and Analytic Applications for merchandise planning and
allocation, and decision support.
The following chart summarizes certain key functions of the retail
enterprise addressed by the Company's products:
[Enterprise Systems Flow Chart]
ENTERPRISE SYSTEMS IN-STORE SYSTEMS ANALYTIC APPLICATIONS
Merchandise Warehouse/ Decision Support Data Warehouse
Management Logistic System Applications Application
Systems
MMS ODBMS WCC DSS Win/DSS Arthur Suite Retail IDEAS
(IBM AS/400) (Client/Server) (Client/Server) (DOS-Based) (Client/Server) Client/Server) (IBM AS/400 &
Windows NT)
- -Inventory Control -Receiving -Point-of-Sale Processing -Merchandise Planning -Sales and Inventory
- Cost and Price Management -Putaway -Cash Register -Store Planning Analysis
- Purchase Order Management -Picking -Price Lookup -Store Allocation -Marketing Analysis
- Automated Replenishment -Shipping -Tendering and Sales Audit -Assortment Planning -Promotional Analysis
- Merchandise Planning -Allocation -Back Office -Performance Analysis -POS Loss Prevention
- Transfer Management and -Sales and Productivity Analysis
Allocation Indicators
-Customer Analyzer
Enterprise Systems
The Company's Enterprise Systems include merchandise management systems
that process high volumes of information to provide decision support for
inventory control, cost and price management, purchase order management,
automated replenishment, merchandise planning, transfer management and
allocation. Merchandise management systems distribute data throughout the retail
enterprise and enable management to make more informed and timely decisions,
respond more rapidly to changes in the competitive environment, monitor
store-level activity and achieve greater operating efficiencies. The Company's
merchandise management systems can be integrated with In-store Systems and
Analytic Applications designed by the Company or by third parties. The Company
offers two merchandise management systems: MMS for the IBM AS/400 platform and
ODBMS for open client/server environments. Both systems are comprised of
functional modules that are selected by the customer and can be configured to
fit the customer's unique requirements.
MMS was first introduced in 1986 and was specifically designed to take
advantage of the IBM AS/400 database and operating environment. MMS can be
configured by the retailer to adapt to changing strategies and prevailing
competitive conditions by performing product price analyses based upon key data
such as gross margin, sales velocity and competitive prices. The product can
then recommend and automate price changes based on the retailer's specifically
defined pricing strategies. To date, the Company has performed over 300 MMS
implementations worldwide. The Company has continued to invest in the
development and enhancement of MMS to address the requirements of a broad
spectrum of retailing formats and processes.
ODBMS, which was commercially released in September 1996, offers the same
core functionality of MMS, excluding the general ledger, accounts payable and
accounts receivable modules of MMS's retail sales accounting system, and also
offers, through its open client/server architecture, enhanced adaptability and
scaleability. ODBMS is primarily designed to operate with the Oracle relational
database management systems running on Windows NT and the most popular UNIX
platforms. ODBMS is designed to support the
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information requirements of international, multi-format retail organizations and
features support for multiple concurrent languages and currencies, user-specific
nomenclature and user-defined data structures and hierarchies. Thus, an
international retailer can centrally establish a product margin objective and
apply it to local market rules, including currency conversions, applicable
taxation and rounding algorithms, to determine final pricing at each location.
License fees for the Company's merchandise management systems vary
depending upon a number of factors, including the size and number of locations
of the retailer, the software modules chosen, the geographic region and the
competitive situation, and have generally ranged from $250,000 to in excess of
$1.0 million.
The Company's Enterprise Systems also include warehouse and logistics
systems for client/server and IBM AS/400 environments. WCC is a client/server
system that combines the latest automation tools, bar coding and radio frequency
technologies with the benefits of a client/server architecture. The product was
acquired from LIOCS Corporation in April 1997 and became commercially available
in December 1997. WCC is a stand-alone system that can be integrated with ODBMS
or software supplied by third-party vendors. WCC provides a variety of functions
including receipt scheduling, license plate labeling, system-directed put-away,
and lot and serial number tracking. For the IBM AS/400 platform, the Company
offers warehouse management, merchandise receiving and wholesale order entry
modules as part of its MMS merchandise product. License fees for the Company's
warehouse and logistic systems have generally ranged from $50,000 to $230,000.
In-Store Systems
The Company offers two In-store Systems: DSS for DOS-based platforms and
Win/DSS for Windows-based environments. The Company's In-store Systems are
designed to enable a retailer to capture and analyze in-store operations
information and transmit such information to corporate-level systems for sales
and other analysis. These systems also allow store level personnel to access
valuable enterprise-wide information to better serve the consumer at the
point-of-sale. DSS and Win/DSS are comprised of functional modules that are
selected by the customer and can be configured to fit the customer's unique
requirements.
DSS can be licensed independently and utilized with a customer's existing
merchandise management system, or it can work in concert with the Company's MMS
merchandise management system, to provide the retailer the ability to manage
information through a wide range of retail operations. A typical installation of
DSS enables the retailer to perform a number of individual store-level functions
and support back office, store inventory and point-of-sale operations. For
example, store managers can use DSS to measure the results of a store
promotional event. In addition, DSS enables retailers to track the preferences
of individual consumers and provide a higher level of personalized service.
Win/DSS incorporates the core functionality of DSS with the enhanced
capabilities of a Windows-based platform. Win/DSS incorporates an
object-oriented software design that is capable of arranging retail business
processes to adapt to a retailer's specialized and evolving requirements. For
example, a retailer can utilize the Win/DSS multi-tasking capabilities by
configuring its point-of-sale systems to simultaneously run credit
authorizations, process transactions and update store inventory records. In
addition, to reflect a more service-oriented workflow, the customer service desk
in the same store can be configured to provide ready access to personal
information and purchase histories of individual consumers. Business information
process flows can be adapted to reflect changing store strategies during special
promotions or periods of peak consumer traffic.
License fees for the Company's in-store systems vary depending upon a
variety of factors, including the size and complexity of the retail operation
and the modules chosen, and generally have ranged from $50,000 to in excess of
$1.0 million.
Analytic Applications
The Company's Analytic Applications include the Arthur Suite, a set of
decision support applications that was acquired from Comshare, Incorporated in
June 1998. The Arthur Suite is a three-tier application that is currently
available for end user/client applications on Windows 95/98 or NT, for
application servers on NT,
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and for database servers on AIX/HP UX. The Arthur Suite is comprised of six core
components: Arthur Planning, a merchandise planning application; Arthur
Allocation, a tool for product and store allocation decision making; Arthur
Assortment Planning, a tool for determining store product assortments; Arthur
Information Manager ("AIM"), a database that allows for central organization of
data and applications; Arthur Performance Analysis, a decision support tool
which the Company may distribute to the retail industry as a value-added
reseller; and Boost Sales and Margin Planning, a merchandise planning tool for
the consumer packaged goods industry. Certain versions of the Arthur Suite
modules are currently available on a stand-alone modular basis. The Company's
development of the Arthur Suite involves a phased re-engineering of these
existing modules and the development of additional functionality and interfaces
that will enable the modules to function as a fully integrated business
solution. The Arthur Suite is designed to enable a retailer to readily access
and assess store and enterprise performance, create coordinated plans for future
seasons, and focus on the resources and factors necessary to improve customer
satisfaction and enhance profitability. The Arthur Suite compliments the
Company's other Enterprise Systems and In-store Systems, and currently can be
integrated with MMS. The Company expects to deliver the first phase of
integration with ODBMS during 1999. License fees for the Arthur Suite have
ranged from $50,000 to $440,000, depending upon the size of the retailer and the
number of modules licensed.
Analytic Applications also include Retail IDEAS, a data warehouse system
developed jointly with Silvon Software, Inc. that provides a comprehensive set
of tools for analyzing business results, monitoring strategic plans and enabling
tactical decisions. Retail IDEAS is currently available on the IBM AS/400 and
Windows NT platforms, and a Unix-based version is scheduled for release during
1999. Retail IDEAS is designed as a packaged offering that enables retailers to
monitor vendor performance, promotional effectiveness and distribution center
productivity, and to analyze financial measurements related to sales and
inventory, margins and profitability, merchandise categories and items, open and
suggested orders, and promotional and pricing events. Retail IDEAS currently
integrates with MMS and may also be used with non-JDA transactional systems.
CONSULTING, MAINTENANCE AND OTHER SERVICES
The Company provides a wide range of professional services designed to
enable customers to rapidly achieve the benefits of the Company's software
products. These services, known as Optimum Pathways, include project management,
system planning, design and implementation, custom modifications, training and
support services. The Company believes that its Optimum Pathways consulting
services facilitate a customer's early success with its products, strengthen its
relationship with the customer, and add to the Company's industry-specific
knowledge base for use in future implementation and product development efforts.
Although the Company's service offerings are optional, the Company has found
that substantially all of its customers utilize some or all of its services to
some degree in connection with the implementation and ongoing support of the
Company's software products. The Company believes its ability to offer these
services provides a competitive advantage. As of December 31, 1998, the Company
had 670 employees in its consulting, maintenance and other services
organization. The Company is pursuing a strategy to increasingly utilize third-
party consultants, such as those from major systems integrators, to assist in
certain large-scale implementations and for extensive business process
re-engineering projects.
Consulting Services
The Company's consulting services group consists of business consultants,
systems analysts and technical personnel with extensive retail industry
experience that are devoted to assisting retailers in all phases of systems
development, including systems planning and design, customer-specific
configuration of application modules, and on-site implementation or conversion
from existing systems. Consulting services are generally billed on a time and
expenses basis. The Company's consulting engagements have typically taken
between six months and one year for Enterprise Systems, between four and eight
months for In-store Systems, and between three and nine months for Analytic
Applications. Given the complexity of platforms on which the Company's ODBMS and
Win/DSS systems operate and the increased ability of the customer to configure
these new products to its work flows and processes, the implementation of such
systems generally requires increased
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levels of consulting services and longer periods of time. Historically, the
Company has aggressively expanded its consulting services organization to
support anticipated growth in product implementations. Although the Company
experienced reduced demand for software licenses during the fourth quarter of
1998, utilization rates for the Company's consulting services personnel
generally remained at historical levels as a result of ongoing implementation
efforts on software licenses sold in prior periods, back-selling of upgrades and
consulting work to existing customers, reductions in the number of outside
consulting personnel utilized in Europe, and the increased levels of consulting
required on the more complex implementations of the Company's newer products.
The Company expects only modest, if any, growth in its consulting services
organization through 1999 due in part to the reduced levels of software licenses
sold during the fourth quarter of 1998. Although the Company intends to maintain
a consulting services organization consistent with demand for the Company's
software products, in the event software license revenues fail to meet
expectations, utilization rates of consulting personnel may decline and the
Company's operating results could be adversely affected.
Education and Training
The Company offers comprehensive education and training programs to its
customers, associates and business partners. The Company initiated JDA
University in 1997, as a formal education program that combines lectures,
demonstrations and hands-on exercise sessions for each of JDA's software
solutions. JDA University features a curriculum for each JDA system, and a
full-time administration consisting of professional instructors and course
developers. The JDA University curriculum ranges from introductory to advanced
levels and includes application training on JDA systems, technical courses on
design and data models for such systems, and developer courses for programmers
and designers. Classes are offered at in-house facilities as well as at customer
locations. Approximately 3,700 individuals attended JDA University during 1998.
Customer Support Services
The Company believes that providing business solutions along with a high
level of on-going support to its customers is a critical element in establishing
long-term relationships and maintaining a high level of customer satisfaction.
The Company offers a comprehensive support program that includes maintenance,
on-line support and help desk services. The standard maintenance support program
includes new releases and unspecified upgrades of products. Standard support
programs have historically been purchased by the majority of the Company's
customers and are generally annual contracts that are paid on a monthly basis.
For clients who have licensed DSS or Win/DSS, the Company offers a program,
known as Optimum Store Support, that features help desk services, 24 hours a
day, 7 days per week, and field upgrade support.
CUSTOMERS
The Company has licensed its software products to more than 600 retail
customers worldwide in a wide variety of retail markets, including hard and soft
lines retailers, warehouse operations, department stores and grocery stores. The
Company generally targets customers having from 50 to over 500 store locations,
with annual sales in excess of $100 million.
SALES AND MARKETING
The Company's worldwide sales effort is conducted primarily through a
direct sales force located in Phoenix, Arizona and through international
operations in Australia, Brazil, Canada, Chile, France, Germany, Mexico,
Singapore and the United Kingdom. Internationally, in addition to its direct
sales force, the Company leverages its cooperative relationships with sales
agents, distributors, and other vendors, including IBM in China, Columbia, and
India, the Beacon Group in Australia, ID Application a.s in Denmark and SPL
Systems (Pty.) Ltd. in South Africa. The pursuit of additional relationships
with system integrators, other major hardware vendors and the retail systems
consulting groups of major accounting firms is also a component of the Company's
sales and marketing strategy. The Company believes these relationships will
provide important product endorsements and valuable feedback as well as sales
referrals.
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The Company's sales cycle typically requires six to nine months from
generation of the sales lead to execution of a license agreement. This cycle can
be longer for Tier 1 retailers and retailers in certain geographic regions.
Because of the complexity and technical nature of the Company's systems,
consulting and product development employees often participate directly in the
sales cycle and educate prospective customers on the advantages of using the
Company's solutions.
The Company's marketing activities are directed at increasing market
awareness of the Company's products and services and identifying prospective
customers. The execution of major agreements with customers, when agreed to by
the customer, are commonly accompanied by press announcements and public
relations activities. The Company combines attendance at key trade shows with a
limited amount of focused advertising and direct mail campaigns to generate
prospects. In addition to these activities, the Company's marketing personnel
provide extensive support to the sales organization, including responding to
requests for proposals, conducting product demonstrations and determining
hardware specifications. The marketing organization is also responsible for
corporate communications and development of sales tools and marketing materials.
As of December 31, 1998, the Company's sales and marketing organization
consisted of 52 sales and marketing personnel in the United States and 66 sales
and marketing personnel in the rest of the world.
PRODUCT DEVELOPMENT AND JDA TECHNOLOGY
The Company has invested and expects to continue to invest substantial
resources in research and development. The Company believes that its future
performance will depend in large part on its ability to maintain and enhance its
current products, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. The Company intends to focus its near term development efforts on
the enhancement of the Company's existing products in order to address
requirements for close integration with emerging standard operating platforms
such as Microsoft's ActiveStore initiative and the IBM San Francisco Project,
increased systems interoperability, enhanced functionality that addresses
international issues such as the adoption of the Euro, and the formation of an
e-commerce division to deliver intranet, extranet and Internet business
solutions. In December 1998, the Company signed an OEM agreement with IBM to
integrate the IBM Net.Commerce merchant server software into the Company's
upcoming e-commerce products.
The Company's software design philosophy is to develop products with broad,
enterprise-wide retailing functionality that is applicable to the majority of
retailers' needs. At the same time, the Company's objective is to design
products that are easily tailored to the specific work flows and business
processes of the individual retailer and are readily adapted to changing
conditions, reducing the amount of software modification required.
The Company has established a design framework, known as the Advanced
Retail Architecture 2000 ("ARA") for developing new products and modules. The
ARA 2000 framework is an enhancement to the original ARA specification developed
by the Company and is based on the principles of multi-tiered distributed
systems, object-oriented technologies, and business application interfaces. The
ARA 2000 architecture is designed to support consolidation of development
efforts between the Company's products, and to protect the Company's and its
customers' software investments from changes in underlying technology and
front-end interfaces. The Company believes products designed to the ARA 2000
specifications can support multiple platforms and accommodate platform changes
with significantly fewer modifications to the Company's application. The Company
intends to apply the ARA 2000 framework to the design of the MMS, ODBMS,
Win/DSS, WCC, Arthur Suite, and any new products to the extent feasible over the
course of several years.
As of December 31, 1998, there were 209 employees on the Company's product
development staff. The Company's product development expenditures in 1998, 1997
and 1996 were $22.2 million, $11.4 million and $6.5 million, and represented
16%, 12% and 14% of total revenues, respectively. The Company currently expects
product development expenses in 1999 to be between $25 million and $30 million.
The Company's ongoing product development efforts are designed to facilitate the
integration of its products and include projects related to the next general
release of ODBMS; the completion of the phased re-engineering of existing
stand-alone modules of the Arthur Suite and the development of additional
functionality and
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interfaces that will enable the modules to function as a fully integrated
solution; and the Company's participation in Microsoft's ActiveStore initiative.
The Company's 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 the Company's
client/server products. The market for these products is new and evolving, and
the Company believes that retailers may generally be more cautious than other
businesses in adopting client/server technologies. Consequently, it is difficult
to assess or predict with any assurance the growth rate, if any, and size of the
market for the Company's client/server products, and there can be no assurance
that this market will continue to develop. Potential and existing customers may
find it difficult, or be unable, to successfully implement the Company's
client/server products, or may not purchase such products for a variety of
reasons, including: the customer's inability to obtain hardware, software,
networking infrastructure, or sufficient internal staff required to implement,
operate and maintain an open client/server solution; the generally longer time
periods and greater cost required to implement such products as compared to IBM
AS/400-based products; and limited implementation experience with such products
by the Company's service personnel or third-party implementation providers.
Furthermore, the Company must overcome significant obstacles to successfully
market its client/server solutions, including limited experience of the
Company's sales and consulting personnel in the client/server market and limited
existing reference accounts in this market. Sales of the Company's ODBMS product
have failed to meet the Company's expectations to date. The Company believes
sales of ODBMS have been affected by external and internal marketing issues,
increased competition and a limited number of referenceable implementations. If
the market for the Company's client/server products fails to develop, develops
more slowly than expected or becomes saturated with competitors, or if the
Company's products do not achieve market acceptance, the Company's business,
operating results and financial condition will continue to be materially
adversely affected.
The computer software industry is subject to rapid technological change,
changing customer requirements, frequent new product introductions and evolving
industry standards that may render existing products and services obsolete. As a
result, the Company's position in its existing markets or other markets that it
may enter could be eroded rapidly by technological advancements not embraced by
the Company. The lifecycles of the Company's products are difficult to estimate.
The products must keep pace with technological developments, conform to evolving
industry standards and address increasingly sophisticated customer needs. In
particular, the Company believes that it must continue to respond quickly to
users' needs for broad functionality and multi-platform support and to advances
in hardware and operating systems. Introduction of new products embodying new
technologies and the emergence of new industry standards could render the
Company's products obsolete and unmarketable. There can be no assurance that the
Company will not experience future difficulties that could delay or prevent the
successful development, introduction and marketing of new products, or that new
products and product enhancements will meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable to develop and introduce
products in a timely manner in response to changing market conditions or
customer requirements, the Company's business, operating results and financial
condition would be materially adversely affected.
In addition, the Company strives to achieve compatibility between those
products and retailing systems platforms which management believes are, or will
become, popular and widely adopted. The Company invests substantial resources in
development efforts aimed at achieving such compatibility. Any failure by the
Company to anticipate or respond adequately to technology or market developments
could result in a loss of competitiveness or revenue.
COMPETITION
The markets for retail information systems are highly competitive. The
Company believes the principal competitive factors in such markets are product
quality, reliability, performance and price, vendor and product reputation,
retail industry expertise, financial stability, features and functions, ease of
use and quality of support. A number of different companies offer competitive
products addressing certain of the Company's target markets. In the Enterprise
Systems market, the Company's merchandise management systems compete
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with internally developed systems and with third-party developers such as GERS
Retail Systems, Island Pacific, Radius PLC, Retek (a subsidiary of HNC Software,
Inc.), Richter Management Services, SAP AG, and STS Systems. The WCC product
competes with warehouse and logistic systems from Catalyst International, Inc.,
EXE and McHugh Freeman. In addition, the Company believes that new market
entrants may attempt to develop fully-integrated enterprise level systems
targeting the retail industry.
In the In-store Systems market, which is more fragmented than the
Enterprise Systems market, the Company competes with major hardware original
equipment manufacturers such as ICL, NCR, and IBM, as well as software companies
such as CRS Business Computers, Datavantage, Inc., STS Systems, and Trimax. In
the Analytic Application markets, the Arthur Suite competes with products from
STS Systems, Mitech Computer Systems, Inc. and IBM's Makaro product line. The
Retail IDEAS product competes with products from vendors such as Microstrategy
and Intrepid. In the market for consulting services, the Company is 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 the Company's
consulting services group.
Some of the Company's existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical,
marketing and other resources than the Company, each of which could provide them
with a significant competitive advantage over the Company. There can be no
assurance that the Company will be able to compete successfully against its
current or future competitors or that competition would not have a material
adverse effect on the Company's business, operating results and financial
condition.
PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary technology, including its software source code. To protect its
proprietary technology, the Company relies on a combination of trade secret,
nondisclosure and copyright law, which may afford only limited protection. In
addition, effective copyright and trade secret protection may be unavailable or
limited in certain foreign countries. The Company presently has no patents or
patent applications pending. The source code for the Company's proprietary
software is protected both as a trade secret and as a copyrighted work. Although
the Company relies on the limited protection afforded by such intellectual
property laws, it also believes that factors such as the technological and
creative skills of its personnel, new product developments, frequent product
enhancements, name recognition and reliable maintenance are also essential to
establishing and maintaining a technology leadership position. The Company
generally enters into confidentiality or license agreements with its employees,
consultants and customers, and generally controls access to and distribution of
its software, documentation and other proprietary information. The terms of the
Company's license agreements with its customers often require the Company to
provide the customer with a listing of the product source code. Although the
license agreements place restrictions on the use by the customer of the
Company's source code and do not permit the re-sale, sublicense or other
transfer of such source code, there can be no assurance that unauthorized use of
the Company's technology will not occur.
Despite the measures taken by the Company to protect its proprietary
rights, unauthorized parties may attempt to reverse engineer or copy aspects of
the Company's products or to obtain and use information that the Company regards
as proprietary. Policing unauthorized use of the Company's products is
difficult. In addition, litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.
Certain technology used by the Company's products is licensed from third
parties, generally on a non-exclusive basis. These licenses generally require
the Company to pay royalties and fulfill confidentiality obligations. The
Company believes that alternative resources exist for each of the material
components of
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technology licensed by the Company from third parties. However, the termination
of any such licenses, or the failure of the third-party licensors to adequately
maintain or update their products, could result in delays in the Company's
ability to ship certain of its products while it seeks to implement technology
offered by alternative sources. Any required replacement licenses could prove
costly. Also, any such delay, to the extent it becomes extended or occurs at or
near the end of a fiscal quarter, could result in a material adverse effect on
the Company's operating results. While it may be necessary or desirable in the
future to obtain other licenses relating to one or more of the Company's
products or relating to current or future technologies, there can be no
assurance that the Company will be able to do so on commercially reasonable
terms, if at all.
In the future, the Company may receive notices claiming that it is
infringing the proprietary rights of third parties, and there can be no
assurance that the Company will not become the subject of infringement claims or
legal proceedings by third parties with respect to current or future products.
In addition, the Company may initiate claims or litigation against third parties
for infringement of the Company's proprietary rights or to establish the
validity of the Company's proprietary rights. Any such claim could be time
consuming, result in costly litigation, cause product shipment delays or force
the Company to enter into royalty or license agreements rather than dispute the
merits of such claims. Moreover, an adverse outcome in litigation or similar
adversarial proceedings could subject the Company to significant liabilities to
third parties, require the expenditure of significant resources to develop
non-infringing technology, require disputed rights to be licensed from others,
or require the Company to cease the marketing or use of certain products, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition. To the extent the Company desires or is
required to obtain licenses to patents or proprietary rights of others, there
can be no assurance that any such licenses will be made available on terms
acceptable to the Company, if at all. As the number of software products in the
industry increases and the functionality of these products further overlaps, the
Company believes the software developers may become increasingly subject to
infringement claims. Any such claims against the Company, with or without merit,
as well as claims initiated by the Company against third parties, could be time
consuming and expensive to defend, prosecute or resolve.
EMPLOYEES
As of December 31, 1998, the Company had 1,102 employees, of which 642 were
located in the United States. The Company has never had a work stoppage and none
of its employees are represented by a collective bargaining agreement. The
Company believes its relations with its employees are good.
The Company's future operating results depend in significant part upon the
continued service of its key technical and senior management personnel. The
Company's future success also depends on its continuing ability to attract and
retain highly qualified technical and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company will retain
its key managerial or technical personnel or that it can attract, assimilate and
retain such personnel in the future. The Company has at times experienced, and
continues to experience, difficulty recruiting qualified personnel, and there
can be no assurance that the Company will not experience such difficulties in
the future. If the Company is unable to hire and retain qualified personnel in
the future, such inability could have a material adverse effect on the Company's
business, operating results and financial condition.
ITEM 2. PROPERTIES
The Company's principal corporate office is currently located in
approximately 56,000 square feet of leased space in Phoenix, Arizona under
leases that expire at various dates through March 31, 1999. This facility is
also used for certain of the Company's sales, consulting, customer support, and
product development functions. The Company also leases approximately 28,000
square feet for two office suites and a training facility in Scottsdale,
Arizona. In addition the Company leases eight sales and support offices in major
cities across the United States.
The Company entered into a ten-year lease in April 1998 for a new corporate
office facility in Scottsdale, Arizona. The lease, which covers approximately
121,000 square feet of a 136,000 square foot facility, is scheduled to commence
in April 1999 at an initial monthly rate of approximately $138,000. The Company
has
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a right of offer on the remaining space. In addition, in the event the developer
elects to sell the building prior to the date of occupancy, the Company has a
right of first refusal to purchase the new office facility until the date of
occupancy. Concurrent with the execution of the lease, the Company was also
granted an option to purchase approximately five acres of real property
contiguous to the office facility. This option may be exercised at a
pre-determined price on or before August 2001 provided that the Company
maintains certain minimum occupancy levels in the office facility.
The Company owns approximately 20,000 square feet of office space in the
United Kingdom, and leases other office space in London, Frankfurt, Paris, Cape
Town, Calgary, Toronto, Montreal, Singapore, Melbourne, Sidney, Santiago, Rio de
Janiero and Mexico City. The Company believes that its existing facilities are
adequate for its current needs and that suitable additional or alternative space
will be available in the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
Bernat v. JDA Software Group, Inc., et al., Dist. of Arizona No.
CIV'99-0065 PHX RGS and related cases.
On January 13, 1999, Rod Bernat, a shareholder of JDA Software Group, Inc.,
filed a securities class action lawsuit against the Company, its Co-Chief
Executive Officers, Frederick M. Pakis and James D. Armstrong, its former Senior
Vice President of Research and Development, Kenneth Desmarchais, and its former
Chief Executive Officer, Brent W. Lippman, in U.S. District Court for the
District of Arizona. The complaint filed in the lawsuit alleges that during the
alleged class period, January 29, 1998 through January 5, 1999, the Company
misrepresented its business, financial statements and business prospects to
investors. The complaint further alleges that certain officers of the Company
sold significant quantities of the Company's common stock during the class
period while the market price of the common stock was artificially inflated by
the alleged misrepresentations. The plaintiffs seek designation of the action as
a class action and damages for violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the
Securities and Exchange Commission ("SEC"). Following the filing of the Bernat
action, lawsuits were filed by Norman Wiss, Theodore J. Bloukos, Gwen Werboski,
Elmer S. Martin, Linda May, Ivan Sommer, David Hesrick and Michael J. Corn all
purporting to act on behalf of the same class of shareholders for the same class
period, making substantially similar allegations. These actions are currently in
the process of being consolidated into one action by the U. S. District Court.
Management believes that the actions are without merit and intends to defend
them vigorously.
The Company is also involved in other legal proceedings and claims arising
in the ordinary course of business. Although there can be no assurance,
management does not believe that the disposition of these matters will have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
JDA's common stock trades on the Nasdaq Stock Market ("NASDAQ") under the
symbol "JDAS." The following table sets forth, for the periods indicated, the
high and low sales prices per share of the common
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stock for the two most recent fiscal years as reported on NASDAQ and as adjusted
for the Company's three-for-two stock split effected in July 1998.
YEAR ENDED 1998 HIGH LOW
- --------------- ---- ---
1st Quarter................................................. $36 2/3 $18 5/32
2nd Quarter................................................. 39 13/32 25 1/2
3rd Quarter................................................. 33 1/2 8 11/16
4th Quarter................................................. 13 9/16 7
YEAR ENDED 1997 HIGH LOW
- --------------- ---- ---
1st Quarter................................................. $20 1/4 $12 2/3
2nd Quarter................................................. 23 3/32 11 1/2
3rd Quarter................................................. 25 7/8 19 5/32
4th Quarter................................................. 30 9/16 18 29/32
On March 19, 1999, the closing sale price for JDA's common stock was
$6 5/16 per share. On this date, there were approximately 280 holders of record
of JDA's common stock. This figure does not reflect more than 1,500 beneficial
stockholders whose shares are held in nominee names. JDA presently intends to
retain future earnings to finance the growth and development of the business,
and as such, does not anticipate paying cash dividends on its common stock in
the foreseeable future.
The market price of the Company's common stock has experienced large
fluctuations and may continue to be volatile in the future. Factors such as
future announcements concerning the Company or its competitors, quarterly
variations in operating results, announcements of technological innovations, the
introduction of new products or changes in product pricing policies by the
Company or its competitors, proprietary rights or other litigation, changes in
earnings estimates by analysts or other factors could cause the market price of
JDA's common stock to fluctuate substantially. Further, the stock market has
from time to time experienced extreme price and volume fluctuations which have
affected the market price for many high technology companies and which, on
occasion, have been unrelated to the operating performance of those companies.
These fluctuations, as well as the general economic, market and political
conditions both domestically and internationally, including recessions or
military conflicts, may materially and adversely affect the market price of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
JDA's consolidated financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The selected consolidated financial data presented
below under the captions "Consolidated Statement of Income Data" and
"Consolidated Balance Sheet Data" for, and as of the end of, each of the years
in the five-year period ended December 31, 1998, are derived from the
consolidated financial statements of JDA Software Group, Inc. The consolidated
financial statements as of December 31, 1998 and 1997, and for each of the years
in the three-year period ended December 31, 1998, and the independent auditors'
report thereon, are included elsewhere herein.
CONSOLIDATED STATEMENT OF INCOME DATA:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Revenues:
Software licenses..................... $ 43,342 $42,041 $24,296 $15,253 $12,221
Consulting, maintenance and other
services........................... 95,121 49,730 23,544 14,831 11,608
-------- ------- ------- ------- -------
Total revenues..................... 138,463 91,771 47,840 30,084 23,829
-------- ------- ------- ------- -------
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YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Cost of revenues:
Software licenses..................... 2,011 1,145 438 159 57
Consulting, maintenance and other
services........................... 65,137 37,727 16,416 9,781 6,870
-------- ------- ------- ------- -------
Total cost of revenues............. 67,148 38,872 16,854 9,940 6,927
-------- ------- ------- ------- -------
Gross profit............................ 71,315 52,899 30,986 20,144 16,902
-------- ------- ------- ------- -------
Operating expenses:
Product development................... 22,171 11,364 6,478 3,512 1,923
Sales and marketing................... 21,282 12,633 7,242 5,199 3,228
General and administrative............ 18,553 9,532 4,989 3,929 2,529
Purchased in-process research and
development........................ 17,000 -- -- -- --
-------- ------- ------- ------- -------
Total operating expenses........... 79,006 33,529 18,709 12,640 7,680
-------- ------- ------- ------- -------
Income (loss) from operations........... (7,691) 19,370 12,277 7,504 9,222
Other income (expense), net............. 3,276 1,407 519 (434) (221)
-------- ------- ------- ------- -------
Income (loss) before income taxes....... (4,415) 20,777 12,796 7,070 9,001
Income tax (benefit) provision(1)....... (1,947) 8,311 5,116 2,669 3,437
-------- ------- ------- ------- -------
Net income (loss)(1).................... $ (2,468) $12,466 $ 7,680 $ 4,401 $ 5,564
======== ======= ======= ======= =======
Basic earnings (loss) per share......... $ (.11) $ .64 $ .43 $ .28 $ .33
======== ======= ======= ======= =======
Diluted earnings (loss) per share....... $ (.11) $ .63 $ .43 $ .28 $ .33
======== ======= ======= ======= =======
Shares used to compute basic earnings
(loss) per share(2)................... 22,194 19,617 18,015 16,428 16,875
Shares used to compute diluted earnings
(loss) per share(2)................... 22,194 19,664 18,015 16,428 16,875
CONSOLIDATED BALANCE SHEET DATA:
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- -------- -------
(IN THOUSANDS)
Cash and cash equivalents.............. $ 42,376 $27,304 $30,986 $ 498 $ 2,913
Marketable securities(3)............... 43,013 -- -- -- --
Working capital........................ 98,322 48,339 39,832 607 7,232
Total assets........................... 199,561 83,202 59,056 27,795 11,557
Long-term liabilities.................. -- 222 620 309 2,607
Redeemable convertible preferred
stock................................ -- -- -- 15,000 --
Stockholders' equity (deficit)......... 171,497 67,910 48,661 (12,292) 6,228
- ---------------
(1) Prior to March 30, 1995, certain of JDA's commonly-held predecessor
companies elected S Corporation status. The results for 1995 and 1994
include a pro forma provision for U.S. federal income taxes at statutory
rates. Without such pro forma provision, net income for 1995 was $5,573.
(See Note 2 of Notes to Consolidated Financial Statements.)
(2) The results for 1995 and 1994 include common and equivalent shares
outstanding subsequent to the Company's reorganization on March 30, 1995. In
addition, the shares used to compute basic and diluted earnings (loss) per
share for all periods shown have been retroactively adjusted to reflect the
Company's three-for-two stock split effected in July 1998.
(3) Includes $6,697 of non-current marketable securities.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
THE FOLLOWING DISCUSSION INCORPORATES THE RESTATEMENT OF CERTAIN HISTORICAL
FINANCIAL DATA PRESENTED IN THE COMPANY'S QUARTERLY REPORTS ON FORM 10-Q FOR THE
PERIODS ENDED JUNE 30, 1998 AND SEPTEMBER 30, 1998. (See Note 18 of Notes to
Consolidated Financial Statements.)
JDA is a global provider of integrated enterprise-wide software products
and services that address the mission-critical and valued-added management
information needs of the entire retail supply chain. The Company's software
products include Enterprise Systems, In-store Systems, and Analytic
Applications. JDA also offers a wide range of professional services through its
consulting and customer support organizations, including project management,
system planning, design and implementation, custom modifications, training and
support services.
JDA has historically derived a significant portion of its revenues from
software licenses and consulting, maintenance and other services relating to its
IBM AS/400-based Merchandise Management System ("MMS"). Total revenues from the
MMS product line represented 45% of the Company's total revenues during 1998 as
compared with 56% in 1997 and 80% in 1996. Although the Company expects MMS
revenues to continue to represent a significant portion of total revenues for
the foreseeable future, MMS revenues as a percentage of total revenues may
continue to decline as a result of reduced demand for MMS and/or increased
revenues attributable to the Company's other product lines.
Software license revenues and consulting, maintenance and other services
revenues represented 31% and 69%, respectively, of JDA's total revenues during
1998, as compared with 46% and 54%, respectively in 1997 and 51% and 49%,
respectively, in 1996. During 1998, JDA's overall revenue mix was affected by
lower than anticipated software license revenues. This decline in software
license revenues occurred first in the Company's international markets during
the second and third quarters of 1998, and then in both international and
domestic markets in the fourth quarter of 1998. The following table sets forth a
quarterly comparison of 1997 and 1998 domestic and international software
license revenues:
1997 1998
------------------------ ----------------------------------------------
% CHANGE % CHANGE
QUARTER ENDED DOMESTIC INTERNATIONAL DOMESTIC VS. 1997 INTERNATIONAL VS. 1997
- ------------- -------- ------------- -------- -------- ------------- --------
3/31 $ 3,456 $ 4,409 $ 7,123 106% $ 4,926 12%
6/30 4,357 5,201 8,302 91% 4,011 (23)%
9/30 3,730 6,336 8,581 130% 3,774 (40)%
12/31 5,793 8,759 3,204 (45)% 3,421 (61)%
------- ------- ------- -------
$17,336 $24,705 $27,210 57% $16,132 (35)%
======= ======= ======= =======
The Company believes it has experienced and is continuing to experience a
decline in overall demand for the Company's Enterprise Systems and In-store
Systems. In particular, sales of the Company's ODBMS product have failed to meet
the Company's expectations to date. The Company believes that sales of ODBMS
have been affected by external and internal marketing issues, increased
competition and a limited number of referenceable implementations. The precise
nature of the decline in demand for the Company's other products cannot be
determined. However, the Company believes it may result from a combination of
deferred purchasing decisions potentially caused by uncertainty related to the
millennium change, elongated sales cycles, ongoing weakness in international
economies and increased competition. The Company believes that software license
results were also adversely impacted in the second and third quarters by
vacancies in senior management positions in Europe and Latin America.
Consulting, maintenance and other services revenues are derived from a
range of services, including system design and implementation and, to a lesser
extent, software maintenance and support and training. Consulting, maintenance
and other services revenues are generally more predictable but generate
significantly lower gross margins than software revenues. The Company has
increased the size of its services organization
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over the past two years in anticipation of an increased mix of consulting,
maintenance and other services revenues in both domestic and international
markets, and continued market acceptance of its newer client/server product
lines, which require longer implementation cycles. In the past, the Company has
experienced some seasonality in the mix of service revenues in relation to total
revenues as a result, the Company believes, of retailers' preferred
implementation timing and the Company's expansion, particularly in international
markets. In light of the current uncertainty regarding demand for the Company's
Enterprise and In-store Systems, and recent declines in software license
revenues, the Company currently anticipates that consulting, maintenance and
other services revenues will increase as a percentage of total revenues.
However, the Company expects only modest growth, if any, in the size of its
services organization during 1999. In Europe, where the demand for services has
been adversely impacted due to the decline in software revenues, the Company has
substantially eliminated the subcontractors it was using to supplement its
implementation staff.
The Company has pursued a strategy of addressing international markets by
developing localized versions of its products and establishing international
subsidiaries with direct sales and consulting capabilities. International
revenues, which include revenues from international offices and export sales,
represented 46% of total revenues in 1998, as compared with 55% in 1997 and 43%
in 1996. Consulting, maintenance and other services in support of international
software licenses typically have lower gross margins than those achieved
domestically due to higher costs or generally lower prevailing billing rates in
certain of the Company's international markets. Therefore, significant growth in
the Company's international operations may result in declines in gross margins
on consulting, maintenance and other services.
Unstable economic conditions have continued in the Asia/Pacific region
during 1998 and the receivable balances for the region have shown no significant
improvement over 1997. Further, certain of the macro-economic factors affecting
the Asia/Pacific region, including significant devaluation of currencies, have
begun to appear in the Latin American region together with slowing payment
trends in the European markets during the second half of 1998, and in particular
during the fourth quarter of 1998 as past due receivables in these regions
increased 31% over the September 30, 1998 balances. As a result, the Company
provided a $2.0 million provision for bad debts during the fourth quarter of
1998. The Asia/Pacific, Latin American and European regions represented 5%, 3%
and 29%, respectively, of the Company's revenues during 1998 and collectively
represented 14% of the Company's income from operations during 1998 excluding
the $17.0 million one-time charge for acquired in-process research and
development. Although the European region reported income from operations of
$3.9 million for 1998, the Asia/Pacific and Latin American regions reported
losses from operations of $659,000 and $2.0 million, respectively.
The Company remains cautious about its expectations regarding international
and domestic operations in the near term, and the Company expects its operating
results to be less predictable in the future as a result of uncertainties in
certain geographic regions and weakness in demand for its software products,
possibly related to the millennium change. Management believes these economic
conditions and uncertainties could adversely impact the Company's business,
operating results and financial condition for an indefinite period of time. The
Company continues to address the organizational issues that have impacted its
execution in Europe and Latin America during 1998. The Company filled the Vice
President -- Latin America position in September 1998 and the position of Vice
President -- EMEA in November 1998. However, the new Vice President -- EMEA
submitted his resignation effective March 31, 1999. The Company has promoted
from within its EMEA organization to fill the vacant position. The Company has
also recently completed the realignment of its sales, marketing and new product
development personnel along product lines to strengthen its ability to compete
during more difficult business conditions.
To the extent the Company's international operations expand or represent an
increasing percentage of the Company's overall business, the Company expects
that an increasing portion of its international software license and consulting,
maintenance and other services revenues will be denominated in foreign
currencies, subjecting the Company to risks related to fluctuations in foreign
currency exchange rates. Historically, the Company's operations have not been
materially adversely affected by fluctuations in foreign currency exchange
rates, and the Company has not engaged in foreign currency hedging transactions.
However, if the Company expands its international operations, exposures to gains
and losses on foreign currency transactions
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may increase. The Company may choose to limit such exposure by entering into
forward foreign exchange contracts or engaging in similar hedging strategies.
There can be no assurance that any currency exchange strategy would be
successful in avoiding or reducing exchange-related losses. In addition,
revenues of the Company earned in various countries where the Company does
business may be subject to taxation by more than one jurisdiction, thereby
adversely affecting the Company's earnings.
RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
The Company purchased Arthur Retail on June 4, 1998. In connection with
this transaction, the Company acquired the rights to the Arthur Suite. The
Arthur Suite is a specific application that is being designed to provide full
lifecycle decision support for retail clients. The Arthur Suite offers a
retailer modules for strategic planning, product and channel planning,
assortment planning and allocation planning. As a support activity to each of
these processes, a performance analysis function enables a retailer to perform a
fact-based review of all relevant statistical data. The development of the
Arthur Suite involves a phased re-engineering of existing stand-alone modular
products and the development of additional functionality and interfaces that
will enable the modules to function as a fully integrated business solution. The
Company initially allocated $40.0 million of the purchase price to in-process
research and development ("IPR&D") which represented the value of products,
including the Arthur Suite, that were in the development stage and for which
technological feasibility had not yet been established. The initial value
allocated to IPR&D and written off by the Company in connection with the
acquisition of Arthur Retail was calculated using estimates of the costs
required to complete the Arthur Suite, the after-tax cash flows attributable to
the Arthur Suite (including incremental revenues from enhanced sales of the
Company's existing products), and the selection of an appropriate rate of return
based upon the weighted average cost of capital.
In its September 9, 1998 letter to the American Institute of Certified
Public Accountants (the "SEC Letter"), the SEC issued guidance on the valuation
methodology for acquired IPR&D. The application of the prescribed methodology
requires that particular consideration be given to (i) the specific nature and
fair value of the Arthur Suite, (ii) the completeness, complexity and uniqueness
of the Arthur Suite at the acquisition date, (iii) the nature, timing and
estimated costs of the efforts necessary to complete the Arthur Suite and the
estimated completion date and (iv) the risks and uncertainties associated with
completing development on schedule, and the consequences if not timely
completed. The Company modified the IPR&D recorded in the Arthur Retail
acquisition in accordance with the guidance set forth in the SEC Letter and
subsequent communications. The revised valuation of the IPR&D was calculated
under a discounted cash flow method using an income approach with a forecast of
expected net cash inflows from the development effort. The forecast incorporated
projections prepared by both the Company and the former owner of Arthur Retail.
Material net cash inflows were expected to commence in 1999. Additionally, a
percentage of completion was estimated that gave consideration to certain key
factors such as the costs invested to date relative to the expected total cost
of the development effort, and the amount of progress completed as of the
acquisition date relative to the overall technological achievements required to
achieve full integration of the Arthur Suite. At the date of acquisition,
although certain versions of the modules of the Arthur Suite were commercially
available for sale, the bulk of the Arthur Suite was still in the fundamental
systems development stage with a substantial amount of coding, interface
development and unit testing still to take place. The IPR&D efforts to complete
the development and full integration of the Arthur Suite were estimated at that
time to be 81% complete and the estimated costs to complete the project totaled
$3.4 million. Through December 31, 1998, efforts to complete the Arthur Suite
have been in line with original expectations and the Arthur Suite has reached a
significant level of development. If the Company is unable to develop and
introduce a fully integrated Arthur Suite in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition would be materially adversely
affected.
The change in the methodology resulted in (i) the exclusion of the
incremental revenues resulting from sales of the Company's existing products
expected from integration with the Arthur Suite and costs associated with
incremental sales and (ii) an increase in expenses to reflect those that the
average buyer (without the benefit of synergies) would experience. In addition,
the discount rate was increased to 25% to reflect the risk
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that the average buyer would experience. As a result, the Company's financial
statements for the quarters ended June 30, 1998 and September 30, 1998 have been
restated to reduce the amount of the purchase price allocated to IPR&D from
$40.0 million to $17.0 million and record $23.0 million of additional goodwill
and other intangibles on the acquisition of Arthur Retail. In addition, the
financial statements have been adjusted to reflect changes in the deferred tax
asset balances resulting from the revised allocation and to record amortization
expense on the additional goodwill and other intangibles. The change had no
impact on net cash flows provided by operations.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial information
expressed as a percentage of total revenues for the periods indicated and
certain gross margin data expressed as a percentage of software license or
consulting, maintenance and other services revenues, as appropriate:
YEAR ENDED
DECEMBER 31,
--------------------
1998 1997 1996
---- ---- ----
Revenues:
Software licenses......................................... 31% 46% 51%
Consulting, maintenance and other services................ 69 54 49
--- --- ---
Total revenues......................................... 100 100 100
--- --- ---
Cost of Revenues:
Software licenses......................................... 1 1 1
Consulting, maintenance and other services................ 47 41 34
--- --- ---
Total cost of revenues................................. 48 42 35
--- --- ---
Gross Profit................................................ 52 58 65
--- --- ---
Operating Expenses:
Product development....................................... 16 12 14
Sales and marketing....................................... 15 14 15
General and administrative................................ 14 11 10
Purchased in-process research and development............. 12 -- --
--- --- ---
Total operating expenses............................... 57 37 39
--- --- ---
Income (Loss) From Operations............................... (5) 21 26
Other income, net......................................... 2 2 1
--- --- ---
Income (Loss) Before Income Taxes........................... (3) 23 27
Income tax (benefit) provision............................ (1) 9 11
--- --- ---
Net Income (Loss)........................................... (2)% 14% 16%
=== === ===
Gross margin on software licenses........................... 95% 97% 98%
Gross margin on consulting, maintenance and other
services.................................................. 32% 24% 30%
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Total revenues for 1998 were $138.5 million, an increase of 51% over the
$91.8 million reported in 1997. Revenues consisted of software licenses and
consulting, maintenance and other services, which represented 31% and 69%,
respectively, of total revenues during 1998, and 46% and 54%, respectively in
1997. The decrease in software license revenues as a percentage of total
revenues resulted primarily from a decrease in international software license
revenues between years.
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Software Licenses. Software license revenues for 1998 were $43.3 million,
an increase of 3% over the $42.0 million reported in 1997. Domestic software
license revenues increased 57% between years due to increased sales of the MMS,
Win/DSS, RetailIDEAS and WCC product lines, and incremental sales of the Arthur
Suite. International software license revenues decreased 35% from the prior year
as a result of the elongation of international sales cycles, deferred purchasing
decisions for merchandising systems, weakening international economies and
increased competition. The international results for 1998 were also impacted by
internal execution issues surrounding the Company's strategic realignment of its
international sales management group. This realignment began during the second
quarter of 1998 and involved the movement of certain key employees from the
European and Latin American regions to other roles within the Company,
specifically the positions of Senior Vice President, International and Senior
Vice President and Managing Director, JDA Arthur. The Company did not fill the
vacated positions of Vice President -- Latin America until September 1998 and
the Vice President -- EMEA until mid-November 1998. However, the new Vice
President -- EMEA submitted his resignation effective March 31, 1999. The
Company has promoted from within its EMEA organization to fill the vacant
position.
Consulting, Maintenance and Other Services. Consulting, maintenance and
other services revenues for 1998 were $95.1 million, an increase of 91% over the
$49.7 reported in 1997. This increase resulted from the higher volume of
software license sales, including client/server products that require longer
implementation cycles, improved utilization, higher average billing rates and
the incremental consulting and maintenance revenues related to the Arthur Suite.
Domestic and international consulting, maintenance and other services revenues
increased 101% and 82%, respectively between years.
Cost of Revenues
Cost of software license revenues was $2.0 million in 1998 as compared to
$1.1 million in 1997. Cost of software licenses represented 5% and 3% of
software license revenues in the respective years. The increase reflects the
higher costs associated with the Company's increased sales of products during
1998 that incorporate software technology licensed from third party suppliers.
Consulting, maintenance and other services costs for 1998 were $65.1 million, an
increase of 73% over the $37.7 million reported in 1997. The Company expanded
its consulting and customer support organizations during 1998 as a result, and
in anticipation, of continued increased sales of new software licenses and
increased demand from the existing client base for additional support and
professional services. The Company increased the number of personnel in its
consulting, maintenance and other services organization by 56% between years,
and as of December 31, 1998, there were 670 employees involved in these
functions worldwide. In addition, the Company utilized a significant number of
subcontractors in Europe during 1998 to provide timely implementation work.
Gross Profit
Gross profit for 1998 was $71.3 million, an increase of 35% over the $52.9
million reported in 1997. Gross profit, as a percentage of total revenues,
decreased from 58% in 1997 to 52% in 1998. This decrease was primarily
attributable to an increase in consulting, maintenance and other services
revenues as a percentage of total revenues during 1998. Gross margins on
consulting, maintenance and other services revenues increased between years,
however, from 24% in 1997 to 32% in 1998. This improvement reflects the
favorable impact of increases in the Company's maintenance base, both from the
Arthur Retail acquisition and core JDA products, and improved utilization and
higher average billing rates in the Company's consulting practice.
Operating Expenses
Product Development. Product development costs for 1998 were $22.2
million, an increase of 95% over the $11.4 million reported in 1997. Product
development costs as a percentage of total revenues increased between years from
12% in 1997 to 16% in 1998. The Company increased its product development staff
by 76% between years and as of December 31, 1998, there were over 200 employees
involved in the product development function. The Company increased its
incremental spending in 1998 for continued improvement of existing products as
well as the ongoing addition of new concepts to its product suite including
development efforts on the next general release of ODBMS, the integration of
ODBMS and the WCC product,
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development of a European version of MMS with Euro capabilities, continued
development and integration of the Arthur Suite, and enhancements to Win/DSS.
The Company believes its current process for developing software is essentially
completed concurrent with the establishment of technological feasibility, and
accordingly, no costs have been capitalized.
Sales and Marketing. Sales and marketing expenses for 1998 were $21.3
million, an increase of 68% over the $12.6 million reported in 1997. Sales and
marketing expenses, as a percentage of total revenues, increased between years
from 14% in 1997 to 15% in 1998. The Company increased its sales and marketing
staff by 62% between years and as of December 31, 1998, there were nearly 120
employees involved in this function. The increase results primarily from the
acquisition of Arthur Retail as well as other additions to both the domestic and
international sales and marketing staffs.
General and Administrative. General and administrative expenses for 1998
were $18.6 million, an increase of 95% over the $9.5 million reported in 1997.
General and administrative expense, as a percentage of total revenues, increased
between years from 11% in 1997 to 14% in 1998. The increase resulted from the
addition of administrative personnel as a result, and in anticipation, of
continued growth in the Company's domestic and international operations,
increased depreciation on purchases of $13.5 million in property and equipment
additions made by the Company during 1998, and the incremental costs of Arthur
Retail, including the amortization of goodwill and other intangibles associated
with its acquisition.
Purchased In-Process Research and Development. The Company recorded a
one-time charge of $17.0 million in 1998 for in-process research and development
acquired in connection with the purchase of Arthur Retail and recorded a related
tax benefit of $6.9 million. Earnings per share for 1998, excluding the one-time
charge for in-process research and development and related tax benefit, were
$0.34.
Provision for Income Taxes
The Company's effective income tax rate reflects statutory federal, state
and foreign tax rates, partially offset by reductions for research and
development expense tax credits.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Total revenues for 1997 were $91.8 million, an increase of 92% over the
$47.8 million reported in 1996. Revenues consisted of software licenses and
consulting, maintenance and other services, which represented 46% and 54%,
respectively, of total revenues during 1997, and 51% and 49%, respectively in
1996.
Software Licenses. Software license revenues for 1997 were $42.0 million,
an increase of 73% over the $24.3 million reported in 1996. Domestic and
international software license revenues for 1997 increased 44% and 101%,
respectively, over 1996. These increases resulted primarily from the Company's
expanded sales and marketing efforts worldwide, the incremental sales of the
Company's newer product lines such as ODBMS, Win/DSS and Retail IDEAS over the
prior year, and an increase in average transaction size.
Consulting, Maintenance and Other Services. Consulting, maintenance and
other services revenues for 1997 were $49.7 million, an increase of 111% over
the $23.5 million reported in 1996. This increase results from increased
software license sales and the introduction of client/server products that
require longer installation cycles. Although domestic consulting, maintenance
and other services revenues increased 62% between the comparable years, nearly
two-thirds of this revenue growth occurred in the Company's international
markets where the comparative increase was 197%.
Cost of Revenues
Cost of software licenses was $1.1 million and $438,000 in 1997 and 1996,
respectively, representing 3% and 2% of software license revenues in the
respective periods. Consulting, maintenance and other services costs for 1997
were $37.7 million, an increase of 130% over the $16.4 million reported in 1996.
The Company has expanded its consulting and customer support organizations as a
result, and in anticipation, of increased
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sales of new software licenses and increased demand from the existing client
base for additional support and professional services. The Company increased the
number of personnel in its consulting, maintenance and other services
organization by 98% during 1997, and as of December 31, 1997, the Company had
430 employees involved in these functions.
Gross Profit
Gross profit for 1997 was $52.9 million, an increase of 71% over the $31.0
million reported in 1996. Gross profit as a percentage of total revenue
decreased from 65% in 1996 to 58% in 1997. This decrease was primarily
attributable to an increase in consulting, maintenance and other services
revenues as a percentage of total revenues in 1997. In addition, the Company's
gross margins on consulting, maintenance and other services revenues decreased
from 30% in 1996 to 24% in 1997 as a result of the rapid expansion of the
consulting infrastructure, including high front-end recruiting, training and
downtime costs associated with the hiring of 213 consultants during 1997.
Consulting, maintenance and other services margins were also reduced by the
higher costs associated with the Company's use of up to 65 outside contractors
in the United Kingdom during the second half of 1997 to service the increased
demand for installation work in that market. The Company's objective is to
improve its consulting, maintenance and other services margins during 1998 by
gradually replacing these contractors with full-time staff and improving
utilization rates and economies of scale, particularly with respect to the
installation of the ODBMS client/server product.
Operating Expenses
Product Development. Product development expenses for 1997 were $11.4
million, an increase of 75% over the $6.5 million reported in 1996. Product
development expenses as a percentage of total revenues decreased from 14% in
1996 to 12% in 1997. The increase in absolute dollars resulted from increases in
the Company's product development staff to continue development efforts on
ODBMS, Win/DSS, Retail IDEAS, and WCC, and to make further enhancements to the
MMS product line.
Sales and Marketing. Sales and marketing expenses for 1997 were $12.6
million, an increase of 74% over the $7.2 million reported in 1996. Sales and
marketing expenses as a percentage of total revenues decreased from 15% in 1996
to 14% in 1997. The increase in absolute dollars results from the Company's
increased sales and marketing presence in both domestic and international
markets. The Company increased its sales and marketing staff from 49 at December
31, 1996 to 73 at December 31, 1997.
General and Administrative. General and administrative expenses for 1997
were $9.5 million, an increase of 91% over the $5.0 million reported in 1996.
General and administrative expenses as a percentage of total revenues were 11%
and 10% in 1997 and 1996, respectively. The increase in absolute dollars results
from the addition of administrative personnel to support the Company's domestic
and international growth and from a $2.0 million increase in the allowance for
doubtful accounts during 1997, including $1.0 million in specific reserves for
receivables originating in the Asia/Pacific region.
Provision for Income Taxes
The Company's effective income tax rate was 40% for both 1997 and 1996.
This rate reflects statutory federal, state and foreign tax rates, partially
offset by a reduction for research and development expense tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through cash generated from operations and public sales of equity securities
and, to a lesser extent, borrowings under its bank line of credit. The Company
had working capital of $98.3 million at December 31, 1998 compared with $48.3
million at December 31, 1997. Cash and cash equivalents at December 31, 1998
were $42.4 million, an increase of $15.1 million from the $27.3 million reported
at December 31, 1997. The Company also had $43.0 million in marketable
securities at December 31, 1998.
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Operating activities provided cash of $9.6 million, $2.1 million, and $6.1
million in the years ended December 31, 1998, 1997, and 1996, respectively. Cash
provided from operating activities in 1998 results primarily from net income of
$7.6 million, excluding the one-time charge for purchased in-process research
and development and related tax benefit, $8.1 million of depreciation and
amortization, and an increase of $3.8 million in deferred revenue, offset in
part by a $10.8 million increase in accounts receivable. The Company had net
accounts receivable of $40.6 million at December 31, 1998, which excluding the
impact of receivables for which the related revenue has been deferred,
represented 101 days of sales outstanding ("DSOs") compared to 91 days at
December 31, 1997. 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 $100.5 million and $12.4 million in
1998 and 1997, respectively, and provided cash of $8.6 million in 1996. The 1998
activity includes the net purchase of $43.0 million of marketable securities,
$13.5 million in capital expenditures to support the Company's growth and a
$44.0 million cash payment for the acquisition of Arthur Retail. The 1997
activity includes $10.8 million in capital expenditures and an initial payment
of $1.6 million for the purchase of LIOCS. The 1996 activity includes the
redemption of $14.6 million in restricted short-term investments acquired during
fiscal year 1995 and capital expenditures of $6.2 million.
Financing activities provided cash of $106.4 million, $7.4 million and
$15.4 million during the years ended December 31, 1998, 1997, and 1996,
respectively. 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. The
1996 activity includes the issuance of 3,274,299 shares of common stock for
$25.3 million in an initial public offering, the net proceeds of which were
offset by the repayment of stockholder notes and the redemption of preferred
stock, and the issuance of 900,000 shares of common stock for $15.5 million in a
secondary public offering. The remaining activity for 1998, 1997 and 1996
consists primarily of proceeds from the issuance of common stock and related tax
benefits under the Company's stock option and employee stock purchase plans.
Changes in the currency exchange rates of the Company's foreign operations
had the effect of reducing cash by $419,000 and $743,000 in 1998 and 1997,
respectively, and increasing cash by $425,000 in 1996. The Company did not enter
into any foreign exchange contracts or engage in similar hedging strategies
during the three-year period ended December 31, 1998.
The Company may in the future pursue additional acquisitions of businesses,
products and technologies, or enter into joint venture arrangements, that could
complement or expand the Company's business. Any material acquisition or joint
venture could result in a decrease to the Company's working capital depending on
the amount, timing and nature of the consideration to be paid. In addition, any
material acquisitions of complementary businesses, products or technologies
could require the Company to obtain additional equity or debt financing.
The Company maintains a $5.0 million revolving line of credit with a
commercial bank. The line of credit is collateralized by property and equipment,
receivables, and intangibles; accrues interest at the bank's reference rate
(which approximates prime) less .25 percentage points; and requires the Company
to maintain certain current ratios and tangible net worth. The line of credit
matures on July 1, 2000. There were no amounts outstanding on the line of credit
at December 31, 1998. The Company believes that its cash and cash equivalents,
investments in marketable securities, available borrowings under the bank line
of credit and funds generated from operations will provide adequate liquidity to
meet the Company's normal operating requirements for at least the next twelve
months.
YEAR 2000 COMPLIANCE
Throughout 1998, the Company designated a project team to assess the Year
2000 compliance of its software products. Based on the Company's assessment to
date, the Company believes the current versions of its software products are
"Year 2000 compliant," that is, they are capable of adequately distinguishing
21st century dates from 20th century dates. However, the Company is aware that
some of its customers are running earlier versions of the Company's software
products that are not Year 2000 compliant. The Company has
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contacted and encouraged such customers to migrate to current product versions.
Moreover, the Company's products are generally integrated into enterprise
systems involving complicated software products developed by other vendors. The
most reasonably likely worst case scenario is that the Company may in the future
be subject to claims based on Year 2000 problems in others' products, custom
modifications made by third parties to the Company's products, or issues arising
from the integration of multiple products within an overall system. Although the
Company has not been a party to any litigation or arbitration proceeding to date
involving its products or services and related to Year 2000 compliance issues,
there can be no assurance that the Company will not in the future be required to
defend its products or services in such proceedings, or to negotiate resolutions
of claims based upon Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, and any liability of the Company for Year 2000-related
damages, including consequential damages, could have a material adverse effect
on the Company's business, operating results and financial condition.
The Company faces risk to the extent that suppliers of products, services
and systems purchased by the Company and others with whom the Company transacts
business on a worldwide basis do not comply with Year 2000 requirements. In the
event any such third parties cannot provide the Company with products, services
or systems that meet the Year 2000 requirements on a timely basis, or in the
event Year 2000 issues prevent such third parties from timely delivery of
products or services required by the Company, the Company's operating results
could be materially adversely affected. The Company's plan for the Year 2000 has
included compliance verification of financial institutions, investment advisors,
independent payroll service providers, external vendors supplying software and
information systems to the Company and communication with significant suppliers
to determine the readiness of third parties' remediation of their own Year 2000
issues. As part of its Year 2000 contingency plan, the Company maintains its
cash and marketable securities with multiple financial institutions and
investment advisors.
The Company is also subject to risk that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources and reduce available funds to correct or
patch their current software systems for Year 2000 compliance. As a result, no
assurance can be given that Year 2000 problems within the Company's existing or
prospective customer base of retail organizations will not result in the
deferral or cancellation of such organizations' decisions to license and
implement information systems such as those offered by the Company. To the
extent Year 2000 issues cause significant delays in, or cancellation of,
decisions to purchase the Company's products or services, the Company's
business, operating results and financial condition would be materially
adversely affected.
The Company recognizes the need to ensure its internal operations will not
be adversely impacted by Year 2000 software failures, and has established a
project team to assess Year 2000 risks regarding the ability of the Company's
internal systems to operate after December 31, 1999. The project team has
identified and implemented changes to the Company's computer hardware and
software applications to ensure availability and integrity of the Company's
financial systems and the reliability of its operational systems. The Company
converted its existing legacy accounting software to a Year 2000 compliant
version in December 1998. This conversion was performed entirely by the
Company's internal IS staff and the costs of modifying this software have been
expensed as incurred. During September 1998, the Company selected a new time and
billing system from an independent third party distributor. This system will
replace an existing legacy system, which is not Year 2000 compliant, and will be
used to accumulate and track billable hours incurred by the Company's consulting
and customer support staff. The current project plan calls for this system to be
fully implemented by September 1999, however, as part of its contingency plan,
the Company is modifying its existing legacy system to be Year 2000 compliant in
order to provide a safeguard against any potential movement in the
implementation time frame of the new system. The conversion of the existing time
and billing system is expected to be completed by April 1999. The Company has
incurred approximately $50,000 to date on Year 2000 compliance activities and
expects to incur no more than $40,000 to complete its Year 2000 compliance
activities. These costs and the timing in which the Company plans to complete
its Year 2000 modification and testing procedures are based on management's best
estimates. However, there can be no assurance that the Company will timely
identify and remediate all significant Year 2000 problems, or that any such
remedial
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efforts will not have a material adverse effect on the Company's business,
operating results and financial condition.
EURO CURRENCY
The participating member countries of the European Union agreed to adopt
the Euro as the common legal currency beginning January 1, 1999. On that same
date they established Fixed Conversion Rates between their existing sovereign
currencies and the Euro. The Euro will be implemented in phases over a
transition period that extends through December 31, 2001. Although the Company's
products currently comply with the requirements of the initial phase-in of the
Euro, they are not fully "Euro Compliant." The Company has defined Euro
Compliant to mean that its products are capable of processing and reporting any
data denominated in the Euro in the same manner as processing and reporting data
denominated in the national currency units that comprise the currencies of those
member states that adopt the Euro (the "NCUs") without any loss of functionality
or interoperability or degradation in performance of volume capacity and,
without prejudice to the generality of the foregoing, has the ability to provide
all the following functions:
(1) Conversion of NCUs to Euro (and vice versa) at the Fixed Conversion
Rates and conversion of NCUs to NCUs using the Fixed Conversion Rates
between the relevant NCUs and the Euro and, in each case, rounding of
such amounts in accordance with applicable laws and regulations from
time to time.
(2) Rounding of amounts denominated in Euro to the nearest "Euro cent" and
of amounts denominated in NCUs to the nearest sub-unit applicable to
the relevant NCUs and use in data of the Euro symbol.
(3) Making and receiving payment of amounts denominated in Euro and in
different denominations of the Euro and/or in NCUs.
(4) All functions and reporting, including regulatory reporting, in both
Euro and NCUs.
The Company is incorporating all required Euro Compliant functionality into
the next version of each of its products that are scheduled for commercial
release at various times during 1999. To the extent the development and release
of fully Euro Compliant versions does not occur in a timely manner, the Company
could experience significant delays in, or cancellation of, decisions to
purchase its products or services, and as a result, the Company's business,
operating results and financial condition would be materially adversely
impacted.
CERTAIN RISKS
Our Operating Results May Fluctuate Significantly. Our quarterly operating
results have varied and are expected to continue to vary in the future. Many
factors may cause these fluctuations, including: demand for our products and
services; the size and timing of individual orders, particularly with respect to
our larger customers; the lengthening of our sales cycle; competitive pricing
pressures; customer order deferrals in anticipation of new products; changes in
the mix of software license revenues; changes in the mix of software license
revenues compared to consulting, maintenance and other services revenues; the
timing of introductions and enhancements of our products or those of our
competitors; market acceptance of new products; technological changes in
platforms supporting our products; changes in our operating expenses; changes in
the mix of domestic and international revenues; our ability to complete fixed
price consulting contracts within budget; employee hiring and retention; foreign
currency exchange rate fluctuations; expansion of international operations;
changes in our strategies; and general industry and economic conditions. In
addition, we believe we have experienced and are continuing to experience a
decline in overall demand for our Enterprise Systems and In-store Systems. In
particular, sales of our ODBMS product have failed to meet our expectations to
date. We believe that sales of ODBMS have been negatively impacted by external
and internal marketing issues, increased competition and a limited number of
referenceable implementations. We have not been able to determine the exact
cause of the decline in demand for our other products, but we believe that it
may result from deferred purchasing decisions. These deferred purchasing
decisions may stem from uncertainty related to
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the millenium change, longer sales cycles, continued weakness in global
economies and increased competition. We believe that the prevailing business
reasons for purchasing merchandising systems and the other software products
offered by the Company still exist. However, you should not rely on historic
growth rates for our Enterprise Systems and In-store Systems as an indication of
their future performance. Because the gross margin on software licenses is
significantly greater than the gross margins on consulting, maintenance and
other services, our combined gross margin has fluctuated from quarter to
quarter, and we expect that it will continue to fluctuate significantly based on
revenue mix and seasonality.
We typically ship our software products when contracts are signed.
Consequently, our software license backlog at the beginning of any quarter has
represented only a small portion of that quarter's expected revenues. As a
result, software license revenues in any quarter depend in large part upon
contracts signed and the related shipment of software in that quarter. It is
therefore difficult for us to predict revenues. Because of the timing of our
sales, we typically recognize a substantial amount of our revenues in the last
weeks or days of the quarter, and we generally derive a significant portion of
our quarterly software license revenues from a small number of relatively large
sales. It is difficult to forecast the timing of large individual sales with
certainty. Accordingly, large individual sales have sometimes occurred in
quarters subsequent to when we anticipated. We expect that the foregoing trends
will continue. If we receive any significant cancellation or deferral of
customer orders, or we are unable to conclude license negotiations by the end of
a fiscal quarter, our operating results may be lower than anticipated. In
addition, weakening international economies may make it more difficult for us to
predict quarterly results in the future, and could negatively impact our
business, operating results and financial condition for an indefinite period of
time.
Our expense levels are based on our expectations of future revenues. Since
software license sales are typically accompanied by a significant amount of
consulting, implementation and support services, our consulting and support
resources must be managed to meet our anticipated software license revenues. As
a result, we hire and train service personnel and incur research and development
costs in advance of anticipated software license revenues. If such revenues fall
short of our expectations, or if we are unable to fully utilize our service
personnel, our operating results are likely to decline because a significant
portion of our expenses cannot be quickly reduced to respond to any unexpected
revenue shortfall.
Based on all of the foregoing, we believe that future revenues, expenses
and operating results are likely to vary significantly from quarter to quarter.
As a result, quarter to quarter comparisons of operating results are not
necessarily meaningful. Furthermore, it is likely that in some future quarter
our operating results may be below the expectations of public market analysts or
investors. If that happens, or if adverse conditions prevail, or are perceived
to prevail, with respect to our business or generally, the price of our common
stock may decline.
A Significant Portion of Our Revenue Is Derived from the Retail
Industry. We have derived substantially all of our revenues to date from the
license of software products and the performance of related services to the
retail industry. Our future growth is critically dependent on increased sales to
the retail industry. The success of our customers is directly linked to economic
conditions in the retail industry, which in turn are subject to intense
competitive pressures and are affected by overall economic conditions. In
addition, we believe that the license of our software products generally
involves a large capital expenditure, which is often accompanied by large-scale
hardware purchases or commitments. As a result, demand for our products and
services could decline in the event of instability or downturns in the retail
industry. Such downturns may cause customers to exit the industry or delay,
cancel or reduce any planned expenditure for information management systems and
software products. We believe that the retail industry is consolidating. Such
consolidation has in the past and may in the future reduce the demand for our
products. Any resulting decline in demand for our products and services would
negatively impact our business, operating results and financial condition.
We May Not be Able to Manage Our Growth. Our business has grown rapidly in
recent years, with revenues increasing from $47.8 million in 1996, to $91.8
million in 1997 and to $138.5 million in 1998. Our recent expansion has resulted
in substantial growth in our number of employees, the scope of our operating
systems and the geographic distribution of our operations and customers. This
rapid growth has placed, and if it continues, will continue to place, a
significant strain on our management and operations. For example, we
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believe that management realignments in connection with our international
operations and the acquisition of Arthur Retail in June 1998 may have reduced
the effectiveness of our sales efforts in Europe and Latin America during 1998.
Our ability to compete effectively and to manage future growth, if any, will
depend on our ability to continue to implement and improve operational,
financial and management information systems on a timely basis; to expand,
train, motivate and manage our work force, in particular our direct sales force
and consulting services organization; and to deal effectively with third-party
systems integrators and consultants. We filled the Vice President -- Latin
American position in September 1998 and the Vice President -- EMEA position in
mid-November 1998. However, the new Vice President -- EMEA submitted his
resignation effective March 31, 1999. The Company has promoted from within its
EMEA organization to fill the vacant position. We anticipate making other
changes to the sales organizations in these regions. In addition, we have
recently filled other senior management positions including Senior Vice
President, Client Services, Senior Vice President, Technology, and Senior Vice
President, Marketing. All members of our 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.
In addition, if we continue to grow, we will have to recruit and hire a
substantial number of other new employees, including consulting and product
development personnel, both domestically and abroad. Our ability to undertake
new projects and increase revenues is substantially dependent on the
availability of consulting personnel to assist in the design, planning and
implementation of our products and services. Consequently, we will not be able
to continue to grow in our business at historical rates without adding
significant numbers of trained consulting personnel. Moreover, if unable to
adequately increase our consulting capacity, we may have to forego licensing
opportunities or become more dependent on systems integrators and professional
consulting firms to provide implementation services for our products. Due to the
present uncertainty surrounding demand for our Enterprise and In-store Systems
and recent declines in our software license revenues, we expect that consulting,
maintenance and other services revenues will increase as a percentage of total
revenues. However, we expect only modest growth, if any, in the size of our
services organization during 1999. If revenues fail to meet expectations
following the hiring and training of new personnel, our operating results will
decline. Due to the addition of significant numbers of new personnel, we have
from time to time incurred significant start-up expenses, including leasing of
office space and equipment, initial training costs and low utilization rates of
new personnel. Such start-up expenses have in the past contributed and may in
the future contribute to significant reductions in gross margin on consulting,
maintenance and other services revenues and on overall gross margin. We cannot
guarantee that start-up expenses incurred in connection with the hiring of
additional technical personnel will not reduce future operating results.
Ability to Attract and Retain Technical Personnel Is Important to Our
Growth. Our success is heavily dependent upon our ability to attract, retain
and motivate skilled technical and managerial personnel, especially highly
skilled engineers involved in ongoing product development, and consulting
personnel who assist in the design, planning and implementation of our products
and services. In particular, our ability to install, maintain and enhance our
products is substantially dependent upon our ability to locate, hire, train and
retain qualified software engineers. The market for such individuals is
intensely competitive, particularly in international markets. In this regard, we
dramatically increased the number of consulting personnel during 1997 and 1998
in connection with the continuing development and roll-out of our client/server
products, and to support further development and implementation of MMS. Given
the critical roles of our product development and consulting staffs, our
inability to recruit successfully or the loss of our product development or
consulting staffs would hurt us. The software industry is characterized by a
high level of employee mobility and aggressive recruiting of skilled personnel.
We cannot guarantee that we will be able to retain our current personnel, or
that we will be able to attract and retain other highly qualified technical and
managerial personnel in the future. Our inability to attract and retain the
necessary technical and managerial personnel would hurt our business, operating
results and financial condition.
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We Have Only Deployed Our New Software Products On a Limited Basis. Our
newer software products, ODBMS, Win/DSS, Retail IDEAS, WCC, and the Arthur
Suite, which are designed for open, client/server environments, have all been
commercially released within the last three years. To date, only a limited
number of customers have licensed or implemented them. The market for these
products is new and evolving, and we believe that retailers may be more cautious
than other businesses in adopting client/server technologies. Consequently, we
cannot predict the growth rate, if any, and size of the market for our
client/server products or that this market will continue to develop. Potential
and existing customers may find it difficult, or be unable, to successfully
implement our client/server products, or may not purchase our products for a
variety of reasons, including: their inability to obtain hardware, software,
networking infrastructure, or sufficient internal staff required to implement,
operate and maintain an open, client/server solution; the generally longer time
periods and greater cost required to implement such products as compared to IBM
AS/400-based products; and limited implementation experience with such products
or third-party implementation providers. In addition, we must overcome
significant obstacles to successfully market our client/server products,
including limited experience of our sales and consulting personnel in the
client/server market and a limited market size. Sales of our ODBMS product have
failed to meet our expectations to date. We believe that sales of ODBMS have
been affected by external and internal marketing issues, increased competition,
and a limited number of referenceable implementations. If the market for our
client/server products fails to develop, develops more slowly than expected or
becomes saturated with competitors, or if our products are not accepted in the
marketplace, our business, operating results and financial condition will
decline.
Our Products Are Concentrated In One Area. We have historically derived a
significant portion of our revenues from software licenses and consulting,
maintenance and other services related to MMS. MMS revenues are partially
dependent on the continued vitality in and support by IBM of its AS/400
platform. Although we expect MMS revenues to continue to represent a significant
portion of total revenues for the foreseeable future, MMS revenues as a
percentage of total revenues may continue to decline as a result of the
increased revenues attributable to our newer software products, particularly
ODBMS, Win/DSS, Retail IDEAS, WCC, and the Arthur Suite. The lifecycle of the
MMS product line is difficult to estimate due largely to the potential effect of
new products, applications and product enhancements, including our own changes
in the retail industry and future competition. Any decline in MMS revenues, as a
result of competition, technological change, a decline in the market for or
support of the IBM AS/400 platform, or other factors, which are not offset by
increases in revenues from other products, will cause our business, operating
results and financial condition to decline. We cannot guarantee that prospective
purchasers of our IBM AS/400-based products will respond favorably to our future
or enhanced software products or that we will continue to be successful in
selling our software products or services in the IBM AS/400 market.
There Are Many Risks Associated with International Operations. Our
international revenues, which include revenues from international subsidiaries
and export sales, represented 46% of total revenues in 1998 as compared with 55%
and 43% of total revenues in fiscal 1997 and 1996, respectively. Although, we
expect that international revenues will continue to account for a significant
portion of our revenues for the foreseeable future, we remain cautious about our
expectations regarding international operations in the near term. If our
international operations grow, we must recruit and hire a number of new
consulting, sales and marketing and support personnel in the countries we have
or will establish offices. We have limited experience in developing localized
versions of our products and in marketing and distributing our products
internationally. International introductions of the Company's products often
require a significant investment in advance of anticipated future revenues. The
opening of our new offices typically results in initial recruiting and training
expenses and reduced labor efficiencies associated with the introduction of
products to a new market. We cannot guarantee that the countries in which we
operate will have a sufficient pool of qualified personnel from which to hire,
or that we will be successful at hiring, training or retaining such personnel.
In addition, we cannot assure you that we will be able to successfully expand
our international operations in a timely manner which could negatively impact
our business, operating results and financial condition.
Our international business operations are subject to risks associated with
international activities, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, longer accounts receivable payment cycles in
certain countries, potentially
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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 fluctuations
in foreign currency exchange rates. As we continue to expand our international
operations, exposures to gains and losses on foreign currency transactions may
increase. We may choose to limit such exposure by entering into forward foreign
exchange contracts or engaging in similar hedging strategies. We cannot
guarantee that any currency exchange strategy would be successful in avoiding
exchange-related losses. In addition, revenues earned in various countries where
we do business may be subject to taxation by more than one jurisdiction, which
would reduce our earnings.
Unstable economic conditions have continued in the Asia/Pacific region
during 1998 and the receivable balances for the region have shown no significant
improvement over 1997. Further, certain of the macro-economic factors affecting
the Asia/Pacific region, including significant devaluation of currencies, have
begun to appear in the Latin American region together with slowing payment
trends in the European markets during the second half of 1998, and in particular
during the fourth quarter of 1998 as past due receivables in these regions
increased 31% over the September 30, 1998 balances. As a result, we provided a
$2.0 million provision for bad debts during the fourth quarter of 1998. The
Asia/Pacific, Latin American and European regions represented 5%, 3% and 29%,
respectively, of our revenues during 1998 and collectively represented 14% of
our income from operations during 1998 excluding the $17.0 million one-time
charge for acquired in-process research and development. Although the European
region reported income from operations of $3.9 million for 1998, the
Asia/Pacific and Latin American regions reported losses from operations of
$659,000 and $2.0 million, respectively. To the extent any of these regions
grows in importance to us, or retailers in other geographic locations are
affected, our business, operating results and financial condition would decline.
Our Markets Are Highly Competitive. The markets for retail information
systems are highly competitive. We believe the principal competitive factors in
such markets are product quality, reliability, performance and price, vendor and
product reputation, retail industry expertise, financial stability, features and
functions, ease of use and quality of support. A number of companies offer
competitive products addressing certain of our target markets. In the Enterprise
Systems market, for example, we compete with internally developed systems and
with third-party developers such as GERS Retail Systems, Island Pacific, Radius
PLC, Retek (a subsidiary of HNC Software, Inc.), Richter Management Services,
SAP AG, and STS Systems. Our WCC product competes with warehouse and logistic
systems from Catalyst International, Inc., EXE and McHugh Freeman. In addition,
new market entrants may offer fully integrated merchandising level systems
targeting the retail industry.
In the In-store Systems market, which is more fragmented than the
Enterprise Systems market, we compete with major hardware equipment
manufacturers such as ICL, NCR and IBM, as well as software companies such as
CRS Business Computers, Datavantage, Inc., STS Systems, and Trimax. In the
Analytic Application markets, the Arthur Suite competes with products from STS
Systems and Mitech Computer Systems, Inc., and IBM's Makaro product line. The
Retail IDEAS product competes with products from vendors such as Microstrategy
and Intrepid. In the market for consulting services, we are pursuing a strategy
of forming informal working relationships with leading retail systems
integrators such as Andersen Consulting and PriceWaterhouseCoopers. These
integrators, as well as independent consulting firms such as IBM's Global
Services Division, also represent potential competition to our consulting
services group.
Some of our existing competitors, as well as a number of potential new
competitors, have significantly greater financial, technical, marketing and
other resources than we do, which could provide them with a significant
competitive advantage over us. We cannot guarantee that we will be able to
compete successfully
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against our current or future competitors or that competition will not have a
material adverse effect on our business, operating results and financial
condition.
There are Risks Associated with Our Strategic Relationships. We have from
time to time established formal and informal relationships with other companies,
including Baan, IBM, Microsoft and Silvon, Inc., to collaborate in areas such as
product development, marketing and distribution. The maintenance of these
relationships and the development of other similar relationships is a meaningful
part of our business strategy. Currently, our relationships with IBM and
Microsoft are cooperative, and there is no written agreement defining the
parties' obligations. We cannot assure you that our current informal
relationships with IBM, Microsoft or other companies will be beneficial to us,
that such relationships can be maintained, or that we will be able to enter into
successful new strategic relationships in the future.
Implementation of Our Products Is A Lengthy Process; Our Fixed-Price
Service Contracts May Result In Losses. Our software products are complex and
perform or directly affect mission-critical functions across many different
functional and geographic areas of the enterprise. Consequently, implementation
of our software is a complex, lengthy process and commitment of resources by our
customers is subject to a number of significant risks over which we have little
or no control. We believe that the complicated nature and increased flexibility
of the client/server versions of our products may contribute to the length of
the implementation process. Delays in the 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. The
lifecycles of our products are difficult to estimate. The products must keep
pace with technological developments, conform to evolving industry standards and
address increasingly sophisticated customer needs. We believe that we must
continue to respond quickly to users' needs for broad functionality and
multi-platform support and to advances in hardware and operating systems.
Introduction of new products embodying new technologies and the emergence of new
industry standards could render our products obsolete and unmarketable. We may
experience future difficulties that could delay or prevent the successful
development, introduction and marketing of new products, or that new products
and product enhancements will meet the requirements of the marketplace and
achieve market acceptance. If we are unable to develop and introduce products in
a timely manner in response to changing market conditions or customer
requirements, our business, operating results and financial condition will be
hurt.
Our Success Depends Upon Our Proprietary Technology. Our success and
ability to compete is dependent in part upon our proprietary technology,
including our software source code. To protect our proprietary technology, we
rely on a combination of trade secret, nondisclosure and copyright laws, which
may afford only limited protection. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries. We
have no patents or patent applications pending. The source code for our
proprietary software is protected both as a trade secret and as a copyrighted
work. Although we rely on the limited protection afforded by such intellectual
property laws, we also believe that factors such as the technological and
creative skills of our personnel, new product developments, frequent product
enhancements,
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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, and
may involve integration with systems developed by third parties. In particular,
it is common for complex software programs, such as our newer, client/server
software products, to contain undetected errors when first released. They are
discovered only after the product has been implemented and used over time with
different computer systems and in a variety of applications and environments.
Despite extensive testing, we have in the past discovered defects or errors in
our products or custom modifications only after our systems have been used by
many customers. In addition, our customers may occasionally experience
difficulties integrating our products with other hardware or software in the
customer's environment that are unrelated to defects in our products. Such
defects, errors or difficulties may cause future delays in product introductions
and shipments, result in increased costs and diversion of
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development resources, require design modifications or impair customer
satisfaction with our products. Our future business growth depends largely on
the continued development and market acceptance of our newer, client/server
products. If customers experience significant problems with implementation of
those products or are otherwise dissatisfied with their functionality or
performance or if they fail to achieve market acceptance for any reason, our
business, operating results and financial condition would be negatively
impacted.
Our products may be used by our customers to perform mission-critical
functions. Consequently, design defects, software errors, misuse of our
products, incorrect data from external sources or other potential problems
arising from the use of our products could result in financial or other damages
to our customers. Prior to 1998, we did not maintain product liability
insurance. Our license agreements with our customers typically contain
provisions designed to limit our exposure to potential claims as well as any
liabilities arising from such claims. However, such provisions may not
effectively protect us against such claims and the associated liability and
costs.
We Are Dependent on Key Personnel. Our performance depends in large part
on the continued performance of our executive officers and other key employees,
particularly the performance and services of James D. Armstrong and Frederick M.
Pakis, our Co-Chief Executive Officers. We do not have in place "key person"
life insurance policies on any of our employees. The loss of the services of
Messrs. Armstrong or Pakis or other key executive officers or employees could
negatively affect our financial performance.
Our Stock Price Has Been Highly Volatile. The market price of our common
stock has experienced large fluctuations that may continue. Future announcements
concerning us or our competitors, quarterly variations in operating results,
accounts receivable balances or aging, announcements of technological
innovations, the introduction of new products or changes in product pricing
policies by us or our competitors, proprietary rights or other litigation,
changes in earnings or other estimates, or recommendations by analysts or other
factors could cause the market price of our common stock to fluctuate
substantially. In addition, stock prices for many technology companies have
fluctuated widely for reasons unrelated to the operating results of such
companies. These fluctuations, as well as general economic, market and political
conditions such as recessions or military conflicts, depress the market price of
our common stock.
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, such as
the acquisition of Arthur Retail during 1998, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The independent auditors' report of Deloitte & Touche LLP and the
consolidated financial statements of JDA as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, are included
in this Form 10-K as listed in Item 14(a).
33
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this Report, in
that the Company intends to file its Proxy Statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Report,
and certain information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors and executive officers of the
Company is incorporated by reference to the Company's Proxy Statement filed in
connection with the Company's 1999 Annual Meeting of Stockholders (the "Proxy
Statement") as set forth under the captions "Proposal No. 1 -- Election of
Directors," and "Executive Officers of the Company."
Information with respect to delinquent filings pursuant to Item 405 of
Regulation S-K is incorporated by reference to the Proxy Statement as set forth
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated by
reference to the Proxy Statement under the captions "Executive Compensation,"
"Summary Compensation Table," "Employment and Change of Control Arrangements,"
"Compensation of Directors," "Option Grants in Last Fiscal Year," "Aggregate
Option Exercises During Fiscal 1998 and Year End Option Values," "Report of The
Compensation Committee on Executive Compensation," and "Stock Performance
Graph."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to ownership of equity securities of the Company
by certain beneficial owners and management is incorporated by reference to the
Proxy Statement as set forth under the caption "Stock Ownership of Certain
Beneficial Owners and Management," and "Employment and Change in Control
Arrangements."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated by reference to the Proxy Statement under the captions "Certain
Transactions" and "Compensation Committee Interlocks and Insider Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets -- December 31, 1998 and 1997
Consolidated Statements of Income -- Three Years Ended December 31,
1998
Consolidated Statements of Stockholders' Equity -- Three Years Ended
December 31, 1998
34
35
Consolidated Statements of Cash Flows -- Three Years Ended December 31,
1998
Notes to Consolidated Financial Statements -- Three Years Ended
December 31, 1998
2. EXHIBITS
See Exhibit Index.
B. REPORTS ON FORM 8-K.
A Form 8-K dated October 2, 1998 was filed with the Securities and Exchange
Commission on October 28, 1998 to announce the adoption of a Preferred Stock
Purchase Rights Plan.
A Form 8-K dated January 11, 1999 was filed with the Securities and
Exchange Commission on January 12, 1999 to announce (1) preliminary financial
results for the year ended December 31, 1998 and for the fiscal quarter ended
December 31, 1998; (2) the Company's intent to restate the second and third
quarter operating results based upon guidance from the Securities and Exchange
Commission regarding appropriate valuation methodologies for in-process research
and development write-offs, which guidance is applicable to the Company's
acquisition on June 4, 1998 of the Arthur Retail Division of Comshare, Inc.; (3)
the resignation of Brent W. Lippman as Chief Executive Officer and Director of
the Company; (4) the return of James D. Armstrong and Frederick M. Pakis,
co-founders and Co-Chairman of the Board, on a full-time basis to serve in the
capacities of Co-Chief Executive Officers; and (5) the decision of the Company
and Baan Company to not form a separate entity joint venture for developing
Baan/JDA Retail business, and instead develop an alternative marketing
arrangement to sell and support their combined solutions to vertically
integrated retailers.
35
36
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
JDA Software Group, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of JDA
Software Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of JDA Software Group, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
January 28, 1999
36
37
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------
1998 1997
--------- --------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 42,376 $27,304
Marketable securities..................................... 36,316 --
Accounts receivable, net.................................. 40,570 32,444
Deferred tax asset........................................ 2,121 1,190
Prepaid expenses and other current assets................. 5,003 2,471
-------- -------
Total current assets................................... 126,386 63,409
-------- -------
Property and Equipment, net................................. 23,890 16,071
Goodwill and Other Intangibles, net......................... 36,039 3,722
Deferred Tax Asset.......................................... 6,549 --
Marketable Securities....................................... 6,697 --
-------- -------
Total assets...................................... $199,561 $83,202
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 4,834 $ 3,076
Accrued expenses and other liabilities.................... 16,336 8,268
Income taxes payable...................................... -- 668
Deferred revenue.......................................... 6,894 3,058
-------- -------
Total current liabilities......................... 28,064 15,070
Deferred Tax Liability...................................... -- 222
-------- -------
Total liabilities...................................... 28,064 15,292
-------- -------
Commitments and Contingencies (Notes 11 and 12)
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, 23,419,808 and
19,688,617 shares, respectively........................ 234 197
Additional paid-in capital................................ 172,417 65,966
Retained earnings (deficit)............................... (430) 2,052
Accumulated other comprehensive income (loss)............. (724) (305)
-------- -------
Total stockholders' equity............................. 171,497 67,910
-------- -------
Total liabilities and stockholders' equity........ $199,561 $83,202
======== =======
See notes to consolidated financial statements.
37
38
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Software licenses......................................... $43,342 $42,041 $24,296
Consulting, maintenance and other services................ 95,121 49,730 23,544
------- ------- -------
Total revenues......................................... 138,463 91,771 47,840
------- ------- -------
Cost of Revenues:
Software licenses......................................... 2,011 1,145 438
Consulting, maintenance and other services................ 65,137 37,727 16,416
------- ------- -------
Total cost of revenues................................. 67,148 38,872 16,854
------- ------- -------
Gross Profit................................................ 71,315 52,899 30,986
------- ------- -------
Operating Expenses:
Product development....................................... 22,171 11,364 6,478
Sales and marketing....................................... 21,282 12,633 7,242
General and administrative................................ 18,553 9,532 4,989
Purchased in-process research and development............. 17,000 -- --
------- ------- -------
Total operating expenses............................... 79,006 33,529 18,709
------- ------- -------
Income (Loss) From Operations............................... (7,691) 19,370 12,277
Other income, net......................................... 3,276 1,407 519
------- ------- -------
Income (Loss) Before Income Taxes........................... (4,415) 20,777 12,796
Income tax (benefit) provision............................ (1,947) 8,311 5,116
------- ------- -------
Net Income (Loss)........................................... $(2,468) $12,466 $ 7,680
======= ======= =======
Basic Earnings (Loss) Per Share............................. $ (.11) $ .64 $ .43
------- ------- -------
Diluted Earnings (Loss) Per Share........................... $ (.11) $ .63 $ .43
------- ------- -------
Shares Used to Compute:
Basic earnings (loss) per share........................... 22,194 19,617 18,015
------- ------- -------
Diluted earnings (loss) per share......................... 22,194 19,664 18,015
------- ------- -------
See notes to consolidated financial statements.
38
39
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
------------------- PAID-IN EARNINGS COMPREHENSIVE
SHARES AMOUNT CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
---------- ------ ---------- --------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance, January 1, 1996.......... 10,761,749 $108 $ 5,653 $(18,065) $ 13 $(12,291)
Issuance of common stock:
Initial public offering...... 3,274,299 33 25,279 25,312
Conversion of preferred
stock...................... 4,200,000 42 7,472 7,514
Secondary stock offering..... 900,000 9 15,536 15,545
Acquisition of JDA Canada.... 215,889 2 2,541 2,543
Tax benefit -- stock
options.................... 1,537 1,537
Employee stock purchase
plan....................... 57,667 1 424 425
Other........................ (29) (29)
Comprehensive income:
Net income...................... 7,680 7,680
Other comprehensive income --
Foreign translation
adjustment................. 425 425
--------
Comprehensive income....... 8,105
---------- ---- -------- -------- ----- --------
Balance, December 31, 1996........ 19,409,604 195 58,442 (10,414) 438 48,661
Issuance of common stock:
Stock options exercised......... 84,522 1 1,579 1,580
Employee stock purchase plan.... 194,491 1 1,585 1,586
Tax benefit -- stock options and
Employee stock purchase
plan......................... 4,859 4,859
Other........................... (499) (499)
Comprehensive income:
Net income...................... 12,466 12,466
Other comprehensive income --
Foreign translation
adjustment................. (743) (743)
--------
Comprehensive income....... 11,723
---------- ---- -------- -------- ----- --------
Balance, December 31, 1997........ 19,688,617 197 65,966 2,052 (305) 67,910
Issuance of common stock:
Secondary stock offering........ 3,450,000 35 99,606 99,641
Stock options exercised......... 233,656 2 4,186 4,188
Employee stock purchase plan.... 47,535 434 434
Tax benefit -- stock options and
Employee stock purchase
plan......................... 2,225 2,225
Other........................... (14) (14)
Comprehensive income (loss):
Net loss........................ (2,468) (2,468)
Other comprehensive income --
Foreign translation
adjustment................. (419) (419)
--------
Comprehensive income
(loss).................. (2,887)
---------- ---- -------- -------- ----- --------
Balance, December 31, 1998........ 23,419,808 $234 $172,417 $ (430) $(724) $171,497
========== ==== ======== ======== ===== ========
See notes to consolidated financial statements.
39
40
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss)......................................... $ (2,468) $ 12,466 $ 7,680
Adjustments to reconcile net income to net cash provided
by Operating activities:
Depreciation and amortization........................... 8,087 2,908 1,163
Provision for doubtful accounts......................... 2,645 1,980 818
Write-off of purchased in-process research and
development.......................................... 17,000 -- --
Deferred income taxes................................... (7,702) (453) 45
Changes in assets and liabilities:
Accounts receivable..................................... (10,771) (17,316) (7,586)
Prepaid expenses and other current assets............... (2,532) (1,752) (342)
Goodwill and other intangibles.......................... (800) -- --
Accounts payable........................................ 1,758 1,134 945
Accrued expenses and other liabilities.................. 1,181 1,752 2,050
Income taxes payable.................................... (668) 29 280
Deferred revenue........................................ 3,836 1,311 1,000
--------- -------- --------
Net cash provided by operating activities............ 9,566 2,059 6,053
--------- -------- --------
INVESTING ACTIVITIES:
Purchase of marketable securities......................... (399,838) -- --
Sales of marketable securities............................ 28,809 -- --
Maturities of marketable securities....................... 328,016 -- 14,649
Purchase of property and equipment........................ (13,480) (10,843) (6,225)
Purchase of Arthur Retail Business Unit................... (44,000) -- --
Purchase of LIOCS Corporation, net of cash acquired....... -- (1,588) --
Cash acquired from purchase of JDA Canada................. -- -- 214
--------- -------- --------
Net cash (used in) provided by investing
activities......................................... (100,493) (12,431) 8,638
--------- -------- --------
FINANCING ACTIVITIES:
Initial public offering transactions:
Issuance of common stock................................ -- -- 25,312
Redemption of preferred stock........................... -- -- (7,514)
Payments on notes and interest payable to
stockholders......................................... -- -- (4,881)
Stockholder transactions:
Payments on notes and interest payable to
stockholders......................................... -- -- (14,300)
Issuance of common stock -- secondary offerings........... 99,641 -- 15,545
Issuance of common stock -- stock option plans............ 4,188 1,580 --
Issuance of common stock -- employee stock purchase
plan.................................................... 434 1,586 425
Tax benefit -- stock options and employee stock purchase
plan.................................................... 2,225 4,859 1,537
Payments on capital lease obligations..................... (56) (93) (92)
Payments on bank line of credit........................... -- -- (575)
Other..................................................... (14) (499) (85)
--------- -------- --------
Net cash provided by financing activities............ 106,418 7,433 15,372
--------- -------- --------
Effect of exchange rates on cash and cash equivalents..... (419) (743) 425
--------- -------- --------
Net increase (decrease) in cash and cash equivalents...... 15,072 (3,682) 30,488
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............. 27,304 30,986 498
--------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR.................... $ 42,376 $ 27,304 $ 30,986
========= ======== ========
See notes to consolidated financial statements.
40
41
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- ------- -------
(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest.................................................. $ 20 $ 13 $ 876
======== ======= =======
Income taxes.............................................. $ 4,932 $ 2,762 $ 2,949
======== ======= =======
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Conversion of Series A preferred stock...................... $ 7,500
=======
SUPPLEMENTAL DISCLOSURES 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)
========
Acquisition of LIOCS Corporation:
Fair value of assets acquired, other than cash............ $ (622)
Goodwill.................................................. (2,022)
Liabilities assumed....................................... 366
Notes payable............................................. 690
-------
Net cash used to purchase LIOCS Corporation............ $(1,588)
=======
Acquisition of JDA Canada:
Fair value of assets acquired, other than cash............ $(1,150)
Goodwill.................................................. (1,967)
Liabilities assumed....................................... 788
Common stock issued....................................... 2,543
-------
Cash acquired in purchase.............................. $ 214
=======
See notes to consolidated financial statements.
41
42
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PERCENTAGES, SHARES, PER SHARE AMOUNTS OR AS OTHERWISE
STATED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Consolidation. JDA Software Group,
Inc. and subsidiaries ("JDA" or the "Company") is a global provider of
integrated retail software products and professional services. Designed to
Optimize the Retail Enterprise, the Company's solutions address the requirements
for the entire retail supply chain including Enterprise Systems for
merchandising, warehouse management and logistic applications, In-store Systems
for point of sale and back office applications, and Analytic Applications for
merchandise planning and allocation, and decision support. The Company offers
products that operate on the IBM AS/400- and DOS-based platforms, as well as
products that operate in the UNIX and Windows NT open client/server
environments. With headquarters in Phoenix, Arizona, the Company has offices in
major cities throughout the United States and internationally in Canada, the
United Kingdom, France, Germany, Mexico, Brazil, Chile, South Africa, Singapore,
and Australia.
The consolidated financial statements include the accounts of JDA and its
subsidiaries, all of which are wholly-owned. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
these estimates.
Revenue Recognition. The Company licenses its software products under
nonexclusive, nontransferable license agreements. In addition, the Company
provides professional services through its consulting and customer support
organizations including project management, system planning, design and
implementation, custom modifications, training and support services. The Company
recognizes revenues in accordance with the provisions of the American Institute
of Certified Public Accountants Statement of Position 97-2, Software Revenue
Recognition. License fee revenues are generally recognized when a license
agreement has been signed, the software product has been shipped, there are no
uncertainties surrounding product acceptance, the fees are fixed and
determinable, and collection is considered probable. Consulting services are
generally billed on an hourly basis and revenues recognized as the work is
performed. Maintenance revenues from ongoing customer support are billed on a
monthly basis and recorded as revenue in the applicable month or on an annual
basis and the revenues recognized ratably over the maintenance period.
Cash and Cash Equivalents and Marketable Securities. Cash and cash
equivalents consist of cash held in bank demand deposits and highly liquid
investments with remaining maturities of three months or less at the date of
purchase. Marketable securities consist of debt securities that have been
classified as held-to-maturity and are presented at amortized cost. Management
determines the appropriate classification of debt and equity securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date.
Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Property and equipment are
depreciated on a straight-line basis over the following estimated useful lives:
computers, furniture, and fixtures -- five to seven years;
buildings -- twenty-five years; automobiles -- three years; leasehold
improvements -- the shorter of the lease term or the estimated useful life of
the asset.
The Company adopted the American Institute of Certified Public Accountants'
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1") effective January 1, 1998.
The Company is currently implementing an enterprise-wide time and billing
system. This project is in the application development stage as defined in SOP
98-1. Accordingly, the external direct costs of materials and services, and the
payroll-related costs of employees' time devoted to the project, will be
capitalized. During 1998, the Company capitalized $250,000 in payments to an
independent third-party software provider in connection with this project.
Capitalized costs of the project will be amortized over five
42
43
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years beginning when the system is placed in service. Training costs and costs
to reengineer business processes are expensed as incurred.
Goodwill and Other Intangibles. Goodwill represents the excess of the
purchase price over the net assets acquired in business combinations and is
being amortized on a straight-line basis over 10 years. Other intangibles
consist primarily of developed software and customer lists purchased from third
parties that are being amortized on a straight-line basis over estimated useful
lives ranging from three to 11 years. The Company capitalizes software purchased
from third parties if the related software product under development has reached
technological feasibility or if there are alternative future uses for the
purchased software. The Company reviews goodwill and other intangibles for
possible impairment of value whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the
asset.
Product Development. The costs to develop new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. The Company considers
technological feasibility to have occurred when all planning, designing, coding
and testing have been completed according to design specifications. Once
technological feasibility is established, any additional costs would be
capitalized. The Company believes its current process for developing software is
essentially completed concurrent with the establishment of technological
feasibility, and accordingly, no costs have been capitalized.
Income taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Earnings per Share. Basic earnings per share is computed using only
weighted average common shares outstanding. Diluted earnings per share gives
effect to all dilutive potential common shares outstanding during the reporting
periods. (See Note 16)
Foreign Currency Translation. The financial statements of international
subsidiaries are translated into U.S. dollars using the exchange rate at each
balance sheet date for assets and liabilities and at an average exchange rate
for the revenues and expenses reported in each fiscal period. The Company has
determined that the functional currency of each foreign subsidiary is the local
currency and as such, foreign currency translation adjustments are recorded as a
separate component of stockholders' equity. The Company has not engaged in
foreign currency hedging transactions.
Stock-Based Compensation. As permitted under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"), the Company has elected to continue to apply the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
No. 25") and provide pro forma disclosure of net income (loss) and net income
(loss) per common share for employee stock option grants made as if the
fair-value method defined in SFAS No. 123 had been applied. (See Note 13)
Reclassifications. Certain reclassifications were made to the 1997 and
1996 financial statements to conform to the 1998 presentation.
New Accounting Standards. In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133"), which is
effective for fiscal years beginning after June 15, 1999. The Company has not
completed the process of evaluating the impact that will result from the
adoption of SFAS No. 133; however, on a preliminary basis, management does not
believe that eventual adoption will have a significant impact on the Company's
financial statements.
43
44
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. REORGANIZATION AND COMMON STOCK OFFERINGS
Reorganization. JDA was formed in March 1995 through the reorganization of
six commonly held predecessor companies. The transaction was accounted for as a
combination of companies under common control in a manner similar to a pooling
of interests. Under the terms of the reorganization, the predecessor companies
were contributed to a common holding company, JDA Software Group, Inc., in
exchange for all of JDA's then outstanding common stock (10,761,749 shares),
$2.3 million in cash and $17.7 million in promissory notes due on various dates
through the year 2000. Simultaneous with this exchange, JDA issued 2,800,000
shares of Series A redeemable preferred stock for $15.0 million. This cash was
invested in restricted short-term investments that were later used for the
payment of $14.0 million on the promissory notes. The issuance of the Series A
redeemable preferred stock and the distribution of cash and promissory notes
were accounted for as dividends, and additional paid-in capital was charged for
$66,000 to reflect the new par value of the common stock and for expenses of
$208,000 related to the reorganization. The Company paid interest on the
promissory notes of $130,000 during 1996.
Initial Public Offering. The Company sold 3,274,299 shares of common stock
on March 15, 1996 for $25.3 million, net of issuance costs of $1.1 million.
Subsequent to the initial public offering, the outstanding shares of the Series
A redeemable preferred stock were converted into 4,200,000 shares of common
stock and 1,250,004 shares of Series B redeemable preferred stock. The Series B
redeemable preferred stock was subsequently redeemed for $7.5 million in cash.
In addition, the remaining $3.7 million in promissory notes were paid from the
proceeds of the initial public offering.
Secondary Public Offerings. The Company completed a secondary public
offering of 3,708,750 shares of common stock in November 1996. The Company sold
900,000 of these shares for $15.5 million, net of issuance costs of $418,000,
with the remaining 2,808,750 shares being sold by certain selling stockholders.
An additional secondary public offering for 3,450,000 shares of common stock was
completed in May 1998 for $99.6 million, net of issuance costs of $668,000. The
Company intends to use the net proceeds from these offerings for general
corporate purposes including product development, working capital and potential
acquisitions. In June 1998, the Company used $44.0 million of the proceeds to
acquire the Arthur Retail Business Unit (See Note 3).
3. ACQUISITIONS
Arthur Retail Business Unit. The Company acquired the Arthur Retail
Business Unit ("Arthur Retail") from Comshare, Incorporated in June 1998 for
$44.0 million in cash and assumed liabilities of $6.9 million, including
specific acquisition related liabilities for consulting and development
commitments with existing customers assumed by the Company, and the professional
fees and other costs incurred in connection with the transaction. Arthur Retail
is a leading provider of strategic merchandise management software applications
that provide retailers with integrated tools for merchandise planning; product,
store allocation and store assortment decision making; and enterprise-wide
decision support. The acquisition was accounted for as a purchase, and
accordingly, the operating results of Arthur Retail have been included in the
Company's consolidated financial statements from the date of acquisition. The
purchase price was allocated to certain intangible assets and in-process
research and development ("IPR&D") based on their fair market values. The excess
of the purchase price over the fair market value of the assets acquired has been
recorded as goodwill. IPR&D includes the value of products in the development
stage for which technological feasibility had not been established and which the
Company believes have no alternative future use. In accordance with applicable
accounting rules and the valuation guidance issued by the Securities and
Exchange Commission ("SEC"), the Company expensed $17.0 million of purchased
IPR&D during the second quarter of 1998 and recorded a related tax benefit of
$6.9 million. (See Note 18) The following unaudited pro forma consolidated
results of operations for the years ended December 31, 1998 and 1997 assume the
Arthur Retail acquisition occurred as of January 1 of each year. The pro forma
results are not necessarily indicative of the actual results
44
45
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that would have occurred had the acquisition been completed as of the beginning
of each of the periods presented, nor are they necessarily indicative of future
consolidated results.
1998 1997
-------- --------
Total revenues......................................... $146,693 $111,369
======== ========
Net income............................................. $ 4,107 $ 8,409
======== ========
Basic and diluted earnings per share................... $ 0.19 $ 0.43
======== ========
LIOCS Corporation. The Company acquired all of the outstanding common
stock of LIOCS Corporation ("LIOCS") in April 1997 for $2.3 million. LIOCS is a
leading provider of advanced distribution and warehouse management solutions.
The Company paid $1.4 million of the purchase price in cash at closing,
deposited $230,000 in an escrow account, and recorded a payable for the
remaining balance of $690,000. The escrow agreement provided that 50% of the
escrow deposit be released 12 months after the closing date, with the remaining
50% released 18 months after the closing date. The $690,000 payment was
contingent upon LIOCS' product offerings achieving specific testing and
performance milestones. These milestones were met during 1997 and the payment
was made prior to December 31, 1997. The $230,000 deposited in the escrow
account was released during 1998 in accordance with the terms of the agreement.
The acquisition was accounted for as a purchase, and, accordingly, the operating
results of LIOCS have been included in the Company's consolidated financial
statements since the date of acquisition. The excess of the purchase price over
the fair value of the assets acquired has been recorded as goodwill. Pro forma
operating results for 1997 and 1996 are not presented as the effect of the
acquisition is not material.
JDA Software Services Ltd. The Company acquired all of the outstanding
common stock of JDA Software Services Ltd. ("JDA Canada") in August 1996 for
215,889 shares of JDA stock valued at $2.5 million. JDA Canada, a provider of
technology solutions for the retail industry, was previously an affiliate of the
Company, however, it had been independently owned since 1987. The acquisition
was accounted for as a purchase, and, accordingly, the operating results of JDA
Canada have been included in the Company's consolidated financial statements
since the date of acquisition. The excess of the purchase price over the fair
value of the assets acquired has been recorded as goodwill. Pro forma operating
results for 1996 are not presented as the effect of the acquisition is not
material.
4. MARKETABLE SECURITIES
The aggregate market values, cost basis, and gross unrealized gains and
losses of short- and long-term held-to-maturity investments at December 31, 1998
are shown below. The Company had no investments in debt or equity securities at
December 31, 1997.
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
U.S. Treasury.................... $ 1,025 $-- $-- $ 1,025
U.S. Government agencies......... 25,107 11 3 25,115
States and municipalities........ 4,603 2 5 4,600
Corporate........................ 12,278 10 -- 12,288
------- --- -- -------
Marketable
Securities........... $43,013 $23 $8 $43,028
======= === == =======
The contractual maturities of marketable securities at December 31, 1998
are as follows. Expected maturities could differ from contractual maturities as
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
45
46
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
MATURITIES IN:
One year or less................. $36,316 $23 $2 $36,337
One to five years................ 5,631 -- 2 5,629
Five to ten years................ 1,066 -- 4 1,062
------- --- -- -------
$43,013 $23 $8 $43,028
======= === == =======
5. ACCOUNTS RECEIVABLE, NET
Accounts receivable consist of the following:
1998 1997
------- -------
Trade receivables........................................ $44,535 $34,765
Less allowance for doubtful accounts..................... (3,965) (2,321)
------- -------
Total.......................................... $40,570 $32,444
======= =======
Unstable economic conditions have continued in the Asia/Pacific region
during 1998 and the receivable balances for the region have shown no significant
improvement over 1997. Further, certain of the macro-economic factors affecting
the Asia/Pacific region, including significant devaluation of currencies, have
begun to appear in the Latin American region together with slowing payment
trends in the European markets during the second half of 1998, and in particular
during the fourth quarter of 1998 as past due receivables in these regions
increased 31% over the September 30, 1998 balances. As a result, the Company
provided a $2.0 million provision for bad debts during the fourth quarter of
1998. Receivables, net of reserves, for these three regions represent $16.5
million, or 41% of the Company's total receivables at December 31, 1998, as
compared to $16.5 million, or 51% at December 31, 1997.
A summary of changes in the allowance for doubtful accounts for the
three-year period ended December 31, 1998 is as follows:
1998 1997 1996
------- ------ ------
Balance at beginning of period.................. $ 2,321 $1,124 $ 651
Provision for doubtful accounts................. 2,645 1,980 818
Deductions...................................... (1,001) (783) (345)
------- ------ ------
Balance at end of period........................ $ 3,965 $2,321 $1,124
======= ====== ======
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
1998 1997
-------- -------
Computers, furniture & fixtures......................... $ 23,126 $14,103
Land and buildings...................................... 3,153 3,137
Automobiles............................................. 5,518 2,764
Leasehold improvements.................................. 2,809 1,255
-------- -------
34,606 21,259
Less accumulated depreciation and amortization.......... (10,716) (5,188)
-------- -------
$ 23,890 $16,071
======== =======
46
47
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. GOODWILL AND OTHER INTANGIBLES, NET
Goodwill and other intangibles consist of the following:
1998 1997
------- ------
Goodwill.................................................. $30,144 $3,989
Developed software and other intangibles.................. 8,500 --
------- ------
38,644 3,989
Less accumulated amortization............................. (2,605) (267)
------- ------
$36,039 $3,722
======= ======
The Company acquired Arthur Retail in June 1998. (See Note 3) In connection
with that transaction, the Company recorded $26.2 million of goodwill and $7.7
million of developed software technology and other intangibles consisting
primarily of customer lists.
8. LINE OF CREDIT
The Company maintains a $5.0 million revolving line of credit with a
commercial bank. The line of credit is collateralized by property and equipment,
receivables, and intangibles; accrues interest at the bank's reference rate
(which approximates prime) less .25 percentage points; and requires the Company
to maintain certain current ratios and tangible net worth. The line of credit
matures on July 1, 2000. There were no amounts outstanding on the line of credit
at December 31, 1998 or 1997.
9. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
1998 1997
------- ------
Accrued compensation and benefits......................... $ 5,682 $3,982
Sales, value added and property taxes..................... 1,902 1,061
Acquisition related liabilities........................... 3,212 --
Other accrued expenses.................................... 5,540 3,225
------- ------
Total........................................... $16,336 $8,268
======= ======
10. DEFERRED REVENUE
Deferred revenue consists of deferrals for license fees, maintenance,
consulting and other services as follows:
1998 1997
------ ------
Software................................................... $ 892 $1,264
Maintenance................................................ 5,019 640
Consulting and other services.............................. 983 1,154
------ ------
$6,894 $3,058
====== ======
11. LEASE COMMITMENTS
The Company leases office space and various equipment under noncancellable
operating leases that expire at various dates through the year 2009. Certain of
the leases contain renewal options. The Company entered into a ten-year lease in
April 1998 for a new corporate office facility in Scottsdale, Arizona. The
lease,
47
48
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which covers approximately 121,000 square feet of a 136,000 square foot
facility, is scheduled to commence in April 1999 at an initial monthly rate of
approximately $138,000. The Company has a right of offer on the remaining space.
In addition, in the event the developer elects to sell the building prior to the
date of occupancy, the Company has a right of first refusal to purchase the new
office facility until the date of occupancy. Concurrent with the execution of
the lease, the Company was also granted an option to purchase approximately five
acres of real property contiguous to the office facility. This option may be
exercised at a pre-determined price on or before August 2001 provided that the
Company maintains certain minimum occupancy levels in the office facility.
Rental expense under operating leases was $4.4 million in 1998, $1.6
million in 1997, and $1.2 million in 1996. The rental expense figure in each
year includes $68,000 in payments to related parties for office space. Future
minimum lease payments under noncancellable operating leases (with minimum or
remaining lease terms in excess of one year) at December 31, 1998 are as
follows:
1999........................................................ $ 4,177
2000........................................................ 3,895
2001........................................................ 3,277
2002........................................................ 3,041
2003........................................................ 2,318
Thereafter.................................................. 9,318
-------
Total minimum lease payments................................ $26,026
=======
12. LEGAL PROCEEDINGS
Bernat v. JDA Software Group, Inc., et al., Dist. of Arizona No.
CIV'99-0065 PHX RGS and related cases.
On January 13, 1999, Rod Bernat, a shareholder of JDA Software Group, Inc.,
filed a securities class action lawsuit against the Company, its Co-Chief
Executive Officers, Frederick M. Pakis and James D. Armstrong, its former Senior
Vice President of Research and Development, Kenneth Desmarchais, and its former
Chief Executive Officer, Brent W. Lippman, in U.S. District Court for the
District of Arizona. The complaint filed in the lawsuit alleges that during the
alleged class period, January 29, 1998 through January 5, 1999, the Company
misrepresented its business, financial statements and business prospects to
investors. The complaint further alleges that certain officers of the Company
sold significant quantities of the Company's common stock during the class
period while the market price of the common stock was artificially inflated by
the alleged misrepresentations. The plaintiffs seek designation of the action as
a class action and damages for violation of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the
SEC. Following the filing of the Bernat action, lawsuits were filed by Norman
Wiss, Theodore J. Bloukos, Gwen Werboski, Elmer S. Martin, Linda May, Ivan
Sommer, David Hesrick and Michael J. Corn all purporting to act on behalf of the
same class of shareholders for the same class period, making substantially
similar allegations. These actions are currently in the process of being
consolidated into one action by the U.S. District Court. Management believes
that the actions are without merit and intends to defend them vigorously.
The Company is also involved in other legal proceedings and claims arising
in the ordinary course of business. Although there can be no assurance,
management does not believe that the disposition of these matters will have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
48
49
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. STOCKHOLDERS' EQUITY
Stock Split. In June 1998, the Company's Board of Directors declared a
three-for-two split of the Company's common stock, effected by a distribution on
or about July 17, 1998, of three shares for every two shares held of record at
the close of business on June 26, 1998. The stock split resulted in the issuance
of 7,775,036 additional shares of common stock and an amount equal to the par
value of the additional shares plus cash paid in lieu of fractional shares was
transferred from retained earnings to effect the split. All references in the
consolidated financial statements to historical shares, weighted average number
of shares, per share amounts and stock plan data have been retroactively
adjusted to reflect the split.
Preferred Stock Purchase Rights Plan. The Company adopted a Preferred
Stock Purchase Rights Plan (the "Rights Plan") on October 2, 1998 designed to
deter coercive or unfair takeover tactics and to prevent a person or a group
from gaining control of the Company without offering a fair price to all
stockholders.
Under the terms of the Rights Plan, a dividend distribution of one
Preferred Stock Purchase Right ("Right") for each outstanding share of the
Company's common stock was made to holders of record on October 20, 1998. These
Rights entitle the holder to purchase one one-hundredth of a share of the
Company's Series A Preferred Stock ("Preferred Stock") at an exercise price of
$100. The Rights become exercisable (a) 10 days after a public announcement that
a person or group has acquired shares representing 15% or more of the
outstanding shares of common stock, or (b) 10 business days following
commencement of a tender or exchange offer for 15% or more of such outstanding
shares of common stock.
The Company can redeem the Rights for $0.001 per Right at any time prior to
their becoming exercisable. The Rights expire on October 1, 2008, unless
redeemed earlier by the Company or exchanged for common stock. Under certain
circumstances, if a person or group acquires 15% or more of the Company's common
stock, the Rights permit stockholders other than the acquiror to purchase common
stock having a market value of twice the exercise price of the Rights, in lieu
of the Preferred Stock. In addition, in the event of certain business
combinations, the Rights permit stockholders to purchase the common stock of an
acquiror at a 50% discount. Rights held by the acquiror will become null and
void in both cases.
Stock Option Plans. The Company maintains various stock option plans for
employees, consultants and non-employee directors as follows:
JDA adopted a stock option plan in 1995 (the "1995 Option Plan") that
provides for the issuance of up to 2,025,000 shares of common stock to employees
under incentive and nonstatutory stock option grants. Incentive and nonstatutory
stock options may be granted at a price not less than the fair market value of
the common stock at the date of grant. The options generally become exercisable
over periods ranging from 18 to 48 months, commencing at the date of grant, and
expire in ten years. The 1995 Option Plan terminates in March 2005. At December
31, 1998, there were 109,008 options outstanding and 166,133 options available
for grant under the 1995 Option Plan.
Certain stockholders of JDA's predecessor companies (See Note 2) entered
into a stock redemption agreement with the Company under which they have agreed
that upon (1) the exercise of the first 1,275,000 options granted to employees
under the 1995 Option Plan, they will sell an equivalent number of their common
shares to JDA at the exercise price specified on the options; and (2) upon the
exercise of the next 750,000 options granted under the 1995 Option Plan, they
will sell an equivalent number of their common shares to JDA at $.01 per share.
As a result, options exercised under the 1995 Option Plan will not increase the
number of outstanding shares of the Company's common stock.
JDA adopted a stock option plan in 1996 (the "1996 Option Plan") that
initially provided for the issuance of up to 1,875,000 shares of common stock to
employees, consultants and directors under incentive and nonstatutory stock
option grants. In June 1998, the Company's stockholders approved an increase in
the number of common shares authorized for issuance under the 1996 Option Plan
from 1,875,000 to 4,500,000.
49
50
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Incentive and nonstatutory stock options may be granted at a price not less than
the fair market value of the common stock at the date of grant. The options
generally become exercisable over a four-year period, commencing at the date of
grant, and expire in ten years. The 1996 Option Plan has no scheduled
termination date. At December 31, 1998, there were 2,334,327 options outstanding
and 1,964,297 options available for grant under the 1996 Option Plan.
JDA adopted an outside director stock option plan in 1996 that provides for
the issuance of up to 225,000 shares of common stock to eligible participants
under nonstatutory stock option grants (the "Directors Plan"). Under the
Directors Plan, outside directors receive a one-time grant to purchase shares
upon appointment to the Board of Directors, and an annual grant for each year of
service thereafter. The nonstatutory stock options may be granted at a price not
less than the fair market value of the common stock at the date of grant. The
options generally become exercisable over a three year period commencing at the
date of grant, and expire in ten years. The Directors Plan has no scheduled
termination date. At December 31, 1998, there were 30,750 options outstanding
and 194,250 options available for grant under the Directors Plan.
JDA adopted a stock option plan in 1998 (the "1998 Option Plan") that
provides for the issuance of up to 187,500 shares of common stock to employees
under nonstatutory stock option grants. The nonstatutory stock options may be
granted at a price not less than the fair market value of the common stock at
the date of grant. Options granted under the 1998 Option Plan are fully vested
and immediately exercisable, and expire in ten years. The 1998 Option Plan has
no scheduled termination date. At December 31, 1998, there were 65,326 options
outstanding and 5,118 options available for grant under the 1998 Option Plan.
The following summarizes the combined stock option activity during the
three-year period ended December 31, 1998:
OPTIONS OUTSTANDING
------------------------------
OPTIONS AVAILABLE EXERCISE PRICE
FOR GRANT SHARES PER SHARE
----------------- ---------- ----------------
Balance, January 1, 1996....................... 75,000 1,660,707 $ 2.33 to $ 3.50
Increase in reserved shares.................. 2,100,000 -- --
Granted...................................... (457,500) 457,500 $ 6.40 to $13.17
Exercised.................................... -- (675,920) $ 2.33 to $ 3.50
---------- ----------
Balance, December 31, 1996..................... 1,717,500 1,442,287 $ 2.33 to $13.17
Granted...................................... (1,107,675) 1,107,675 $11.83 to $22.50
Cancelled.................................... 152,257 (152,257) $ 2.83 to $18.00
Exercised.................................... -- (704,287) $ 2.33 to $13.17
---------- ----------
Balance, December 31, 1997..................... 762,082 1,693,418 $ 2.83 to $22.50
Increase in reserved shares.................. 2,812,500 -- --
Granted...................................... (2,416,297) 2,416,297 $ 8.81 to $37.25
Cancelled.................................... 1,171,513 (1,171,513) $ 3.50 to $32.25
Exercised.................................... -- (398,791) $ 2.33 to $19.54
---------- ----------
Balance, December 31, 1998..................... 2,329,798 2,539,411 $ 2.33 to $37.25
========== ==========
The grant and cancellation activity for the year ended December 31, 1998
includes 986,519 of previously issued options at prices ranging from $10.25 to
$32.25 that were cancelled and re-issued at $8.88 in connection with the
Company's repricing of certain outstanding options for all participants,
excluding directors and executive officers, on December 15, 1998.
50
51
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes certain weighted average information on options
outstanding at December 31, 1998:
OPTIONS OUTSTANDING
--------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------------- ----------- ------------ -------- ----------- --------
$2.33 to $9.69.............. 1,276,779 9.48 $ 8.31 224,824 $ 5.55
$11.83 to $20.67............ 878,857 8.37 $17.79 242,283 $18.25
$21.33 to $37.25............ 383,775 9.32 $26.06 35,653 $21.51
--------- -------
2,539,411 502,760
========= =======
The following pro forma information presents net income and basic and
diluted earnings per share as if compensation expense had been recognized for
stock options granted in the three-year period ended December 31, 1998, as
determined under the fair value method used in the Black-Scholes options pricing
model, and to include the effect of shares issued under the employee stock
purchase plan. The weighted average Black-Scholes value per option granted in
1998, 1997 and 1996 was $11.27, $17.29 and $7.48, respectively.
1998 1997 1996
----------- ----------- --------
Net income (loss) as reported........... $ (2,468) $ 12,466 $ 7,680
Pro forma net income (loss)............. $ (21,732) $ 3,241 $ 6,926
Basic earnings (loss) per share -- as
reported.............................. $ (.11) $ .64 $ .43
Diluted earnings (loss) per share -- as
reported.............................. $ (.11) $ .63 $ .43
Basic earnings (loss) per share -- pro
forma................................. $ (.98) $ .17 $ .38
Diluted earnings (loss) per share -- pro
forma................................. $ (.98) $ .16 $ .38
ASSUMPTIONS:
Expected dividend yield................. 0% 0% 0%
Expected stock price volatility......... 107% 95% 65%
Risk-free interest rate................. 5.25% 5.25% 5.25%
Expected life of option................. 3.14 years 3.47 years 4 years
No expense has been recognized for stock-based compensation in the three
years ended December 31, 1998 as the underlying stock options were granted at
current market price.
Employee Stock Purchase Plans. JDA adopted an employee stock purchase plan
in 1996 ("1996 Purchase Plan") that provides for the purchase of up to 300,000
shares of common stock during a 24-month offering period beginning August 9,
1996. Under the 1996 Purchase Plan, eligible employees may purchase common stock
semi-annually at 85% of the lesser of (1) the fair market value on the first day
of the 24-month offering period or (2) the fair market value on the last day of
each semi-annual purchase period. During 1998, 47,535 shares were purchased at
prices ranging from $7.37 to $19.76. During 1997, 194,268 shares were purchased
at prices ranging from $7.37 to $17. During 1996, 57,667 shares were purchased
at $7.37. At February 28, 1998 there were only 530 shares of common stock
available for issuance under the 1996 Purchase Plan and as a result, the 1996
Purchase Plan was terminated by the Board of Directors.
51
52
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company adopted an employee stock purchase plan in 1998 ("1998 Purchase
Plan") that provides for the purchase of up to 450,000 shares of common stock
during a 24-month offering period beginning June 15, 1998. Under the 1998
Purchase Plan, eligible employees may purchase common stock semi-annually at 85%
of the lesser of (1) the fair market value on the first day of the 24-month
offering period, or (2) the fair market value on the last day of each
semi-annual purchase period. No shares were purchased under the 1998 Purchase
Plan during 1998. On March 4, 1999, the Board of Directors approved the
formation of a new employee stock purchase plan, pending shareholder approval at
the 1999 Annual Meeting of Stockholders, that will provide for an initial share
reserve of 750,000 shares of common stock, which amounts will be increased on
August 1st of each year by an amount equal to the lesser of 750,000 shares or an
amount determined by the Board of Directors. All other terms with respect to
offering periods, eligibility and purchase price are similar to the 1998
Purchase Plan.
During 1998, 1997 and 1996, certain employees exercised options or sold
stock acquired under the stock purchase plans, in disqualifying dispositions
that resulted in deductions for income tax purposes. The Company's tax liability
for 1998, 1997 and 1996 was reduced by $2.2 million, $4.9 million, and $1.5
million, respectively, to give effect to these dispositions with an offsetting
credit to additional paid-in capital.
14. EMPLOYEE BENEFIT PLANS.
JDA has adopted a defined contribution plan under Section 401(k) of the
Internal Revenue Code covering all eligible employees ("401(k) Plan"). Eligible
participants may contribute up to $10,000 or 20% of their total compensation,
whichever is lower. The Company provides matching contributions to the 401(k)
Plan in amounts determined by the Board of Directors. Participants will be
immediately vested in their personal contributions and over a five year graded
schedule for amounts contributed by the Company. The Company made matching
contributions to the 401(k) Plan of $302,000, $137,000, and $86,000 in 1998,
1997 and 1996, respectively.
15. INCOME TAXES
The income tax provision (benefit) includes income taxes currently payable
and those deferred due to temporary differences between the financial statement
and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future. The components of the income tax provision
(benefit) included in the Consolidated Statements of Income are as follows:
1998 1997 1996
------- ------ ------
Current:
Federal............................................... $ 4,087 $5,185 $3,152
State................................................. 346 1,539 750
Foreign............................................... 1,322 2,040 1,169
------- ------ ------
Total current...................................... 5,755 8,764 5,071
------- ------ ------
Deferred:
Federal............................................... (7,086) (378) (184)
State................................................. (616) (75) (41)
Foreign............................................... -- -- 270
------- ------ ------
Total deferred..................................... (7,702) (453) 45
------- ------ ------
Total provision (benefit)..................... $(1,947) $8,311 $5,116
======= ====== ======
52
53
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax provision (benefit) differed from the amounts computed by
applying the statutory U.S. federal income tax rate of 34% to income before
income taxes as a result of the following:
1998 1997 1996
------- ------ ------
Federal statutory rate.................................. $(1,501) $7,272 $4,351
Research and development credit......................... (620) -- (30)
State income taxes...................................... (245) 990 800
Foreign rate in excess of US statutory rate............. 266 -- --
Change in tax rates..................................... (108) -- --
Other................................................... 261 49 (5)
------- ------ ------
Total......................................... $(1,947) $8,311 $5,116
======= ====== ======
The income tax effects of temporary differences that give rise to the
Company's deferred income tax assets and liabilities are as follows:
1998 1997
---------------------- ----------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------- ----------- ------- -----------
Deferred tax asset:
Non-deductible accruals and reserves........... $1,780 $ -- $ 541 $ --
Deferred revenue............................... 312 -- 595 --
Carryovers..................................... -- 203 -- 91
Foreign translation adjustment................. -- -- -- 203
Goodwill....................................... 6,375 -- --
Other.......................................... 29 -- 54 --
------ ------ ------ -----
Total.................................. 2,121 6,578 1,190 294
Deferred tax liability:
Tax over book depreciation..................... -- (17) -- (492)
Other.......................................... -- (12) -- (24)
------ ------ ------ -----
Total.................................. $2,121 $6,549 $1,190 $(222)
====== ====== ====== =====
16. EARNINGS PER SHARE
Earnings per share is calculated as follows:
1998 1997 1996
------- ------- -------
Net income (loss)..................................... $(2,468) $12,466 $ 7,680
------- ------- -------
Shares -- Basic earnings per share.................... 22,194 19,617 18,015
Dilutive effect of common stock equivalents........... -- 47 --
------- ------- -------
Shares -- Diluted earnings per share.................. 22,194 19,664 18,015
======= ======= =======
Basic earnings per share.............................. $ (.11) $ .64 $ .43
======= ======= =======
Diluted earnings per share............................ $ (.11) $ .63 $ .43
======= ======= =======
17. BUSINESS SEGMENTS, GEOGRAPHIC DATA AND MAJOR CUSTOMERS
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related Information ("SFAS No.
131") effective January 1, 1998. The
53
54
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company provides enterprise-wide software products and a full-range of
consulting and support services exclusively to the retail industry. Throughout
1998, the Company was organized along five geographic regions that have separate
management teams and reporting infrastructures: the United States, EMEA (Europe,
Middle East and Africa), Asia/Pacific, Canada and Latin America. Similar
products and services are offered in each geographic region and local management
is evaluated primarily based on total revenues and operating income. The
accounting policies of each region are the same as those described in Note 1 of
the Notes to Consolidated Financial Statements. The geographic distribution of
the Company's revenues, income (loss) from operations, and identifiable assets
for the three-year period ended December 31, 1998 is as follows:
1998 1997 1996
-------- ------- -------
Revenues:
United States.............................. $ 81,526 $50,697 $30,310
-------- ------- -------
EMEA....................................... 41,371 26,937 8,643
Asia/Pacific............................... 6,613 8,796 3,923
Canada..................................... 11,287 7,842 3,455
Latin America.............................. 5,056 6,561 4,777
-------- ------- -------
Total international..................... 64,327 50,136 20,798
-------- ------- -------
Sales and transfers between regions........ (7,390) (9,062) (3,268)
-------- ------- -------
Total revenues..................... $138,463 $91,771 $47,840
======== ======= =======
Income (loss) from operations:
United States.............................. $(11,969) $10,786 $ 7,346
-------- ------- -------
EMEA....................................... 3,939 3,448 414
Asia....................................... (659) 320 113
Canada..................................... 2,953 1,839 1,416
Latin America.............................. (1,955) 2,977 2,988
-------- ------- -------
Total international..................... 4,278 8,584 4,931
-------- ------- -------
Total income (loss) from
operations....................... $ (7,691) $19,370 $12,277
======== ======= =======
Identifiable assets:
United States.............................. $156,197 $50,981 $43,296
-------- ------- -------
EMEA....................................... 32,763 26,097 11,275
Asia....................................... 2,934 3,124 1,343
Canada..................................... 5,471 2,718 3,076
Latin America.............................. 2,196 282 66
-------- ------- -------
Total international..................... 43,364 32,221 15,760
-------- ------- -------
Total identifiable assets.......... $199,561 $83,202 $59,056
======== ======= =======
The loss from operations reported for the United States in 1998 includes
$17.0 million of purchased in-process research and development that was expensed
during the second quarter of 1998 in connection with the acquisition of Arthur
Retail. (See Note 3) Other research and development expense is allocated to the
United States where substantially all the work is performed.
No customer accounted for more than 10% of the Company's revenues during
the three years ended December 31, 1998.
54
55
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company currently classifies its products and services into three
primary product categories: Enterprise Systems that distribute data throughout a
retail enterprise and provide decision support for inventory control, cost and
price management, purchase order management, automated replenishment,
merchandise planning and allocation; In-store Systems that enable a retailer to
capture and analyze operational information and transmit such information to
corporate-level systems for sales and other analysis; and Analytic Applications
that provide a comprehensive set of tools for analyzing business results and
trends, monitoring strategic plans and enabling tactical decisions. A summary of
the total revenues attributable to each of these product categories for the
three years ended December 31, 1998 is shown below:
1998 1997 1996
-------- ------- -------
Revenues:
Enterprise systems......................... $ 91,254 $72,422 $41,522
In-store systems........................... 24,637 15,753 5,358
Analytic applications...................... 18,257 1,314 --
Other...................................... 4,315 2,282 960
-------- ------- -------
$138,463 $91,771 $47,840
======== ======= =======
18. QUARTERLY DATA (UNAUDITED)
The following table presents selected unaudited quarterly operating results
for the two-year period ended December 31, 1998. The quarterly results for the
three-month periods ended June 30, 1998 and September 30, 1998 have been
restated as discussed below. JDA believes that all necessary adjustments have
been included in the amounts shown below to present fairly the related quarterly
results.
CONSOLIDATED STATEMENT OF INCOME DATA:
1997
---------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
Revenues................................. $16,844 $21,097 $23,675 $30,155 $91,771
Income from operations................... 3,499 3,954 5,109 6,808 19,370
Net income............................... 2,313 2,590 3,259 4,304 12,466
Basic earnings per share................. $ .12 $ .13 $ .17 $ .22 $ .64
Diluted earnings per share............... $ .12 $ .13 $ .16 $ .22 $ .63
1998
----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------------- ------------- ------- --------
(AS RESTATED) (AS RESTATED)
Revenues........................... $30,893 $ 35,686 $38,862 $33,022 $138,463
Income (loss) from operations...... 5,246 (10,732) 4,727 (6,932) (7,691)
Net income (loss).................. 3,484 (5,658) 3,441 (3,735) (2,468)
Basic earnings (loss) per share.... $ .18 $ (.26) $ .15 $ (.16) $ (.11)
Diluted earnings (loss) per
share............................ $ .17 $ (.26) $ .15 $ (.16) $ (.11)
The Company purchased Arthur Retail on June 4, 1998. In connection with
this transaction, the Company acquired the rights to the Arthur Enterprise Suite
(the "Arthur Suite"). The Arthur Suite is a specific application that is being
designed to provide full lifecycle decision support for retail clients. The
Arthur Suite offers a retailer modules for strategic planning, product and
channel planning, assortment
55
56
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
planning and allocation planning. As a support activity to each of these
processes, a performance analysis function enables a retailer to perform a
fact-based review of all relevant statistical data. The development of the
Arthur Suite involves a phased re-engineering of existing stand-alone modular
products and the development of additional functionality and interfaces that
will enable the modules to function as a fully integrated business solution. The
Company initially allocated $40.0 million of the purchase price to IPR&D which
represented the value of products, including the Arthur Suite, that were in the
development stage and for which technological feasibility had not yet been
established. The initial value allocated to IPR&D and written off by the Company
in connection with the acquisition of Arthur Retail was calculated using
estimates of the costs required to complete the Arthur Suite, the after-tax cash
flows attributable to the Arthur Suite (including incremental revenues from
enhanced sales of the Company's existing products), and the selection of an
appropriate rate of return based upon the weighted average cost of capital.
In its September 9, 1998 letter to the American Institute of Certified
Public Accountants (the "SEC Letter"), the SEC issued guidance on the valuation
methodology for acquired IPR&D. The application of the prescribed methodology
requires that particular consideration be given to (i) the specific nature and
fair value of the Arthur Suite, (ii) the completeness, complexity and uniqueness
of the Arthur Suite at the acquisition date, (iii) the nature, timing and
estimated costs of the efforts necessary to complete the Arthur Suite and the
estimated completion date and (iv) the risks and uncertainties associated with
completing development on schedule, and the consequences if not timely
completed. The Company modified the IPR&D recorded in the Arthur Retail
acquisition in accordance with the guidance set forth in the SEC Letter and
subsequent communications. The revised valuation of the IPR&D was calculated
under a discounted cash flow method using an income approach with a forecast of
expected net cash inflows from the development effort. The forecast incorporated
projections prepared by both the Company and the former owner of Arthur Retail.
Material net cash inflows were expected to commence in 1999. Additionally, a
percentage of completion was estimated that gave consideration to certain key
factors such as the costs invested to date relative to the expected total cost
of the development effort, and the amount of progress completed as of the
acquisition date relative to the overall technological achievements required to
achieve full integration of the Arthur Suite. At the date of acquisition,
although certain versions of the modules of the Arthur Suite were commercially
available for sale, the bulk of the Arthur Suite was still in the fundamental
systems development stage with a substantial amount of coding, interface
development and unit testing still to take place. The IPR&D efforts to complete
the development and full integration of the Arthur Suite were estimated at that
time to be 81% complete and the estimated costs to complete the project totaled
$3.4 million. Through December 31, 1998, efforts to complete the Arthur Suite
have been in line with original expectations and the Arthur Suite has reached a
significant level of development. If the Company is unable to develop and
introduce a fully integrated Arthur Suite in a timely manner in response to
changing market conditions or customer requirements, the Company's business,
operating results and financial condition would be materially adversely
affected.
The change in the methodology resulted in (i) the exclusion of the
incremental revenues resulting from sales of the Company's existing products
expected from integration with the Arthur Suite and costs associated with
incremental sales and (ii) an increase in expenses to reflect those that the
average buyer (without the benefit of synergies) would experience. In addition,
the discount rate was increased to 25% to reflect the risk that the average
buyer would experience. As a result, the Company's financial statements for the
quarters ended June 30, 1998 and September 30, 1998 have been restated to reduce
the amount of the purchase price allocated to IPR&D from $40.0 million to $17.0
million and record $23.0 million of additional goodwill and other intangibles on
the acquisition of Arthur Retail. In addition, the financial statements have
been adjusted to reflect changes in the deferred tax asset balances resulting
from the revised allocation and to record amortization expense on the additional
goodwill and other intangibles. The change had no impact on net cash
56
57
JDA SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
flows provided by operations. The following table outlines the revisions to
previously published condensed consolidated financial statements (in thousands,
except for per share amounts):
AS OF JUNE 30, 1998 AS OF SEPTEMBER 30, 1998
---------------------- ------------------------
PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
---------- -------- ----------- ---------
Balance Sheet Data:
Goodwill and other intangibles................ $ 13,035 $ 36,035 $ 13,423 $ 35,848
Non-current deferred tax asset................ 14,217 4,891 14,295 5,113
Total assets.................................. 185,329 199,003 192,102 205,345
Retained earnings (deficit)................... (13,811) (137) (9,937) 3,306
Total stockholders' equity.................... 157,827 171,501 162,194 175,437
Total liabilities and Stockholders' equity.... 185,329 199,003 192,102 205,345
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
---------------------- ----------------------
PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
Statement of Operations Data:
Purchased in-process research and
development................................. $ 40,000 $ 17,000 $ 40,000 $17,000
Total operating expenses....................... 52,770 29,770 64,068 41,068
Income (loss) from operations.................. (33,732) (10,732) (28,486) (5,486)
Income (loss) before income taxes.............. (32,886) (9,886) (27,311) (4,311)
Income tax (benefit) provision................. (13,554) (4,228) (11,463) (2,137)
Net income (loss).............................. (19,332) (5,658) (15,848) (2,174)
Basic and diluted earnings (loss) per share.... $ (.87) $ (.26) $ (.76) $ (.10)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
---------------------- ----------------------
PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- --------
Statement of Operations Data:
General and administrative expenses............. $ 4,063 $ 4,638 $ 10,602 $11,177
Purchased in-process research and development... -- -- 40,000 17,000
Total operating expenses........................ 16,041 16,616 80,108 57,683
Income (loss) from operations................... 5,302 4,727 (23,183) (758)
Income (loss) before income taxes............... 6,455 5,880 (20,856) 1,569
Income tax (benefit) provision.................. 2,582 2,439 (8,881) 301
Net income (loss)............................... 3,873 3,441 (11,975) 1,268
Basic and diluted earnings (loss) per share..... $ .17 $ .15 $ (.55) $ .06
57
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JDA SOFTWARE GROUP, INC.
By: /s/ JAMES D. ARMSTRONG
------------------------------------
James D. Armstrong
Co-Chief Executive Officer
(Principal Executive Officer)
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 31, 1999 by the following persons in the
capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ JAMES D. ARMSTRONG Co-Chairman of the Board and Co-Chief
- ----------------------------------------------------- Executive Officer (Principal Executive
James D. Armstrong Officer)
/s/ FREDERICK M. PAKIS Co-Chairman of the Board and Co-Chief
- ----------------------------------------------------- Executive Officer
Frederick M. Pakis
/s/ KRISTEN L. MAGNUSON Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer
Kristen L. Magnuson (Principal Financial and Accounting Officer)
/s/ J. MICHAEL GULLARD Director
- -----------------------------------------------------
J. Michael Gullard
/s/ WILLIAM C. KEIPER Director
- -----------------------------------------------------
William C. Keiper
/s/ STEPHEN A. MCCONNELL Director
- -----------------------------------------------------
Stephen A. McConnell
/s/ JOCK PATTON Director
- -----------------------------------------------------
Jock Patton
58
59
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
2.1** -- Asset Purchase Agreement dated as of June 4, 1998 by and
among JDA Software Group, Inc., JDA Software, Inc. and
Comshare, Incorporated.
2.2** -- Software License Agreement dated as of June 4, 1998 by and
between Comshare, Incorporated and JDA Software, Inc.
3.1*** -- Second Restated Certificate of Incorporation of the Company
together with Certificate of Amendment dated June 12, 1998.
3.2*** -- First Amended and Restated Bylaws.
4.1* -- Specimen Common Stock certificate.
4.2*(1) -- Stock Redemption Agreement among the Company, James D.
Armstrong and Frederick M. Pakis dated March 30, 1995.
10.1*(1) -- Form of Indemnification Agreement.
10.2*(1) -- 1995 Stock Option Plan, as amended, and form of agreement
thereunder.
10.3(1) -- 1996 Stock Option Plan, as amended.
10.4+(1) -- 1996 Employee Stock Purchase Plan, as amended, and form of
agreement thereunder.
10.5*(1) -- 1996 Outside Directors Stock Option Plan and forms of
agreement thereunder.
10.6***(1) -- Employment Agreement between James D. Armstrong and JDA
Software, Inc. dated January 1, 1998.
10.7***(1) -- Employment Agreement between Frederick M. Pakis and JDA
Software, Inc. dated January 1, 1998.
10.8(1) -- 1998 Nonstatutory Stock Option Plan.
10.9(1) -- 1998 Employee Stock Purchase Plan.
10.10+ -- Lease Agreement between The Manufacturers Life Insurance
Company and JDA Software Canada Ltd. (formerly known as JDA
Software Services Ltd.) dated December 6, 1995 (North York,
Ontario).
10.11*** -- Lease Agreement between Opus West Corporation and JDA
Software Group, Inc. dated April 30, 1998, together with
First Amendment dated June 30, 1998.
10.12*** -- Real Estate Option Agreement and Escrow Instructions between
Mall at the Crossroads, Inc. and JDA Software Group, Inc.
dated June 8, 1998.
10.13* -- Assignment and Assumption Agreement regarding Master Lease
between Pacific Atlantic Systems Leasing, Inc. and JDA
Software, Inc. and Consent of Paradise Partners Limited
Partnership to Assignment, dated March 17, 1995 (Phoenix,
Arizona).
10.14*(1) -- Lease Agreement between Pakis-Armstrong Venture and JDA
Software, Inc. dated January 1, 1996 (Scottsdale, Arizona).
10.15* -- Lease Agreement between Holly Pond Associates Limited
Partnership and JDA Software, Inc. dated June 16, 1993
(Stamford, Connecticut).
10.16+ -- Lease Agreement between Oxford Development Group, Inc. and
JDA Software Canada Ltd. (formerly known as JDA Software
Services Ltd.) dated July 11, 1994 (Calgary, Alberta).
10.17*# -- License Agreement between Uniface Corporation and JDA
Software, Inc. dated February 9, 1994.
10.18*# -- Standard Value-Added Reseller Agreement between Uniface
Corporation and JDA Software, Inc. dated February 9, 1994.
10.19*(1) -- JDA Software, Inc. 401(k) Profit Sharing Plan, adopted as
amended effective January 1, 1995.
10.20 -- Business Loan Agreement between Bank of America Arizona and
JDA Software, Inc. dated September 30, 1998.
59
60
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.21***(1) -- Form of Amendment of Stock Option Agreement between JDA
Software Group, Inc. and Brent W. Lippman, amending certain
stock options granted to Mr. Lippman pursuant to the JDA
Software Group, Inc. 1996 Stock Option Plan on (i) June 19,
1996; (ii) January 28, 1997; (iii) July 10, 1997; and (iv)
January 27, 1998.
10.22***(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.
10.23***(1) -- Form of Amendment of Stock Option Agreement between JDA
Software Group, Inc. and Brent W. Lippman, amending that
certain stock option granted to Mr. Lippman pursuant to the
JDA Software Group, Inc. 1995 Stock Option Plan on November
15, 1995.
10.24++(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 From of Right Certificate, and as Exhibit C
the Summary of Terms and Rights Agreement).
10.25+++(1) -- Form of Incentive Stock Option Agreement between JDA
Software Group, Inc. and Brent W. Lippman to be used in
connection with stock grants to Mr. Lippman pursuant to the
JDA Software Group, Inc. 1996 Stock Option Plan.
10.26+++(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.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Independent Auditors.
27.1 -- Financial Data Schedule -- Fiscal Year End 1998.
27.2 -- Financial Data Schedule -- Quarters 2 and 3 of 1998.
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-748), declared effective on March 14, 1996.
** Incorporated by reference to the Company's Current Report on Form 8-K dated
June 4, 1998, as filed on June 19, 1998.
*** Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998, as filed on August 14, 1998.
+ Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-15659), declared effective on November 21, 1996.
++ Incorporated by reference to the Company's Current Report on Form 8-K dated
October 2, 1998, as filed on October 28, 1998.
+++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1998, as filed on November 13,
1998.
# Confidential treatment has been granted as to part of this exhibit.
(1) Management contracts or compensatory plans or arrangements covering
executive officers or directors of the Company.
60