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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
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
(602) 404-5500
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the Registrant's Common Stock, $0.01 par
value, was 13,320,957 as of April 15, 1998.
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JDA SOFTWARE GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income
for the Three Months Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1998 and 1997 5
Notes to Interim Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 31,897 $ 27,304
Accounts receivable, net 33,721 32,444
Deferred tax asset 1,202 1,190
Prepaid expenses and other current assets 2,830 2,471
-------- --------
Total current assets 69,650 63,409
PROPERTY AND EQUIPMENT, NET 18,842 16,071
GOODWILL, NET 3,658 3,722
-------- --------
Total assets $ 92,150 $ 83,202
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,462 $ 3,076
Accrued expenses and other liabilities 6,942 8,181
Income taxes payable 823 668
Deferred revenue 2,046 3,058
Current portion of capital lease obligations 44 42
-------- --------
Total current liabilities 14,317 15,025
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 35 45
DEFERRED TAX LIABILITY 234 222
-------- --------
Total liabilities 14,586 15,292
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized 2,000,000
Shares; None issued or outstanding -- --
Common stock, $.01 par value. Authorized 18,000,000
Shares; Issued and outstanding 13,318,781 and 13,151,246,
respectively 133 132
Additional paid in capital 71,930 65,966
Retained earnings 5,601 2,117
Accumulated other comprehensive income (loss) (100) (305)
-------- --------
Total stockholders' equity 77,564 67,910
-------- --------
Total liabilities and stockholders' equity $ 92,150 $ 83,202
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</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
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<S> <C> <C>
REVENUES:
Software licenses $12,049 $ 7,866
Consulting, maintenance and other services 18,844 8,978
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Total revenues 30,893 16,844
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COST OF REVENUES:
Software licenses 505 200
Consulting, maintenance and other services 13,844 6,704
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Total cost of revenues 14,349 6,904
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GROSS PROFIT 16,544 9,940
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OPERATING EXPENSES:
Product development 4,279 2,235
Sales and marketing 3,896 2,517
General and administrative 3,123 1,689
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Total operating expenses 11,298 6,441
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INCOME FROM OPERATIONS 5,246 3,499
Other income 329 356
------- -------
INCOME BEFORE INCOME TAXES 5,575 3,855
Provision for income taxes 2,091 1,542
------- -------
NET INCOME $ 3,484 $ 2,313
======= =======
BASIC AND DILUTED EARNINGS PER SHARE $ 0.26 $ 0.18
======= =======
SHARES USED TO COMPUTE:
Basic earnings per share 13,236 13,007
======= =======
Diluted earnings per share 13,579 13,168
======= =======
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,484 $ 2,313
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,152 369
Provision for doubtful accounts 49 7
Deferred income taxes -- (105)
Changes in assets and liabilities:
Accounts receivable (1,326) (1,147)
Prepaid expenses and other current assets (359) (213)
Accounts payable 1,386 (862)
Accrued and other liabilities (1,239) (577)
Income taxes payable 155 468
Deferred revenue (1,012) (213)
-------- --------
Net cash provided by operating activities 2,290 40
INVESTING ACTIVITIES:
Purchase of property and equipment (3,859) (1,261)
-------- --------
Net cash used in investing activities (3,859) (1,261)
-------- --------
FINANCING ACTIVITIES:
Issuance of common stock - stock option plan 3,780 --
Issuance of common stock - employee stock purchase plan 434 739
Tax benefit - stock options and employee stock purchase plan 1,751 --
Payments on capital lease obligations (8) (35)
-------- --------
Net cash provided by financing activities 5,957 704
-------- --------
Effect of exchange rates on cash 205 (221)
-------- --------
Net increase(decrease) in cash and cash equivalents 4,593 (738)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,304 $ 30,986
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,897 $ 30,248
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ -- $ 7
======== ========
Income taxes $ 71 $ 955
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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JDA SOFTWARE GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
applicable to interim financial statements. Accordingly, they do not include all
of the information and notes required for complete financial statements. In the
opinion of management, all adjustments and reclassifications considered
necessary for a fair and comparable presentation have been included and are of a
normal recurring nature. Operating results for the three months ended March 31,
1998, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998.
2. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS No. 130") effective January 1, 1998.
SFAS No. 130 requires that items defined as other comprehensive income, such as
foreign currency translation adjustments, be separately classified in the
financial statements and that the accumulated balance of other comprehensive
income be reported separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. The components of
comprehensive income for the three months ended March 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
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<S> <C> <C>
Comprehensive income:
Net income $3,484 $ 2,313
Other comprehensive income (loss) -
Foreign currency adjustment 205 (221)
------ -------
Comprehensive income $3,689 $ 2,092
====== =======
</TABLE>
3. EARNINGS PER SHARE
Shares used in the earnings per share calculation are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
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<S> <C> <C>
Shares - Basic earnings per share .............. 13,236 13,007
Dilutive effect of common stock equivalents .... 343 161
------- -------
Shares - Diluted earnings per share ............ 13,579 13,168
======= =======
</TABLE>
3. SEGMENT DISCLOSURES
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. SFAS No. 131 requires public companies to
report certain information about operating segments in their financial
statements, and establishes related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 does not need to be applied
to interim financial statements in the initial year of application; however,
comparative information for interim periods in the initial year of application
will be reported in the financial statements for interim periods in fiscal 1999.
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PART I: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Discussion containing such forward-looking statements may be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the captions "Overview," "Three Months Ended March 31, 1998
Compared to Three Months Ended March 31, 1997," "Liquidity and Capital
Resources," and "Certain Risks." Actual results for future periods could differ
materially from those discussed in this report on Form 10-Q as a result of the
various risks and uncertainties discussed herein.
OVERVIEW
JDA Software Group, Inc. ("JDA" or the "Company") is a leading
international provider of integrated enterprise-wide software products and
services that address the mission-critical management information needs of the
retail supply chain. The Company's products include: merchandising, financial
and decision support systems at the corporate level; point-of-sale, back office
and distributed processing applications at the store level; and warehouse
management and logistics systems at the distribution level. JDA also offers a
wide range of professional services through its consulting and customer support
organizations, including project management, system planning, design and
implementation, custom modifications, training and support services.
In 1986, the Company introduced MMS, its first enterprise retail
information solution, based on the IBM AS/400 platform. The Company's
development efforts through 1993 were focused exclusively on enhancements,
revisions and upgrades to MMS, which is currently in its fourth generation
release. In 1994, the Company acquired DSS, an in-store system, from JDA
Software Services Ltd. ("JDA Canada"), a then unaffiliated Canadian company.
Since 1994, the Company has significantly increased its product development
expenditures to develop products for open platforms. As a result of these
efforts, the Company commercially released ODBMS, an open, client/server
enterprise system, in September 1996, and Win/DSS, a Windows-based in-store
system, in January 1997. The Company also released Retail IDEAS, a data
warehouse system, in January 1997 and acquired WCC, a client/server warehouse
automation and management system, in connection with the acquisition of LIOCS
Corporation ("LIOCS") in April 1997.
JDA has historically derived the majority of its revenues from software
licenses and consulting, maintenance and other services relating to MMS. Total
revenues from the MMS product line represented 50% of the Company's total
revenues during the three months ended March 31, 1998 as compared with 56%, 80%
and 91% in fiscal years 1997, 1996 and 1995, respectively. Although the Company
expects MMS revenues to continue to represent a significant portion of total
revenues for the foreseeable future, MMS revenues as a percentage of total
revenues may continue to decline as a result of the increased revenues
attributable to the Company's newer product lines, particularly ODBMS and
Win/DSS.
Software license revenues and consulting, maintenance and other
services revenues represented 39% and 61%, respectively, of JDA's total revenues
during the three months ended March 31, 1998, as compared with 46% and 54%,
respectively in fiscal year 1997, and 51% and 49%, respectively, in fiscal years
1996 and 1995. Consulting, maintenance and other services revenues are derived
from a range of services, including system design and implementation and, to a
lesser extent, software maintenance and support, and training. During the past
two years, the Company has accelerated the growth of its services organization
in anticipation of an increased mix of consulting, maintenance and other
services revenues in both domestic and international markets, and continued
market acceptance of its newer client/server product lines, which require longer
implementation cycles. The Company believes its ability to offer a wide range of
professional services provides it with a competitive advantage as well as
additional revenue streams. Consulting, maintenance and other services revenues
are generally more predictable and generate significantly lower gross margins
than software revenues. In addition, consulting, maintenance and other services
costs tend to be higher during periods of rapid expansion, particularly with the
opening of new international offices where initial recruiting costs, training
and other start-up expenses must be incurred in advance of anticipated revenues,
and as a result of the reduced labor efficiencies associated with the
introduction of products to a new customer base.
The Company has pursued a strategy of addressing international markets
by developing localized versions of its products and establishing international
subsidiaries with direct sales and consulting capabilities. International
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revenues, which include revenues from international subsidiaries and export
sales, represented 48% of total revenues for the three months ended March 31,
1998, and 55%, 43% and 39% of total revenues in fiscal years 1997, 1996 and
1995, respectively. Consulting, maintenance and other services in support of
international software licenses typically have lower gross margins than those
achieved domestically due to generally lower prevailing billing rates and/or
higher costs in certain of the Company's international markets. Therefore,
significant growth in the Company's international operations may result in
further declines in gross margins on consulting, maintenance and other services.
The Asia/Pacific region encountered unstable local economies and
significant devaluation in its currencies during the last six months of 1997 and
continuing into 1998. The economic situation in the region has resulted in
slower payment of outstanding receivable balances and various requests for
extended or modified payment terms. This region represented 4% of the Company's
revenues for the three months ended March 31, 1998 and less than 10% of revenues
and 2% of income from operations during fiscal year 1997. Asia/Pacific
receivables, net of reserves, were approximately 9% of the Company's total net
receivables at March 31, 1998. To the extent the Asia/Pacific region grows in
importance to the Company, or that the factors affecting the region begin to
adversely affect retailers in other geographic locations, the Company's
business, operating results and financial condition could be adversely affected.
To the extent the Company's international operations expand, the
Company expects that an increasing portion of its international software license
and consulting, maintenance and other services revenues will be denominated in
foreign currencies, subjecting the Company to fluctuations in foreign currency
exchange rates. Historically, the Company's operations have not been materially
adversely affected by fluctuations in foreign currency exchange rates, and the
Company has not engaged in foreign currency hedging transactions. However, as
the Company continues to expand its international operations, exposures to gains
and losses on foreign currency transactions may increase. The Company may choose
to limit such exposure by entering into forward foreign exchange contracts or
engaging in similar hedging strategies. There can be no assurance that any
currency exchange strategy would be successful in avoiding exchange-related
losses. In addition, revenues of the Company earned in various countries where
the Company does business may be subject to taxation by more than one
jurisdiction, thereby adversely affecting the Company's earnings.
Prior to 1998, the Company recognized revenue in accordance with the
provisions of the American Institute of Certified Public Accountants ("AICPA")
Statement of Position No. 91-1, Software Revenue Recognition ("SOP 91-1"). Under
SOP 91-1, software license revenue is recognized upon the shipment of the
product if collection is probable and the Company's remaining obligations under
the license agreement are insignificant. Consulting services are generally
billed on an hourly basis and revenues are recognized as the work is performed.
Maintenance revenues from ongoing customer support are billed on a monthly basis
and recorded as revenue in the applicable month. The AICPA has recently adopted
Statement of Position No. 97-2, Software Revenue Recognition ("SOP 97-2"), that
supersedes SOP 91-1. The Company adopted SOP 97-2 effective January 1, 1998. The
adoption of SOP 97-2 did not have a significant impact on the Company's
financial statements for the three months ended March 31, 1998. However, there
can be no assurance that subsequent interpretations of this pronouncement by the
Company's independent auditors or the Securities and Exchange Commission will
not modify the Company's revenue recognition policies, or that such
modifications will not have a material adverse effect on the operating results
reported in any particular quarter. There can be no assurance that the Company
will not be required to adopt changes in its software licensing or services
practices to conform to SOP 97-2, or that such changes will not result in delays
or cancellations of potential sales of the Company's products.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUES
Total revenues for the three months ended March 31, 1998 were $30.9
million, an increase of 83% over the $16.8 million reported in the comparable
prior year period. Revenues consist of software licenses and consulting,
maintenance and other services, which represented 39% and 61%, respectively, of
total revenues during the three months ended March 31, 1998, and 47% and 53%,
respectively in the comparable prior year period.
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Software Licenses. Software license revenues for the three months ended
March 31, 1998 were $12.0 million, an increase of 53% over the $7.9 million
reported in the comparable prior year period. Domestic and international
software license revenues increased 106% and 12%, respectively, between the
comparable periods. These increases resulted primarily from the Company's
worldwide expansion of its sales and marketing staff, an increase in domestic
sales of the MMS product line between such periods, and incremental sales of
ODBMS and Retail IDEAS over the comparable prior year period.
Consulting, Maintenance and Other Services. Consulting, maintenance and
other services revenues for the three months ended March 31, 1998 were $18.8
million, an increase of 110% over the $9.0 million reported in the comparable
prior year period. This increase resulted from increased software license sales
and the introduction of client/server products that require longer
implementation cycles. Although domestic consulting, maintenance and other
services revenues increased 88% between the comparable periods, nearly 60% of
total revenue growth occurred in the Company's international markets where the
comparative increase was 135%.
COST OF REVENUES
Cost of software licenses was $505,000 for the three months ended March
31, 1998 and $200,000 in the comparable prior year period. Cost of software
licenses represented 4% and 3% of software license revenues in the respective
periods. The increase between such periods reflects the higher costs associated
with ODBMS and Retail IDEAS that incorporate software technology licensed from
third party suppliers. Consulting, maintenance and other services costs for the
three months ended March 31, 1998 were $13.8 million, an increase of 107% over
the $6.7 million reported in the comparable prior year period. The Company has
expanded its consulting and customer support organizations as a result of, 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 90% between the
comparable periods, and as of March 31, 1998 the Company had approximately 500
employees involved in these functions. The Company anticipates that the dollar
amount of consulting, maintenance and other services will continue to increase
as the Company expands its operations.
GROSS PROFIT
Gross profit for the three months ended March 31, 1998 was $16.5
million, an increase of 66% over the $9.9 million reported in the comparable
prior year period. Gross profit as a percentage of total revenues decreased from
59% in the three months ended March 31, 1997 to 54% in the comparable current
year period. This decrease was primarily attributable to an increase in
consulting, maintenance and other services revenues as a percentage of total
revenues from 53% to 61% between the comparable periods. The Company did,
however, increase gross margin on consulting, maintenance and other services
revenues between the comparable periods from 25% in 1997 to 27% in 1998. The
increase results from improved utilization rates and economies of scale between
periods. There can be no assurance that the Company will successfully maintain
or improve consulting, maintenance and other services margins, and such margins
could be materially, adversely affected if revenues were to fall short of
expectation, or if other factors were to significantly affect the utilization
rates of the service personnel. Other factors include the continued rapid
expansion of the Company's consulting infrastructure and the resulting high
front-end recruiting, training and downtime costs, and the higher costs
associated with the continued or increased use of outside contractors in
international markets such as the United Kingdom to service the increased demand
for installation work. The Company currently anticipates that quarterly
consulting, maintenance and other services revenues as a percentage of total
revenues will increase in 1998 compared to 1997, and accordingly, that overall
gross profit as a percentage of total revenues will be reduced as a result of
the significantly lower gross margins associated with consulting, maintenance
and other services as compared to software licenses.
OPERATING EXPENSES
Product Development. Product development expenses for the three months
ended March 31, 1998 were $4.3 million, an increase of 91% over the $2.2 million
reported in the comparable prior year period. Product development expenses as a
percentage of total revenues increased between the comparable periods from 13%
in 1997 to 14% in 1998. The Company increased its product development staff by
36% between the comparable periods to continue development efforts on ODBMS,
Win/DSS, Retail IDEAS, and WCC, and to make further enhancements to the
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MMS product line. In addition, certain product development activities were
conducted by the Company's services organization and by outside contractors
during the three months ended March 31, 1998. Such activities were conducted
primarily by the Company's internal product development staff in the comparable
prior year period. The Company believes that a strong commitment to product
development will be required in order to remain competitive. JDA has identified
certain functions and design features in connection with early installations of
ODBMS that it plans to add to the base code in order to shorten the deployment
cycle and increase customer satisfaction. The Company currently expects product
development expenses in 1998 to be between $18 million and $19 million as it
incorporates these features into the ODBMS product and adds similar improvements
to Win/DSS and other product lines. The Company believes its current process for
developing software is essentially completed concurrent with the establishment
of technological feasibility, and accordingly, no costs have been capitalized.
Sales and Marketing. Sales and marketing expenses for the three months
ended March 31, 1998 were $3.9 million, an increase of 55% over the $2.5 million
reported in the comparable prior year period. Sales and marketing expenses as a
percentage of total revenues decreased between the comparable periods from 15%
in 1997 to 13% in 1998 due to the significant increase in total revenues. The
increase in absolute dollars resulted from the Company's increased sales and
marketing presence in both domestic and international markets. The Company
increased its sales and marketing staff from 52 at March 31, 1997 to 76 at March
31, 1998. The Company anticipates that sales and marketing expenses may continue
to increase in absolute dollars as the Company expands its operations.
General and Administrative. General and administrative expenses for the
three months ended March 31, 1998 were $3.1 million, an increase of 85% over the
$1.7 million reported in the comparable prior year period. General and
administrative expenses as a percentage of total revenues were 10% in each of
the comparable periods. The increase in absolute dollars results from the
addition of administrative personnel to support the Company's domestic and
international growth. The Company anticipates that general and administrative
expenses may continue to increase in absolute dollars as the Company expands
its operations.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate was 38% for the three months
ended March 31, 1998 compared with a rate of 40% in the comparable prior year
period. 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 $55.3 million at March 31, 1998 compared with $48.4
million at December 31, 1997. Cash and cash equivalents at March 31, 1998 were
$31.9 million, an increase of $4.6 million from the $27.3 million reported at
December 31, 1997.
Operating activities provided cash of $2.3 million and $40,000 during
the three months ended March 31, 1998 and 1997, respectively. Cash provided by
operating activities increased in 1998 primarily due to $3.5 million in net
income. The Company had net accounts receivable of $33.7 million and $32.4
million at March 31, 1998 and December 31, 1997, respectively, which represented
98 days and 99 days of sales outstanding ("DSOs"). DSOs have historically been
higher in the second and third quarters of each fiscal year, as a result, the
Company believes, of the seasonal cash flow requirements of its retail
customers. DSOs may fluctuate significantly on a quarterly basis due to a number
of factors including seasonality, shifts in customer buying patterns, the
underlying mix of products and services, and the geographic concentration of
revenues.
Investing activities utilized cash of $3.9 million and $1.3 million
during the three months ended March 31, 1998 and 1997, respectively. The
activity in both periods represents capital expenditures to support the
Company's growth.
Financing activities provided cash of $6.0 million and $704,000 during
the three months ended March 31, 1998 and 1997, respectively. The activity in
both periods consists primarily of proceeds from the issuance of stock and
related tax benefits.
Changes in the currency exchange rates of the Company's foreign
operations had the effect of increasing cash by $205,000 during the three months
ended March 31, 1998 and reducing cash by $221,000 in the three
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months ended March 31, 1997. The Company did not enter into any foreign exchange
contracts or engage in similar hedging strategies during either of these
periods.
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. Although the Company is in negotiation for a credit facility which
may include up to $35 million in funds which may be used for acquisitions by the
Company, there can be no assurance that such financing will be available on
acceptable terms, if at all.
The Company maintains a $5.0 million line of credit with a commercial
bank. The line of credit is collateralized by property and equipment,
receivables and intangibles; accrues interest at the bank's reference rate,
which approximates prime; and requires the Company to maintain certain current
ratios and tangible net worth. The line of credit matures on July 1, 1998, and
the Company intends to seek renewal at that time. There were no amounts
outstanding on the line of credit as of March 31, 1998. The Company believes
that its cash and cash equivalents, available borrowings under the bank line of
credit and funds generated from operations will provide adequate liquidity to
meet the Company's normal operating requirements for at least the next twelve
months.
YEAR 2000 COMPLIANCE
Many currently installed computer systems are not capable of
distinguishing 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies in a
very wide variety of applications will experience operating difficulties unless
they are modified or upgraded to adequately process information involving,
related to or dependent upon the century change. Significant uncertainty exists
in the software and other industries concerning the scope and magnitude of
problems associated with the century change. The Company recognizes the need to
ensure its operations will not be adversely impacted by Year 2000 software
failures, and has established a project team to assess the Year 2000 risks. The
project team will coordinate the identification and implementation of changes to
computer hardware and software applications that will ensure availability and
integrity of the Company's financial systems and the reliability of its
operational systems. The Company is also assessing the potential overall impact
of the impending century change on the Company's business, operating results and
financial condition.
Based on the Company's assessment to date, the Company believes its
current versions of its software products and services are "Year 2000
compliant," that is, they are capable of adequately distinguishing 21st century
dates from 20th century dates. However, the Company believes some of the
Company's customers are running earlier versions of the Company's software
products that are not Year 2000 compliant, and the Company has been encouraging
such customers to migrate to current product versions. Moreover, the Company's
products are generally integrated into enterprise systems involving complicated
software products developed by other vendors. The Company may in the future be
subject to claims based on Year 2000 problems in others' products, custom
modifications made by third parties to the Company's products, or issues arising
from the integration of multiple products within an overall system. Although the
Company has not been a party to any litigation or arbitration proceeding to date
involving its products or services and related to Year 2000 compliance issues,
there can be no assurance that the Company will not in the future be required to
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 is currently reviewing its internal management information
and other systems in order to identify and modify those products, services or
systems that are not Year 2000 compliant. The total cost of these Year 2000
Compliance Activities has not been, and is not anticipated to be, material to
the Company's financial condition or its operating results. These costs and the
timing in which the Company plans to complete its Year 2000 Modification and
testing 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
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problems, that remedial efforts will not involve significant time and expense,
or that such problems will not have a material adverse effect on the Company's
business, operating results and financial condition.
The Company also faces risk to the extent that suppliers of products,
services and systems purchased by the Company and others with whom the Company
transacts business on a worldwide basis do not comply with Year 2000
requirements. In the event any such third parties cannot timely provide the
Company with products, services or systems that meet the Year 2000 requirements
on a timely basis, or in the event Year 2000 issues prevent such third parties
from timely delivery of products or services required by the Company, the
Company's operating results could be materially adversely affected. Also, no
assurance can be given that Year 2000 problems within the Company's prospective
customer base of retail organizations will not result in the deferral or
cancellation of such organizations' decisions to license and implement
information systems such as those offered by the Company. To the extent Year
2000 issues cause significant delays, in or cancellation of, decisions to
purchase the Company's products or services, the Company's business, operating
results and financial condition would be materially adversely affected.
CERTAIN RISKS
Variability in Quarterly Operating Results. The Company's quarterly
operating results have varied and are expected to continue to vary in the
future. These fluctuations may be caused by many factors, including: demand for
the Company's products and services; the size and timing of individual sales;
the lengthening of the Company's sales cycle; competitive pricing pressures;
customer order deferrals in anticipation of new products; changes in the mix of
products and services sold; the timing of introductions and enhancements of
products by the Company or its competitors; market acceptance of new products;
technological changes in platforms supporting the Company's products; changes in
the Company's operating expenses; changes in the mix of domestic and
international revenues; the Company's ability to complete fixed-price consulting
contracts within budget; personnel changes; foreign currency exchange rate
fluctuations; expansion of international operations; changes in the Company's
strategies; and general industry and economic conditions. The Company's business
has experienced, and is expected to continue to experience, some degree of
seasonality due in large part to its retail customers' buying cycles.
Specifically, within each fiscal year software license revenues have been
highest in the fourth quarter. Further, the gross margin on software licenses is
significantly greater than the gross margins on consulting, maintenance and
other services. As a result, the Company's gross margin has fluctuated from
quarter to quarter, and management expects that its gross margin may continue to
fluctuate significantly based on revenue mix and seasonality.
The Company's software products typically ship when contracts are
signed. Consequently, 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 are difficult to forecast
because such revenues are substantially dependent on agreements executed and the
related shipment of software in that quarter. Moreover, the Company typically
recognizes a substantial amount of its revenues in the last weeks or days of the
quarter. The Company generally derives a significant portion of its quarterly
software license revenues from a small number of relatively large sales. The
timing of large individual sales is difficult to predict, and in some cases,
large individual sales have occurred in quarters subsequent to those originally
anticipated by the Company. The Company anticipates that the foregoing trends
will continue. Any significant cancellation or deferral of customer orders, or
the Company's inability to conclude license negotiations in the compressed time
frame at the end of a fiscal quarter may have a material adverse effect on its
operating results reported in any particular quarter.
Further, the Company's expense levels are based on its expectations of
future revenues. Since software license sales are typically accompanied by a
significant amount of consulting, implementation and support services, the
Company's consulting and support resources must be managed to meet anticipated
software license revenues. As a result, service personnel are generally hired
and trained in advance of anticipated software license revenues. If such
revenues were to fall short of expectations, or if other factors were to
significantly affect the utilization rates of the service personnel, the
operating results reported in any particular quarter are likely to be adversely
affected because a significant portion of the Company's expenses are not
variable in the short-term, and cannot be quickly reduced to respond to any
unexpected revenue shortfall.
Prior to 1998, the Company recognized revenue in accordance with the
provisions of the American Institute of Certified Public Accountants ("AICPA")
Statement of Position No. 91-1, Software Revenue Recognition ("SOP 91-1"). The
AICPA has recently adopted Statement of Position No. 97-2, Software Revenue
Recognition
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("SOP 97-2"), that supersedes SOP 91-1. The Company adopted SOP 97-2 effective
January 1, 1998. The adoption of SOP 97-2 did not have a significant impact on
the Company's financial statements for the three months ended March 31, 1998.
However, there can be no assurance that subsequent interpretations of this
pronouncement by the Company's independent auditors or the Securities and
Exchange Commission will not modify the Company's revenue recognition policies,
or that such modifications will not have a material adverse effect on the
operating results reported in any particular quarter. There can be no assurance
that the Company will not be required to adopt changes in its software licensing
or services practices to conform to SOP 97-2, or that such changes, if adopted,
will not result in delays or cancellations of potential sales of the Company's
products.
Based on all of the foregoing, the Company believes that future
revenues, expenses and operating results are likely to vary significantly from
quarter to quarter. As a result, quarter to quarter comparisons of operating
results are not necessarily meaningful or indicative of future performance.
Furthermore, the Company believes it is likely that in some future quarter the
Company's operating results may be below the expectations of public market
analysts or investors. In such event, or in the event that adverse conditions
prevail, or are perceived to prevail, with respect to the Company's business or
generally, the market price of the Common Stock would likely be materially
adversely affected.
Dependence on Retail Industry. The Company has derived substantially
all of its revenues to date from the license of software products and related
services to the retail industry, and its future growth is critically dependent
on increased sales to the retail industry. The success of the Company's
customers is intrinsically linked to economic conditions in the retail industry,
which in turn are subject to intense competitive pressures and are affected by
overall economic conditions. In addition, the Company believes the license of
its software products is relatively discretionary and generally involves a
significant commitment of capital, which is often accompanied by large-scale
hardware purchases or commitments. As a result, although the Company believes
its products can assist retailers in a competitive environment, demand for the
Company's products and services could be adversely affected by instability or
downturns in the retail industry which may cause customers to exit the industry
or delay, cancel or reduce any planned expenditures for information management
systems and software products. The Company also believes that the retail
industry is experiencing a period of increased consolidation, which has in the
past and may in the future affect the demand for the Company's products. There
can be no assurance that the Company will be able to continue its revenue growth
or sustain its profitability on a quarterly or annual basis or that its
operating results will not be adversely affected by future downturns in the
retail industry. Any resulting decline in demand for the Company's products and
services would have a material adverse effect on the Company's business,
operating results and financial condition.
Management of Growth. The Company's business has grown rapidly in
recent years, with revenues increasing from $30.1 million in 1995 to $47.8
million in 1996 to $91.8 million in 1997. The Company's recent expansion has
resulted in substantial growth in the number of its employees, the scope of its
operating systems and the geographic distribution of its operations and
customers. This recent rapid growth has placed, and if continued will continue
to place, a significant strain on the Company's management and operations. The
Company's ability to compete effectively and to manage future growth, if any,
will depend on its ability to continue to implement and improve operational,
financial and management information systems on a timely basis, to expand,
train, motivate and manage its work force, in particular its direct sales force
and consulting services organization, and to deal effectively with third-party
systems integrators and consultants. Several of the Company's executive
management personnel have only recently joined the Company. In addition, Brent
W. Lippman has only recently assumed the role of Chief Executive Officer. The
Company's future growth and success depends in significant part upon the ability
of the Company's executive management team to effectively manage the expansion
of the Company's operations. There can be no assurance that the Company will be
able to manage its recent or any future growth, and any failure to do so would
have a material adverse effect on the Company's business, operating results and
financial condition.
The Company anticipates that continued growth, if any, will require it
to recruit and hire a substantial number of new employees, including consulting
and product development personnel, both domestically and abroad. The Company's
ability to undertake new projects and increase revenues is substantially
dependent on the availability of consulting personnel to assist in the design,
planning and implementation of the Company's solutions. Consequently, the
Company will not be able to continue to increase its business at historical
rates without adding significant numbers of trained consulting personnel.
Moreover, in the event the Company is unable to sufficiently increase its
consulting capacity, the Company may be required to forego licensing
opportunities or become
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increasingly dependent on systems integrators and professional consulting firms
to provide implementation services for its products. Therefore, in anticipation
of increasing its business the Company continues to significantly increase its
consulting capacity. However, to the extent anticipated revenues fail to
materialize following the hiring and training of new personnel, the Company's
operating results would be adversely affected. The addition of significant
numbers of new personnel requires the Company to incur significant start-up
expenses, including procurement of office space and equipment, initial training
costs and low utilization rates of new personnel. Such start-up expenses have in
the past contributed and may in the future contribute to significant reductions
in gross margin on consulting, maintenance and other services revenues and on
overall gross margin. There can be no assurance that start-up expenses incurred
in connection with the hiring of additional technical personnel will not result
in a material adverse impact on the Company's future operating results.
Ability to Attract and Retain Technical Personnel. The Company is
heavily dependent upon its ability to attract, retain and motivate skilled
technical and managerial personnel, especially highly skilled engineers involved
in ongoing product development and consulting personnel who assist in the
design, planning and implementation of the Company's solutions. In particular,
the Company's ability to install, maintain and enhance its products is
substantially dependent upon its ability to locate, hire, train and retain
qualified software engineers. The market for such individuals is intensely
competitive, particularly in international markets. In this regard, as part of
its strategy, the Company plans to significantly increase the number of
consulting personnel in connection with the continuing roll-out of its
client/server products and to support further development and implementation of
MMS. Given the critical roles of the Company's product development and
consulting staffs, the inability to recruit successfully or the loss of a
significant part of its product development or consulting staffs would have a
material adverse effect on the Company. The software industry is characterized
by a high level of employee mobility and aggressive recruiting of skilled
personnel. There can be no assurance that the Company will be able to retain its
current personnel, or that it will be able to attract and retain other highly
qualified technical and managerial personnel in the future. The inability to
attract and retain the necessary technical and managerial personnel could have a
material adverse effect upon the Company's business, operating results and
financial condition.
Limited Deployment of and Uncertain Market for New Software Products.
The Company's newer software products, ODBMS, Win/DSS, Retail IDEAS and WCC,
which are designed for open, client/server environments, have all been
commercially released within the last 18 months. To date, only a limited number
of customers have licensed or implemented the Company's client/server products.
The market for these products is new and evolving, and the Company believes that
retailers may generally be more cautious than other businesses in adopting
client/server technologies. Consequently, it is difficult to assess or predict
with any assurance the growth rate, if any, and size of the market for the
Company's client/server products and there can be no assurance that this market
will continue to develop. Potential and existing customers may find it
difficult, or be unable, to successfully implement the Company's client/server
products, or may not purchase such products for a variety of reasons, including:
the customer's inability to obtain hardware, software, networking
infrastructure, or sufficient internal staff required to implement, operate and
maintain an open, client/server solution; the generally longer time periods and
greater cost required to implement such products as compared to IBM AS/400-based
products; and limited implementation experience with such products by the
Company's service personnel or third-party implementation providers.
Furthermore, the Company must overcome significant obstacles to successfully
market its client/server solutions, including limited experience of the
Company's sales and consulting personnel in the client/server market and limited
existing reference accounts in this market. If the market for the Company's
client/server products fails to develop, develops more slowly than expected or
becomes saturated with competitors, or if the Company's products do not achieve
market acceptance, the Company's business, operating results and financial
condition will be materially adversely affected.
Product Concentration. The Company has historically derived the
majority of its revenues from software licenses and consulting, maintenance and
other services related to MMS. MMS revenues are in part dependent on continued
vitality in and support by IBM of its AS/400 platform. Although the Company
expects MMS revenues to continue to represent a significant portion of total
revenues for the foreseeable future, MMS revenues as a percentage of total
revenues may continue to decline as a result of the increased revenues
attributable to the Company's newer software products, particularly ODBMS and
Win/DSS. The life cycle of the MMS product line is difficult to estimate due
largely to the potential effect of new products, applications and product
enhancements, including those introduced by the Company, changes in the retail
industry and future competition. Any decline in MMS revenues, as a result of
competition, technological change, a decline in the market for or support of the
IBM AS/400 platform, or other factors, to the extent not offset by increases in
revenues from other products, would have
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a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that prospective purchasers of
the Company's IBM AS/400-based products will respond favorably to the Company's
future or enhanced software products or that the Company will continue to be
successful in selling its software products or services in the IBM AS/400
market.
International Operations. The Company's international revenues, which
include revenues from international subsidiaries and export sales, represented
48% and 51% of total revenues for the three months ended March 31, 1998 and
1997, respectively, and 55%, 43% and 39% of total revenues in fiscal 1997, 1996
and 1995, respectively. The Company expects that international revenues will
continue to account for a significant percentage of the Company's revenues for
the foreseeable future. The Company anticipates that continued growth of its
international operations will require the Company to recruit and hire a number
of new consulting, sales and marketing and support personnel in the countries in
which the Company has established or will establish offices. In addition, the
Company has only limited experience in developing localized versions of its
products and in marketing and distributing its products internationally.
International introductions of the Company's products often require significant
investment by the Company in advance of anticipated future revenues. The opening
of new offices by the Company typically results in initial recruiting and
training expenses and reduced labor efficiencies associated with the
introduction of products to a new market. There can be no assurance that the
countries in which the Company operates will have a sufficient pool of qualified
personnel from which the Company may hire, or that the Company will be
successful at hiring, training or retaining such personnel. In addition, there
can be no assurance that the Company will be able to successfully localize,
market, sell and deliver its products internationally. The inability of the
Company to successfully expand its international operations in a timely manner
could materially adversely affect the Company's business, operating results and
financial condition.
The Company's international business operations are subject to risks
inherent in international activities, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, longer accounts receivable payment cycles in
certain countries, potentially adverse tax consequences, difficulties in
staffing and managing geographically disparate operations, greater difficulty in
safeguarding intellectual property, licensing and other trade restrictions,
currency 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 prevailing billing rates and/or
higher costs in certain of the Company's international markets. Accordingly, any
significant growth in the Company's international operations may result in
further declines in gross margins on consulting, maintenance and other services.
To the extent the Company's international operations expand, the Company expects
that an increasing portion of its international software license and consulting,
maintenance and other services revenues will be denominated in foreign
currencies, subjecting the Company to fluctuations in foreign currency exchange
rates. The Company does not currently engage in foreign currency hedging
transactions. However, as the Company continues to expand its international
operations, exposures to gains and losses on foreign currency transactions may
increase. The Company may choose to limit such exposure by entering into forward
foreign exchange contracts or engaging in similar hedging strategies. There can
be no assurance that any currency exchange strategy would be successful in
avoiding exchange-related losses. In addition, revenues of the Company earned in
various countries where the Company does business may be subject to taxation by
more than one jurisdiction, thereby adversely affecting the Company's earnings.
The Asia/Pacific region encountered unstable local economies and
significant devaluation in its currencies during the last six months of 1997 and
continuing into 1998. The economic situation in the region has resulted in
slower payments of outstanding receivable balances and various requests for
extended or modified payment terms. To date, this region has not represented a
significant portion of the Company's revenues. However, to the extent the
Asia/Pacific region grows in importance to the Company, or the factors affecting
the region begin to adversely affect retailers in other geographic locations,
the Company's business, operating results and financial condition could be
materially adversely affected.
Competition. The markets for retail information systems are highly
competitive. The Company believes the principal competitive factors in such
markets are product quality, reliability, performance and price, vendor and
product reputation, retail industry expertise, financial stability, features and
functions, ease of use and quality of support. A number of companies offer
competitive products addressing certain of the Company's target markets. In the
enterprise systems market, the Company competes with internally developed
systems and with third-party
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developers such as Intrepid Systems ("Intrepid"), Island Pacific, Radius PLC,
Retek (a subsidiary of HNC Software, Inc.), STS Systems and Richter Management
Services. In addition, the Company believes that new market entrants may attempt
to develop fully integrated enterprise level systems targeting the retail
industry. In particular, SAP AG has announced the availability of an integrated
client/server enterprise system competitive with the Company's products. In
addition, Intrepid has announced the formation of a joint development and
marketing relationship with PeopleSoft, Inc., a provider of enterprise
applications software, to develop products that are expected to compete directly
with ODBMS.
In the in-store systems market, which is more fragmented than the
enterprise systems market, the Company competes with major hardware original
equipment manufacturers such as ICL, NCR and IBM, as well as software companies
such as CRS Business Computers, Datavantage, STS Systems, Trimax and GERS Retail
Systems. In the distribution and warehouse management systems market, the
Company's WCC product competes with products from Catalyst International, Inc.,
EXE and McHugh Freeman. The Retail IDEAS product competes with products from
Microstrategy and Intrepid, among other vendors. In the market for consulting
services, the Company is pursuing a strategy of forming informal working
relationships with leading retail systems integrators such as Andersen
Consulting and Ernst & Young LLP. These integrators, as well as independent
consulting firms such as the Global Services Division of IBM, also represent
potential competition to the Company's consulting services group.
Many of the Company's existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical,
marketing and other resources than the Company, each of which could provide them
with a significant competitive advantage over the Company. There can be no
assurance that the Company will be able to compete successfully against its
current or future competitors or that competition will not have a material
adverse effect on the Company's business, operating results and financial
condition.
Risks Associated with Strategic Relationships. The Company has from
time to time established formal and informal relationships with other companies,
including IBM and Silvon, Inc., involving collaboration in areas such as product
development, marketing and distribution. The maintenance of these relationships
and the development of other such relationships is a meaningful part of the
Company's business strategy. Currently, the Company's relationship with IBM is
cooperative in that there is no written agreement defining the parties'
obligations. There can be no assurance that the Company's current informal
relationships will be beneficial to the Company, that such relationships will be
sustained, or that the Company will be able to enter into successful new
strategic relationships in the future.
Lengthy Implementation Process; Fixed-Price Service Contracts. The
Company's software products are complex and perform or directly affect
business-critical functions across many different functional and geographic
areas of the enterprise. Consequently, implementation of the Company's software
is a complex, lengthy process that involves a significant commitment of
resources by the Company's customers and that is subject to a number of
significant risks over which the Company has little or no control. The Company
believes that implementation of the client/server versions of its products is
likely to be more complex and require more time than implementation of its DOS-
based and AS/400-based products. In addition, the Company's lack of experience
in implementing its client/server-based products may contribute to the length of
the implementation process. Delays in the completion of implementations of any
of its software products, whether by the Company or its business partners, may
result in customer dissatisfaction or damage to the Company's reputation and
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company offers a combination of software products, implementation
and support services to its customers. Typically, the Company enters into
service agreements with its customers that provide for consulting and
implementation services on a "time and expenses" basis. Certain customers have
asked for, and the Company has from time to time entered into, fixed-price
service contracts. These contracts specify certain milestones to be met by the
Company regardless of actual costs incurred by the Company in fulfilling those
obligations. The Company believes that fixed-price service contracts may
increasingly be offered by its competitors to differentiate their product and
service offerings. As result, the Company may enter into more fixed-price
contracts in the future. There can be no assurance that the Company can
successfully complete these contracts on budget, and the Company's inability to
do so could have a material adverse effect on its business, operating results
and financial condition.
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Technological Change and Market Acceptance of Evolving Standards. The
computer software industry is subject to rapid technological change, changing
customer requirements, frequent new product introductions and evolving industry
standards that may render existing products and services obsolete. As a result,
the Company's position in its existing markets, or other markets that it may
enter, could be eroded rapidly by technological advancements not embraced by the
Company. The life cycles of the Company's products are difficult to estimate.
The products must keep pace with technological developments, conform to evolving
industry standards and address increasingly sophisticated customer needs. In
particular, the Company believes that it must continue to respond quickly to
users' needs for broad functionality and multi-platform support and to advances
in hardware and operating systems. Introduction of new products embodying new
technologies and the emergence of new industry standards could render the
Company's products obsolete and unmarketable. There can be no assurance that the
Company will not experience future difficulties that could delay or prevent the
successful development, introduction and marketing of new products, or that new
products and product enhancements will meet the requirements of the marketplace
and achieve market acceptance. If the Company is unable to develop and introduce
products in a timely manner in response to changing market conditions or
customer requirements, the Company's business, operating results and financial
condition would be materially adversely affected.
Dependence on Proprietary Technology. The Company's success and ability
to compete is dependent in part upon its proprietary technology, including its
software source code. To protect its proprietary technology, the Company relies
on a combination of trade secret, nondisclosure and copyright law, which may
afford only limited protection. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries.
The Company presently has no patents or patent applications pending. The source
code for the Company's proprietary software is protected both as a trade secret
and as a copyrighted work. Although the Company relies on the limited protection
afforded by such intellectual property laws, it also believes that factors such
as the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
maintenance are also essential to establishing and maintaining a technology
leadership position. The Company generally enters into confidentiality or
license agreements with its employees, consultants and customers, and generally
controls access to and distribution of its software, documentation and other
proprietary information. The terms of the Company's license agreements with its
customers often require the Company to provide the customer with a listing of
the product source code. Although the license agreements place restrictions on
the use by the customer of the Company's source code and do not permit the
re-sale, sublicense or other transfer of such source code, there can be no
assurance that unauthorized use of the Company's technology will not occur.
Despite the measures taken by the Company to protect its proprietary
rights, unauthorized parties may attempt to reverse engineer or copy aspects of
the Company's products or to obtain and use information that the Company regards
as proprietary. Policing unauthorized use of the Company's products is
difficult. In addition, litigation may be necessary in the future to enforce the
Company's intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, operating results and financial
condition.
Certain technology used by the Company's products is licensed from
third parties, generally on a non-exclusive basis. These licenses generally
require the Company to pay royalties and fulfill confidentiality obligations.
The Company believes that alternative resources exist for each of the material
components of technology licensed by the Company from third parties. However,
the termination of any such licenses, or the failure of the third-party
licensors to adequately maintain or update their products, could result in
delays in the Company's ability to sell certain of its products while it seeks
to implement technology offered by alternative sources. Any required replacement
licenses could prove costly. Also, any such delay, to the extent it becomes
extended or occurs at or near the end of a fiscal quarter, could result in a
material adverse effect on the Company's 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
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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 that software developers may become increasingly subject to
infringement claims. Any such claims against the Company, with or without merit
as well as claims initiated by the Company against third parties, could be time
consuming and expensive to defend, prosecute or resolve.
Product Defects; Product Liability; Risk of Integration Difficulties.
The Company's software products are highly complex and sophisticated and could,
from time to time, contain design defects or software errors that could be
difficult to detect and correct. In addition, implementation of the Company's
products generally involves a significant amount of customer-specific
customization, and may involve integration with systems developed by third
parties. In particular, it is common for complex software programs, such as the
Company's newer, client/server software products, to contain undetected errors
when first released which are discovered only after the product has been
implemented and used over time with different computer systems and in a variety
of applications and environments. Despite extensive testing, the Company from
time to time has discovered defects or errors in its products or custom
modifications only after its systems have been used by many customers. In
addition, the Company or its customers may from time to time experience
difficulties integrating the Company's products with other hardware or software
in the customer's environment that are unrelated to defects in the Company's
products. There can be no assurance that errors in the Company's software
products will not be discovered or, if discovered, that they will be
successfully corrected on a timely basis, if at all. Further, there can be no
assurance that such defects, errors or difficulties will not cause future delays
in product introductions and shipments, result in increased costs and diversion
of development resources, require design modifications or impair customer
satisfaction with the Company's products. The Company's future business growth
is substantially dependent on the continued development of market acceptance of
its newer, client/server products. If customers experience significant problems
with implementation of the Company's client/server products or are otherwise
dissatisfied with the functionality or performance of such products, or if such
products fail to achieve market acceptance for any reason, the Company's
business, operating results and financial condition would be materially
adversely affected.
Since the Company's products may be used by its customers to perform
mission-critical functions, design defects, software errors, misuse of the
Company's products, incorrect data from external sources or other potential
problems within or out of the Company's control that may arise from the use of
the Company's products could result in financial or other damages to the
Company's customers. Prior to 1997, the Company did not maintain product
liability insurance. Although the Company's license agreements with its
customers typically contain provisions designed to limit the Company's exposure
to potential claims as well as any liabilities arising from such claims, such
provisions may not effectively protect the Company against such claims and the
liability and costs associated therewith. Accordingly, any such claim could have
a material adverse effect on the Company's business, operating results and
financial condition.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the continued performance of its executive officers and other key
employees, particularly the performance and services of Brent W. Lippman, the
Company's Chief Executive Officer. The Company does not have in place "key
person" life insurance policies on any of its employees. The loss of the
services of Mr. Lippman or other key executive officers or employees could have
a material adverse effect on the business, operating results and financial
condition of the Company.
Volatility of Market Price. The market price of the Common Stock has
experienced large fluctuations which may be expected to continue. Future
announcements concerning the Company or its competitors, quarterly variations in
operating results, accounts receivable balances or aging, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, proprietary rights
or other litigation, changes in earnings estimates by analysts or other factors
could
18
<PAGE> 19
cause the market price of the Common Stock to fluctuate substantially. In
addition, stock prices for many technology companies have fluctuated widely for
reasons which have often been unrelated to the operating results of such
companies. These fluctuations, as well as general economic, market and political
conditions such as recessions or military conflicts, may materially and
adversely affect the market price of the Common Stock.
Acquisition Strategy. It is expected that the Company will grow
internally and through strategic acquisitions in order, among other things, to
expand the breadth and depth of its product suite and to build its professional
services organization. The Company continually evaluates potential acquisitions
of complementary businesses, products and technologies, including those which
could be material in size and scope. Acquisition opportunities considered to
date include private companies, public companies and divisions and product lines
of companies with annual revenues that range from several million dollars to
revenues comparable to those of the Company. Although there are no current
commitments or agreements regarding any acquisitions, from time to time the
Company has taken a number of actions with acquisition candidates in pursuit of
various acquisition opportunities, including: engaged in preliminary
discussions; exchanged nonpublic information; provided verbal and written
expressions of interest; reviewed technological feasability; and made
preliminary proposals regarding potential transaction structures and prices.
Acquisitions involve a number of special risks, including diversion of
management's attention to the assimilation of the operations and personnel of
acquired businesses, and the integration of acquired businesses products and
technologies into the Company's business and product offerings. Achieving the
anticipated benefits of any acquisition will depend, in part, upon whether the
integration of the acquired business, products or technology is accomplished in
an efficient and effective manner, and there can be no assurance that this will
occur. 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 the Company
may pursue, and any related diversion of management's attention, could have a
material adverse effect on the business, operating results and financial
condition of the Company. Moreover, there can be no assurance that any products
acquired will gain acceptance in the Company's markets, or that the Company will
obtain the anticipated or desired benefits of such acquisitions. Any acquisition
pursued or consummated by the Company could result in potentially dilutive
issuances of equity securities, the incurrence by the Company 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 items could have a material adverse
effect on the Company's business, operating results and financial condition.
A relatively large acquisition by the Company could result in the use
of a significant portion of the Company's available cash. Although the Company
is in negotiation for a credit facility which may include up to $35 million in
funds which may be used for acquisitions by the Company, there can be no
assurance that such financing will be available on acceptable terms, if at all.
If the Company acquires businesses, technologies or products in the near future,
it may use advances under such a credit facility, issue equity securities or a
combination of the foregoing in order to pay for any such acquisitions.
Although the Company anticipates that one or more acquisitions,
including material acquisitions, may become available in the near future, the
Company is unable to predict with any reasonable degree of certainty the
likelihood of any such acquisition being completed. Consequently, no assurance
can be given that any acquisition by the Company will occur, or that any
completed acquisition will not materially and aversely affect the Company's
business, operating results or financial condition.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
None
19
<PAGE> 20
JDA SOFTWARE GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JDA SOFTWARE GROUP, INC.
Dated: April 27, 1998 By: /s/ Kristen L. Magnuson
------------------------
Kristen L. Magnuson
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE> 21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1* Second Restated Certificate of Incorporation of the Company.
3.2* Bylaws.
4.1* Stock Redemption Agreement by and among the Company, James D. Armstrong
and Frederick M. Pakis dated March 30, 1995.
27.1 Financial Data Schedule.
* Incorporated by reference to the Company's registration statement on Form S-1
(No. 333-748), declared effective on March 14, 1996.
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JDA SOFTWARE
GROUP, INC.'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER ENDED
MARCH 31, 1998 AND IS QUALIFIED BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 31,897
<SECURITIES> 0
<RECEIVABLES> 36,088
<ALLOWANCES> (2,367)
<INVENTORY> 0
<CURRENT-ASSETS> 69,650
<PP&E> 25,024
<DEPRECIATION> (6,182)
<TOTAL-ASSETS> 92,150
<CURRENT-LIABILITIES> 14,317
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 77,431
<TOTAL-LIABILITY-AND-EQUITY> 92,150
<SALES> 0
<TOTAL-REVENUES> 30,893
<CGS> 0
<TOTAL-COSTS> 14,349
<OTHER-EXPENSES> 11,298
<LOSS-PROVISION> 49
<INTEREST-EXPENSE> (329)
<INCOME-PRETAX> 5,575
<INCOME-TAX> 2,091
<INCOME-CONTINUING> 3,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,484
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
