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JDA Software Group 10-K 2008 Documents found in this filing:Table of Contents
Commission File Number 0-27876
Scottsdale, Arizona 85260
(Address of principal executive
offices, including zip code)
Registrant’s telephone number, including area code:
(480) 308-3000
Securities registered pursuant to Section 12(b) of the
Act:
NONE
Securities registered pursuant to Section 12(g) of the
Act:
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
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 þ No o
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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12-b-2
of the Exchange Act
Yes o No þ
The approximate aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant (based on
the closing sales price of such stock as reported by the NASDAQ
Stock Market) on June 30, 2007 was $558,406,817. The number
of shares of common stock, $0.01 par value per share,
outstanding as of March 7, 2008 was 30,456,441.
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This Annual Report on
Form 10-K
contains forward-looking statements reflecting management’s
current forecast of certain aspects of our future. It is based
on current information that we have assessed but which by its
nature is dynamic and subject to rapid and even abrupt changes.
Forward looking statements include statements regarding future
operating results, liquidity, capital expenditures, product
development and enhancements, numbers of personnel, strategic
relationships with third parties, and strategy. The
forward-looking statements are generally accompanied by words
such as “plan,” “estimate,”
“expect,” “intend,” “believe,”
“should,” “would,” “could,”
“anticipate” or other words that convey uncertainty of
future events or outcomes. Our actual results could differ
materially from those stated or implied by our forward-looking
statements due to risks and uncertainties associated with our
business. These risks are described throughout this Annual
Report on
Form 10-K,
which you should read carefully. We would particularly refer you
to Item 1A. “Risk Factors” for an extended
discussion of the risks confronting our business. The
forward-looking statements in this Annual Report on
Form 10-K
should be considered in the context of these risk factors. We
disclaim any obligation to update information contained in any
forward-looking statement.
PART I
We are a leading provider of sophisticated software solutions
designed specifically to address the supply and demand chain
requirements of global consumer products companies,
manufacturers, wholesale/distributors and retailers, as well as
government and aerospace defense contractors and travel,
transportation, hospitality and media organizations, and have an
install base of over 5,600 customers worldwide. Our solutions
enable customers to manage and optimize the coordination of
supply, demand and flows of inventory throughout the supply and
demand chain to the consumer. We have invested nearly
$840 million in developed and acquired technology since
1996 when we became a public company. We believe the quality and
breadth of our product offerings promote customer loyalty and
drive repeat business as 65%, 79% and 70% of our sales were made
to existing customers during 2007, 2006 and 2005, respectively.
As of December 31, 2007, we employed approximately 1,600
associates and conducted business from 27 offices in three
geographic regions: the Americas (includes the United States,
Canada, and Latin America), Europe (Europe, Middle East and
Africa), and Asia/Pacific. Each region has separate management
teams and reporting structures. Our corporate offices are
located in Scottsdale, Arizona.
Historically, the process by which goods are manufactured,
distributed, and ultimately sold to consumers has been
understood in terms of the supply chain, running forward from
the suppliers of raw materials to manufacturers and the
distribution of products to meet the anticipated demand of
customers and consumers; and the demand chain, extending back
from the consumer to the retail store and its distribution
centers. Providers of software solutions have focused on
different vertical markets within these broad segments and
attempted to help customers optimize the various processes
relevant, in the case of the supply chain, to supplying goods to
customers and retail outlets, and in the case of the demand
chain, to selling and delivering goods to the ultimate consumer.
JDA has been integrating solutions to address the full supply
and demand chain since 2000, with the fundamental belief that
the processes used in both markets are often common and could
benefit from collaboration. Today we see retailers becoming
increasingly focused on the upstream manufacturing supply chain
and we also see manufacturers increasingly focused on becoming
consumer centric.
Throughout the supply and demand chains, businesses increasingly
face new challenges created by global operations and
increasingly demanding consumers. These two factors are in
conflict with one another as the extended global supply chain
introduces longer lead times while the accelerated pace of
change in consumer demand requires increased responsiveness.
Consumer preferences can change rapidly and without notice, and
intensified competition ensures that an organization’s
production, inventory, distribution or allocation mistakes will
be costly and their impact felt instantly in the market. JDA
believes that in the new global marketplace, all processes
involved in providing goods to the end customers and consumers
should ultimately be driven by customer behavior
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and consumer buying patterns. Manufacturers, suppliers and
retailers all require the ability to quickly adjust their plans
to changing market realities, and to collaborate to ensure
timely delivery of the right products to customers and consumers
at the right price at the right time. The retail and supplier
community needs solutions that enable a common, shared view of
the consumer signal throughout the supply and demand chain; we
call this “One Synchronized View of Demand.”
We primarily sell to one large segment of the market —
consumer products supply and demand chain companies, which
encompass retail companies as well as manufacturing and
wholesale distribution vertical industries — and
market our products as modular, yet integrated suites of
solutions which are designed to give our customers one
synchronized view of product demand across their enterprise and
extended supply chain. Some of our products are specific to
certain types of companies within this target market; for
example, we have certain products, such as
point-of-sale
applications, that are only applicable to a retail operation.
Our integrated suite of solutions combines the functionality of
planning, optimization, execution and analysis applications to
enable our customers to develop an integrated enterprise plan to
track and optimize the flow of inventory through the supply and
demand chain while optimizing their resources, operating
efficiencies and financial results. Our customers can select
individual products from our suite and implement them on a
stand-alone basis or they can implement various combinations of
our products to create an integrated solution.
In addition, our solutions include corporate level merchandise
operations systems, which enable retailers to manage their
inventory, product mix, pricing and promotional execution and
enhance the productivity and accuracy of warehouse processes;
in-store systems, which provide retailers with
point-of-sale
and back office applications to capture, analyze and transmit
certain sales, store inventory and other operational information
to corporate level merchandise operations systems; and
transportation and logistics management solutions, which are
designed to enable manufacturers, distributors, retailers,
shippers, consignees, carriers, trading partners and logistics
service providers to effectively manage the complexities of
transportation and logistics, including multiple modes of
transport such as by air, rail, sea and road.
Our solutions also include a comprehensive set of tools for
advanced decision support and analysis covering strategic
business planning, forecasting, promotional planning,
distribution planning, manufacturing planning and scheduling,
price and revenue optimization, inventory optimization,
collaborative synchronization of inventory, distribution,
production and material plans, category management and workforce
management. In addition, we also provide revenue management
solutions that enable passenger travel companies, cargo
carriers, hotel and resort companies, media networks, broadcast
groups and cable companies to more accurately forecast future
demand, optimize the allocation of capacity, maximize revenues
and improve customer satisfaction. Many of our products can be
and are sold to multiple customer types and most of our products
are sold across each of our geographic regions.
We organize and manage our operations by type of customer across
the following reportable business segments:
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Disclosures of certain financial information regarding our
business segments and geographic regions is included in our
consolidated financial statements as of December 31, 2007
and 2006, and for each of the years in the three-year period
ended December 31, 2007, which are included elsewhere
herein.
JDA has served the retail industry since 1985. Since 2000, we
have expanded into the consumer goods manufacturing and
wholesale-distribution markets through strategic acquisitions.
Our market expansion has been primarily achieved through a
series of ten acquisitions over the past ten years, the largest
being the acquisition of Manugistics Group, Inc. which we
completed in July 2006. Our future growth plans include
additional acquisitions to further expand our markets and
improve our offering, revenues and profitability.
Most of our customers today, whether they are retailers,
manufacturers or distributors, have already put the underlying
transactional systems in place that are required to automate the
basic manual tasks of buying and managing inventory and tracking
all transactions from order to collection. These types of
solutions provide companies with certain operational benefits
and fundamental information; however, these systems do not help
improve the planning and optimization aspects of their business.
We believe the next key challenge for many retail, manufacturing
and distribution companies worldwide will be their ability to
continually improve operating margins and efficiencies. To this
end, we believe our market position and business opportunities
are strong; we are the leading company that currently provides
an established suite of solutions that address these needs and
other additional, often complex business challenges. We also
believe this market advantage will last for several years as our
competitors attempt to replicate the sophisticated solutions and
level of integration that we are able to deliver today.
Additionally, while our competitors attempt to replicate our
capabilities, we plan to add new innovations that will enhance
or expand our advantage.
Our strategy for growth in 2008 can be summarized as follows:
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The CoE is designed to complement and enhance our
existing on-shore business model, not replace it, and our goal
is to achieve all of these benefits without sacrificing our
capability to work
face-to-face
with our customers, most of which are in the Americas and
Europe. We do plan to reduce our total on-shore headcount by
approximately 50 associates during 2008 through attrition and
minor adjustments as related functions become available at the
CoE. From an overall financial perspective, we believe
the CoE will result in a net cost to JDA during 2008 as
duplicate resources will be retained on-shore during the period
of time we hire and train the new Indian associates in order to
ensure a smooth transition. We believe the CoE will
improve our operating margins from 2009 forward.
In January 2007, we announced the adoption of our JDA
Enterprise Architecture platform. This platform provides the
strategic technology base that we will use to integrate and
develop new solutions for our target markets. Customer
acceptance of the JDA Enterprise Architecture has
generally been positive, and we plan to expand the use of this
platform over time to provide an increasingly seamless solution
for our customers. During 2007, we launched several key
integrations between JDA Enterprise Architecture-based
solutions and other products in our solution suite. In 2008, we
will continue this process, integrating additional JDA products
to the JDA Enterprise Architecture.
The JDA Enterprise Architecture is designed to support
our advanced planning and optimization solutions via a common
platform for user interfaces, master and operational data,
security, exception management, workflow, analysis and
reporting. The JDA Enterprise Architecture features a
“grid computing facility,” which utilizes parallel
processing that enables the largest global customers to solve
their complex business challenges and handle the large number of
SKUs, time horizons and parameter settings. With the “grid
computing facility” customers can model their complete
supply chain without the need to make simplifying assumptions.
We believe the JDA Enterprise Architecture provides our
customers with better visibility of key performance indicators
and “one view” of demand across all enterprise
planning and optimization activities thereby allowing more
profitable and informed decisions in manufacturing, sourcing,
supply chain planning, distribution, merchandising, logistics,
promotions, replenishment and shelf optimization. The JDA
Enterprise Architecture is architected primarily using Java
J2EE technology. We are in the process of enhancing the
interoperability between the Microsoft .Net technologies and the
JDA Enterprise Architecture, and we plan to launch
various solutions in 2008 that take advantage of this
interoperability.
In 2008, our product strategy will focus on providing a
comprehensive solution suite that allows our customers to
implement an “Integrated Planning and Execution”
solution. Integrated Planning and Execution represents the
ability for our customers to coordinate their decision making
activities across the enterprise through certain common
processes, such as a single demand plan for the whole
enterprise. It also represents the ability to ensure that
planning systems are constantly in synchronization with
execution systems and activities across the enterprise. This
strategy requires a broad and integrated suite of planning
solutions that can interoperate as well as the ability to
transform those plans into action through execution systems. Our
products provide all of these capabilities and we believe the
breadth and depth of our solution offerings is a distinct
competitive advantage. We also believe our
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ability to offer customers flexibility in their deployment
approach provides a distinct competitive advantage as customers
can implement individual solutions on a stand-alone basis or
implement various combinations of our products to create an
integrated solution.
Product development expense for 2007, 2006 and 2005 was
$51.2 million, $56.3 million and $44.4 million,
respectively.
We have established an Investment Protection Program
(“IPP”) to protect our customers’ investment
in JDA products as we migrate to new technology platforms. Under
the IPP, existing customers are provided with the right to
like-for-like
functionality in a new technology platform without additional
license fee subject to certain conditions including a
requirement that the new solution has no more than minimal
differences in price, features and functionality from the
existing products. Customers will pay any required third party
charges associated with the new technology platform.
With the expanding complexities of today’s global economy,
increased competitive imperatives, challenging new business
models and increased customer sophistication, the movement
towards a holistic perspective over the entire supply and demand
chain is converging into what we refer to as “Integration
Planning and Execution.” We offer a complete, supply and
demand chain industry-specialized suite of applications with the
depth and breadth of capabilities necessary for enabling
Integration Planning and Execution. The following table provides
a listing and brief description of the products in our solution
suite that provide customers with a flexible platform and the
ability to optimize advanced decision making processes.
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7
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We offer comprehensive customer support solutions to help
customers optimize their investment in our products. Our
standard maintenance services agreement entitles customers to
receive unspecified new product releases (exclusive of those
that introduce significant new functionality), comprehensive
error diagnosis and correction, global phone, email and internet
support, a customer relationship management portal that provides
24/7 self-service for managing and reporting issues, and access
to an online user community and searchable solution
knowledge-base. Customers have the option of choosing
maintenance service programs that extend hours of coverage,
incorporate support for custom configurations, or provide
special attention through periods of high
9
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activity or upgrade processing. We also offer enhanced support
services that provide customers with difficult to find technical
and database administration skills and an outsource alternative
to help desk and other information technology services. In
addition, we have a Platinum Support offering that
includes 24x7 support for critical issues on certain of our
products, annual strategic planning meetings, technical and
functional health checks, and customized training. The vast
majority of our customers have participated in one or more of
our customer support solutions programs and we have historically
realized a retention rate of approximately 95% in our installed
customer base.
Consulting services are generally billed bi-weekly on an hourly
basis or pursuant to the terms of a fixed price contract. In
addition, we augment our services on large-scale implementations
and extensive business process re-engineering projects with
third-party business alliances, consulting firms and system
integrators. Consulting engagements have typically ranged from
one month for certain Space & Category Management
Solutions to over
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two years for our larger Merchandise Operations Systems,
Demand and Allocation & Replenishment
Solutions; however, the time required to complete a project
can vary significantly based on the size of the customer and the
number and type of applications being implemented.
We market our products and services primarily through our direct
sales force. The direct sales force for the Americas region is
based in Scottsdale, Arizona with 13 additional regional sales
and support offices across the United States, Canada and Latin
America. Our international direct sales force is located in 14
sales and support offices in major cities throughout Europe,
Asia, Australia, and Japan. We have created dedicated sales
organizations in each of our geographic regions, as well as the
Services Industries business unit. As of
December 31, 2007, our global sales and marketing
organization consisted of 222 employees including quota
carrying sales representatives in the Americas, Europe and
Asia/Pacific of 36, 16 and 16, respectively. We expanded our
investment in the sales and marketing organization during 2007
and now believe that we have established a global sales presence
which is appropriate for our current size of operation. We plan
modest increases in our overall investment in sales and
marketing in 2008.
We continue to develop the network of partners and Value-Added
Resellers (VARs) who support us in the attainment of our goals.
We expanded the use of VARs extensively in our European region
during 2006 and 2007. We believe this model has helped us to
achieve a stronger presence in those geographies within this
diverse region where we do not have direct operations. We have
signed a partnership agreements with Sirius and Logicalis, two
USA-based hardware resellers to provide hardware sales support
to complement the sales of our products in North America. Our
Alliance Connection program, first launched in 2007, is
designed to provide increased value to our partners and maximize
their ability to generate additional revenues for both
themselves and JDA.
Sales to new customers have historically required between three
and twelve months from generation of the sales lead to the
execution of a software license agreement. Sales cycles are
typically longer for larger dollar projects, large
multi-national organizations and companies in certain geographic
regions. During the past three years, we have noted an increased
requirement for senior executives, boards of directors or
significant equity investor approval for larger dollar contracts
that have lengthened the traditional time from lead generation
to the execution of a software agreement. We believe our ability
to offer a comprehensive portfolio of integrated software
applications that can be installed independently or as a
complete solution, has created increased cross-selling
opportunities to existing customers.
We believe that while our markets are still subject to intense
competition, the number of competitors in many of our
application markets has decreased over the past five years. We
believe the principal competitive factors in our markets are
feature and functionality, product reputation, performance and
scalability, quality of referenceable accounts, vendor
viability, ability to implement, retail and demand chain
industry expertise, total solution cost, technology platform and
quality of customer support.
We have two types of competitors: the first type being Oracle
and SAP AG, two large horizontal software companies that have
increased their presence in the retail marketplace over the past
few years, and the second type being the smaller point solution
providers who typically focus on limited solution areas. We
believe that Oracle and SAP AG represent our more important
long-term competitors as we expand our product offerings and
compete
head-to-head
with them on broader system selection opportunities. We also
expect Oracle and SAP AG to provide more aggressive competition
for us due to the strength of their brands and market positions.
Our success and competitive position is dependent in part upon
our ability to develop and maintain the proprietary aspect of
our technology. The reverse engineering, unauthorized copying,
or other misappropriation of our technology could enable third
parties to benefit from our technology without paying
for it.
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We rely on a combination of copyright, trade secrets,
trademarks, confidentiality procedures, contractual restrictions
and patents to protect our proprietary technology. We seek to
protect the source code to our software, documentation and other
written materials under trade secret and copyright laws.
Effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries. We license
our software products under signed license agreements that
impose restrictions on the licensee’s ability to utilize
the software and do not permit the re-sale, sublicense or other
transfer of the software. Finally, we seek to avoid disclosure
of our intellectual property by requiring employees and
independent consultants to execute confidentiality agreements
with us and by restricting access to our source code.
We license and integrate technology from third parties in
certain of our software products. For example, we license the
Uniface client/server application development technology from
Compuware, Inc. for use in Portfolio Merchandise
Management, certain applications from Silvon Software, Inc.
for use in Performance Analysis by IDEAS, Cognos for use
in JDA Reporting and JDA Analytics, and the
WebLogic application from BEA Systems, Inc. or the IBM Websphere
applications for use in most of the JDA Enterprise
Architecture platform solutions and the Data Integrator
application from Business Object S.A which is also used in
certain of the products acquired from Manugistics. Our third
party licenses generally require us to pay royalties and fulfill
confidentiality obligations. We also resell Oracle database
licenses.
Our standard software license agreements contain an infringement
indemnity clause under which we agree to indemnify and hold
harmless our customers and business partners against liability
and damages arising from claims of various intellectual property
infringement by our products. These terms constitute a form of
guarantee that is subject to the disclosure requirements, but
not the initial recognition or measurement provisions of
Financial Accounting Standards Board issued FASB Interpretation
No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
the Indebtedness of Others.” We have never lost an
infringement claim and our costs to defend such lawsuits have
been insignificant. Although it is possible that in the future
third parties may claim that our current or potential future
software solutions infringe on their intellectual property
rights, we do not currently expect a significant impact on our
business, operating results, or financial condition.
As of December 31, 2007 we had 1,596 employees: 1,011
were based in the Americas region, 206 were based in Europe, and
379 were based in the Asia/Pacific region, including 259 in
India. Of the total, 222 were engaged in sales and marketing,
429 were in consulting services, 265 were engaged in client
support services, 462 were in product development, and 218 were
in administrative functions. We believe that our relations with
our employees are good. We have never had a work stoppage and
none of our employees are subject to a collective bargaining
agreement.
Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those filed or furnished pursuant to
Sections 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, are available free of charge from our website
at www.jda.com, as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the
Securities and Exchange Commission.
We operate in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The following section
describes material risks and uncertainties that we believe may
adversely affect our business, financial condition, results of
operations or the market price of our stock. This section should
be read in conjunction with the audited Consolidated Financial
Statements and Notes thereto, and Management’s Discussion
and Analysis of Financial Condition and Results of Operations as
of December 31, 2007 and for the twelve months then ended
contained elsewhere in this
Form 10-K.
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Risks
Related To Our Business
Software license revenues in any quarter depend substantially
upon contracts signed and the related shipment of software in
that quarter. It is therefore difficult for us to accurately
predict software license revenues. Because of the timing of our
sales, we typically recognize the substantial majority of our
software license revenues in the last weeks or days of the
quarter. In addition, it is difficult to forecast the timing of
large individual software license sales with a high degree of
certainty due to the extended length of the sales cycle and the
generally more complex contractual terms that may be associated
with such licenses that could result in the deferral of some or
all of the revenue to future periods. Our customers and
potential customers, especially for large individual software
license sales, are requiring that their senior executives, board
of directors and significant equity investors approve such sales
without the benefit of the direct input from our sales
representatives. As a result, large individual sales have
sometimes occurred in quarters subsequent to when we
anticipated, our sales process may be less visible than in the
past and sales cycles are more difficult to predict. We expect
to experience continued difficulty in accurately forecasting the
timing of deals. 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.
Economic,
political and market conditions can adversely affect our revenue
growth and profitability.
Our revenue and profitability depend on the overall demand for
our software and related services. A regional
and/or
global change in the economy and financial markets could result
in delay or cancellation of customer purchases. Current adverse
conditions in credit markets and their effects on the United
States and global economies and markets is an example of a
negative change that has delayed certain customer purchases.
Although these adverse conditions have only delayed a small
number of customer deals to date, a further worsening or
broadening, or protracted extension, of these conditions may
have a more significant negative impact on our operating results.
In addition, our growth strategy contemplates significant
contributions from acquisitions. In general, we prefer to use
cash from operations and debt rather than equity to acquire
companies. The availability and cost of debt are therefore
dependencies for the Company and to the extent that debt becomes
less available or more costly, our ability to execute our growth
strategy will be impaired. Historically, developments associated
with terrorist attacks on United States’ interests,
continued violence in the Middle East, natural catastrophes or
contagious diseases have resulted in economic, political and
other uncertainties, and factors such as these could further
adversely affect our revenue growth and operating results. If
demand for our software and related services decrease, our
revenues would decrease and our operating results would be
adversely affected which, in turn, may cause our stock price to
fall.
Developing and localizing software is expensive and the
investment in product development often involves a long payback
cycle. We have and expect to continue making significant
investments in software research and development and related
product opportunities. Accelerated product introductions and
short product life cycles require high levels of expenditures
for research and development that could adversely affect our
operating results if not offset by revenue increases. We believe
that we must continue to dedicate a significant amount of
resources to our research and development efforts to maintain
our competitive position. However, it is difficult to estimate
when, if ever, we will receive significant revenues from these
investments.
We are developing our next generation JDA Enterprise
Architecture solutions based upon service oriented
architecture technologies. The JDA Enterprise Architecture
is based on the technical platform originally developed by
Manugistics and is based on Java J2EE. We made a decision in
January 2007 to use the JDA Enterprise Architecture as
our primary technology platform, rather than the Microsoft .NET
platform that had been our primary technology platform for new
product development. A significant factor in selecting the
JDA Enterprise Architecture is that it is more mature
than the Portfolio-Enabled platform we had been developing
because Manugistics began its development efforts approximately
two years before we began developing our
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Microsoft .NET based applications. As of December 31, 2007,
there are nearly 200 customers that have installed and are using
the JDA Enterprise Architecture in production.
The risks of our commitment to the JDA Enterprise
Architecture platform include, but are not limited to, the
following:
The risk associated with developing products that utilize new
technologies remains high. Despite our increasing confidence in
this investment and our efforts to mitigate the risks of the
JDA Enterprise Architecture platform project, there can
be no assurances that our efforts to migrate many of our current
products and to develop new JDA Enterprise Architecture
solutions will be successful. If the JDA Enterprise
Architecture platform project is not successful, it likely
will have a material adverse effect on our business, operating
results and financial condition.
Our software products are highly complex and sophisticated. As a
result, they may occasionally contain design defects, software
errors or security problems that could be difficult to detect
and correct. In addition, implementation of our products may
involve customer-specific configuration by third parties or us,
and may involve integration with systems developed by third
parties. In particular, it is common for complex software
programs such as ours to contain undetected errors, particularly
in early versions of our products. 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 certain defects or errors in our products or custom
configurations only after our software products have been used
by many clients. In addition, our clients may occasionally
experience difficulties integrating our products with other
hardware or software in their environment that are unrelated to
defects in our products. Such defects, errors or difficulties
may cause future delays in product introductions, result in
increased costs and diversion of development resources, require
design modifications or impair customer satisfaction with our
products.
We believe that significant investments in research and
development are required to remain competitive, and that speed
to market is critical to our success. Our future performance
will depend in large part on our ability to enhance our existing
products through internal development and strategic partnering,
internally develop new products which leverage both our existing
customers and sales force, and strategically acquire
complementary solutions that add functionality for specific
business processes to an enterprise-wide system. If clients
experience significant problems with implementation of our
products or are otherwise dissatisfied with their functionality
or
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performance or if they fail to achieve market acceptance for any
reason, our market reputation could suffer, and we could be
subject to claims for significant damages. There can be no
assurances that the contract provisions in our customer
agreements that limit our liability and exclude consequential
damages will be enforced. Any such damages claim could impair
our market reputation and could have a material adverse affect
on our business, operating results and financial condition.
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 products can be a lengthy process, and
commitment of resources by our clients is subject to a number of
significant risks over which we have little or no control. The
implementation time for certain of our applications, including
Merchandise Operations Systems, Demand, Fulfillment and
Revenue Management solutions can be longer and more
complicated than our other applications as they typically
(i) involve more significant integration efforts in order
to complete implementation, (ii) require the execution of
implementation procedures in multiple layers of software,
(iii) offer a customer more deployment options and other
configuration choices, and (iv) may involve third party
integrators to change business processes concurrent with the
implementation of the software. Delays in the implementations of
any of our software products, whether by our business partners
or us, may result in client dissatisfaction, disputes with our
customers, or damage to our reputation.
In addition, approximately 20% of our consulting services
revenues are derived under fixed price arrangements that require
us to provide identified deliverables for a fixed fee. If we are
unable to meet our contractual obligations under fixed price
contracts within our estimated cost structure, our operating
results could suffer.
We rely on a combination of copyright, trade secrets,
trademarks, confidentiality procedures, contractual restrictions
and patents to protect our proprietary technology. Despite our
efforts, these measures can only provide limited protection.
Unauthorized third parties may try to copy or reverse engineer
portions of our products or otherwise obtain and use our
intellectual property. In addition, the laws of some countries
do not provide the same level of protection of our proprietary
rights as do the laws of the United States or are not adequately
enforced in a timely manner. If we cannot protect our
proprietary technology against unauthorized copying or use, we
may not remain competitive.
We periodically receive notices from others claiming we are
infringing their intellectual property rights, principally
patent rights. We expect the number of such claims will increase
as the functionality of products overlap and the volume of
issued software patents continues to increase. Responding to any
infringement claim, regardless of its validity, could:
If a successful claim is made against us and we fail to develop
or license a substitute technology, our business, results of
operations, financial condition or cash flows could be adversely
affected.
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We license and integrate technology from third parties in
certain of our software products. For example, we license the
Uniface client/server application development technology from
Compuware, Inc. for use in Portfolio Merchandise
Management, certain applications from Silvon Software, Inc.
for use in Performance Analysis by IDEAS, Cognos for use
in JDA Reporting and JDA Analytics, the WebLogic
application from BEA Systems, Inc. or the IBM Websphere
applications for use in most of the JDA Enterprise
Architecture platform solutions and the Data Integrator
application from Business Object S.A which is also used in
certain of the products acquired from Manugistics. Our third
party licenses generally require us to pay royalties and fulfill
confidentiality obligations. We also resell Oracle database
licenses. If we are unable to continue to license any of this
third party software, or if the third party licensors do not
adequately maintain or update their products, we would face
delays in the releases of our software until equivalent
technology can be identified, licensed or developed, and
integrated into our software products. These delays, if they
occur, could harm our business, operating results and financial
condition. It is also possible that intellectual property
acquired from third parties through acquisitions, mergers,
licenses or otherwise obtained may not have been adequately
protected, or infringes another parties intellectual property
rights.
We encounter competitive products from a different set of
vendors in each of our primary product categories. We believe
that while our markets are still subject to intense competition,
the number of competitors in many of our application markets has
decreased over the past five years. We believe the principal
competitive factors in our markets are feature and
functionality, product reputation, performance and scalability,
quality of referenceable accounts, vendor viability, ability to
implement, retail and demand chain industry expertise, total
solution cost, technology platform and quality of customer
support.
The intensely competitive markets in which we compete can put
pressure on us to reduce our prices. If our competitors offer
deep discounts on certain products, we may need to lower prices
or offer other favorable terms in order to compete successfully.
Any such changes would likely reduce margins and could adversely
affect operating results. Our software license updates and
product support fees are generally priced as a percentage of our
new license fees. Our competitors may offer a lower percentage
pricing on product updates and support, which could put pressure
on us to further discount our new license prices. Any
broadly-based changes to our prices and pricing policies could
cause new software license and services revenues to decline or
be delayed as our sales force implements and our customers
adjust to the new pricing policies.
The enterprise software market continues to consolidate and this
has resulted in larger, new competitors with significantly
greater financial, technical and marketing resources than we
possess. This could create a significant competitive advantage
for our competitors and negatively impact our business. The
consolidation trend is evidenced by our acquisition of
Manugistics Group, Inc., Oracle’s acquisitions of Retek,
ProfitLogic, Inc., 360Commerce, and Global Logistics
Technologies, Inc. (G-LOG), and SAP AG’s acquisitions of
Triversity, Inc. and Khimetrics, Inc. Oracle did not compete
with our retail specific products prior to its acquisitions of
Retek, ProfitLogic, Inc., 360Commerce, and Global Logistics
Technologies, Inc. It is difficult to estimate what long term
effect these acquisitions will have on our competitive
environment. We have encountered competitive situations with SAP
AG where, in order to encourage customers to purchase licenses
of its non-retail specific applications and gain retail market
share, we suspect they have also offered to license at no charge
certain of its retail software applications that compete with
our solutions. If large competitors such as Oracle and SAP AG
and other large private companies are willing to license their
retail
and/or other
applications at no charge it may result in a more difficult
competitive environment for our products. In addition, we could
face competition from large, multi-industry technology companies
that have historically not offered an enterprise solution set to
the retail supply chain market. We cannot guarantee that we will
be able to compete successfully for customers or acquisition
targets against our current or future competitors, or that
competition will not have a material adverse effect on our
business, operating results and financial condition.
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Although we are in the process of increasing our off-shore
resources through our CoE in India, our consulting
services business model is currently largely based on relatively
high cost onshore resources and we are increasingly faced with
competition from low cost off-shore service providers and
smaller boutique consulting firms. This competition is expected
to continue to grow and while we continue to successfully
command premium rates for our on-shore services, which we
believe offer good overall value for the money, our on-shore
hourly rates are much higher than those offered by these
competitors. As these competitors gain more experience with our
products, the quality gap between our offerings may diminish and
result in decreased revenues and profits from our consulting
practice. In addition, we face increased competition for
services work from ex-employees of JDA who offer services
directly or through lower cost boutique consulting firms. These
competitive service providers have taken business from JDA and
while they are currently relatively small compared with our
consulting services business, if they grow successfully then it
will be largely at our expense. We are attempting to improve our
competitive position by developing our own offshore consulting
services group at our CoE; however, we cannot guarantee
these efforts will be successful or enhance our ability to
compete.
International revenues represented 40% of our total revenues in
2007 as compared to 39% and 41% in 2006 and 2005, respectively.
As we grow our international operations, we may need to recruit
and hire new consulting, product development, sales and
marketing and support personnel in the countries in which we
have or will establish offices. Entry into new international
markets typically requires the establishment of new marketing
and distribution channels, as well as the development and
subsequent support of localized versions of our software.
International introductions of our products often require a
significant investment in advance of anticipated future
revenues. In addition, the opening of a new office typically
results in initial recruiting and training expenses and reduced
labor efficiencies associated with the introduction of products
to a new market. If we are less successful in a new market than
we expect, we may not be able to realize an adequate return on
our initial investment and our operating results could suffer.
We cannot guarantee that the countries in which we operate will
have a sufficient pool of qualified personnel from which to
hire, that we will be successful at hiring, training or
retaining such personnel or that we can expand or contract our
international operations in a timely, cost effective manner. If
we have to downsize certain international operations, the costs
to do so are typically much higher than downsizing costs in the
United States, particularly in Europe.
Our international business operations are subject to risks
associated with international activities, including:
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We expect that an increasing portion of our international
software license, consulting services and maintenance services
revenues will be denominated in foreign currencies, subjecting
us to fluctuations in foreign currency exchange rates. If we
expand our international operations, exposures to gains and
losses on foreign currency transactions may increase. We use
derivative financial instruments, primarily forward exchange
contracts, to manage a majority of the foreign currency exchange
exposure associated with net short-term foreign denominated
assets and liabilities which exist as part of our ongoing
business operations but we do not hedge ongoing or anticipated
revenues, costs and expenses, including the additional costs we
expect to incur with the expansion of the CoE in India.
We cannot guarantee that any currency exchange strategy would be
successful in avoiding exchange-related losses.
We are in the process of significantly expanding our CoE
in Hyderabad, India. In order to take advantage of cost
efficiencies associated with India’s lower wage scale, we
intend to expand the CoE during 2008 beyond a research
and development center to include consulting services, customer
support and information technology resources. We believe that a
properly functioning CoE will be important in achieving
desired long-term operating results. Delays in expanding the
CoE or operating difficulties could impair our ability to
develop, implement and support our products, which would likely
negatively impact our operating results. Potential reasons for
delays or difficulties, include, but are not limited to:
Our success is heavily dependent upon our ability to attract,
hire, train, retain and motivate skilled personnel, including
sales and marketing representatives, qualified software
engineers involved in ongoing product development, and
consulting personnel who assist in the implementation of our
products and provide other services. The market for such
individuals is competitive. For example, it has been
particularly difficult to attract and retain product development
personnel experienced in object oriented development
technologies. Given the critical roles of our sales, product
development and consulting staffs, our inability to recruit
successfully or any significant loss of key personnel would
adversely affect us. A high level of employee mobility and
aggressive recruiting of skilled personnel characterizes the
software industry. It may be particularly difficult to retain or
compete for skilled personnel against larger, better known
software companies. We cannot guarantee that we will be able to
retain our current personnel, attract and retain other highly
qualified technical and managerial personnel in the future, or
be able to assimilate the employees from any acquired
businesses. We will continue to adjust the size and composition
of our workforce to match the different product and geographic
demand cycles. If we are unable to attract and retain the
necessary technical and managerial personnel, or assimilate the
employees from any acquired businesses, our business, operating
results and financial condition would be adversely affected.
Our performance depends in large part on the continued
performance of our executive officers and other key employees,
particularly the performance and services of James D. Armstrong
our Chairman and Hamish N. J. Brewer our Chief Executive
Officer. We do not have in place “key person” life
insurance policies on any of our employees. The loss of the
services of Mr. Armstrong, Mr. Brewer, or other key
executive officers or employees
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without a successor in place, or any difficulties associated
with a successor, could negatively affect our financial
performance.
We continually evaluate potential acquisitions of complementary
businesses, products and technologies, including those that are
significant in size and scope. In pursuit of our strategy to
acquire complementary products, we have completed ten
acquisitions over the past ten years, the most recent being
Manugistics Group, Inc. in July 2006. The risks we commonly
encounter in acquisitions include:
As a result of the Manugistics acquisition, we acquired a number
of contracts with the government. Government contracts entail
many unique risks, including, but not limited to, the following:
(i) early termination of contracts by the Government;
(ii) costly and complex competitive bidding process;
(iii) required extensive use of subcontractors, whose work
may be deficient or not performed in a timely manner;
(iv) significant penalties associated with employee
misconduct in the highly regulated Government marketplace;
(v) changes or delays in Government funding that could
negatively impact contracts; and (vi) onerous contractual
provisions unique to the Government such as “most favored
customer” provisions.
Risks
Related To Our Industry
The markets for our software products are characterized by rapid
technological change, evolving industry standards, changes in
customer requirements and frequent new product introductions and
enhancements. We continuously evaluate new technologies and when
appropriate implement into our products advanced technology such
as our current JDA Enterprise Architecture platform
effort. However, if we fail in our product development
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efforts to accurately address in a timely manner, evolving
industry standards, new technology advancements or important
third-party interfaces or product architectures, sales of our
products and services may suffer.
Our software products can be licensed with a variety of popular
industry standard platforms and are authored in various
development environments using different programming languages
and underlying databases and architectures. There may be future
or existing platforms that achieve popularity in the marketplace
that may not be compatible with our software product design.
Developing and maintaining consistent software product
performance across various technology platforms could place a
significant strain on our resources and software product release
schedules, which could adversely affect our results of
operations.
Historically, we have derived over 75% of our revenues from the
license of software products and the performance of related
services to retail customers. With the acquisition of
Manugistics this percentage decreased, as expected, to 54% in
the second half of 2006 and 52% for the year ended
December 31, 2007. However, since many of manufacturing and
distribution customers acquired from Manugistics supply products
directly or indirectly to the retail industry, the success of
most of our customers is directly linked to general economic
conditions, as well as those of the retail industry. In
addition, we believe that the licensing of certain of our
software products involves a large capital expenditure, which is
often accompanied by large-scale hardware purchases or other
capital commitments. As a result, demand for our products and
services could decline in the event of instability or potential
economic downturn.
Even though retailers in general have enjoyed good operating
results over the past five years, we believe the retail industry
has remained cautious with their level of investment in
information technology and recent results have dropped
dramatically as the economy has slowed. In 2007 only a small
number of our sales opportunities were negatively impacted by
the worsening economic environment and our sales results have
been improving in recent quarters, as such, we remain cautiously
optimistic regarding our future prospects. We believe that the
retail industry will be negatively impacted if weak economic
conditions or geopolitical concerns persist for an extended
period of time. Weak and uncertain economic conditions have in
the past, and may in the future, negatively impact our revenues,
including a potential deterioration of our maintenance revenue
base as customers look to reduce their costs, elongate our
selling cycles, and delay, suspend or reduce the demand for our
products. As a result, it is difficult in the current economic
environment to predict exactly when specific software licenses
will close within a six to nine month time frame. In addition,
weak and uncertain economic conditions could impair our
customers’ ability to pay for our products or services. Any
of these factors could adversely impact our business, quarterly
or annual operating results and financial condition.
Risks
Related To Our Stock
Because of the difficulty in predicting the timing of particular
sales within any one quarter, we provide annual guidance only.
Our actual quarterly operating results have varied in the past
and are expected to continue to vary in the future. Fluctuating
quarterly results can affect our annual guidance. If our
quarterly or annual operating results, particularly our software
revenues, fail to meet management’s or analysts’
expectations, the price of our stock could decline. Many factors
may cause these fluctuations, including:
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Charges to earnings resulting from past or future acquisitions
or internal reorganizations may also adversely affect our
operating results. Under purchase accounting, we allocate the
total purchase price to an acquired company’s net tangible
assets, amortizable intangible assets and in-process research
and development based on their fair values as of the date of the
acquisition and record the excess of the purchase price over
those fair values as goodwill. Management’s estimates of
fair value are based upon assumptions believed to be reasonable
but which are inherently uncertain. As a result, any of the
following or other factors could result in material charges that
would adversely affect our results:
In addition, fluctuations in the price of our common stock may
expose us to the risk of securities class action lawsuits.
Defending against such lawsuits could result in substantial
costs and divert management’s attention and resources.
Furthermore, any settlement or adverse determination of these
lawsuits could subject us to significant liabilities.
Our certificate of incorporation, which authorizes the issuance
of “blank check preferred” stock, our
stockholders’ rights plan which permits our stockholders to
counter takeover attempts, and Delaware state corporate laws
which restrict business combinations between a corporation and
15% or more owners of outstanding voting stock of the
corporation for a three-year period, individually or in
combination, may discourage, delay or prevent a merger or
acquisition that a JDA stockholder may consider favorable.
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We sold 50,000 shares of a new designated series of
preferred stock (the “Series B Convertible Preferred
Stock”) to funds affiliated with Thoma Cressey Bravo Equity
Partners in connection with our acquisition of Manugistics
Group, Inc. on July 5, 2006. The Series B Convertible
Preferred Stock contain certain voting rights that require us to
get approval of a majority of the holders if we want to take
certain actions, including a change in control. These voting
rights could discourage, delay or prevent a merger or
acquisition that another stockholder may consider favorable.
The terms of the Series B Preferred Stock issued in
connection with the acquisition of Manugistics may have a
material adverse effect on our financial condition and results
of operations. The Series B Preferred Stock has a
liquidation preference in the amount of $50 million plus
accrued and unpaid dividends, if any, which must be paid before
common stockholders would receive funds in the event of
liquidation, including some changes of control and a redemption
right after September 6, 2013 to receive a redemption value
of $50 million. In addition, we are required to redeem the
shares of the Series B Preferred Stock in certain
circumstances, including a change in control. We have also
agreed not to issue securities senior to or on a par with the
Series B Preferred Stock while the Series B Preferred
Stock is outstanding, which could materially and adversely
affect our ability to raise additional funds.
As of December 31, 2007, we leased office space in the
Americas for 13 regional sales and support offices across the
United States, Canada and Latin America, and for 14 other
international sales and support offices located in major cities
throughout Europe, Asia, Australia, and Japan. The leases are
primarily non-cancelable operating leases with initial terms
ranging from one to 20 years that expire at various dates
through the year 2018. None of the leases contain contingent
rental payments; however, certain of the leases contain
scheduled rent increases and renewal options. We expect that in
the normal course of business most of these leases will be
renewed or that suitable additional or alternative space will be
available on commercially reasonable terms as needed. We believe
our existing facilities are adequate for our current needs and
for the foreseeable future. As of December 31, 2007, we
have approximately 38,000 square feet of excess space that
we are trying to sublet.
In March 2007, we sold a 15,000 square foot office facility
in the United Kingdom for approximately $6.3 million and
recognized a gain of approximately $4.1 million.
We own our corporate office facility in Scottsdale, Arizona. The
corporate office facility includes a 136,000 square foot,
three story office building, a two-story parking garage, and
approximately 8.8 acres of land upon which these structures
are located. The corporate office is used for certain of our
sales, marketing, consulting, customer support, training, and
product development functions, as well as executive and
administrative functions.
We are involved in legal proceedings and claims arising in the
ordinary course of business. Although there can be no assurance,
management does not currently believe the disposition of these
matters will have a material adverse effect on our business,
financial position, results of operations or cash flows.
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Our 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 our common stock for the two
most recent fiscal years as reported on NASDAQ.
On March 7, 2008, the closing sale price for our common
stock was $17.06 per share. On this date, there were
approximately 185 holders of record of our common stock. This
figure does not reflect what we believe are more than 7,000
beneficial stockholders whose shares are held in nominee names
by brokers and other institutions. We have never declared or
paid any cash dividend on our common stock. Since we presently
intend to retain future earnings to finance the growth and
development of our business, we do not anticipate paying cash
dividends on our common stock in the foreseeable future.
See Item 1A for a discussion of factors which have and may
continue to impact our operating results and adversely affect
the market price of our common stock.
See Item 12 for information regarding securities authorized
for issuance under equity compensation plans.
Stock
Performance Graph
The graph below compares the cumulative total return on our
Common Stock with the NASDAQ Stock Market index
(U.S. companies) and the cumulative total return of NASDAQ
Computer and Data Processing Stocks (Peer Group) for the period
from December 31, 2002 to December 31, 2007. The
comparison assumes that $100 was
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invested on December 31, 2002 in our Common Stock and in
each of the comparison indices, and assumes reinvestment of
dividends.
The information contained in the Stock Performance Graph shall
not be deemed to be soliciting material or to be filed with the
SEC nor shall such information be incorporated by reference into
any future filing under the Securities Act of 1933, as amended,
or the Exchange Act, except to the extent we specifically
incorporate it by reference into such filing.
The following selected financial data should be read in
conjunction with our 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 Operations 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, 2007, are
derived from the consolidated financial statements of JDA
Software Group, Inc. The consolidated financial statements as of
December 31, 2007 and 2006, and for each of the years in
the three-year period ended December 31, 2007, together
with the report of the independent registered public accounting
firm, are included elsewhere herein.
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Consolidated
Statement of Operations Data:
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Significant
Trends and Developments in Our Business
Annual Guidance for 2008. The following
summarizes our annual guidance for 2008 and includes ranges for
software revenues, total revenues and GAAP earnings per share
that we believe are realistic and achievable:
It is normal for our business to experience quarterly
fluctuations and as result, we do not plan to provide
quarter-to-quarter
guidance during 2008. We remain focused on delivering
year-over-year
growth and will only revise our annual guidance, as necessary
during the course of the year.
Our Plans do not Contemplate Significant Economic Impact on
our Software Sales. Despite uncertainties in the
economy, we remain cautiously optimistic about our prospects for
2008 due to our recent strong sales performance. Software sales
will continue to be the leading indicator for our business and
we believe the size and quality of our sales pipeline is strong
as we enter 2008. We have identified only a small number of
transactions during 2007 that appear to have been impacted by
the economy and that resulted in either a reduction in the scope
of the license or in the indefinite delay of a planned project.
However, there is inherent uncertainty in our pipeline and due
to the nature of our sales cycle, we have limited ability to
anticipate actual quarterly results. We do not currently see any
clear evidence that our prospects are changing dramatically. We
believe that as companies consider the economic uncertainty of
the future, they may seek more efficiency in existing business
assets and we believe that this scenario could favor our
products and offerings.
We Will Make an Incremental Investment to Expand our
Operations in India in 2008 and Create a Center of
Excellence. We acquired our first off-shore
facility in Hyderabad, India in the Manugistics acquisition.
This
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operation employed approximately 200 associates and was
primarily focused on product development. Since the acquisition,
we have taken time to more fully understand the risks and
benefits of this business model before making any significant
changes. In particular, we were initially concerned about
associate attrition, which at the time of acquisition was
running over 25%. Eighteen months later we have successfully
delivered our first major product release through the Indian
facility and have reduced associate attrition to approximately
13.5%. With this experience behind us, we are now prepared to
implement changes that we believe will fundamentally improve our
competitiveness and profitability. We will make a
$7.8 million incremental investment to expand our
operations in India in 2008 and create a comprehensive
CoE that encompasses additional product development
activities, customer implementation services, customer support
services and internal administrative services. The investment is
primarily related to the addition of approximately 230 new
associates at our Hyderabad, Indian facility, approximately half
of which we hope to hire during the first half of 2008. We
believe the CoE will provide an improved business model
for JDA and enhance our growth potential and operating results
by:
The CoE is designed to complement and enhance our
existing on-shore business model, not replace it, and our goal
is to achieve all of these benefits without sacrificing our
capability to work
face-to-face
with our customers, most of which are in the Americas and
Europe. We do plan to reduce our total on-shore headcount by
approximately 50 associates during 2008 through attrition and
minor adjustments as related functions become available at the
CoE. From an overall financial perspective, we believe
the CoE will result in a net cost to JDA during 2008 as
duplicate resources will be retained on-shore during the period
of time we hire and train the new Indian associates in order to
ensure a smooth transition. We believe the CoE will
improve our operating margins from 2009 forward.
We Expect our Total costs and Expenses to Increase in
2008. We expect our total costs and expenses,
excluding amortization of intangibles and restructuring charges,
to increase between 2% and 5% in 2008 compared to 2007. This
increase primarily includes incremental expense in our services
and product development functions as associates are added in
India during the transition to the CoE. We also plan
modest increases in our overall investment in sales and
marketing in 2008. We expect to incur restructuring charges of
$1.0 million to $1.3 million for termination of
redundant headcount in first half 2008.
We Will Continue to Actively Look for Strategic Acquisition
Opportunities in 2008. We have substantially
completed the integration of the sales, customer support,
consulting services and administrative functions from the
Manugistics acquisition and have made significant progress in
our plans for the integration of our combined solution suite and
operating platform. As a result, we believe we are now ready to
undertake another acquisition and are actively looking for
strategic acquisition opportunities in 2008.
Summary of 2007 Results. The Manugistics
acquisition significantly impacts the comparability of our
operating results for 2007 and 2006. The operating results for
2007 include the impact of Manugistics for the entire
12-month
period. The operating results for 2006 only include the impact
of Manugistics from date of acquisition, (i.e., July 5,
2006) through December 31, 2006. We believe the
combination of the two companies created a unique competitive
position for JDA that has enhanced our profile in the
marketplace. We also believe no other software
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company is currently able to offer a similar breadth and depth
of vertically focused solutions to the supply and demand chain
market. The acquisition has provided cross-selling opportunities
for Manugistics’ advanced optimization solutions in our
existing retail customer base and Manugistics’ supply chain
and revenue management solutions have enabled us to
significantly expand our presence with manufacturers,
wholesalers and distributors.
Going forward we will no longer separately report the various
components of revenue generated from the Manugistics product
lines. We believe software license sales performance should be
viewed on a combined basis when assessing the overall demand
within our customer base, and viewed over a longer period of
time in order to mitigate the significant variability that often
occurs from
quarter-to-quarter
due to overlapping functionality of certain products, the size
and timing of individual contracts and our ability to recognize
revenue with respect to contracts signed in a given quarter.
The following tables summarize the changes in the various
components of revenue for the years ended December 31, 2007
and 2006 with and without Manugistics.
Combined
JDA and Manugistics:
JDA
Only:
Manugistics
Only:
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The following table summarizes software license revenue by
region for the years ended December 31, 2007 and 2006 with
and without Manugistics.
Software license sales and total revenues increased 50% and 35%,
respectively in 2007 compared to 2006. Software license sales
include organic growth of 28% in 2007 compared to 2006,
including 30% from our core JDA products and 18% from the
Manugistics product lines. Regional software license sales
increased 44%, 54% and 73% in the Americas, European and
Asia/Pacific regions, respectively in 2007 compared to 2006, and
include annual increases in both core JDA and Manugistics
product lines in each region.
We believe our competitive position remains strong and we
continue to maintain consistent competitive win rates in our
markets. Software sales to new customers increased
$15.7 million or 151% in 2007 compared to 2006. In
addition, software sales to new customers, as a percentage of
total software sales, increased to 35% in 2007 from 21% in 2006.
We continue to have strong back selling opportunities with the
JDA and Manugistics install-base customers where sales increased
23% in 2007 compared to 2006. We signed ten larger software
licenses
(³$1.0 million)
in 2007 compared to six in 2006 and we have multiple
opportunities involving larger software licenses in our sales
pipeline as we enter 2008. We believe the market views us
differently since the Manugistics acquisition and recognizes
that the combined company is a specialized, domain-focused
company that has the financial strength, products and the
ability to invest in such a way that enables us to be a
long-term contender in the market and compete successfully
against large horizontal enterprise application companies in
head-to-head
sales opportunities.
Software sales performance in the Americas region during 2007,
and in particular the United States, continues to reflect the
positive impact of the organizational changes that were made to
the regional sales management team during the second half of
2006. These changes significantly increased our business
development efforts and improved the sales force execution and
sales performance in the region. We have a solid pipeline of
sales opportunities in the Americas that includes both mid-size
and larger software deals. The Americas is our largest region
and, as a result, we believe the software sales performance in
the region will continue to be a key driver of our overall
success.
Software sales performance in the European region during 2007
continues to show steady improvement since the reorganization of
the region in 2005. The sales organization has stabilized in the
region and we believe the accuracy of the software forecast has
significantly improved. The quality and number of opportunities
in the sales pipeline continues to grow and includes larger
software deals. We continue to experience large fluctuations in
quarterly software sales performance in the Asia/Pacific region.
We believe this is due primarily to organizational issues and
high turnover in the regional sales force. We will continue to
focus on improving our sales execution processes and the size
and quality of our sales opportunity pipeline in the
Asia/Pacific region in order to improve the predictability of
software license deals in the region, although the timeframe for
the implementation of these
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processes remains uncertain. We also believe China and India are
markets that will continue to provide meaningful opportunities
for software companies in the future.
Maintenance services revenues increased 38% in 2007 compared to
2006 and represented 48% and 47% of total revenues, respectively
in these periods. We believe our large annual recurring
maintenance revenue base provides significant stability and
enhances our ability to maintain profitable operations.
Favorable foreign exchange rate variances provided a
$5.1 million benefit to maintenance services revenues in
2007 compared to 2006. We added $11.3 million in new
maintenance revenues in 2007 related to new software sales, rate
increases on annual renewals, and reinstatements of previously
cancelled maintenance agreements, offset in part by a decrease
in recurring maintenance revenues due to attrition. Our average
annualized attrition rate was 5.6% in 2007 compared to 5.2% in
2006. We expect maintenance revenues to be approximately
$45.0 million in first quarter 2008.
Maintenance services gross profits were $133.0 million and
$97.5 million in 2007 and 2006, respectively, and
represented 75% of maintenance service revenues in both periods.
The increase in margin dollars is due to a $48.9 million in
maintenance services revenues, offset in part by an increase in
costs resulting from a 24% increase in average headcount,
primarily due to the acquisition of Manugistics, annual salary
increases and a $2.3 million increase in incentive
compensation due to the Company’s improved operating
performance. We expect maintenance services margins to range
between 74% and 76% in 2008. As of December 31, 2007, we
had 265 employees in our customer support function compared
to 246 at December 31, 2006.
Service revenues, which include consulting services, hosting
services and training revenues, net revenues from our hardware
reseller business and reimbursed expenses, increased
$22.6 million or 23% to $121.8 million in 2007
compared to 2006. Service revenues continue to be impacted by
product mix and low rate competition. The increase in service
revenues includes a $33.0 million increase in revenues from
new and assumed projects involving the Manugistics product
lines, offset in part by a $10.5 million decrease in
service revenues from projects involving core JDA products. We
believe this decrease is due to delays in the start of certain
projects and the lag effect of lower software licenses in the
Americas and Asia/Pacific regions during early 2006. Our global
utilization rate was 53% in 2007, compared to 50% in 2006 and
our average blended global billing rates were $198, and $191,
respectively in these periods. We expect a modest sequential
improvement in service revenues in first quarter 2008 due to
seasonally better utilization.
Services gross profits were $27.8 million and
$24.3 million in 2007 and 2006, respectively, and
represented 23% of service revenues in 2007 compared to 24% in
2006. The increase in service margin dollars is due to a
$22.6 million increase in services revenues, offset in part
by an increase in costs resulting from a 16% increase in average
headcount, primarily due to the acquisition of Manugistics,
salary increases, a $3.1 million increase in incentive
compensation due to the Company’s improved operating
performance, a $1.7 million increase in reimbursed expenses
and a $1.0 million increase in travel costs. Service gross
profits for 2007 also include a $2.0 million favorable
impact from the release of $3.4 million of previously
deferred consulting revenue upon completion and final acceptance
of a fixed bid project inherited from Manugistics, net of
$1.4 million in related deferred costs that were also
released. Service margins will be impacted during 2008 by the
temporary duplicate investment in consulting resources that will
occur as we hire and train new associates in service-related
functions at the CoE. We plan to aggressively hire
associates for the CoE during the first and second
quarters of 2008 and would expect the duplicate investment to
decline later in the year. We currently anticipate that our
service margins will remain in the low to mid 20% range
throughout 2008 as we transition to the CoE. As of
December 31, 2007, we had 429 employees in our
services organization compared to 498 at December 31, 2006.
Sales and marketing expense increased $15.0 million or 31%
to $63.2 million in 2007 compared to 2006. The increase is
due primarily to a 17% increase in average headcount, a
$4.3 million increase in sales commissions due to the 50%
increase in software license sales and a $1.8 million
increase in stock-based compensation due to the Company’s
improved operating performance. As of December 31, 2007 we
had 222 employees in the sales and marketing function,
compared to 219 at December 31, 2006, including quota
carrying sales associates and related sales management of 68 and
66, respectively. We plan for modest increases in our overall
investment in sales and marketing in 2008.
Product development expense decreased $5.1 million or 9% to
$51.2 million in 2007 compared to 2006. The decrease is due
primarily to a 14% decrease in average headcount which resulted
in a $4.5 million decrease in
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salaries and related benefits. We reduced our product
development workforce by 120 FTE in first quarter 2007 in
connection with our decision to standardize future product
offerings on the JDA Enterprise Architecture platform.
Product development expense in 2007 was also reduced by the
offset of $3.2 million in costs related to ongoing funded
development efforts that were reimbursed by customers, offset in
part by a $3.4 million increase in incentive compensation
due to the Company’s improved operating performance.
Product development expense in 2006 included $871,000 in charges
related to the settlement of certain customer-specific
situations, including $488,000 in charges related to the
discontinuance of the PRO application during fourth
quarter 2006. Product development expense will be impacted
during 2008 by the temporary duplicate investment in product
development resources that will occur as we hire and train new
associates in development-related functions at the CoE.
We plan to aggressively hire associates for the CoE
during the first and second quarters of 2008 and would
expect the duplicate investment to decline later in the year. As
of December 31, 2007, we had 462 employees in the
product development function compared to 538 at
December 31, 2006.
General and administrative expense increased $8.2 million
or 24% to $41.5 million in 2007 compared to 2006. The
increase is due primarily to a 9% increase in average headcount,
which resulted in a $3.2 million increase in salaries and
related benefits, a $3.8 million increase in incentive
compensation due to the Company’s improved operating
performance, including $2.2 million in stock-based
compensation primarily related to the Manugistics Integration
Incentive Plan, an $853,000 increase in outside contractor costs
for assistance with internal system initiatives and an $832,000
increase in legal and accounting costs as result of the larger
combined company and the compliance costs incurred to implement
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109
(“FIN 48”). As of December 31, 2007, we
had 218 employees in general and administrative functions
compared to 200 at December 31, 2006.
The provision for doubtful accounts increased $1.5 million
to $2.9 million in 2007 compared to 2006 primarily due to
certain foreign receivables for which collection is doubtful.
On August 18, 2006, our Board of Directors approved a
special Manugistics Incentive Plan (“Integration
Plan”). The Integration Plan provided for the issuance of
contingently issuable restricted stock units under the 2005
Incentive Plan to executive officers and certain other members
of our management team if we were able to successfully integrate
the Manugistics acquisition and achieve a defined performance
threshold goal in 2007. The performance threshold goal was
defined as $85.0 million of adjusted EBITDA (earnings
before interest, taxes, depreciation and amortization), which
excludes certain non-routine items. A partial pro-rata issuance
of restricted stock units would be made if we achieved a minimum
performance threshold. The Board subsequently approved
additional contingently issuable restricted stock units under
the Integration Plan for executive officers and new participants
in 2007. The Company’s actual EBITDA performance for 2007
was approved by the Board in January 2008 and qualified
participants for a pro-rata issuance equal to 99.25% of the
contingently issuable restricted stock units. In total, 502,935
restricted stock units were issued on January 28, 2008 with
a grant date fair value of $8.1 million. The restricted
stock units vested 50% upon the date of issuance with the
remaining 50% vesting ratably over the subsequent
24-month
period.
No share-based compensation expense was recognized in 2006
related to the Integration Plan as management determined it was
not probable that the performance condition would be met. The
Company’s performance against the defined performance
threshold goal was evaluated on a quarterly basis throughout
2007 and stock-based compensation recognized on a graded vesting
basis over the requisite service periods that run from the date
of the various board approvals through January 2010. A deferred
compensation charge of $8.1 million was recorded in the
equity section of our balance sheet during 2007, with a related
increase to additional paid-in capital, for the total grant date
fair value of the awards. We recognized $5.4 million in
share-based compensation expense related to these restricted
stock unit awards in 2007. This charge is reflected in the
consolidated statements of income under the captions “Cost
of maintenance services,” “Cost of consulting
services,” “Product development,” “Sales and
marketing,” and “General and administrative.”
We recorded total share-based compensation expense of
$6.2 million, $656,000 and $350,000 related to 2005
Incentive Plan awards in 2007, 2006 and 2005, respectively and
as of December 31, 2007 we have included
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$3.5 million of deferred compensation in stockholders’
equity. A summary of total share-based compensation by expense
category for years ended December 31, 2007, 2006 and 2005
is as follows:
On February 7, 2008, the Board approved an incentive plan
for 2008 similar to the Integration Plan (“New Incentive
Plan”). The New Incentive Plan provides for the issuance of
contingently issuable performance share awards under the 2005
Incentive Plan to executive officers and other certain other
members of our management team if we are able to achieve a
defined performance threshold goal in 2008. The performance
threshold goal is defined as $95.0 million of adjusted
EBITDA (earnings before interest, taxes, depreciation and
amortization), which excludes certain non-routine items and
share-based compensation. A partial pro-rata issuance of
performance share awards will be made if we achieve a minimum
performance threshold. The New Incentive Plan initially provides
for up to 259,516 contingently issuable performance share awards
with a fair value of approximately $4.5 million. The
performance share awards, if any, will be issued after the
approval of our 2008 financial results in January 2009 and will
vest 50% upon the date of issuance with the remaining 50%
vesting ratably over a
24-month
period. The Company’s performance against the defined
performance threshold goal will be evaluated on a quarterly
basis throughout 2008 and stock-based compensation recognized
over the requisite service period that runs from
February 7, 2008 (the date of board approval) through
January 2011 pursuant to the guidance in
SFAS No. 123(R). If we achieve the defined performance
threshold goal we would expect to recognize approximately
$3.0 million of the award as share-based compensation in
2008.
On February 7, 2008, the Board of Directors approved a 2008
cash incentive bonus plan (“Incentive Plan”) for our
executive officers. The Incentive Plan provides for
$2.9 million in targeted cash bonuses based upon defined
annualized operational performance goals. A partial pro-rata
cash bonus will be paid if we achieve a minimum annualized
performance threshold. There is no cap on the maximum amount the
executives can receive if the Company exceeds the defined
annualized operational and software performance goals.
Our Financial Position is Solid and We Are Generating
Positive Cash Flow From Operations. We had
working capital of $67.9 million at December 31, 2007
compared to $41.1 million at December 31, 2006. The
working capital balances at December 31, 2007 and 2006
include cash and cash equivalents of $95.3 million and
$53.6 million, respectively. We generated
$79.7 million in cash flow from operations in 2007 compared
to $15.4 million in 2006. Net accounts receivable were
$74.7 million or 68 days sales outstanding
(“DSO”) at December 31, 2007 compared to
$79.5 million or 81 DSO at December 31, 2006. During
2007 we also received $6.3 million in proceeds from the
sale of an office facility in the United Kingdom, paid
$7.6 million of direct costs related to the Manugistics
acquisition, spent $7.4 million on capital expenditures and
repaid $41.5 million of our long-term debt leaving a net
debt position (i.e., cash and cash equivalents less long-term
debt) of less than $4.3 million at December 31, 2007.
We expect cash flow from operations to be positive in 2008. We
also believe our cash position is sufficient to meet our
operating needs for the foreseeable future.
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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 revenue, maintenance services
revenue, product revenues or services revenues, as appropriate:
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The following table sets forth a comparison of selected
financial information, expressed as a percentage change between
2007 and 2006, and between 2006 and 2005. In addition, the table
sets forth cost of revenues and product development expenses
expressed as a percentage of the related revenues:
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The following tables set forth selected comparative financial
information on revenues in our business segments and
geographical regions, expressed as a percentage change between
2007 and 2006, and between 2006 and 2005. In addition, the
tables set forth the contribution of each business segment and
geographical region to total revenues in 2007, 2006 and 2005,
expressed as a percentage of total revenues:
The operating results for 2007 include the impact of
Manugistics for the entire year. The operating results for 2006
only include the impact of Manugistics from the date of
acquisition (i.e., July 5, 2006) through
December 31, 2006. The impact of the Manugistics
acquisition on our product and service revenues in 2007 compared
to 2006 is summarized in Significant Trends and Developments
in Our Business where we provide tables that summarize
(i) the various components of revenue with and without
Manugistics and, (ii) software license results by region
with and without Manugistics.
Retail. Software license revenues in this
reportable business segment increased 38% in 2007 compared to
2006. Before considering the impact of Manugistics, software
license revenues in this reportable business segment increased
40% in 2007 compared to 2006 primarily due to software license
sales to new customers. There were six
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large transactions ³
$1.0 million in this reportable business segment in both
2007 and 2006. We closed 136 deals in this reportable business
segment in 2007 compared to 96 in 2006.
Manufacturing &
Distribution. Software license revenues in this
reportable business segment increased 46% in 2007 compared to
2006. Before considering the impact of Manugistics, software
license revenues in this reportable business segment increased
10% in 2007 compared to 2006 primarily due to an increase in
software license sales to new customers. There were three large
transactions ³ $1.0 million
in this reportable business segment in 2007 compared to none in
2006. We closed 151 deals in this reportable business segment in
2007 compared to 157 in 2006.
Services Industries. Software license revenues
in this reportable business segment resulted entirely from sales
to customers of the Revenue Management product lines acquired
from Manugistics. There was one large transaction
³ $1.0 million in this
reportable business segment in 2007 compared to none in 2006. We
closed nine deals in this reportable business segment in 2007
compared to none in 2006.
Regional Results. Software license revenues in
the Americas region increased 44% in 2007 compared to 2006.
Before considering the impact of Manugistics, software license
revenues in the Americas region increased 19% in 2007 compared
to 2006 due primarily improved sales execution and an increase
in software license sales to new customers. There were five
large transactions ³
$1.0 million in the Americas region in 2007 compared to two
large transactions ³
$1.0 million in 2006.
Software license revenues in the Europe region increased 54% in
2007 compared to 2006. Before considering the impact of
Manugistics, software license revenues in the Europe region
increased 59% in 2007 compared to 2006 due to improved sales
execution and an increase in software license sales to new
customers. There were three large transactions
³ $1.0 million in the
Europe region in 2007 compared to two large transactions
³ $1.0 million in 2006.
Software license revenues in the Asia/Pacific region increased
73% in 2007 compared to 2006. Before considering the impact of
Manugistics, software license revenues in the Asia/Pacific
region increased 27% in 2007 compared to 2006. There were two
large transactions ³
$1.0 million in the Asia/Pacific region in 2007 compared to
two large transactions ³
$1.0 million in 2006.
Maintenance Services. Maintenance services
revenues increased 38% in 2007 compared to 2006. Before
considering the impact of Manugistics, maintenance services
revenues increased 8% in 2007 compared to 2006. Maintenance
services revenues in 2007 include a $5.1 million favorable
foreign exchange rate variance compared to 2006. Excluding the
impact of the favorable foreign exchange rate variance,
maintenance services revenues increased 34% in 2007 compared to
2006.
Service revenues increased 23% in 2007 compared to 2006. Before
considering the impact of Manugistics, services revenues
decreased 14% in 2007 compared to 2006 due to a
$10.5 million decrease in service revenues from projects
involving core JDA products. We believe this decrease is due to
delays in the start of certain projects and the lag effect of
lower software sales in the Americas and Asia/Pacific regions
during early 2006.
Fixed bid consulting services work represented 20% of total
consulting services revenue in 2007 compared to 14% in 2006.
Cost of Software Licenses. The increase in
cost of software licenses in 2007 compared to 2006 resulted
primarily from a $475,000 increase in third party royalties due
on software sales involving Manugistics product lines.
Amortization of Acquired Software
Technology. The increase in amortization of
acquired software technology in 2007 compared to 2006 resulted
from amortization of software technology acquired in the
Manugistics acquisition, offset in part by a decrease in
amortization on software technology related to the Intactix
suite of products that has now been fully amortized.
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Cost of Maintenance Services. The increase in
cost of maintenance services in 2007 compared to 2006 resulted
from a 24% increase in average headcount, primarily due to the
acquisition of Manugistics, annual salary increases, a
$2.3 million increase in incentive compensation due to the
Company’s improved operating performance and a
$2.1 million increase in fees and royalties paid to third
parties who provide first level support to certain of our
customers.
The increase in cost of service revenues in 2007 compared to
2006 resulted from a 16% increase in average headcount,
primarily due to the acquisition of Manugistics, salary
increases, a $3.1 million increase in incentive
compensation due to the Company’s improved operating
performance, a $1.7 million decrease in deferred consulting
costs due primarily to the completion of certain fixed bid
consulting projects in the United States involving Manugistics
products for which the related consulting revenue was also
deferred, a $1.7 million increase in reimbursed expenses
and a $1.0 million increase in travel costs.
The increase in gross profit dollars in 2007 compared to 2006
resulted primarily from the $87.3 million increase in
revenue contribution from Manugistics and the 30% increase in
software sales of core JDA products, offset in part by the
$10.5 million decrease in service revenues from projects
involving core JDA products, the increases in average headcount
in our customer support and consulting services organizations to
support the larger revenue streams and customer directed
development activities, the $5.4 million increase in
incentive compensation due to the Company’s improved
operating performance and the $1.0 million increase in
travel costs. Gross profit dollars for 2007 also include a
$2.0 million favorable impact from the release of
$3.4 million of previously deferred consulting revenue upon
completion and final acceptance of a fixed bid project inherited
from Manugistics, net of $1.4 million in related deferred
costs that were also released. The gross margin percentage
increased to 60% in 2007 compared to 59% in 2006 due to the
higher mix of product revenues.
Services gross profit dollars increased $3.5 million in
2007 compared to 2006, however, service margins as a percentage
of service revenues decreased to 23% in 2007 compared to 24% in
2006. The increase in service margin dollars is due primarily to
the $33.0 million increase in services revenue contribution
from Manugistics, offset in part by the 14% decrease in service
revenues from projects involving core JDA products. Service
margins as a percentage of service revenues decreased in 2007
primarily due to the higher average headcount, annual salary
increases and higher incentive compensation due to the
Company’s improved operating performance. Services gross
profits for 2007 also include a $2.0 million favorable
impact from the release of $3.4 million of previously
deferred consulting revenue upon completion and final acceptance
of a fixed bid project inherited from Manugistics, net of
$1.4 million in related deferred costs that were also
released.
Product Development. The decrease in product
development expense in 2007 compared to 2006 is due primarily to
a 14% decrease in average headcount, which resulted in a
$4.5 million decrease in salaries and related benefits, and
the offset of $3.2 million in costs related to ongoing
funded development efforts that were reimbursed by customers,
offset in part by a $3.4 million increase in incentive
compensation due to the Company’s improved operating
performance. Product development expense in 2006 included
$871,000 in charges related to the settlement of certain
customer-specific situations, including $488,000 in charges
related to the discontinuance of the PRO application
during fourth quarter 2006.
Sales and Marketing. The increase in sales and
marketing expense in 2007 compared to 2006 is due primarily to a
17% increase in average headcount, a $4.3 million increase
in sales commissions due to the 50% increase in software license
sales and a $1.8 million increase in stock-based
compensation due to the Company’s improved operating
performance.
General and Administrative. The increase in
general and administrative expense in 2007 compared to 2006 is
due primarily to a 9% increase in average headcount, which
resulted in a $3.2 million increase in salaries and related
benefits, a $3.8 million increase in incentive compensation
due to the Company’s improved operating performance,
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including $2.2 million in stock-based compensation
primarily related to the Manugistics Integration Incentive Plan,
an $853,000 increase in outside contractor costs for assistance
with internal system initiatives and an $832,000 increase in
legal and accounting costs as result of the larger combined
company and compliance costs incurred to implement FIN 48.
Provision for Doubtful Accounts. The increase
in the provision for doubtful accounts in 2007 compared to 2006
is primarily for certain foreign receivables for which
collection is doubtful.
Amortization of Intangibles. The increase in
amortization of intangibles in 2007 compared to 2006 results
primarily from amortization of the customer list and trademark
intangibles recorded in the acquisition of Manugistics.
Restructuring Charges. We recorded
restructuring charges of $6.2 million in 2007 that included
$5.9 million for termination benefits and $292,000 for
office closures. The termination benefits are primarily related
to a workforce reduction of approximately 120 full-time
employees (“FTE”) in our Scottsdale, Arizona product
development group as a direct result of our decision to
standardize future product offerings on the JDA Enterprise
Architecture platform and a reduction of approximately 40
FTE in our worldwide consulting services group. The office
closure charge is for the closure and integration costs of
redundant office facilities.
We recorded restructuring charges of $6.2 million in 2006
that included $4.8 million for termination benefits and
relocation bonuses and $1.4 million for office closures.
The restructuring charges were primarily related to the
consolidation of two existing JDA offices in the United Kingdom
into the Manugistics office facility in the United Kingdom
and the elimination of certain accounting and administrative
positions in Europe and Canada.
Gain on Sale of Office Facility. During 2007
we sold a 15,000 square foot facility in the United Kingdom
for approximately $6.3 million and recognized a gain of
$4.1 million.
We had operating income of $48.8 million in 2007 compared
to operating income of $7.3 million in 2006. The
improvement in operating income resulted primarily from a
$96.1 million or 35% increase in total revenues, which
includes an $87.3 million increased revenue contribution
from Manugistics, offset in part by an increase in average
headcount, increases in incentive compensation and commissions
due to the Company’s improved operating performance, a
$7.4 million increase in amortization on intangibles
recorded in the acquisition of Manugistics and a
$1.5 million higher provision for doubtful accounts. In
addition, we recorded a $4.1 million gain on the sale of an
office facility in 2007.
Operating income in our Retail reportable business
segment increased to $48.6 million in 2007 compared to
$27.4 million in 2006. The increase in operating income in
this reportable business segment resulted primarily from a
$25.2 million increase in product revenues and a 30%
decrease in product development costs, offset in part by a 24%
increase in allocated sales and marketing costs based upon the
pro rata share of software sales that came from this reportable
business segment.
Operating income in our Manufacturing and Distribution
reportable business segment increased to $62.2 million
in 2007 compared to $31.9 million in 2006. The increase
resulted primarily from increases in product and service
revenues of $41.7 million and $22.7 million,
respectively, primarily from the Manugistics product lines,
offset in part by a $24.9 million increase in maintenance
and service revenue costs due to the Manugistics acquisition, a
23% increase in product development costs and a 29% increase in
allocated sales and marketing costs based upon the pro rata
share of software sales that came from this reportable business
segment.
The Services Industries reportable business segment had
operating income of $364,000 in 2007 compared to an operating
loss of $1.5 million in 2006. The improvement resulted
primarily from increases in product and service revenues of
$6.6 million and $4.3 million, respectively offset in
part by a $4.2 million increase in total costs of revenue,
and a $4.9 million increase in operating costs for product
development and sales and marketing activities.
The combined operating income reported in the reportable
business segments excludes $62.3 million and
$50.6 million of general and administrative expenses and
other charges in 2007 and 2006, respectively, that are not
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directly identified with a particular reportable business
segment and which management does not consider in evaluating the
operating income (loss) of the reportable business segments.
Interest Expense and Amortization of Loan
Fees. We incurred interest expense of
$10.0 million and recorded $1.8 million in
amortization of loan origination fees in 2007 compared to
$6.5 million and $1.1 million, respectively in 2006.
The interest expense and loan origination fees relate primarily
to $175 million in aggregate term loan borrowings on
July 5, 2006 that were used to finance the acquisition of
Manugistics and the repayment of their debt obligations. We
repaid $40.0 million and $35.4 million of the term
loan borrowings in 2007 and 2006, respectively leaving an
outstanding balance of $99.6 million at December 31,
2007.
Interest Income and Other, Net. We recorded
interest income and other, net of $3.5 million in 2007
compared to $3.9 million in 2006. During second quarter
2006, we liquidated substantially all of our investments in
marketable securities in order to generate cash to complete the
acquisition of Manugistics. Subsequent to this liquidation, our
remaining excess cash balances have been invested primarily in
money market accounts.
We recorded non-cash charges of $3.1 million in 2006 to
reflect the change in the fair value of the conversion feature
in the $50 million of Series B Preferred Stock issued
in connection with the acquisition of Manugistics. The primary
factor causing the change in the fair value of the conversion
feature was the increase in our stock price from the close of
acquisition on July 5, 2006 to October 20, 2006. The
conversion feature as originally drafted was considered an
embedded derivative under the provisions of Statement of
Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities
(“SFAS No. 133”) and accordingly has
been accounted for separately from the Series B Preferred
Stock. On the date of issuance, we recorded a $10.9 million
liability for the estimated fair value of the conversion feature
and reduced the face value of the Series B Preferred Stock
to $39.1 million. The language in the agreement describing
the conversion feature did not reflect the original intent of
the parties, and as a result, we filed a Certificate of
Correction with the State of Delaware on October 20, 2006
to correct the definition of the cash redemption price in the
original Designation of Rights, Preferences, Privileges and
Restrictions of the Series B Preferred Stock. After this
change, the conversion feature no longer met the bifurcation
criteria in SFAS No. 133. See the footnotes to the
consolidated financial statements for a complete description of
this transaction.
A summary of the income tax provision recorded in 2007 and 2006
is as follows:
The income tax provision in 2007 and 2006 takes into account the
source of taxable income, domestically by state and
internationally by country, and available income tax credits,
but does not include the tax benefits realized from the employee
stock options exercised during these years of $1.3 million
and $330,000, respectively. These tax benefits reduced our
income tax liabilities and are included as an increase to
additional
paid-in-capital
to the extent they exceed the book compensation of the award.
The effective tax rate in 2007 is lower than the federal
statutory rate of 35% due to the impact of foreign tax rate
differentials. The effective tax rate in 2006 is higher than the
federal
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statutory rate of 35% due primarily to the non-deductibility of
the expense for the change in fair value of the conversion
feature of the Series B Preferred Stock.
The operating results for 2006 include the impact of
Manugistics from the date of acquisition (i.e., July 5,
2006) through December 31, 2006. The impact of the
Manugistics acquisition on our product and service revenues in
2006 compared to 2005 is summarized in Significant Trends and
Developments in Our Business where we provide tables that
summarize (i) the various components of revenue with and
without Manugistics and, (ii) software license results by
region with and without Manugistics.
Retail. Software license revenues in this
reportable business segment, which include $4.2 million in
software license revenues from the Manugistics product lines,
decreased 38% in 2006 compared to 2005. Before considering the
impact of Manugistics, software license revenues in this
reportable business segment decreased 44% in 2006 compared to
2005 primarily due to a decrease in the number of large
transactions of ³
$1.0 million and a 44% decrease in the average selling
price on such transactions. We had six large transactions of
³ $1.0 million in 2006,
including one involving Manugistics product lines, compared to
nine large transactions of ³
$1.0 million in 2005 which included one unusually large
multi-million dollar transaction with multiple applications.
Software license revenues in this reportable business segment
were also impacted in 2006 by a decrease in software license
transactions of <$1.0 million with new customers and a
decrease in follow-on sales to existing customers in the
Americas and Europe regions of approximately $4.1 million
and $2.4 million, respectively compared to 2005.
Manufacturing &
Distribution. Software license revenues in this
reportable business segment, which include $5.4 million in
software license revenues from the Manugistics product lines,
increased 51% in 2006 compared to 2005. Before considering the
impact of Manugistics, software license revenues in this
reportable business segment increased 8% in 2006 compared to
2005 primarily due to an increase in follow-on sales to existing
customers that expanded the scope of existing licenses.
Services Industries. The increase in software
license revenues in this reportable business segment in 2006
compared to 2005 resulted entirely from sales to customers of
the Revenue Management business acquired from Manugistics. The
majority of the software revenue in this reportable business
segment is subject to contract accounting and the benefit of
revenue deferred prior to the Manugistics acquisition was not
brought forward in purchase accounting as there were no
additional delivery obligations.
Regional Results. Software license revenues in
the Americas region, which include $4.9 million in software
license revenues from the Manugistics product lines, decreased
28% in 2006 compared to 2005. Before considering the impact of
Manugistics, software license revenues in the Americas region
decreased 40% in 2006 compared to 2005 which is primarily due to
a lack of sales management, business development and sales force
execution. In addition, software license revenues in 2005
included one unusually large multi-million dollar transaction
that included multiple applications. Software license
revenues in the Europe region, which include $4.3 million
in software license revenues from the Manugistics product lines,
increased 18% in 2006 compared to 2005. Before considering the
impact of Manugistics, software license revenues in the Europe
region decreased 18% primarily due to a $2.4 million
decrease in follow-on sales to existing customers that expand
the scope of existing licenses. The Europe region recorded two
large transactions ³
$1.0 million in 2006, one of which involved the Manugistics
product lines, compared to one large transaction
³ $1.0 million in 2005.
Software license revenues in the Asia/Pacific region, which
include $608,000 in software license revenues from the
Manugistics product lines, decreased 9% in 2006 compared to
2005. Before considering the impact of Manugistics, software
license revenues in the Asia/Pacific region decreased 19%
primarily due to a 35% decrease in average sales price on new
software license deals >$1.0 million in 2006 compared
to 2005. We recorded two large transactions of
³ $1.0 million in the
Asia/Pacific region in 2006 compared to two large transaction of
³ $1.0 million in 2005.
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Maintenance Services. Maintenance services
revenues, which include $21.0 million from the acquired
Manugistics product lines, increased 50% in 2006 compared to
2005. Before considering the impact of Manugistics, maintenance
services revenues increased 1% in 2006 compared to 2005. Despite
historically strong retention rates of approximately 95%, growth
in new maintenance services revenues on our core JDA
applications was hindered by lower software sales and the
suspension of revenue recognition of more than $1.0 million
in maintenance revenues related to certain customer-specific
support issues, including the discontinuance of the PRO
application.
Service revenues, which include $24.6 million from the
Manugistics product lines, increased 40% in 2006 compared to
2005. Before considering the impact of Manugistics, services
revenues increased 5% in 2006 compared to 2005 due primarily to
ongoing projects in the Americas including a large multi-product
implementation in the United States that was completed in 2006,
offset in part by flat to lower utilization rates and consulting
services revenue in the Europe and Asia/Pacific regions. Service
revenues were also impacted by a $1.2 million or 36%
decrease in hosting revenues in 2006 compared to 2005 primarily
due to the loss of a large customer as a result of their merger.
Net revenues from our hardware reseller business decreased 56%
to $533,000 in 2006 compared to $1.2 million in 2005.
Fixed bid consulting services work represented 14% of total
consulting services revenue in 2006 and 2005.
Cost of Software Licenses. The increase in
cost of software licenses in 2006 compared to 2005 resulted
primarily from sales of certain of our applications that
incorporate functionality from third party software providers
and require the payment of royalties, including $730,000 related
to the Manugistics product lines, offset in part by a $350,000
decrease in costs associated with certain third party software
database applications that we resell.
Amortization of Acquired Software
Technology. The increase in amortization of
acquired software technology in 2006 compared to 2005 resulted
primarily from amortization of the software technology acquired
in the Manugistics acquisition.
Cost of Maintenance Services. The increase in
cost of maintenance services in 2006 compared to 2005 resulted
from a 28% increase in average headcount, due to the acquisition
of Manugistics and the transfer of certain product development
resources to our customer support organization, a
$2.6 million increase in third party maintenance royalties
primarily related to the Manugistics revenue streams, $487,000
in charges associated with the resolution of certain
customer-specific support issues and a $368,000 increase in
outside contractor costs.
The increase in cost of service revenues in 2006 compared to
2005 resulted from a 27% increase in average services headcount,
primarily from the acquisition of Manugistics during the second
half, as well as a $5.7 million increase in outside
contractor costs for ongoing consulting projects in the United
States and a $3.2 million increase in reimbursed expenses,
offset in part by the deferral of $1.0 million in
consulting costs on a large Manugistics implementation project
in the United States for which revenue recognition was deferred,
and a $586,000 decrease in training costs.
The increase in gross profit dollars in 2006 compared to 2005
resulted primarily from the $76.3 million revenue
contribution from Manugistics and higher service revenue margins
offset in part by related increases in average headcount in our
customer support and consulting services organizations to
support the larger revenue streams. The gross margin percentage
decreased to 58% in 2006 compared to 60% in 2005. This decrease
resulted from the lower mix of software license revenues.
The increase in service revenue margins in 2006 compared to 2005
resulted primarily from the 40% increase in service revenues,
the deferral of $1.0 million in consulting costs on a large
Manugistics implementation project in the United States for
which revenue recognition was deferred, and a $586,000 decrease
in training costs, offset in
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part by a 27% increase in average services headcount primarily
from the acquisition of Manugistics and a $5.7 million
increase in outside contractor costs for ongoing consulting
projects in the United States.
Operating expenses, excluding amortization of intangibles and
restructuring charges, increased $27.4 million, or 25% in
2006 compared to 2005, and represented 50% and 52% of total
revenues in each period, respectively. The increase in operating
expenses resulted primarily from an increase in average
headcount from the acquisition of Manugistics, an increase in
costs related to the use of outside contractors to assist in
development activities, higher travel, training, legal and
accounting costs related to the integration of Manugistics and a
decrease in capitalized costs related to the development of
internal systems, offset in part by lower incentive compensation.
Product Development. The increase in product
development expense in 2006 compared to 2005 resulted from a 36%
increase in average product development headcount, primarily
from the acquisition of Manugistics, which resulted in higher
salaries, benefits, travel, training and occupancy costs, a
$793,000 increase in outside contractor costs to assist in the
development of our solutions, offset in part by the transfer of
certain product development resources to the customer support
organization, a $513,000 decrease in incentive compensation as a
result of lower software license revenues and a $499,000
decrease in vendor cost reimbursements on joint development
projects. Product development expense included $871,000 and
$600,000 in charges related to the settlement of certain
customer-specific situations in 2006 and 2005, respectively
including $488,000 in charges related to the discontinuance of
PRO during fourth quarter 2006.
Sales and Marketing. The increase in sales and
marketing expense in 2006 compared to 2005 resulted from a 41%
increase in average headcount, primarily from the acquisition of
Manugistics, which resulted in higher salaries, benefits, travel
and marketing costs, offset in part by a $1.9 million
decrease in incentive compensation due to lower software license
revenues and a $400,000 decrease in utilization of consulting
services employees to assist in presales activities.
General and Administrative. The increase in
general and administrative expense in 2006 compared to 2005
resulted from a 23% increase in average headcount, primarily
from the acquisition of Manugistics, which resulted in higher
salaries, benefits, travel and training costs. We also had a
$926,000 increase in legal and accounting costs as a result of
the larger combined company, a $670,000 decrease in capitalized
costs associated with major system initiatives, and a $376,000
increase in stock-based compensation for new hires in the
management team.
Provision for Doubtful Accounts. The provision
for doubtful accounts in 2006 includes $1.0 million related
to the discontinuance of PRO.
Amortization of Intangibles. The increase in
amortization of intangibles in 2006 compared to 2005 resulted
primarily from $5.5 million in amortization on the customer
list intangibles recorded in the acquisition of Manugistics.
Restructuring Charges. We recorded
restructuring charges of $6.2 million in 2006 that included
$4.8 million for termination benefits and relocation
bonuses and $1.4 million for office closures. The
restructuring charges were primarily related to the
consolidation of two existing JDA offices in the United Kingdom
into the Manugistics office facility in the United Kingdom and
the elimination of certain accounting and administrative
positions in Europe and Canada.
We recorded restructuring charges of $2.4 million in 2005
to complete the restructuring initiatives contemplated in our
2005 Operating Plan. The restructuring charges in 2005 included
$2.0 million in termination benefits for 44 FTE and
$423,000 for net rentals remaining under existing operating
leases on certain vacated facilities.
Loss on Impairment of Trademarks. The Company
announced in fourth quarter 2006 that it would continue to
support the E3 product suite through the end of 2012. With this
announcement, the E3 trademarks were tested for impairment and
we recorded an impairment loss of $200,000 in fourth quarter
2006. We also recorded an impairment loss of $200,000 during
fourth quarter 2005 on the E3 trademarks primarily due to a
lower software revenue forecast and a flattening of the
projected revenue growth curve.
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Operating income increased to $7.3 million in 2006 compared
to $1.9 million in 2005. A 29% increase in total revenues,
resulting primarily from the $76.3 million revenue
contribution from Manugistics and a $9.7 million decrease
in impairment charges, were offset in part by the costs and
expenses related to a 31% increase in average headcount
including 677 employees added through the acquisition of
Manugistics, the $6.4 million increase in amortization of
intangibles and a $3.8 million increase in restructuring
charges.
Operating income in our Retail reportable business
segment increased to $27.4 million in 2006 compared to
$25.4 million in 2005. The increase in operating income in
this reportable business segment resulted primarily from a
$15.6 million increase in service revenues, a
$9.7 million decrease in impairment charges and a 5%
decrease in allocated sales and marketing costs based upon the
pro rata share of software sales that came from this reportable
business segment, offset in part by a $10.4 million
decrease in product revenues, an $8.7 million increase in
maintenance and service revenue costs and an 18% increase in
product development costs.
Operating income in our Manufacturing and Distribution
reportable business segment increased to $31.9 million
in 2006 compared to $9.6 million in 2005. The increase
resulted primarily from increases in product and service
revenues of $41.3 million and $9.5 million,
respectively, offset in part by a $13.7 million increase in
maintenance and service revenue costs due to the Manugistics
acquisition, a 93% increase in allocated sales and marketing
costs based upon the pro rata share of software sales that came
from this reportable business segment, and a 42% increase in
product development costs.
All customers in the Services Industries reportable
business segment are new to JDA and represent the former Revenue
Management business acquired from Manugistics. This reportable
business segment incurred an initial loss of $1.5 million
in 2006 on total revenues of $5.6 million, total costs of
revenue of $5.1 million, and $2.0 million in operating
costs for product development and sales and marketing activities.
The combined operating income reported in the reportable
business segments excludes $50.6 million and
$33.1 million of general and administrative expenses and
other charges in 2006 and 2005, respectively, that are not
directly identified with a particular reportable business
segment and which management does not consider in evaluating the
operating income (loss) of the reportable business segments.
During 2006 we incurred interest expense of $6.5 million on
aggregate term loan obligations and $1.1 million in
amortization of loan origination fees. To finance the
acquisition of Manugistics and the repayment of their debt
obligations, we entered into a credit agreement with a
consortium of lenders that provided for $175 million in
aggregate term loans with interest payable quarterly at the
London Interbank Offered Rate (“LIBOR”) + 2.25%. Prior
to this transaction, we had no long-term debt obligations.
We recorded interest income and other, net of $3.9 million
in 2006 compared to $2.8 million in 2005. During 2005 and
the first half of 2006, we invested our excess cash balances in
a variety of financial instruments including bank time deposits
and variable and fixed rate obligations of the
U.S. Government and it agencies, states, municipalities,
commercial paper and corporate bonds with interest rates
generally ranging between 2% and 5%. We liquidated substantially
all of our investments through sales or maturities in second
quarter 2006 to generate cash to complete the acquisition of
Manugistics on July 5, 2006. During the second half of 2006
our excess cash balances were primarily invested in money market
accounts.
We recorded non-cash charges of $3.1 million in 2006 to
reflect the change in the fair value of the conversion feature
in the $50 million of Series B Preferred Stock issued
in connection with the acquisition of Manugistics. The primary
factor causing the change in the fair value of the conversion
feature was the increase in our stock price from the close of
acquisition on July 5, 2006 to October 20, 2006. The
conversion feature as originally drafted was considered an
embedded derivative under the provisions of Statement of
Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities
(“SFAS No. 133”) and accordingly has
been accounted for separately from the Series B Preferred
Stock. On the date of issuance, we recorded a $10.9 million
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liability for the estimated fair value of the conversion feature
and reduced the face value of the Series B Preferred Stock
to $39.1 million. The language in the agreement describing
the conversion feature did not reflect the original intent of
the parties, and as a result, we filed a Certificate of
Correction with the State of Delaware on October 20, 2006
to correct the definition of the cash redemption price in the
original Designation of Rights, Preferences, Privileges and
Restrictions of the Series B Preferred Stock. After this
change, the conversion feature no longer met the bifurcation
criteria in SFAS No. 133. See the footnotes to the
consolidated financial statements for a complete description of
this transaction.
A summary of the income tax (provision) benefit recorded in 2006
and 2005 is as follows:
The income tax (provision) benefit for 2006 and 2005 takes into
account the source of taxable income, domestically by state and
internationally by country, and available income tax credits,
but does not include the tax benefits realized from the employee
stock options exercised during these years of $330,000 and
$807,000, respectively. These tax benefits reduced our income
tax liabilities and are included as an increase to additional
paid-in-capital
to the extent they exceed the book compensation expense of the
award. The effective tax rate is higher in 2006 as compared to
2005 due to the non-deductibility of the expense for the change
in fair value of the conversion feature of the redeemable
Series B Preferred Stock.
Liquidity
and Capital Resources
We had working capital of $67.9 million at
December 31, 2007 compared to $41.1 million at
December 31, 2006. The working capital balances at
December 31, 2007 and 2006 include cash and cash
equivalents of $95.3 million and $53.6 million,
respectively. The increase in working capital resulted from
$79.7 million in cash flow from operating activities,
$9.9 million from the issuance of common stock and
$6.9 million in proceeds from the disposal of property and
equipment, offset in part by the repayment of $41.5 million
of long-term debt, the payment of $7.6 million of direct
costs related to the Manugistics acquisition and
$7.4 million of capital expenditures.
Net accounts receivable were $74.7 million or 68 days
sales outstanding (“DSO”) at December 31, 2007
compared to $79.5 million or 81 DSO at December 31,
2006. The improvement in DSO is due primarily to improved
collection efforts and the higher level of revenues recorded by
the Company in 2007 compared to 2006. Our DSO results may
fluctuate significantly on a quarterly basis due to a number of
factors including the percentage of total revenues that comes
from software license sales which typically have installment
payment terms, seasonality, shifts in customer buying patterns
or industry mix of our customers, the timing of annual
maintenance renewals, lengthened contractual payment terms in
response to competitive pressures, the underlying mix of
products and services, and the geographic concentration of
revenues.
Operating activities provided cash of $79.7 million
in 2007 compared to $15.4 million in 2006. The principle
sources of our cash flow from operations are typically net
income adjusted for depreciation and amortization and bad debt
provisions, collections on accounts receivable and increases in
deferred maintenance revenue. The increase in cash flow from
operations in 2007 compared to 2006 results primarily from a
$27.0 million increase in net income, a $14.2 million
larger net decrease in accounts receivable due to improved
collection efforts, a
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$10.9 million decrease in deferred income taxes due
primarily to the utilization of net operating losses, a
$7.4 million increase in amortization on intangible
balances recorded in the acquisition of Manugistics, a
$5.5 million increase in stock-based compensation,
primarily related to the Manugistics Integration Incentive Plan,
and a $4.2 million larger increase in deferred revenue
balances due to the timing of the annual renewal period for
maintenance contracts assumed in the acquisition of Manugistics,
offset in part by a $4.1 million gain on the sale of an
office facility in the United Kingdom.
Investing activities utilized cash of $8.2 million
in 2007 and $45.8 million in 2006. Net cash used in
investing activities in 2007 includes $7.6 million in
payment of direct costs related to the Manugistics acquisition
and $7.4 million in capital expenditures, offset in part by
$6.9 million in proceeds from the disposal of property and
equipment, including $6.3 million from the sale of the
office facility in the United Kingdom. Net cash utilized by
investing activities in 2006 includes $72.9 million in net
cash expended to acquire Manugistics, $8.0 million in
capital expenditures and $6.7 million in payment of direct
costs related to the Manugistics acquisition, offset in part by
$40.4 million in net proceeds from sales and maturities of
marketable securities to generate cash to complete the
acquisition of Manugistics and the final $1.2 million
payment on the promissory note receivable from Silvon Software,
Inc.
Financing activities utilized cash of $30.6 million
in 2007 and provided cash of $11.4 million in 2006.
Financing activities in 2007 include the repayment of
$41.5 million of long term debt. Financing activities in
2006 include proceeds of $168.4 million from term loan
borrowings, net of nearly $6.6 million of loan origination
and other administrative fees, and the issuance of
$50 million in Series B Preferred Stock to Thoma
Cressey Bravo in connection with the acquisition of Manugistics.
We used the proceeds from the term loan borrowings and the Thoma
Cressey Bravo equity investment, together with the
companies’ combined cash balances at closing, to fund the
cash obligations of the acquisition and to retire approximately
$174 million of Manugistics’ existing debt and capital
lease obligations. In additional, we repaid $35 million of
the term loans in the second half of 2006. The term loan
borrowings contain certain financial and other covenants. We
were in compliance with the financial and other covenants at
December 31, 2007. The activity in both periods includes
proceeds from the issuance of common stock.
Changes in the currency exchange rates of our foreign
operations had the effect of increasing cash by $770,000 in
2007 and $1.6 million in 2006 due to the continuing
weakness of the US Dollar against major foreign currencies
including the British Pound Sterling, the Euro and the Japanese
Yen. We use derivative financial instruments, primarily forward
exchange contracts, to manage a majority of the short-term
foreign currency exchange exposure associated with foreign
currency denominated assets and liabilities which exist as part
of our ongoing business operations. We do not hedge the
potential impact of foreign currency exposure on our ongoing
revenues and expenses from foreign operations. The exposures
relate primarily to the gain or loss recognized in earnings from
the settlement of current foreign denominated assets and
liabilities. We do not enter into derivative financial
instruments for trading or speculative purposes. The forward
exchange contracts generally have maturities of less than
90 days, and are not designated as hedging instruments
under Financial Accounting Standard No. 133, Accounting
for Derivative Instruments and Hedging Activities
(“SFAS No. 133”). Forward exchange
contracts are
marked-to-market
at the end of each reporting period, with gains and losses
recognized in other income, net, offset by the gains or losses
resulting from the settlement of the underlying foreign currency
denominated assets and liabilities.
Treasury Stock Repurchases. In July 2007, the
term loan credit agreement (see Contractual Obligations)
was amended to allow us to make open market cash purchases of
our common stock in an aggregate amount not to exceed
$75.0 million. There were no open market cash purchases of
our common stock during 2007.
In January 2005, our Board of Directors authorized a program to
repurchase up to one million shares of our outstanding common
stock on the open market or in private transactions at
prevailing market prices during a one-year period ending
January 26, 2006. The program was adopted as part of our
revised approach to equity compensation, which emphasizes
performance-based awards to employees and open market stock
repurchases by the Company designed to mitigate or eliminate
dilution from future employee and director equity-based
incentives. We repurchased a total of 747,500 shares of our
common stock for $8.7 million under this program, all of
which were made during 2005.
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During 2007 and 2006, we repurchased 12,411 and
14,656 shares, respectively tendered by employees for the
payment of applicable statutory withholding taxes on the
issuance of restricted shares under the 2005 Performance
Incentive Plan. The shares were repurchased in 2007 for $244,000
at prices ranging from $14.52 to $24.96 per share. The shares
were repurchased in 2006 for $189,000 at prices ranging from
$11.19 to $17.00 per share.
Accelerated Vesting of Options. On
February 15, 2005, the Compensation Committee of our Board
of Directors approved the immediate vesting of all unvested
stock options previously awarded to employees, officers and
directors. The accelerated options were issued under our 1995
Stock Option Plan, 1996 Stock Option Plan, 1996 Outside Director
Stock Option Plan and 1998 Non-statutory Stock Option Plan. The
closing market price per share of our common stock on
February 15, 2005 was $11.85 and the exercise prices of the
approximately 1.4 million in unvested options on that date
ranged from $8.50 to $28.20. The exercise of vested stock
options increases our working capital.
Contractual Obligations. The following
summarizes scheduled principal maturities and interest on
long-term debt and our operating lease obligations as of
December 31, 2007.
Long-term debt includes $99.6 million in borrowings under
term loan agreements which are due in quarterly installments of
$437,500 through July 5, 2013, with the remaining balance
due at maturity. In addition to the scheduled maturities, the
term loan agreements also require additional mandatory
repayments on the term loans based on a percentage of our annual
excess cash flow, as defined, beginning with the fiscal year
that commenced January 1, 2007. Pursuant to this provision,
we are required to remit an additional mandatory payment of
approximately $5.3 million on the term loan by
March 30, 2008. The scheduled principal maturities in the
table above only include this initial mandatory repayment based
on our annual excess cash flow, as defined. Interest is payable
quarterly on the term loans at the London Interbank Offered Rate
(“LIBOR”) + 2.25%. We entered into an interest rate
swap agreement on July 28, 2006 to fix LIBOR at 5.365% on
$140 million, or 80% of the aggregate term loans. We have
structured the interest rate swap with decreasing notional
amounts to match the expected pay down of the debt. The notional
value of the interest rate swap was $85.5 million at
December 31, 2007 and represented approximately 86% of the
aggregate term loan balance. The interest rate swap agreement is
effective through October 5, 2009 and has been designated a
cash flow hedge derivative.
Operating lease obligations represent future minimum lease
payments under non-cancelable operating leases with minimum or
remaining lease terms at December 31, 2007. We lease office
space in the Americas for 13 regional sales and support offices
across the United States, Canada and Latin America, and for 14
other international sales and support offices located in major
cities throughout Europe, Asia, Australia, and Japan. The leases
are primarily non-cancelable operating leases with initial terms
ranging from one to 20 years that expire at various dates
through the year 2018. None of the leases contain contingent
rental payments; however, certain of the leases contain
scheduled rent increases and renewal options. We expect that in
the normal course of business most of these leases will be
renewed or that suitable additional or alternative space will be
available on commercially reasonable terms as needed. In
addition, we lease various computers, telephone systems,
automobiles, and office equipment under non-cancelable operating
leases with initial terms ranging from 12 to 48 months.
Certain of the equipment leases contain renewal options and we
expect that in the normal course of business some or all of
these leases will be renewed or replaced by other leases.
The contractual obligations shown above exclude
$5.4 million in non-current liabilities for uncertain tax
positions as we are unable to make reasonably reliable estimates
of the period cash settlement with the respective taxing
authorities.
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We believe our cash and cash equivalents and net cash provided
from operations will provide adequate liquidity to meet our
normal operating requirements for the foreseeable future. A
major component of our positive cash flow is the collection of
accounts receivable and the generation of cash earnings.
Critical
Accounting Policies
We have identified the policies below as critical to our
business operations and the understanding of our results of
operations. The impact and any associated risks related to these
policies on our business operations is discussed throughout
Management’s Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our
reported and expected financial results. The preparation of this
Annual Report on
Form 10-K
requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities, disclosure of
contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from
those estimates.
We license software primarily under non-cancelable agreements
and provide related services, including consulting, training and
customer support. We recognize revenue in accordance with
Statement of Position
97-2
(“SOP 97-2”),
Software Revenue Recognition, as amended and interpreted
by Statement of Position
98-9,
Modification of
SOP 97-2,
Software Revenue Recognition, with respect to certain
transactions, as well as Technical Practice Aids issued from
time to time by the American Institute of Certified Public
Accountants, Accounting Research Bulletin No. 45,
Long-Term Construction-Type Contracts (“ARB
No. 45”), Statement of Position
81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts
(“SOP 81-1”)
and Staff Accounting Bulletin No. 104, Revenue
Recognition, that provides further interpretive guidance for
public companies on the recognition, presentation and disclosure
of revenue in financial statements.
Software license revenue is generally recognized using the
residual method when:
Ø
Persuasive evidence of an arrangement exists and a license
agreement has been signed;
Ø
Delivery, which is typically FOB shipping point, is complete;
Ø
Fees are fixed and determinable and there are no uncertainties
surrounding product acceptance;
Ø
Collection is considered probable; and
Ø
Vendor-specific evidence of fair value (“VSOE”) exists
for all undelivered elements.
Our customer arrangements typically contain multiple elements
that include software, options for future purchases of software
products not previously licensed to the customer, maintenance,
consulting and training services. The fees from these
arrangements are allocated to the various elements based on
VSOE. Under the residual method, if an arrangement contains an
undelivered element, the VSOE of the undelivered element is
deferred and the revenue recognized once the element is
delivered. If we are unable to determine VSOE for any
undelivered element included in an arrangement, we will defer
revenue recognition until all elements have been delivered. In
addition, if a software license contains milestones, customer
acceptance criteria or a cancellation right, the software
revenue is recognized upon the achievement of the milestone or
upon the earlier of customer acceptance or the expiration of the
acceptance period or cancellation right. For arrangements that
provide for significant services or custom development that are
essential to the software’s functionality, the software
license revenue and contracted services are recognized under the
percentage of completion method as prescribed in the provisions
of ARB No. 45 and
SOP 81-1.
Maintenance services are separately priced and stated in our
arrangements. Maintenance services typically include on-line
support, access to our Solution Centers via telephone and web
interfaces, comprehensive error diagnosis and correction, and
the right to receive unspecified upgrades and enhancements, when
and if
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we make them generally available. Maintenance services are
generally billed on a monthly basis and recorded as revenue in
the applicable month, or billed on an annual basis with the
revenue initially deferred and recognized ratably over the
maintenance period. VSOE for maintenance services is the price
customers will be required to pay when it is sold separately,
which is typically the renewal rate.
Consulting and training services are separately priced and
stated in our arrangements, are generally available from a
number of suppliers, and are generally not essential to the
functionality of our software products. Consulting services
include project management, system planning, design and
implementation, customer configurations, and training. These
services are generally billed bi-weekly on an hourly basis or
pursuant to the terms of a fixed price contract. Consulting
services revenue billed on an hourly basis is recognized as the
work is performed. Under fixed price service contracts and
milestone-based arrangements that include services that are not
essential to the functionality of our software products,
consulting services revenue is recognized using the proportional
performance method. We measure
progress-to-completion
under the proportional performance method by using input
measures, primarily labor hours, which relate hours incurred to
date to total estimated hours at completion. We continually
update and revise our estimates of input measures. If our
estimates indicate that a loss will be incurred, the entire loss
is recognized in that period. Training revenues are included in
consulting revenues in the Company’s consolidated
statements of income and are recognized once the training
services are provided. VSOE for consulting and training services
is based upon the hourly or per class rates charged when those
services are sold separately. We offer hosting services on
certain of our software products under arrangements in which the
end users do not take possession of the software. Revenues from
hosting services are included in consulting revenues, billed
monthly and recognized as the services are provided. Revenues
from our hardware reseller business are also included in
consulting revenues, reported net (i.e., the amount billed to a
customer less the amount paid to the supplier) pursuant to
EITF 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent, and recognized upon shipment of the hardware.
Customers are reviewed for creditworthiness before we enter into
a new arrangement that provides for software
and/or a
service element. We do not sell or ship our software, nor
recognize any license revenue unless we believe that collection
is probable. Payments for our software licenses are typically
due within twelve months from the date of delivery. Although
infrequent, where software license agreements call for payment
terms of twelve months or more from the date of delivery,
revenue is recognized as payments become due and all other
conditions for revenue recognition have been satisfied.
We do not have significant billing or collection problems. We
review each past due account and provide specific reserves based
upon the information we gather from various sources including
our customers, subsequent cash receipts, consulting services
project teams, members of each region’s management, and
credit rating services such as Dun and Bradstreet. Although
infrequent and unpredictable, from time to time certain of our
customers have filed bankruptcy, and we have been required to
refund the pre-petition amounts collected and settle for less
than the face value of their remaining receivable pursuant to a
bankruptcy court order. In these situations, as soon as it
becomes probable that the net realizable value of the receivable
is impaired, we provide reserves on the receivable. In addition,
we monitor economic conditions
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in the various geographic regions in which we operate to
determine if general reserves or adjustments to our credit
policy in a region are appropriate for deteriorating conditions
that may impact the net realizable value of our receivables.
Goodwill is tested annually for impairment, or more frequently
if events or changes in business circumstances indicate the
asset might be impaired, using a two-step process that compares
a weighted average of the fair value of future cash flows under
the “Discounted Cash Flow Method of the Income
Approach” and the “Guideline Company Method” to
the carrying value of goodwill allocated to our reporting units.
No indications of impairment were identified in 2006 or 2007
with respect to the goodwill allocated to our Retail,
Manufacturing and Distribution and Services Industries
reportable business segments. An impairment loss of
$9.7 million was recorded in 2005 due to the historical
performance of our
point-of-sale
systems (which are now included under the Retail
reportable business segment) being below expectations and
the slower projected growth rate for these applications in our
operating plans. The impairment loss is reported as a separate
component of operating expenses in our consolidated statements
of income under the caption “Loss on impairment of
goodwill.”
Customer lists are amortized on a straight-line basis over
estimated useful lives ranging from 8 years to
13 years. The values allocated to customer list intangibles
are based on the projected economic life of each acquired
customer base, using historical turnover rates and discussions
with the management of the acquired companies. We estimate the
economic lives of these assets using the historical life
experiences of the acquired companies as well as our historical
experience with similar customer accounts for products that we
have developed internally. We review customer attrition rates
for each significant acquired customer group on annual basis, or
more frequently if events or circumstances change, to ensure the
rate of attrition is not increasing and if revisions to the
estimated economic lives are required. We have experienced a
higher than expected attrition rate in the customer group
acquired from Manugistics during the first 18 months
subsequent to the acquisition. We performed a discounted cash
flow analysis on the remaining maintenance streams from this
acquired customer group as of December 31, 2007 and found
no indication of impairment. However, since the attrition rate
experienced in 2007 was higher than the initial estimates used
in the purchase price allocation, we will reduce the estimated
useful life of the Manugistics customer lists from 13 years
to 8 years effective January 1, 2008. With this
change, the quarterly amortization of the Manugistics customer
lists will increase to $4.9 million, or approximately
$2.1 million per quarter, over the remaining useful life
which extends through June 2014.
Acquired software technology is capitalized if the related
software product under development has reached technological
feasibility or if there are alternative future uses for the
purchased software. Amortization of software technology is
reported as a cost of product revenues in accordance with
Financial Accounting Standards No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed (“SFAS No. 86”). Software
technology is amortized on a
product-by-product
basis with the amortization recorded for each product being the
greater of the amount computed using (a) the ratio that
current gross revenues for a product bear to the total of
current and anticipated future revenue for that product, or
(b) the straight-line method over the remaining estimated
economic life of the product including the period being reported
on. The estimated economic lives of our acquired software
technology range from 5 years to 15 years.
Trademarks have been acquired primarily in the acquisitions of
Manugistics and E3 Corporation (“E3”). The Manugistics
trademarks are being amortized on a straight-line basis over an
estimated useful life of 3 years. We initially assigned
indefinite useful lives to the E3 trademarks, and recorded no
amortization, as we believed there were no legal, regulatory,
contractual, competitive, economic, or other factors that would
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limit their useful lives or the indefinite development of next
generation products that would contribute to our cash flows. The
E3 trademarks were tested annually for impairment in accordance
with SFAS No. 142 using the “Relief from Royalty
Method of the Income Approach” and impairment losses of
$200,000 were recorded in 2006 and 2005 due to a lower software
revenue forecast and a flattening of the projected revenue
growth curve. The impairment charges are reported as a separate
component of operating expenses in our consolidated statements
of income under the caption “Loss on impairment of
trademark.” The Company announced in fourth quarter 2006
that it would continue to support the E3 product suite through
the end of 2012 at a minimum. With this announcement, we
classified the E3 trademarks as an amortized intangible asset at
December 31, 2006 and began amortizing the remaining
balance of $1.8 million prospectively on a straight-line
basis over an estimated remaining useful life of 3 years.
We exercise significant judgment in determining our income tax
provision due to transactions, credits and calculations where
the ultimate tax determination is uncertain. Uncertainties arise
as a consequence of the actual source of taxable income between
domestic and foreign locations, the outcome of tax audits and
the ultimate utilization of tax credits. Although we believe our
estimates are reasonable, the final tax determination could
differ from our recorded income tax provision and accruals. In
such case, we would adjust the income tax provision in the
period in which the facts that give rise to the revision become
known. These adjustments could have a material impact on our
income tax provision and our net income for that period.
In June 2006, the Financial Accounting Standards Board issued
FIN 48. FIN 48 clarifies the accounting for income tax
uncertainties and defines the minimum recognition threshold a
tax position is required to meet before being recognized in the
financial statements. FIN 48 also prescribes a two-step
approach for evaluating tax positions and requires expanded
disclosures at each interim and annual reporting period.
FIN 48 is effective for fiscal years beginning after
December 15, 2006 and requires that differences between the
amounts recognized in the statements of financial position prior
to the adoption of FIN 48 and the amounts reported after
adoption are to be accounted for as cumulative-effect
adjustments to beginning retained earnings.
We adopted the provisions of FIN 48 on January 1,
2007. The amount of unrecognized tax benefits at January 1,
2007 was $3.5 million, of which $799,000 would impact our
effective tax rate if recognized. With the adoption of
FIN 48, we recognized a charge of approximately
$1.0 million to beginning retained earnings for uncertain
tax positions. In addition, a FIN 48 adjustment of
$2.9 million was made to the purchase price allocation on
the Manugistics acquisition to record a tax liability for
uncertain tax positions which increased the goodwill balance.
Other than the settlement of a tax audit in Germany, which could
result in a decrease of approximately $800,000 in the
FIN 48 tax liability in 2008, we do not believe there are
any other uncertain tax positions for which it is reasonably
possible that the total amounts of unrecognized tax benefits
will significantly increase or decrease within the next
12 months.
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The FIN 48 adjustments on January 1, 2007 include an
accrual of approximately $1.3 million for interest and
penalties. To the extent interest and penalties are not assessed
with respect to the uncertain tax positions, the accrued amounts
for interest and penalties will be reduced and reflected as a
reduction of the overall tax provision. We have accrued
additional interest and penalties related to uncertain tax
positions of $630,000 in 2007 which are included as a component
of income tax expense.
As of December 31, 2007, we had approximately
3.2 million stock options outstanding with exercise prices
ranging from $6.44 to $27.50 per share. We do not expect the
outstanding stock options to result in a significant
compensation expense charge as all stock options were fully
vested prior to the adoption of SFAS No. 123(R). Stock
options are no longer used for share-based compensation. A 2005
Performance Incentive Plan (“2005 Incentive Plan”) was
approved by our stockholders on May 16, 2005 that provides
for the issuance of up to 1,847,000 shares of common stock
to employees, consultants and directors under stock purchase
rights, stock bonuses, restricted stock, restricted stock units,
performance awards, performance units and deferred compensation
awards. With the adoption of the 2005 Incentive Plan, we
terminated all prior stock option plans except for those
provisions necessary to administer the outstanding options. The
2005 Incentive Plan contains certain restrictions that limit the
number of shares that may be issued and cash awarded under each
type of award, including a limitation that awards granted in any
given year can be no more than two percent (2%) of the total
number of shares of common stock outstanding as of the last day
of the preceding fiscal year. Awards granted under the 2005
Incentive Plan will be in such form as the Compensation
Committee shall from time to time establish and may or may not
be subject to vesting conditions based on the satisfaction of
service requirements or other conditions, restrictions or
performance criteria including the Company’s achievement of
annual operating goals. Restricted stock and restricted stock
units may also be granted as a component of an incentive package
offered to new employees or to existing employees based on
performance or in connection with a promotion, and will
generally vest over a three-year period, commencing at the date
of grant. We measure the fair value of awards under the 2005
Incentive Plan based on the market price of the underlying
common stock as of the date of grant. The awards are amortized
over their applicable vesting period using graded vesting.
On August 18, 2006, our Board of Directors approved a
special Manugistics Incentive Plan (“Integration
Plan”). The Integration Plan provided for the issuance of
contingently issuable restricted stock units under the 2005
Incentive Plan to executive officers and certain other members
of our management team if we were able to successfully integrate
the Manugistics acquisition and achieve a defined performance
threshold goal in 2007. The performance threshold goal was
defined as $85.0 million of adjusted EBITDA (earnings
before interest, taxes, depreciation and amortization), which
excludes certain non-routine items. A partial pro-rata issuance
of restricted stock units would be made if we achieved a minimum
performance threshold. The Board subsequently approved
additional contingently issuable restricted stock units under
the Integration Plan for executive officers and new participants
in 2007. The Company’s actual EBITDA performance for 2007
was approved by the Board in January 2008 and qualified
participants for a pro-rata issuance equal to 99.25% of the
contingently issuable restricted stock units. In total, 502,935
restricted stock units were issued on January 28, 2008 with
a grant date fair value of $8.1 million. The restricted
stock units vested 50% upon the date of issuance with the
remaining 50% vesting ratably over the subsequent
24-month
period.
No stock-based compensation expense was recognized in 2006
related to the Integration Plan as management determined it was
not probable that the performance condition would be met. The
Company’s
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performance against the defined performance threshold goal was
evaluated on a quarterly basis throughout 2007 and stock-based
compensation recognized on a graded vesting basis over the
requisite service periods that run from the date of the various
board approvals through January 2010. A deferred compensation
charge of $8.1 million was recorded in the equity section
of our balance sheet during 2007, with a related increase to
additional paid-in capital, for the total grant date fair value
of the awards. We recognized $5.4 million in stock-based
compensation expense related to these restricted stock unit
awards in 2007. This charge is reflected in the consolidated
statements of income under the captions “Cost of
maintenance services,” “Cost of consulting
services,” “Product development,” “Sales and
marketing,” and “General and administrative.”
On February 7, 2008, the Board approved an incentive plan
for 2008 similar to the Integration Plan (“New Incentive
Plan”). The New Incentive Plan provides for the issuance of
contingently issuable performance share awards under the 2005
Incentive Plan to executive officers and other certain other
members of our management team if we are able to achieve a
defined performance threshold goal in 2008. The performance
threshold goal is defined as $95.0 million of adjusted
EBITDA (earnings before interest, taxes, depreciation and
amortization), which excludes certain non-routine items. A
partial pro-rata issuance of performance share awards will be
made if we achieve a minimum performance threshold. The New
Incentive Plan initially provides for up to 259,516 contingently
issuable performance share awards with a fair value of
approximately $4.5 million. The performance share awards,
if any, will be issued after the approval of our 2008 financial
results in January 2009 and will vest 50% upon the date of
issuance with the remaining 50% vesting ratably over a
24-month
period. The Company’s performance against the defined
performance threshold goal will be evaluated on a quarterly
basis throughout 2008 and stock-based compensation recognized
over the requisite service period that runs from
February 7, 2008 (the date of board approval) through
January 2011 pursuant to the guidance in
SFAS No. 123(R). If we achieve the defined performance
threshold goal we would expect to recognize approximately
$3.0 million of the award as stock-based compensation in
2008.
We are exposed to interest rate risk in connection with our
long-term debt which provides for quarterly interest payments at
the London Interbank Offered Rate (“LIBOR”) + 2.25%.
To manage this risk, we entered into an interest rate swap
agreement on July 28, 2006 to fix LIBOR at 5.365% on
$140 million, or 80% of the aggregate term loans. We have
structured the interest rate swap with decreasing notional
amounts to match the expected pay down of the debt. The notional
value of the interest rate swap was $85.5 million at
December 31, 2007 and represented approximately 86% of the
aggregate term loan balance. The interest rate swap agreement is
effective through October 5, 2009 and has been designated a
cash flow hedge derivative. SFAS No. 133 requires
derivatives to be recorded as either an asset or a liability in
the balance sheet at fair value. Changes in the fair value of
derivatives that are designated as highly effective and qualify
as a cash flow hedge are deferred and recorded as a component of
“Accumulated other comprehensive income (loss)” until
net income is affected by the variability of cash flows of the
hedged transaction (i.e., that quarterly payment of interest).
When the hedged transaction affects earnings, the resulting gain
or loss is reclassified from “Accumulated other
comprehensive income (loss)” to the consolidated statement
of income on the same line as the underlying transaction (i.e.,
interest expense). A change in the fair value of an ineffective
portion of a hedging derivative is recognized immediately in
earnings. We evaluate the
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effectiveness of the cash flow hedge derivative on a quarterly
basis. As of December 31, 2007, the hedge was highly
effective and we have recorded a net unrealized loss of $290,000
in “Accumulated other comprehensive income (loss).”
In connection with the acquisition of Manugistics, we issued
50,000 shares of Series B Convertible Preferred Stock
(“Series B Preferred Stock”) for $50 million
in cash. The Series B Preferred Stock included a scheduled
redemption right that allowed any holder to demand a redemption
of all or any part of their shares after September 6, 2013
at a cash redemption price equal to the greater of (a) a
$1,000 per share liquidation value or (b) the fair market
value of the common stock that would be issued upon conversion
of the Series B Preferred Stock. The conversion feature as
originally drafted was considered an embedded derivative under
the provisions of SFAS No. 133, and accordingly was
accounted for separately from the Series B Preferred Stock.
On the date of issuance, we recorded a $10.9 million
liability for the estimated fair value of the conversion feature
and reduced the face value of the Series B Preferred Stock
to $39.1 million.
The language in the agreement describing the conversion feature
did not reflect the original intent of the parties, and as a
result, we filed a Certificate of Correction with the State of
Delaware on October 20, 2006 to correct the definition of
cash redemption price and limit the cash redemption to the
$1,000 per share liquidation value. After this change, the
conversion feature no longer met the bifurcation criteria in
SFAS No. 133. We recorded non-cash charges of
$3.1 million in 2006 to reflect the increase in the fair
value of the conversion feature from July 5, 2006 to
October 20, 2006. The increase in the fair value of the
conversion feature resulted from the increase in our stock price
during this period of time. We reclassified the $14 million
estimated fair value of the conversion feature on
October 20, 2006 to additional paid-in capital pursuant to
the guidance in Emerging Issues Task Force Issue
No. 06-7,
Issuer’s Accounting for a Previously Bifurcated
Conversion Option in a Convertible Debt Instrument When the
Conversion Option No Longer Meets the Bifurcation Criteria in
FASB Statement No. 133 (“EITF Issue
No. 06-7”).
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS No. 157”). Among other
requirements, SFAS No. 157 defines fair value and
establishes a framework for measuring fair value and also
expands disclosure about the use of fair value to measure assets
and liabilities. SFAS No. 157 is effective beginning
the first fiscal year that begins after November 15, 2007.
We are still evaluating the impact of SFAS No. 157;
however, we do not believe the adoption will have a significant
impact on our financial position, results of operations and cash
flows.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, (“SFAS No. 159”).
SFAS No. 159 expands opportunities to use fair value
measurement in financial reporting and permits entities to
choose to measure many financial instruments and certain other
items at fair value. SFAS No. 159 is effective
beginning the first fiscal years that begins after
November 15, 2007. We do not currently intend to expand the
use of fair value measurements in our financial reporting.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), “Business Combinations”
(“SFAS No. 141(R)”), which replaces
SFAS No. 141, “Business
Combinations.” SFAS No. 141(R) retains the
underlying concepts of SFAS No. 141 that require all
business combinations to be accounted for at fair value under
the acquisition method of accounting, however,
SFAS No. 141(R) significantly changes certain aspects
of the prior guidance including: (i) acquisition-related
costs, except for those costs incurred to issue debt or equity
securities, will no longer be capitalized and must be expensed
in the period incurred; (ii) non-controlling interests will
be valued at fair value at the acquisition date;
(iii) in-process research and development will be recorded
at fair value as an indefinite-lived intangible asset at the
acquisition date; (iv) restructuring costs associated with
a business combination will no longer be capitalized and must be
expensed subsequent to the acquisition date; and
(v) changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date will no
longer be recorded as an adjustment of goodwill, rather such
changes will be recognized through income tax expense or
directly in contributed capital. SFAS 141(R) is effective
for all business combinations having an acquisition date on or
after the beginning of the first annual period subsequent to
December 15, 2008, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax
contingencies. SFAS 141(R) amends
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SFAS 109 such that adjustments made to valuation allowances
on deferred taxes and acquired tax contingencies associated with
acquisitions that closed prior to the effective date of
SFAS 141(R) would also apply the provisions of
SFAS 141(R). We are currently evaluating the effects that
SFAS 141(R) may have on our financial statements.
We are exposed to certain market risks in the ordinary course of
our business. These risks result primarily from changes in
foreign currency exchange rates and interest rates. In addition,
our international operations are subject to risks related to
differing economic conditions, changes in political climate,
differing tax structures, and other regulations and restrictions.
Foreign currency exchange rates. Our
international operations expose us to foreign currency exchange
rate changes that could impact translations of foreign
denominated assets and liabilities into U.S. dollars and
future earnings and cash flows from transactions denominated in
different currencies. International revenues represented 40% of
our total revenues in 2007 as compared to 39% and 41% in 2006
and 2005, respectively. In addition, the identifiable net assets
of our foreign operations totaled 28% of consolidated net assets
at December 31, 2007 and 2006. Our exposure to currency
exchange rate changes is diversified due to the number of
different countries in which we conduct business. We operate
outside the United States primarily through wholly owned
subsidiaries in Europe, Asia/Pacific, Canada and Latin America.
We have determined that the functional currency of each of our
foreign subsidiaries is the local currency and as such, foreign
currency translation adjustments are recorded as a separate
component of stockholders’ equity. Changes in the currency
exchange rates of our foreign subsidiaries resulted in our
reporting unrealized foreign currency translation gains of
$3.3 million and $2.0 million in 2007 and 2006,
respectively and an unrealized foreign currency translation loss
of $1.0 million in 2005.
Foreign currency gains and losses will continue to result from
fluctuations in the value of the currencies in which we conduct
operations as compared to the U.S. Dollar, and future
operating results will be affected to some extent by gains and
losses from foreign currency exposure. We prepared sensitivity
analyses of our exposures from foreign net working capital as of
December 31, 2007 to assess the impact of hypothetical
changes in foreign currency rates. Based upon the results of
these analyses, a 10% adverse change in all foreign currency
rates from the December 31, 2007 rates would result in a
currency translation loss of $1.7 million before tax.
We use derivative financial instruments, primarily forward
exchange contracts, to manage a majority of the foreign currency
exchange exposure associated with net short-term foreign
denominated assets and liabilities which exist as part of our
ongoing business operations. The exposures relate primarily to
the gain or loss recognized in earnings from the settlement of
current foreign denominated assets and liabilities. We do not
enter into derivative financial instruments for trading or
speculative purposes. The forward exchange contracts generally
have maturities of less than 90 days, and are not
designated as hedging instruments under SFAS No. 133.
Forward exchange contracts are
marked-to-market
at the end of each reporting period, with gains and losses
recognized in other income offset by the gains or losses
resulting from the settlement of the underlying foreign
denominated assets and liabilities.
At December 31, 2007, we had forward exchange contracts
with a notional value of $28.4 million and an associated
net forward contract liability of $131,000. At December 31,
2006, we had forward exchange contracts with a notional value of
$20.7 million and an associated net forward contract
liability of $22,000. The net forward contract liabilities are
included in accrued expenses and other current liabilities. The
notional value represents the amount of foreign currencies to be
purchased or sold at maturity and does not represent our
exposure on these contracts. We prepared sensitivity analyses of
the impact of changes in foreign currency exchange rates on our
forward exchange contracts at December 31, 2007. Based on
the results of these analyses, a 10% adverse change in all
foreign currency rates from the December 31, 2007 rates
would result in a net forward contract liability of
$2.5 million that would increase the underlying currency
transaction loss on our net foreign assets. We recorded a
foreign currency exchange contract gain of $147,000 in 2007 and
contract losses of $316,000 and $464,000 in 2006 and 2005,
respectively.
Interest rates. Through first quarter 2006, we
invested our cash in a variety of financial instruments
denominated in U.S. dollars, including bank time deposits
and variable and fixed rate obligations of the
U.S. Government and its agencies, states, municipalities,
commercial paper and corporate bonds, and classified
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all of our investments as
available-for-sale
in accordance with Statement of Financial Accounting Standards
No. 115, “Accounting for Certain Investments in
Debt and Equity Securities.” We liquidated
substantially all of our investments through sales or maturities
in second quarter 2006 in order to generate cash to complete the
acquisition of Manugistics. There were no securities held as of
December 31, 2007 and 2006 and our excess cash balances
were primarily invested in money market accounts. Cash balances
in foreign currencies overseas are operating balances and are
invested in short-term deposits of the local operating bank.
Interest income earned on our investments is reflected in our
financial statements under the caption “Other income
(expense), net.” Our future interest income may fall short
of expectations due to changes in interest rates.
We are exposed to interest rate risk in connection with our
long-term debt which provides for quarterly interest payments at
the London Interbank Offered Rate (“LIBOR”) + 2.25%.
To manage this risk, we entered into an interest rate swap
agreement on July 28, 2006 to fix LIBOR at 5.365% on
$140 million, or 80% of the aggregate term loans. We have
structured the interest rate swap with decreasing notional
amounts to match the expected pay down of the debt. The notional
value of the interest rate swap was $85.5 million at
December 31, 2007 and represented approximately 86% of the
aggregate term loan balance. The interest rate swap agreement is
effective through October 5, 2009 and has been designated a
cash flow hedge derivative. SFAS No. 133 requires
derivatives to be recorded as either an asset or a liability in
the balance sheet at fair value. Changes in the fair value of
derivatives that are designated as highly effective and qualify
as a cash flow hedge are deferred and recorded as a component of
“Accumulated other comprehensive income (loss)” until
net income is affected by the variability of cash flows of the
hedged transaction (i.e., that quarterly payment of interest).
When the hedged transaction affects earnings, the resulting gain
or loss is reclassified from “Accumulated other
comprehensive income (loss)” to the consolidated statement
of income on the same line as the underlying transaction (i.e.,
interest expense). A change in the fair value of an ineffective
portion of a hedging derivative is recognized immediately in
earnings. We evaluate the effectiveness of the cash flow hedge
derivative on a quarterly basis. As of December 31, 2007,
the hedge was highly effective and we have recorded a net
unrealized loss of $290,000 in “Accumulated other
comprehensive income (loss).”
Our consolidated financial statements as of December 31,
2007 and 2006, and for each of the three years in the period
ended December 31, 2007, together with the report of the
independent registered public accounting firm of
Deloitte & Touche LLP, are included in this
Form 10-K
as required by
Rule 14a-3(b).
None
Disclosure Controls and Procedures. During and
subsequent to the reporting period, and under the supervision
and with the participation of our management, including our
principal executive officer and principal financial and
accounting officer, we conducted an evaluation of our disclosure
controls and procedures that were in effect at the end of the
period covered by this report. Disclosure controls and
procedures is defined under
Rule 13a-15(e)
of the Securities Exchange Act of 1934 (the “Act”) as
those controls and other procedures of an issuer that are
designed to ensure that the information required to be disclosed
by the issuer in the reports it files or submits under the Act
is recorded, processed, summarized and reported, within the time
periods specified in the Commission’s rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it
files or submits under the Act is accumulated and communicated
to the issuer’s management, including its principal
executive officer and principal financial officer, or persons
performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on their
evaluation, our principal executive officer and principal
financial and accounting officer have concluded that our
disclosure controls and procedures that were in effect on
December 31, 2007 were effective to ensure that information
required to be disclosed in our reports to be filed under the
Exchange Act is accumulated and communicated to management,
including the chief executive officer and chief financial
officer, to allow timely decisions regarding disclosures and is
recorded, processed,
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summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms.
Management’s Report on Internal Control Over Financial
Reporting. Our management is responsible for
establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f).
Management conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the
Internal Control — Integrated Framework,
management concluded that our internal control over financial
reporting was effective as of December 31, 2007. The
effectiveness of our internal control over financial reporting
as of December 31, 2007 has been audited by
Deloitte & Touche, LLP, an independent registered
accounting firm, as stated in their attestation report, which is
included herein.
Changes in Internal Control Over Financial
Reporting. The term “internal control over
financial reporting” is defined under
Rule 13a-15(f)
of the Act and refers to the process of a company that is
designed by, or under the supervision of, the issuer’s
principal executive and principal financial officers, or persons
performing similar functions, and effected by the issuer’s
board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that: (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the issuer; (ii) provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the issuer are being made only in accordance
with authorizations of management and directors of the issuer;
and (iii) provide reasonable assurance regarding the
prevention or timely detection of unauthorized acquisition, use
or disposition of the issuer’s assets that could have a
material effect on the financial statements.
There were no changes in our internal controls over financial
reporting during the three months ended December 31, 2007
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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To the Board of Directors and Stockholders of
JDA Software Group, Inc.
Scottsdale, Arizona
We have audited the internal control over financial reporting of
JDA Software Group, Inc. and subsidiaries (the
“Company”) as of December 31, 2007, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on the criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2007 of the Company and our report dated
March 14, 2008 expressed an unqualified opinion on those
financial statements and included an explanatory paragraph
regarding the Company’s 2007 change in its method of
accounting for income taxes to comply with FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes,
an Interpretation of FASB Statement No. 109.”
/s/ DELOITTE &
TOUCHE LLP
Phoenix, Arizona
March 14, 2008
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Certain information required by Part III is omitted from
this
Form 10-K,
as we intend to file our Proxy Statement pursuant to
Regulation 14A not later than 120 days after the end
of the fiscal year covered by this
Form 10-K,
and certain information included therein is incorporated herein
by reference.
Our directors and executive officers, and their ages as of
March 15, 2008, are as follows:
James D. Armstrong has been a Director and Chairman of
the Board since co-founding our Company in 1985 (Co-Chairman
from January 1999 to August 2000). Mr. Armstrong also
served as our Chief Executive Officer from 1985 to July 2003,
(Co-Chief Executive Officer from January 1999 to July 1999).
Mr. Armstrong founded JDA Software Services, Ltd., a
Canadian software development company, in 1978 and served as its
President until 1987. Mr. Armstrong is Chairman of Omnilink
Systems, Inc., a privately-held high-tech company that provides
Vital Status Services tracking via GPS, cellular triangulation,
RFID and situation-specific sensor devices. Mr. Armstrong
also serves as a Trustee for the Arizona State University
Foundation, and is on the Board of Directors of Rancho Feliz
Charitable Organization. Mr. Armstrong studied engineering
at Ryerson Polytechnic Institute in Toronto, Ontario.
Orlando Bravo has been a Director since July 2006 and was
appointed to the Board in connection with the issuance of the
Series B Convertible Preferred Stock to funds affiliated
with Thoma Cressey Bravo (“TCB” and formerly known as
Thoma Cressey Equity Partners, Inc.), a private equity
investment firm. Mr. Bravo has been a Managing Partner at
TCB since its formation in 1998 and is responsible for
TCB’s software investments. Over the past four years,
Mr. Bravo has led or co-led the buyout of seven software
companies with an aggregate enterprise value of over
$2 billion and closed 17 add-on acquisitions with an
aggregate enterprise value of $1 billion. Mr. Bravo
also serves as a director of several software companies in which
TCB holds an investment including Activant
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Solutions, Inc., a provider of business management solutions for
small and medium-sized retail and wholesale distribution
businesses, Datatel, Inc., a provider of information management
software and services to higher education institutions and
Made2Manage Systems, a provider of enterprise information
systems for small and midsized manufacturers. Mr. Bravo
previously served as Chairman of Prophet 21, Inc., a provider of
enterprise software solutions and services to the durable goods
industry and as a director of VECTORsgi, a provider of financial
transaction processing solutions to financial institutions prior
to the sale of those companies by TCB. Prior to joining TCB,
Mr. Bravo worked in the New York-based Mergers and
Acquisitions group of Morgan Stanley & Co.
Mr. Bravo attended Brown University where he received
Bachelor of Arts degrees in Economics and Political Science,
Stanford University where he received a Master of Business
Administration degree from the Graduate School of Business and a
Juris Doctorate from the Stanford Law School. Mr. Bravo
currently serves on the Board of Visitors of Stanford Law School.
J. Michael Gullard has been a Director since January
1999. Mr. Gullard has been the General Partner of
Cornerstone Management, a venture capital and consulting firm
specializing in software and data communications companies since
1984. Mr. Gullard also serves as Chairman of the Board and
Audit Committee of DynTek, Inc., a publicly-held company which
provides professional technology services to government,
education and mid-market commercial customers, and as a Director
and Chairman of the Audit Committee of Alliance Semiconductor
Corporation, a publicly-held corporation that provides
high-value memory, mixed-signal and system solution
semiconductor products designed, developed and marketed for the
communications, computing, consumer and industrial markets and
as a director of Proxim Wireless Corporation, a publicly-held
company which provides wide-band wireless solutions for a
variety of applications. Mr. Gullard previously served as
Chairman of Merant PLC (formerly Micro Focus Group Ltd.) from
1996 to 2004, a former publicly-held corporation headquartered
in England with extensive operations in the United States that
specialized in change management software tools and merged with
Serena Software, Inc. in 2004, as Chairman of NetSolve,
Incorporated from 1992 to 2004, a former publicly-held
corporation which provides IT infrastructure management services
on an out-sourced basis that was sold to Cisco Corporation in
2004, as Chief Executive Officer and Chief Financial Officer of
Telecommunications Technology, Inc. from 1979 to 1984, and held
a variety of financial and operational management positions at
Intel Corporation from 1972 to 1979. Mr. Gullard is
currently Chairman of Mainsoft Corp., a private company, and
serves on the Board of Directors of Planar Systems, a
publicly-held designer and distributor of specialty displays.
Mr. Gullard has formerly served as a Director of other
technology companies. Mr. Gullard attended Stanford
University where he received a Bachelor of Arts Degree in
Economics and a Masters Degree from the Graduate School of
Business.
Douglas G. Marlin has been a Director since May 2001.
Mr. Marlin served as President and principal owner of
Marlin Ventures, Inc., a Canadian-based consulting firm, from
1997 to 2000. From 1987 to 1996, Mr. Marlin served as
President of JDA Software Services, Ltd., and from 1981 to 1987
as its Vice President. Prior to that, Mr. Marlin served in
a variety of technical and development positions with IBM from
1973 to 1981. Mr. Marlin currently serves on the Board of
Directors of Zed I Solutions, a Canadian technology company that
develops hardware and software for real time industrial process
monitoring, and Aero-Mechanical Services Ltd, a Canadian
technology company providing Internet-based aircraft monitoring
services. Mr. Marlin attended the University of Calgary
where he received a Bachelor of Science Degree in Mathematics.
Jock Patton has been a Director since January 1999.
Mr. Patton is a private investor and a Director of Janus
Capital Group. Mr. Patton previously served as Chief
Executive Officer of Rainbow Multimedia Group, Inc., a producer
of digital entertainment, from 1999 to 2001. From 1992 to 1997,
Mr. Patton served as a Director and President of StockVal,
Inc., an SEC registered investment advisor providing securities
analysis software and proprietary data to mutual funds, major
money managers and brokerage firms worldwide. Prior to 1992,
Mr. Patton was a Partner and Director in the law firm of
Streich Lang where he founded and headed the
Corporate/Securities Practice Group. Mr. Patton has
previously served on the Board of Directors of various public
and private companies, including Swift Transportation Company
where he was Chairman until the company was sold in May 2007.
Mr. Patton holds an A.B. Degree in Political Science and
Juris Doctorate, both from the University of California.
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Other
Executive Officers:
Hamish N. J. Brewer has served as our President and Chief
Executive Officer since August 2003. Mr. Brewer previously
served as President from March 2001 to July 2003, as Senior Vice
President, Sales from 2000 to March 2001, as Senior Vice
President, Enterprise Systems, from 1999 to 2000, as Senior Vice
President, International during 1998 to 1999, as Director of our
Europe, Middle East and African operations from 1996 to 1998,
and as a Marketing Representative from 1994 to 1996. Prior to
joining JDA, Mr. Brewer served as a Retail Marketing
Specialist with IBM from 1986 to 1990 and in various operational
positions with a privately-held retail sales organization
located in England. Mr. Brewer received a Bachelor of
Science and a Bachelor of Commerce degree from the University of
Birmingham in England.
Kristen L. Magnuson has served as our Chief Financial
Officer since September 1997 and was promoted to Executive Vice
President from Senior Vice President in March 2001. Prior to
joining JDA, Ms. Magnuson served as Vice President of
Finance and Planning for Michaels Stores, Inc., a publicly-held
arts and craft retailer from 1990 to 1997, as Senior Vice
President and Controller of MeraBank FSB, an $8 billion
financial institution, from 1987 to 1990, and various positions
including Audit Principal in the audit department of
Ernst & Young from 1978 to 1987. Ms. Magnuson
currently serves on the Board of Directors of Convio, Inc., a
privately-held internet software and services company that
provides online Constituent Relationship Management solutions
for nonprofit organizations. Ms. Magnuson is a Certified
Public Accountant and received a Bachelor of Business
Administration degree in Accounting from the University of
Washington.
Christopher J. Koziol has served as our Chief Operating
Officer since June 2005. Prior to joining JDA, Mr. Koziol
served as Managing Director of Mission Advisors, LLC, a
privately-held firm that provides early stage turnaround
consulting, strategy, business development and operations
management advisory services to small and medium-sized
enterprises from 2001 to 2005. From 1985 to 2001,
Mr. Koziol held a variety of executive positions, including
President and Chief Operating Officer, with MicroAge, Inc., a
publicly-held distributor and integrator of information
technology products and services and a Fortune 500 company,
and as an Account Executive with Western Office Systems from
1983 to 1985. Mr. Koziol worked in various sales and sales
management positions with the Pepsi-Cola Bottling Group from
1982 to 1983. Mr. Koziol received a Bachelor of Science
degree in Business Administration, Marketing from the University
of Arizona and is a graduate of the Harvard Business School
Program for Management Development.
Philip Boland has served as our Senior Vice President,
Worldwide Consulting Services since June 2006. Mr. Boland
previously served as Regional Vice President of Customer
Solutions and Services, Asia Pacific from 1999 to 2005, as
Director of Consulting Services, Asia Pacific from 1998 to 1999,
and as Country Manager, Australia and New Zealand from 1996 to
1998. Prior to joining JDA, Mr. Boland served as a
Principal Consultant for the Retail Industry IT practice at
Price Waterhouse, Australia from 1995 to 1996, in various
management positions including Vice President of Development and
Professional Services for Uniquest, Inc. (formerly
PRJ & Associates), a global supplier of retail
application solutions and implementation services from 1986 to
1995 and in various buying, sales and IT management positions
with Coles Myer, one of Australia’s largest retailers, from
1975 to 1986. Mr. Boland received a Bachelor of Arts degree
in Economics from the University of Melbourne and a Post
Graduate Diploma in Marketing from the David Syme Business
School of Caulfield Institute of Technology.
Brian P. Boylan has served as our Senior Vice President,
Human Resources since April 2007. Mr. Boylan previously
served as our Vice President, Human Resources from June 2005 to
March 2007. Prior to joining JDA, Mr. Boylan was a founding
partner of Alliance HR Advisors, a human resources consulting
firm from 2004 to 2005. Mr. Boylan previously served as
Senior Vice President of Legal Affairs and Human Resources of
Asarco Incorporated, an international natural resource company
from 2001 to 2003, where he also served in various executive and
management positions from 1988 through 2003, including Director
of Employee Relations, Operations Manager and Vice President of
Human Resources. Mr. Boylan also served as Assistant
General Counsel for the New York City Office of Labor Relations
Office from 1986 to 1987. Mr. Boylan received a Bachelor of
Business Administration degree in Labor-Management Relations
from Pace University and a Juris Doctor degree from the Brooklyn
Law School.
G. Michael Bridge has served as our Senior Vice
President and General Counsel since August 2004. Mr. Bridge
previously served as Vice President and General Counsel from
July 1999 to July 2004. Prior to
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joining JDA, Mr. Bridge served as Corporate Counsel of
Vivid Semiconductor, Inc., a privately-held semiconductor
company from 1998 to 1999, as Corporate Counsel of
PictureVision, Inc, a privately-held Internet company from 1997
to 1998, and as Vice President and General Counsel of USAGroup
TRG, a privately-held software company from 1991 to 1997. From
1989 to 1991 Mr. Bridge served as an associate in the
corporate and securities department of Piper &
Marbury. Mr. Bridge’s education includes a Bachelor of
Arts degree from the University of Southern California, and a
Juris Doctor degree from Cornell University.
Tom Dziersk has served as our Senior Vice President,
Americas since August 2006. Prior to joining JDA,
Mr. Dziersk served as President and Chief Executive Officer
of SAMSys, Inc., a privately-held manufacturer of radio
frequency identification reader (RFID) technology, from January
2006 until the sale of the company in April 2006, and as
President and Chief Executive Officer of ClearOrbit, Inc., a
privately-held supply chain execution automation company from
December 2000 to August 2005. Prior to that, Mr. Dziersk
served as Senior Vice President of Sales and Marketing of
Essentus International, Inc. (formerly Richter Systems), a
privately-held provider of business-to-business portal
functionality and enterprise resource planning software
solutions for the apparel and footwear industries from July 1999
to November 2000, and in various management and sales positions
with JBA International, Inc., an enterprise resource planning
software firm, from June 1991 to May 1999 and with Loadstar
Computer Systems, a provider of specialized software solutions
for the automotive aftermarket industry, from June 1985 to June
1991. Mr. Dziersk received a Bachelor of Arts degree in
Economics from the University of Michigan.
Laurent F. Ferrere II has served as our Senior Vice
President, Product Management and Chief Marketing Officer since
July 2007. Prior to joining JDA, Mr. Ferrere served as
Chief Marketing Officer and Vice President of Sales Operations
of Manhattan Associates, a publicly-held software company from
2004 to 2006, as a founding executive of InterimOne, a
privately-held executive management a strategy advisory firm
from 2001 to 2004, as Senior Vice President of Vastera, a global
trade management firm from 1997 to 2001, as a Principle and
Director of Industry Marketing for JDEdwards, a publicly-held
software company from 1992 to 1997 and in various management
positions with Andersen Consulting (now Accenture) from 1981 to
1992. Mr. Ferrere has previously served on the Board of
Directors of NetRegulus, a venture-backed provider of web-based
enterprise regulatory management software and in Board advisory
roles with various software and marketing companies.
Mr. Ferrere received a Bachelor of Science degree in
Business and Computer Science from Western Illinois University.
David J. Johnston has served as our Senior Vice
President, Supply Chain since April 2007. Mr. Johnston
previously served as our Vice President of Forecasting and
Replenishment Solutions from January 2006 to March 2007 and as
Vice President of Product Marketing from September 2001 to
December 2005. Prior to joining JDA, Mr. Johnston served as
Vice President, Industry Marketing and Partner Relationships
from 1999 to 2001 and as Vice President of Product Development
from 1995 to 1998 of E3 Corporation, a privately-held software
company acquired by JDA in September 2001, as a Development
Manager for IBM Corporation from 1989 to 1995 and in various
information technology positions for D.H. Holmes Company
Limited, a publicly-held department store from 1984 to 1989.
Mr. Johnston studied computer science at Louisiana State
University and the University of New Orleans.
David R. King has served as our Senior Vice President,
Product Development since January 2004. Prior to joining JDA,
Mr. King served as Vice President Product Planning of Geac
Computer Corp. Ltd, a publicly-held Canadian software company,
from August 2003 to December 2003, as Sr. Vice President of
Product Development and Chief Technology Officer of Comshare,
Inc., a publicly-held software company, from 1997 to 2003, and
as its Director of Applied Technology and Research from 1991 to
1997, and in various management positions including Director,
Advanced Product Design and Development of Execucom Systems
Corporation, a privately-held provider of decision and executive
support systems, from 1983 to 1991. Prior to that, Mr. King
was a full-time faculty member responsible for teaching
undergraduate and graduate courses in statistics, research
methods, mathematical and computer modeling at Old Dominion
University, the University of Maryland, and the University of
South Carolina, from 1969 to 1982. Mr. King currently
serves on the advisory boards for MIS at the University of
Georgia and Arizona State University Technopolis. In addition,
Mr. King has written over 50 articles and books in the
areas of decision support, business intelligence and electronic
commerce. Mr. King’s education includes a Bachelor of
Sociology Degree, a Master of Sociology Degree, and a Ph.D. in
Sociology with a minor in Mathematical Statistics from the
University of North Carolina.
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Christopher J. Moore has served as our Senior Vice
President, Customer Support Solutions since January 2004.
Mr. Moore previously served as our Vice President, US
Consulting Services from 1999 to 2003, as Vice President, CSG
Operations in 1999, as a Regional Director, CSG from 1997 to
1998, as Associate Consulting Director from 1995 to 1997, as
Senior Implementation Manager from 1994 to 1995, and in various
other programmer, analyst and consulting positions from 1991 to
1993. Prior to joining JDA, Mr. Moore served in various
management positions with Vormittag Associates, Inc. a
privately-held software and consulting services distributor,
from 1990 to 1991, Sunrise Software Systems, a privately-held
POS hardware and software distributor, from 1989 to 1990, and
Computer Generated Solutions, a privately-held consulting
company, from 1987 to 1989. Mr. Moore attended Polytechnic
University and received a Bachelor of Science degree in Computer
Science.
Wayne J. Usie has served as our Senior Vice President,
Retail since July 2006. Mr. Usie previously served as our
Senior Vice President, Americas from January 2003 to June 2006
and as Senior Vice President, Product Development from January
2001 to December 2002. Prior to joining JDA, Mr. Usie
served as Vice President — Information Technology for
Family Dollar Stores, Inc., a publicly-held mass merchant
discount retailer from 1997 to 2000, as Vice
President — Chief Financial Officer and Chief
Information Officer of Campo Electronics, Appliances, and
Computers, Inc., a publicly-held consumer electronics retailer,
from 1996 to 1997, as President and Chief Executive Officer of
International Networking & Computer Consultants, Inc.,
a privately-held software integration consulting firm, from 1992
to 1996, and in various management positions in the regional
accounting firm of Broussard, Poche, Lewis & Breaux
from 1988 to 1992. Mr. Usie attended Louisiana State
University and received a Bachelor of Science Degree in Business
Administration — Accounting.
Information relating to the designation of our Audit Committee
Financial Expert, beneficial ownership reporting compliance
under Section 16(a) of the Exchange Act, and the adoption
of a Code of Ethics, is incorporated by reference to the proxy
statement under the captions “Corporate
Governance — Committees of our Board of
Directors,” “Section 16(a) Beneficial Ownership
Reporting Compliance,” “Report of the Audit
Committee,” and “Corporate Governance — Code
of Business Conduct and Ethics.”
The information relating to executive compensation is
incorporated by reference to the Proxy Statement under the
captions “Executive Compensation — Compensation
Discussion and Analysis,” “Executive
Compensation — Summary Compensation Table,”
“Executive Compensation — Grants of Plan Based
Awards,” “Executive Compensation —
Outstanding Equity Awards at Fiscal Year-End,”
“Executive Compensation — Option Exercises and
Stock Vested,” “Potential Payments upon Termination or
Change in Control,” “Director Compensation,” and
“Compensation Committee Interlocks and Insider
Participation.”
The information relating to security ownership of certain
beneficial owners and management and related stockholder matters
is incorporated by reference to the Proxy Statement under the
captions “Security Ownership of Certain Beneficial Owners
and Management,” and “Securities Authorized for
Issuance under Equity Compensation Plans.”
The information relating to certain relationships and related
transactions is incorporated by reference to the Proxy Statement
under the caption “Transactions with Related Persons.”
The information relating to principal accountant fees and
services is incorporated by reference to the Proxy Statement
under the captions “Report of the Audit
Committee — Principal Accounting Firm Fees” and
“Report of the Audit Committee — Policy for
Approving Audit and Permitted Non-Audit Services of the
Independent Auditor.”
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a. The following documents are filed as part of this Report:
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets — December 31, 2007
and 2006
Consolidated Statements of Operations — Three Years
Ended December 31, 2007
Consolidated Statements of Stockholders’ Equity and
Comprehensive Income — Three Years Ended
December 31, 2007
Consolidated Statements of Cash Flows — Three Years
Ended December 31, 2007
Notes to Consolidated Financial Statements — Three
Years Ended December 31, 2007
2. Financial Statement Schedules — None
3. Exhibits — See Exhibit Index.
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To the Board of Directors and Stockholders of
JDA Software Group, Inc.
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheets of
JDA Software Group, Inc. and subsidiaries (the
“Company”) as of December 31, 2007 and 2006, and
the related consolidated statements of operations,
stockholders’ equity and comprehensive income, and cash
flows for each of the three years in the period ended
December 31, 2007. 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 the standards of the
Public Company Accounting Oversight Board (United States). 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,
2007 and 2006, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 17 to the financial statements, the
Company changed its method of accounting for income taxes in
2007 to comply with FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109.”
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
December 31, 2007, based on the criteria established in
Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 14, 2008 expressed an
unqualified opinion on the Company’s internal control over
financial reporting.
/s/ DELOITTE &
TOUCHE LLP
Phoenix, Arizona
March 14, 2008
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