UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period from to
Commission File Number: 0-27876
JDA SOFTWARE GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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86-0787377
(I.R.S. Employer
Identification No.)
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14400 North 87
th
Street
Scottsdale, Arizona 85260
(480) 308-3000
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) had been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Acts.
(Check one):
Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
The number of shares outstanding of the Registrants Common Stock, $0.01 par value, was 41,679,360
as of May 3, 2010.
JDA SOFTWARE GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts, unaudited)
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March 31,
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December 31,
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2010
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2009
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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155,817
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$
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75,974
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Restricted cash
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11,698
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287,875
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Accounts receivable, net
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107,881
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68,883
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Income tax receivable
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1,050
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Deferred tax asset
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57,828
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19,142
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Prepaid expenses and other current assets
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29,705
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15,667
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Total current assets
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363,979
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467,541
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Non-Current Assets:
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Property and equipment, net
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43,296
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40,842
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Goodwill
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201,316
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135,275
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Other Intangibles, net:
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Customer-based intangibles
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167,395
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99,264
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Technology-based intangibles
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44,264
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20,240
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Marketing-based intangibles
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13,960
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157
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Deferred tax asset
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268,821
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44,350
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Other non-current assets
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17,154
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13,997
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Total non-current assets
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756,206
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354,125
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Total Assets
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$
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1,120,185
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$
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821,666
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities:
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Accounts payable
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$
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11,063
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$
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7,192
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Accrued expenses and other liabilities
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74,068
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45,523
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Income taxes payable
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3,489
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Deferred revenue
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127,905
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65,665
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Total current liabilities
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213,036
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121,869
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Non-Current Liabilities:
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Long-term debt
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272,333
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272,250
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Accrued exit and disposal obligations
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6,458
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7,341
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Liability for uncertain tax positions
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14,215
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8,770
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Deferred revenue
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28,942
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Total non-current liabilities
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321,948
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288,361
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Total Liabilities
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534,984
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410,230
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Commitments and Contingencies (Note 8)
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Stockholders Equity
:
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Preferred stock, $.01 par value; authorized 2,000,000 shares; none
issued or outstanding
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Common stock, $.01 par value; authorized 50,000,000 shares; issued
43,528,992 and 36,323,245 shares, respectively
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435
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363
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Additional paid-in capital
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553,705
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361,362
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Deferred compensation
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(15,906
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)
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(5,297
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)
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Retained earnings
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69,746
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74,014
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Accumulated other comprehensive income
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2,706
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3,267
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Less treasury stock, at cost, 1,901,490 and 1,785,715 shares, respectively
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(25,485
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)
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(22,273
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)
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Total stockholders equity
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585,201
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411,436
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Total liabilities and stockholders equity
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$
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1,120,185
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$
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821,666
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See notes to condensed consolidated financial statements.
3
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share data, unaudited)
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Three Months Ended
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March 31,
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2010
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2009
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REVENUES:
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Software licenses
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$
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24,437
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$
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14,357
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Subscriptions and other recurring revenues
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4,287
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968
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Maintenance services
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57,060
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42,997
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Product revenues
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85,784
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58,322
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Consulting services
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43,002
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23,034
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Reimbursed expenses
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2,845
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1,977
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Service revenues
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45,847
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25,011
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Total revenues
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131,631
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83,333
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COST OF REVENUES:
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Cost of software licenses
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1,008
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602
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Amortization of acquired software technology
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1,576
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1,008
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Cost of maintenance services
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12,033
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10,549
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Cost of product revenues
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14,617
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12,159
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Cost of consulting services
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35,269
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19,382
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Reimbursed expenses
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2,845
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1,977
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Cost of service revenues
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38,114
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21,359
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Total cost of revenues
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52,731
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33,518
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GROSS PROFIT
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78,900
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49,815
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OPERATING EXPENSES:
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Product development
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17,277
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12,573
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Sales and marketing
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21,112
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14,252
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General and administrative
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17,697
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11,026
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Amortization of intangibles
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8,566
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6,076
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Restructuring charges
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7,758
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1,430
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Acquisition-related costs
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6,743
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Total operating expenses
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79,153
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45,357
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OPERATING INCOME (LOSS)
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(253
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)
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4,458
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Interest expense and amortization of loan fees
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(6,086
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)
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(239
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)
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Interest income and other, net
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1,123
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(243
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)
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INCOME (LOSS) BEFORE INCOME TAXES
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(5,216
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)
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3,976
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Income tax (provision) benefit
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|
948
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(1,332
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)
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NET INCOME (LOSS)
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$
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(4,268
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)
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$
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2,644
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BASIC EARNINGS (LOSS) PER SHARE
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$
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(.11
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)
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$
|
.08
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DILUTED EARNINGS (LOSS) PER SHARE
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$
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(.11
|
)
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$
|
.08
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SHARES USED TO COMPUTE
:
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Basic earnings (loss) per share
|
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39,343
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34,961
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Diluted earnings (loss) per share
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39,343
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35,075
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See notes to condensed consolidated financial statements.
4
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
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Three Months Ended
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March 31,
|
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2010
|
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|
2009
|
|
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NET INCOME (LOSS)
|
|
$
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(4,268
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)
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$
|
2,644
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|
|
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|
|
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OTHER COMPREHENSIVE LOSS:
|
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Foreign currency translation loss
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(561
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)
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(614
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)
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|
|
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Total other comprehensive loss
|
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(561
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)
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|
|
(614
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)
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|
|
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|
|
|
|
|
|
|
|
|
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COMPREHENSIVE INCOME (LOSS)
|
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$
|
(4,829
|
)
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|
$
|
2,030
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|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
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|
|
|
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Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
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|
2009
|
|
|
|
|
|
|
|
|
|
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OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,268
|
)
|
|
$
|
2,644
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
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Depreciation and amortization
|
|
|
13,148
|
|
|
|
9,411
|
|
Amortization of loan origination fees, debt issuance costs and original issue discount
|
|
|
427
|
|
|
|
|
|
Share-based compensation expense
|
|
|
3,277
|
|
|
|
1,410
|
|
Net gain on disposal of property and equipment
|
|
|
(5
|
)
|
|
|
(16
|
)
|
Deferred income taxes
|
|
|
(2,546
|
)
|
|
|
1,007
|
|
Changes in assets and liabilities, net of effects from business acquisition:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,211
|
)
|
|
|
13,594
|
|
Income tax receivable
|
|
|
1,076
|
|
|
|
(848
|
)
|
Prepaid expenses and other current assets
|
|
|
(7,889
|
)
|
|
|
(2,964
|
)
|
Accounts payable
|
|
|
550
|
|
|
|
4,474
|
|
Accrued expenses and other liabilities
|
|
|
(11,101
|
)
|
|
|
(15,422
|
)
|
Income tax payable
|
|
|
(2,127
|
)
|
|
|
117
|
|
Deferred revenue
|
|
|
28,864
|
|
|
|
19,648
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
12,195
|
|
|
|
33,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
276,177
|
|
|
|
|
|
Purchase of i2 Technologies, Inc
|
|
|
(213,427
|
)
|
|
|
|
|
Payment of direct costs related to prior acquisitions
|
|
|
(850
|
)
|
|
|
(817
|
)
|
Purchase of other property and equipment
|
|
|
(533
|
)
|
|
|
(1,003
|
)
|
Proceeds from disposal of property and equipment
|
|
|
17
|
|
|
|
16
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
61,384
|
|
|
|
(1,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance of common stock equity plans
|
|
|
10,904
|
|
|
|
2,506
|
|
Purchase of treasury stock and other, net
|
|
|
(3,392
|
)
|
|
|
(3,219
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
7,512
|
|
|
|
(713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(1,248
|
)
|
|
|
(219
|
)
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
79,843
|
|
|
|
30,319
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
75,974
|
|
|
|
32,696
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
155,817
|
|
|
$
|
63,015
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
6
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
4,745
|
|
|
$
|
1,096
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
427
|
|
|
$
|
43
|
|
|
|
|
|
|
|
|
Cash received for income tax refunds
|
|
$
|
928
|
|
|
$
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of i2 Technologies, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets acquired:
|
|
|
|
|
|
|
|
|
Current assets acquired
|
|
$
|
300,097
|
|
|
|
|
|
Property and equipment acquired
|
|
|
3,116
|
|
|
|
|
|
Customer-based intangibles
|
|
|
76,200
|
|
|
|
|
|
Technology-based intangibles
|
|
|
25,600
|
|
|
|
|
|
Marketing-based intangibles
|
|
|
14,300
|
|
|
|
|
|
Long-term deferred tax assets acquired
|
|
|
218,322
|
|
|
|
|
|
Other non-current assets acquired
|
|
|
3,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identifiable assets acquired
|
|
|
641,560
|
|
|
|
|
|
Goodwill
|
|
|
66,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
707,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
|
|
|
Deferred revenue assumed
|
|
|
(62,614
|
)
|
|
|
|
|
Other current liabilities assumed
|
|
|
(41,128
|
)
|
|
|
|
|
Non-current liabilities assumed
|
|
|
(4,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(107,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired from i2 Technologies, Inc.
|
|
$
|
599,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger consideration to acquire i2 Technologies, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of JDA common stock issued as merger consideration
|
|
$
|
167,979
|
|
|
|
|
|
Cash merger consideration
|
|
|
431,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total merger consideration to acquire i2 Technologies, Inc.
|
|
$
|
599,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash merger consideration
|
|
$
|
431,775
|
|
|
|
|
|
Less cash acquired from i2 Technologies
|
|
|
218,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash expended to acquire i2 Technologies, Inc.
|
|
$
|
213,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
7
JDA SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except percentages, shares, per share amounts, or as otherwise stated)
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of JDA Software Group,
Inc. (we or the Company) have been prepared in accordance with the FASB Standard Accounting
Codification (Codification), which is the authoritative source of generally accepted accounting
principles (GAAP) for nongovernmental entities in the United States. The interim financial
statements do not include all of the information and notes required for complete financial
statements. In the opinion of management, all adjustments considered necessary for a fair and
comparable presentation have been included and are of a normal recurring nature. Operating results
for the three months ended March 31, 2010 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2010. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and the notes thereto included
in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
The preparation of financial statements in conformity with the Codification requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the reporting periods. Actual
results could differ from those estimates.
Certain reclassifications have been made to the consolidated statements of operations for the
three months ended March 31, 2009 to conform to the current presentation. In the consolidated
statement of income, we have reported subscription revenues under the caption Subscriptions and
other recurring revenues. Subscription revenues were previously reported in revenues under the
caption Software licenses and were not material.
2. Acquisition of i2 Technologies, Inc.
On January 28, 2010, we completed the acquisition of i2 Technologies, Inc. (i2) for
approximately $599.8 million, which includes cash consideration of approximately $431.8 million and
the issuance of approximately 6.2 million shares of our common stock with an acquisition date fair
value of approximately $168.0 million, or $26.88 per share, determined on the basis of the closing
market price of our common stock on the date of acquisition (the Merger). The combination of JDA
and i2 creates a market leader in the supply chain management market. We believe this combination
provides JDA with (i) a strong, complementary presence in new markets such as discrete
manufacturing; (ii) enhanced scale; (iii) a more diversified, global customer base of over 6,000
customers; (iv) a comprehensive product suite that provides end-to-end supply chain management
(SCM) solutions; (v) incremental revenue opportunities associated with cross-selling of products
and services among our existing customer base; and (vi) an ability to increase profitability
through net cost synergies within twelve months after the Merger.
Under the terms of the Merger Agreement, each issued and outstanding share of i2 common stock
was converted into the right to receive $12.70 in cash and 0.2562 of a share of JDA common stock
(the Merger Consideration). Holders of i2 common stock did not receive any fractional JDA shares
in the Merger. Instead, the total number of shares that each holder of i2 common stock received in
the Merger was rounded down to the nearest whole number, and JDA paid cash for any resulting
fractional share determined by multiplying the fraction by $26.65, which represents the average
closing price of JDA common stock on Nasdaq for the five consecutive trading days ending three days
prior to the effective date of the Merger.
Each outstanding option to acquire i2 common stock was canceled and terminated at the
effective time of the Merger and converted into the right to receive the Merger Consideration with
respect to the number of shares of i2 common stock that would have been issuable upon a net
exercise of such option, assuming the market value of the i2 common stock at the time of such
exercise was equal to the value of the Merger Consideration as of the close of trading on the day
immediately prior to the effective date of the Merger. Any outstanding option with a per share
exercise price that was greater than or equal to such amount was cancelled and terminated and no
payment was made with respect thereto. In addition, each i2 restricted stock unit award
outstanding immediately prior to the effective time of the Merger was fully vested and cancelled,
and each holder of such awards became entitled to receive the Merger Consideration for each share
of i2 common stock into which the vested portion of the awards would otherwise have been
convertible. Each i2 restricted stock award was vested immediately prior to the effective time of
the Merger and was entitled to receive the Merger Consideration.
8
Each outstanding share of i2s Series B Preferred Stock was converted into the right to
receive $1,100 per share in cash, which is equal to the stated change of control liquidation value
of each such share plus all accrued and unpaid dividends thereon through the effective date of the
Merger.
At the effective time of the Merger, each outstanding warrant to purchase shares of i2s
common stock ceased to represent a right to acquire i2s common stock and was assumed by JDA and
converted into a warrant with the right to receive upon exercise, the Merger Consideration that
would have been received as a holder of i2 common stock if such i2 warrant had been exercised prior
to the effective time of the Merger. In total, 420,237 warrants to purchase i2 common stock at an
exercise price of $15.4675 were assumed and converted into the right to receive the Merger
Consideration upon exercise, including 107,663 shares of JDA common stock.
The Merger is being accounted for using the acquisition method of accounting, with JDA
identified as the acquirer, and the operating results of i2 have been included in our consolidated
financial statements from the date of acquisition. Under the acquisition method of accounting, all
assets acquired and liabilities assumed will be recorded at their respective acquisition-date fair
values. We have allocated all goodwill recorded in the i2 acquisition ($66.0 million) to our
Supply Chain
reportable business segmenting unit (see Note 13). None of the goodwill recorded in
the i2 acquisition is deductible for tax purposes. In addition, we have initially recorded $116.1
million in other intangible assets, including $76.2 million for customer-based intangibles
(maintenance relationships and future technological enhancements, service relationships and a
covenant not-to-compete), $25.6 million for technology-based intangibles consisting of developed
technology and $14.3 million for marketing-based intangibles consisting of trademark and trade
names. However, the purchase price allocation has not been finalized. We are still in the process
of obtaining all information necessary to determine the fair values of the acquired assets and we
have retained an independent third-party appraiser for the intangible assets to assist management
in its valuation. This could result in adjustments to the carrying value of the assets and
liabilities acquired, the useful lives of intangible assets and the residual amount allocated to
goodwill. The preliminary allocation of the purchase price is based on the best estimates of
management and is subject to revision based on the final valuations and estimates of useful lives.
The initial estimated weighted average amortization period for all intangible assets acquired in
this transaction that are subject to amortization is 6.7 years.
The following table summarizes our initial estimate of the fair values of the assets acquired
and liabilities assumed at the date of acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Useful Life
|
|
|
Amortization Period
|
|
Cash
|
|
$
|
218,348
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable acquired
|
|
|
31,711
|
|
|
|
|
|
|
|
|
|
Other current assets acquired
|
|
|
50,038
|
|
|
|
|
|
|
|
|
|
Property and equipment acquired
|
|
|
3,116
|
|
|
|
|
|
|
|
|
|
Customer-based intangibles
|
|
|
76,200
|
|
|
|
1 to 7 years
|
|
|
6 years
|
Technology-based intangibles
|
|
|
25,600
|
|
|
7 years
|
|
|
7 years
|
Marketing-based intangibles
|
|
|
14,300
|
|
|
5 years
|
|
|
5 years
|
Long-term deferred tax assets acquired
|
|
|
218,322
|
|
|
|
|
|
|
|
|
|
Other non-current assets
|
|
|
3,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
641,560
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
66,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
707,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue assumed
|
|
|
(62,614
|
)
|
|
|
|
|
|
|
|
|
Other current liabilities assumed
|
|
|
(41,128
|
)
|
|
|
|
|
|
|
|
|
Other non-current liabilities assumed
|
|
|
(4,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(107,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired from i2 Technologies, Inc.
|
|
$
|
599,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the date of the acquisition, the gross contractual amount of trade accounts
receivable acquired were $35.4 million, of which approximately $3.7 million is expected to be
uncollectable.
Liabilities have been recognized for certain assumed customer and labor disputes of $7.7
million and $268,000, respectively. The potential undiscounted amount of all future payments that
we could be required to make to settle the customer and labor disputes is estimated to range
between $5.2 million and $9.4 million and $73,000 and $1.2 million, respectively.
9
The following unaudited pro-forma consolidated results of operations for the three months
ended March 31, 2010 and 2009 assume the i2 acquisition occurred as of January 1 of each year. The
pro-forma results are not necessarily indicative of the actual
results that would have occurred had the acquisition been completed as of the beginning of
each of the periods presented, nor are they necessarily indicative of future consolidated results.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
146,657
|
|
|
$
|
139,709
|
|
Net loss
|
|
$
|
(18,703
|
)
|
|
$
|
(3,527
|
)
|
Basic loss per share
|
|
$
|
(0.45
|
)
|
|
$
|
(0.09
|
)
|
Diluted loss per share
|
|
$
|
(0.45
|
)
|
|
$
|
(0.09
|
)
|
The amounts of i2 revenues and earnings (loss) included in our consolidated statements of
operations for the three months ended March 31, 2010, and the revenues and earnings (loss) of the
combined entity had the acquisition date been January 1, 2009 or January 1, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Earnings (Loss)
|
i2operating results from January 28, 2010 to March 31, 2010
|
|
$
|
37,261
|
|
|
$
|
*
|
|
i2 operating results from January 1, 2010 to March 31, 2010
|
|
$
|
52,287
|
|
|
$
|
*
|
|
i2 operating results from January 1, 2009 to March 31, 2009
|
|
$
|
56,376
|
|
|
$
|
1,871
|
|
|
|
|
*
|
|
We are unable to provide separate disclosure of the earnings (loss) of i2 from January
28, 2010 (date of acquisition) to
March 31, 2010 and the pro-forma results from January 1, 2010 to March 31, 2010 as the
operating expenses of the
combined company were co-mingled at the date of acquisition.
|
Through March 31, 2010, we have expensed approximately $11.5 million of costs related to the
acquisition of i2, including $6.7 million in first quarter 2010. These costs, which consist
primarily of investment banking fees, commitment fees on unused bank financing, legal and
accounting fees, are included in the consolidated statements of income under the caption
Acquisition-related costs.
On December 10, 2009, we issued $275 million of five-year, 8.0% Senior Notes (the Senior
Notes) at an initial offering price of 98.988% of the principal amount. The net proceeds from the
sale of the Senior Notes, which exclude the original issue discount ($2.8 million) and other debt
issuance costs ($6.7 million) were placed in escrow and subsequently used, together with cash on
hand at JDA and i2, to fund the cash portion of the merger consideration in the acquisition of i2
(see Note 7).
3. Derivative Instruments and Hedging Activities
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 currency
denominated assets and liabilities that exist as part of our ongoing business operations that are
denominated in a currency other than the functional currency of the subsidiary. The exposures
relate primarily to the gain or loss recognized in earnings from the settlement of current foreign
currency 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. Forward exchange contracts are
marked-to-market at the end of each reporting period, using quoted prices for similar assets or
liabilities in active markets, with gains and losses recognized in other income offset by the gains
or losses resulting from the settlement of the underlying foreign currency denominated assets and
liabilities.
At March 31, 2010, we had forward exchange contracts with a notional value of $83.3 million
and an associated net forward contract receivable of $337,000 determined on the basis of Level 2
inputs. At December 31, 2009, we had forward exchange contracts with a notional value of $37.9
million and an associated net forward contract liability of $354,000 determined on the basis of
Level 2 inputs. These derivatives are not designated as hedging instruments. The forward contract
receivables or liabilities are included in the condensed consolidated balance sheet under the
captions, Prepaid expenses and other current assets or Accrued expenses and other liabilities
as appropriate. 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 recorded net foreign
currency exchange contract gain of $961,000 in first quarter 2010 and a net foreign currency
exchange contract loss of $318,000 in first quarter 2009, which are included in the condensed
consolidated statements of operations under the caption Interest Income and other, net.
10
4. Goodwill and Other Intangibles, net
Goodwill and other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Estimated Useful
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Lives
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
|
|
|
|
$
|
211,029
|
|
|
$
|
|
|
|
$
|
144,988
|
|
|
$
|
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(9,713
|
)
|
|
|
|
|
|
|
(9,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, net of impairment losses
|
|
|
|
|
|
$
|
201,316
|
|
|
|
|
|
|
$
|
135,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-based intangible assets
|
|
|
1 to 13 years
|
|
|
|
259,583
|
|
|
|
(92,188
|
)
|
|
|
183,383
|
|
|
|
(84,119
|
)
|
Technology-based intangible assets
|
|
|
5 to 15 years
|
|
|
|
91,446
|
|
|
|
(47,182
|
)
|
|
|
65,847
|
|
|
|
(45,607
|
)
|
Marketing-based intangible assets
|
|
5 years
|
|
|
19,491
|
|
|
|
(5,531
|
)
|
|
|
5,191
|
|
|
|
(5,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370,520
|
|
|
|
(144,901
|
)
|
|
|
254,421
|
|
|
|
(134,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
571,836
|
|
|
$
|
(144,901
|
)
|
|
$
|
389,696
|
|
|
$
|
(134,760
|
)
|
|
|
|
|
|
|
|
|
|
Goodwill.
We have initially recorded $66.0 million of goodwill in connection with our
acquisition of i2 (see Note 2), all of which has been allocated to our
Supply Chain
reportable
business segment (see Note 13). However, the purchase price allocation has not been finalized and
adjustments may still be made to the carrying value of the assets and liabilities acquired, the
useful lives of intangible assets and the residual amount allocated to goodwill. We are still in
the process of obtaining all information necessary to determine the fair values of the acquired
assets and we have retained an independent third party appraiser for the intangible assets to
assist management in its valuation. We found no indication of impairment of our goodwill balances
during the three months ended March 31, 2010 and, absent future indicators of impairment, the next
annual impairment test will be performed in fourth quarter 2010. As of March 31, 2010, the
goodwill balance has been allocated to our reporting units as follows: $197.6 million to
Supply
Chain
and $3.7 million to
Services Industries.
Customer-based
intangible assets include customer lists, maintenance relationships and future
technological enhancements, service relationships and covenants not-to-compete;
Technology-based
intangible assets include acquired software technology; and
Marketing-based
intangible assets
include trademarks and trade names.
Customer-based
and
Marketing-based
intangible assets are being
amortized on a straight-line basis.
Technology-based
intangible assets are being 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. We have
initially recorded $76.2 million, $25.6 million and $14.3 million of
customer-based,
technology-based
and
marketing-based
intangible assets, respectively, in connection with our
acquisition of i2 (see Note 2).
Amortization expense for first quarter 2010 and 2009 was $10.1 million and $7.1 million,
respectively. The increase in amortization in first quarter 2010 compared to first quarter 2009 is
due to amortization on the identifiable intangible assets recorded in the acquisition of i2.
Amortization expense is reported in the consolidated statements of operations within cost of
revenues under the caption Amortization of acquired software technology and in operating expenses
under the caption Amortization of intangibles. As of March 31, 2010, we expect amortization
expense for the remainder of 2010 and the next four years to be as follows:
|
|
|
|
|
Year
|
|
Amortization
|
|
|
|
|
|
2010
|
|
$
|
35,781
|
|
2011
|
|
$
|
46,018
|
|
2012
|
|
$
|
45,431
|
|
2013
|
|
$
|
44,742
|
|
2014
|
|
$
|
27,672
|
|
11
5. Restructuring Reserves
2010 Restructuring Charges
We recorded restructuring charges of $7.8 million in first quarter 2010 for termination
benefits, office closures and contract terminations associated with the acquisition of i2 and the
continued transition of additional on-shore activities to our Center of Excellence (
CoE
) in
India. The charges include $5.2 million for termination benefits related to a workforce reduction
of 86 full-time employees (FTE) primarily in product development, sales, information technology
and other administrative positions in each of our geographic regions. In addition, the charges
include $2.5 million for estimated costs to close and integrate redundant office facilities and for
the integration of information technology and termination of certain i2 contracts that have no
future economic benefit to the Company and are incremental to the other costs that will be incurred
by the combined Company. As of March 31, 2010, approximately $5.6 million of the costs associated
with these restructuring charges have been paid and the remaining balance of $2.3 million in
included in the condensed consolidated balance sheet under the caption Accrued expenses and other
current liabilities. A summary of the first quarter 2010 restructuring charge is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Changes
|
|
Balance
|
Description of charge
|
|
Initial Reserve
|
|
Cash Charges
|
|
in Exchange Rates
|
|
March 31, 2010
|
|
Termination benefits
|
|
$
|
5,233
|
|
|
$
|
(5,089
|
)
|
|
$
|
(1
|
)
|
|
$
|
143
|
|
Office closures
|
|
|
2,512
|
|
|
|
(431
|
)
|
|
|
47
|
|
|
|
2,128
|
|
|
|
|
Total
|
|
$
|
7,745
|
|
|
$
|
(5,520
|
)
|
|
$
|
46
|
|
|
$
|
2,271
|
|
|
|
|
The balance in the reserve for office closures is primarily related to redundant office
facility leases in Dallas, Texas and the United Kingdom that are being amortized over the related
lease terms that extend through 2014. The balance in the reserve for termination benefits is
related to certain foreign employees that we expect to pay in 2010.
2009 Restructuring Charges
We recorded restructuring charges of $6.5 million in 2009, including $1.5 million in first
quarter 2009, primarily associated with the transition of additional on-shore activities to the
Center of Excellence (
CoE
) in India and certain restructuring activities in the EMEA sales
organization. The charges include termination benefits related to a workforce reduction of 86
full-time employees (FTE) in product development, service, support, sales and marketing,
information technology and other administrative positions, primarily in the Americas region. In
addition, the restructuring charges include approximately $2.0 million in severance and other
termination benefits under separation agreements with our former Executive Vice President and Chief
Financial Officer and our former Chief Operating Officer. As of March 31, 2010, approximately
$6.3 million of the costs associated with these restructuring charges have been paid and the
remaining balance of $204,000 is included in the condensed consolidated balance sheet under the
caption Accrued expenses and other current liabilities. We expect substantially all of the
remaining costs will be paid in 2010.
6. Manugistics Acquisition Reserves
We recorded initial acquisition reserves of $47.4 million for restructuring charges and
other direct costs associated with the acquisition of Manugistics in 2006. The restructuring
charges were primarily related to facility closures, employee severance and termination benefits
and other direct costs associated with the acquisition, including investment banker fees,
change-in-control payments, and legal and accounting costs. Subsequent adjustments of $2.9
million were made to reduce the reserves in 2007 and 2008 based on our revised estimates of the
restructuring costs to exit certain of the activities of Manugistics. The majority these
adjustments were made by June 30, 2007 and included in the final purchase price allocation. All
adjustments made subsequent to June 30, 2007, including a $1.4 million increase recorded in 2009,
have been included in the consolidated statements of income under the caption Restructuring
charges. Adjustments made in 2009 resulted primarily from our revised estimate of sublease rentals
and market adjustments on an unfavorable office facility lease in the United Kingdom. The unused
portion of the acquisition reserves at March 31, 2010 includes $4.4 million of current liabilities
under the caption Accrued expenses and other liabilities and $6.5 million of
non-current liabilities under the caption Accrued exit and disposal obligations. A summary
of the charges and adjustments recorded against the reserves is as follows:
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
Balance
|
|
|
|
Initial
|
|
|
Adjustments
|
|
|
Cash
|
|
|
Exchange
|
|
|
December 31,
|
|
|
Adjustments
|
|
|
Cash
|
|
|
Exchange
|
|
|
March 31,
|
|
Description of charge
|
|
Reserve
|
|
|
to Reserves
|
|
|
Charges
|
|
|
Rates
|
|
|
2009
|
|
|
to Reserves
|
|
|
Charges
|
|
|
Rates
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office closures, lease
terminations and sublease
costs
|
|
$
|
29,212
|
|
|
$
|
(949
|
)
|
|
$
|
(16,110
|
)
|
|
$
|
(724
|
)
|
|
$
|
11,429
|
|
|
$
|
|
|
|
$
|
(783
|
)
|
|
$
|
(216
|
)
|
|
$
|
10,430
|
|
Employee severance and
termination benefits
|
|
|
3,607
|
|
|
|
(767
|
)
|
|
|
(2,468
|
)
|
|
|
125
|
|
|
|
497
|
|
|
|
|
|
|
|
(67
|
)
|
|
|
(28
|
)
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT projects, contract
termination penalties,
capital lease buyouts
and other costs to exit
activities of
Manugistics
|
|
|
1,450
|
|
|
|
222
|
|
|
|
(1,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,269
|
|
|
|
(1,494
|
)
|
|
|
(20,250
|
)
|
|
|
(599
|
)
|
|
|
11,926
|
|
|
$
|
|
|
|
|
(850
|
)
|
|
|
(244
|
)
|
|
|
10,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
13,125
|
|
|
|
6
|
|
|
|
(13,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,394
|
|
|
$
|
(1,488
|
)
|
|
$
|
(33,381
|
)
|
|
$
|
(599
|
)
|
|
$
|
11,926
|
|
|
$
|
|
|
|
$
|
(850
|
)
|
|
$
|
(244
|
)
|
|
$
|
10,832
|
|
|
|
|
The balance in the reserve for office closures, lease termination and sublease costs is
primarily related to office facility leases in Rockville, Maryland and the United Kingdom and is
being amortized over the related lease terms that extend through 2018. The balance in the reserve
for employee severance and termination benefits is related to certain foreign employees that we
expect to pay in 2010.
7. Long-term Debt
On December 10, 2009, we issued $275 million of 8.0% Senior Notes at an initial offering price
of 98.988% of the principal amount. The net proceeds from the sale of the Senior Notes, which
exclude the original issue discount ($2.8 million) and other debt issuance costs ($6.7 million)
were placed in escrow and subsequently used, together with cash on hand at JDA and i2, to fund the
cash portion of the Merger Consideration in the acquisition of i2 (see Note 2).
The Senior Notes have a five-year term and mature on December 15, 2014. Interest is computed
on the basis of a 360-day year composed of twelve 30-day months, and is payable semi-annually on
June 15 and December 15 of each year, beginning on June 15, 2010. The obligations under the Senior
Notes are fully and unconditionally guaranteed on a senior basis by our substantially all of
existing and future domestic subsidiaries (including, following the Merger, i2 and its domestic
subsidiaries).
At any time prior to December 15, 2012, we may redeem up to 35% of the aggregate principal
amount of the Senior Notes at a redemption price equal to 108% of the principal amount, plus
accrued and unpaid interest, with the cash proceeds of an equity offering of our common stock. At
any time prior to December 15, 2012, we may also redeem all or a part of the Senior Notes at a
redemption price equal to 100% of the principal amount, plus accrued and unpaid interest and a
make whole premium calculated as the greater of (i) 1% of the principal amount of the Senior
Notes redeemed or (ii) the excess of the present value of the redemption price of the Senior Notes
redeemed at December 15, 2012 over the principal amount the Senior Notes redeemed. In addition, we
may redeem the Senior Notes on or after December 15, 2012 at a redemption price of 104% of the
principal amount, and on or after December 15, 2013 at a redemption price of 100% of the principal
amount, plus accrued and unpaid interest. The Senior Notes rank equally in right of payment with
all existing and future senior debt and are senior in right of payment to all subordinated debt.
The Senior Notes contain certain restrictive covenants including (i) a requirement to
repurchase the Senior Notes at price equal to 101% of the principal amount, plus accrued and unpaid
interest, in the event of a change in control and (ii) restrictions that limit our ability to pay
dividends, make investments, incur additional indebtedness, create liens, issue preferred stock or
consolidate, merge, sell or otherwise dispose of all or substantially all of our or their assets.
The Senior Notes also provide for customary events of default and in the case of an event of
default arising from specified events of bankruptcy or insolvency, all outstanding Senior Notes
will become due and payable immediately without further action or notice. If any other event of
default occurs or is continuing, the trustee or holders of at least 25% in aggregate principal
amount of the then outstanding Senior Notes may declare all the Senior Notes to be due and payable
immediately.
The Senior Notes and the related guarantees have not been registered under the Securities Act
of 1933, as amended, or any state securities laws, and may not be offered or sold in the United
States without registration or an applicable exemption from registration requirements. In
connection with the issuance of the Senior Notes, we entered into an exchange and registration
rights agreement. Under the terms of the exchange and registration rights agreement, we are
required to file an exchange offer registration statement
13
within 180 days following the issuance of the Senior Notes enabling holders to exchange the
Senior Notes for registered notes with terms substantially identical to the terms of the Senior
Notes; to use commercially reasonable efforts to have the exchange offer registration statement
declared effective by the Securities and Exchange Commission (the SEC) on or prior to 270 days
after the closing of the note offering (the Registration Deadline); and, unless the exchange
offer would not be permitted by applicable law or SEC policy, to complete the exchange offer within
30 business days after the Registration Deadline. Under specified circumstances, including if the
exchange offer would not be permitted by applicable law or SEC policy, the registration rights
agreement provides that we shall file a shelf registration statement for the resale of the Senior
Notes. If we default on these registration obligations, additional interest (referred to as special
interest), up to a maximum amount of 1.0% per annum, will be payable on the Senior Notes until all
such registration defaults are cured.
The fair value and carrying amount of the Senior Notes were $271.1 million and $272.3 million,
respectively at March 31, 2010 and $269.4 million and $272.3 million, respectively at December 31,
2009.
The $2.8 million original issue discount on the Senior Notes and other debt issuance costs of
approximately $6.7 million are being amortized using the effective interest and straight-line
methods, respectively over the five-year term and are reflected in the consolidated statements of
income under the caption, Interest expense and amortization of loan fees. We accrued $5.5
million of interest on the Senior Notes in first quarter 2010 and amortized approximately $427,000
of the original issue discount and related loan origination fees.
8. Legal Proceedings
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.
On April 29, 2009, i2 filed a lawsuit for patent infringement against Oracle Corporation
(NASDAQ: ORCL). The lawsuit, filed in the United States District Court for the Eastern District of
Texas, alleges infringement of 11 patents related to supply chain management, available to promise
software and other enterprise software applications. As a result of our acquisition of i2 on
January 28, 2010, i2 is now a wholly-owned subsidiary of the Company. On April 22, 2010, Oracle
filed counterclaims against i2 and JDA Software Group, Inc. alleging the infringement by i2 of five
Oracle patents.
9. Share-Based Compensation
Our 2005 Performance Incentive Plan, as amended (2005 Incentive Plan), provides for the
issuance of up to 3,847,000 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. The 2005 Incentive Plan contains certain
restrictions that limit the number of shares that may be issued and the amount of cash awarded
under each type of award, including a limitation that awards granted in any given year can
represent 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 are
in such form as the Compensation Committee shall from time to time establish and the awards 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 Companys achievement of annual
operating goals. Restricted stock and restricted stock units may also be granted under the 2005
Incentive Plan 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 fair value of each award is amortized over the applicable vesting period of the awards
using graded vesting and reflected in the consolidated statements of operations under the captions
Cost of maintenance services, Cost of consulting services, Product development, Sales and
marketing, and General and administrative.
Annual stock-based incentive programs (Performance Programs) have been approved for
executive officers and certain other members of our management team for years 2007 through 2010
that provide for contingently issuable performance share awards or restricted stock units upon
achievement of defined performance threshold goals. A summary of the annual Performance Programs
is as follows:
2010 Performance Program.
In February 2010, the Board approved a stock-based incentive
program for 2010 (2010 Performance Program). The 2010 Performance Program provides for the
issuance of contingently issuable performance share awards under the 2005 Incentive Plan to
executive officers and certain other members of our management team if we are able to achieve a
14
defined adjusted EBITDA performance threshold goal in 2010. A partial pro-rata issuance of
performance share awards will be made if we achieve a minimum adjusted EBITDA performance
threshold. The 2010 Performance Program initially provides for the issuance of up to approximately
555,000 of targeted contingently issuable performance share awards. The performance share awards,
if any, will be issued after the approval of our 2010 financial results in January 2011 and will
vest 50% upon the date of issuance with the remaining 50% vesting ratably over a 24-month period.
Our performance against the defined performance threshold goal will be evaluated on a quarterly
basis throughout 2010 and share-based compensation will be recognized over the requisite service
period that runs from February 3, 2010 (the date of board approval) through January 2013. A
deferred compensation charge of $13.7 million was recorded in the equity section our balance sheet
in first quarter 2010, with a related increase to additional paid-in capital, for the total grant
date fair value of the current estimated awards to be issued under the 2010 Performance Program.
Although all necessary service and performance conditions have not been met through March 31, 2010,
based on first quarter 2010 results and the outlook for the remainder of 2010, management has
determined that it is probable the Company will achieve its minimum adjusted EBITDA performance
threshold. As a result, we recorded $2.3 million in stock-based compensation expense related to
these awards in first quarter 2010 on a graded vesting basis. If we achieve the defined
performance threshold goal we would expect to recognize approximately $9.2 million of the award as
share-based compensation in 2010.
2009 Performance Program
. The 2009 Performance Program provided for the issuance of
contingently issuable performance share awards if we were able to achieve $91.5 million of adjusted
EBITDA. The Companys actual 2009 adjusted EBITDA performance qualified participants to receive
100% of their target awards. In total, 506,450 contingently issuable performance share awards were
issued in January 2010 with a grant date fair value of $6.8 million that is being recognized as
share-based compensation over requisite service periods that run from the date of Board approval of
the 2009 Performance Program through January 2012. The performance share awards vested 50% upon the
date of issuance with the remaining 50% vesting ratably over the subsequent 24-month period.
Through March 31, 2010, approximately 1,900 of the performance share awards granted under the 2009
Performance Program have been subsequently forfeited. A deferred compensation charge of $6.8
million was recorded in the equity section of our balance sheet during 2009, with a related
increase to additional paid-in capital, for the total grant date fair value of the awards. We
recognized $4.5 million in share-based compensation expense related to these performance share
awards in 2009, including $755,000 in first quarter 2009, plus an additional $266,000 in first
quarter 2010.
2008 Performance Program
. The 2008 Performance Program provided for the issuance of
contingently issuable performance share awards if we were able to achieve $95 million of adjusted
EBITDA. The Companys actual 2008 adjusted EBITDA performance, which exceeded the defined
performance threshold goal of $95 million, qualified participants to receive approximately 106% of
their target awards. In total, 222,838 performance share awards were issued in January 2009 with a
grant date fair value of $3.9 million that is being recognized as stock-based compensation over
requisite service periods that run from the date of Board approval of the 2008 Performance Program
through January 2011. Through March 31, 2010, approximately 4,900 of performance share awards
granted under the 2008 Performance Program have been subsequently forfeited. A deferred
compensation charge of $3.9 million was recorded in the equity section of our balance sheet during
2008, with a related increase to additional paid-in capital, for the total grant date fair value of
the awards. We recognized $117,000 and $147,000 in share-based compensation expense related to
these performance share awards in first quarter 2010 and 2009, respectively.
2007 Performance Program
. The 2007 Performance Program provided for the issuance of
contingently issuable restricted stock units if we were able to successfully integrate the
Manugistics acquisition and achieve $85 million of adjusted EBITDA. The Companys actual 2007
adjusted EBITDA performance qualified participants for a pro-rata issuance equal to 99.25% of their
target awards. In total, 502,935 restricted stock units were issued in January 2008 with a grant
date fair value of $8.1 million. Approximately 35,000 of the restricted stock units granted under
the 2007 Integration Program have been subsequently forfeited. We recognized $883,000 in
share-based compensation expense related to these performance share awards in 2009, including
$237,000 in first quarter 2009 and as of December 31, 2009, all share-based compensation expense
had been recognized.
During first quarter 2010 and 2009, we recorded share-based compensation expense of $138,000
and $101,000, respectively related to other 2005 Incentive Plan awards.
Equity Inducement Awards
. During third quarter 2009, we announced the appointment of Peter S.
Hathaway to the position of Executive Vice President and Chief Financial Officer and Jason B.
Zintak to the newly-created position of Executive Vice President, Sales and Marketing. In order to
induce Mr. Hathaway and Mr. Zintak to accept employment, the Compensation Committee granted certain
equity awards outside of the terms of the 2005 Incentive Plan and pursuant to NASDAQ Marketplace
Rule 5635(c)(4).
|
(i)
|
|
100,000 shares of restricted stock with a grant date fair value of $1.8 million
were granted to Mr. Hathaway (50,000 shares) and Mr. Zintak (50,000 shares). The
restricted stock awards vest over a three-year period, with one-third
|
15
|
|
|
vesting on the
first anniversary of their employment with the remainder vesting ratably over the
subsequent 24-month period. A deferred compensation charge of $1.8 million has been recorded in the
equity section of our balance sheet for the total grant date fair value of the
restricted stock. Stock-based compensation is being recorded on a graded vesting basis
over requisite service periods that run from their effective dates of employment
through June 2012. We recognized $497,000 in share-based compensation related to
these awards in 2009, plus an additional $248,000 in first quarter 2010 which is
reflected in the consolidated statements of income under the caption General and
administrative.
|
|
(ii)
|
|
55,000 contingently issuable performance share awards were granted to Mr.
Hathaway (25,000 shares) and Mr. Zintak (30,000 shares) if the Company was able to
achieve the $91.5 million adjusted EBITDA performance threshold goal defined under the
2009 Performance Program. The Companys actual 2009 adjusted EBITDA performance
qualified Mr. Hathaway and Mr. Zintak to receive 100% of their target awards. A total
of 55,000 performance share awards were issued in January 2010 with a grant date fair
value of $996,000 that is being recognized as share-based compensation over requisite
service periods that run from their effective dates of employment through January 2012.
The performance share awards vested 50% upon the date of issuance with the remaining 50%
vesting ratably over the subsequent 24-month period. A deferred compensation charge of
$996,000 has been recorded in the equity section of our balance sheet, with a related
increase to additional paid-in capital, for the total grant date fair value of the
awards. We recognized $664,000 in share-based compensation related to these awards in
2009, plus an additional $42,000 in first quarter 2010 which is reflected in the
consolidated statements of income under the caption General and administrative.
|
|
|
(iii)
|
|
100,000 contingently issuable restricted stock units were granted to Mr.
Hathaway (50,000 shares) and Mr. Zintak (50,000 shares) that will vest in defined
tranches if and when we achieve certain pre-defined performance milestones. As of March
31, 2010, none of these awards had been issued, no deferred compensation charge has been
recorded in the equity section of our balance sheet, and no share-based compensation
expense has been recognized related to these grants as management is unable to determine
if it is probable the pre-defined performance milestones will be attained.
|
Employee Stock Purchase Plan
. Our employee stock purchase plan (2008 Purchase Plan) has an
initial reserve of 1,500,000 shares and provides eligible employees with the ability to defer up to
10% of their earnings for the purchase of our common stock on a semi-annual basis at 85% of the
fair market value on the last day of each six-month offering period that begin on February
1
st
and August 1
st
of each year. The 2008 Purchase Plan is considered
compensatory and, as a result, stock-based compensation is recognized on the last day of each
six-month offering period in an amount equal to the difference between the fair value of the stock
on the date of purchase and the discounted purchase price. A total of 44,393 shares of common stock
were purchased on January 31, 2010 at a price of $22.28 and we recorded $175,000 of related
share-based compensation expense. A total of 100,290 shares of common stock were purchased on
February 1, 2009 at a price of $9.52 and we recognized $169,000 in share-based compensation expense
in connection with such purchases. The share-based compensation expense in connection with these
purchases 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.
10. Treasury Stock Repurchases
On March 5, 2009, the Board adopted a program to repurchase up to $30 million of our common
stock in the open market or in private transactions at prevailing market prices during the 12-month
period ended March 10, 2010. During 2009, we repurchased 265,715 shares of our common stock under
this program for $2.9 million at prices ranging from $10.34 to $11.00 per share. There were no
shares of common stock repurchased under this program in 2010.
During first quarter 2010 and 2009, we also repurchased 115,775 and 58,161 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. These shares were
repurchased for $3.2 million at prices ranging from $25.47 to $28.27 in first quarter 2010 and for
$701,000 at prices ranging from $9.92 to $13.43 in first quarter 2009.
During 2009 and 2008, we also repurchased 108,765 and 118,048 common 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. These shares were repurchased in 2009
for $1.6 million at prices ranging from $9.75 to $26.05 and in 2008 for $2.1 million at prices
ranging from $11.50 to $20.40 per share.
16
11. Income Taxes
Income taxes are provided using the liability method. The provision for income taxes reflects
the Companys estimate of the effective rate expected to be applicable for the full fiscal year,
adjusted by any discrete events, which are reported in the period in which they occur. This
estimate is re-evaluated each quarter based on our estimated tax expense for the year. The method
used to calculate the Companys effective rate for the three months ended March 31, 2010 is
different from the method used to calculate the effective rate for the three months ended March 31,
2009. The change in the method used is due to the Companys ability to forecast income by
jurisdiction and reliably estimate an overall annual effective tax rate.
We recorded an income tax benefit of $948,000 for the three months ended March 31, 2010 and an
income tax provision of $1.3 million for the three months ended March 31, 2009, representing
effective income tax rates of 18% and 34%, respectively. Our effective income tax rate during the
three months ended March 31, 2010 and 2009 differed from the 35% U.S. statutory rate primarily due
to the mix of revenue by jurisdiction, changes in our liability for uncertain tax positions, state
income taxes (net of federal benefit), and items not deductible for tax, including those related to
certain costs the Company incurred in the acquisition of i2 Technologies, Inc. during the first
quarter of 2010.
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.
As of March 31, 2010 we had approximately $14.7 million of unrecognized tax benefits that
would impact our effective tax rate if recognized, some of which relate to uncertain tax positions
associated with the acquisition of Manugistics and i2. Future recognition of uncertain tax
positions resulting from the acquisition of Manugistics will be treated as a component of income
tax expense rather than as a reduction of goodwill. During first quarter 2010, there were no
significant changes in the unrecognized tax benefits recorded, other than the recording of i2s
unrecognized tax benefits. It is reasonably possible that approximately $8.5 million of
unrecognized tax benefits will be recognized within the next twelve months. We have placed a
valuation allowance against the Arizona research and development credit as we do not expect to be
able to utilize it prior to its expiration.
We treat interest and penalties related to uncertain tax positions as a component of income
tax expense including accruals of $429,000 in first quarter 2010 and $118,000 in first quarter
2009. As of March 31, 2010 and December 31, 2009 there are approximately $5.0 million and $2.3
million, respectively of interest and penalty accruals related to uncertain tax positions which are
reflected in the consolidated balance sheet under the caption Liability for uncertain tax
positions. 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 to tax expense.
We conduct business globally and, as a result, JDA Software Group, Inc. or one or more of our
subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. In the normal course of business we are subjected to examination by taxing
authorities throughout the world, including significant jurisdictions in the United States, the
United Kingdom, Australia, India and France. With few exceptions, we are no longer subject to U.S.
federal, state and local, or non-U.S. income tax examinations for years before 2003. We are
currently under audit by the Internal Revenue Service for the 2009 tax year. The examination phase
of these audits has not yet been completed; however, we do not anticipate any material adjustments.
We have participated in the Internal Revenue Services Compliance Assurance Program (CAP)
since 2007. The CAP program was developed by the Internal Revenue Service to allow for transparency
and to remove uncertainties in tax compliance. The CAP program is offered by invitation only to
those companies with both a history of immaterial audit adjustments and a high level of tax
complexity and will involve a review of each quarterly tax provision. The Internal Revenue Service
has completed their review of our 2007 and 2008 tax returns and no material adjustments have been
made as a result of these examinations.
12. Earnings (Loss) per Share
From July 2006 through September 2009, the Company had two classes of outstanding capital
stock, common stock and Series B preferred stock. The Series B preferred stock, which was issued
in connection with the acquisition of Manugistics, was a participating security such that in the
event a dividend was declared or paid on the common stock, the Company would be required to
17
simultaneously declare and pay a dividend on the Series B preferred stock as if the Series B
preferred stock had been converted into common stock. Companies that have participating securities are required to apply the
two-class method to compute basic earnings per share. Under the two-class computation method,
basic earnings per share is calculated for each class of stock and participating security
considering both dividends declared and participation rights in undistributed earnings as if all
such earnings had been distributed during the period.
During third quarter 2009, all shares of the Series B preferred stock were either converted
into shares of common stock or repurchased for cash. The calculation of diluted earnings per share
applicable to common shareholders for first quarter 2009 includes the assumed conversion of the
Series B preferred stock into common stock as of the beginning of the period.
The diluted earnings (loss) per share calculation for first quarter 2010 excludes
approximately 719,000 of vested options for the purchase of common stock as their inclusion would
be anti-dilutive due to the net loss incurred in first quarter 2010. The dilutive effect of
outstanding stock options is included in the diluted earnings (loss) per share calculations for
first quarter 2009 using the treasury stock method. The diluted earnings (loss) per share
calculations for first quarter 2010 and 2009 also exclude approximately 555,000 and 507,000 of
contingently issuable performance share awards, respectively for which all necessary conditions had
not been met (see Note 8) and approximately 292,000 and 190,000 unvested performance share awards,
respectively, as their affect would be anti-dilutive. In addition, the diluted earnings (loss) per
share calculation for first quarter 2010 also excludes 91,000 warrants for the purchase of common
stock as their effect would also be anti-dilutive. Earnings (loss) per share for first quarter 2010
and 2009 are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,268
|
)
|
|
$
|
2,644
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings:
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
(4,268
|
)
|
|
|
2,371
|
|
Series B Preferred Stock
|
|
|
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,268
|
)
|
|
$
|
2,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares:
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
39,343
|
|
|
|
31,357
|
|
Series B Preferred Stock
|
|
|
|
|
|
|
3,604
|
|
|
|
|
|
|
|
|
Shares Basic earnings per share
|
|
|
39,343
|
|
|
|
34,961
|
|
Dilutive common stock equivalents
|
|
|
|
|
|
|
114
|
|
|
|
|
|
|
|
|
Shares Diluted earnings per share
|
|
|
39,343
|
|
|
|
35,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share applicable to common shareholders:
|
|
|
|
|
|
|
|
|
Common Stock
|
|
$
|
(.11
|
)
|
|
$
|
.08
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
$
|
|
|
|
$
|
.08
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share applicable to common
shareholders
|
|
$
|
(.11
|
)
|
|
$
|
.08
|
|
|
|
|
|
|
|
|
18
13. Business Segments and Geographic Data
We are a leading global provider of sophisticated enterprise software solutions designed
specifically to address the supply chain, merchandising and pricing requirements of manufacturers,
wholesale/distributors and retailers, as well as government and aerospace defense contractors and
travel, transportation, hospitality and media organizations. We have licensed our software to more
than 6,000 customers worldwide. We generate sales in three geographic regions that have separate
management teams and reporting structures: the Americas (United States, Canada, and Latin America),
Europe (Europe, Middle East and Africa), and Asia/Pacific. Similar products and services are
offered in each geographic region. Identifiable assets are also attributed to a geographical
region. The geographic distribution of our revenues and identifiable assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
87,700
|
|
|
$
|
60,578
|
|
Europe
|
|
|
25,314
|
|
|
|
16,653
|
|
Asia/Pacific
|
|
|
18,617
|
|
|
|
6,102
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
131,631
|
|
|
$
|
83,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
903,719
|
|
|
$
|
695,539
|
|
Europe
|
|
|
125,417
|
|
|
|
85,817
|
|
Asia/Pacific
|
|
|
91,049
|
|
|
|
40,310
|
|
|
|
|
|
|
|
|
Total identifiable assets
|
|
$
|
1,120,185
|
|
|
$
|
821,666
|
|
|
|
|
|
|
|
|
Revenues in the Americas for first quarter 2010 and 2009 include $75.0 million and $53.6
million from the United States, respectively. Identifiable assets for the Americas include $866.2
million and $666.0 million in the United States as of March 31, 2010 and December 31, 2009,
respectively. The increase in identifiable assets at March 31, 2010 compared to December 31, 2009
resulted primarily from net assets recorded in the acquisition of i2 (see Note 2).
In connection with the acquisition of i2, management approved a realignment of our reportable
business segments to better reflect the core business in which we operate, the supply chain
management market, and how our chief operating decision maker views, evaluates and makes decisions
about resource allocations within our business. As a result of this realignment, we have
eliminated
Retail
and
Manufacturing and Distribution
as reportable business segments and beginning
with first quarter 2010 will report our operations within the following segments:
|
|
Supply Chain.
This reportable business segment includes all revenues related to
applications and services sold to customers in the supply chain management market. The
majority of our products are specifically designed to provide customers with one synchronized
view of product demand while managing the flow and allocation of materials, information,
finances and other resources across global supply chains, from manufacturers to distribution
centers and transportation networks to the retail store and consumer (collectively, the
Supply Chain)
. This segment combines all revenues previously reported by the Company under
the
Retail
and
Manufacturing and Distribution
reportable business segments and includes all
revenues related to i2 applications and services.
|
|
|
Services Industries
.
This reportable business segment includes all revenues related to
applications and services sold to customers in service industries such as travel,
transportation, hospitality, media and telecommunications. The
Services Industries
segment is
centrally managed by a team that has global responsibilities for this market.
|
A summary of the revenues, operating income and depreciation attributable to each of these
reportable business segments for first quarter 2010 and 2009 is as follows:
19
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Supply Chain
|
|
$
|
125,233
|
|
|
$
|
78,223
|
|
Services Industries
|
|
|
6,398
|
|
|
|
5,110
|
|
|
|
|
|
|
|
|
|
|
$
|
131,631
|
|
|
$
|
83,333
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Supply Chain
|
|
$
|
39,904
|
|
|
$
|
22,111
|
|
Services Industries
|
|
|
607
|
|
|
|
879
|
|
Other (see below)
|
|
|
(40,764
|
)
|
|
|
(18,532
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(253
|
)
|
|
$
|
4,458
|
|
|
|
|
|
|
|
|
Depreciation:
|
|
|
|
|
|
|
|
|
Supply Chain
|
|
$
|
2,429
|
|
|
$
|
1,787
|
|
Services Industries
|
|
|
216
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
$
|
2,645
|
|
|
$
|
2,013
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
17,697
|
|
|
$
|
11,026
|
|
Amortization of intangible assets
|
|
|
8,566
|
|
|
|
6,076
|
|
Restructuring charges
|
|
|
7,758
|
|
|
|
1,430
|
|
Acquisition-related costs
|
|
|
6,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,764
|
|
|
$
|
18,532
|
|
|
|
|
|
|
|
|
Operating income in the
Supply Chain
and
Services Industry
reportable business segments
includes direct expenses for software licenses, maintenance services, service revenues, and product
development expenses, as well as allocations for sales and marketing expenses, occupancy costs,
depreciation expense and amortization of acquired software technology. The Other caption
includes general and administrative expenses and other charges 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 segment.
Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations.
Managements Discussion and Analysis of Financial Condition and Results of Operations contains
certain forward-looking statements that are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The forward-looking statements include
statements, among other things, concerning our business strategy, including anticipated trends and
developments in and management plans for our business and the markets in which we operate; future
financial results, operating results, revenues, gross margin, operating expenses, products,
projected costs and capital expenditures; research and development programs; sales and marketing
initiatives; and competition. Forward-looking statements are generally accompanied by words such as
will or expect and other words with forward-looking connotations. All forward-looking
statements included in this Form 10-Q are based upon information available to us as of the filing
date of this Form 10-Q. We undertake no obligation to update any of these forward-looking
statements for any reason. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of activity, performance,
or achievements to differ materially from those expressed or implied by these statements. These
factors include the matters discussed in the section entitled Risk Factors elsewhere in this Form
10-Q. You should carefully consider the risks and uncertainties described under this section.
Significant Trends and Developments in Our Business
Acquisition of i2 Technologies, Inc.
On January 28, 2010, we completed the acquisition of i2
Technologies, Inc. (i2) for approximately $599.8 million, which includes cash consideration of
approximately $431.8 million and the issuance of approximately 6.2 million shares of our common
stock with an acquisition date fair value of approximately $168.0 million, or $26.88 per share,
determined on the basis of the closing market price of our common stock on the date of acquisition
(the Merger). The combination of JDA and i2 creates a market leader in the supply chain
management market. We believe this combination provides JDA with (i) a strong, complementary
presence in new markets such as discrete manufacturing; (ii) enhanced scale; (iii) a more
diversified, global customer base of over 6,000 customers; (iv) a comprehensive product suite that
provides end-to-end supply chain management (SCM) solutions; (v) incremental revenue
opportunities associated with cross-selling of products and services among our existing customer
base; and (vi) an ability to increase profitability through net cost synergies within twelve months
after the Merger.
The Merger is being accounted for using the acquisition method of accounting, with JDA
identified as the acquirer, and the operating results of i2 have been included in our consolidated
financial statements from the date of acquisition. Under the acquisition method of accounting, all
assets acquired and liabilities assumed will be recorded at their respective acquisition-date fair
values. We have initially recorded $66.0 million of goodwill in the i2 acquisition and $116.1
million in other identifiable intangible assets, including $76.2 million for customer-based
intangibles (maintenance relationships and future technological enhancements, service relationships
and a covenant not-to-complete), $25.6 million for technology-based intangibles consisting of
developed technology and $14.3 million for marketing-based intangibles consisting of trademark and
trade names. However, the purchase price allocation has
20
not been finalized. We are still in the process of obtaining all information necessary to
determine the fair values of the acquired assets and we have retained an independent third-party
appraiser for the intangible assets to assist management in its valuation. This could result in
adjustments to the carrying value of the assets and liabilities acquired, the useful lives of
intangible assets and the residual amount allocated to goodwill. The preliminary allocation of the
purchase price is based on the best estimates of management and is subject to revision based on the
final valuations and estimates of useful lives. See Note 2 to the Condensed Consolidated Financial
Statements for a complete description of this transaction and the initial purchase price
allocation.
On December 10, 2009, we issued $275 million of five-year, 8.0% Senior Notes (the Senior
Notes) at an initial offering price of 98.988% of the principal amount. The net proceeds from the
sale of the Senior Notes, which exclude the original issue discount ($2.8 million) and other debt
issuance costs ($6.7 million) were placed in escrow and subsequently used, together with cash on
hand at JDA and i2, to fund the cash portion of the merger consideration in the acquisition of i2.
Through March 31, 2010, we have expensed approximately $11.5 million of costs related to the
acquisition of i2, including $6.7 million in first quarter 2010. These costs, which consist
primarily of investment banking fees, commitment fees on unused bank financing and, legal and
accounting fees, are included in the consolidated statements of income under the caption
Acquisition-related costs.
The following table summarizes the impact of the i2 acquisition on our product and service
revenues in first quarter 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
JDA
|
|
|
i2
|
|
|
Combined
|
|
Software licenses and subscriptions
|
|
$
|
15,878
|
|
|
$
|
12,846
|
|
|
$
|
28,724
|
|
Maintenance services
|
|
|
46,491
|
|
|
|
10,569
|
|
|
|
57,060
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
62,369
|
|
|
|
23,415
|
|
|
|
85,784
|
|
Service revenues
|
|
|
32,001
|
|
|
|
13,846
|
|
|
|
45,847
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
94,370
|
|
|
$
|
37,261
|
|
|
$
|
131,631
|
|
|
|
|
|
|
|
|
|
|
|
Outlook for 2010.
Based on our first quarter performance and the outlook for the
remainder of the year, we are reconfirming the previously provided guidance for 2010. This
information considers a full year of JDA revenues and operating results and eleven months of i2
revenues and operating results as the acquisition of i2 was completed on January, 28, 2010.
|
|
|
|
|
|
|
|
|
|
|
Outlook for 2010
|
|
|
Low End
|
|
High End
|
Software and subscription revenues
|
|
$125 million
|
|
$135 million
|
Total revenues
|
|
$590 million
|
|
$625 million
|
Adjusted EBITDA
|
|
$160 million
|
|
$170 million
|
Adjusted earnings per share
|
|
$
|
1.85
|
|
|
$
|
2.00
|
|
Cash flow from operations
|
|
$100 million
|
|
$110 million
|
We define EBITDA as GAAP net income (loss) before interest expense, income tax provision
(benefit), depreciation and amortization. Adjusted EBITDA is defined as EBITDA for the relevant
period as adjusted by adding back additional amounts consisting of (i) restructuring charges, (ii)
share-based compensation, (iii) acquisition-related costs, (iv) interest income and other
non-operating income (expense), (v) non-recurring transition costs to integrate the i2 acquisition
and (vi) other significant non-routine operating income and expense items that may be incurred from
time-to-time.
Earnings per share is defined as net income divided by the weighted average shares outstanding
during the period. Adjusted earnings per share excludes (i) amortization, (ii) restructuring
charges, (iii) share-based compensation, (iv) acquisition-related costs and (v) non-recurring
transition costs to integrate the i2 acquisition and (vi) other significant non-routine operating
income and expense items that may be incurred from time-to-time.
We have not provided an outlook for 2010 GAAP net income or GAAP earnings per share, nor a
reconciliation between the non-GAAP measurements presented herein (i.e., Adjusted EBITDA and
Adjusted earnings per share) and the most directly
21
comparable GAAP measurements. We recorded a preliminary allocation of the purchase price in first
quarter 2010 (see Note 2 to the Condensed Consolidated Financial Statements). The preliminary
allocation is based on the best estimates of management and is subject to revision as the final
fair values of, and allocated purchase price to, the acquired assets and assumed liabilities in the
acquisition of i2 are completed over the remainder of 2010. The final purchase price allocation
may result in changes to depreciation and amortization which could affect GAAP net income and
earnings per share. However, because Adjusted EBITDA and adjusted earnings per share are
essentially determined without regard to depreciation and/or amortization, among other factors, we
do not anticipate material changes to our outlook of Adjusted EBITDA based on the final valuation
and allocation of the i2 transaction. Of course, any estimate is subject to the limitation
described herein, including the safe harbor statement above.
Quarter-to-quarter software sales will fluctuate due to the timing of large transactions
greater than $1.0 million (large transactions), which can significantly impact the dollar volume
of software sales in any given quarter. We believe the current trend in software sales is
positive. Software sales activity in North America remained strong during first quarter 2010.
First quarter 2010 software sales results in the Asia/Pacific were significantly influenced by
sales of applications acquired from i2.
The integration of the JDA and i2 sales teams has progressed smoothly, customer acceptance of
the change has been positive and we have been able to successfully close deals in the i2 pipeline
without any significant delays, including four large transactions for i2 products in first quarter
2010. As noted in our 2009 Form 10-K filing, we are in the process of changing this business
model and have begun to transition the i2 business toward the more traditional software industry
model that emphasizes the sale of software that can be implemented with little or no post-sale
customization, together with a sustainable recurring maintenance stream.
During first quarter 2010, we announced a comprehensive, multi-year product roadmap for the
combined product suites and believe the early feedback from our customers have been positive. We
do not expect to make any significant changes to our existing or acquired product offerings during
the remainder of 2010; however, we will begin to issue new product releases in 2011 that bring
together and combine the two product suites, and over time, we will create a suite of convergent
offerings that include a superset of the broad functionality of both the JDA and i2 offerings,
while eliminating areas of overlap and adding significant new innovation. We believe it will take
several years to fully implement the convergence strategy in our product suite. We also believe
the issuance of the product roadmap is an important achievement as it provides the direction and
clarity that our customers and sales force need in order to continue to do business without delay
or uncertainty. During this time we will also focus on building relationships with the traditional
i2 discrete manufacturing customer base, the majority of which have had little or no historical
exposure to JDA, and developing a combined business development and sales execution strategy. To
that end, our industry executives have completed a customer outreach program that targeted those
customers that have historically generated the majority of the i2 revenues. The response to this
effort has been positive.
We have identified several key areas for potential cross-selling and up-selling opportunities
leading to future revenue synergies in our retail customer base. i2 has developed various supply
chain and merchandise planning products for the retail marketplace that offer certain distinct
capabilities compared to the existing JDA applications that are also targeted at this market. We
believe there are both cross-selling and up-selling opportunities for these applications with the
more than 1,500 customers in our retail customer base. We also believe there will be opportunities
to merge certain of the JDA and i2 solutions and build new product offerings for i2s discrete
manufacturing customers.
Our average annualized maintenance retention rate, which includes i2, increased to
approximately 98% in first quarter 2010 compared to approximately 97% in first quarter 2009. i2s
annualized maintenance retention rate for 2009 was in the low 80% range. We have encountered the
normal extended negotiation process as we are going through the first maintenance renewal cycle
with the i2 customer base. This will continue throughout the year, but we currently expect the
majority of the i2 maintenance base to renew on schedule. Where appropriate, we have suspended the
recognition of revenue on i2 maintenance renewals until the negotiations are complete. These
suspensions primarily relate to those inherited i2 maintenance contracts that did not have
automatic renewal provisions. We believe that most of this suspended revenue may be resolved and
recognized in 2010. In addition, volatility in foreign currency exchange rates has and will
continue to significantly impact our maintenance services revenue. For example, favorable foreign
exchange rate variances increased maintenance services revenues in first quarter 2010 by $1.6
million compared to first quarter 2009.
Consulting services revenue is a lagging indicator for the Company that is directly tied to
software sales performance. Consulting services revenue has trended up in recent quarters,
including first quarter 2010 compared to first quarter 2009, due primarily to our improved software
sales performance over the past three years. In addition, first quarter 2010 was favorably
impacted by new incremental service revenues from the i2 products. Billable hours increased 117% in
first quarter 2010 compared to fourth quarter 2009, due primarily to projects involving i2
products, and our global utilization rate improved to 59% in first quarter 2010, compared to 55% in
fourth quarter 2009 and 52% in first quarter 2009. Services margin improved to 17% in first
quarter 2010
compared to 15% in fourth quarter 2009 and 16% in first quarter 2009. Our initial focus
during the i2 integration has been to ensure a
22
seamless transition for customers as we work through
the complex process of absorbing all of the large i2 services projects that were ongoing at the
date of acquisition. A key factor for improving our consulting margins in 2010 and beyond will be
our ability to more fully leverage the service capabilities of the
CoE
and increase the volume of
work and implementation projects performed through this operation. We realized an improvement in
the volume of work and implementation projects executed through the
CoE
in first quarter 2010 as
approximately 31% of all billable hours were delivered through the
CoE
compared to 7% in first
quarter 2009. This improvement results primarily from services provided on assumed i2 projects. i2
has historically provided a significant portion of its consulting work through their
CoE
facility.
One of our primary initiatives in 2009 was the development of a Managed Services offering
which expands our existing hosted services and includes: (i) outsourced operations for information
technology, data and application management and hosting; (ii) workforce augmentation; (iii)
management of process and user information; (iv) business process execution services including
analysis and recommendations; and (v) business optimization services such as network design, demand
classification, inventory policy and channel clustering. Our Managed Services offering provides
customers with alternatives to reduce their costs of operation, operate effectively with
constrained resources, leverage outside domain expertise to augment their personnel and to improve
the value they derive from their JDA products. We signed five new managed service agreements in
fourth quarter and an additional eight new deals in first quarter 2010, including contracts with
both large and mid-market customers.
We Will Continue to More Fully Leverage Our Centers of Excellence.
With the acquisition of
i2, we now have two
CoE
facilities, and over 1,100, or nearly 40%, of our associates are based in
India. The
CoE
facilities are designed to complement and enhance our existing on-shore business
model, not replace it. Our goal is to achieve all of these benefits without sacrificing our
capability to work face-to-face with our customers. We expect the overall share of consulting
services work performed through the
CoE
facilities will increase in 2010. We also believe there
may be additional opportunities to further leverage the
CoE
in our customer support organization
and product development function. We are managing the two
CoE
facilities uniformly through one
management team and expect to consolidate certain functions into logical units during 2010.
We Expect to Realize Significant Cost Synergies as We Integrate and Combine the Two Companies.
We expect to realize approximately $20 million in net cost savings during 2010. The expected net
costs savings include about $6 to $7 million of gross margin compression from the effects of
revenue attrition, especially maintenance, during the integration of i2. We are actively working
on the integration of the two companies and we believe we are on track to achieve these synergies.
We achieved approximately $4.0 million, or approximately 20% of our total targeted cost synergies
in first quarter 2010, which included only two months of combined post-merger activity.
Share-Based Compensation Expense.
We recorded share-based compensation expense of $3.3 million
and $1.4 million in three months ended March 31, 2010 and 2009, respectively and as of March 31,
2010, we have included $15.9 million of deferred compensation in stockholders equity. A summary of
total stock-based compensation by expense category for the three months ended March 31, 2010 and
2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Cost of maintenance services
|
|
$
|
114
|
|
|
$
|
94
|
|
Cost of consulting services
|
|
|
448
|
|
|
|
211
|
|
Product development
|
|
|
333
|
|
|
|
169
|
|
Sales and marketing
|
|
|
866
|
|
|
|
381
|
|
General and administrative
|
|
|
1,516
|
|
|
|
555
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
3,277
|
|
|
$
|
1,410
|
|
|
|
|
|
|
|
|
In February 2010, the Board approved a stock-based incentive program for 2010 (2010
Performance Program). The 2010 Performance Program provides for the issuance of contingently
issuable performance share awards under the 2005 Incentive Plan to executive officers and certain
other members of our management team if we are able to achieve a defined adjusted EBITDA
performance threshold goal in 2010. A partial pro-rata issuance of performance share awards will be
made if we achieve a minimum adjusted EBITDA performance threshold. The 2010 Performance Program
initially provides for the issuance of up to approximately 555,000 of targeted contingently
issuable performance share awards. The performance share awards, if any, will be issued after the
approval of our 2010 financial results in January 2011 and will vest 50% upon the date of issuance
with the remaining 50% vesting ratably over a 24-month period. Our performance against the defined
performance threshold goal will be evaluated on a quarterly basis throughout 2010 and share-based
compensation will be recognized over the requisite service period that runs from February 3, 2010
(the date of board approval) through January 2013. Deferred compensation of $13.7 million was
recorded in the equity section our balance sheet in first quarter 2010, with a related increase to
additional paid-in capital, for the total grant date fair value of the current
23
estimated awards to
be issued under the 2010 Performance Program. Although all necessary service and performance
conditions have not been met through March 31, 2010, based on first quarter 2010 results and the
outlook for the remainder of 2010, management has determined that it is probable the Company will
achieve its minimum adjusted EBITDA performance threshold. As a result, we recorded $2.3 million
in stock-based compensation expense related to these awards in first quarter 2010 on a graded
vesting basis. If we achieve the defined performance threshold goal we would expect to recognize
approximately $9.2 million of the award as share-based compensation in 2010.
In February 2010, the Board also approved a 2010 cash incentive bonus plan (Incentive Plan)
for our executive officers, including those new executives joining the Company through the
acquisition of i2. The Incentive Plan provides for approximately $4.1 million in targeted cash
bonuses if we are able to achieve a defined adjusted EBITDA performance threshold goal in 2010 and
at managements discretion,amounts are payable quarterly under the plan on the basis of the actual
EBITDA achieved by the Company for the applicable quarter of 2010 when compared to the annual
target and the outlook for the remainder of the year. A partial pro-rata cash bonus will be paid
if we achieve a minimum adjusted EBITDA 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.
We Expect to Make Additional Strategic Acquisitions.
Acquisitions have been, and we expect
they will continue to be, an integral part of our overall growth plan. We believe strategic
acquisition opportunities will allow JDA to continue to strengthen its position as a leading supply
chain management software and services provider. Our intent is to seek acquisition opportunities
that complement the Companys current software and services offerings. We may make future
acquisitions that are significant in relation to the current size of JDA or smaller acquisitions
that add specific functionality to enhance our existing product suite.
Our Financial Position is Strong and We Expect to Continue Generating Positive Cash Flow from
Operations.
We had working capital of $150.9 million at March 31, 2010 compared to $345.7 million
at December 31, 2009. The working capital balance at March 31, 2010 and December 31, 2009 included
$155.8 million and $76.0 million, respectively, in cash and cash equivalents. In addition, working
capital at December 31, 2009 included $287.9 million of restricted cash, consisting primarily of
net proceeds from the issuance of the Senior Notes (see
Contractual Obligations
), which together
with cash on hand at JDA and i2, was used to fund the cash portion of the merger consideration in
the acquisition of i2 on January 28, 2010. Net accounts receivable were $107.9 million or 74 days
sales outstanding (DSO) at March 31, 2010 compared to $68.9 million or 58 days DSO at December
31, 2009. Our quarterly DSO results historically increase during the first quarter of each year
due to the heavy annual maintenance renewal billings that occur during this time frame and then
typically decrease slowly over the remainder of the year. The increase in DSO at March 31, 2010
also includes the impact of receivables assumed in the i2 acquisition, and the DSO result is higher
as the calculation only includes two months of i2 revenues. We generated $12.2 million in cash flow
from operating activities in first quarter 2010 compared to $33.1 million in first quarter 2009.
The decrease in cash flow in first quarter 2010 is due primarily to our net loss for the quarter,
which includes $6.7 million of acquisition-related costs, $7.8 million of restructuring charges,
the majority of which are related to actions taken as a result of the i2 acquisition and $717,000
of non-recurring, transition-related costs for salaries and retention bonuses for i2 employees that
are being retained for a defined period of time. In addition, we had lower cash provided by working
capital in the three months ended March 31, 2010 due to the timing and payment of accounts
receivable. Accounts receivable increased approximately $7.2 million in the three months ended
March 31, 2010 due to increased sales over the past twelve months and decreased $13.6 million in
the three months ended March 31, 2009 due primarily to the collection of an unusually large
receivable.
We expect to increase our cash balance during 2010 through the generation of between $100
million to $110 million of operating cash flow, offset in part by approximately $22 million of
interest payable on the Senior Notes, $20 million of capital expenditures, $10 million related to
the payment of transaction-related costs, and $10 million of cash taxes primarily related to state,
local and foreign taxes. The increase in capital expenditures in 2010 is primarily driven by the
expansion of our Managed Services offering (approximately $8 million) as well as the addition of
i2. While our Managed Services business requires more capital than our other offerings, we expect
this business to produce a strong return on investment and form a major component of our organic
growth in coming years. Our weighted average outstanding shares are expected to be between 41
million and 42 million for 2010.
24
Results of Operations
The following table sets forth a comparison of selected financial information (in thousands),
expressed as both a dollar change and percentage change between periods for the three months ended
March 31, 2010 and 2009 and as a percentage of total revenues. In addition, the table expresses
certain gross margin data as a percentage of software license revenue, maintenance revenue, product
revenues or services revenues, as appropriate. The operating results for the three months ended
March 31, 2010 include the impact of the i2 acquisition from the date of acquisition (January 28,
2010) through March 31, 2010. The i2 acquisition also impacts the comparability of the information
presented in the business segment and geographical regions disclosures that follow. The impact of
the i2 acquisition on our product and service revenues in first quarter 2010 is summarized in
Significant Trends and Developments in Our Business
. The operating expenses of the combined
company were co-mingled at the date of acquisition and as a result, no separate disclosure is made
of the impact of the i2 acquisition on operating expenses or operating income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended
|
|
|
2009 to 2010
|
|
|
|
March 31,
|
|
|
|
|
|
|
%
|
|
|
|
2010
|
|
|
%
|
|
|
2009
|
|
|
%
|
|
|
$ Change
|
|
|
Change
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
$
|
24,437
|
|
|
|
19
|
%
|
|
$
|
14,357
|
|
|
|
17
|
%
|
|
$
|
10,080
|
|
|
|
70
|
%
|
Subscriptions and other recurring revenue
|
|
|
4,287
|
|
|
|
3
|
|
|
|
968
|
|
|
|
1
|
|
|
|
3,319
|
|
|
|
333
|
%
|
Maintenance
|
|
|
57,060
|
|
|
|
43
|
|
|
|
42,997
|
|
|
|
52
|
|
|
|
14,063
|
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
85,784
|
|
|
|
65
|
|
|
|
58,322
|
|
|
|
70
|
|
|
|
27,462
|
|
|
|
47
|
%
|
Service revenues
|
|
|
45,847
|
|
|
|
35
|
|
|
|
25,011
|
|
|
|
30
|
|
|
|
20,836
|
|
|
|
83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
131,631
|
|
|
|
100
|
%
|
|
|
83,333
|
|
|
|
100
|
%
|
|
|
48,298
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses
|
|
|
1,008
|
|
|
|
1
|
%
|
|
|
602
|
|
|
|
1
|
%
|
|
|
406
|
|
|
|
67
|
%
|
Amortization of acquired software technology
|
|
|
1,576
|
|
|
|
1
|
|
|
|
1,008
|
|
|
|
1
|
|
|
|
568
|
|
|
|
56
|
%
|
Maintenance services
|
|
|
12,033
|
|
|
|
9
|
|
|
|
10,549
|
|
|
|
13
|
|
|
|
1,484
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
14,617
|
|
|
|
11
|
|
|
|
12,159
|
|
|
|
15
|
|
|
|
2,458
|
|
|
|
20
|
%
|
Service revenues
|
|
|
38,114
|
|
|
|
29
|
|
|
|
21,359
|
|
|
|
25
|
|
|
|
16,755
|
|
|
|
78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
52,731
|
|
|
|
40
|
|
|
|
33,518
|
|
|
|
40
|
|
|
|
19,213
|
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
78,900
|
|
|
|
60
|
|
|
|
49,815
|
|
|
|
60
|
|
|
|
29,085
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
17,277
|
|
|
|
13
|
|
|
|
12,573
|
|
|
|
15
|
|
|
|
4,704
|
|
|
|
37
|
%
|
Sales and marketing
|
|
|
21,112
|
|
|
|
16
|
|
|
|
14,252
|
|
|
|
17
|
|
|
|
6,860
|
|
|
|
48
|
%
|
General and administrative
|
|
|
17,697
|
|
|
|
13
|
|
|
|
11,026
|
|
|
|
13
|
|
|
|
6,671
|
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,086
|
|
|
|
42
|
|
|
|
37,851
|
|
|
|
45
|
|
|
|
18,235
|
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
8,566
|
|
|
|
7
|
|
|
|
6,076
|
|
|
|
7
|
|
|
|
2,490
|
|
|
|
41
|
%
|
Restructuring charge
|
|
|
7,758
|
|
|
|
6
|
|
|
|
1,430
|
|
|
|
2
|
|
|
|
6,328
|
|
|
|
443
|
%
|
Acquisition-related costs
|
|
|
6,743
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
6,743
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(253
|
)
|
|
|
|
%
|
|
$
|
4,458
|
|
|
|
6
|
%
|
|
|
(4,711
|
)
|
|
|
(106
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses and subscription revenues
|
|
|
|
|
|
|
96
|
%
|
|
|
|
|
|
|
96
|
%
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
|
|
|
|
79
|
%
|
|
|
|
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
|
|
|
|
83
|
%
|
|
|
|
|
|
|
79
|
%
|
|
|
|
|
|
|
|
|
Services revenues
|
|
|
|
|
|
|
17
|
%
|
|
|
|
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
25
The following tables set forth selected comparative financial information on revenues for
our revised business segments and geographical regions, expressed as a percentage change between
first quarter 2010 and 2009. In addition, the tables set forth the
contribution of each business segment and geographical region to total revenues in first
quarter 2010 and 2009, expressed as a percentage of total revenues. In connection with the
acquisition of i2, management approved a realignment of our reportable business segments to better
reflect the core business in which we operate, the supply chain management market, and how our
chief operating decision maker views, evaluates and makes decisions about resource allocations
within our business. As a result of this realignment, we have eliminated
Retail
and
Manufacturing
and Distribution
as reportable business segments and beginning with first quarter 2010 will report
our operations within the following segments:
|
|
Supply Chain.
This reportable business segment includes all revenues related to
applications and services sold to customers in the supply chain management market. The
majority of our products are specifically designed to provide customers with one synchronized
view of product demand while managing the flow and allocation of materials, information,
finances and other resources across global supply chains, from manufacturers to distribution
centers and transportation networks to the retail store and consumer (collectively, the
Supply Chain)
. This segment combines all revenues previously reported by the Company under
the
Retail
and
Manufacturing and Distribution
reportable business segments and includes all
revenues related to i2 applications and services.
|
|
|
|
Services Industries
.
This reportable business segment includes all revenues related to
applications and services sold to customers in service industries such as travel,
transportation, hospitality, media and telecommunications. The
Services Industries
segment is
centrally managed by a team that has global responsibilities for this market.
|
Business Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
Supply Chain
|
|
Industries
|
|
|
2010 vs 2009
|
|
2010 vs 2009
|
Software licenses and subscriptions
|
|
|
100
|
%
|
|
|
(15
|
)%
|
Maintenance services
|
|
|
32
|
%
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
49
|
%
|
|
|
11
|
%
|
Service revenues
|
|
|
87
|
%
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
60
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
37
|
%
|
|
|
51
|
%
|
Sales and marketing
|
|
|
51
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
80
|
%
|
|
|
(31
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
Supply Chain
|
|
Industries
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Contribution to total revenues
|
|
|
95
|
%
|
|
|
94
|
%
|
|
|
5
|
%
|
|
|
6
|
%
|
Geographical Regions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Americas
|
|
Europe
|
|
Asia/Pacific
|
|
|
2010 vs 2009
|
|
2010 vs 2009
|
|
2010 vs 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses and subscriptions
|
|
|
70
|
%
|
|
|
70
|
%
|
|
|
319
|
%
|
Maintenance services
|
|
|
26
|
%
|
|
|
33
|
%
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
38
|
%
|
|
|
42
|
%
|
|
|
150
|
%
|
Service revenues
|
|
|
58
|
%
|
|
|
92
|
%
|
|
|
333
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
45
|
%
|
|
|
52
|
%
|
|
|
205
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Americas
|
|
Europe
|
|
Asia/Pacific
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Contribution to total revenues
|
|
|
67
|
%
|
|
|
73
|
%
|
|
|
19
|
%
|
|
|
20
|
%
|
|
|
14
|
%
|
|
|
7
|
%
|
26
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Software License and Subscription Results by Region
.
The following table summarizes software license and subscription revenues by region for first
quarter 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Region
|
|
2010
|
|
|
2009
|
|
|
$Change
|
|
|
% Change
|
|
Americas
|
|
$
|
18,916
|
|
|
$
|
11,105
|
|
|
$
|
7,811
|
|
|
|
70
|
%
|
Europe
|
|
|
5,403
|
|
|
|
3,170
|
|
|
|
2,233
|
|
|
|
70
|
%
|
Asia/Pacific
|
|
|
4,405
|
|
|
|
1,050
|
|
|
|
3,355
|
|
|
|
320
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,724
|
|
|
$
|
15,325
|
|
|
$
|
13,399
|
|
|
|
87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in software license and subscription revenues in each region in first
quarter 2010 compared to first quarter 2009 is due primarily to the incremental revenues provided
from four large transactions for i2 products and the recurring subscription revenues on contracts
assumed in the i2 acquisition.
The following table summarizes the number of large transactions by region for first quarter
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Large Transactions
|
|
|
Three Months Ended March 31,
|
|
|
2010
|
|
2009
|
Region
|
|
JDA
|
|
i2
|
|
Total
|
|
|
Americas
|
|
|
3
|
|
|
|
1
|
|
|
|
4
|
|
|
|
2
|
|
Europe
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
Asia/Pacific
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4
|
|
|
|
4
|
|
|
|
8
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continue to have significant back-selling opportunities as 71% and 62% of our software
license and subscription revenues in first quarter 2010 and 2009, respectively, came from our
install-base customers. We closed 51 new software deals in first quarter 2010 compared to 46 in
first quarter 2009 and our average selling price (ASP) was $618,000 for the 12-month period ended
March 31, 2010 compared to $697,000 for the 12-month period ended March 31, 2009 which included the
impact of an unusually large transaction from fourth quarter 2008. The 12-month period ended March
31, 2010 represents the sixth consecutive quarter our trailing 12-month ASP has exceeded $600,000.
Software License and Subscription Results by Reportable Business Segment.
Supply Chain.
Software license and subscription revenues in this reportable business segment
increased 100% in first quarter 2010 compared to first quarter 2009, due primarily to the
incremental revenues provided from four large transactions for i2 products and the recurring
subscription revenues on contracts assumed in the i2 acquisition. In total, there were eight large
transactions in this reportable business segment in first quarter 2010 compared to two in first
quarter 2009.
Services Industries.
Software license revenues in this reportable business segment decreased
15% in first quarter 2010 compared to first quarter 2009, due to a decrease in the number of large
transactions. There were no large transactions in this reportable business segment in first
quarter 2010 compared to one in first quarter 2009. The large transaction in first quarter 2009
is being recognized on a percentage of completion basis including approximately 2% of the related
software license fees in first quarter 2010 compared to approximately 20% in first quarter 2009.
Maintenance Services
Maintenance services revenues increased $14.1 million, or 33%, to $57.1 million in first
quarter 2010 compared to $43.0 million in first quarter 2009, and represented 43% and 52% of total
revenues, respectively, in these periods. The increase is due primarily to $10.6 million of new
incremental maintenance revenues from the i2 products. In addition, favorable foreign exchange
rate variances increased maintenance services revenues in first quarter 2010 by $1.6 million
compared to first quarter 2009 due primarily to the weakening of the U.S. Dollar against European
currencies. Excluding the impact of the $10.6 million of new incremental maintenance from the i2
products and the favorable foreign exchange rate variance, maintenance services revenues increased
approximately $1.8 million in first quarter 2010 compared to first quarter 2009 as maintenance
revenues from new software
27
sales, rate increases on annual renewals and reinstatements of
previously suspended and cancelled maintenance agreements more than offset decreases in recurring
maintenance revenues due to attrition.
Service Revenues
Service revenues, which include consulting services, managed services, training revenues, net
revenues from our hardware reseller business and reimbursed expenses, increased $20.8 million, or
83%, to $45.8 million in first quarter 2010 compared to $25.0 million in first quarter 2009. The
increase is due primarily to $13.8 million of new incremental service revenues from the i2
products. Excluding these incremental revenues our core consulting services business increased
approximately $7.0 million in first quarter 2010 compared to first quarter 2009, primarily as a
result of our improved software sales performance over the past three years.
Fixed bid consulting services work represented 22% of total consulting services revenue in
first quarter 2010 compared to 9% in first quarter 2009.
Cost of Product Revenues
Cost of Software Licenses.
The increase in cost of software licenses in first quarter 2010
compared to first quarter 2009 is due primarily to an increase in royalties on embedded third-party
software applications and an increase in royalties on certain third party applications that we
resell. A large portion of our software revenue mix comes from products that have embedded
third-party applications and/or require payment of higher royalty fee obligations, in particular
the applications we acquired from Manugistics and i2.
Amortization of Acquired Software Technology
. The increase in amortization of acquired
software technology in first quarter 2010 compared to first quarter 2009 is due primarily to the
amortization on software technology acquired in the i2 acquisition.
Cost of Maintenance Services.
Cost of maintenance services increased $1.5 million, or 14%, to
$12.0 million in first quarter 2010 compared to $10.5 million in first quarter 2009. The increase
is due primarily to an increase in salaries and related benefits resulting from the associates
added in the i2 acquisition, a $294,000 increase in incentive compensation and a $217,000 increase
in maintenance royalties and fees paid to third parties who provide first level support to certain
of our customers. As of March 31, 2010 we had 399 employees in customer support functions compared
to 297 at December 31, 2009 and 301 at March 31, 2009.
Cost of Service Revenues
Cost of service revenues increased $16.8 million, or 78%, to $38.1 million in first quarter
2010 compared to $21.4 million in first quarter 2009. The increase is due primarily to an increase
in salaries and related benefits resulting from the associates added in the i2 acquisition, a $2.6
million increase in incentive compensation, a $2.0 million increase in outside contractor costs, a
$921,000 increase in reimbursed expenses and a $651,000 increase in travel costs. As of March 31,
2010 we had 1,010 employees in service functions compared to 456 at December 31, 2009 and 439 at
March 31, 2009.
Operating Expenses
Operating expenses, excluding amortization of intangibles, restructuring charges and
acquisition-related costs were $56.1 million in first quarter 2010 compared to $37.9 million in
first quarter 2009 and represented 43% and 45% of total revenues, respectively.
Product Development.
Product development expense increased $4.7 million, or 37%, to $17.3
million in first quarter 2010 compared to $12.6 million in first quarter 2009 and represented 13%
and 15% of total revenues, respectively. The increase is due primarily to an increase in salaries
and related benefits resulting from the associates added in the i2 acquisition and a $947,000
increase in incentive compensation. As of March 31, 2010 we had 849 people in product development
functions compared to 607 at December 31, 2009 and 566 at March 31, 2009.
Sales and Marketing.
Sales and marketing expense increased $6.9 million, or 48%, to $21.1
million in first quarter 2010 compared to $14.3 million in first quarter 2009 and represented 16%
and 17% of total revenues, respectively. The increase is due primarily to an increase in salaries
and related benefits resulting from the associates added in the i2 acquisition, a $2.3 million
increase in incentive compensation that includes a $1.8 million increase in commissions resulting
from the increase in software license sales and a $523,000 increase in travel costs. As of March
31, 2010 we had 323 people in sales and marketing functions compared to 224 at December 31, 2009
and 217 at March 31, 2009, including quota carrying sales associates of 96, 75 and 68,
respectively.
28
General and Administrative.
General and administrative expense increased $6.7 million, or
61%, to $17.7 million in first quarter 2010 compared to $11.0 million in first quarter 2009 and
represented approximately 13% of total revenues in both periods. The increase is due primarily to
an increase in salaries and related benefits resulting from the associates added in the i2
acquisition, a $2.0 million increase in legal costs, a $1.7 million increase in incentive
compensation that includes a $961,000 increase in share-based compensation resulting from an
increase in the value of potential equity awards under the 2010 Performance Plan compared to the
2009 Performance Plan and the costs associated with certain equity inducement awards granted to new
executive officers, $717,000 of non-recurring, transition-related costs for salaries and retention
bonuses for i2 employees that are being retained for a defined period of time and a $254,000
increase in outside contractor costs. As of March 31, 2010 we had 352 people in general and
administrative functions compared to 245 at December 31, 2009 and 237 at March 31, 2009.
Amortization of Intangibles.
The increase in amortization of intangibles in first quarter 2010
compared to first quarter 2009 is due primarily to the amortization on customer list and trademark
intangible assets acquired in the i2 acquisition, offset in part to the cessation of amortization
on certain trademark intangibles from prior acquisitions that are now fully amortized.
Restructuring Charges.
We recorded restructuring charges of $7.8 million in first quarter
2010 for termination benefits, office closures and contract terminations associated with the
acquisition of i2 and the continued transition of additional on-shore activities to our
CoE
facilities. The charges include $5.2 million for termination benefits related to a workforce
reduction of 86 FTE primarily in product development, sales, information technology and other
administrative positions in each of our geographic regions. In addition, the charges include $2.5
million for estimated costs to close and integrate redundant office facilities and for the
integration of information technology and termination of certain i2 contracts that have no future
economic benefit to the Company and are incremental to the other costs that will be incurred by the
combined Company. The first quarter 2010 charges also include immaterial adjustments to increase
reserves recorded for restructuring activities in prior periods.
We recorded a restructuring charge of $1.5 million in first quarter 2009 for termination
benefits related to a workforce reduction of 42 information technology, product development,
service and support positions in the Americas and Asia/Pacific regions. This charge is due
primarily to the transition of additional on-shore activities to the
CoE
. We also recorded $65,000
in adjustments in first quarter 2009 to reduce the estimated restructuring reserves established in
prior years.
Acquisition-Related Costs.
During first quarter 2010 we expensed approximately $6.7 million of
costs related to the acquisition of i2 on January 28, 2010. These costs consist primarily of
investment banking fees, commitment fees on unused bank financing, legal and accounting fees.
Operating Income
We incurred an operating loss of $253,000 in first quarter 2010 compared to operating income
of $4.5 million in first quarter 2009. The operating loss in first quarter 2010 includes
restructuring charges of $7.8 million for termination benefits, office closures and contract
terminations associated with the acquisition of i2 and the continued transition of additional
on-shore activities to our
CoE
facilities, $6.7 million of costs related to the acquisition of i2
and $717,000 of non-recurring, transition-related costs for salaries and retention bonuses for i2
employees that are being retained for a defined period of time. Operating income in first quarter
2009 was reduced by $1.4 million of restructuring charges. Excluding the impact of these
non-recurring costs, operating income increased $9.1 million in first quarter 2010 compared to
first quarter 2009, due primarily to the $29.1 million increase in gross profit resulting from the
increase in total revenues, offset in part by an $18.2 million increase in operating expenses,
excluding amortization of intangibles, restructuring charges and acquisition-related costs.
The combined operating income reported in the reportable business segments excludes $40.8
million and $18.5 million of general and administrative expenses and other charges in first quarter
2010 and 2009, 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.
Other Income (Expense)
29
Interest Expense and Amortization of Loan Fees.
The increase in interest expense and
amortization of loan fees in first quarter 2010 compared to first quarter 2009 is due primarily to
$5.5 million of interest on the Senior Notes issued and amortization of $427,000 on the original
issue discount on the Senior Notes and related loan origination fees.
Interest Income and Other, Net.
The increase in interest income and other, net in first
quarter 2010 compared to first quarter 2009 is due primarily to changes in foreign currency gains
and losses. We recorded a net foreign currency exchange gain of $961,000 in first quarter 2010
compared to a net foreign currency exchange loss of $318,000 in first quarter 2009.
Income Tax Provision
Income taxes are provided using the liability method. The provision for income taxes reflects
the Companys estimate of the effective rate expected to be applicable for the full fiscal year,
adjusted by any discrete events, which are reported in the period in which they occur. This
estimate is re-evaluated each quarter based on our estimated tax expense for the year. The method
used to calculate the Companys effective rate for the three months ended March 31, 2010 is
different from the method used to calculate the effective rate for the three months ended March 31,
2009. The change in the method used is due to the Companys ability to forecast income by
jurisdiction and reliably estimate an overall annual effective tax rate.
We recorded an income tax benefit of $948,000 for the three months ended March 31, 2010 and an
income tax provision of $1.3 million for the three months ended March 31, 2009, representing
effective income tax rates of 18% and 34%, respectively. Our effective income tax rate during the
three months ended March 31, 2010 and 2009 differed from the 35% U.S. statutory rate primarily due
to the mix of revenue by jurisdiction, changes in our liability for uncertain tax positions, state
income taxes (net of federal benefit), and items not deductible for tax, including those related to
certain costs the Company incurred in the acquisition of i2 Technologies, Inc. during the first
quarter of 2010.
Liquidity and Capital Resources
We had working capital of $150.9 million at March 31, 2010 compared to $345.7 million at
December 31, 2009. The working capital balances at March 31, 2010 and December 31, 2009 include
$155.8 million and $76.0 million, respectively, in cash and cash equivalents. In addition, the
working capital balance at December 31, 2009 included $287.9 million of restricted cash, consisting
primarily of net proceeds from the issuance of the Senior Notes (see
Contractual Obligations
),
which together with cash on hand at JDA and i2, was used to fund the cash portion of the merger
consideration in the acquisition of i2 on January 28, 2010. We received $154.4 million in cash
collections in first quarter 2010 and as of March 31, 2010 we were in a net debt position of $107.5
million.
Net accounts receivable were $107.9 million or 74 days sales outstanding (DSO) at March 31,
2010 compared to $68.9 million or 58 days DSO at December 31, 2009. Our quarterly DSO results
historically increase during the first quarter of each year due to the heavy annual maintenance
renewal billings that occur during this time frame and then typically decrease slowly over the
remainder of the year. The increase in DSO at March 31, 2010 also includes the impact of
receivables assumed in the i2 acquisition and the DSO result is higher as the calculation only
includes two months of i2 revenues. DSO results can 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, the timing of customer payments and 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 $12.2 million in first quarter 2010 compared to $33.1
million in first quarter 2009. The principal 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 decrease in
cash flow in first quarter 2010 is due primarily to our net loss for the quarter, which includes
$6.7 million of acquisition-related costs, $7.8 million of restructuring charges, the majority of
which are related to actions taken as a result of the i2 acquisition and $717,000 of non-recurring,
transition-related costs for salaries and retention bonuses for i2 employees that are being
retained for a defined period of time. In addition, we had lower cash provided by working capital
in the three months ended March 31, 2010 due to the timing and payment of accounts receivable.
Accounts receivable increased approximately $7.2 million in the three months ended March 31, 2010
due to increased sales over the past twelve months and decreased $13.6 million in the three months
ended March 31, 2009 due primarily to the collection of an unusually large receivable.
Investing activities
provided cash of $61.4 million in first quarter 2010 and utilized cash of
$1.8 million in first quarter 2009.
Cash provided from investing activities in first quarter 2010 includes a $276.2 million change
in restricted cash offset by the $213.4
30
million of net cash expended to acquire i2. Investing
activities also include purchases of property and equipment of $533,000 and $1.0 million in first
quarter 2010 and 2009, respectively, and the payment of direct costs related to prior acquisitions
of $850,000 and $817,000, respectively.
Financing activities
provided cash of $7.5 million in first quarter 2010 and utilized cash of
$713,000 in first quarter 2009. Cash provided by financing activities in first quarter 2010
includes $10.9 million in proceeds from the issuance of stock ($9.7 million from the exercise of
stock options and $1.2 million from the purchase of common stock under the Employee Stock Purchase
Plan), offset in part by $3.4 million in treasury stock repurchases. Cash utilized in financing
activities in first quarter 2009 includes $3.2 million in treasury stock repurchases, offset in
part by $2.5 million in proceeds from the issuance of stock ($1.4 million from the exercise of
stock options and $1.1 million from the purchase of common stock under the Employee Stock Purchase
Plan).
Changes in the currency exchange rates of our foreign operations
had the effect of decreasing
cash by $1.2 million and $219,000 in first quarter 2010 and 2009, respectively. 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 revaluation or
settlement of current foreign currency 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. 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 currency denominated assets and liabilities.
Treasury Stock Repurchases.
On March 5, 2009, the Board adopted a program to repurchase up to
$30.0 million of our common stock in the open market or in private transactions at prevailing
market prices during the 12-month period ending March 10, 2010. During first quarter 2009, we
repurchased 229,912 shares of our common stock under this program for $2.5 million at prices
ranging from $10.34 to $11.00 per share. No shares were purchased under this program in first
quarter 2010.
During first quarter 2010 and 2009, we also repurchased 115,775 and 58,161 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. These shares were
repurchased for $3.2 million at prices ranging from $25.47 to $28.27 in first quarter 2010 and for
$701,000 at prices ranging from $9.92 to $13.43 in first quarter 2009.
Contractual Obligations
. We currently lease office space in the Americas for 15 regional
sales and support offices across the United States and Latin America, and for 22 other
international sales and support offices located in major cities throughout Europe, Asia, Australia,
Japan and our
CoE
facilities in Bangalore and Hyderabad, India. 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.
There have been no material changes in our contractual obligations and other commercial
commitments since the end of fiscal year 2009 except for assumed lease obligations in connection
with our acquisition of i2 on January 28, 2010. Information regarding our contractual obligations
and commercial commitments, including those assumed in the acquisition of i2, is provided in our
Annual Report on Form 10-K for the year ended December 31, 2009.
We expect to increase our cash balance during 2010 through the generation of between $100
million to $110 million of operating cash flow, offset in part by approximately $22 million of
interest payable on the Senior Notes, $20 million of capital expenditures, $10 million related to
the payment of transaction-related costs, and $10 million of cash taxes primarily related to state,
local and foreign taxes. The increase in capital expenditures in 2010 is primarily driven by the
expansion of our Managed Services offering (approximately $8 million) as well as the addition of
i2.
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.
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Critical Accounting Policies
There were no significant changes in our critical accounting policies during first quarter
2010. 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 Managements Discussion and Analysis of
Financial Condition and Results of Operations where such policies affect our reported and expected
financial results. The preparation of this Quarterly Report on Form 10-Q 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.
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Revenue recognition
. Our revenue recognition policy is significant because our revenue
is a key component of our results of operations. In addition, our revenue recognition
determines the timing of certain expenses such as commissions and royalties. We follow
specific and detailed guidelines in measuring revenue; however, certain judgments affect
the application of our revenue policy.
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We license software primarily under non-cancelable agreements and provide related services,
including consulting, training and customer support. Software license revenue is generally
recognized using the residual method when:
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Persuasive evidence of an arrangement exists and a license agreement has been signed;
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Delivery, which is typically FOB shipping point, is complete;
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Fees are fixed and determinable and there are no uncertainties surrounding product acceptance;
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Collection is considered probable; and
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Vendor-specific evidence of fair value (VSOE) exists for all undelivered elements.
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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 softwares functionality, the
software license revenue and contracted services are recognized under the percentage of
completion method. We measure progress-to-completion on arrangements involving significant
services or custom development that are essential to the softwares functionality 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.
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Subscription and other recurring revenues include fees for access rights to software
solutions that are offered under a subscription-based delivery model where the users do not
take possession of the software. Under this model, the software applications are hosted by
the Company or by a third party and the customer accesses and uses the software on an
as-needed basis over the internet or via a dedicated line. The underlying arrangements
typically include (i) a single fee for the service that is billed monthly, quarterly or
annually, (ii) cover a period from 36 to 60 months and (iii) do not provide the customer with
an option to take delivery of the software at any time during or after the subscription term.
Subscription revenues are recognized ratably over the subscription term beginning on the
commencement dates of each contract.
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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 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.
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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
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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 Companys 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.
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Consulting and training services, when sold with subscription offerings, are accounted for
separately if they have standalone value to the customer and there is objective and reliable
evidence of fair value for the undelivered elements. In these situations, the consulting and
training revenues are recognized as the services are rendered for time and material contracts
or when milestones are achieved and accepted by the customer under fixed price service
contracts. If the consulting and training services sold with the subscription offerings do
not quality for separate accounting, all fees from the arrangement are treated as a single
unit of accounting and recognized ratably over the subscription term.
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Managed service offerings are separately price and stated in our arrangements with the
related revenues included in consulting revenues. Managed services typically include
implementation lab services, advance customer support and software and hardware
administration services, and are billed monthly, quarterly or annually with the revenue
recognized ratably over the term of the contract. 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) and recognized upon shipment of the hardware.
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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.
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Accounts Receivable.
Consistent with industry practice and to be competitive in the
software marketplace, we typically provide payment terms on most software license sales.
Software licenses are generally due within twelve months from the date of delivery.
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 revenue unless we believe that collection is probable. For those customers
who are not credit worthy, we require prepayment of the software license fee or a letter of
credit before we will ship our software. We have a history of collecting software payments
when they come due without providing refunds or concessions. Consulting services are
generally billed bi-weekly and maintenance services are billed annually or monthly. For
those customers who are significantly delinquent or whose credit deteriorates, we typically
put the account on hold and do not recognize any further services revenue, and may as
appropriate withdraw support and/or our implementation staff until the situation has been
resolved.
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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 regions 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 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.
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Business Combinations
. The acquisition of i2 on January 28, 2010 is being accounted for
at fair value under the acquisition method of accounting. However, the purchase price
allocation has not been finalized. We are still in the process of obtaining all information
necessary to determine the fair values of the acquired assets and we have retained an
independent third party appraiser for the intangible assets to assist management in its
valuation. This could result in adjustments to the carrying value of the assets and
liabilities acquired, the useful lives of intangible assets and the residual amount
allocated to goodwill.
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The preliminary allocation of the purchase price is based on the
best estimates of management and is subject to revision based on the final valuations and
estimates of useful lives. Under the acquisition method of accounting, (i)
acquisition-related costs, except for those costs incurred to issue debt or equity
securities, are expensed in the period incurred; (ii) non-controlling interests are valued
at fair value at the acquisition date; (iii) in-process research and development is
recorded at fair value as an indefinite-lived intangible asset at the acquisition date;
(iv) restructuring costs associated with a business combination are expensed subsequent to
the acquisition date; and (v) changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date are recognized through income tax
expense.
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Goodwill and Other Identifiable Intangible Assets
. Our business combinations have
typically resulted in goodwill and other identifiable intangible assets. These intangible
assets affect the amount of future period amortization expense and potential impairment
charges we may incur. The determination of the value of such intangible assets and the
annual impairment tests that we perform require management to make estimates of future
revenues, customer retention rates and other assumptions that affect our consolidated
financial statements.
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Goodwill is tested annually for impairment, or more frequently if events or changes in
business circumstances indicate the asset might be impaired, by comparing 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 the goodwill allocated
to our reporting units. We found no indication of impairment of our goodwill balances during
first quarter 2010 with respect to the goodwill allocated to our
Supply Chain
and
Services
Industries
reportable business segments. Absent future indications of impairment, the next
annual impairment test will be performed in fourth quarter 2010.
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Customer-based
intangible assets include customer lists, maintenance relationships and future
technological enhancements, service relationships and covenants not-to-compete.
Customer-based
intangible assets are amortized on a straight-line basis over estimated useful
lives ranging from one 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 initially recorded $76.2 million of customer-based
intangible assets in connection with the acquisition of i2.
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Technology-based
intangible assets include acquired software technology. 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 in the consolidated statements of operations
in cost of revenues under the caption Amortization of acquired software technology.
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. We have initially recorded
$25.6 million of
Technology-based
intangible assets in connection with the acquisition of i2.
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Marketing-based
intangible assets include trademarks and trade names. Trademarks are being
amortized on a straight-line basis over estimated useful lives of five years. We have
initially recorded $14.3 million of
Marketing-based
intangible assets in connection with the
acquisition of i2.
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Product Development.
The costs to develop new software products and enhancements to
existing software products are expensed as incurred until technological feasibility has
been established. We consider technological feasibility to have occurred when all planning,
designing, coding and testing have been completed according to design specifications. Once
technological feasibility is established, any additional costs would be capitalized. We
believe our current process for developing software is essentially completed concurrent
with the establishment of technological feasibility, and accordingly, no costs have been
capitalized.
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Income Taxes
. Deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the tax basis of assets and liabilities and
amounts reported in the consolidated balance sheets, as well as operating loss and tax
credit carry-forwards. We follow specific and detailed guidelines regarding the
recoverability of any tax assets recorded on the balance sheet and provide valuation
allowances when recovery of deferred tax assets is not considered likely.
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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.
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As of March 31, 2010 we have approximately $14.7 million of unrecognized tax benefits that
would impact our effective tax rate if recognized, some of which relate to uncertain tax
positions associated with the acquisition of Manugistics and i2. Future recognition of
uncertain tax positions resulting from the acquisition of Manugistics will be treated as a
component of income tax expense rather than as a reduction of goodwill. During first quarter
2010, there were no significant changes in the unrecognized tax benefits recorded, other than
the recording of i2s unrecognized tax benefits. It is reasonably possible that approximately
$8.5 million of unrecognized tax benefits will be recognized within the next twelve months.
We have placed a valuation allowance against the Arizona research and development credit as
we do not expect to be able to utilize it prior to its expiration.
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We treat interest and penalties related to uncertain tax positions as a component of income
tax expense including accruals of $429,000 in first quarter 2010 and $118,000 in first
quarter 2009. As of March 31, 2010 and December 31, 2009 there are approximately $5.0
million and $2.3 million, respectively of interest and penalty accruals related to uncertain
tax positions which are reflected in the consolidated balance sheet under the caption
Liability for uncertain tax positions. 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 to tax expense.
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Share-Based Compensation
. Our 2005 Performance Incentive Plan, as amended (2005
Incentive Plan) provides for the issuance of up to 3,847,000 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. The 2005 Incentive Plan contains certain restrictions that limit the
number of shares that may be issued and the amount of cash awarded under each type of
award, including a limitation that awards granted in any given year can represent 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 are in
such form as the Compensation Committee shall from time to time establish and the awards
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
Companys achievement of annual operating goals. Restricted stock and restricted stock
units may also be granted under the 2005 Incentive Plan 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 fair
value of each award is amortized over the applicable vesting period of the awards using
graded vesting and reflected in the consolidated statements of operations under the
captions Cost of maintenance services, Cost of consulting services, Product
development, Sales and marketing, and General and administrative.
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Annual stock-based incentive programs have been approved for executive officers and certain
other members of our management team for years 2007 through 2010 that provide for
contingently issuable performance share awards or restricted stock units upon achievement of
defined performance threshold goals. The defined performance threshold goal for each year
has been an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization)
targets, which excludes certain non-routine items. The awards vest 50% upon the date the
Board approves the achievement of the annual performance threshold goal with the remaining
50% vesting ratably over the subsequent 24-month period.
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Equity Inducement Awards
. During third quarter 2009, we announced the appointment of Peter S.
Hathaway to the position of Executive Vice President and Chief Financial Officer and Jason
Zintak to the newly-created position of Executive Vice President, Sales and Marketing. In
order to induce Mr. Hathaway and Mr. Zintak to accept employment, the Compensation Committee
granted certain equity awards outside of the terms of the 2005 Incentive Plan and pursuant to
NASDAQ Marketplace Rule 5635(c)(4).
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Stock Option Plans
. We maintained various stock option plans through May 2005 (Prior
Plans). The Prior Plans provided for the issuance of shares of common stock to employees,
consultants and directors under incentive and non-statutory stock
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option grants. Stock
option grants under the Prior Plans were made at a price not less than the fair market value
of the common stock at the date of grant, generally vested over a three to four-year period
commencing at the date of grant and expire in ten years. Stock options are no longer used
for share-based compensation and no grants have been made under the Prior Plans since 2004.
With the adoption of the 2005 Incentive Plan, we terminated all Prior Plans except for those
provisions necessary to administer the outstanding options, all of which are fully vested. As
of March 31, 2010, we had approximately 719,000 vested stock options outstanding with
exercise prices ranging from $10.33 to $27.50 per share.
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Employee Stock Purchase Plan
. Our employee stock purchase plan (2008 Purchase Plan) has an
initial reserve of 1,500,000 shares and provides eligible employees with the ability to defer
up to 10% of their earnings for the purchase of our common stock on a semi-annual basis at
85% of the fair market value on the last day of each six-month offering period that begin on
February 1
st
and August 1
st
of each year. The 2008 Purchase Plan is
considered compensatory and, as a result, stock-based compensation is recognized on the last
day of each six-month offering period in an amount equal to the difference between the fair
value of the stock on the date of purchase and the discounted purchase price. A total of
44,393 shares of common stock were purchased on January 31, 2010 at a price of $22.28 and we
recorded $175,000 of related share-based compensation expense. A total of 100,290 shares of
common stock were purchased on February 1, 2009 at a price of $9.52 and we recognized
$169,000 in share-based compensation expense in connection with such purchases. The
share-based compensation expense in connection with these purchases, which 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.
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Derivative Instruments and Hedging Activities
. 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 currency denominated
assets and liabilities that exist as part of our ongoing business operations that are
denominated in a currency other than the functional currency of the subsidiary. 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 90 days or less and are not designated as hedging instruments.
Forward exchange contracts are marked-to-market at the end of each reporting period, using
quoted prices for similar assets or liabilities in active markets, with gains and losses
recognized in other income offset by the gains or losses resulting from the settlement of
the underlying foreign currency denominated assets and liabilities.
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At March 31, 2010, we had forward exchange contracts with a notional value of $83.3 million
and an associated net forward contract receivable of $337,000 determined on the basis of
Level 2 inputs. At December 31, 2009, we had forward exchange contracts with a notional
value of $37.9 million and an associated net forward contract liability of $354,000
determined on the basis of Level 2 inputs. These derivatives are not designated as hedging
instruments. The forward contract receivables or liabilities are included in the condensed
consolidated balance sheet under the captions, Prepaid expenses and other current assets or
Accrued expenses and other liabilities as appropriate. 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 recorded net foreign currency exchange contract gain of
$961,000 in first quarter 2010 and a net foreign currency exchange contract loss of $318,000
in first quarter 2009, which are included in the condensed consolidated statements of income
under the caption Interest Income and other, net.
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Other Recent Accounting Pronouncements
In September 2009, FASB issued an amendment to its accounting guidance on certain revenue
arrangements with multiple deliverables that enables a vendor to account for products and services
(deliverables) separately rather than as a combined unit. The revised guidance establishes a
selling price hierarchy for determining the selling price of a deliverable, which is based on: (a)
vendor-specific objective evidence; (b) third-party evidence; or (c) managements best estimate of
selling price. This guidance also eliminates the residual method of allocation and requires that
the arrangement consideration be allocated at the inception of the arrangement to all deliverables
using the relative selling price method. In addition, this guidance significantly expands required
disclosures related to a such revenue arrangements that have multiple deliverables. The revised
guidance is effective for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010 with early adoption permitted. We are currently assessing the
impact the new guidance will have on certain of our revenue arrangements, specifically those
involving the delivery of software-as-a-service and certain other managed service offerings as i2
derived a significant portion of their revenues from these form of contracts. The ultimate impact
on our consolidated financial statements will depend on the nature and terms of the revenue
arrangements entered into or materially modified after the adoption date. The new guidance does not
significantly change the accounting for the majority of our existing and future revenue
arrangements that are subject to specific guidance in sections 605 and 985 of the Codification (see
Revenue Recognition
discussion above).
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In December 2009, FASB issued a new guidance for improvements to financial reporting by
enterprises involved with variable interest entities. The new guidance provides an amendment to its
consolidation guidance for variable interest entities and the definition of a variable interest
entity and requires enhanced disclosures to provide more information about an enterprises
involvement in a variable interest entity. This amendment also requires ongoing assessments of
whether an enterprise is the primary beneficiary of a variable interest entity and is effective for
reporting periods beginning after December 15, 2009. There was no significant impact from adoption
of this guidance on our consolidated financial position or results of operations.
In January 2010, FASB issued an amendment to its accounting guidance for fair value
measurements which adds new requirements for disclosures about transfers into and out of Levels 1
and 2 and separate disclosures about purchases, sales, issuances, and settlements related to Level
3 measurements. The revised guidance also clarifies existing fair value disclosures about the level
of disaggregation and about inputs and valuation techniques used to measure fair value. The
amendment is effective for the first reporting period beginning after December 15, 2009, except for
the requirements to provide the Level 3 activity of purchases, sales, issuances, and settlements on
a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. There was no significant impact from adoption of this
guidance on our consolidated financial position or results of operations.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
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 currency 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 2009 and 43%
in first quarter 2010. In addition, the identifiable net assets of our foreign operations totaled
23% and 19% of consolidated net assets at March 31, 2010 and December 31, 2009, respectively. 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 an
unrealized foreign currency exchange losses of $561,000 and $614,000 in the three months ended
March 31, 2010 and 2009, respectively.
The foreign currency exchange loss in first quarter 2010 resulted primarily from the
strengthening of the U.S. Dollar, particularly against the British Pound and the Euro. 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 March 31, 2010 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 March 31, 2010 rates would result in a currency translation loss of
$319,000 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 revaluation or
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 March 31, 2010, we had forward exchange contracts with a notional value of $83.3 million
and an associated net forward contract receivable of $337,000 determined on the basis of Level 2
inputs. At December 31, 2009, we had forward exchange contracts with a notional value of $37.9
million and an associated net forward contract payable of $354,000 determined on the basis of Level
2 inputs. These derivatives are not designated as hedging instruments. The forward exchange
contract receivables or liabilities are included in the condensed consolidated balance sheet under
the captions Prepaid expenses and other current assets or Accrued expenses and other
liabilities as appropriate. 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 recorded
a foreign currency exchange contract gain of
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$961,000 in first quarter 2010 and a foreign currency
exchange contract loss of $318,000 in first quarter 2009, which are included in condensed
consolidated statements of income under the caption Interest income and other, net.
Interest rates
. Excess cash balances as of March 31, 2010 and December 31, 2009 are included
in our operating account. Cash balances in foreign currencies overseas are also operating balances
and are invested in short-term deposits of the local operating bank. Interest income earned on
investments is reflected in our financial statements under the caption Interest income and other,
net.
Investments in both fixed rate and floating rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value adversely impacted due
to a rise in interest rates, while floating rate securities may produce less income than expected
if interest rates fall.
We issued $275 million of Senior Notes in December 2009 at an initial offering price of
98.988% of the principal amount. The net proceeds from the sale of the Senior Notes, which exclude
the original issue discount ($2.8 million) and other debt issuance costs ($6.7 million) were placed
in escrow and subsequently used, together with cash on hand at JDA and i2, to fund the cash portion
of the merger consideration in the acquisition of i2 on January 28, 2010. The Senior Notes mature
in 2014. Interest accrues on the Senior Notes at a fixed rate of 8% per annum, payable
semi-annually in cash on June 15 and December 15 of each year, commencing on June 15, 2010. The
interest is computed on the basis of a 360-day year comprised of twelve 30-day months.
Item 4: Controls and Procedures
Disclosure Controls and Procedures
. 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. The phrase disclosure controls and procedures
is defined under Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Act) and refers to
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 Securities
and Exchange Commissions (the Commission) 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 issuers 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 March 31, 2010 were effective to ensure that information
required to be disclosed in our reports to be filed under the 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, summarized and reported within the time
periods specified in the Commissions rules and forms.
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 issuers principal executive and
principal financial officers, or persons performing similar functions, and effected by the issuers
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 issuers 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 March 31, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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.
On April 29, 2009, i2 filed a lawsuit for patent infringement against Oracle Corporation
(NASDAQ: ORCL). The lawsuit, filed in the United States District Court for the Eastern District of
Texas, alleges infringement of 11 patents related to supply chain management, available to promise
software and other enterprise software applications. As a result of our acquisition of i2 on
January 28, 2010, i2 is now a wholly-owned subsidiary of the Company. On April 22, 2010, Oracle
filed counterclaims against i2 and JDA Software Group, Inc. alleging the infringement by i2 of five
Oracle patents.
Item 1A.
Risk Factors
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 unaudited Condensed Consolidated
Financial Statements and Notes thereto, and Managements Discussion and Analysis of Financial
Condition and Results of Operations as of March 31, 2010 and for the three months then ended
contained elsewhere in this Form 10-Q.
Risks Related To Our Business
We may not be able to sustain profitability in the future.
We incurred a net operating loss of $4.3 million in first quarter 2010 compared to net income
of $2.6 million in first quarter 2009, and net income of $26.3 million and $3.1 million for the
years ended December 31, 2009 and 2008, respectively. Our ability to sustain profitability will
depend, in part, on our ability to:
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attract and retain an adequate client base;
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manage effectively a larger and more global business;
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react to changes, including technological changes, in the markets we target or operate
in;
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deploy our services in additional markets or industry segments;
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respond to competitive developments and challenges;
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attract and retain experienced and talented personnel; and
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establish strategic business relationships.
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We may not be able to do any of these successfully, and our failure to do so is likely to have
a negative impact on our operating results and cash flows, which could affect our ability to make
payments on the notes.
We have a substantial amount of debt, which could impact our ability to obtain future financing or
pursue our growth strategy.
After the acquisition of i2, we have $275 million of long-term debt. Cash flow from
operations was $12.2 million in first quarter 2010 and includes the impact of i2 from the January
28, 2010 (date of acquisition) through March 31, 2010. Cash flow from operations, without the cash
flow from i2, was $33.1 million in first quarter 2009, and $96.5 million and $47.1 million in the
years ended December 31, 2009 and 2008, respectively. Our indebtedness could have significant
adverse effects on our business, including the following:
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we must use a substantial portion of our cash flow from operations to pay interest on our
indebtedness, which will reduce the funds available to us for operations and other purposes;
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our ability to obtain additional financing for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired;
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our high level of indebtedness could place us at a competitive disadvantage compared to
our competitors that may have proportionately less debt;
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our flexibility in planning for, or reacting to, changes in our business and the industry
in which we operate may be limited;
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our high level of indebtedness may make us more vulnerable to economic downturns and
adverse developments in our business; and
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our ability to fund a change of control offer may be limited.
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The instruments governing the notes contain, and the instruments governing any indebtedness we
may incur in the future may contain, restrictive covenants that limit our ability to engage in
activities that may be in our long-term best interests. Our failure to comply with these covenants
could result in an event of default which, if not cured or waived, could result in the acceleration
of all or a portion of our outstanding indebtedness.
Payments on our indebtedness will require a significant amount of cash.
As a result of financial, business, economic and other factors, many of which we cannot
control, our business may not generate sufficient cash flow from operations in the future and our
currently anticipated growth in revenue and cash flow may not be realized, either or both of which
could result in our being unable to repay indebtedness, including our outstanding notes, or to fund
other liquidity needs. If we do not have sufficient cash resources in the future, we may be
required to refinance all or part of our then existing debt, sell assets or borrow more money.
There can be no assurance that we will be able to accomplish any of these alternatives on terms
acceptable to us or at all. In addition, the terms of existing or future debt agreements may
restrict us from adopting any of these alternatives.
We may incur substantial additional indebtedness that could further
e
xacerbate the risks associated
with our indebtedness.
We may incur substantial additional indebtedness in the future. Although the indenture
governing our outstanding notes contains restrictions on our incurrence of additional debt, these
restrictions are subject to a number of qualifications and exceptions, and we could incur
substantial additional secured or unsecured indebtedness, which may include a credit facility that
may include financial ratio requirements and covenants. If we incur additional debt, the risks
related to our leverage and debt service requirements would increase.
We may not receive significant revenues from our current research and development efforts, which
may limit our business from developing in ways that we currently anticipate.
Developing and localizing software is expensive and the investment in product development
often involves a long payback cycle. We have made and expect to continue making significant
investments in software research and development and related product opportunities. If product life
cycles shorten or key technologies upon which we depend change rapidly, we may need to make high
levels of expenditures for research and development that could adversely affect our operating
results if not offset by corresponding 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 may misjudge when software sales will be realized, which may materially reduce our revenue and
cash flow and adversely affect our business.
Software license revenues in any quarter depend substantially upon contracts signed and the
related shipment of software in that quarter. 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 increasingly requiring that their
senior executives, board
40
of directors and significant equity investors approve such purchases
without the benefit of the direct input from our sales representatives. As a result, we may have
less visibility into the progression of the selection and approval process throughout our sales
cycles, which in turn makes it more difficult to predict the quarter in which individual sales will
occur, especially in large sales opportunities.
We are also at risk of having pending transactions abruptly terminated if the boards of
directors or executive management of our customers decide to withdraw funding from information
technology projects as a result of a deep or prolonged global economic downturn and credit crisis.
If this type of behavior becomes commonplace among existing or potential customers then we may face
a significant reduction in new software sales. In the last year we have seen an increasing number
of our prospects indicate to us that they can sign agreements prior to the end of our quarter, when
in fact their approval process precludes them from being able to complete the transaction until
after the end of our quarter. In addition, because of the current economic downturn, we may need to
increase our use of alternate licensing models that reduce the amount of software revenue we
recognize upon shipment of our software.
Each of these circumstances adds to the difficulty of accurately forecasting the timing of
deals. 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 if we are unable to
conclude license negotiations by the end of a fiscal quarter, our quarterly operating results will
be lower than anticipated.
In addition to the above, we may be unable to recognize revenues associated with certain
projects assumed in the acquisition of i2 in accordance with our expectations. i2 historically
recognized a significant portion of revenues from sales of software solutions and development
projects over time using the percentage of completion method of contract accounting. Failure to
complete project phases in accordance with the overall project plan can create variability in our
expected revenue streams if we are not able to recognize revenues related to particular projects
because of delays in development.
We may face liability if our products are defective or if we make errors implementing our products.
Our software products are highly complex and sophisticated. As a result, they could contain
design defects, software errors or security problems that are difficult to detect and correct. In
particular, it is common for complex software programs such as ours to contain undetected errors,
particularly in early versions of our products. Errors 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, implementation of our products may involve customer-specific configuration by
third parties or us, and may involve integration with systems developed by third parties. Our
clients may occasionally experience difficulties integrating our products with other hardware or
software in their particular 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. If clients experience significant problems with
implementation of our products or are otherwise dissatisfied with their functionality or
performance, or if our products 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 contractual 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.
We may have difficulty implementing our software products, which would harm our business and
relations with customers.
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 can be longer and more complicated than our
other applications as they typically:
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involve more significant integration efforts in order to complete implementation;
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require the execution of implementation procedures in multiple layers of software;
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offer a customer more deployment options and other configuration choices;
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require more training; and
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may involve third party integrators to change business processes concurrent with the
implementation of the software.
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Delays in the implementations of any of our software products, whether by our business
partners or by us, may result in client dissatisfaction, disputes with our customers, or damage to
our reputation.
Our operating results may be adversely affected as a result of our failure to meet contractual
obligations under fixed-price contracts within our estimated cost structure.
A portion of our consulting services revenues are derived under fixed price arrangements that
require us to provide identified deliverables for a fixed fee. During first quarter 2010
approximately 22% of our consulting services revenues were derived under fixed price arrangements,
compared to 9% in first quarter 2009 and 15% in each of the years ended December 31, 2009 and 2008.
With the acquisition of i2, the percentage of consulting services revenues derived under fixed
price arrangements may increase. Our failure to meet our contractual obligations under fixed price
contracts within our estimated cost structure may result in our having to record the cost related
to the performance of services in the period that the services were rendered, but delay the timing
of revenue recognition to a future period in which the obligations are met, which may cause our
operating results to suffer.
We may have difficulty developing our new managed services offering, which could reduce future
revenue growth opportunities.
We have limited experience operating our applications for our customers under our Managed
Services offering, either on a hosted or remote basis. We began these services in late 2009 and
through March 31, 2010 they represented a very small part of our revenues. We have hired management
personnel with significant expertise in operating a managed services business, and we have begun to
make capital expenditures for this business. We may encounter difficulties developing our Managed
Services into a mature services offering, or the rate of adoption by our customers may be slower
than anticipated. If our Managed Services business does not grow or operate as expected, it could
divert management resources, harm our strategy and reduce opportunities for future revenue growth.
The enforcement and protection of our intellectual property rights may be expensive and could
divert our valuable resources.
We rely primarily on patent, copyright and trademark laws, as well as nondisclosure and
confidentiality agreements and other methods, to protect our proprietary information, technologies
and processes. Policing unauthorized use of our products and technologies is difficult and
time-consuming. Unauthorized parties may try to copy or reverse engineer portions of our products,
circumvent our security devices or otherwise obtain and use our intellectual property. We cannot be
certain that the steps we have taken will prevent the misappropriation or unauthorized use of our
proprietary information and technologies, particularly in foreign countries where the laws may not
protect our proprietary intellectual property rights as fully or as readily as United States laws.
We cannot be certain that the laws and policies of any country, including the United States, or the
practices of any of the standards bodies, foreign or domestic, with respect to intellectual
property enforcement or licensing will not be changed in a way detrimental to our licensing program
or to the sale or use of our products or technology.
We may need to litigate to enforce our intellectual property rights, protect our trade secrets
or determine the validity and scope of proprietary rights of others. As a result of any such
litigation, we could lose our ability to enforce one or more patents or incur substantial
unexpected operating costs. Any action we take to enforce our intellectual property rights could be
costly and could absorb significant management time and attention, which, in turn, could negatively
impact our operating results. Our patent infringement lawsuit against Oracle, originally brought by
i2 against Oracle alleging the infringement by Oracle of certain i2 patents, and Oracles
corresponding patent infringement counterclaim against us is an example of such intellectual
property litigation. In addition, failure to protect our trademark rights could impair our brand
identity.
Third parties may claim we infringe their intellectual property rights, which would result in an
increase in litigation and other related costs.
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We periodically receive notices or claims from others that we are infringing upon their
intellectual property rights, especially 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:
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be time-consuming, costly and/or result in litigation;
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divert managements time and attention from developing our business;
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require us to pay monetary damages or involve settlement payments, either of which could
be significant;
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require us to enter into royalty and licensing agreements that we would not normally find
acceptable;
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require us to stop selling or to redesign certain of our products; or
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require us to satisfy indemnification obligations to our customers.
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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.
If we lose access to critical third-party software or technology, our costs could increase and the
introduction of new products and product enhancements could be delayed, potentially hurting our
competitive position.
We license and integrate technology from third parties in certain of our software products.
Our third-party licenses generally require us to pay royalties and fulfill confidentiality
obligations. 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 likely 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 may face difficulties in our highly competitive markets, which may make it difficult to
attract and retain clients and grow revenues.
The supply chain software market continues to consolidate and this has resulted in larger, new
competitors with significantly greater financial and marketing resources and more numerous
technical resources than we possess. This could create a significant competitive advantage for our
competitors and negatively impact our business. It is difficult to estimate what long term effect
these acquisitions will have on our competitive environment. We have encountered competitive
situations with certain enterprise software vendors where, in order to encourage customers to
purchase licenses of their specific applications and gain market share, we suspect they have also
offered to license at no charge certain of their retail and/or supply chain software applications
that compete with our solutions. If large competitors such as Oracle, SAP AG and other large
private companies are willing to license their retail, supply chain and/or other applications at no
charge, it may result in a more difficult competitive environment for our products. 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.
We encounter competitive products from a different set of vendors in many of our primary
product categories. We believe that while our markets are 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, the depth
of planning and optimization provided and available deployment models. We compete on the basis of
the reputation of our products, the performance and scalability of our products, the quality of our
customer base, our ability to implement, our retail and supply chain industry
expertise, our lower total cost of ownership, technology platform and quality of customer
support across multiple regions for global customers.
The competitive markets in which we compete could 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 would adversely affect our 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
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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.
We have increased our off-shore resources through our
CoE
. However, our consulting services
business model is currently largely based on relatively high-cost on-shore resources and, although
it has started to increase, utilization of
CoE
consulting services resources in the Hyderabad
facility has been lower than planned.
We believe the primary reason for this lower-than-expected utilization may be due to slower
internal adoption of our planned mix of on-shore/off-shore services. Further, we face competition
from low-cost off-shore service providers and smaller boutique consulting firms. This competition
is expected to continue and 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 service offerings and theirs may diminish, resulting 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 some are still relatively
small compared to our consulting services business, if they grow successfully, it will be largely
at our expense. We continue to attempt to improve our competitive position by further developing
and increasing the utilization of our own offshore consulting services group at our
CoE
facility in
Hyderabad, and this should be enhanced by the
CoE
facility in Bangalore that we obtained in the i2
acquisition since it has been in operation for a longer period of time; however, we cannot
guarantee these efforts will be successful or enhance our ability to compete.
There are many risks associated with international operations, which may negatively impact our
overall business and profitability.
International revenues represented approximately 43% of our total revenues in first quarter
2010 and approximately 40% of our total revenues in the three years ended December 31, 2009, 2008
and 2007, or 40%, 40% and 41% on a pro forma basis, after giving effect to acquisition of i2, and
we expect to generate a significant portion of our revenues from international sales in the future.
Our international business operations are subject to risks associated with international
activities, including:
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currency fluctuations, the impact of which could significantly increase as a result of:
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our continuing expansion of the CoE in India; and
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the acquisition of i2, as the majority of i2s international expenses, including
the compensation expense of over 65% of its employees, is denominated in currencies
other than the U.S. Dollar;
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higher operating costs due to the need to comply with local laws or regulations;
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lower margins on consulting services;
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competing against low-cost service providers;
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unexpected changes in employment and other regulatory requirements;
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tariffs and other trade barriers;
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costs and risks of adapting our products for use in foreign countries;
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longer payment cycles in certain countries;
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potentially negative tax consequences;
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difficulties in staffing and managing geographically disparate operations;
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greater difficulty in safeguarding intellectual property, licensing and other trade
restrictions;
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ability to negotiate and have enforced favorable contract provisions;
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repatriation of earnings;
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the challenges of finding qualified management for our international operations;
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general economic conditions in international markets; and
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|
developing and deploying the skills required to service our broad set of product
offerings across the markets we serve.
|
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 our
CoE
in India. We cannot guarantee that any currency exchange strategy would be
successful in avoiding exchange-related losses.
If we experience expansion delays or difficulties with our Center of Excellence in India, our costs
may increase and our margins may decrease.
We are continuing the expansion of our
CoE
facilities located in Hyderabad and Bangalore,
India. In order to take advantage of cost efficiencies associated with Indias lower wage scale, we
expanded 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. Although we
have not yet fully utilized certain of the service capabilities of the
CoE
, we believe progress is
being made. We are satisfied with the progress of our product development, information technology
and other administrative support functions at the
CoE
. We are also beginning to gain leverage from
the
CoE
in our consulting services business, and we expect the overall share of consulting services
work performed by the
CoE
will continue to increase. We also believe there are additional
opportunities to further leverage the
CoE
in our customer support organization. If we encounter any
delays in our efforts to increase the utilization of our services resources at the
CoE,
it may have
an overall effect of reducing our consulting services margins and negatively impacting our
operating results. Additional risks associated with our
CoE
strategy include, but are not limited
to:
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|
|
the slower-than-expected rate of internal adoption of our planned mix of
on-shore/off-shore services;
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significant expected increases in labor costs in India;
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|
increased risk of associate attrition due to the improvement of the Indian economy and
job market;
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|
terrorist activities in the region;
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|
inability to hire or retain sufficient personnel with the necessary skill sets to meet
our needs;
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economic, security and political conditions in India;
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|
inadequate facilities or communications infrastructure; and
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|
local law or regulatory issues.
|
In addition, i2 conducted a large portion of its software solutions development and services
operations in Bangalore, India and the distributed nature of its development and consulting
resources could create increased operational challenges and complications for us based upon the
above factors.
Economic, political and market conditions can adversely affect our revenue and profitability.
Our revenue and profitability depend on the overall demand for our software and related
services. Historically, events such as terrorist attacks, natural catastrophes and contagious
diseases have created uncertainties in our markets and caused disruptions in our sales cycles. A
regional and/or global change in the economy or financial markets, such as the current severe
global economic
45
downturn, could result in delay or cancellation of customer purchases. A downturn
in the economy, such as the current global recession, may cause an increase in customer bankruptcy
reorganizations, liquidations and consolidations, which may negatively impact our accounts
receivables and expected future revenues from such customers. Current adverse conditions in credit
markets, reductions in consumer confidence and spending and the fluctuating commodities and/or fuel
costs are examples of changes that have delayed or terminated certain customer purchases. These
adverse conditions have delayed or terminated certain of our customer deals. A further worsening or
broadening or protracted extension of these conditions would have a significant negative impact on
our operating results. In addition to the potential negative impact of the economic downturn on our
software sales, customers are increasingly seeking to reduce their maintenance fees or to avoid
price increases. This has resulted in elevated levels of maintenance attrition in recent periods. A
prolonged economic downturn may further increase our attrition rates, particularly if many of our
larger maintenance customers cease operations. Because maintenance is our largest source of
revenue, increases in our attrition rates can have a significant adverse impact on our operating
results. Weak and uncertain economic conditions could also impair our customers ability to pay for
our products or services. Any of these factors could adversely impact our quarterly or annual
operating results and our financial condition.
We may be unable to retain key personnel, which could materially impact our ability to further
develop our business.
While the rate of retention of our associates is high compared to industry averages, our
operations are dependent upon our ability to attract and retain highly skilled associates and the
loss of certain key individuals to any of our competitors could adversely impact our business. In
addition, 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. Brewer, our Chief Executive Officer. Following our acquisition of i2,
our associates (including our associates who were former associates of i2) may experience
uncertainty as a result of integration activities, which may adversely affect our ability to
attract and retain key personnel. We also must continue to attract new talent and continue to
properly motivate our other existing associates and keep them focused on our strategies and goals,
which effort may be adversely affected as a result of the uncertainty and difficulties with
integrating i2 with JDA.
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 without a
successor in place, or any difficulties associated with a successor, could negatively affect our
financial performance.
We may have difficulty integrating future acquisitions, which would reduce the anticipated benefits
of those transactions.
We intend to 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 eleven acquisitions over the past
twelve years, including our acquisitions of i2 in January 2010 and of Manugistics in July 2006. The
risks we commonly encounter in acquisitions include:
|
|
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if we incur significant debt to finance a future acquisition and our combined business
does not perform as expected, we may have difficulty complying with debt covenants;
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|
|
|
|
if we use our stock to make a future acquisition, it will dilute existing shareholders;
|
|
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|
|
we may have difficulty assimilating the operations and personnel of any acquired company;
|
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|
|
the challenge and additional investment involved to integrate new products and
technologies into our sales and marketing process;
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|
|
|
we may have difficulty effectively integrating any acquired technologies or products with
our current products and technologies, particularly where such products reside on different
technology platforms, or overlap with our products;
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|
our ongoing business may be disrupted by transition and integration issues;
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|
customer purchases and projects may become delayed until we publish a combined product
roadmap, and once we do publish the roadmap it may disrupt additional purchases and
projects;
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|
the costs and complexity of integrating the internal information technology
infrastructure of each acquired business with ours may be greater than expected and require
capital investments;
|
46
|
|
|
we may not be able to retain key technical and managerial personnel from an acquired
business;
|
|
|
|
|
we may be unable to achieve the financial and strategic goals for any acquired and
combined businesses;
|
|
|
|
|
we may have difficulty in maintaining controls, procedures and policies during the
transition and integration period following a future acquisition;
|
|
|
|
|
our relationships with partner companies or third-party providers of technology or
products could be adversely affected;
|
|
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|
our relationships with employees and customers could be impaired;
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|
our due diligence process may fail to identify significant issues with product quality,
product architecture, legal or tax contingencies, customer obligations and product
development, among other things;
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|
as successor we may be subject to certain liabilities of our acquisition targets; and
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|
we may be required to sustain significant exit or impairment charges if products acquired
in business combinations are unsuccessful.
|
Our failure to effectively integrate any future acquisition would adversely affect the benefit
of such transaction, including potential synergies or sales growth opportunities, to the extent in
or the time frame anticipated.
Government contracts are subject to unique costs, terms, regulations, claims and penalties that
could reduce their profitability to us.
As a result of the acquisition of Manugistics, we acquired a number of contracts with the U.S.
government. Government contracts entail many unique risks, including, but not limited to, the
following:
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early termination of contracts by the government;
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|
costly and complex competitive bidding process;
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|
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|
required extensive use of subcontractors, whose work may be deficient or not performed in
a timely manner;
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|
significant penalties associated with employee misconduct in the highly regulated
government marketplace;
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|
changes or delays in government funding that could negatively impact contracts; and
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|
onerous contractual provisions unique to the government such as most favored customer
provisions.
|
These risks may make the contracts less profitable or cause them to be terminated, which would
adversely affect the business.
If we do not identify, adopt and develop product architecture that is compatible with
e
merging
industry standards, our products will be less attractive to customers.
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 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.
47
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.
We may be impacted by shifts in consumer preferences affecting the supply chain that could reduce
our revenues.
We are dependent upon and derive most of our revenue from the supply chain linking
manufacturers, distributors and retailers to consumers, or the consumer products supply chain
vertical. If a shift in spending occurs in this vertical market that results in decreased demand
for the types of solutions we sell, it would be difficult to adjust our strategies and solution
offerings because of our dependence on these markets. If the consumer products supply chain
vertical experiences a decline in business, it could have a significant adverse impact on our
business prospects, particularly if it is a prolonged decline. The current economic downturn has
caused declines in certain areas of the consumer products supply chain. If economic conditions
continue to deteriorate or the failure rates of customers in our target markets increase, we may
experience an overall decline in sales that would adversely impact our business.
Risks Related to the Acquisition of i2
We may not realize the anticipated benefits of our acquisition of i2, including potential synergies, due to challenges associated with integrating the companies or other factors.
The success of our acquisition of i2 will depend in part on the success of our management in
integrating the operations, technologies and personnel of i2 with JDA. Managements inability to
meet the challenges involved in integrating successfully the operations of JDA and i2 or otherwise
to realize the anticipated benefits of the transaction could seriously harm our results of
operations. In addition, the overall integration of the two companies will require substantial
attention from our management, particularly in light of the geographically dispersed operations of
the two companies, which could further harm our results of operations.
The challenges involved in integration include:
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|
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integrating the two companies operations, processes, people, technologies, products and
services;
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|
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|
coordinating and integrating sales and marketing and research and development functions;
|
|
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|
|
demonstrating to our clients that the acquisition will not result in adverse changes in
business focus, products and service deliverables (including customer satisfaction);
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|
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|
assimilating and retaining the personnel of both companies and integrating the business
cultures, operations, systems and clients of both companies; and
|
|
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|
|
consolidating corporate and administrative infrastructures and eliminating duplicative
operations and administrative functions.
|
We may not be able to successfully integrate the operations of i2 in a timely manner, or at
all, and we may not realize the anticipated benefits of the acquisition, including potential
synergies or sales or growth opportunities, to the extent or in the time frame anticipated. The
anticipated benefits and synergies of the acquisition are based on assumptions and current
expectations, with limited actual experience, and assume that we will successfully integrate and
reallocate resources among our facilities without unanticipated costs and that our efforts will not
have unforeseen or unintended consequences. In addition, our ability to realize the benefits and
synergies of the business combination could be adversely impacted to the extent that JDAs or i2s
relationships with existing or potential clients, suppliers or strategic partners is adversely
affected as a consequence of the transaction, as a result of further weakening of global economic
conditions, or by practical or legal constraints on its ability to combine operations. Furthermore,
a portion of our ability to realize synergies and cost savings depends on our ability to continue
to migrate work from certain of our on-shore facilities to our off-shore facilities.
If we are unable to successfully execute on any of our identified business opportunities or other
business opportunities that we determines to pursue, we may not achieve the benefits of the
acquisition and our business may be harmed.
As a result of our acquisition of i2, we have approximately 3,000 employees. In order to
pursue business opportunities, we will need to continue to build our infrastructure, client
initiatives and operational capabilities. Our ability to do any of these successfully could be
affected by one or more of the following factors:
48
|
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the ability of our technology and hardware, suppliers and service providers to perform as
we expect;
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|
our ability to execute our strategy and continue to operate a larger, more diverse
business efficiently on a global basis;
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|
our ability to effectively manage our third party relationships;
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|
our ability to attract and retain qualified personnel;
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|
our ability to effectively manage our employee costs and other expenses;
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|
our ability to retain and grow revenues and profits from our clients and the current
portfolio of business with each client;
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|
technology and application failures and outages, security breaches or interruption of
service, which could adversely affect our reputation and our relations with our clients;
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|
our ability to accurately predict and respond to the rapid technological changes in our
industry and the evolving service and pricing demands of the markets we serve; and
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our ability to raise additional capital to fund our long-term growth plans.
|
Our failure to adequately address the above factors would have a significant impact on our
ability to implement our business plan and our ability to pursue other opportunities that arise,
which might negatively affect our business.
i2 has been, and we may be, subject to product quality and performance claims, which could
seriously harm our business.
From time to time prior to the acquisition, customers of i2 made claims pertaining to the
quality and performance of i2s software and services, citing a variety of issues. Whether customer
claims regarding the quality and performance of i2s products and services are founded or
unfounded, they may adversely impact customer demand and affect JDAs market perception, its
products and services. Any such damage to our reputation could have a material adverse effect on
our business, results of operations, cash flow and financial condition.
Risks Related To Our Stock
Our quarterly operating results may fluctuate significantly, which could adversely affect the price
of our stock.
Our quarterly operating results have varied in the past and are expected to continue to vary
in the future. If our quarterly or annual operating results, particularly our software revenues,
fail to meet managements or analysts expectations, the price of our stock could decline. Many
factors may cause these fluctuations, including:
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The difficulty of predicting demand for our software products and services, including the size and timing of
individual contracts and our ability to recognize revenue with respect to contracts signed in a given quarter,
particularly with respect to our larger customers;
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Changes in the length and complexity of our sales cycle, including changes in the contract approval process at our
customers and potential customers that now require a formal proposal process, a longer decision making period and
additional layers of customer approval, often including authorization of the transaction by senior executives,
boards of directors and significant equity investors;
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Competitive pricing pressures and competitive success or failure on significant transactions;
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|
Customer order deferrals resulting from the anticipation of new products, economic uncertainty, disappointing
operating results by the customer, management changes, corporate reorganizations or otherwise;
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The timing of new software product and technology introductions and enhancements to our software products or those
of our competitors, and market acceptance of our new software products and technology;
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Lack of desired features and functionality in our individual products or our suite of products;
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49
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Changes in the number, size or timing of new and renewal maintenance contracts or cancellations;
|
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Unplanned changes in our operating expenses;
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Changes in the mix of domestic and international revenues, or expansion or contraction of international operations;
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Our ability to complete fixed price consulting contracts within budget;
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Foreign currency exchange rate fluctuations;
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Lower-than-anticipated utilization in our consulting services group as a result of increased competition, reduced
levels of software sales, reduced implementation times for our products, changes in the mix of demand for our
software products, mergers and consolidations within our customer base, or other reasons; and
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Our limited ability to reduce costs in the short term to compensate for any unanticipated shortfall in product or
services revenue.
|
Charges to earnings resulting from past or future acquisitions, including our acquisition of
i2, or internal reorganizations may also adversely affect our operating results. Under the
acquisition method of accounting, we allocate the total purchase price to an acquired companys net
tangible assets, amortizable intangible assets and in-process research and development, if any,
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. Managements estimates of fair value are based upon
assumptions believed to be reasonable but which are inherently uncertain. In addition, we have
not completed the valuation analysis and calculations necessary to finalize the required purchase
price allocation. In addition to goodwill, the final purchase price allocation may include revised
allocations to intangible assets such as trademarks and trade names, in-process research and
development, developed technology and customer-related assets. As a result, we are unable to fully
forecast at this time certain operating results that will ultimately impact our GAAP results for
2010, including the amount of potential amortization on acquired intangibles and the amount of
depreciation on acquired property and equipment. As a result, any of the following or other
factors could result in material charges that would adversely affect our results:
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Loss on impairment of goodwill and/or other intangible assets due to economic
conditions or an extended decline in the market price of our stock below book
value;
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Changes in the useful lives or the amortization of identifiable intangible assets;
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Accrual of newly identified pre-merger contingent liabilities, in which case the
related charges could be required to be included in earnings in the period in
which the accrual is determined to the extent it is identified subsequent to the
finalization of the purchase price allocation;
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Charges to income to eliminate certain JDA pre-merger activities that duplicate
those of the acquired company or to reduce our cost structure; and
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Changes in deferred tax assets and valuation allowances.
|
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 managements attention and resources. Furthermore, any settlement or adverse
determination of these lawsuits could subject us to significant liabilities.
Anti-takeover provisions in our organizational documents and Delaware law could prevent or delay a
change in control.
Our certificate of incorporation, which authorizes the issuance of blank check preferred
stock 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
50
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4.
Reserved
Item 5. Other Information
Not applicable
Item 6. Exhibits
See Exhibits Index
51
JDA SOFTWARE GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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JDA SOFTWARE GROUP, INC
.
|
|
Dated: May 10, 2010
|
By:
|
/s/ Hamish N. Brewer
|
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|
Hamish N. Brewer
|
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|
President and Chief Executive Officer
(Principal Executive Officer)
|
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|
By:
|
/s/ Peter S. Hathaway
|
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|
|
Peter S. Hathaway
|
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|
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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52
EXHIBIT INDEX
|
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|
Exhibit #
|
|
Description of Document
|
|
|
|
3.1
|
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Third Restated Certificate of Incorporation of the Company together with
Certificate of Amendment dated July 23, 2002. (Incorporated by reference to Exhibit 3.1 to
the Companys Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2002, as filed on November 12, 2002).
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3.2
|
|
Amended and Restated Bylaws of JDA Software Group, Inc. (as amended through April 22,
2010) (Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form
8-K dated April 22, 2010, as filed on April 28, 2010).
|
|
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|
3.3
|
|
Certificate of Designation of rights, preferences, privileges and restrictions of Series B
Convertible Preferred Stock of JDA Software Group, Inc filed with the Secretary of State of
the State of Delaware on July 5, 2006. (Incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K dated July 5, 2006, as filed on July 6, 2006).
|
|
|
|
3.4
|
|
Certificate of Correction filed to correct a certain error in the Certificate of
Designation of
rights, preferences, privileges and restrictions of Series B Convertible Preferred Stock of
JDA Software Group, Inc. filed with the Secretary of State of the State of Delaware on July
5, 2006. (Incorporated by reference to Exhibit 3.4 to the Companys Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2006, as filed on November 9,
2006).
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4.1
|
|
Specimen Common Stock Certificate of JDA Software Group, Inc. (Incorporated by
reference the Companys Registration Statement on Form S-1 (File No. 333-748), declared
effective on March 14, 1996).
|
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|
4.2
|
|
Indenture, dated as of December 10, 2009, by and among JDA Software Group, Inc., the
Guarantors named therein, and U.S. Bank National Association, as Trustee governing the
8% Senior Notes due 2014. (Incorporated by reference to Exhibit 4.1 to the Companys
Current Report on Form 8-K dated December 10, 2009, as filed on December 11, 2009).
|
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10.1(1)(2)
|
|
Executive Employment Agreement between Pete Hathaway and JDA Software Group, Inc. dated
July 20, 2009. (Filed herewith).
|
|
|
|
10.2(1)
|
|
Executive Employment Agreement between Jason B. Zintak and JDA Software Group, Inc. dated
August 18, 2009. (Filed herewith).
|
|
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31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer. (Filed herewith).
|
|
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|
31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer. (Filed herewith).
|
|
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|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(Filed herewith).
|
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(1)
|
|
Management contracts or compensatory plans or arrangements covering executive
officers or directors of the Company.
|
|
(2)
|
|
An extension of confidential treatment has been requested with respect to certain
portions of this exhibit.
|
53
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