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EX-3.1 - EX-3.1 - JDA SOFTWARE GROUP INC | p18036exv3w1.htm |
EX-31.1 - EX-31.1 - JDA SOFTWARE GROUP INC | p18036exv31w1.htm |
EX-31.2 - EX-31.2 - JDA SOFTWARE GROUP INC | p18036exv31w2.htm |
EX-32.1 - EX-32.1 - JDA SOFTWARE GROUP INC | p18036exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number: 0-27876
JDA SOFTWARE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
86-0787377 (I.R.S. Employer Identification No.) |
14400 North 87th Street
Scottsdale, Arizona 85260
(480) 308-3000
(Address and telephone number of principal executive offices)
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 | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the
Exchange Act). Yes o No þ
The number of shares outstanding of the Registrants Common Stock, $0.01 par value, was 41,799,525
as of August 5, 2010.
JDA SOFTWARE GROUP, INC.
FORM 10-Q
TABLE OF CONTENTS
2
Table of Contents
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts, unaudited)
(In thousands, except share amounts, unaudited)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 146,179 | $ | 75,974 | ||||
Restricted cash |
11,780 | 287,875 | ||||||
Accounts receivable, net |
116,091 | 68,883 | ||||||
Deferred tax asset |
57,630 | 19,142 | ||||||
Prepaid expenses and other current assets |
33,251 | 15,667 | ||||||
Total current assets |
364,931 | 467,541 | ||||||
Non-Current Assets: |
||||||||
Property and equipment, net |
44,648 | 40,842 | ||||||
Goodwill |
197,813 | 135,275 | ||||||
Other Intangibles, net: |
||||||||
Customer-based intangibles |
156,614 | 99,264 | ||||||
Technology-based intangibles |
41,161 | 20,240 | ||||||
Marketing-based intangibles |
13,226 | 157 | ||||||
Deferred tax asset |
269,421 | 44,350 | ||||||
Other non-current assets |
17,381 | 13,997 | ||||||
Total non-current assets |
740,264 | 354,125 | ||||||
Total Assets |
$ | 1,105,195 | $ | 821,666 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable |
$ | 14,423 | $ | 7,192 | ||||
Accrued expenses and other liabilities |
68,840 | 45,523 | ||||||
Income taxes payable |
3,152 | 3,489 | ||||||
Deferred revenue |
121,818 | 65,665 | ||||||
Total current liabilities |
208,233 | 121,869 | ||||||
Commitments and Contingencies (Note 8) |
||||||||
Non-Current Liabilities: |
||||||||
Long-term debt |
272,451 | 272,250 | ||||||
Accrued exit and disposal obligations |
6,626 | 7,341 | ||||||
Liability for uncertain tax positions |
10,306 | 8,770 | ||||||
Deferred revenue |
14,601 | | ||||||
Total non-current liabilities |
303,984 | 288,361 | ||||||
Total Liabilities |
512,217 | 410,230 | ||||||
Stockholders Equity: |
||||||||
Preferred stock, $.01 par value; authorized 2,000,000 shares; none
issued or outstanding |
| | ||||||
Common stock, $.01 par value; authorized, 50,000,000 shares; issued
43,628,080 and 36,323,245 shares, respectively |
436 | 363 | ||||||
Additional paid-in capital |
554,579 | 361,362 | ||||||
Deferred compensation |
(12,783 | ) | (5,297 | ) | ||||
Retained earnings |
77,612 | 74,014 | ||||||
Accumulated other comprehensive income (loss) |
(1,014 | ) | 3,267 | |||||
Less treasury stock, at cost, 1,920,105 and 1,785,715 shares, respectively |
(25,852 | ) | (22,273 | ) | ||||
Total stockholders equity |
592,978 | 411,436 | ||||||
Total liabilities and stockholders equity |
$ | 1,105,195 | $ | 821,666 | ||||
See notes to condensed consolidated financial statements.
3
Table of Contents
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share data, unaudited)
(in thousands, except earnings per share data, unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
REVENUES: |
||||||||||||||||
Software licenses |
$ | 32,152 | $ | 26,589 | $ | 56,589 | $ | 40,946 | ||||||||
Subscriptions and other recurring revenues |
5,806 | 996 | 10,093 | 1,964 | ||||||||||||
Maintenance services |
60,594 | 44,371 | 117,654 | 87,368 | ||||||||||||
Product revenues |
98,552 | 71,956 | 184,336 | 130,278 | ||||||||||||
Consulting services |
55,255 | 25,079 | 98,257 | 48,113 | ||||||||||||
Reimbursed expenses |
4,566 | 2,450 | 7,411 | 4,427 | ||||||||||||
Service revenues |
59,821 | 27,529 | 105,668 | 52,540 | ||||||||||||
Total revenues |
158,373 | 99,485 | 290,004 | 182,818 | ||||||||||||
COST OF REVENUES: |
||||||||||||||||
Cost of software licenses |
909 | 1,235 | 1,917 | 1,837 | ||||||||||||
Amortization of acquired software technology |
1,803 | 980 | 3,379 | 1,988 | ||||||||||||
Cost of maintenance services |
14,227 | 10,984 | 26,260 | 21,533 | ||||||||||||
Cost of product revenues |
16,939 | 13,199 | 31,556 | 25,358 | ||||||||||||
Cost of consulting services |
40,742 | 20,131 | 76,011 | 39,513 | ||||||||||||
Reimbursed expenses |
4,566 | 2,450 | 7,411 | 4,427 | ||||||||||||
Cost of service revenues |
45,308 | 22,581 | 83,422 | 43,940 | ||||||||||||
Total cost of revenues |
62,247 | 35,780 | 114,978 | 69,298 | ||||||||||||
GROSS PROFIT |
96,126 | 63,705 | 175,026 | 113,520 | ||||||||||||
OPERATING EXPENSES: |
||||||||||||||||
Product development |
19,481 | 12,664 | 36,758 | 25,237 | ||||||||||||
Sales and marketing |
24,460 | 16,170 | 45,572 | 30,422 | ||||||||||||
General and administrative |
19,801 | 11,670 | 37,498 | 22,696 | ||||||||||||
Amortization of intangibles |
9,915 | 6,051 | 18,481 | 12,127 | ||||||||||||
Restructuring charges |
4,548 | 2,732 | 12,306 | 4,162 | ||||||||||||
Acquisition-related costs |
865 | | 7,608 | | ||||||||||||
Total operating expenses |
79,070 | 49,287 | 158,223 | 94,644 | ||||||||||||
OPERATING INCOME |
17,056 | 14,418 | 16,803 | 18,876 | ||||||||||||
Interest expense and amortization of loan fees |
(6,182 | ) | (386 | ) | (12,268 | ) | (625 | ) | ||||||||
Interest income and other, net |
(642 | ) | 123 | 481 | (120 | ) | ||||||||||
INCOME BEFORE INCOME TAXES |
10,232 | 14,155 | 5,016 | 18,131 | ||||||||||||
Income tax provision |
2,366 | 5,220 | 1,418 | 6,552 | ||||||||||||
NET INCOME |
$ | 7,866 | $ | 8,935 | $ | 3,598 | $ | 11,579 | ||||||||
BASIC EARNINGS PER SHARE |
$ | .19 | $ | .26 | $ | .09 | $ | .33 | ||||||||
DILUTED EARNINGS PER SHARE |
$ | .19 | $ | .25 | $ | .09 | $ | .33 | ||||||||
SHARES USED TO COMPUTE: |
||||||||||||||||
Basic earnings per share |
41,672 | 35,004 | 40,514 | 34,983 | ||||||||||||
Diluted earnings per share |
42,265 | 35,232 | 41,151 | 35,154 | ||||||||||||
See notes to condensed consolidated financial statements.
4
Table of Contents
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
(in thousands, unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
NET INCOME |
$ | 7,866 | $ | 8,935 | $ | 3,598 | $ | 11,579 | ||||||||
OTHER COMPREHENSIVE INCOME (LOSS): |
||||||||||||||||
Foreign currency
translation
adjustment |
(3,720 | ) | 4,188 | (4,281 | ) | 3,574 | ||||||||||
Total other
comprehensive income
(loss) |
(3,720 | ) | 4,188 | (4,281 | ) | 3,574 | ||||||||||
COMPREHENSIVE INCOME
(LOSS) |
$ | 4,146 | $ | 13,123 | $ | (683 | ) | $ | 15,153 | |||||||
See notes to condensed consolidated financial statements.
5
Table of Contents
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
(in thousands, unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net Income |
$ | 3,598 | $ | 11,579 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
28,010 | 18,842 | ||||||
Provision for doubtful accounts |
500 | 300 | ||||||
Amortization of loan fees |
922 | | ||||||
Share-based compensation expense |
6,569 | 3,567 | ||||||
Net gain on disposal of property and equipment |
(9 | ) | (54 | ) | ||||
Deferred income taxes |
(304 | ) | 5,670 | |||||
Changes in assets and liabilities, net of effects from business acquisitions: |
||||||||
Accounts receivable |
(14,856 | ) | 16,820 | |||||
Income tax receivable |
2,031 | (1,434 | ) | |||||
Prepaid expenses and other current assets |
(13,911 | ) | (6,882 | ) | ||||
Accounts payable |
3,634 | 7,139 | ||||||
Accrued expenses and other liabilities |
(14,075 | ) | (13,507 | ) | ||||
Income tax payable |
(3,737 | ) | 365 | |||||
Deferred revenue |
11,196 | 18,107 | ||||||
Net cash provided by operating activities |
$ | 9,568 | $ | 60,512 | ||||
INVESTING ACTIVITIES: |
||||||||
Change in restricted cash |
$ | 276,095 | $ | | ||||
Purchase of i2 Technologies, Inc |
(213,427 | ) | | |||||
Payment of direct costs related to acquisitions |
(1,639 | ) | (1,489 | ) | ||||
Purchase of other property and equipment |
(6,397 | ) | (1,407 | ) | ||||
Proceeds from disposal of property and equipment |
349 | 54 | ||||||
Net cash provided by (used in) investing activities |
$ | 54,981 | $ | (2,842 | ) | |||
FINANCING ACTIVITIES: |
||||||||
Issuance of common stock under equity plans |
$ | 11,610 | $ | 4,642 | ||||
Purchase of treasury stock and other, net |
(3,758 | ) | (3,899 | ) | ||||
Net cash provided by financing activities |
$ | 7,852 | $ | 743 | ||||
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
(2,196 | ) | 1,566 | |||||
Net increase in cash and cash equivalents |
70,205 | 59,979 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
75,974 | 32,696 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 146,179 | $ | 92,675 | ||||
See notes to condensed consolidated financial statements.
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Table of Contents
JDA SOFTWARE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid for income taxes |
$ | 6,244 | $ | 2,260 | ||||
Cash paid for interest |
$ | 12,227 | $ | 98 | ||||
Cash received for income tax refunds |
$ | 1,458 | $ | 722 | ||||
ACQUISITION OF i2 TECHNOLOGIES, INC. |
||||||||
Identifiable assets acquired: |
||||||||
Current assets acquired |
$ | 300,456 | ||||||
Property and equipment acquired |
3,115 | |||||||
Customer-based intangibles |
74,600 | |||||||
Technology-based intangibles |
24,300 | |||||||
Marketing-based intangibles |
14,300 | |||||||
Long-term deferred tax assets acquired |
221,060 | |||||||
Other non-current assets acquired |
3,925 | |||||||
Total identifiable assets acquired |
641,756 | |||||||
Goodwill |
62,538 | |||||||
Total assets acquired |
704,294 | |||||||
Liabilities assumed: |
||||||||
Deferred revenue assumed |
(59,095 | ) | ||||||
Other current liabilities assumed |
(44,251 | ) | ||||||
Non-current liabilities assumed |
(1,194 | ) | ||||||
Total liabilities assumed |
(104,540 | ) | ||||||
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
Table of Contents
JDA SOFTWARE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except percentages, shares, per share amounts, or as otherwise stated)
(unaudited)
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 and six months ended June 30, 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 and six months ended June 30, 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
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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 initially recorded $66.0 million of goodwill during the three months ended March 31,
2010 and made subsequent adjustments of $3.5 million during the three months ended June 30, 2010 to
reduce the goodwill balance to $62.5 million (see Note 4). None of the goodwill recorded in the i2
acquisition is deductible for tax purposes. In addition, through June 30, 2010 we have recorded
$113.2 million in other intangible assets, including $74.6 million for customer-based intangibles
(maintenance relationships and future technological enhancements, service relationships and a
covenant not-to-compete), $24.3 million for technology-based intangibles consisting of developed
technology and $14.3 million for marketing-based intangibles consisting of trademark and trade
names. The estimated weighted average amortization period for all intangible assets acquired in
this transaction that are subject to amortization is approximately six years.
The purchase price allocation has not been finalized. The preliminary allocation of the
purchase price as of June 30, 2010 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. We
currently anticipate that additional adjustments may still be made to the fair value of acquired
deferred revenue balances, tax-related accounts, amortization of intangible assets and the residual
amount allocated to goodwill.
The following table summarizes our preliminary estimate through June 30, 2010 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 |
33,419 | |||||||
Other current assets acquired |
48,689 | |||||||
Property and equipment acquired |
3,115 | |||||||
Customer-based intangibles |
74,600 | 1 to 7 years | 6 years | |||||
Technology-based intangibles |
24,300 | 7 years | 7 years | |||||
Marketing-based intangibles |
14,300 | 5 years | 5 years | |||||
Long-term deferred tax assets acquired |
221,060 | |||||||
Other non-current assets |
3,925 | |||||||
Total assets acquired |
641,756 | |||||||
Goodwill |
62,538 | |||||||
Total assets acquired |
704,294 | |||||||
Deferred revenue assumed |
(59,095 | ) | ||||||
Other current liabilities assumed |
(44,251 | ) | ||||||
Other non-current liabilities assumed |
(1,194 | ) | ||||||
Total liabilities assumed |
(104,540 | ) | ||||||
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 $36.3 million, of which approximately $2.8 million is expected to be
uncollectable.
Contingent liabilities were recorded in purchase accounting for certain assumed customer and
labor disputes in the amounts 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 approximately
$5.2 million and $242.0 million and $73,000 and $1.2 million, respectively. See Note 8 for a discussion of legal proceedings.
9
Table of Contents
The following unaudited pro-forma consolidated results of operations for the six months ended
June 30, 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.
Six Months Ended | Six Months Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
Total revenues |
$ | 305,030 | $ | 296,249 | ||||
Net income (loss) |
$ | (10,848 | ) | $ | 26,980 | |||
Basic earnings (loss) per share |
$ | (0.26 | ) | $ | 0.58 | |||
Diluted earnings (loss) per share |
$ | (0.26 | ) | $ | 0.58 |
The amounts of i2 revenues and earnings (loss) included in our consolidated statements of
operations for the six months ended June 30, 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) | |||||||
i2 operating results from January 28, 2010 to June 30, 2010 |
$ | 90,195 | $ | * | ||||
i2 operating results from January 1, 2010 to June 30, 2010 |
$ | 105,221 | $ | * | ||||
i2 operating results from January 1, 2009 to June 30, 2009 |
$ | 113,431 | $ | 11,663 |
* | We are unable to provide separate disclosure of the earnings (loss) of i2 from January 28, 2010 (date of acquisition) to June 30, 2010 and the pro-forma results from January 1, 2010 to June 30, 2010 as the operating expenses of the combined company were co-mingled at the date of acquisition. |
Through June 30, 2010, we have expensed approximately $12.4 million of costs related to the
acquisition of i2, including $865,000 and $7.6 million in the three and six months ended June 30,
2010, respectively. 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 ($7.1 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 June 30, 2010, we had forward exchange contracts with a notional value of $72.3 million and
an associated net forward contract receivable of $545,000 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 a net foreign
currency exchange loss of $958,000 in the three months ended June 30, 2010 and a net foreign
currency exchange gain of $102,000 in the three months ended June 30, 2009. In the six months ended
June 30, 2010 we recorded a net foreign currency exchange contract gain of $3,000 compared to a net
foreign
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currency exchange contract loss of $216,000 in the six months ended June 30, 2009. Net foreign
currency exchange gains (losses) are included in the condensed consolidated statements of
operations under the caption Interest Income and other, net.
4. Goodwill and Other Intangibles, net
Goodwill and other intangible assets consist of the following:
June 30, 2010 | December 31, 2009 | |||||||||||||||||||
Estimated Useful | Gross Carrying | Accumulated | Gross Carrying | Accumulated | ||||||||||||||||
Lives | Amount | Amortization | Amount | Amortization | ||||||||||||||||
Goodwill: |
||||||||||||||||||||
Gross goodwill |
$ | 207,526 | $ | | $ | 144,988 | $ | | ||||||||||||
Accumulated impairment losses |
(9,713 | ) | (9,713 | ) | ||||||||||||||||
Goodwill, net of impairment losses |
$ | 197,813 | $ | 135,275 | ||||||||||||||||
Identifiable intangible assets: |
||||||||||||||||||||
Customer-based intangible assets |
1 to 13 years | 257,983 | (101,369 | ) | 183,383 | (84,119 | ) | |||||||||||||
Technology-based intangible assets |
7 to 15 years | 90,147 | (48,986 | ) | 65,847 | (45,607 | ) | |||||||||||||
Marketing-based intangible assets |
5 years | 19,491 | (6,265 | ) | 5,191 | (5,034 | ) | |||||||||||||
367,621 | (156,620 | ) | 254,421 | (134,760 | ) | |||||||||||||||
$ | 565,434 | $ | (156,620 | ) | $ | 389,696 | $ | (134,760 | ) | |||||||||||
Goodwill. We initially recorded $66.0 million of goodwill during the three months ended
March 31, 2010 in connection with our acquisition of i2 (see Note 2), all of which has been
allocated to our Supply Chain reportable business segmenting unit (see Note 13). Subsequent
adjustments of $3.5 million were recorded during the three months ended June 30, 2010 to reduce the
goodwill balance to $62.5 million. These adjustments were primarily made to (i) increase the fair
value of assumed accounts receivable, (ii) reduce the fair value of customer-based and
technology-based intangible assets, (iii) decrease the fair value of deferred revenue, (iv) record
long-term deferred tax assets and current income tax payable liabilities, and (v) reduce the
liability for uncertain tax positions. The purchase price allocation has not been finalized. The
preliminary allocation of the purchase price as of June 30, 2010 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. We currently anticipate that additional adjustments may still be made to the
fair value of acquired deferred revenue balances, tax-related accounts, amortization of intangible
assets and the residual amount allocated to goodwill. We found no indication of impairment of our
goodwill balances during the three months ended June 30, 2010 and, absent future indicators of
impairment, the next annual impairment test will be performed in fourth quarter 2010. As of June
30, 2010, the goodwill balance has been allocated to our reporting units as follows: $194.1
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. Through
June 30, 2010, we have recorded $74.6 million, $24.3 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 the three and six months ended June 30, 2010 was $11.7 million and
$21.9 million, respectively. Amortization expense for the three and six months ended June 30, 2009
was $7.0 million and $14.1 million, respectively. The increase in amortization in the 2010 periods
compared to the 2009 periods is due to amortization on the identifiable intangible assets recorded
in the acquisition of i2.
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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 June 30, 2010, we expect amortization
expense for the remainder of 2010 and the next four years to be as follows:
Year | Amortization | |
2010 |
$23,893 | |
2011 |
$45,518 | |
2012 |
$44,931 | |
2013 |
$44,241 | |
2014 |
$27,172 |
5. Restructuring Reserves
2010 Restructuring Charges
We recorded restructuring charges of $12.4 million in the six months ended June 30, 2010,
including $7.8 million in first quarter 2010 and $4.6 million in second quarter 2010. These charges
are primarily 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) facilities. The charges include $8.4 million for termination benefits related
to a workforce reduction of 127 associates primarily in product development, sales, information
technology and other administrative positions in each of our geographic regions. In addition, the
charges include $4.0 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 June 30, 2010, approximately $7.0 million of the costs
associated with these restructuring charges have been paid and the remaining balance of $5.3
million includes $4.4 million of current liabilities under the caption Accrued expenses and other
current liabilities and $942,000 of non-current liabilities under the caption Accrued exit and
disposal obligations. A summary of the restructuring charges in the six months ended June 30,
2010 is as follows:
Impact of Changes | Balance | |||||||||||||||
Description of charge | Initial Reserve | Cash Payments | in Exchange Rates | June 30, 2010 | ||||||||||||
Termination benefits |
$ | 8,426 | $ | (6,334 | ) | $ | 6 | $ | 2,098 | |||||||
Office closures |
3,946 | (748 | ) | 23 | 3,221 | |||||||||||
Total |
$ | 12,372 | $ | (7,082 | ) | $ | 29 | $ | 5,319 | |||||||
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 utilized as payments are
made 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 and $2.3 million in second quarter 2009, primarily associated with the transition of
additional on-shore activities to the CoE facilities 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. We recorded an adjustment of $78,000
during the six months ended June 30, 2010 to reduce previously established reserves related to the
2009 restructuring charge. As of June 30, 2010, approximately $6.4 million of the costs associated
with these restructuring charges have been paid and the remaining balance of $114,000 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.
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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 June 30, 2010 includes $4.2 million of current liabilities under the caption Accrued
expenses and other liabilities and $5.7 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:
Initial | Adjustments | Cash | Impact of Changes | Balance | Adjustments to | Cash | Impact of Changes | Balance | ||||||||||||||||||||||||||||
Description of charge | Reserve | to Reserves | Payments | in Exchange Rates | December 31, 2009 | Reserves | Payments | in Exchange Rates | June 30, 2010 | |||||||||||||||||||||||||||
Restructuring charges: |
||||||||||||||||||||||||||||||||||||
Office closures, lease
terminations and
sublease costs |
$ | 29,212 | $ | (949 | ) | $ | (16,110 | ) | $ | (724 | ) | $ | 11,429 | $ | | $ | (1,572 | ) | $ | (262 | ) | $ | 9,595 | |||||||||||||
Employee severance and
termination benefits |
3,607 | (767 | ) | (2,468 | ) | 125 | 497 | (73 | ) | (67 | ) | (63 | ) | 294 | ||||||||||||||||||||||
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 | $ | (73 | ) | (1,639 | ) | (325 | ) | 9,889 | |||||||||||||||||||||
Direct costs |
13,125 | 6 | (13,131 | ) | | | | | | | ||||||||||||||||||||||||||
Total |
$ | 47,394 | $ | (1,488 | ) | $ | (33,381 | ) | $ | (599 | ) | $ | 11,926 | $ | (73 | ) | $ | (1,639 | ) | $ | (325 | ) | $ | 9,889 | ||||||||||||
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 utilized as payments are made 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 ($7.1 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 substantially all of our
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.
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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 were
required to file, and did initially file on June 9, 2010, an exchange offer registration statement,
as amended, enabling holders to exchange the Senior Notes for registered notes with terms
substantially identical to the terms of the Senior Notes. We are also required 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.
The fair value and carrying amount of the Senior Notes were $276.4 million and $272.5 million,
respectively at June 30, 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 $7.1 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 $11.0
million of interest on the Senior Notes in the six months ended June 30, 2010 and have amortized
approximately $922,000 of the original issue discount and related loan origination fees.
8. Legal Proceedings
Dillards, Inc. vs. i2 Technologies, Inc.
In September 2007, Dillards, Inc. filed a lawsuit against i2 Technologies, Inc. in the
191st Judicial District Court of Dallas County, Texas, (the trial court) Cause No.
07-10924-J, which alleges that i2 committed fraud and failed to meet certain obligations to
Dillards regarding the purchase of two i2 products in the year 2000 under a software license
agreement and related services agreement. Dillards paid i2 approximately $8.1 million under these
two agreements.
On June 15, 2010, the jury in the trial court ruled in favor of the plaintiffs and rendered
three alternative verdicts ranging from $8.1 million to $237 million. Dillards is pursuing the
verdict in the amount of $237 million, which includes $150 million punitive damages, $76.2 million
in lost profits and pre-judgment interest of approximately 10.8 million. Post-judgment interest
will accrue on the total amount of the judgment at 5% compounded annually. The Company has
requested that the trial court set aside or reduce the verdict before it is entered as a judgment.
There is no statutory time limit within which the trial court judge is required to enter judgment
on this matter. If the trial court enters a judgment based on the pending jury verdict, or if
another judgment is returned that we believe is unacceptable, the Company intends to pursue all
available remedies in the appeals process. We have the right under Texas law to suspend
enforcement of the trial court judgment during the appeals process by posting a $25 million bond
and we are prepared to do that, if necessary. There can be no assurance that the verdict will be
set aside or reduced, that any appeal of the judgment will be successful, or that the lawsuit can
be settled on terms acceptable to the Company.
The Company will accrue an estimated loss from this matter if it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. In evaluating the
probability of an unfavorable outcome in this litigation we have considered (a) the nature of the
litigation and claim, (b) the progress in the case, (c) the opinions of legal counsel and other
advisors, (d) the experience of the Company and others in similar cases, and (e) how management
intends to respond in the event an unfavorable final judgment is returned by the trial court. We
currently estimate the potential loss for this matter to range between zero and $237 million
(representing a maximum award for lost profits, punitive damages and pre-judgment interest), plus
post-judgment interest. The final
trial court judgment or any revised result that may be achieved through an appeals process
(which could take several years to complete), could result in multiple potential outcomes within
this range. Management has determined that the best estimate of the potential outcome of this
matter is $5 million which was recorded on the opening balance sheet of i2. We have not accrued any
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additional estimated contingent losses in this lawsuit as a result of the jury verdict.
Managements best estimate is based on our evaluation of the case, which included input from i2s
in-house counsel and trial lawyers, and other outside litigation experts who assisted in our due
diligence process. This amount is also supported by subsequent analyses and focus group assessments
prepared by outside trial consultants prior to the actual trial.
i2 Technologies, Inc. vs. Oracle Corporation
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, Tyler Division (No. 6:09-cv-194-LED) 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 four Oracle patents. In response to i2s motion to sever the
Oracle counterclaim, on June 11, 2010, the trial court split the initial case into two cases,
staying the second case (No. 6:10-cv-00284-LED) pending the outcome of the first case. The trial
court instructed i2 to select five patents for the first case and Oracle to select one patent for
the first case.
Shareholder Class Action Litigation
In December, 2009, the Company was sued in a putative shareholder class action against i2 and
its board of directors, in the County Court of Law No. 2 of Dallas County (No. CC-09-08476-B). The
plaintiffs allege in this lawsuit that the directors of i2 breached their fiduciary duties to
shareholders of i2 by selling i2 to the Company via an allegedly unfair process and at an unfair
price, and that the Company aided and abetted this alleged breach. On January 26, 2010, the Court
denied the plaintiffs request for a preliminary injunction that sought to enjoin the merger
between JDA and i2. The plaintiffs subsequently filed an amended complaint, alleging unspecified
monetary damages in addition to declaratory and injunctive relief and attorneys fees. The Company,
i2 and i2s directors have denied all allegations and discovery is ongoing.
We are involved in other 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.
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
defined adjusted EBITDA performance threshold goal in 2010. A partial pro-rata issuance of
performance share awards will be made if
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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 $13.8 million has been recorded in the equity section our balance
sheet, 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 June 30, 2010, based on
first half 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 have recorded $4.6 million in stock-based compensation expense related to these awards
in the six months ended June 30, 2010, including $2.3 million in second quarter 2010. 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 June 30, 2010, approximately 10,100 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 $2.3 million in the six months ended June 30, 2009, plus an additional
$502,000 in the six months ended June 30, 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 June 30, 2010, approximately 5,700 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 $522,000 in share-based compensation expense related to these awards in
2009, including $294,000 in the six months ended June 30, 2009, plus an additional $231,000 in the
six months ended June 30, 2010.
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 were subsequently forfeited. We recognized $883,000 in share-based
compensation expense related to these performance share awards in 2009, including $484,000 in the
six months ended June 30, 2009 and as of December 31, 2009 all share-based compensation expense had
been recognized.
During the six months ended June 30, 2010 and 2009, we recorded share-based compensation
expense of $470,000 and $341,000, 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 vesting on the first anniversary of their employment with the remainder vesting ratably over the subsequent 24- |
16
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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 $497,000 in the six months ended June 30, 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 $83,000 in the six months ended June 30, 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 June 30, 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
1st and August 1st 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 recognized $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 the six months ended June 30, 2010 and 2009, we also repurchased 134,390 and 79,259
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 $3.6 million at prices ranging from $22.47 to $30.06 in the six months ended
June 30, 2010 and for $988,000 at prices ranging from $9.75 to $15.87 in the six months ended June
30, 2009.
11. Income Taxes
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 June 30,
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2010 is different from the method used to calculate the effective rate for
the three months ended June 30, 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 income tax provisions of $2.4 million and $5.2 million for the three months ended
June 30, 2010 and 2009, respectively, representing effective income tax rates of 23% and 37%,
respectively. We recorded income tax provisions of $1.4 million and $6.6 million for the six months
ended June 30, 2010 and 2009, respectively, representing effective income tax rates of 28% and 36%,
respectively. Our effective income tax rates during the three months and six month periods ended
June 30, 2010 and 2009 differed from the 35% U.S. statutory rate primarily due to changes in our
liability for uncertain tax positions, state income taxes (net of federal benefit), the effect of
foreign operations and items not deductible for tax, including those related to certain costs the
Company incurred in connection with the acquisition of i2 Technologies, Inc. during first quarter
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 June 30, 2010 we had approximately $12.6 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 second quarter 2010, the liability for
uncertain tax positions decreased by approximately $2.1 million. The decrease was primarily
related to the Company receiving communication that the Indian and U.S. authorities reached a
settlement related to i2s 2002 through 2006 tax years. It is reasonably possible that
approximately $6.3 million of all items included in our 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 a $194,000 benefit in the six months ended June 30, 2010 and an accrual of
$383,000 for the six months ended June 30, 2009. As of June 30, 2010 and December 31, 2009 there
are approximately $2.8 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 of the overall tax provision.
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 a few minor 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 tax returns prior to 2009 and no material adjustments have been
made as a result of these examinations.
12. Earnings 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
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.
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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 the three and six months ended June 30, 2009 includes the
assumed conversion of the Series B preferred stock into common stock as of the beginning of the
period.
The dilutive effect of outstanding stock options is included in the diluted earnings per share
calculations for 2010 and 2009 using the treasury stock method. Diluted earnings per share for the
three months ended June 30, 2010 and 2009 exclude approximately 12,000 and 1.2 million,
respectively of vested options for the purchase of common stock that have grant prices in excess of
the average market price, or which are otherwise anti-dilutive. Diluted earnings per share for the
six months ended June 30, 2010 and 2009 exclude approximately 6,000 and 1.3 million, respectively
of vested options for the purchase of common stock that have grant prices in excess of the average
market price, or which are otherwise anti-dilutive. In addition, diluted earnings per share also
exclude approximately 555,000 and 596,000 of contingently issuable performance share awards,
respectively for which all necessary conditions had not been met (see Note 8). Earnings per share
for three and six months ended June 30, 2010 and 2009 are calculated as follows:
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 7,866 | $ | 8,935 | $ | 3,598 | $ | 11,579 | ||||||||
Less dividends paid |
| | | | ||||||||||||
Undistributed earnings |
$ | 7,866 | $ | 8,935 | $ | 3,598 | $ | 11,579 | ||||||||
Allocation of undistributed earnings: |
||||||||||||||||
Common Stock |
$ | 7,866 | $ | 8,015 | $ | 3,598 | $ | 10,387 | ||||||||
Series B Preferred Stock |
| 920 | | 1,192 | ||||||||||||
$ | 7,866 | $ | 8,935 | $ | 3,598 | $ | 11,579 | |||||||||
Weighted average shares: |
||||||||||||||||
Common Stock |
41,672 | 31,400 | 40,514 | 31,379 | ||||||||||||
Series B Preferred Stock |
| 3,604 | | 3,604 | ||||||||||||
Shares Basic earnings per share |
41,672 | 35,004 | 40,514 | 34,983 | ||||||||||||
Dilutive common stock equivalents |
593 | 228 | 637 | 171 | ||||||||||||
Shares Diluted earnings per share |
42,265 | 35,232 | 41,151 | 35,154 | ||||||||||||
Basic earnings per share applicable to: |
||||||||||||||||
Common Stock |
$ | .19 | $ | .26 | $ | .09 | $ | .33 | ||||||||
Series B Preferred Stock |
$ | | $ | .26 | $ | | $ | .33 | ||||||||
Diluted earnings per share applicable to common shareholders |
$ | .19 | $ | .25 | $ | .09 | $ | .33 | ||||||||
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 | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Americas |
$ | 107,304 | $ | 65,803 | $ | 195,004 | $ | 126,381 | ||||||||
Europe |
26,874 | 20,186 | 52,188 | 36,839 | ||||||||||||
Asia/Pacific |
24,195 | 13,496 | 42,812 | 19,598 | ||||||||||||
Total revenues |
$ | 158,373 | $ | 99,485 | $ | 290,004 | $ | 182,818 | ||||||||
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June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Identifiable assets: |
||||||||
Americas |
$ | 890,253 | $ | 695,539 | ||||
Europe |
119,549 | 85,817 | ||||||
Asia/Pacific |
95,393 | 40,310 | ||||||
Total identifiable assets |
$ | 1,105,195 | $ | 821,666 | ||||
Revenues in the Americas for three months ended June 30, 2010 and 2009 include $93.3
million and $57.2 million from the United States, respectively and $168.3 million and $110.7
million in the six months ended June 30, 2010 and 2009, respectively. Identifiable assets for the
Americas include $853.7 million and $666.0 million in the United States as of June 30, 2010 and
December 31, 2009, respectively. The increase in identifiable assets at June 30, 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 eliminated
Retail and Manufacturing and Distribution as reportable business segments and beginning with first
quarter 2010 have reported 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 the three and six months ended June 30, 2010 and 2009 is as
follows:
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Supply Chain |
$ | 152,931 | $ | 88,161 | $ | 278,164 | $ | 166,384 | ||||||||
Services Industries |
5,442 | 11,324 | 11,840 | 16,434 | ||||||||||||
$ | 158,373 | $ | 99,485 | $ | 290,004 | $ | 182,818 | |||||||||
Operating income (loss): |
||||||||||||||||
Supply Chain |
$ | 52,638 | $ | 29,127 | $ | 92,542 | $ | 51,238 | ||||||||
Services Industries |
(453 | ) | 5,744 | 154 | 6,623 | |||||||||||
Other (see below) |
(35,129 | ) | (20,453 | ) | (75,893 | ) | (38,985 | ) | ||||||||
$ | 17,056 | $ | 14,418 | $ | 16,803 | $ | 18,876 | |||||||||
Depreciation: |
||||||||||||||||
Supply Chain |
$ | 2,634 | $ | 1,743 | $ | 5,063 | $ | 3,530 | ||||||||
Services Industries |
148 | 327 | 364 | 553 | ||||||||||||
$ | 2,782 | $ | 2,070 | $ | 5,427 | $ | 4,083 | |||||||||
Other: |
||||||||||||||||
General and administrative expenses |
$ | 19,801 | $ | 11,670 | $ | 37,498 | $ | 22,696 | ||||||||
Amortization of intangible assets |
9,915 | 6,051 | 18,481 | 12,127 | ||||||||||||
Restructuring charge |
4,548 | 2,732 | 12,306 | 4,162 | ||||||||||||
Acquisition-related costs |
865 | | 7,608 | | ||||||||||||
$ | 35,129 | $ | 20,453 | $ | 75,893 | $ | 38,985 | |||||||||
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
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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.
14. Condensed Consolidating Financial Information
Pursuant to the indenture governing the Senior Notes (see Note 7) our obligations under the
Senior Notes are fully and unconditionally guaranteed, joint and severally, on a senior basis by
substantially all of our existing and future domestic subsidiaries (including, following the
Merger, i2 and its domestic subsidiaries). Pursuant to Regulation S-X, Section 210.3-10(f), we are
required to present condensed consolidating financial information for subsidiaries that have
guaranteed the debt of a registrant issued in a public offering, where the guarantee is full and
unconditional, joint and several, and where the voting interest of the subsidiary is 100% owned by
the registrant.
The following tables present condensed consolidating balance sheets as of June 30, 2010 and
December 31, 2009, and condensed consolidating statements of income for the three and six months
ended June 30, 2010 and 2009, and condensed consolidated statements of cash flow for the six months
ended June 30 2010 and 2009 for (i) JDA Software Group, Inc. the parent company and issuer of the
Senior Notes, (ii) the guarantor subsidiaries on a combined basis, (iii) the non-guarantor
subsidiaries on a combined basis, (iv) elimination adjustments, and (v) total consolidating
amounts. The condensed consolidating financial information should be read in conjunction with the
consolidated financial statements herein.
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Unaudited Condensed Consolidating Balance Sheets
June 30, 2010
(in thousands)
June 30, 2010
(in thousands)
JDA Software | Guarantor | Non-Guarantor | ||||||||||||||||||
Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 111,909 | $ | 34,270 | $ | | $ | 146,179 | ||||||||||
Restricted cash |
| 10,971 | 809 | | 11,780 | |||||||||||||||
Accounts receivable |
| 95,406 | 20,685 | | 116,091 | |||||||||||||||
Income tax receivable |
4,531 | (3,499 | ) | (1,032 | ) | | | |||||||||||||
Deferred tax asset |
| 55,682 | 1,948 | | 57,630 | |||||||||||||||
Prepaid expenses and other current assets |
| 21,424 | 11,827 | | 33,251 | |||||||||||||||
Total current assets |
4,531 | 291,893 | 68,507 | | 364,931 | |||||||||||||||
Non-Current Assets: |
||||||||||||||||||||
Property and equipment, net |
| 38,680 | 5,968 | | 44,648 | |||||||||||||||
Goodwill |
| 197,813 | | | 197,813 | |||||||||||||||
Other intangibles, net: |
||||||||||||||||||||
Customer-based intangibles |
| 156,614 | | | 156,614 | |||||||||||||||
Technology-based intangibles |
| 41,161 | | | 41,161 | |||||||||||||||
Marketing-based intangibles |
| 13,226 | | | 13,226 | |||||||||||||||
Deferred tax asset |
| 257,546 | 11,875 | | 269,421 | |||||||||||||||
Other non-current assets |
6,266 | 108 | 11,007 | | 17,381 | |||||||||||||||
Investment in subsidiaries |
161,334 | 74,331 | | (235,665 | ) | | ||||||||||||||
Intercompany accounts |
694,337 | (730,368 | ) | 36,031 | | | ||||||||||||||
Total non-current assets |
861,937 | 49,111 | 64,881 | (235,665 | ) | 740,264 | ||||||||||||||
Total Assets |
$ | 866,468 | $ | 341,004 | $ | 133,388 | $ | (235,665 | ) | $ | 1,105,195 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Accounts Payable |
$ | | $ | 12,688 | $ | 1,735 | $ | | $ | 14,423 | ||||||||||
Accrued expenses and other liabilities |
1,039 | 43,150 | 24,651 | | 68,840 | |||||||||||||||
Income taxes payable |
| (3,296 | ) | 6,448 | | 3,152 | ||||||||||||||
Deferred revenue |
| 89,952 | 31,866 | | 121,818 | |||||||||||||||
Total current liabilities |
1,039 | 142,494 | 64,700 | | 208,233 | |||||||||||||||
Non-Current Liabilities: |
||||||||||||||||||||
Long-term debt |
272,451 | | | | 272,451 | |||||||||||||||
Accrued exit and disposal obligations |
| 4,292 | 2,334 | | 6,626 | |||||||||||||||
Liability for uncertain tax positions |
| 9,052 | 1,254 | | 10,306 | |||||||||||||||
Deferred revenues |
| 14,429 | 172 | | 14,601 | |||||||||||||||
Total non-current liabilities |
272,451 | 27,773 | 3,760 | | 303,984 | |||||||||||||||
Total Liabilities |
273,490 | 170,267 | 68,460 | | 512,217 | |||||||||||||||
Stockholders Equity |
592,978 | 170,737 | 64,928 | (235,665 | ) | 592,978 | ||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 866,468 | $ | 341,004 | $ | 133,388 | $ | (235,665 | ) | $ | 1,105,195 | |||||||||
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Condensed Consolidating Balance Sheets
December 31, 2009
(in thousands)
December 31, 2009
(in thousands)
JDA Software | Guarantor | Non-Guarantor | ||||||||||||||||||
Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 47,170 | $ | 28,804 | $ | | $ | 75,974 | ||||||||||
Restricted cash |
287,875 | | | | 287,875 | |||||||||||||||
Accounts receivable |
| 53,535 | 15,348 | | 68,883 | |||||||||||||||
Income tax receivable |
469 | 5,941 | (6,410 | ) | | | ||||||||||||||
Deferred tax asset |
| 17,973 | 1,169 | | 19,142 | |||||||||||||||
Prepaid expenses and other current assets |
| 11,273 | 4,394 | | 15,667 | |||||||||||||||
Total current assets |
288,344 | 135,892 | 43,305 | | 467,541 | |||||||||||||||
Non-Current Assets: |
||||||||||||||||||||
Property and equipment, net |
| 35,343 | 5,499 | | 40,842 | |||||||||||||||
Goodwill |
| 135,275 | | | 135,275 | |||||||||||||||
Other intangibles, net: |
||||||||||||||||||||
Customer-based intangibles |
| 99,264 | | | 99,264 | |||||||||||||||
Technology-based intangibles |
| 20,240 | | | 20,240 | |||||||||||||||
Marketing-based intangibles |
| 157 | | | 157 | |||||||||||||||
Deferred tax asset |
| 37,781 | 6,569 | | 44,350 | |||||||||||||||
Other non-current assets |
6,697 | 124 | 7,176 | | 13,997 | |||||||||||||||
Investment in subsidiaries |
154,166 | 27,575 | | (181,741 | ) | | ||||||||||||||
Intercompany accounts |
234,479 | (253,131 | ) | 18,652 | | | ||||||||||||||
Total non-current assets |
395,342 | 102,628 | 37,896 | (181,741 | ) | 354,125 | ||||||||||||||
Total Assets |
$ | 683,686 | $ | 238,520 | $ | 81,201 | $ | (181,741 | ) | $ | 821,666 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Accounts Payable |
$ | | $ | 6,140 | $ | 1,052 | $ | | $ | 7,192 | ||||||||||
Accrued expenses and other liabilities |
| 28,809 | 16,714 | | 45,523 | |||||||||||||||
Income taxes payable |
| 1,255 | 2,234 | | 3,489 | |||||||||||||||
Deferred revenue |
| 44,145 | 21,520 | | 65,665 | |||||||||||||||
Total current liabilities |
| 80,349 | 41,520 | | 121,869 | |||||||||||||||
Non-Current Liabilities: |
||||||||||||||||||||
Long-term debt |
272,250 | | | | 272,250 | |||||||||||||||
Accrued exit and disposal obligations |
| 4,723 | 2,618 | | 7,341 | |||||||||||||||
Liability for uncertain tax positions |
| 8,770 | | | 8,770 | |||||||||||||||
Total non-current liabilities |
272,250 | 13,493 | 2,618 | | 288,361 | |||||||||||||||
Total Liabilities |
272,250 | 93,842 | 44,138 | | 410,230 | |||||||||||||||
Stockholders Equity |
411,436 | 144,678 | 37,063 | (181,741 | ) | 411,436 | ||||||||||||||
Total Liabilities and Stockholders Equity |
$ | 683,686 | $ | 238,520 | $ | 81,201 | $ | (181,741 | ) | $ | 821,666 | |||||||||
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Unaudited Condensed Consolidating Statements of Income
Three Months Ended June 30, 2010
(in thousands)
Three Months Ended June 30, 2010
(in thousands)
JDA Software | Guarantor | Non-Guarantor | ||||||||||||||||||
Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Software licenses |
$ | | $ | 32,152 | $ | | $ | | $ | 32,152 | ||||||||||
Subscriptions and other recurring revenues |
| 5,806 | | | 5,806 | |||||||||||||||
Maintenance services |
| 42,480 | 18,114 | | 60,594 | |||||||||||||||
Product revenues |
| 80,438 | 18,114 | | 98,552 | |||||||||||||||
Consulting services |
| 37,535 | 17,720 | | 55,255 | |||||||||||||||
Reimbursed expenses |
| 3,048 | 1,518 | | 4,566 | |||||||||||||||
Service revenues |
| 40,583 | 19,238 | | 59,821 | |||||||||||||||
Total revenues |
| 121,021 | 37,352 | | 158,373 | |||||||||||||||
Cost of Revenues: |
||||||||||||||||||||
Cost of software licenses |
| 909 | | | 909 | |||||||||||||||
Amortization of acquired software technology |
| 1,803 | | | 1,803 | |||||||||||||||
Cost of maintenance services |
| 9,499 | 4,728 | | 14,227 | |||||||||||||||
Cost of product revenues |
| 12,211 | 4,728 | | 16,939 | |||||||||||||||
Cost of consulting services |
| 28,478 | 12,264 | | 40,742 | |||||||||||||||
Reimbursed expenses |
| 3,044 | 1,522 | | 4,566 | |||||||||||||||
Cost of service revenues |
| 31,522 | 13,786 | | 45,308 | |||||||||||||||
Total cost of revenues |
| 43,733 | 18,514 | | 62,247 | |||||||||||||||
Gross Profit |
| 77,288 | 18,838 | | 96,126 | |||||||||||||||
Operating Expenses: |
||||||||||||||||||||
Product development |
| 12,387 | 7,094 | | 19,481 | |||||||||||||||
Sales and marketing |
| 14,904 | 9,556 | | 24,460 | |||||||||||||||
General and administrative |
| 15,824 | 3,997 | | 19,801 | |||||||||||||||
Amortization of intangibles |
| 9,915 | | | 9,915 | |||||||||||||||
Restructuring charges |
| 3,771 | 777 | | 4,548 | |||||||||||||||
Acquisition-related costs |
| 865 | | | 865 | |||||||||||||||
Total operating expenses |
| 57,666 | 21,404 | | 79,070 | |||||||||||||||
Operating Income (Loss) |
| 19,622 | (2,566 | ) | | 17,056 | ||||||||||||||
Interest expense and amortization of loan fees |
(5,995 | ) | (127 | ) | (60 | ) | | (6,182 | ) | |||||||||||
Interest income and other, net |
| (10,683 | ) | 10,041 | | (642 | ) | |||||||||||||
Equity in earnings (loss) of subsidiaries |
11,583 | 5,697 | | (17,280 | ) | | ||||||||||||||
Income (Loss) Before Income Taxes |
5,588 | 14,509 | 7,415 | (17,280 | ) | 10,232 | ||||||||||||||
Income tax (provision) benefit |
2,278 | (1,813 | ) | (2,831 | ) | | (2,366 | ) | ||||||||||||
Net Income (Loss) |
$ | 7,866 | $ | 12,696 | $ | 4,584 | $ | (17,280 | ) | $ | 7,866 | |||||||||
24
Table of Contents
Unaudited Condensed Consolidating Statements of Income
Three Months Ended June 30, 2009
(in thousands)
Three Months Ended June 30, 2009
(in thousands)
JDA Software | Guarantor | Non-Guarantor | ||||||||||||||||||
Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Software licenses |
$ | | $ | 26,585 | $ | | $ | | $ | 26,589 | ||||||||||
Subscriptions and other recurring revenues |
| 996 | | | 996 | |||||||||||||||
Maintenance services |
| 28,462 | 15,909 | | 44,371 | |||||||||||||||
Product revenues |
| 56,047 | 15,909 | | 71,956 | |||||||||||||||
Consulting services |
| 16,377 | 8,702 | | 25,079 | |||||||||||||||
Reimbursed expenses |
| 1,694 | 756 | | 2,450 | |||||||||||||||
Service revenues |
| 18,071 | 9,458 | | 27,529 | |||||||||||||||
Total revenues |
| 74,118 | 25,367 | | 99,485 | |||||||||||||||
Cost of Revenues: |
||||||||||||||||||||
Cost of software licenses |
| 1,235 | | | 1,235 | |||||||||||||||
Amortization of acquired software technology |
| 980 | | | 980 | |||||||||||||||
Cost of maintenance services |
| 8,140 | 2,844 | | 10,984 | |||||||||||||||
Cost of product revenues |
| 10,355 | 2,844 | | 13,199 | |||||||||||||||
Cost of consulting services |
| 13,200 | 6,931 | | 20,131 | |||||||||||||||
Reimbursed expenses |
| 1,694 | 756 | | 2,450 | |||||||||||||||
Cost of service revenues |
| 14,894 | 7,687 | | 22,581 | |||||||||||||||
Total cost of revenues |
| 25,249 | 10,531 | | 35,780 | |||||||||||||||
Gross Profit |
| 48,869 | 14,836 | | 63,705 | |||||||||||||||
Operating Expenses: |
||||||||||||||||||||
Product development |
| 10,107 | 2,557 | | 12,664 | |||||||||||||||
Sales and marketing |
| 9,677 | 6,493 | | 16,170 | |||||||||||||||
General and administrative |
| 9,232 | 2,438 | | 11,670 | |||||||||||||||
Amortization of intangibles |
| 6,051 | | | 6,051 | |||||||||||||||
Restructuring charges |
| 1,678 | 1,054 | | 2,732 | |||||||||||||||
Total operating expenses |
| 36,745 | 12,542 | | 49,287 | |||||||||||||||
Operating Income |
| 12,124 | 2,294 | | 14,418 | |||||||||||||||
Interest expense and amortization of loan fees |
(275 | ) | (74 | ) | (37 | ) | | (386 | ) | |||||||||||
Interest income and other, net |
| 3,454 | (3,331 | ) | | 123 | ||||||||||||||
Equity in earnings (loss) of subsidiaries |
9,105 | (2,131 | ) | | (6,974 | ) | | |||||||||||||
Income (Loss) Before Income Taxes |
8,830 | 13,373 | (1,074 | ) | (6,974 | ) | 14,155 | |||||||||||||
Income tax (provision) benefit |
105 | (6,012 | ) | 687 | | (5,220 | ) | |||||||||||||
Net Income (Loss) |
$ | 8,935 | $ | 7,361 | $ | (387 | ) | $ | (6,974 | ) | $ | 8,935 | ||||||||
25
Table of Contents
Unaudited Condensed Consolidating Statements of Income
Six Months Ended June 30, 2010
(in thousands)
Six Months Ended June 30, 2010
(in thousands)
JDA Software | Guarantor | Non-Guarantor | ||||||||||||||||||
Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Software licenses |
$ | | $ | 56,589 | $ | | $ | | $ | 56,589 | ||||||||||
Subscriptions and other recurring revenues |
| 10,093 | | | 10,093 | |||||||||||||||
Maintenance services |
| 80,768 | 36,886 | | 117,654 | |||||||||||||||
Product revenues |
| 147,450 | 36,886 | | 184,336 | |||||||||||||||
Consulting services |
| 68,219 | 30,038 | | 98,257 | |||||||||||||||
Reimbursed expenses |
| 5,184 | 2,227 | | 7,411 | |||||||||||||||
Service revenues |
| 73,403 | 32,265 | | 105,668 | |||||||||||||||
Total revenues |
| 220,853 | 69,151 | | 290,004 | |||||||||||||||
Cost of Revenues: |
||||||||||||||||||||
Cost of software licenses |
| 1,917 | | | 1,917 | |||||||||||||||
Amortization of acquired software technology |
| 3,379 | | | 3,379 | |||||||||||||||
Cost of maintenance services |
| 17,848 | 8,412 | | 26,260 | |||||||||||||||
Cost of product revenues |
| 23,144 | 8,412 | | 31,556 | |||||||||||||||
Cost of consulting services |
| 53,574 | 22,437 | | 76,011 | |||||||||||||||
Reimbursed expenses |
| 5,180 | 2,231 | | 7,411 | |||||||||||||||
Cost of service revenues |
| 58,754 | 24,668 | | 83,422 | |||||||||||||||
Total cost of revenues |
| 81,898 | 33,080 | | 114,978 | |||||||||||||||
Gross Profit |
| 138,955 | 36,071 | | 175,026 | |||||||||||||||
Operating Expenses: |
||||||||||||||||||||
Product development |
| 24,359 | 12,399 | | 36,758 | |||||||||||||||
Sales and marketing |
| 28,361 | 17,211 | | 45,572 | |||||||||||||||
General and administrative |
| 30,406 | 7,092 | | 37,498 | |||||||||||||||
Amortization of intangibles |
| 18,481 | | | 18,481 | |||||||||||||||
Restructuring charges |
| 8,914 | 3,392 | | 12,306 | |||||||||||||||
Acquisition-related costs |
| 7,608 | | | 7,608 | |||||||||||||||
Total operating expenses |
| 118,129 | 40,094 | | 158,223 | |||||||||||||||
Operating Income (Loss) |
| 20,826 | (4,023 | ) | | 16,803 | ||||||||||||||
Interest expense and amortization of loan fees |
(11,923 | ) | (246 | ) | (99 | ) | | (12,268 | ) | |||||||||||
Interest income and other, net |
| (14,274 | ) | 14,755 | | 481 | ||||||||||||||
Equity in earnings (loss) of subsidiaries |
10,990 | 6,841 | | (17,831 | ) | | ||||||||||||||
Income (Loss) Before Income Taxes |
(933 | ) | 13,147 | 10,633 | (17,831 | ) | 5,016 | |||||||||||||
Income tax (provision) benefit |
4,531 | (2,289 | ) | (3,660 | ) | | (1,418 | ) | ||||||||||||
Net Income (Loss) |
$ | 3,598 | $ | 10,858 | $ | 6,973 | $ | (17,831 | ) | $ | 3,598 | |||||||||
26
Table of Contents
Unaudited Condensed Consolidating Statements of Income
Six Months Ended June 30, 2009
(in thousands)
Six Months Ended June 30, 2009
(in thousands)
JDA Software | Guarantor | Non-Guarantor | ||||||||||||||||||
Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Revenues: |
||||||||||||||||||||
Software licenses |
$ | | $ | 40,946 | $ | | $ | | $ | 40,946 | ||||||||||
Subscriptions and other recurring revenues |
| 1,964 | | | 1,964 | |||||||||||||||
Maintenance services |
| 56,395 | 30,973 | | 87,368 | |||||||||||||||
Product revenues |
| 99,305 | 30,973 | | 130,278 | |||||||||||||||
Consulting services |
| 31,689 | 16,424 | | 48,113 | |||||||||||||||
Reimbursed expenses |
| 3,030 | 1,397 | | 4,427 | |||||||||||||||
Service revenues |
| 34,719 | 17,821 | | 52,540 | |||||||||||||||
Total revenues |
| 134,024 | 48,794 | | 182,818 | |||||||||||||||
Cost of Revenues: |
||||||||||||||||||||
Cost of software licenses |
| 1,837 | | | 1,837 | |||||||||||||||
Amortization of acquired software technology |
| 1,988 | | | 1,988 | |||||||||||||||
Cost of maintenance services |
| 16,074 | 5,459 | | 21,533 | |||||||||||||||
Cost of product revenues |
| 19,899 | 5,459 | | 25,358 | |||||||||||||||
Cost of consulting services |
| 25,597 | 13,916 | | 39,513 | |||||||||||||||
Reimbursed expenses |
| 3,030 | 1,397 | | 4,427 | |||||||||||||||
Cost of service revenues |
| 28,627 | 15,313 | | 43,940 | |||||||||||||||
Total cost of revenues |
| 48,526 | 20,772 | | 69,298 | |||||||||||||||
Gross Profit |
| 85,498 | 28,022 | | 113,520 | |||||||||||||||
Operating Expenses: |
||||||||||||||||||||
Product development |
| 20,494 | 4,743 | | 25,237 | |||||||||||||||
Sales and marketing |
| 19,205 | 11,217 | | 30,422 | |||||||||||||||
General and administrative |
| 18,452 | 4,244 | | 22,696 | |||||||||||||||
Amortization of intangibles |
| 12,127 | | | 12,127 | |||||||||||||||
Restructuring charges |
| 2,885 | 1,277 | | 4,162 | |||||||||||||||
Total operating expenses |
| 73,163 | 21,481 | | 94,644 | |||||||||||||||
Operating Income |
| 12,335 | 6,541 | | 18,876 | |||||||||||||||
Interest expense and amortization of loan fees |
(409 | (138 | ) | (78 | ) | | (625 | ) | ||||||||||||
Interest income and other, net |
| 6,331 | (6,451 | ) | | (120 | ) | |||||||||||||
Equity in earnings (loss) of subsidiaries |
11,833 | (2,053 | ) | | (9,780 | ) | | |||||||||||||
Income (Loss) Before Income Taxes |
11,424 | 16,475 | 12 | (9,780 | ) | 18,131 | ||||||||||||||
Income tax (provision) benefit |
155 | (7,008 | ) | 301 | | (6,552 | ) | |||||||||||||
Net Income (Loss) |
$ | 11,579 | $ | 9,467 | $ | 313 | $ | (9,780 | ) | $ | 11,579 | |||||||||
27
Table of Contents
Unaudited Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2010
(in thousands)
Six Months Ended June 30, 2010
(in thousands)
JDA Software | Guarantor | Non-Guarantor | ||||||||||||||||||
Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net Cash Provided by (Used in) Operating
Activities |
$ | 147,828 | $ | (147,903 | ) | $ | 9,643 | $ | | $ | 9,568 | |||||||||
Investing Activities: |
||||||||||||||||||||
Change in restricted cash |
276,095 | (10,971 | ) | 10,971 | | 276,095 | ||||||||||||||
Purchase of
i2 Technologies, Inc. |
(431,775 | ) | 218,348 | | | (213,427 | ) | |||||||||||||
Payment of direct costs related to prior
acquisitions |
| (1,639 | ) | | | (1,639 | ) | |||||||||||||
Purchase of property and equipment |
| (4,531 | ) | (1,866 | ) | | (6,397 | ) | ||||||||||||
Proceeds from disposal of property and
equipment |
| 336 | 13 | | 349 | |||||||||||||||
Net cash provided by (used in)
investing activities |
(155,680 | ) | 201,543 | 9,118 | | 54,981 | ||||||||||||||
Financing Activities: |
||||||||||||||||||||
Issuance of common stock equity plans |
11,610 | | | | 11,610 | |||||||||||||||
Purchase of treasury stock and other ,
net |
(3,758 | ) | | | | (3,758 | ) | |||||||||||||
Change in intercompany receivable/payable |
| 18,727 | (18,727 | ) | | | ||||||||||||||
Net cash provided by (used in)
financing activities |
7,852 | 18,727 | (18,727 | ) | | 7,852 | ||||||||||||||
Effect of Exchange Rates on Cash and Cash
Equivalents |
| (7,628 | ) | 5,432 | | (2,196 | ) | |||||||||||||
Net increase in cash and
equivalents |
| 64,739 | 5,466 | | 70,205 | |||||||||||||||
Cash and Cash Equivalents, Beginning of
Period |
| 47,170 | 28,804 | | 75,974 | |||||||||||||||
Cash and Cash Equivalents, End of Period |
$ | | $ | 111,909 | $ | 34,270 | $ | | $ | 146,179 | ||||||||||
28
Table of Contents
Unaudited Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2009
(in thousands)
Six Months Ended June 30, 2009
(in thousands)
JDA Software | Guarantor | Non-Guarantor | ||||||||||||||||||
Group, Inc. | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net Cash Provided by (Used in) Operating Activities |
$ | (743 | ) | $ | 59,432 | $ | 1,823 | $ | | $ | 60,512 | |||||||||
Investing Activities: |
||||||||||||||||||||
Payment of direct costs related to prior
acquisitions |
| (1,489 | ) | | | (1,489 | ) | |||||||||||||
Purchase of property and equipment |
| (139 | ) | (1,268 | ) | | (1,407 | ) | ||||||||||||
Proceeds from disposal of property and
equipment |
| 4 | 50 | | 54 | |||||||||||||||
Net cash used in investing
activities |
| (1,624 | ) | (1,218 | ) | | (2,842 | ) | ||||||||||||
Financing Activities: |
||||||||||||||||||||
Issuance of common stock equity plans |
4,642 | | | | 4,642 | |||||||||||||||
Purchase of treasury stock and other, net |
(3,899 | ) | | | | (3,899 | ) | |||||||||||||
Change in intercompany receivable/payable |
| 1,495 | (1,495 | ) | | | ||||||||||||||
Net cash provided by (used in) financing
activities |
743 | 1,495 | (1,495 | ) | | 743 | ||||||||||||||
Effect of Exchange Rates on Cash and Cash Equivalents |
| (2,526 | ) | 4,092 | | 1,566 | ||||||||||||||
Net increase in cash and equivalents |
| 56,777 | 3,202 | | 59,979 | |||||||||||||||
Cash and Cash Equivalents, Beginning of Period |
| 10,841 | 21,855 | | 32,696 | |||||||||||||||
Cash and Cash Equivalents, End of Period |
$ | | $ | 67,618 | $ | 25,057 | $ | | $ | 92,675 | ||||||||||
29
Table of Contents
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 initially recorded $66.0 million of goodwill during the three months ended March 31,
2010 and made subsequent adjustments of $3.5 million during the three months ended June 30, 2010 to
reduce the goodwill balance to $62.5 million. In addition, through June 30, 2010 we have recorded
$113.2 million in other intangible assets, including $74.6 million for customer-based intangibles
(maintenance relationships and future technological enhancements, service relationships and a
covenant not-to-compete), $24.3 million for technology-based intangibles consisting of developed
technology and $14.3 million for marketing-based intangibles consisting of trademark and trade
names.
The purchase price allocation has not been finalized. The preliminary allocation of the
purchase price as of June 30, 2010 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. We
currently anticipate that additional adjustments may still be made to the fair value of acquired
deferred revenue balances, tax-related accounts, amortization of intangible assets and the residual
amount allocated to goodwill. See Note 2 to the Condensed Consolidated Financial Statements for a
complete description of this transaction and the initial purchase price allocation.
Through June 30, 2010, we have expensed approximately $12.4 million of costs related to the
acquisition of i2, including $865,000 and $7.6 million in the three and six months ended June 30,
2010, respectively. 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 ($7.1 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 to the Condensed Consolidated Financial Statements for a complete description of the Senior Notes.
30
Table of Contents
The following tables summarize the impact of the i2 acquisition on our product and service
revenues:
Second Quarter 2010
Revenues: | JDA | i2 | Combined | |||||||||||||||||
Software licenses and subscriptions |
$ | 21,728 | 57 | % | $ | 16,230 | 43 | % | $ | 37,958 | ||||||||||
Maintenance services |
45,417 | 75 | % | 15,177 | 25 | % | 60,594 | |||||||||||||
Product revenues |
67,145 | 68 | % | 31,407 | 32 | % | 98,552 | |||||||||||||
Service revenues |
38,294 | 64 | % | 21,527 | 36 | % | 59,821 | |||||||||||||
Total revenues |
$ | 105,439 | 67 | % | $ | 52,934 | 33 | % | $ | 158,373 | ||||||||||
First Half 2010
Revenues: | JDA | i2 | Combined | |||||||||||||||||
Software licenses and subscriptions |
$ | 37,606 | 56 | % | $ | 29,076 | 44 | % | $ | 66,682 | ||||||||||
Maintenance services |
91,908 | 78 | % | 25,746 | 22 | % | 117,654 | |||||||||||||
Product revenues |
129,514 | 70 | % | 54,822 | 30 | % | 184,336 | |||||||||||||
Service revenues |
70,295 | 67 | % | 35,373 | 33 | % | 105,668 | |||||||||||||
Total revenues |
$ | 199,809 | 69 | % | $ | 90,195 | 31 | % | $ | 290,004 | ||||||||||
Outlook for 2010. Based on our first half 2010 performance and the outlook for the
remainder of the year, we are reconfirming our previously announced annual guidance for revenue and
earnings. 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. We have, however, lowered our outlook for cash flow from operations to a range of $80
million to $90 million from the previously announced range of $100 million to $110 million,
primarily due to a greater than originally expected negative impact of working capital. Operating
cash flows for the six months ended June 30, 2010 were negatively impacted by decreases in deferred
revenue balances from maintenance and other contracts assumed in the i2 acquisition that were
renewed in the months just prior to the acquisition and for which the related cash was collected by
i2 prior to the acquisition close date. See Liquidity and Capital Resources.
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 (Revised) |
$80 million | $90 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 comparable GAAP measurements. The purchase
price allocation has not been finalized.
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The preliminary allocation of the purchase price as of June 30, 2010 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.
We currently anticipate that additional adjustments may still need to be made to the fair value of acquired deferred revenue balances, tax-related accounts,
amortization of intangible assets and the residual amount allocated to goodwill.
The final purchase price allocation may result in
changes to 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.
We reported record software sales of approximately $38 million in second quarter 2010.
Software license sales are a leading indicator for our business and we believe this record
quarterly result reinforces the competitive strength of our product offerings, particularly when
considering the current economic environment. We believe the following software trends will impact
our second half 2010 software sales:
| Quarter-to-quarter software sales will fluctuate due to the timing of transactions in our sales pipeline. | ||
| Second half 2010 software license revenues could be softer in the third quarter followed by a strengthening of software sales in the fourth quarter. | ||
| We did not expect to realize any significant software revenue synergies from i2 in 2010 based on our past experience with other acquisitions. |
Our average annualized maintenance retention rate, which includes i2, increased to
approximately 97% in second quarter 2010 compared to approximately 94% in second quarter 2009. As
expected, we have encountered the normal extended negotiation process as we are going through the
first maintenance renewal cycle with the i2 customer base. The renewal process includes resetting pricing
and renegotiating the terms of the agreements, many of which have historically been
one-year contracts. We currently expect most of the i2 maintenance base to renew on schedule;
however, where appropriate we have suspended the recognition of revenue on i2 maintenance renewals
until the negotiations are complete. As of June 30, 2010, we had approximately $4.0 million of
maintenance revenue suspended. In addition, volatility in foreign currency exchange rates has and
will continue to impact our maintenance services revenue. Foreign exchange
rate variances increased maintenance services revenues in second quarter 2010 by $721,000 compared
to second quarter 2009. Maintenance gross margins increased to nearly 77% in second quarter 2010
compared to 75% in second quarter 2009, due primarily to the continued strength in our software
license sales and increased operating leverage from our larger maintenance base.
Consulting services revenue generally follows
software sales since the majority of this activity relates to implementation services. Consulting services revenue has trended up in recent quarters, due
primarily to our improved software sales performance over the past three years that has resulted in
multiple large projects. In addition, first half 2010 was favorably impacted by new incremental
service revenues from the i2 products. Billable hours increased 30% sequentially in second quarter
2010 compared to first quarter 2010 and approximately 200% compared to second quarter 2009, due
primarily to assumed projects involving i2 products and higher billable hours from certain large
ongoing projects in the Americas and Asia/Pacific regions. Our global utilization rate was 59% in
second quarter 2010 compared to 59% in first quarter 2010 and 57% in second quarter 2009.
Services margin improved to 24% in second quarter 2010 compared to 17% in first quarter 2010
and 18% in second quarter 2009. These increases are the result of the higher volume of consulting
services revenues, higher billable hours from certain high margin projects and increased deployment
of CoE resources on global service projects. We realized an improvement in the volume of work and
implementation projects executed through the CoE in second quarter 2010 as approximately 31% of all
billable hours were delivered through the CoE compared to 7% in second quarter 2009. This
improvement results primarily from services provided on assumed i2 projects.
We signed five new managed service agreements in fourth quarter 2009, eight new deals in first
quarter 2010 and nine new deals in second quarter 2010. These transactions include contracts with
both large and mid-market customers.
We Have Incurred Significant Unplanned Legal Expenses. We have incurred significant unplanned
legal expenses in first half 2010 due to the ongoing litigation between Dillards and i2
Technologies and the patent infringement litigation i2 filed against a
32
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competitor (see Note 8 to the Condensed Consolidated Financial Statements). Legal expenses in first half 2010 were $5.8
million, including approximately $3.4 million in second quarter 2010, compared to $1.1 million in first
half 2009. We expect our quarterly legal expenses to persist at this level until we resolve these
matters. We currently believe we may be able to offset the negative impact of these unplanned legal
expenses through a combination of continued strength in software sales and short-term cost savings.
We Have Realized Cost Synergies as We Integrate and Combine i2 and JDA. We achieved
approximately $9.0 million, or approximately 45% of our total targeted net cost synergies in first
half 2010, which included only five months of combined post-merger activity.
Share-Based Compensation Expense. We recorded share-based compensation expense of $6.6
million and $3.6 million in six months ended June 30, 2010 and 2009, respectively and as of June
30, 2010, we have included $12.8 million of deferred compensation in stockholders equity. A
summary of total stock-based compensation by expense category for the three and six months ended
June 30, 2010 and 2009 is as follows:
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cost of maintenance services |
$ | 163 | $ | 174 | $ | 277 | $ | 286 | ||||||||
Cost of consulting services |
330 | 260 | 778 | 471 | ||||||||||||
Product development |
173 | 191 | 506 | 360 | ||||||||||||
Sales and marketing |
884 | 688 | 1,750 | 1,069 | ||||||||||||
General and administrative |
1,742 | 844 | 3,258 | 1,399 | ||||||||||||
Total stock-based compensation |
$ | 3,292 | $ | 2,157 | $ | 6,569 | $ | 3,567 | ||||||||
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. A deferred compensation charge of $13.8 million
has been recorded in the equity section our balance sheet, 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 June 30, 2010, based on first half 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 have recorded $4.6 million in
stock-based compensation expense related to these awards in the six months ended June 30, 2010,
including $2.3 million in second quarter 2010. 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 the Compensation Committees 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 adjusted EBITDA
performance threshold goal.
We May 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. If the Dillards litigation
continues for an extended period of time it may delay our making acquisitions, though we do not
currently expect any delay to be significant.
33
Table of Contents
Financial and Cash Flow From Operations. We had working capital of $156.7 million at June 30,
2010 compared to $345.7 million at December 31, 2009. The working capital balances include cash of $158.0 million and
$363.8 million, respectively, which includes restricted cash of $11.8 million and $287.9 million,
respectively. The restricted cash balance at December 31, 2009 consisted primarily of net proceeds
from the issuance of the Senior Notes (see Contractual Obligations) of approximately $265 million,
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 $116.1 million or 66 days sales outstanding (DSO) at June 30,
2010 compared to $107.9 million or 74 days DSO at March 31, 2010 and $68.9 million or 58 days DSO
at December 31, 2009 and $62.7 million or 57 days DSO at June 30, 2009, which represented an
historical low DSO result for the Company. 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 June 30, 2010 compared to June 30, 2009 reflects the impact of uncollected
receivables assumed in the i2 acquisition.
We generated $9.6 million in cash from operating activities in the six months ended June 30,
2010 compared to $60.5 million in the six months ended June 30, 2009. The decrease in cash flow is
due primarily to an $8.0 million decrease in the current period net income, which includes $7.6
million of acquisition-related costs, $12.3 million of restructuring charges and $1.4 million of
non-recurring, transition-related costs for salaries and retention bonuses for i2 employees. In
addition, changes in working capital utilized approximately $29.7 million of cash in the six months
ended June 30, 2010 and provided approximately $20.6 million of cash in the six months ended June
30, 2009, due primarily to the timing and payment of accounts receivable. Accounts receivable
increased approximately $14.9 million in the six months ended June 30, 2010 due primarily to
increased sales over the past twelve months and decreased $16.8 million in the six months ended
June 30, 2009 due primarily to the collection of an unusually large receivable. In addition,
operating cash flows for the six months ended June 30, 2010 were negatively impacted by decreases
in deferred revenue balances from maintenance and other recurring revenue contracts assumed in the
i2 acquisition that were renewed in the months just prior to the acquisition and for which the
related cash was collected by i2 prior to the acquisition close date.
Future Tax Benefits From the i2 Acquisition. Since the acquisition of i2 we initiated a
process to determine the value of acquired net operating loss carry forwards and other favorable
tax attributes such as amortization of intangibles and capitalized research and development costs.
Based on our review, we now estimate future income tax benefits from the i2 acquisition to
approximate $110 million over the next five years (2010 through 2014), and, as a result, we do not
expect to pay significant federal income taxes during this time. We also believe that in the
subsequent years there is an additional $100 million of estimated future income tax benefits
available. Our estimates of the cash benefit of the i2 net operating loss carry forwards are
subject to review by the Internal Revenue Service.
Our weighted average shares outstanding for second quarter 2010 were approximately 42.3
million and we expect our quarterly weighted average shares outstanding to remain around this level
for the remainder of 2010.
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Results of Operations
The following tables set forth a comparison of selected financial information (in thousands),
expressed as both a dollar change and percentage change between periods for the three and six
months ended June 30, 2010 and 2009 and as a percentage of total revenues. In addition, the tables
express 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 and six
months ended June 30, 2010 include the impact of the i2 acquisition from the date of acquisition
(January 28, 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 half 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.
Three Months ended | ||||||||||||||||||||||||
June 30, | 2009 to 2010 | |||||||||||||||||||||||
2010 | % | 2009 | % | $ Change | % Change | |||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Software licenses |
$ | 32,152 | 20 | % | $ | 26,589 | 27 | % | $ | 5,563 | 21 | % | ||||||||||||
Subscriptions and other recurring revenue |
5,806 | 4 | 996 | 1 | 4,810 | 483 | % | |||||||||||||||||
Maintenance |
60,594 | 38 | 44,371 | 44 | 16,223 | 37 | % | |||||||||||||||||
Product revenues |
98,552 | 62 | 71,956 | 72 | 26,596 | 37 | % | |||||||||||||||||
Service revenues |
59,821 | 38 | 27,529 | 28 | 32,292 | 117 | % | |||||||||||||||||
Total revenues |
158,373 | 100 | % | 99,485 | 100 | % | 58,888 | 59 | % | |||||||||||||||
Cost of Revenues: |
||||||||||||||||||||||||
Software licenses |
909 | 1 | % | 1,235 | 1 | % | (326 | ) | (26 | %) | ||||||||||||||
Amortization of acquired software technology |
1,803 | 1 | 980 | 1 | 823 | 84 | % | |||||||||||||||||
Maintenance services |
14,227 | 9 | 10,984 | 11 | 3,243 | 30 | % | |||||||||||||||||
Product revenues |
16,939 | 11 | 13,199 | 13 | 3,740 | 28 | % | |||||||||||||||||
Service revenues |
45,308 | 28 | 22,581 | 23 | 22,727 | 101 | % | |||||||||||||||||
Total cost of revenues |
62,247 | 39 | 35,780 | 36 | 26,467 | 74 | % | |||||||||||||||||
Gross Profit |
96,126 | 61 | 63,705 | 64 | 32,421 | 51 | % | |||||||||||||||||
Operating Expenses: |
||||||||||||||||||||||||
Product development |
19,481 | 12 | 12,664 | 13 | 6,817 | 54 | % | |||||||||||||||||
Sales and marketing |
24,460 | 15 | 16,170 | 16 | 8,290 | 51 | % | |||||||||||||||||
General and administrative |
19,801 | 13 | 11,670 | 12 | 8,131 | 70 | % | |||||||||||||||||
63,742 | 40 | 40,504 | 41 | 23,238 | 57 | % | ||||||||||||||||||
Amortization of intangibles |
9,915 | 6 | 6,051 | 6 | 3,864 | 64 | % | |||||||||||||||||
Restructuring charge |
4,548 | 3 | 2,732 | 3 | 1,816 | 66 | % | |||||||||||||||||
Acquisition-related costs |
865 | 1 | | | 865 | 100 | % | |||||||||||||||||
Operating income |
$ | 17,056 | 11 | % | $ | 14,418 | 14 | % | 2,638 | 18 | % | |||||||||||||
Gross margins: |
||||||||||||||||||||||||
Software licenses and subscription revenues |
98 | % | 96 | % | ||||||||||||||||||||
Maintenance |
77 | % | 75 | % | ||||||||||||||||||||
Product revenues |
83 | % | 82 | % | ||||||||||||||||||||
Services revenues |
24 | % | 18 | % |
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Table of Contents
Six Months ended | ||||||||||||||||||||||||
June 30, | 2009 to 2010 | |||||||||||||||||||||||
2010 | % | 2009 | % | $ Change | % Change | |||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Software licenses |
$ | 56,589 | 20 | % | $ | 40,946 | 22 | % | $ | 15,643 | 38 | % | ||||||||||||
Subscriptions and other recurring revenue |
10,093 | 3 | 1,964 | 1 | 8,129 | 414 | % | |||||||||||||||||
Maintenance |
117,654 | 41 | 87,368 | 48 | 30,286 | 35 | % | |||||||||||||||||
Product revenues |
184,336 | 64 | 130,278 | 71 | 54,058 | 41 | % | |||||||||||||||||
Service revenues |
105,668 | 36 | 52,540 | 29 | 53,128 | 101 | % | |||||||||||||||||
Total revenues |
290,004 | 100 | % | 182,818 | 100 | % | 107,186 | 59 | % | |||||||||||||||
Cost of Revenues: |
||||||||||||||||||||||||
Software licenses |
1,917 | 1 | % | 1,837 | 1 | % | 80 | 4 | % | |||||||||||||||
Amortization of acquired software technology |
3,379 | 1 | 1,988 | 1 | 1,391 | 70 | % | |||||||||||||||||
Maintenance services |
26,260 | 9 | 21,533 | 12 | 4,727 | 22 | % | |||||||||||||||||
Product revenues |
31,556 | 11 | 25,358 | 14 | 6,198 | 24 | % | |||||||||||||||||
Service revenues |
83,422 | 29 | 43,940 | 24 | 39,482 | 90 | % | |||||||||||||||||
Total cost of revenues |
114,978 | 40 | 69,298 | 38 | 45,680 | 66 | % | |||||||||||||||||
Gross Profit |
175,026 | 60 | 113,520 | 62 | 61,506 | 54 | % | |||||||||||||||||
Operating Expenses: |
||||||||||||||||||||||||
Product development |
36,758 | 12 | 25,237 | 14 | 11,521 | 46 | % | |||||||||||||||||
Sales and marketing |
45,572 | 16 | 30,422 | 17 | 15,150 | 50 | % | |||||||||||||||||
General and administrative |
37,498 | 13 | 22,696 | 12 | 14,802 | 65 | % | |||||||||||||||||
119,828 | 41 | 78,355 | 43 | 41,473 | 53 | % | ||||||||||||||||||
Amortization of intangibles |
18,481 | 6 | 12,127 | 7 | 6,354 | 52 | % | |||||||||||||||||
Restructuring charge |
12,306 | 4 | 4,162 | 2 | 8,144 | 196 | % | |||||||||||||||||
Acquisition-related costs |
7,608 | 3 | | | 7,608 | 100 | % | |||||||||||||||||
Operating income |
$ | 16,803 | 6 | % | $ | 18,876 | 10 | % | (2,073 | ) | (11 | %) | ||||||||||||
Gross margins: |
||||||||||||||||||||||||
Software licenses and subscription revenues |
97 | % | 96 | % | ||||||||||||||||||||
Maintenance |
78 | % | 75 | % | ||||||||||||||||||||
Product revenues |
83 | % | 81 | % | ||||||||||||||||||||
Services revenues |
21 | % | 16 | % |
36
Table of Contents
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
the three and six months ended June 30, 2010 and 2009. In addition, the tables set forth the
contribution of each business segment and geographical region to total revenues in the three and
six months ended June 30, 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 in first quarter 2010
have reported 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
Supply Chain | Services Industries | |||||||||||||||
June 30, 2010 vs. 2009 | June 30, 2010 vs. 2009 | |||||||||||||||
Quarter | Six Months | Quarter | Six Months | |||||||||||||
Software licenses and subscriptions |
90 | % | 94 | % | (96 | %) | (82 | %) | ||||||||
Maintenance services |
37 | % | 35 | % | 22 | % | 36 | % | ||||||||
Product revenues |
54 | % | 51 | % | (81 | %) | (58 | %) | ||||||||
Service revenues |
123 | % | 106 | % | 58 | % | 51 | % | ||||||||
Total revenues |
73 | % | 67 | % | (52 | %) | (28 | %) | ||||||||
Product development |
56 | % | 46 | % | 24 | % | 38 | % | ||||||||
Sales and marketing |
56 | % | 53 | % | 14 | % | 18 | % | ||||||||
Operating income |
81 | % | 81 | % | (108 | %) | (98 | %) |
Contribution to Total Revenues | ||||||||||||||||
June 30, 2010 vs. 2009 | ||||||||||||||||
Quarter | Six Months | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Supply Chain |
97 | % | 89 | % | 96 | % | 91 | % | ||||||||
Services Industries |
3 | % | 11 | % | 4 | % | 9 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % |
37
Table of Contents
Geographical Regions
The Americas | Europe | Asia/Pacific | ||||||||||||||||||||||
June 30, 2010 vs. 2009 | June 30, 2010 vs. 2009 | June 30, 2010 vs. 2009 | ||||||||||||||||||||||
Quarter | Six Months | Quarter | Six Months | Quarter | Six Months | |||||||||||||||||||
Software licenses and subscriptions |
89 | % | 81 | % | (5 | )% | 24 | % | (26 | )% | 13 | % | ||||||||||||
Maintenance services |
32 | % | 29 | % | 29 | % | 31 | % | 98 | % | 96 | % | ||||||||||||
Product revenues |
50 | % | 45 | % | 18 | % | 29 | % | 10 | % | 48 | % | ||||||||||||
Service revenues |
90 | % | 75 | % | 86 | % | 89 | % | 499 | % | 418 | % | ||||||||||||
Total revenues |
63 | % | 54 | % | 33 | % | 42 | % | 79 | % | 118 | % |
Contribution to Total Revenues | ||||||||||||||||
June 30, 2010 vs. 2009 | ||||||||||||||||
Quarter | Six Months | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
The Americas |
68 | % | 66 | % | 67 | % | 69 | % | ||||||||
Europe |
17 | % | 20 | % | 18 | % | 20 | % | ||||||||
Asia/Pacific |
15 | % | 14 | % | 15 | % | 11 | % | ||||||||
100 | % | 100 | % | 100 | % | 100 | % |
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
Software License and Subscription Results by Region.
The following table summarizes software license and subscription revenues by region for second
quarter 2010 and 2009:
Three Months Ended June 30, | ||||||||||||||||
Region | 2010 | 2009 | $Change | % Change | ||||||||||||
Americas |
$ | 27,080 | $ | 14,357 | $ | 12,723 | 89 | % | ||||||||
Europe |
4,773 | 5,012 | (239 | ) | (5 | %) | ||||||||||
Asia/Pacific |
6,105 | 8,216 | (2,111 | ) | (26 | %) | ||||||||||
Total |
$ | 37,958 | $ | 27,585 | $ | 10,373 | 38 | % | ||||||||
Software sales in North America continue to be the most significant contributor to our
software sales result. The increase in software license and
subscription revenues in the Americas region in second quarter 2010 compared to second quarter 2009
is due primarily to the incremental sales of i2 products and the recurring subscription revenues on
contracts assumed in the i2 acquisition, together with an increase in the number of large
transactions. Software sales in the Asia/Pacific region
were significantly influenced by sales of applications acquired from i2 in first half 2010. The second quarter
2009 software license results for the Asia/Pacific region included one unusually large transaction.
38
Table of Contents
The following table summarizes the number of large transactions by region for second quarter 2010
and 2009:
# of Large Transactions | ||||||||||||||||
Three Months Ended June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Region | JDA | i2 | Total | |||||||||||||
Americas |
4 | | 4 | 3 | ||||||||||||
Europe |
| | | 1 | ||||||||||||
Asia/Pacific |
| 2 | 2 | 1 | ||||||||||||
Total |
4 | 2 | 6 | 5 | ||||||||||||
Approximately 79% and 64% of our software license and subscription revenues in second
quarter 2010 and 2009, respectively, came from our install-base customers. We closed 54 new
software deals in second quarter 2010 compared to 68 in second quarter 2009 and our average selling
price (ASP) was $608,000 for the 12-month period ended June 30, 2010 compared to $819,000 for the
12-month period ended June 30, 2009 which included the impact of an unusually large transaction
from fourth quarter 2008.
Software License and Subscription Results by Reportable Business Segment.
Supply Chain. Software license and subscription revenues in this reportable business segment
increased 90% in second quarter 2010 compared to second quarter 2009, due primarily to the
incremental sales of i2 products (including two large transactions) and the recurring subscription
revenues on contracts assumed in the i2 acquisition, together with an increase in the number of
mid-sized software transactions. In total, there were six large transactions in this reportable
business segment in second quarter 2010 compared to four in first quarter 2009.
Services Industries. Software license revenues in this reportable business segment decreased
96% in second quarter 2010 compared to second quarter 2009, due to a decrease in the number of
large transactions. There were no large transactions in this reportable business segment in second
quarter 2010 compared to one unusually large transaction in second quarter 2009.
Maintenance Services
Maintenance services revenues increased $16.2 million, or 37%, to $60.6 million in second
quarter 2010 compared to $44.4 million in second quarter 2009, and represented 38% and 44% of total
revenues, respectively, in these periods. The increase is due primarily to $15.2 million of new
incremental maintenance revenues from the i2 products. In addition, favorable foreign exchange
rate variances increased maintenance services revenues in second quarter 2010 by $721,000 compared
to second quarter 2009 due primarily to the weakening of the U.S. Dollar against European
currencies. Excluding the impact of the $15.2 million of new incremental maintenance from the i2
products and the favorable foreign exchange rate variance, maintenance services revenues were flat
in second quarter 2010 compared to second quarter 2009 as maintenance revenues from new software
sales and rate increases on annual renewals were substantially offset by net suspensions of
maintenance revenue on customers who are significantly delinquent or whose credit has deteriorated
and 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 $32.3 million, or
117%, to $59.8 million in second quarter 2010 compared to $27.5 million in second quarter 2009.
The increase is due primarily to $21.5 million of new incremental service revenues from the i2
products. Excluding these incremental revenues our core consulting services business increased
approximately $10.8 million in second quarter 2010 compared to second quarter 2009, primarily as a
result of our improved software sales performance over the past three years and an increase in
billable hours from certain large ongoing projects in the Americas and Asia/Pacific regions that
involve core JDA products.
Cost of Product Revenues
Cost of Software Licenses. The decrease in cost of software licenses in second quarter 2010
compared to second quarter 2009 is due primarily to a decrease in royalties on embedded third-party
software applications.
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Amortization of Acquired Software Technology. The increase in amortization of acquired
software technology in second quarter 2010 compared to second 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 $3.2 million, or 30%, to
$14.2 million in second quarter 2010 compared to $11.0 million in second quarter 2009. The increase
is due primarily to an increase in salaries and related benefits resulting from the associates
added in the i2 acquisition.
Cost of Service Revenues
Cost of service revenues increased $22.7 million, or 101%, to $45.3 million in second quarter
2010 compared to $22.6 million in second 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 $4.2
million increase in outside contractor costs, a $2.1 million increase in reimbursed expenses, a
$1.9 million increase in incentive compensation and a $977,000 increase in travel costs, offset in
part by a $2.2 million increase in deferred costs for a large consulting project.
Operating Expenses
Operating expenses, excluding amortization of intangibles, restructuring charges and
acquisition-related costs were $63.7 million in second quarter 2010 compared to $40.5 million in
second quarter 2009 and represented 40% and 41% of total revenues, respectively.
Product Development. Product development expense increased $6.8 million, or 54%, to $19.5
million in second quarter 2010 compared to $12.7 million in second quarter 2009 and represented 12%
and 13% of total revenues, respectively. The increase is due primarily to an increase in salaries,
incentive compensation and related benefits resulting from the associates added in the i2
acquisition.
Sales and Marketing. Sales and marketing expense increased $8.3 million, or 51%, to $24.5
million in second quarter 2010 compared to $16.2 million in second quarter 2009 and represented 15%
and 16% of total revenues, respectively. The increase is due primarily to an increase in salaries,
incentive compensation
and related benefits resulting from the associates added in the i2 acquisition, a $2.1 million
increase in commissions resulting from the increase in software license sales and an $860,000
increase in travel costs.
General and Administrative. General and administrative expense increased $8.1 million, or 70%,
to $19.8 million in second quarter 2010 compared to $11.7 million in second quarter 2009 and
represented 13% and 12% of total revenues, respectively. The increase is due primarily to a $2.7
million increase in legal costs due to the ongoing litigation between Dillards and i2 Technologies
and the patent infringement litigation i2 filed against a competitor, an increase in salaries,
incentive compensation and related benefits resulting primarily from the associates added in the i2
acquisition and $723,000 of non-recurring, transition-related costs for salaries and retention
bonuses for i2 employees that are being retained for a defined period of time. The non-recurring,
transition-related costs should decline over the next two quarters as transition personnel complete
their assignments.
Amortization of Intangibles. The increase in amortization of intangibles in second quarter
2010 compared to second 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 $4.6 million in second quarter
2010 for termination benefits, office closures and contract terminations primarily associated with
the acquisition of i2 and the continued transition of additional on-shore activities to our CoE
facilities. The charges include $3.2 million for termination benefits related to a workforce
reduction of 41 associates primarily in product development, sales, information technology and
other administrative positions in each of our geographic regions. In addition, the charges include
$1.4 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 second quarter 2010 charges also include immaterial adjustments to decrease
reserves recorded for restructuring activities in prior periods.
We recorded a restructuring charge of $2.3 million in second quarter 2009. This charge is
primarily associated with the transition of additional on-shore activities to the CoE and includes
termination benefits related to a workforce reduction of 27 associates in product development,
service, support, information technology and other administrative positions, primarily in the
Americas region. In addition, the charge includes $1.0 million in severance and other
termination benefits pursuant to a separation
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agreement with our former Executive Vice President and Chief Financial Officer. We also recorded net adjustments of $395,000 in second quarter 2009 to
reduce estimated restructuring reserves established in prior years and to increase certain
Manugistics acquisition reserves based on our revised estimate of sublease rentals and market
adjustments on an unfavorable office facility in the United Kingdom.
Acquisition-Related Costs. During second quarter 2010 we expensed approximately $865,000 of
costs related to the acquisition of i2 on January 28, 2010. These costs consist primarily of
legal, accounting and other outside professional fees.
Other Income (Expense)
Interest Expense and Amortization of Loan Fees. The increase in interest expense and
amortization of loan fees in second quarter 2010 compared to second quarter 2009 is due primarily
to $5.5 million of interest on the Senior Notes issued and amortization of $495,000 on the original
issue discount on the Senior Notes and related loan origination fees.
Interest Income and Other, Net. The decrease in interest income and other, net in second
quarter 2010 compared to second quarter 2009 is due primarily to changes in foreign currency gains
and losses. We recorded a net foreign currency exchange loss of $958,000 in second quarter 2010
compared to a net foreign currency exchange gain of $102,000 in second quarter 2009.
Income Tax Provision
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 June 30, 2010 is different from the method used to calculate the effective rate for
the three months ended June 30, 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 income tax provisions of $2.4 million and $5.2 million for the three months ended
June 30, 2010 and 2009, respectively, representing effective income tax rates of 23% and 37%,
respectively. Our effective income tax rate during the three months ended June 30, 2010 and 2009
differed from the 35% U.S. statutory rate primarily due to changes in our liability for uncertain
tax positions, state income taxes (net of federal benefit), the effect of foreign operations and
items not deductible for tax, including those related to certain costs the Company incurred in
connection with the acquisition of i2 Technologies, Inc. during first quarter 2010.
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
Software License and Subscription Results by Region.
The following table summarizes software license and subscription revenues by region for first
half 2010 and 2009:
Six Months Ended June 30, | ||||||||||||||||
Region | 2010 | 2009 | $Change | % Change | ||||||||||||
Americas |
$ | 45,997 | $ | 25,462 | $ | 20,535 | 81 | % | ||||||||
Europe |
10,176 | 8,182 | 1,994 | 24 | % | |||||||||||
Asia/Pacific |
10,509 | 9,266 | 1,243 | 13 | % | |||||||||||
Total |
$ | 66,682 | $ | 42,910 | $ | 23,772 | 55 | % | ||||||||
The increase in software license and subscription revenues in each region in first half
2010 compared to first half 2009 is due primarily to the incremental sales of i2 products and the
recurring subscription revenues on contracts assumed in the i2 acquisition.
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The following table summarizes the number of large transactions by region for first half 2010 and
2009:
# of Large Transactions | ||||||||||||||||
Six Months Ended June 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Region | JDA | i2 | Total | |||||||||||||
Americas |
7 | 1 | 8 | 5 | ||||||||||||
Europe |
| 2 | 2 | 2 | ||||||||||||
Asia/Pacific |
1 | 3 | 4 | 1 | ||||||||||||
Total |
8 | 6 | 14 | 8 | ||||||||||||
Software License and Subscription Results by Reportable Business Segment.
Supply Chain. Software license and subscription revenues in this reportable business segment
increased 94% in first half 2010 compared to first half 2009, due primarily to the incremental
sales of i2 products (including six large transactions) and the recurring subscription revenues on
contracts assumed in the i2 acquisition, together with an increase in the number of mid-sized
software transactions. In total, there were 14 large transactions in this reportable business
segment in first half 2010 compared to six in first half 2009.
Services Industries. Software license revenues in this reportable business segment decreased
82% in first half 2010 compared to first half 2009, due to a decrease in the number of large
transactions. There were no large transactions in this reportable business segment in first half
2010 compared to two in first half 2009, one of which was an unusually large transaction. The
other large transaction in first half 2009 was being recognized on a percentage of completion basis
including approximately 2% of the related software license fees in first half 2010 compared to
approximately 43% in first half 2009.
Maintenance Services
Maintenance services revenues increased $30.3 million, or 35%, to $117.7 million in first half
2010 compared to $87.4 million in first half 2009, and represented 41% and 48% of total revenues,
respectively, in these periods. The increase is due primarily to $25.7 million of new incremental
maintenance revenues from the i2 products. In addition, favorable foreign exchange rate variances
increased maintenance services revenues in first half 2010 by approximately $2.4 million compared
to first half 2009 due primarily to the weakening of the U.S. Dollar against European currencies.
Excluding the impact of the $25.7 million of new incremental maintenance from the i2 products and
the favorable foreign exchange rate variance, maintenance services revenues increased approximately
$1.7 million in first half 2010 compared to first half 2009 as maintenance revenues from new
software sales and rate increases on annual renewals were partially offset by net suspensions of
maintenance revenue on customers who are significantly delinquent or whose credit has deteriorated
and 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 $53.1 million, or
101%, to $105.7 million in first half 2010 compared to $52.5 million in first half 2009. The
increase is due primarily to $35.3 million of new incremental service revenues from the i2
products. Excluding these incremental revenues our core consulting services business increased
approximately $17.8 million in first half 2010 compared to first half 2009, primarily as a result
of our improved software sales performance over the past three years and an increase in billable
hours from certain large ongoing projects in the Americas and Asia/Pacific regions that involve
core JDA products.
Cost of Product Revenues
Cost of Software Licenses. The increase in cost of software licenses in first half 2010
compared to first half 2009 is due primarily to an increase in royalties on embedded third-party
software applications.
Amortization of Acquired Software Technology. The increase in amortization of acquired
software technology in first half 2010 compared to first half 2009 is due primarily to the
amortization of software technology acquired in the i2 acquisition.
Cost of Maintenance Services. Cost of maintenance services increased $4.7 million, or 22%, to
$26.3 million in first half 2010 compared to $21.5 million in first half 2009. The increase is due
primarily to an increase in salaries, incentive compensation and
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related benefits resulting from the associates added in the i2 acquisition and a $635,000
increase in maintenance royalties and fees paid to third parties who provide first level support to
certain of our customers.
Cost of Service Revenues
Cost of service revenues increased $39.5 million, or 90%, to $83.4 million in first half 2010
compared to $43.9 million in first half 2009. The increase is due primarily to an increase in
salaries, incentive compensation and related benefits resulting from the associates added in the i2
acquisition, a $4.2 million increase in outside contractor costs, a $3.0 million increase in
reimbursed expenses and a $1.6 million increase in travel costs, offset in part by a $3.1 million
increase in deferred costs for a large consulting project.
Operating Expenses
Operating expenses, excluding amortization of intangibles, restructuring charges and
acquisition-related costs were $119.8 million in first half 2010 compared to $78.4 million in first
half 2009 and represented 41% and 43% of total revenues, respectively.
Product Development. Product development expense increased $11.5 million, or 46%, to $36.8
million in first half 2010 compared to $25.2 million in first half 2009 and represented 12% and 14%
of total revenues, respectively. The increase is due primarily to an increase in salaries,
incentive compensation and related benefits resulting from the associates added in the i2
acquisition.
Sales and Marketing. Sales and marketing expense increased $15.2 million, or 50%, to $45.6
million in first half 2010 compared to $30.4 million in first half 2009 and represented 16% and 17%
of total revenues, respectively. The increase is due primarily to an increase in salaries,
incentive compensation and related benefits resulting from the associates added in the i2
acquisition, a $3.7 million increase in commissions resulting from the increase in software license
sales and a $1.4 million increase in travel costs.
General and Administrative. General and administrative expense increased $14.8 million, or
65%, to $37.5 million in first half 2010 compared to $22.7 million in first half 2009 and
represented 13% and 12% of total revenues, respectively. The increase is due primarily to a $4.7
million increase in legal costs due to the ongoing litigation between Dillards and i2 Technologies
and the patent infringement litigation i2 filed against a competitor, an increase in salaries,
incentive compensation and related benefits resulting primarily from the associates added in the i2
acquisition and $1.4 million of non-recurring, transition-related costs for salaries and retention
bonuses for i2 employees that are being retained for a defined period of time..
Amortization of Intangibles. The increase in amortization of intangibles in first half 2010
compared to first half 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 $12.4 million in the six months
ended June 30, 2010, including $7.8 million in first quarter 2010 and $4.6 million in second
quarter 2010. These charges are primarily 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 $8.4 million for termination
benefits related to a workforce reduction of 127 associates primarily in product development,
sales, information technology and other administrative positions in each of our geographic regions.
In addition, the charges include $4.0 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 half 2010 charges also include
immaterial adjustments to increase reserves recorded for restructuring activities in prior periods.
We recorded restructuring charges of $3.8 million in first half 2009, including $1.5 million
in first quarter 2009 and $2.3 million in second quarter 2009. These charges are primarily
associated with the transition of additional on-shore activities to the CoE. The charges include
termination benefits related to a workforce reduction of 69 FTE in product development, service,
support, information technology and other administrative positions, primarily in the Americas
region. In addition, the charge includes $1.0 million in severance and other termination benefits
pursuant to a separation agreement with our former Executive Vice President and Chief Financial
Officer. We also recorded net adjustments of $310,000 in first half 2009 to reduce estimated
restructuring reserves established in prior years and to increase certain Manugistics acquisition
reserves based on our revised estimate of sublease rentals and market adjustments on an unfavorable
office facility in the United Kingdom.
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Acquisition-Related Costs. During first half 2010 we expensed approximately $7.6 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, accounting and other
outside professional fees.
Other Income (Expense)
Interest Expense and Amortization of Loan Fees. The increase in interest expense and
amortization of loan fees in first half 2010 compared to first half 2009 is due primarily to $11.0
million of interest on the Senior Notes issued and amortization of $922,000 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 half
2010 compared to first half 2009 is due primarily to changes in foreign currency gains and losses.
We recorded a net foreign currency exchange gain of $3,000 in first half 2010 compared to a net
foreign currency exchange loss of $216,000 in first half 2009.
Income Tax Provision
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 six
months ended June 30, 2010 is different from the method used to calculate the effective rate for
the six months ended June 30, 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 income tax provisions of $1.4 million and $6.6 million for the six months ended
June 30, 2010 and 2009, respectively, representing effective income tax rates of 28% and 36%,
respectively. Our effective income tax rate during the six months ended June 30, 2010 and 2009
differed from the 35% U.S. statutory rate primarily due to changes in our liability for uncertain
tax positions, state income taxes (net of federal benefit), the effect of foreign operations and
items not deductible for tax, including those related to certain costs the Company incurred in
connection with the acquisition of i2 Technologies, Inc. during the first quarter of 2010.
Liquidity and Capital Resources
We had working capital of $156.7 million at June 30, 2010 compared to $345.7 million at
December 31, 2009. The working capital balances include cash of $158.0 million and $363.8 million,
respectively, which includes restricted cash of $11.8 million and $287.9 million, respectively.
The restricted cash balance at December 31, 2009 consisted primarily of net proceeds from the
issuance of the Senior Notes (see Contractual Obligations) of approximately $265 million, 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 approximately $300.0
million in cash collections in the first half of 2010 and as of June 30, 2010 we were in a net debt
position of approximately $117.0 million.
Net accounts receivable were $116.1 million or 66 days sales outstanding (DSO) at June 30,
2010 compared to $107.9 million or 74 days DSO at March 31, 2010 and $68.9 million or 58 days DSO
at December 31, 2009 and $62.7 million or 57 days DSO at June 30, 2009, which represented an
historical low DSO result for the Company. 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 June 30, 2010 compared to June 30, 2009 reflects the impact of uncollected
receivables assumed in the i2 acquisition, primarily maintenance invoices on which related revenue
recognition has been withheld. 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 $9.6 million in the six months ended June 30, 2010
compared to $60.5 million in the six months ended June 30, 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 changes in deferred maintenance revenue.
The decrease in cash flow in the six months ended June 30, 2010 compared to the six months ended
June 30, 2009 is due primarily to an $8.0 decrease in the current period net income, which includes
$7.6 million of acquisition-related costs, $12.3 million
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of
restructuring charges, the majority of which are related to actions taken as a result of the i2 acquisition and $1.4 million 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, changes in working capital utilized approximately $29.7 million of cash in
the six months ended June 30, 2010 and provided approximately $20.6 million of cash in the six
months ended June 30, 2009 due to the timing and payment of accounts receivable. Accounts
receivable increased approximately $14.9 million in the six months ended June 30, 2010 due
primarily to increased sales over the past twelve months and decreased $16.8 million in the six
months ended June 30, 2009 due primarily to the collection of an unusually large receivable. In
addition, operating cash flows for the six months ended June 30, 2010 were negatively impacted by
decreases in deferred revenue balances from maintenance and other contracts assumed in the i2
acquisition that were renewed in the months just prior to the acquisition and for which the related
cash was collected by i2 prior to the acquisition close date. We
initially expected to increase our cash balance during 2010 through
the generation of between $100 million to $110 million of operating
cash flow. However, due to the impact of the changes described above,
we have revised our outlook and now believe that cash flow from
operations for 2010 will range between $80 million and $90 million.
Investing activities provided cash of $55.0 million in the six months ended June 30, 2010 and
utilized cash of $2.8 million in the six months ended June 30, 2009. Cash provided from investing
activities in the six month ended June 30, 2010 includes a $276.1 million change in restricted cash
offset by the $213.4 million of net cash expended to acquire i2. Investing activities also include
purchases of property and equipment of $6.4 million and $1.4 million in the six month ended June
30, 2010 and 2009, respectively, and the payment of direct costs related to prior acquisitions of
$1.6 million and $1.5 million, respectively.
Financing activities provided cash of $7.9 million and $743,000 in the six months ended June
30, 2010 and 2009, respectively. Cash provided by financing activities includes $11.6 million and
$4.6 million in proceeds from the issuance of stock, respectively, offset in part by treasury stock
repurchases and other financing activities of $3.8 million and $3.9 million, respectively.
Changes in the currency exchange rates of our foreign operations had the effect of decreasing
cash by $2.2 million in the six months ended June 30, 2010 and increasing cash by $1.6 million in
the six months ended June 30, 2009. 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 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 the six months ended June 30, 2010 and 2009, we also repurchased 134,390 and 79,259
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 $3.6 million at prices ranging from $22.47 to $30.06 in the six months ended
June 30, 2010 and for $988,000 at prices ranging from $9.75 to $15.87 in the six months ended June
30, 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 24 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.
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We believe our cash and cash equivalents and net cash provided from operations will provide
adequate liquidity to meet our normal operating requirements for the foreseeable future. A major
component of our positive cash flow is the collection of accounts receivable and the generation of
cash earnings.
Critical Accounting Policies
There were no significant changes in our critical accounting policies during second 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.
| 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. | ||
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: |
| Persuasive evidence of an arrangement exists and a license agreement has been signed; | ||
| Delivery, which is typically FOB shipping point, is complete; | ||
| Fees are fixed and determinable and there are no uncertainties surrounding product acceptance; | ||
| Collection is considered probable; and | ||
| Vendor-specific evidence of fair value (VSOE) exists for all undelivered elements. |
Our customer arrangements typically contain multiple elements that include software, options for future purchases of software products not previously licensed to the customer, maintenance, consulting and training services. The fees from these arrangements are allocated to the various elements based on VSOE. Under the residual method, if an arrangement contains an undelivered element, the VSOE of the undelivered element is deferred and the revenue recognized once the element is delivered. If we are unable to determine VSOE for any undelivered element included in an arrangement, we will defer revenue recognition until all elements have been delivered. In addition, if a software license contains milestones, customer acceptance criteria or a cancellation right, the software revenue is recognized upon the achievement of the milestone or upon the earlier of customer acceptance or the expiration of the acceptance period or cancellation right. For arrangements that provide for significant services or custom development that are essential to the 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. |
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. |
Maintenance services are separately priced and stated in our arrangements. Maintenance services typically include on-line |
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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. |
Consulting and training services are separately priced and stated in our arrangements, are generally available from a number of suppliers, and are generally not essential to the functionality of our software products. Consulting services include project management, system planning, design and implementation, customer configurations, and training. These services are generally billed bi-weekly on an hourly basis or pursuant to the terms of a fixed price contract. Consulting services revenue billed on an hourly basis is recognized as the work is performed. Under fixed price service contracts and milestone-based arrangements that include services that are not essential to the functionality of our software products, consulting services revenue is recognized using the proportional performance method. We measure progress-to-completion under the proportional performance method by using input measures, primarily labor hours, which relate hours incurred to date to total estimated hours at completion. We continually update and revise our estimates of input measures. If our estimates indicate that a loss will be incurred, the entire loss is recognized in that period. Training revenues are included in consulting revenues in the 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. |
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. |
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. |
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. |
| 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. | ||
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 |
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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. |
| Business Combinations. The acquisition of i2 on January 28, 2010 is being accounted for at fair value under the acquisition method of accounting. The purchase price allocation has not been finalized. The preliminary allocation of the purchase price as of June 30, 2010 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. We currently anticipate that additional adjustments may still be made to the fair value of acquired deferred revenue balances, tax-related accounts, amortization of intangible assets and the residual amount allocated to goodwill. 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. |
| 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. | ||
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 second 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. | |||
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 $74.6 million of customer-based intangible assets in connection with the acquisition of i2. | |||
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 $24.3 million of Technology-based intangible assets in connection with the acquisition of i2. | |||
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. |
| 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 |
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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. |
| 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. | ||
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 June 30, 2010 we have approximately $12.6 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 second quarter 2010, the liability for uncertain tax positions decreased by approximately $2.1 million. The decrease was primarily related to the Company receiving communication that the Indian and U.S. authorities reached a settlement related to i2s 2002-2006 tax years. It is reasonably possible that approximately $6.3 million of all items included in our 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 a $194,000 benefit in the six months ended June 30, 2010 and an accrual of $383,000 for the six months ended June 30, 2009. As of June 30, 2010 and December 31, 2009 there are approximately $2.8 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 of the overall tax provision. |
| 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 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 |
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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. | |||
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). | |||
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 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 June 30, 2010, we had approximately 670,000 vested stock options outstanding with exercise prices ranging from $10.33 to $27.50 per share. | |||
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 1st and August 1st 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 recognized $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. |
| 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. | ||
At June 30, 2010, we had forward exchange contracts with a notional value of $72.3 million and an associated net forward contract receivable of $545,000 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 a net foreign currency exchange loss of $958,000 in the three months ended June 30, 2010 and a net foreign currency exchange gain of $102,000 in the three months ended June 30, 2009. In the six months ended June 30, 2010 we recorded a net foreign currency exchange contract gain of $3,000 compared to a net foreign currency exchange contract loss of $216,000 in the six months ended June 30, 2009. Net foreign currency exchange gains (losses) are included in the condensed consolidated statements of operations 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. In addition, this guidance significantly expands required disclosures related to
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).
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 42%
in the six months ended June 30, 2010. In addition, the identifiable net assets of our foreign
operations totaled 23% and 19% of consolidated net assets at June 30, 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 loss of $4.3 million in the six months
ended June 30, 2010 and an unrealized foreign currency exchange gain of $3.6 million in the six
months ended June 30, 2009.
The foreign currency exchange loss in the six months ended June 30, 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 June 30, 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 June 30, 2010 rates
would result in a currency translation loss of approximately $880,000 before tax.
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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 June 30, 2010, we had forward exchange contracts with a notional value of $72.3 million and
an associated net forward contract receivable of $545,000 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 a net foreign
currency exchange loss of $958,000 in the three months ended June 30, 2010 and a net foreign
currency exchange gain of $102,000 in the three months ended June 30, 2009. In the six months ended
June 30, 2010 we recorded a net foreign currency exchange contract gain of $3,000 compared to a net
foreign currency exchange contract loss of $216,000 in the six months ended June 30, 2009. Net
foreign currency exchange gains (losses) are included in the condensed consolidated statements of
operations under the caption Interest Income and other, net.
Interest rates. Excess cash balances as of June 30, 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 ($7.1 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 June 30, 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
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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 June 30, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Dillards, Inc. vs. i2 Technologies, Inc.
In September 2007, Dillards, Inc. filed a lawsuit against i2 Technologies, Inc. in the
191st Judicial District Court of Dallas County, Texas, (the trial court) Cause No.
07-10924-J, which alleges that i2 committed fraud and failed to meet certain obligations to
Dillards regarding the purchase of two i2 products in the year 2000 under a software license
agreement and related services agreement. Dillards paid i2 approximately $8.1 million under these
two agreements.
On June 15, 2010, the jury in the trial court ruled in favor of the plaintiffs and rendered
three alternative verdicts ranging from $8.1 million to $237 million. Dillards is pursuing the
verdict in the amount of $237 million, which includes $150 million punitive damages, $76.2 million
in lost profits and pre-judgment interest of approximately 10.8 million. Post-judgment interest
will accrue on the total amount of the judgment at 5% compounded annually. The Company has
requested that the trial court set aside or reduce the verdict before it is entered as a judgment.
There is no statutory time limit within which the trial court judge is required to enter judgment
on this matter. If the trial court enters a judgment based on the pending jury verdict, or if
another judgment is returned that we believe is unacceptable, the Company intends to pursue all
available remedies in the appeals process. We have the right under Texas law to suspend
enforcement of the trial court judgment during the appeals process by posting a $25 million bond
and we are prepared to do that, if necessary. There can be no assurance that the verdict will be
set aside or reduced, that any appeal of the judgment will be successful, or that the lawsuit can
be settled on terms acceptable to the Company.
The Company will accrue an estimated loss from this matter if it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. In evaluating the
probability of an unfavorable outcome in this litigation we have considered (a) the nature of the
litigation and claim, (b) the progress in the case, (c) the opinions of legal counsel and other
advisors, (d) the experience of the Company and others in similar cases, and (e) how management
intends to respond in the event an unfavorable final judgment is returned by the trial court. We
currently estimate the potential loss for this matter to range between zero and $237 million
(representing a maximum award for lost profits, punitive damages and pre-judgment interest), plus
post-judgment interest. The final trial court judgment or any revised result that may be achieved
through an appeals process (which could take several years to complete), could result in multiple
potential outcomes within this range. Management has determined that the best estimate of the
potential outcome of this matter is $5 million which was recorded on the opening balance sheet of
i2. We have not accrued any additional estimated contingent losses in this lawsuit as a result of
the jury verdict. Managements best estimate is based on our evaluation of the case, which included
input from i2s in-house counsel and trial lawyers, and other outside litigation experts who
assisted in our due diligence process. This amount is also supported by subsequent analyses and
focus group assessments prepared by outside trial consultants prior to the actual trial.
i2 Technologies, Inc. vs. Oracle Corporation
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, Tyler Division (No. 6:09-cv-194-LED) 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 four Oracle patents. In response to i2s motion to sever the
Oracle counterclaim, on June 11, 2010, the trial court split the initial case into two cases,
staying the second case
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(No. 6:10-cv-00284-LED) pending the outcome of the first case. The trial
court instructed i2 to select five patents for the first case and Oracle to select one patent for
the first case.
Shareholder Class Action Litigation
In December, 2009, the Company was sued in a putative shareholder class action against i2 and
its board of directors, in the County Court of Law No. 2 of Dallas County (No. CC-09-08476-B).
The plaintiffs allege in this lawsuit that the directors of i2 breached their fiduciary duties to
shareholders of i2 by selling i2 to the Company via an allegedly unfair process and at an unfair
price, and that the Company aided and abetted this alleged breach. On January 26, 2010, the Court
denied the plaintiffs request for a preliminary injunction that sought to enjoin the merger
between JDA and i2. The plaintiffs subsequently filed an amended complaint, alleging unspecified
monetary damages in addition to declaratory and injunctive relief and attorneys fees. The
Company, i2 and i2s directors have denied all allegations and discovery is ongoing.
We are involved in other 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.
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 June 30, 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.
Our ability to sustain profitability will depend, in part, on our ability to:
| attract and retain an adequate client base; | ||
| manage effectively a larger and more global business with larger, complex tier one projects; | ||
| react to changes, including technological changes, in the markets we target or operate in; | ||
| deploy our services in additional markets or industry segments; | ||
| respond to competitive developments and challenges; | ||
| attract and retain experienced and talented personnel; and | ||
| establish strategic business relationships. |
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 $9.6 million in first half 2010 and includes the impact of i2 from the January 28,
2010 (date of acquisition) through June 30, 2010. Cash flow from operations, without the cash flow
from i2, was $60.5 million in first half 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; | ||
| our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; | ||
| our high level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt; | ||
| our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; | ||
| our high level of indebtedness may make us more vulnerable to economic downturns and adverse developments in our business; and | ||
| our ability to fund a change of control offer may be limited. |
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 exacerbate 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
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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. 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 and delivery.
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:
| involve more significant integration efforts in order to complete implementation; | ||
| require the execution of implementation procedures in multiple layers of software; | ||
| offer a customer more deployment options and other configuration choices; |
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| require more training; and | ||
| may involve third party integrators to change business processes concurrent with the implementation of the software. |
Delays in the implementations of any of our software products, whether by our business
partners or by us, may result in client dissatisfaction, disputes with our customers, damage to our
reputation or cancellation of large projects. With the i2 acquisition, we have increased the
number of large, complex projects with global tier one customers. Cancellation of a large, global
implementation project could have a material adverse affect on our operating results.
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. 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.
Litigation Could Harm Our Business.
We may be subject to legal proceedings and claims involving customer, stockholder, consumer,
competition and other issues on a global basis. As described in Item 1, Note 8 Legal
Proceedings in Part I and Item 1 Legal Proceedings in Part II of this Form 10-Q, we are
currently engaged in a number of legal proceedings, including litigation with Dillards, Oracle and
a group of i2s shareholders. These legal proceedings are subject to inherent uncertainties, and
unfavorable rulings could occur and could have a material adverse effect on our business, financial
position, results of operations or cash flows.
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 June 30, 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 and result in counterclaims,
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.
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Third parties may claim we infringe their intellectual property rights, which would result in
an increase in litigation and other related costs.
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:
| be time-consuming, costly and/or result in litigation; |
| divert managements time and attention from developing our business; |
| require us to pay monetary damages or involve settlement payments, either of which could be significant; |
| require us to enter into royalty and licensing agreements that we would not normally find acceptable; |
| require us to stop selling or to redesign certain of our products; or |
| require us to satisfy indemnification obligations to our customers. |
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
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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 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 42% of our total revenues in first half 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:
| currency fluctuations, the impact of which could significantly increase as a result of: |
| our continuing expansion of the CoE in India; and | ||
| 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; |
| higher operating costs due to the need to comply with local laws or regulations; |
| lower margins on consulting services; |
| competing against low-cost service providers; |
| unexpected changes in employment and other regulatory requirements; |
| tariffs and other trade barriers; |
| costs and risks of adapting our products for use in foreign countries; |
| longer payment cycles in certain countries; |
| potentially negative tax consequences; |
| difficulties in staffing and managing geographically disparate operations; |
| greater difficulty in safeguarding intellectual property, licensing and other trade restrictions; |
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| ability to negotiate and have enforced favorable contract provisions; |
| repatriation of earnings; |
| the challenges of finding qualified management for our international operations; |
| general economic conditions in international markets; and |
| 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:
| the slower-than-expected rate of internal adoption of our planned mix of on-shore/off-shore services; |
| significant expected increases in labor costs in India; |
| increased risk of associate attrition due to the improvement of the Indian economy and job market; |
| terrorist activities in the region; |
| inability to hire or retain sufficient personnel with the necessary skill sets to meet our needs; |
| economic, security and political conditions in India; |
| inadequate facilities or communications infrastructure; and |
| 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.
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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 protracted
global economic downturn, could result in delay or cancellation of customer purchases. A downturn
in the economy 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. 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 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:
| 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; |
| if we use our stock to make a future acquisition, it will dilute existing shareholders; |
| we may have difficulty assimilating the operations and personnel of any acquired company; |
| the challenge and additional investment involved to integrate new products and technologies into our sales and marketing process; |
| 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; |
| our ongoing business may be disrupted by transition and integration issues; |
| 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; |
| 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; |
| our relationships with employees and customers could be impaired; |
| 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; |
| as successor we may be subject to certain liabilities of our acquisition targets; |
| we may be required to sustain significant exit or impairment charges if products acquired in business combinations are unsuccessful; and |
| adverse outcomes in legal proceedings. |
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:
| early termination of contracts by the government; |
| costly and complex competitive bidding process; |
| required extensive use of subcontractors, whose work may be deficient or not performed in a timely manner; |
| significant penalties associated with employee misconduct in the highly regulated government marketplace; |
| changes or delays in government funding that could negatively impact contracts; and |
| 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 emerging
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.
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Our software products can be licensed with a variety of popular industry standard platforms
and are authored in various development environments using different programming languages and
underlying databases and architectures. There may be future or existing platforms that achieve
popularity in the marketplace that may not be compatible with our software product design.
Developing and maintaining consistent software product performance across various technology
platforms could place a significant strain on our resources and software product release schedules,
which could adversely affect our results of operations.
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:
| integrating the two companies operations, processes, people, technologies, products and services; |
| coordinating and integrating sales and marketing and research and development functions; |
| demonstrating to our clients that the acquisition will not result in adverse changes in business focus, products and service deliverables (including customer satisfaction); |
| assimilating and retaining the personnel of both companies and integrating the business cultures, operations, systems and clients of both companies; and |
| 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.
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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:
| the ability of our technology and hardware, suppliers and service providers to perform as we expect; |
| our ability to execute our strategy and continue to operate a larger, more diverse business efficiently on a global basis; |
| our ability to effectively manage our third party relationships; |
| our ability to attract and retain qualified personnel; |
| our ability to effectively manage our employee costs and other expenses; |
| our ability to retain and grow revenues and profits from our clients and the current portfolio of business with each client; |
| technology and application failures and outages, security breaches or interruption of service, which could adversely affect our reputation and our relations with our clients; |
| 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 |
| 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:
| 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; | ||
| 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; | ||
| Competitive pricing pressures and competitive success or failure on significant transactions; | ||
| 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; | ||
| Lack of desired features and functionality in our individual products or our suite of products; | ||
| Changes in the number, size or timing of new and renewal maintenance contracts or cancellations; | ||
| Unplanned changes in our operating expenses; | ||
| Changes in the mix of domestic and international revenues, or expansion or contraction of international operations; | ||
| Our ability to complete fixed price consulting contracts within budget; | ||
| Foreign currency exchange rate fluctuations; | ||
| 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 | ||
| 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. The purchase price
allocation has not been finalized. The preliminary allocation of the purchase price as of June 30,
2010 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. We currently anticipate that
additional adjustments may still be made to the fair value of acquired deferred revenue balances,
tax-related accounts, amortization of intangible assets and the residual amount allocated to
goodwill. 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:
| 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; | ||
| Changes in the useful lives or the amortization of identifiable intangible assets; | ||
| 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; | ||
| Charges to income to eliminate certain JDA pre-merger activities that duplicate those of the acquired company or to reduce our cost structure; and | ||
| 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.
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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 |
Item 3. | Defaults Upon Senior Securities Not applicable |
Item 4. | Reserved |
Item 5. | Other Information Not applicable |
Item 6. | Exhibits See Exhibits Index |
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JDA SOFTWARE GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
JDA SOFTWARE GROUP, INC. |
||||
Dated: August 9, 2010 | By: | /s/ Hamish N. Brewer | ||
Hamish N. Brewer | ||||
President and Chief Executive Officer (Principal Executive Officer) | ||||
By: | /s/ Peter S. Hathaway | |||
Peter S. Hathaway | ||||
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
Exhibit # | Description of Document | |||
3.1
|
| Third Restated Certificate of Incorporation of the Company as amended through July 14, 2010 (Filed herewith). | ||
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). | ||
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). | ||
4.2
|
| 8% Senior Notes due 2014 Indenture dated as of December 10, 2009 among JDA Software Group, Inc., the Guarantors, and U.S. Bank National Association, as trustee ((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). | ||
4.3
|
| Supplemental Indenture dated as of January 28, 2010 among JDA Software Group, Inc., i2 Technologies, Inc., i2 Technologies US, Inc., the Guarantors and U.S. Bank National Association, as trustee (Incorporation by reference to Exhibit 4.3 to the Companys Registration Statement on Form S-4 (File No. 333-167429), as filed on June 9, 2010). | ||
31.1
|
| Rule 13a-14(a) Certification of Chief Executive Officer. (Filed herewith). | ||
31.2
|
| Rule 13a-14(a) Certification of Chief Financial Officer. (Filed herewith). | ||
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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