| JDA SOFTWARE GROUP INC Item 1A Risk Factors We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties |
| The following section describes some, but not all, of these risks and uncertainties that we believe may adversely affect our business, financial condition, results of operations or the market price of our stock |
| This section should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2005 and for the year then ended contained elsewhere in this Form 10-K Our Stock Price Has Been And May Remain Volatile |
| The trading price of our common stock has in the past and may in the future be subject to wide fluctuations |
| Examples of factors that we believe have led to disappointing results include the following: • Cancelled or delayed purchasing decisions • Announcements of reduced visibility and increased uncertainty concerning future demand for our products; • Increased competition; • Elongated sales cycles; • A limited number of reference accounts with implementations in the early years of product release; • Certain design and stability issues in early versions of our products; • Lack of desired features and functionality in our products; and • Performance of other technology stocks or our industry |
| In addition, fluctuations in the price of our common stock may expose us to the risk of securities class action lawsuits |
| Defending against such lawsuits could result in substantial costs and divert management’s attention and resources |
| Furthermore, any settlement or adverse determination of these lawsuits could subject us to significant liabilities |
| In January 2006, we began providing quantitative guidance for the first time since 2002 |
| Because of the difficulty in predicting the timing of particular sales within any one quarter, we are providing annual guidance only |
| Our actual 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 fail to meet management’s 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; • 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, or otherwise; • 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; 14 _________________________________________________________________ [50]Table of Contents • Changes in the number, size or timing of new and renewal maintenance contracts or cancellations; • 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; • Operational issues resulting from corporate reorganizations; and • 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, or other reasons |
| Charges to earnings resulting from past or future acquisitions may also adversely affect our operating results |
| Under purchase accounting, we allocate the total purchase price to an acquired company’s net tangible assets, amortizable intangible assets and in-process research and development based on their fair values as of the date of the acquisition and record the excess of the purchase price over those fair values as goodwill |
| Management’s estimates of fair value are based upon assumptions believed to be reasonable but which are inherently uncertain |
| As a result, any of the following or other factors could result in material charges that would adversely affect our results: • Loss on impairment of goodwill and/or other intangible assets; • Changes in the useful lives or the amortization of identifiable intangible assets and charges for stock-based compensation; • 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; and • Charges to income to eliminate certain JDA pre-merger activities that duplicate those of the acquired company or to reduce our cost structure |
| We recorded a dlra9dtta7 million loss on impairment of goodwill in our In-Store Systems business segment in fourth quarter 2005 |
| In addition we recorded impairment losses of dlra200cmam000 and dlra1dtta1 million in fourth quarter 2005 and 2004, respectively on the trademarks acquired from E3 Corporation |
| Software license revenues in any quarter depend substantially upon contracts signed and the related shipment of software in that quarter |
| It is therefore difficult for us to accurately predict software license revenues |
| Because of the timing of our sales, we typically recognize the substantial majority of our software license revenues in the last weeks or days of the quarter, and we may derive a significant portion of our quarterly software license revenues from a small number of relatively large sales |
| 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 |
| Accordingly, large individual sales have sometimes occurred in quarters subsequent to when we anticipated |
| Although our increased use of Proof of Concept (“POC”) and Milestone-Based (“Milestone”) licensing models may improve our ability to predict the timing of certain deals, they still represent a small percentage of our overall software license revenues and we expect to experience continued difficulty in accurately forecasting the timing of deals |
| If we receive any significant cancellation or deferral of customer orders, or we are unable to conclude license negotiations by the end of a fiscal quarter, our operating results may be lower than anticipated |
| In addition, any weakening or uncertainty in the economy may make it more difficult for us to predict quarterly results in the future, and could negatively impact our business, operating results and financial condition for an indefinite period of time |
| Our revenue and profitability depend on the overall demand for our software and related services |
| A regional and/or global change in the economy and financial markets could result in delay or cancellation of customer purchases |
| 15 _________________________________________________________________ [51]Table of Contents Historically, developments associated with terrorist attacks on United States’ interests, continued violence in the Middle East, natural catastrophes or contagious diseases such as the Severe Acute Respiratory Syndrome (“SARS”) have resulted in economic, political and other uncertainties, and factors such as these could further adversely affect our revenue growth and operating results |
| If demand for our software and related services decrease, our revenues would decrease and our operating results would be adversely affected which, in turn, may cause our stock price to fall |
| Our Gross Margins May Vary Significantly Or Decline |
| Because the gross margins on product revenues (software licenses and maintenance services) are significantly greater than the gross margins on consulting services revenue, our combined gross margin has fluctuated from quarter to quarter and it may continue to fluctuate significantly based on revenue mix |
| Demand for the implementation of products with longer implementation timeframes, specifically Merchandise Operations Systems and In-Store Systems, has been depressed for an extended period of time |
| Although we have seen indications in recent quarters that demand for Merchandise Operations Systems may be returning, we believe that overall demand continues to be greater for products that have a higher short term ROI and a lower total cost of ownership with less disruption to the underlying business of our customers |
| Most of our current implementations are for our Strategic Demand Management Solutions that have shorter implementation timeframes and most of the software demand in recent years has been for these products |
| Depressed sales of Merchandise Operations Systems and In-Store Systems continues to have a corollary negative impact on our service revenues as consulting services revenue typically lags the performance of software revenues by as much as one year |
| In addition, gross margins on consulting services revenue vary significantly with the rates at which we utilize our consulting personnel, and as a result, our overall gross margins will be adversely affected when there is not enough sufficient demand for our consulting services |
| We may face some constraints on our ability to adjust consulting service headcount and expense to meet demand, due in part to our need to retain consulting personnel with sufficient skill sets to implement and maintain our full set of products |
| Our expense levels are based on our expectations of future revenues |
| Since software license sales are typically accompanied by a significant amount of consulting and maintenance services, the size of our services organization must be managed to meet our anticipated software license revenues |
| We have also made a strategic decision to make a significant investment in new product development |
| As a result, we hire and train service personnel and incur research and development costs in advance of anticipated software license revenues |
| If software license revenues fall short of our expectations, or if we are unable to fully utilize our service personnel, our operating results are likely to decline because a significant portion of our expenses cannot be quickly reduced to respond to any unexpected revenue shortfall |
| We have in the past and may in the future be impacted by customer bankruptcies that occur in periods subsequent to the software license sale |
| During weak economic conditions there is an increased risk that certain of our customers will file bankruptcy |
| When our customers file bankruptcy, we may be required to forego collection of pre-petition amounts owed and to repay amounts remitted to us during the 90-day preference period preceding the filing |
| Accounts receivable balances related to pre-petition amounts may in certain of these instances be large due to extended payment terms for software license fees, and significant billings for consulting and implementation services on large projects |
| The bankruptcy laws, as well as the specific circumstances of each bankruptcy, may severely limit our ability to collect pre-petition amounts, and may force us to disgorge payments made during the 90-day preference period |
| We also face risk from international customers that file for bankruptcy protection in foreign jurisdictions, in that the application of foreign bankruptcy laws may be more difficult to predict |
| Although we believe that we have sufficient reserves to cover anticipated customer bankruptcies, there can be no assurance that such reserves will be adequate, and if they are not adequate, our business, operating results and financial condition would be adversely affected |
| We are developing our next generation PortfolioEnabled solutions based upon the Microsoft |
| The initial PortfolioEnabled solutions may not offer every capability of their predecessor products but will offer other advantages such as an advanced technology platform, the ability of PRO to install on Unix/ Oracle environments utilizing Microsoft |
| Net application services componentry with subsequent releases to include Microsoft SQL Server 2005, or other advantages such as “planning by attribute” capabilities in the enterprise planning solution |
| Further, the PortfolioEnabled products do offer some capabilities that go beyond the current generation products they are replacing, 16 _________________________________________________________________ [52]Table of Contents and as a result, we believe they offer features and functionality that will be competitive in the marketplace |
| Sales cycles to new customers tend to be more elongated than those to existing customers who already have contracts in place with us and prior experience with our products |
| We will continue selling the equivalent Portfolio Synchronized versions of these products until the new PortfolioEnabled solutions have achieved critical mass in the marketplace and the demand for the Portfolio Synchronized versions has diminished |
| The risks of our commitment to the |
| Net Platform include, but are not limited to, the following: • The possibility that it may be more difficult than we currently anticipate to develop our products for the |
| Net Platform, and we could incur costs in excess of our projections to complete the planned transition of our product suite; • The difficulty our sales organization may encounter in determining whether to propose the Portfolio Synchronized products or the next generation PortfolioEnabled products based on the |
| Net Platform to current or prospective customers; • The possibility that our |
| Net Platform beta customers will not become favorable reference sites; • Adequate scalability of the |
| Net Platform for our largest customers; • The possibility we may not complete the transition to the |
| Net Platform in the time frame we currently expect; • The ability of our development staff to learn how to efficiently and effectively develop products using the |
| Net Platform; • Our ability to transition our customer base onto the |
| Net Platform when it is available; • The possibility that it may take several quarters for our consulting and support organizations to be fully trained and proficient on this new technology and as a result, we may encounter difficulties implementing and supporting new products or versions of existing products based on the |
| Net Platform; • We may be required to supplement our consulting and support organizations with |
| Net proficient resources from our product development teams to support early |
| Net implementations which could impact our development schedule for the release of additional |
| Net products; • Microsoft’s ability to achieve market acceptance of the |
| Net platform; • Delays in Microsoft’s ability to commercially release necessary components for deployment of our applications; and • Microsoft’s continued commitment to enhancing and marketing the |
| The risk associated with developing products that utilize new technologies remains high |
| Despite our increasing confidence in this investment and our efforts to mitigate the risks of the |
| Net Platform project, there can be no assurances that our efforts to re-write many of our current products and to develop new PortfolioEnabled solutions using the |
| Net Platform project is not successful, it likely will have a material adverse effect on our business, operating results and financial condition |
| Certain of our software products, including Portfolio Point of Sale, Portfolio Workforce Management, Portfolio Registry, Trade Events Management, PRO, Enterprise Planning and certain modules of Portfolio CRM and Intellect, have been commercially released within the last two years |
| The markets for these products are new and evolving, and we believe that retailers and their suppliers may be cautious in adopting new technologies |
| Consequently, we cannot predict the growth rate, if any, and size of the markets for our e-commerce products or that these markets will continue to develop |
| Potential and existing customers may find it difficult, or be unable, to successfully implement our e-commerce products, or may not purchase our products for a variety of reasons, including their inability or unwillingness to deploy sufficient internal personnel and computing resources for a successful implementation |
| In addition, we must overcome significant obstacles to successfully market our newer products, including limited experience of our sales and consulting personnel |
| If the markets for our newer products fail to develop, develop more slowly or differently than expected or become saturated with competitors, or if our products are not accepted in the marketplace or are technically flawed, our business, operating results and financial condition would be adversely affected |
| 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 |
| Net 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 will suffer |
| Our software products can be licensed with a variety of popular industry standard platforms, and are authored in various development environments using different programming languages and underlying databases and architectures |
| There may be future or existing platforms that achieve popularity in the marketplace that may not be compatible with our software product design |
| Developing and maintaining consistent software product performance across various technology platforms could place a significant strain on our resources and software product release schedules, which could adversely affect our results of operations 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 may occasionally contain design defects or software errors that could be difficult to detect and correct |
| In addition, implementation of our products may involve customer-specific configuration by third parties or us, and may involve integration with systems developed by third parties |
| In particular, it is common for complex software programs, such as our UNIX/Oracle, |
| They are discovered only after the product has been implemented and used over time with different computer systems and in a variety of applications and environments |
| Despite extensive testing, we have in the past discovered certain defects or errors in our products or custom configurations only after our software products have been used by many clients |
| For example, we will likely continue to experience undetected errors in our |
| Net applications as we begin to implement them at early adopter customer sites |
| In addition, our clients may occasionally experience difficulties integrating our products with other hardware or software in their environment that are unrelated to defects in our products |
| Such defects, errors or difficulties may cause future delays in product introductions, result in increased costs and diversion of development resources, require design modifications or impair customer satisfaction with our products |
| We believe that significant investments in research and development are required to remain competitive, and that speed to market is critical to our success |
| Our future performance will depend in large part on our ability to enhance our existing products through internal development and strategic partnering, internally develop new products which leverage both our existing customers and sales force, and strategically acquire complementary retail point and collaborative solutions that add functionality for specific business processes to an enterprise-wide system |
| If clients experience significant problems with implementation of our products or are otherwise dissatisfied with their functionality or performance or if they fail to achieve market acceptance for any reason, our market reputation could suffer, and we could be subject to claims for significant damages |
| Although our customer agreements contain limitation of liability clauses and exclude consequential damages, there can be no assurances that such contract provisions 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 Products |
| 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 |
| Although average implementation times have recently declined, we believe the implementation of the UNIX/Oracle versions of our products can be longer and more complicated than our other applications as they typically (i) appeal to larger retailers who have multiple divisions requiring multiple implementation projects, (ii) require the execution of implementation procedures in multiple layers of software, (iii) offer a retailer more deployment options and other configuration choices, and (iv) may involve third party integrators to change business processes concurrent with the implementation of the software |
| Delays in the implementations of any of our software products, whether by our business partners or us, may result in client dissatisfaction, disputes with our customers, or damage to our reputation |
| 18 _________________________________________________________________ [54]Table of Contents There is also a risk that it may take several quarters for our consulting and support organizations to be fully trained and proficient on the new |
| Net technology platform and as a result, we may encounter difficulties implementing and supporting new products or versions of existing products based on the |
| In addition, we may be required to supplement our consulting and support organizations with |
| Net proficient resources from our product development teams to support early |
| Net implementations which could impact our development schedule for the release of additional |
| Significant problems implementing our software therefore, can cause delays or prevent us from collecting license fees for our software and can damage our ability to obtain new business |
| As a result of the headcount reductions taken in fourth quarter 2004 and the first half of 2005 to manage the utilization pressure from decreased demand for our services, we face the risk of constraints in our services offerings in the event of greater than anticipated licensing activity or more complex implementation projects |
| We offer a combination of software products, consulting and maintenance services to our customers |
| Historically, we have entered into service agreements with our customers that provide for consulting services on a “time and expenses” basis |
| We believe our competitors may be offering fixed-price service contracts to potential customers in order to differentiate their product and service offerings |
| As a result, we may be required during negotiations with customers to enter into fixed-price service contracts which link services payments, and occasionally software payments, to implementation milestones |
| Fixed bid consulting services work represented 14prca of total consulting services revenue in 2005 as compared to 16prca in 2004 and 15prca in 2003 |
| If we are unable to meet our contractual obligations under fixed-price contracts within our estimated cost structure, our operating results could suffer |
| Our Success Depends Upon Our Proprietary Technology |
| Our success and competitive position is dependent in part upon our ability to develop and maintain the proprietary aspect of our technology |
| The reverse engineering, unauthorized copying, or other misappropriation of our technology could enable third parties to benefit from our technology without paying for it |
| We rely on a combination of trademark, trade secret, copyright law and contractual restrictions to protect the proprietary aspects of our technology |
| We seek to protect the source code to our software, documentation and other written materials under trade secret and copyright laws |
| To date, we have not protected our technology with issued patents, although we do have several patent applications pending |
| Effective copyright and trade secret protection may be unavailable or limited in certain foreign countries |
| We license our software products under signed license agreements that impose restrictions on the licensee’s ability to utilize the software and do not permit the re-sale, sublicense or other transfer of the source code |
| Finally, we seek to avoid disclosure of our intellectual property by requiring employees and independent consultants to execute confidentiality agreements with us and by restricting access to our source code |
| There has been a substantial amount of litigation in the software and Internet industries regarding intellectual property rights |
| It is possible that in the future third parties may claim that our current or potential future software solutions or we infringe on their intellectual property |
| We expect that software product developers and providers of e-commerce products will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlap |
| Moreover, as software patents become more common, the likelihood increases that a patent holder will bring an infringement action against us, or against our customers, to whom we have indemnification obligations |
| There appears to be an increase in the number of firms with patent portfolios whose primary business is to bring or threaten to bring patent infringement lawsuits in the hope of settling for royalty fees |
| In particular, we have noticed increased activity from such firms in the in-store systems area |
| In addition, we may find it necessary to initiate claims or litigation against third parties for infringement of our proprietary rights or to protect our trade secrets |
| Since we resell hardware, we may also become subject to claims from third parties that the hardware, or the combination of hardware and software, infringe their intellectual property |
| Although we may disclaim certain intellectual property representations to our customers, these disclaimers may not be sufficient to fully protect us against such claims |
| We may be more vulnerable to patent claims since we do not have any issued patents that we can assert defensively against a patent infringement claim |
| Any claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or license agreements |
| Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could have a material adverse effect on our business, operating results and financial condition |
| We license and integrate technology from third parties in certain of our software products |
| For example, we license the Uniface client/server application development technology from Compuware, Inc |
| for use in Portfolio Merchandise Management, certain applications from Silvon Software, Inc |
| for use in Performance Analysis by IDEAS, IBM’s Net |
| commerce merchant server software for use in Customer Order Management, the Syncsort application for use in certain of the Portfolio Planning by Arthur products, and IBM’s Ascential Software integration tool |
| Our third party licenses generally require us to pay royalties and fulfill confidentiality obligations |
| We also resell Oracle database licenses |
| If we are unable to continue to license any of this third party software, or if the third party licensors do not adequately maintain or update their products, we would face delays in the releases of our software until equivalent technology can be identified, licensed or developed, and integrated into our software products |
| These delays, if they occur, could harm our business, operating results and financial condition |
| It is also possible that intellectual property acquired from third parties through acquisitions, mergers, licenses or otherwise may not have been adequately protected, or infringes another parties intellectual property rights |
| We encounter competitive products from a different set of vendors in each of our primary product categories |
| We believe that while our markets are still subject to intense competition, the number of significant competitors in many of our application markets has decreased over the past five years |
| We believe the principal competitive factors in our markets are feature and functionality, product reputation and quality of referenceable accounts, vendor viability, retail and demand chain industry expertise, total solution cost, technology platform and quality of customer support |
| The enterprise software market continues to consolidate |
| Although the consolidation trend has resulted in fewer competitors in every significant product market we supply, it has also resulted in larger, new competitors with significantly greater financial, technical and marketing resources than we possess |
| This could create a significant competitive advantage over us and negatively impact our business |
| The consolidation trend is evidenced by Oracle’s acquisitions of Retek on April 12, 2005, of ProfitLogic, Inc |
| on July 18, 2005, and of 360Commerce on January 13, 2006; and by SAP AG’s acquisitions of Triversity, Inc |
| on September 19, 2005 and its pending acquisition of Khimetrics, Inc |
| Oracle did not compete with our retail specific products prior to its acquisition of Retek and although this acquisition has not significantly impacted our near-term strategy, it is difficult to estimate what effect this acquisition will ultimately have on our competitive environment |
| We have recently encountered competitive situations with Oracle in certain of our international markets where, in order to encourage customers to purchase their retail applications, we suspect they have offered to license their database applications at no charge |
| We have also encountered competitive situations with SAP AG where, in order to encourage customers to purchase licenses of its non-retail applications and gain retail market share, they have offered to license at no charge certain of its retail software applications that compete with the JDA Portfolio products |
| If large competitors such as Oracle and SAP AG and other large private companies are willing to license their retail and/or other applications at no charge it may result in a more difficult competitive environment for our products |
| In addition, we could face competition from large, multi-industry technology companies that have historically not offered an enterprise solution set to the retail supply chain market |
| Because competitors such as Oracle and SAP AG have significantly greater resources than we possess, they could also make it more difficult for us to grow through acquisition by outbidding us for potential acquisition targets |
| 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 Are Dependent Upon The Retail Industry |
| Historically, we have derived over 75prca of our revenues from the license of software products and the performance of related services to retail customers, and our future growth is critically dependent on increased sales to retail customers |
| The success of our customers is directly linked to general economic conditions as well as those of the retail industry |
| In addition, we believe that the licensing of certain of our software products involves a large capital expenditure, which is often accompanied by large-scale hardware purchases or other capital commitments |
| As a result, demand for our products and services could decline in the event of instability or potential downturns |
| We believe the retail industry has remained cautious with their level of investment in information technology during the uncertain economic cycle of the last few years |
| We remain concerned about weak and uncertain economic conditions, 20 _________________________________________________________________ [56]Table of Contents industry consolidation and the disappointing results of retailers in certain of our geographic regions |
| The retail industry will be negatively impacted if weak economic conditions or geopolitical concerns persist for an extended period of time |
| Weak and uncertain economic conditions have in the past, and may in the future, negatively impact our revenues, including a potential deterioration of our maintenance revenue base as customers look to reduce their costs, elongate our selling cycles, and delay, suspend or reduce the demand for our products |
| As a result, it is difficult in the current economic environment to predict exactly when specific software licenses will close within a six to nine month time frame |
| In addition, weak and uncertain economic conditions could impair our customers’ ability to pay for our products or services |
| Any of these factors could adversely impact our business, quarterly or annual operating results and financial condition |
| International revenues represented 41prca of our total revenues in 2005 as compared to 40prca and 44prca of total revenues in 2004 and 2003, respectively |
| If our international operations grow, we may need to recruit and hire new consulting, sales and marketing and support personnel in the countries in which we have or will establish offices |
| Entry into new international markets typically requires the establishment of new marketing and distribution channels as well as the development and subsequent support of localized versions of our software |
| International introductions of our products often require a significant investment in advance of anticipated future revenues |
| In addition, the opening of a new office typically results in initial recruiting and training expenses and reduced labor efficiencies associated with the introduction of products to a new market |
| If we are less successful in a new market than we expect, we may not be able to realize an adequate return on our initial investment and our operating results could suffer |
| We cannot guarantee that the countries in which we operate will have a sufficient pool of qualified personnel from which to hire, that we will be successful at hiring, training or retaining such personnel or that we can expand or contract our international operations in a timely, cost effective manner |
| If we have to downsize certain international operations, the costs to do so are typically much higher than downsizing costs in the United States, particularly in Europe |
| Our international business operations are subject to risks associated with international activities, including: • Currency fluctuations; • Higher operating costs due to local laws or regulations; • Unexpected changes in employment and other regulatory requirements; • Tariffs and other trade barriers; • Costs and risks of localizing products for foreign countries; • Longer accounts receivable payment cycles in certain countries; • Potentially negative tax consequences; • Difficulties in staffing and managing geographically disparate operations; • Greater difficulty in safeguarding intellectual property, licensing and other trade restrictions; • Ability to negotiate and have enforced favorable contract provisions; • Repatriation of earnings; • The burdens of complying with a wide variety of foreign laws; • Anti-American sentiment due to the war with Iraq, and other American policies that may be unpopular in certain regions; • The effects of regional and global infectious diseases; • The challenges of finding qualified management for our international operations; and • General economic conditions in international markets |
| Consulting services associated with certain international software licenses typically have lower gross margins than those achieved domestically due to generally lower billing rates and/or higher labor costs in certain of our international markets |
| Accordingly, any significant growth in our international operations may result in declines in gross margins on consulting services |
| 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 21 _________________________________________________________________ [57]Table of Contents 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 |
| We cannot guarantee that any currency exchange strategy would be successful in avoiding exchange-related losses |
| In addition, revenues earned in various countries where we do business may be subject to taxation by more than one jurisdiction, which would reduce our earnings |
| Impact Of Substantial Cash Bids When Competing For Acquisition Opportunities We continue to focus our acquisition strategy on larger companies |
| However, we may increasingly compete for acquisitions with companies that have significantly greater cash resources |
| These companies are able to make substantial all cash offers to acquisition targets |
| Because of the volatility of our stock price, it may be difficult for us to compete for large acquisitions where there are competing all cash offers and our offer price includes our stock |
| If we are unable to successfully compete for larger acquisitions, our ability to achieve growth through acquisitions will be adversely affected |
| We May Have Difficulty Integrating Acquisitions |
| We continually evaluate potential acquisitions of complementary businesses, products and technologies, including those that are significant in size and scope |
| In pursuit of our strategy to acquire complementary products, we have completed nine acquisitions over the past eight years including the Arthur Retail Business Unit in June 1998, Intactix International, Inc |
| in April 2000, E3 Corporation in September 2001, and substantially all the assets of Timera Texas, Inc |
| The E3 acquisition was our largest to date, and involved the integration of E3’s products and operations in 12 countries |
| The risks we commonly encounter in acquisitions include: • We may have difficulty assimilating the operations and personnel of the acquired company; • The challenge to integrate new products and technologies into our sales and marketing process, particularly in the case of smaller acquisitions; • We may have difficulty effectively integrating the acquired technologies or products with our current products and technologies; • Our ongoing business may be disrupted by transition and integration issues; • We may not be able to retain key technical and managerial personnel from the acquired business; • We may be unable to achieve the financial and strategic goals for the acquired and combined businesses; • We may have difficulty in maintaining controls, procedures and policies during the transition and integration; • 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, and product development, among other things; • We may be subject to as a successor, certain liabilities of our acquisition targets; and • We may be required to sustain significant exit or impairment charges if products acquired in business combinations are unsuccessful |
| Our certificate of incorporation, which authorizes the issuance of “blank check preferred” stock, our stockholders’ rights plan which permits our stockholders to counter takeover attempts, and Delaware state corporate laws which restrict business combinations between a corporation and 15prca 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 |
| Our success is heavily dependent upon our ability to attract, hire, train, retain and motivate skilled personnel, including sales and marketing representatives, qualified software engineers involved in ongoing product development, and consulting personnel who assist in the implementation of our products and services |
| The market for such individuals is competitive |
| For example, it has been particularly difficult to attract and retain product development personnel experienced in the Microsoft |
| Net Platform since the |
| Net Platform is a new and evolving technology |
| Given the critical roles of our sales, product development and consulting staffs, our inability to recruit successfully or any significant loss of key personnel would adversely affect us |
| A high level of employee mobility and aggressive recruiting of skilled personnel characterize the software industry |
| It may be particularly difficult to retain or compete for skilled personnel against larger, better known software companies |
| has announced it intends to open a research and development center in the Phoenix area |
| We cannot guarantee that we will be able to retain our current personnel, attract and retain other highly qualified technical and managerial personnel in the future, or be able to assimilate the employees from any acquired businesses |
| We will continue to adjust the size and composition of our workforce to match the different product and geographic demand cycles |
| If we were unable to attract and retain the necessary technical and managerial personnel, or assimilate the employees from any acquired businesses, our business, operating results and financial condition would be adversely affected |
| We Are Dependent On Key Personnel |
| Our performance depends in large part on the continued performance of our executive officers and other key employees, particularly the performance and services of James D Armstrong our Chairman and Hamish N J Brewer our Chief Executive Officer |
| We do not have in place “key person” life insurance policies on any of our employees |
| Brewer, or other key executive officers or employees without a successor in place, or any difficulties associated with our succession, could negatively affect our financial performance |