SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

 

 

 

 

 

Commission File Number 0-27876

JDA SOFTWARE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

14400 North 87th Street
Scottsdale, Arizona 85260
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code:
(480) 308-3000

 

 

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act  Yes o     No þ

 

The approximate aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (based on the closing sales price of such stock as reported by the NASDAQ Stock Market) on June 30, 2009 was $447,182,136. The number of shares of common stock, $0.01 par value per share, outstanding as of March 5, 2010 was 41,534,345.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

This Annual Report on Form 10-K contains forward-looking statements reflecting management’s current forecast of certain aspects of our future. It is based on current information that we have assessed but which by its nature is dynamic and subject to rapid and even abrupt changes. Forward looking statements include statements regarding future operating results, liquidity, capital expenditures, product development and enhancements, numbers of personnel, strategic relationships with third parties, and strategy. The forward-looking statements are generally accompanied by words such as “plan,” “estimate,” “expect,” “intend,” “believe,” “should,” “would,” “could,” “anticipate” or other words that convey uncertainty of future events or outcomes. Our actual results could differ materially from those stated or implied by our forward-looking statements due to risks and uncertainties associated with our business. These risks are described throughout this Annual Report on Form 10-K, which you should read carefully. We would particularly refer you to Item 1A. “Risk Factors” for an extended discussion of the risks confronting our business. The forward-looking statements in this Annual Report on Form 10-K should be considered in the context of these risk factors. We disclaim any obligation to update information contained in any forward-looking statement.

 

PART I

 

 

Recent Developments

 

On January 28, 2010, we completed the acquisition of i2 Technologies, Inc. (“i2”) for approximately $600.0 million, which includes cash consideration of approximately $432.0 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 and transportation; (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 in the first six to nine 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.

 

Each outstanding share of i2’s 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.

Throughout Part I of this Annual Report on Form 10-K, except as otherwise specified, we have described our business as currently operated, giving effect to our acquisition of i2.

 

Overview

 

We are a leading provider of sophisticated enterprise software solutions designed to enable planning, optimization and execution of merchandising and supply chain processes for manufacturers, wholesalers and distributors, and retailers, as well as government and aerospace defense contractors. Additionally, we provide pricing, yield management and demand management software solutions for travel, transportation, hospitality and media organizations. We believe we have the broadest and deepest suite of software products and services for supply chain management. Our software offerings are highly tailored to industry-specific needs and are integrated to provide a complete set of solutions for our customers. These attributes, we believe, position us well against both broad enterprise resource planning (“ERP”) competitors and point solution providers, and promote customer loyalty.

 

Industry Overview

 

Organizations rely on various types of enterprise software solutions to optimize their business processes in order to enhance revenue growth and control expenses. The enterprise software market includes both vertically-specialized solutions such as SCM solutions, as well as horizontal business applications such as ERP suites, business intelligence applications, customer relationship management (“CRM”) solutions, analytical applications and other financial and operational software.

 

SCM solutions represent a distinct subset of the broader enterprise software applications market. SCM software manages the utilization of assets and labor, the flow and allocation of materials and products and the management of information, finances and other resources across global supply chains, from manufacturers to distribution centers and transportation networks to the retail store and consumer. SCM software is used to reduce costs by improving the efficiency of supply chain flows and increase revenue by matching the supply of goods with actual customer demand more accurately. For example, SCM software enables companies to offer differentiated products targeted to specific end markets while, at the same time, ensuring the availability of appropriate sales personnel and programs to help consumers make their purchases.

 

The SCM market is expected to grow by approximately 5% annually, from approximately $6.3 billion of revenues in 2008 to approximately $8.2 billion in 2013, according to Gartner’s September 2009 publication entitled “Forecast: Enterprise Software Markets, Worldwide, 2008-2013, 3Q09 Update.” The SCM software market is segmented into the following categories (sub-segment size in 2008 is noted in parentheses):

 

 

Key growth drivers for the SCM market include:

 

 

 

Product Overview

 

We market our software products as modular yet integrated suites that are designed to give our customers one synchronized view of product demand across their enterprise and extended supply chain. Our integrated suites of software products combine the functionality of planning, optimization, execution and analysis applications to enable our customers to develop an integrated enterprise plan to track and optimize the flow of inventory through the supply chain while optimizing their resources, operating efficiencies and financial results. Our customers can select individual products from our suites and implement them on a stand-alone basis or they can implement various combinations of our products to create an integrated solution. This flexibility provides speed to value which is highly desirable in the current economic environment.

 

Our product suites include the following:

 

Planning and Optimization Solutions

 

 

 

Transaction Systems

 

 

Our software solutions also include a comprehensive set of tools for advanced decision support and analysis covering strategic business planning, forecasting, promotional planning, distribution planning, manufacturing planning and scheduling, price and revenue optimization, inventory optimization, collaborative synchronization of inventory, distribution, production and material plans, category management and workforce management. Many of our products can be and are sold to multiple customer types and most of our products are sold across each of our geographic regions.

 

Business Segments

 

We organize and manage our operations by type of customer across the following reportable business segments:

 

 

 

Disclosures of certain financial information regarding our business segments and geographic regions are included in our consolidated financial statements as of December 31, 2009 and 2008, and for each of the years in the three-year period ended December 31, 2009, which are included elsewhere herein. Prior to the acquisition, i2 operated in one reportable business segment, supply chain management solutions. We intend to divide this business segment between our Retail and Manufacturing and Distribution reportable business segments.

 

Business Opportunities and Growth Strategies

 

Since our founding in 1985, JDA has expanded from a provider of inventory management software solutions for the retail industry to a global leader in supply chain management software solutions serving multiple end-markets such as retail, consumer, manufacturing and wholesale/distribution. The company has grown through a combination of organic growth and acquisitions.

 

JDA plans to continue to expand through a combination of organic growth and acquisition, and intends to implement the following strategies:

 

Focus on Core Competency:  Supply chain products and services help customers cut costs by improving efficiency and growing revenues by better matching demand with supply. Even in the current economic environment, our customers continue to license and purchase JDA’s products because of their high return on investment, creating a business opportunity for the company. We plan to continue to focus on the supply chain management space, utilizing our deep expertise and expanding our product offerings and end-markets.

 

Increase Add-On Sales to Existing Customers:  A significant portion of our sales are from existing customers. We plan to pursue additional sales opportunities with these customers by both cross-selling JDA and i2 products and offerings and up-selling additional products and services.

 

Invest in New Business Opportunities:  We will continue to invest in growth initiatives that fit into our strategy of focusing on our core SCM competency, expanding our presence globally, and broadening our product and service offerings. For example, we expect to grow our managed services business to provide customers more value from their investments in JDA products at a lower total cost of ownership.

 

Expand Margins Through New Low-Cost Delivery Models:  In 2008, we outlined a strategy to expand our operations in India and create a Center of Excellence (“CoE”)  in Hyderabad, India. We continue to execute plans to grow the size and capabilities of this CoE facility. The CoE is designed to complement and enhance our existing on-shore business model across multiple activities including research and development, customer support, services and internal administration, supporting our growth with high quality services at a lower cost structure. As a result of our acquisition of i2, our CoE capabilities and capacity have been significantly expanded with the addition of a second location in Bangalore, India.

 

Expand Marketing and Indirect Sales Alliances:  We will continue to develop and expand our marketing and indirect sales alliances, which help promote JDA solutions globally. We will also utilize, to a greater extent, our JDA Alliance Connection program, first launched in 2007. This program is designed to provide increased value to our sales agents and distributors and to maximize their ability to generate additional revenues for both themselves and JDA.

Product Strategy

 

In January 2007, we announced the adoption of our JDA Enterprise Architecture platform. This platform provides the strategic technology base we use to integrate and develop new solutions for our target markets. The JDA Enterprise Architecture was developed utilizing core assets acquired in our acquisition of Manugistics Group, Inc. in 2006. Customer acceptance of the JDA Enterprise Architecture has generally been positive, and we plan to expand the use of this platform over time to provide an increasingly seamless solution for our customers. Since adoption of the JDA Enterprise Architecture in 2007, we have continued with our strategy of integrating our solutions with this technology.

 

The JDA Enterprise Architecture is designed to support our advanced planning, optimization and execution solutions via a common platform for user interfaces, master and operational data, security, exception management, workflow, analysis and reporting. The JDA Enterprise Architecture features a “grid computing facility” that utilizes parallel processing. This architecture has demonstrated the ability to scale, enabling the largest global customers to solve their complex business challenges and accommodate the large number of stock keeping units (“SKUs”), time horizons and optimization decisions that reduce costs and improve sales. We believe the JDA Enterprise Architecture provides our customers with better visibility of key performance indicators and “one view” of demand across all supply chain planning, optimization and execution activities, thereby allowing more profitable and informed decisions in manufacturing, sourcing, supply chain planning, distribution, merchandising, logistics, promotions, replenishment, shelf optimization and in-store management. The JDA Enterprise Architecture is architected primarily using Java J2EE technology.

 

In 2009, our product strategy focused on, and in 2010 the combined company’s product strategy will continue to focus on, innovations that provide advanced capabilities that enhance our comprehensive solution suite to enable our customers to implement an “Integrated Planning and Execution” solution. Integrated Planning and Execution represents the ability for our customers to coordinate their decision making activities across the enterprise through certain common processes, such as a single time-phased demand plan for the whole enterprise. It also represents the ability to ensure that supply chain planning systems are constantly in synchronization with execution systems and activities across the enterprise. This strategy requires a broad and integrated suite of planning solutions that can interoperate, as well as the ability to transform those plans into action through execution systems. Our products provide all of these capabilities, and we believe the breadth and depth of our solution offerings is a distinct competitive advantage, as we believe our competitors, even those with far greater financial resources at their disposal, will struggle to replicate the capabilities of the JDA Enterprise Architecture and the functionality of our solution suite in a reasonable period of time. We also believe our ability to offer customers flexibility in their deployment approach provides a distinct competitive advantage as customers can implement individual solutions on a stand-alone basis or implement various combinations of our products to create an integrated solution.

 

Following the acquisition of i2, we believe it may take several years to fully implement a convergence strategy in our product suite. We currently expect to announce a multi-year product roadmap for the combined product suites during the first half of 2010; however, we do not expect to make any significant changes to our existing or acquired product offerings during the coming year as a result of this process. We also anticipate that we can begin to issue new product releases in 2011 that bring together and combine the two product suites, and over time, we will create convergent offerings that include the broad functionality of both the JDA and i2 offerings while eliminating areas of overlap. We currently expect to continue the support of all existing products of both JDA and i2 until the convergence strategy is complete.

 

Investment Protection Program

 

We have established an Investment Protection Program to protect our customers’ investment in JDA products as we migrate to new technology platforms. Under the Investment Protection Program, existing maintenance paying customers are provided with the right to like-for-like functionality in a new technology platform without the need to pay an additional license fee subject to certain conditions, including a requirement that the new solution has no more than minimal differences in price, features and functionality from the existing products. Customers will pay any required third-party charges associated with the new technology platform.

Services

 

We expanded the overall value proposition and operating effectiveness of our services offerings in 2009 by combining them under a single global organization called JDA Services. The various service units share resources, work load, effort, strategy, business development and customer interactions. The key components of our services are as follows:

 

Maintenance Services

 

 

Consulting Services

 

 

 

Sales and Marketing

 

We market our products and services primarily through our direct sales force, and have created dedicated sales organizations in each of our geographic regions, as well as the Services Industries business unit. As of December 31, 2009, our direct sales force was located in 28 sales and support offices in major cities throughout the Americas, Europe and Asia/Pacific, and our overall global sales and marketing organization consisted of 242 employees, including 75 quota carrying sales representatives. After giving effect to our acquisition of i2, our direct sales force is located in 47 regional sales and support offices in major cities throughout the Americas, Europe and Asia/Pacific, and our overall global sales and marketing organization consists of 327 employees, including approximately 90 quota carrying sales representatives.

 

We continue to develop a network of value-added resellers, or VARs, and other marketing and indirect sales alliances that support and help us attain our goals. We use VARs extensively in our European and Asian regions and we believe this model helps us to achieve a stronger presence in those geographies within these diverse markets where we do not have direct operations. Our Alliance Connection program, first launched in 2007, is designed to provide increased value to our partners and to maximize their ability to generate additional revenues for themselves and JDA. Our partners enable us to operate with broader international coverage than would be possible if we undertook all of our sales activities directly. JDA has also been expanding relationships with systems integrators to assist with delivery of services on many of our larger projects involving larger Tier One customers. In 2008 we developed a JDA Certified Project Program which is designed to ensure consistent quality of projects regardless of whether JDA undertakes part or all of a customer engagement.

 

Sales to new customers have historically required between three and twelve months. Sales cycles are typically longer for larger dollar projects, large multi-national organizations and companies in certain geographic regions. During the past several years, we have noted an increased requirement for senior executive, board of directors or significant equity investor approval for larger dollar contracts that have lengthened the traditional time from selection to the execution of a software agreement. We believe our ability to offer a comprehensive portfolio of integrated software applications that customers can install independently or as a complete solution, has created increased cross-selling opportunities to existing customers.

 

Competition

 

We believe that although 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 (i) feature and functionality, (ii) the depth of planning and optimization provided, (iii) available

deployment models that accelerate the time to value, (iv) product reputation, (v) performance and scalability, (vi) the quality of customer base, (vii) the perception of vendor viability, (viii) ability to implement, (ix) retail and supply chain industry expertise, (x) total cost of ownership, (xi) technology platform and (xii) quality of customer support across multiple regions for global customers.

 

We have two types of competitors: the first type being composed of Oracle Corporation (“Oracle”) and SAP AG, two large horizontal software companies that have each increased their presence in the retail and manufacturing marketplace over the past few years, and the second type being the smaller point solution providers who typically focus on limited solution areas. We believe that Oracle and SAP AG represent our more important long-term competitors as we expand our product offerings and compete head-to-head with them on broader system selection opportunities. We also expect Oracle and SAP AG to provide more aggressive competition for us due to the strength of their brands, financial size and overall market positions.

 

Proprietary Rights

 

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 copyrights, trade secrets, trademarks, confidentiality procedures, contractual restrictions and patents to protect our proprietary technology. We seek to protect the source code to our software, documentation and other written materials under trade secret and copyright laws. Effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. We license our software products under signed license agreements that impose restrictions on the licensee’s ability to utilize the software and do not permit the re-sale, sublicense or other transfer of the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and independent consultants to execute confidentiality agreements with us and by restricting access to our source code.

 

We license and integrate technology from third parties in certain of our software products. Examples of third-party software imbedded in our products include the following: the WebLogic application from BEA Systems, Inc. (acquired by Oracle) or the IBM Websphere applications for use in most of the JDA Enterprise Architecture platform solutions; the Data Integrator application from Business Object S.A (acquired by SAP), which is used in certain of the products acquired from Manugistics, Cognos (acquired by IBM) for use in JDA Reporting and JDA Analytics; iLog CPlex (acquired by IBM) for use in certain of our transportation and network optimization applications; 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 Merchandise Performance Analysis and Java technologies which are owned by Sun Microsystems but are currently subject to a proposed acquisition by Oracle and Clearcase (acquired by IBM) for use in certain of our Demand Management, Allocation, Replenishment and Fulfillment, Transportation and Logistics Management and Store Systems applications. Our third party licenses generally require us to pay royalties and fulfill confidentiality obligations. We also resell Oracle database licenses.

 

Our standard software license agreements contain an infringement indemnity clause under which we agree to indemnify and hold harmless our customers and business partners against liability and damages arising from claims of various intellectual property infringement by our products. These terms constitute a form of guarantee that is subject to the disclosure requirements, but not the initial recognition or measurement provisions of Accounting Standard Codification (“ASC”) 460 — Guarantees. We have never lost an infringement claim and our costs to defend such lawsuits have been insignificant. Although it is possible that in the future third parties may claim that our current or potential future software solutions infringe on their intellectual property rights, we do not currently expect a significant impact on our business, operating results, or financial condition.

 

Employees

 

As of December 31, 2009, we had 1,847 employees: 925 were based in the Americas region, 200 were based in Europe, and 722 were based in the Asia/Pacific region, including 598 in India. Of the total, 242 were engaged in sales and marketing, 456 were in consulting services, 297 were engaged in customer support services, 607 were in

product development, and 245 perform administrative functions. After the acquisition of i2, we have 2,969 employees, of which 1,321 were based in the Americas region, 287 were based in Europe, and 1,361 were based in the Asia/Pacific region, including 1,130 in India. Of this total, 327 are engaged in sales and marketing, 1,007 are engaged in consulting services, 406 are engaged in customer support services, 869 are engaged in product development, and 360 perform administrative functions. Our employees in Germany are represented by a Works Council. Although there are no formal employee representative bodies in other countries, the employees of certain of our foreign subsidiaries are covered by national, regional or sectoral collective agreements as required by statute or standard local practice. We believe that our relations with our employees are good and we have never had a work stoppage.

 

Available Information

 

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge from our website at www.jda.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

 

 

We operate in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The following section describes material risks and uncertainties that we believe may adversely affect our business, financial condition, results of operations or the market price of our stock. This section should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Form 10-K.

 

Risks Related To Our Business

 

We may not remain profitable.

 

We had net income of $26.3 million and $3.1 million for the years ended December 31, 2009 and 2008, respectively. We may not be able to sustain such profitability in the future. Our ability to sustain profitability will depend, in part, on our ability to:

 

 

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. Our cash flow from operations, without the cash flow from i2, was $96.5 million and $47.1 million in 2009 and 2008, respectively. Our indebtedness could have significant adverse effects on our business, including the following:

 

 

 

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 be able to 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 of directors and significant equity investors approve such purchases without the benefit of the direct input from our sales representatives. As a result, we may have less visibility into the progression of the selection and approval process throughout our sales cycles, which in turn makes it more difficult to predict the quarter in which individual sales will occur, especially in large sales opportunities.

 

We are also at risk of having pending transactions abruptly terminated if the boards of directors or executive management of our customers decide to withdraw funding from information technology projects as a result of a deep or prolonged global economic downturn and credit crisis. If this type of behavior becomes commonplace among existing or potential customers then we may face a significant reduction in new software sales. In the last year we have seen an increasing number of our prospects indicate to us that they can sign agreements prior to the end of our quarter, when in fact their approval process precludes them from being able to complete the transaction until after the end of our quarter. In addition, because of the current economic downturn, we may need to increase our use of alternate licensing models that reduce the amount of software revenue we recognize upon shipment of our software.

 

Each of these circumstances add to the difficulty of accurately forecasting the timing of deals. We expect to experience continued difficulty in accurately forecasting the timing of deals. If we receive any significant cancellation or deferral of customer orders, or if we are unable to conclude license negotiations by the end of a fiscal quarter, our quarterly operating results will be lower than anticipated.

 

In addition to the above, we may be unable to recognize revenues associated with certain projects assumed in the acquisition of i2 in accordance with our expectations. i2 historically recognized a significant portion of revenues from sales of software solutions and development projects over time using the percentage of completion method of contract accounting. Failure to complete project phases in accordance with the overall project plan can create variability in our expected revenue streams if we are not able to recognize revenues related to particular projects because of delays in development.

 

We may face liability if our products are defective or if we make errors implementing our products.

 

Our software products are highly complex and sophisticated. As a result, they could contain design defects, software errors or security problems that are difficult to detect and correct. In particular, it is common for complex software programs such as ours to contain undetected errors, particularly in early versions of our products. Errors are discovered only after the product has been implemented and used over time with different computer systems and in a variety of applications and environments. Despite extensive testing, we have in the past discovered certain defects or errors in our products or custom configurations only after our software products have been used by many clients.

 

In addition, implementation of our products may involve customer-specific configuration by third parties or us, and may involve integration with systems developed by third parties. Our clients may occasionally experience difficulties integrating our products with other hardware or software in their particular environment that are unrelated to defects in our products. Such defects, errors or difficulties may cause future delays in product introductions, result in increased costs and diversion of development resources, require design modifications or impair customer satisfaction with our products. If clients experience significant problems with implementation of our products or are otherwise dissatisfied with their functionality or performance, or if our products fail to achieve market acceptance for any reason, our market reputation could suffer, and we could be subject to claims for significant damages. There can be no assurances that the contractual provisions in our customer agreements that limit our liability and exclude consequential damages will be enforced. Any such damages claim could impair our market reputation and could have a material adverse affect on our business, operating results and financial condition.

We may have difficulty implementing our software products, which would harm our business and relations with customers.

 

Our software products are complex and perform or directly affect mission-critical functions across many different functional and geographic areas of the enterprise. Consequently, implementation of our software products can be a lengthy process, and commitment of resources by our clients is subject to a number of significant risks over which we have little or no control. The implementation time for certain of our applications can be longer and more complicated than our other applications as they typically:

 

 

Delays in the implementations of any of our software products, whether by our business partners or by us, may result in client dissatisfaction, disputes with our customers, or damage to our reputation.

 

Our operating results may be adversely affected as a result of our failure to meet contractual obligations under fixed-price contracts within our estimated cost structure.

 

A portion of our consulting services revenues are derived under fixed price arrangements that require us to provide identified deliverables for a fixed fee. During the years ended December 31, 2009 and 2008, approximately 15% of our consulting services revenues were derived under fixed price arrangements. Our failure to meet our contractual obligations under fixed price contracts within our estimated cost structure may result in our having to record the cost related to the performance of services in the period that the services were rendered, but delay the timing of revenue recognition to a future period in which the obligations are met, which may cause our operating results to suffer.

 

We may have difficulty developing our new managed services offering, which could reduce our 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 December 31, 2009 they represented a very small part of our revenues. We have hired management personnel with significant expertise in operating a managed services business and we have begun to make capital expenditures for this business. We may encounter difficulties developing our Managed Services into a mature services offering, or the rate of adoption by our customers may be slower than anticipated. If our Managed Services business does not grow or operate as expected, it could divert management resources, harm our strategy and reduce opportunities for future revenue growth.

 

The enforcement and protection of our intellectual property rights may be expensive and could divert our valuable resources.

 

We rely primarily on patent, copyright and trademark laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary information, technologies and processes. Policing unauthorized use of our products and technologies is difficult and time-consuming. Unauthorized parties may try to copy or reverse engineer portions of our products, circumvent our security devices or otherwise obtain and use our intellectual property. We cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our proprietary information and technologies, particularly in foreign countries where the laws may not protect our proprietary intellectual property rights as fully or as readily as United States laws. We cannot be certain that the laws and policies of any country, including the United States, or the practices of any of the standards bodies, foreign or domestic, with respect to intellectual property enforcement or licensing will not be changed in a way detrimental to our licensing program or to the sale or use of our products or technology.

We may need to litigate to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights of others. As a result of any such litigation, we could lose our ability to enforce one or more patents or incur substantial unexpected operating costs. Any action we take to enforce our intellectual property rights could be costly and could absorb significant management time and attention, which, in turn, could negatively impact our operating results. In addition, failure to protect our trademark rights could impair our brand identity.

 

Third parties may claim we infringe their intellectual property rights, which would result in an increase in litigation and other related costs.

 

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:

 

 

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. Examples of third-party software embedded in our products include the following: the WebLogic application from BEA Systems, Inc. (acquired by Oracle) or the IBM Websphere applications for use in most of the JDA Enterprise Architecture platform solutions; the Data Integrator application from Business Object S.A (acquired by SAP), which is used in certain of the products acquired from Manugistics, Cognos (acquired by IBM) for use in JDA Reporting and JDA Analytics; iLog CPlex (acquired by IBM) for use in certain of our Transportation and Network Optimization applications; 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 Merchandise Performance Analysis and Java technologies which are owned by Sun Microsystems but are currently subject to a proposed acquisition by Oracle and Clearcase (acquired by IBM) for use in certain of our Demand Management, Allocation, Replenishment and Fulfillment, Transportation and Logistics Management and Store systems applications. Our third-party licenses generally require us to pay royalties and fulfill confidentiality obligations. We also resell Oracle database licenses. If we are unable to continue to license any of this third party software, or if the third party licensors do not adequately maintain or update their products, we would face delays in the releases of our software until equivalent technology can be identified, licensed or developed, and integrated into our software products. These delays, if they occur, could harm our business, operating results and financial condition. It is also possible that intellectual property acquired from third parties through acquisitions, mergers, licenses, or otherwise obtained may not have been adequately protected, or infringes another parties intellectual property rights.

 

We may face difficulties in our highly competitive markets, which may make it difficult to attract and retain clients and grow revenues.

 

The supply chain software market continues to consolidate and this has resulted in larger, new competitors with significantly greater financial and marketing resources and more numerous technical resources than we

possess. This could create a significant competitive advantage for our competitors and negatively impact our business. It is difficult to estimate what long term effect these acquisitions will have on our competitive environment. We have encountered competitive situations with certain enterprise software vendors where, in order to encourage customers to purchase licenses of their specific applications and gain market share, we suspect they have also offered to license at no charge certain of their retail and/or supply chain software applications that compete with our solutions. If large competitors such as Oracle, SAP AG and other large private companies are willing to license their retail, supply chain and/or other applications at no charge, it may result in a more difficult competitive environment for our products. We cannot guarantee that we will be able to compete successfully for customers or acquisition targets against our current or future competitors, or that competition will not have a material adverse effect on our business, operating results and financial condition.

 

We encounter competitive products from a different set of vendors in many of our primary product categories. We believe that while our markets are subject to intense competition, the number of competitors in many of our application markets has decreased over the past five years. We believe the principal competitive factors in our markets are feature and functionality, the depth of planning and optimization provided and available deployment models. We compete on the basis of the reputation of our products, the performance and scalability of our products, the quality of our customer base, our ability to implement, our retail and supply chain industry expertise, our lower total cost of ownership, technology platform and quality of customer support across multiple regions for global customers.

 

The competitive markets in which we compete could put pressure on us to reduce our prices. If our competitors offer deep discounts on certain products, we may need to lower prices or offer other favorable terms in order to compete successfully. Any such changes would likely reduce margins and would adversely affect our operating results. Our software license updates and product support fees are generally priced as a percentage of our new license fees. Our competitors may offer a lower percentage pricing on product updates and support, which could put pressure on us to further discount our new license prices. Any broadly-based changes to 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 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:

 

 

Arrow Pointing Right our continuing expansion of the CoE in India; and

 

 

 

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 Hyderabad, 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 India’s 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:

 

 

In addition, i2 conducted a large portion of its software solutions development and services operations in Bangalore, India and the distributed nature of its development and consulting resources could create increased operational challenges and complications for us based upon the above factors.

 

Economic, political and market conditions can adversely affect our revenue and profitability.

 

Our revenue and profitability depend on the overall demand for our software and related services. Historically, events such as terrorist attacks, natural catastrophes and contagious diseases have created uncertainties in our markets and caused disruptions in our sales cycles. A regional and/or global change in the economy or financial markets, such as the current severe global economic downturn, could result in delay or cancellation of customer purchases. A downturn in the economy, such as the current global recession, may cause an increase in customer bankruptcy reorganizations, liquidations and consolidations, which may negatively impact our accounts receivables and expected future revenues from such customers. Current adverse conditions in credit markets, reductions in consumer confidence and spending and the fluctuating commodities and/or fuel costs are examples of changes that have delayed or terminated certain customer purchases. These adverse conditions have delayed or terminated certain of our customer deals. A further worsening or broadening or protracted extension of these conditions would have a significant negative impact on our operating results. In addition to the potential negative impact of the economic downturn on our software sales, customers are increasingly seeking to reduce their maintenance fees or to avoid price increases. This has resulted in elevated levels of maintenance attrition in recent periods. A prolonged economic downturn may further increase our attrition rates, particularly if many of our larger maintenance customers cease operations. Because maintenance is our largest source of revenue, increases in our attrition rates can have a significant adverse impact on our operating results. Weak and uncertain economic conditions could also impair our customers’ ability to pay for our products or services. Any of these factors could adversely impact our quarterly or annual operating results and our financial condition.

 

We may be unable to retain key personnel, which could materially impact our ability to further develop our business.

 

While the rate of retention of our associates is high compared to industry averages, our operations are dependent upon our ability to attract and retain highly skilled associates and the loss of certain key individuals to any of our competitors could adversely impact our business. In addition, our performance depends in large part on the continued performance of our executive officers and other key employees, particularly the performance and services of James D. Armstrong, our Chairman, and Hamish N. Brewer, our Chief Executive Officer. Following our acquisition of i2, our employees (including our employees who were former employees 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 and motivate our other employees 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:

 

 

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:

 

 

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.

 

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 manufacturing, distribution and retail 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 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. Management’s 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:

 

 

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 JDA’s or i2’s relationships with existing or potential clients, suppliers or strategic partners is adversely affected as a consequence of the transaction, as a result of further weakening of global economic conditions, or by practical or legal constraints on its ability to combine operations. Furthermore, a portion of our ability to realize synergies and cost savings depends on our ability to continue to migrate work from certain of our on-shore facilities to our off-shore facilities.

 

If we are unable to successfully execute on any of our identified business opportunities or other business opportunities that we determines to pursue, we may not achieve the benefits of the acquisition and our business may be harmed.

 

As a result of our acquisition of i2, we have approximately 3,000 employees. In order to pursue business opportunities, we will need to continue to build our infrastructure, client initiatives and operational capabilities. Our ability to do any of these successfully could be affected by one or more of the following factors:

 

 

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 i2’s software and services, citing a variety of issues. Whether customer claims regarding the quality and performance of i2’s products and services are founded or unfounded, they may adversely impact customer demand and affect JDA’s 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 management’s or analysts’ expectations, the price of our stock could decline. Many factors may cause these fluctuations, including:

 

 

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 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. In addition, we have not completed the valuation analysis and calculations necessary to finalize the required purchase price allocation. In addition to goodwill, the final purchase price allocation may include allocations to intangible assets such as trademarks and trade names, in-process research and development, developed technology and customer-related assets. As a result, we are unable to 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:

 

 

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.

 

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.

 

 

 

We own our corporate office facility in Scottsdale, Arizona. The corporate office facility includes a 136,000 square foot, three-story office building, a two-story parking garage, and approximately 8.8 acres of land upon which these structures are located. The corporate office is used for certain of our sales, marketing, consulting, customer support, training, and product development functions, as well as executive and administrative functions. As of December 31, 2009, we have leased approximately 24,000 square feet of excess office space in our corporate office facility, and have identified an additional 13,000 square feet that is available for lease.

 

We currently lease office space in the Americas for 12 regional sales and support offices across the United States and Latin America, and for 15 other international sales and support offices located in major cities throughout Europe, Asia, Australia, Japan and the CoE facility in 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. We believe our existing facilities are adequate for our current needs and for the foreseeable future. As of December 31, 2009, we have sublet approximately 191,000 square feet of excess office space through 2012, and have identified an additional 24,000 square feet that we are trying to sublet.

In March 2007, we sold a 15,000 square foot office facility in the United Kingdom for approximately $6.3 million and recognized a gain of approximately $4.1 million.

 

In addition to the above, we assumed certain operating lease obligations in connection with our acquisition of i2 on January 28, 2010. These leases include office space in the Americas for 5 regional sales and support offices across the United States, Canada and Latin America, and for 14 other international sales and support offices located in major cities through Europe, Asia, Australia, Japan and Center of Excellence facilities in Bangalore and Mumbai, India. The leases are primarily non-cancelable operating leases with initial terms generally ranging from one to seven years that expire at various dates through the year 2014. 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 a portion of these leases will be renewed or that suitable additional or alternative space will be available on commercially reasonable terms as needed, and others will be cancelled as we consolidate JDA and i2 offices. In addition, we assumed various leases on computers, automobiles, and other 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.

 

 

We are involved in legal proceedings and claims arising in the ordinary course of business. Although there can be no assurance, management does not currently believe the disposition of these matters will have a material adverse effect on our business, financial position, results of operations or cash flows.

 

On April 29, 2009, i2 filed a lawsuit for patent infringement against Oracle Corporation (NASDAQ: ORCL). The lawsuit, filed in the United States District Court for the Eastern District of Texas, alleges infringement of 11 patents related to supply chain management, available to promise software and other enterprise software applications. As a result of our acquisition of i2 on January 28, 2010, i2 is now a wholly-owned subsidiary of the Company. i2 incurred expenses related to this matter of approximately $1.0 million for the twelve months ended December 31, 2009.

 

 

PART II

 

 

Our common stock trades on the NASDAQ Stock Market (“NASDAQ”) under the symbol “JDAS.” The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock for the two most recent fiscal years as reported on NASDAQ.

 

 

 

On March 5, 2010, the closing sale price for our common stock was $29.44 per share. On this date, there were approximately 272 holders of record of our common stock. This figure does not reflect what we believe are more than 20,000 beneficial stockholders whose shares are held in nominee names by brokers and other institutions. We have never declared or paid any cash dividend on our common stock. Since we presently intend to retain future earnings to finance the growth and development of our business, we do not anticipate paying cash dividends on our common stock in the foreseeable future.

 

See Item 1A for a discussion of factors which have and may continue to impact our operating results and adversely affect the market price of our common stock. See Item 12 for information regarding securities authorized for issuance under equity compensation plans.

Stock Performance Graph

 

The graph below compares the cumulative total return on our Common Stock with the NASDAQ Stock Market index (U.S. companies) and the cumulative total return of NASDAQ Computer and Data Processing Stocks (Peer Group) for the period from December 31, 2004 to December 31, 2009. The comparison assumes that $100 was invested on December 31, 2004 in our Common Stock and in each of the comparison indices, and assumes reinvestment of dividends.

 

 

 

 

 

The information contained in the Stock Performance Graph shall not be deemed to be soliciting material or to be filed with the SEC nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.

 

 

The following selected financial data should be read in conjunction with our consolidated financial statements and related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein. The selected consolidated financial data presented below under the captions “Consolidated Statement of Operations Data” and “Consolidated Balance Sheet Data” for, and as of the end of, each of the years in the five-year period ended December 31, 2009, are derived from the consolidated financial statements of JDA Software Group, Inc. The consolidated financial statements as of December 31, 2009 and 2008, and for each of the years in the three-year period ended December 31, 2009, together with the report of the independent registered public accounting firm, are included elsewhere herein.

Consolidated Statement of Operations Data:

 

Consolidated Balance Sheet Data:

 

 

 

 

 

Management’s discussion and analysis of financial condition and results of operations contain 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 concerning, among other things, 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-K are based upon information available to us as of the filing date of this Form 10-K. 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-K. 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 $600.0 million, which includes cash consideration of approximately $432.0 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 and transportation; (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 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 will be accounted for using the acquisition method of accounting with JDA identified as the acquirer. Under the acquisition method of accounting, we will record all assets acquired and liabilities assumed at their respective acquisition-date fair values. We have not completed the valuation analysis and calculations necessary to finalize the required purchase price allocations. In addition to goodwill, the final purchase price allocation may include allocations to intangible assets such as trademarks and trade names, in-process research and development, developed technology and customer-related assets.

 

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%. The net proceeds from the sale of the Senior Notes, which exclude the original issue discount ($2.8 million) and other debt issuance costs ($6.5 million) were placed in escrow and subsequently used, together with cash on hand at JDA and i2, to fund the cash portion of the merger consideration in the acquisition of i2.

 

Through December 31, 2009, we expensed approximately $4.8 million of costs related to the acquisition of i2. 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.”

 

Outlook for 2010.  The following summarizes our outlook for 2010. This information considers a full year of JDA revenues and operating results and eleven months of i2 revenues and operating results as the acquisition of i2 was completed on January 28, 2010. Our business model contemplates running the combined companies as an integrated business from the completion of the acquisition and as such, we do not intend to provide separate reporting of the results of operations of i2.

 

 

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), and (v) 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) other significant non-routine operating and non-operating income (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. We are still in the process of establishing the fair value of, and allocated purchase price to, the acquired assets and assumed liabilities in the acquisition of i2. This allocation is likely to result in increased depreciation and amortization which could affect GAAP earnings per share. However, because Adjusted EBITDA is essentially determined without regard to depreciation or amortization, among other factors, we do not anticipate material changes to our outlook of Adjusted EBITDA based on the 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 believe the weak economy will continue to drive an increased awareness in our target markets of the need to focus on achieving more process and operating efficiencies, including decisions to invest in solutions that improve operating margins, rather than make large infrastructure-type technology purchases. This scenario favors our supply chain solution offerings, in particular our planning and optimization applications, which can provide a quick return on investment and are focused on some of the largest profit drivers in our customers’ businesses. Not only do our solutions enable companies to free up working capital by improving inventory productivity, they can also support increased sales by improving customer service levels and optimizing pricing decisions. Our solutions also enable cost reductions such as reduced labor and transportation costs. We think the buying characteristics in the market are shifting to an increased willingness to commit capital expenditures to projects that will improve business results quickly. We believe these trends have helped us achieve solid performance in a very difficult market, and that our value proposition and singular focus on the SCM market, competitive position, business model and financial health are all in excellent condition.

 

Quarter-to-quarter software sales will fluctuate due to the timing of large transactions greater than $1.0 million (“large transactions”), which can significantly impact the dollar volume of software sales in any given quarter. We believe the current trend in software sales is positive, and as we enter the first half of 2010, our sales pipeline includes a strong representation of both large transactions and mid-size software sales opportunities ranging from $300,000 to $1.0 million (“mid-size sales opportunities”). The overall volume of i2 opportunities in the pipeline is relatively low compared to JDA. This is in line with i2’s historical business model which emphasized growth through a services model that relied heavily on a small number of large transactions combined with subscription license revenues and significant post-sale customization of the software. We intend to change this business model and transition the i2 business toward the more traditional software industry model that emphasizes the sale of software that can be implemented with little or no post-sale customization, together with a sustainable recurring maintenance stream. We believe our service functions should focus on customer delivery, customer satisfaction and reference-able customers rather than large customization projects. We also expect to focus on business development activities that will compliment the larger i2 sales opportunities and expand the pipeline of mid-size sales opportunities for the i2 solutions.

 

We believe it may take several years to fully implement a convergence strategy in our product suite. We currently expect to announce a multi-year product roadmap for the combined product suites during the first half of 2010; however, we do not expect to make any significant changes to our existing or acquired product offerings during the coming year as a result of this process. We also anticipate that we can begin to issue new product releases in 2011 that bring together and combine the two product suites, and over time, we will create convergent offerings that include the broad functionality of both the JDA and i2 offerings while eliminating areas of overlap. During this time we will also focus on building relationships with the traditional i2 discrete manufacturing customer base, the majority of which have had little or no historical exposure to JDA, and develop a combined business development and sales execution strategy.

 

We have identified several key areas for potential cross-selling and up-selling opportunities; however, we do not expect to see material synergistic revenue growth from the i2 acquisition during 2010. We believe there will be opportunities for future revenue synergies in our retail customer base. i2 has developed various supply chain and planning products for the retail marketplace that offer certain distinct capabilities compared to the existing JDA applications that are also targeted at this market. We believe there are both cross-selling and up-selling opportunities for these applications with the more than 1,500 customers in our retail customer base. We also believe there will be opportunities to merge certain of the JDA and i2 solutions and build new product offerings for i2’s discrete

manufacturing customers. There appears to be an increasing interest among discrete manufacturers, especially those in areas such as high tech, to obtain greater visibility and increased information regarding how their products are being marketed and sold at retail outlets.

 

There is also a difference between the way i2 classified certain consulting implementation services in its financial results, and the way we will classify the revenue of these services going forward. Historically, i2 has reported a “software solutions” total in its consolidated statements of operation that included software license revenue as well as service revenues for the installation and implementation work necessary to modify and customize the software prior to its intended use. Most of the on-going projects assumed in the acquisition, as well as certain of the i2 software products that will be marketed post-acquisition, require the contractual delivery of significant customization services. In these situations, JDA will follow its classification policy and report all implementation services required to complete the on-going projects and any agreed customization on new software sales as consulting services.

 

Volatility in foreign currency exchange rates continues to significantly impact our maintenance services revenue. For example, unfavorable foreign exchange rate variances reduced maintenance services revenues in 2009 by $7.4 million compared to 2008. Excluding the impact of the unfavorable foreign exchange rate variance, maintenance services revenues increased approximately $3.9 million in 2009 compared to 2008 as maintenance revenues from new software sales, rate increases on annual renewals and reinstatements of previously suspended and cancelled maintenance agreements more than offset decreases in recurring maintenance revenues due to attrition. The 2010 outlook assumes a conservative view of maintenance revenues. We believe foreign exchange rate volatility may continue, and that we could also experience higher than normal maintenance attrition from the effects of the economy and the effects of the merger. Our average annualized maintenance retention rate was approximately 92% in 2009 and i2’s annual maintenance retention rate was in the low 80% range during 2009. Our 2010 outlook contemplates an average annualized maintenance retention rate for the combined companies to be about 90% in 2010 assuming a constant currency.

 

Consulting services revenue is a lagging indicator for the company, and for the first time in several years, revenues from our consulting services business improved in year-over-year comparisons. We believe this improvement is due primarily to our improved software sales performance over the past three years. Our consulting margin results were 19% in both 2009 and 2008. A key factor for improving our consulting margins in 2010 and beyond will be our ability to more fully leverage the service capabilities of the CoE and increase the volume of work and implementation projects performed through this operation. We realized an improvement in the volume of work and implementation projects executed through the CoE in 2009 as approximately 7% of all billable hours were delivered through the CoE compared to less than 2% in 2008. With the i2 acquisition, we have added an additional CoE facility in Bangalore, India. i2 has historically provided a significant portion of its consulting work through their CoE facility. Our 2010 outlook contemplates an overall increase in the volume of work and billable hours through the CoE facilities in 2010 in comparison to our historical results.

 

One of our primary initiatives in 2009 was the development of a Managed Services offering which expands our existing hosted services and includes: (i) outsourced operations for information technology, data and application management and hosting; (ii) workforce augmentation; (iii) management of process and user information; (iv) business process execution services including analysis and recommendations; and (v) business optimization services such as network design, demand classification, inventory policy and channel clustering. We believe our Managed Services offering provides customers with attractive and effective alternatives, to reduce their costs of operation, operate effectively with constrained resources, leverage outside domain expertise to augment their personnel and to improve the value they derive from their JDA products. We began signing new customer agreements for these services in fourth quarter 2009, and we believe our Managed Services business has the potential to improve organic growth for us in 2010 and beyond. We believe the acquisition of i2 will accelerate our business plan for Managed Services through its existing managed services business. We currently expect approximately $8.0 million in capital expenditures in 2010 related to our Managed Services business.

 

We Will Continue to More Fully Leverage Our Centers of Excellence.  With the acquisition of i2, we now have two CoE facilities, and over 1,100, or nearly 40%, of our associates are based in India. The CoE facilities are

designed to complement and enhance our existing on-shore business model, not replace it. Our goal is to achieve all of these benefits without sacrificing our capability to work face-to-face with our customers. We expect the overall share of consulting services work performed through the CoE facilities will increase in 2010. We also believe there are additional opportunities to further leverage the CoE in our customer support organization.

 

We Expect to Realize Significant Cost Synergies as We Integrate and Combine the Two Companies.  We expect to realize approximately $20 million in net cost savings during 2010. This figure excludes about $6 to $7 million of gross margin compressions from the effects of revenue attrition, especially maintenance, during the integration of i2. We are actively working on the integration of the two companies and we believe we are on track to achieve these synergies. We currently expect to be able to achieve approximately 15% of the synergies in first quarter 2010, 25% in both second and third quarter 2010, and the remaining 35% in fourth quarter 2010.

 

Our 2010 outlook contemplates certain cost increases including a $6.0 million year-over-year increase in merit compensation, reflecting the fact that neither JDA nor i2 provided merit increases in 2009. In addition, we have increased our bad debt estimate by about $2.0 million which considers the potential impact of a continued recession and the possible effects that may arise as a result of the merger.

 

We Expect to Make Additional Strategic Acquisitions.  Acquisitions have been and we expect they will continue to be an integral part of our overall growth plan. We believe strategic acquisition opportunities will allow JDA to continue to strengthen its position as a leading supply chain management software and services provider. Our intent is to seek acquisition opportunities that complement the Company’s supply chain 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. We also believe the changes that were implemented in our executive leadership structure during 2009 better position us to execute our growth initiatives.

 

Share-Based Compensation Expense.  We recorded total share-based compensation expense of $8.1 million, $4.3 million and $6.2 million related to equity awards in 2009, 2008 and 2007, respectively and as of December 31, 2009 we have included $5.3 million of deferred compensation in stockholders’ equity. A summary of total share-based compensation by expense category for the years ended December 31, 2009, 2008 and 2007 is as follows:

 

 

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, including new JDA Associates joining the Company through the acquisition of i2, 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 approximately 555,000 of targeted contingently issuable performance share awards with a fair value of approximately $15.1 million. 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. If we achieve the defined performance threshold goal we would expect to recognize approximately $10.1 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. Amounts are payable quarterly under the plan on the basis of the actual EBITDA achieved by the Company for the applicable quarter of 2010. A partial pro-rata cash bonus will be paid if we achieve a minimum adjusted EBITDA performance threshold. There is no cap on the maximum amount the executives can receive if the Company exceeds the defined annualized operational and software performance goals.

 

Our Financial Position is Strong and We Expect to Continue Generating Positive Cash Flow from Operations.  We had working capital of $345.7 million at 2009 compared to $32.1 million at December 31, 2008. The working capital balance at December 31, 2009 and 2008 includes $76.0 million and $32.7 million, respectively, in cash and cash equivalents. In addition, working capital at December 31, 2009 includes $287.9 million of restricted cash, consisting primarily of net proceeds from the issuance of the Senior Notes (see Contractual Obligations), which together with cash on hand at JDA and i2, was used to fund the cash portion of the merger consideration in the acquisition of i2 on January 28, 2010. Net accounts receivable were $68.9 million, or 58 days sales outstanding (“DSO”), at December 31, 2009 compared to $79.4 million, or 67 DSO, at December 31, 2008. During 2009 we generated $96.5 million in cash flow from operating activities and utilized $30.1 million to repurchase redeemable preferred stock ($28.1 million) and common stock ($2.0 million) held by Thoma Bravo.

 

We expect to increase our cash balance during 2010 through the generation of between $100 million to $110 million of operating cash flow, offset in part by approximately $22 million of interest on the Senior Notes, $20 million of capital expenditures, $10 million related to the payment of transaction-related costs, and $10 million of cash taxes primarily related to state, local and foreign taxes. The increase in capital expenditures in 2010 is driven by the expansion of our Managed Services offering (approximately $8 million) as well as the addition of i2. While our Managed Services business requires more capital than our other offerings, we expect this business to produce a strong return on investment and form a major component of our organic growth in coming years. Our weighted average shares are expected to be between 41 and 42 million for 2010.

Results of Operations

 

The following table sets forth certain selected financial information expressed as a percentage of total revenues for the periods indicated and certain gross margin data expressed as a percentage of software license revenue, maintenance services revenue, product revenues or services revenues, as appropriate:

 

The following table sets forth a comparison of selected financial information, expressed as a percentage change between 2009 and 2008, and between 2008 and 2007. In addition, the table sets forth cost of revenues and product development expenses expressed as a percentage of the related revenues:

 

The following tables set forth selected comparative financial information on revenues, operating expenses and operating income in our business segments and geographical regions, expressed as a percentage change between 2009 and 2008, and between 2008 and 2007. In addition, the tables set forth the contribution of each business segment and geographical region to total revenues in 2009, 2008 and 2007, expressed as a percentage of total revenues, as well as the number of large transactions greater than or equal to $1.0 million.:

 

 

 

 

 

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

 

Software Revenues

 

Software License Results by Region.

 

The following table summarizes software license revenues by region for 2009 and 2008:

 

The decrease in software license revenues in the Americas region in 2009 compared to 2008 is due primarily to a decrease in license revenues recognized from large transactions. Notably, in 2008 we recognized a license sale in fourth quarter for $11.5 million which was the largest license transaction in our history.

 

The increase in software license revenues in the Asia/Pacific region in 2009 compared to 2008 is due primarily to an increase in license revenues recognized from large transactions, including one large transaction in second quarter 2009 which was the largest license transaction ever recognized in the Asia/Pacific region.

 

Software License Results by Reportable Business Segment.

 

Retail.  Software license revenues in this reportable business segment decreased 14% in 2009 compared to 2008, due primarily to a decrease in the average sales price of large transactions. There were 12 large transactions in this reportable business segment in both 2009 and 2008. The 2008 software results include a large $11.5 million license that represents the largest transaction in our history.

 

Manufacturing & Distribution.  Software license revenues in this reportable business segment decreased 6% in 2009 compared to 2008, due primarily to a decrease in the size of large transactions and a decrease in follow-on sales to existing customers for new product or to expand the scope of an existing license. There were four large transactions in this reportable business segment in both 2009 and 2008.

 

Services Industries.  Software license revenues in this reportable business segment increased 96% in 2009 compared to 2008, due to an increase in the size of large transactions. There were three large transactions in this reportable business segment in both 2009 and 2008. Two of the large transactions in 2009 are being recognized on a percentage of completion basis and through December 31, 2009 we have recognized approximately 72% of the related software license fees.

 

Maintenance Services

 

Maintenance services revenues decreased $3.5 million, or 2%, to $179.3 million in 2009 compared to $182.8 million in 2008, and represented 46% and 47% of total revenues, respectively, in these periods. Unfavorable foreign exchange rate variances reduced maintenance services revenues in 2009 by approximately $7.4 million compared to 2008 due primarily to the strengthening of the U.S. Dollar against European currencies. Excluding the impact of the unfavorable foreign exchange rate variance, maintenance services revenues increased approximately $3.9 million in 2009 compared to 2008 as maintenance revenues from new software sales, rate increases on annual renewals and reinstatements of previously suspended and cancelled maintenance agreements more than offset decreases in recurring maintenance revenues due to attrition.

 

Service Revenues

 

Service revenues, which include consulting services, hosting services and training revenues, net revenues from our hardware reseller business and reimbursed expenses, increased $3.1 million, or 3%, to $117.7 million in 2009 compared to $114.6 million in 2008. The increase in 2009 compared to 2008 reflects increases in consulting services revenue, utilization and realized average hourly billing rates in the Americas region and the Services Industries reportable business segment, offset in part by decreases in consulting services revenue and lower realized average hourly billing rates in the EMEA and Asia/Pacific regions and a $741,000 decrease in non-consulting services (training and hosting services, hardware sales and reimbursed expenses).

 

Fixed bid consulting services work represented 15% of total consulting services revenue in both 2009 and 2008.

 

Cost of Product Revenues

 

Cost of Software Licenses.  The decrease in cost of software licenses in 2009 compared to 2008 is due primarily to a decrease in royalties on embedded third-party software applications, offset in part by an increase in royalties on certain third party applications that we resell. A large portion of our software revenue mix comes from products that have embedded third-party applications and/or require payment of higher royalty fee obligations, in particular the applications we acquired from Manugistics.

Amortization of Acquired Software Technology.  The decrease in amortization of acquired software technology in 2009 compared to 2008 is due primarily to the cessation of amortization on certain acquired technology that is now fully amortized.

 

Cost of Maintenance Services.  Cost of maintenance services decreased $2.5 million, or 6%, to $43.2 million in 2009 compared to $45.7 million in 2008. The decrease in cost of maintenance services in 2009 compared to 2008 is due primarily to a decrease in salaries and related benefits and a $416,000 decrease in maintenance royalties and fees paid to third parties who provide first level support to certain of our customers. Although the average customer support headcount increased 4% in 2009 compared to 2008, salaries and related benefits decreased approximately $2.1 million as new and replacement positions were filled with lower cost resources at the CoE.

 

Cost of Service Revenues

 

Cost of service revenues increased $2.8 million, or 3%, to $95.3 million in 2009 compared to $92.5 million in 2008. The increase in cost of service revenues in 2009 compared to 2008 is due primarily to a $1.8 million increase in incentive compensation and a $1.6 million increase in outside contractor costs. These additional costs were offset in part by cost savings associated with the movement of service functions to the CoE and a $607,000 decrease in travel costs. Although the average services headcount was flat in 2009 compared to 2008, salaries and related benefits decreased as we continue to successfully implement our lower cost delivery model through the expansion of the CoE.

 

Operating Expenses

 

Operating expenses, excluding amortization of intangibles, restructuring charges and acquisition-related costs were $165.0 million in 2009, which is flat compared to 2008. During 2009, operating expenses were impacted by a $2.0 million decrease in sales commissions resulting from the decrease in software license revenues, and a decrease in salaries and related benefits due to new and replacement positions being filled with lower cost resources at the CoE. These decreases were substantially offset by a $2.7 million increase in share-based compensation due primarily to an increase in the value of equity awards issued under the 2009 Performance Plan compared to the 2008 Performance Plan and the costs associated with certain equity inducement awards granted to new executive officers, a $1.2 million increase in the provision for doubtful accounts and a $360,000 increase in marketing-related costs.

 

Product Development.  Product development expense decreased $2.5 million, or 5%, to $51.3 million in 2009 compared to $53.9 million in 2008. The decrease is due primarily to a decrease in salaries and related benefits. Although the average product development headcount increased over 13% in 2009 compared to 2008, salaries and related benefits decreased as new and replacement positions were filled with lower cost resources at the CoE.

 

Sales and Marketing.  Sales and marketing expense decreased $467,000, or less than 1%, to $66.0 million in 2009 compared to $66.5 million in 2008. The decrease is due primarily to a $2.0 million decrease in sales commissions resulting from the decrease in software license revenues and a $454,000 decrease in travel costs, substantially offset by a $1.1 million increase in share-based compensation, a $360,000 increase in marketing-related costs and an increase in outside contractor costs.

 

General and Administrative.  General and administrative expense increased $2.7 million, or 6%, to $47.7 million in 2009 compared to $45.0 million in 2008. The increase is due primarily to a $1.4 million increase in share-based compensation resulting from an increase in the value of equity awards issued under the 2009 Performance Plan compared to the 2008 Performance Plan and the costs associated with certain equity inducement awards granted to new executive officers. The increase in general and administrative expense in 2009 compared to 2008 also includes a $1.2 million increase in the provision for doubtful accounts associated primarily with two specific accounts and a $327,000 increase in legal and accounting fees, offset in part by a decrease in salaries and benefits. Although the average general and administrative headcount increased approximately 1% in 2009 compared to 2008, salaries and related benefits decreased $579,000 as new and replacement positions were filled with lower cost resources at the CoE.

Amortization of Intangibles.  The decrease in amortization of intangibles in 2009 compared to 2008 is due primarily to the cessation of amortization on certain trademark and customer list intangibles that are now fully amortized.

 

Restructuring Charges.  Restructuring charges in 2009 include (i) a $6.5 million charge for 2009 restructuring activities, (ii) a $376,000 adjustment to reduce estimated restructuring reserves established in prior years, (iii) an adjustment of $1.4 million 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, (iv) the reversal of $758,000 in contingency reserves established in the initial purchase accounting on the Manugistics acquisition and (v) $111,000 in adjustments to other acquisition-related reserves. The charge for 2009 restructuring activities is primarily associated with the transition of additional on-shore activities to the CoE 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.

 

Restructuring charges in 2008 include (i) an $8.0 million charge for 2008 restructuring activities, (ii) $426,000 in net adjustments to increase certain Manugistics acquisition reserves based on our revised estimates of the restructuring costs to exit certain activities of Manugistics primarily related to facility closures and employee severance and termination benefits and (iii) and $38,000 of net adjustments to reduce estimated restructuring reserves established in prior years and to reverse certain contingency reserves established in the initial purchase accounting of Manugistics acquisition. The charge for 2008 restructuring activities was primarily associated with our transition of certain on-shore activities to the CoE and included $7.9 million for termination benefits, primarily related to a workforce reduction of 100 FTE in product development, consulting and sales-related positions across all of our geographic regions and $119,000 for office closure and integration costs of redundant office facilities.

 

Acquisition-Related Costs.  During 2009 we expensed approximately $4.8 million of costs related to the acquisition of i2 on January 28, 2010. These costs consist primarily of investment banking fees, commitment fees on unused bank financing, legal and accounting fees.

 

Operating Income

 

Operating income increased $19.6 million to $39.9 million in 2009 compared to $20.3 million in 2008. Operating income in 2008 was reduced by $25.1 million in costs associated with the abandoned acquisition of i2 Technologies, which are included in operating expenses under the caption “Costs of abandoned acquisition.” Excluding the impact of these non-recurring costs, operating income decreased $5.5 million in 2009 compared to 2008, due primarily to the $4.5 million decrease in total revenues.

 

The combined operating income reported in the reportable business segments excludes $82.9 million and $102.7 million of general and administrative expenses and other charges in 2009 and 2008, respectively, that are not directly identified with a particular reportable business segment and which management does not consider in evaluating the operating income (loss) of the reportable business segments.

 

Other Income (Expense)

 

Interest Expense and Amortization of Loan Fees.  The decrease in interest expense and amortization of loan fees in 2009 compared to 2008 is due primarily to the repayment in full during 2008 of all remaining borrowings on term loans used to finance the acquisition of Manugistics, the accelerated amortization of related loan origination fees and an $899,000 payment in consideration for early termination of a related interest rate swap. We issued $275 million of Senior Notes on December 10, 2009 at an initial offering price of 98.988%. The net proceeds from the sale of the Senior Notes, which exclude the original issue discount ($2.8 million) and other debt issuance costs ($6.5 million) were placed in escrow and, together with cash on hand at JDA and i2, were used to fund the cash portion of the merger consideration in the acquisition of i2. Through December 31, 2009, we have amortized

approximately $110,000 of the original issue discount and related loan origination fees and accrued $1.3 million of interest in on the Senior Notes.

 

Finance Costs on Abandoned Acquisition.  During 2008, we accrued $5.3 million in finance costs related to loan origination ($3.4 million) and “ticking” fees ($1.9 million) on the debt financing commitments from Credit Suisse, Credit Suisse Securities (USA) LLC, Wachovia Bank, National Association and Wachovia Capital Markets, LLC related to the abandoned acquisition of i2. During 2009, approximately $767,000 of the “ticking” fees were waived pursuant to a mutual release agreement and the related expense was reversed.

 

Interest Income and Other, Net.  The decrease in interest income and other, net in 2009 compared to 2008 is due primarily to a $1.5 million decrease in interest on invested funds as the excess cash balances that were held in interest bearing accounts during 2008 were used to repay the remaining balance of the term loans used to finance the acquisition of Manugistics.

 

Income Tax Provision

 

A summary of the income tax provision recorded in 2009 and 2008 is as follows: