INFA » Topics » Our international operations expose us to greater risks, including but not limited to those regarding intellectual property, collections, exchange rate fluctuations, and regulations, which could limit our future growth.

These excerpts taken from the INFA 10-K filed Feb 28, 2008.
Our international operations expose us to greater risks, including but not limited to those regarding intellectual property, collections, exchange rate fluctuations, and regulations, which could limit our future growth.
 
We have significant operations outside the United States, including software development centers in India, Ireland, Israel, the Netherlands, and the United Kingdom, sales offices in Europe, including France, Germany, the Netherlands, Switzerland, and the United Kingdom, as well as in countries in Asia-Pacific, and customer support centers in India, the Netherlands, and the United Kingdom. Additionally, since 2005 we have opened sales offices in Brazil, China, India, Italy, Japan, Mexico, South Korea, and Taiwan, and we plan to continue to expand our international operations in the Asia-Pacific market. Our international operations face numerous risks. For example, to sell our products in certain foreign countries, our products must be localized, that is, customized to meet local user needs and to meet the requirements of certain markets, particularly some in Asia, our product must be double-byte enabled. Developing internationalized versions of our products for foreign markets is difficult, requires us to incur additional expenses, and can take longer than we anticipate. We currently have limited experience in internationalizing products and in testing whether these internationalized products will be accepted in the target countries. We cannot ensure that our internationalization efforts will be successful.
 
In addition, we have only a limited history of marketing, selling, and supporting our products and services internationally. As a result, we must hire and train experienced personnel to staff and manage our foreign operations. However, we have experienced difficulties in recruiting, training, managing, and retaining an international staff, in particular related to sales management and sales personnel, which have affected our ability to increase sales productivity, and related to turnover rates and wage inflation in India, which have increased costs. We may continue to experience such difficulties in the future.


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We must also be able to enter into strategic distributor relationships with companies in certain international markets where we do not have a local presence. If we are not able to maintain successful strategic distributor relationships internationally or recruit additional companies to enter into strategic distributor relationships, our future success in these international markets could be limited.
 
Business practices in the international markets that we serve may differ from those in North America and may require us to include terms in our software license agreements, such as extended payment or warranty terms, or performance obligations that may require us to defer license revenues and recognize them ratably over the warranty term or contractual period of the agreement. For example, in 2004, we were unable to recognize a portion of license fees for two large software license agreements signed in Europe in the third quarter of 2004. We deferred the license revenues related to these software license agreements in September 2004 due to extended warranties that contained provisions for additional unspecified deliverables and began amortizing the deferred revenues balances to license revenues in September 2004 for a two- to five-year period. Although historically we have infrequently entered into software license agreements that require ratable recognition of license revenue, we may enter into software license agreements in the future that may include non-standard terms related to payment, maintenance rates, warranties, or performance obligations.
 
Our software development centers in India, Ireland, Israel, the Netherlands, and the United Kingdom also subject our business to certain risks, including:
 
  n   greater difficulty in protecting our ownership rights to intellectual property developed in foreign countries, which may have laws that materially differ from those in the United States;
 
  n   communication delays between our main development center in Redwood City, California and our development centers in India, Ireland, Israel, the Netherlands, and the United Kingdom as a result of time zone differences, which may delay the development, testing, or release of new products;
 
  n   greater difficulty in relocating existing trained development personnel and recruiting local experienced personnel, and the costs and expenses associated with such activities; and
 
  n   increased expenses incurred in establishing and maintaining office space and equipment for the development centers.
 
Additionally, our international operations as a whole are subject to a number of risks, including the following:
 
  n   greater risk of uncollectible accounts and longer collection cycles;
 
  n   higher risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;
 
  n   greater risk of a failure of our foreign employees to comply with both U.S. and foreign laws, including antitrust regulations, the Foreign Corrupt Practices Act, and any trade regulations ensuring fair trade practices;
 
  n   potential conflicts with our established distributors in countries in which we elect to establish a direct sales presence;
 
  n   our limited experience in establishing a sales and marketing presence and the appropriate internal systems, processes, and controls in Asia-Pacific, especially China, Singapore, South Korea, and Taiwan;
 
  n   fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business, if we continue to not engage in hedging activities; and
 
  n   general economic and political conditions in these foreign markets.
 
For example, an increase in international sales would expose us to foreign currency fluctuations where an unfavorable change in the exchange rate of foreign currencies against the U.S. dollar would result in lower revenues when translated into U.S. dollars although operating expenditures would be lower as well. Historically the effect of changes in foreign currency exchange rates on revenue and operating expenses has been immaterial. However, as our international operations grow, the effect of changes in the foreign currency exchange rates could be greater in terms of revenue and operating expenses. These factors and other factors could harm our ability to gain future international revenues and, consequently, materially impact our business, results of operations, and financial condition. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. Our failure to manage our international operations and the associated risks effectively could limit the future growth of our business.


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Our
international operations expose us to greater risks, including
but not limited to those regarding intellectual property,
collections, exchange rate fluctuations, and regulations, which
could limit our future growth.



 



We have significant operations outside the United States,
including software development centers in India, Ireland,
Israel, the Netherlands, and the United Kingdom, sales offices
in Europe, including France, Germany, the Netherlands,
Switzerland, and the United Kingdom, as well as in countries in
Asia-Pacific, and customer support centers in India, the
Netherlands, and the United Kingdom. Additionally, since 2005 we
have opened sales offices in Brazil, China, India, Italy, Japan,
Mexico, South Korea, and Taiwan, and we plan to continue to
expand our international operations in the Asia-Pacific market.
Our international operations face numerous risks. For example,
to sell our products in certain foreign countries, our products
must be localized, that is, customized to meet local user needs
and to meet the requirements of certain markets, particularly
some in Asia, our product must be double-byte enabled.
Developing internationalized versions of our products for
foreign markets is difficult, requires us to incur additional
expenses, and can take longer than we anticipate. We currently
have limited experience in internationalizing products and in
testing whether these internationalized products will be
accepted in the target countries. We cannot ensure that our
internationalization efforts will be successful.


 



In addition, we have only a limited history of marketing,
selling, and supporting our products and services
internationally. As a result, we must hire and train experienced
personnel to staff and manage our foreign operations. However,
we have experienced difficulties in recruiting, training,
managing, and retaining an international staff, in particular
related to sales management and sales personnel, which have
affected our ability to increase sales productivity, and related
to turnover rates and wage inflation in India, which have
increased costs. We may continue to experience such difficulties
in the future.





12





Table of Contents






We must also be able to enter into strategic distributor
relationships with companies in certain international markets
where we do not have a local presence. If we are not able to
maintain successful strategic distributor relationships
internationally or recruit additional companies to enter into
strategic distributor relationships, our future success in these
international markets could be limited.


 



Business practices in the international markets that we serve
may differ from those in North America and may require us to
include terms in our software license agreements, such as
extended payment or warranty terms, or performance obligations
that may require us to defer license revenues and recognize them
ratably over the warranty term or contractual period of the
agreement. For example, in 2004, we were unable to recognize a
portion of license fees for two large software license
agreements signed in Europe in the third quarter of 2004. We
deferred the license revenues related to these software license
agreements in September 2004 due to extended warranties that
contained provisions for additional unspecified deliverables and
began amortizing the deferred revenues balances to license
revenues in September 2004 for a two- to five-year period.
Although historically we have infrequently entered into software
license agreements that require ratable recognition of license
revenue, we may enter into software license agreements in the
future that may include non-standard terms related to payment,
maintenance rates, warranties, or performance obligations.


 



Our software development centers in India, Ireland, Israel, the
Netherlands, and the United Kingdom also subject our business to
certain risks, including:


 














































  n  

greater difficulty in protecting our ownership rights to
intellectual property developed in foreign countries, which may
have laws that materially differ from those in the United States;
 
  n  

communication delays between our main development center in
Redwood City, California and our development centers in India,
Ireland, Israel, the Netherlands, and the United Kingdom as a
result of time zone differences, which may delay the
development, testing, or release of new products;
 
  n  

greater difficulty in relocating existing trained development
personnel and recruiting local experienced personnel, and the
costs and expenses associated with such activities; and
 
  n  

increased expenses incurred in establishing and maintaining
office space and equipment for the development centers.


 



Additionally, our international operations as a whole are
subject to a number of risks, including the following:


 












































































  n  

greater risk of uncollectible accounts and longer collection
cycles;
 
  n  

higher risk of unexpected changes in regulatory practices,
tariffs, and tax laws and treaties;
 
  n  

greater risk of a failure of our foreign employees to comply
with both U.S. and foreign laws, including antitrust
regulations, the Foreign Corrupt Practices Act, and any trade
regulations ensuring fair trade practices;
 
  n  

potential conflicts with our established distributors in
countries in which we elect to establish a direct sales presence;
 
  n  

our limited experience in establishing a sales and marketing
presence and the appropriate internal systems, processes, and
controls in Asia-Pacific, especially China, Singapore, South
Korea, and Taiwan;
 
  n  

fluctuations in exchange rates between the U.S. dollar and
foreign currencies in markets where we do business, if we
continue to not engage in hedging activities; and
 
  n  

general economic and political conditions in these foreign
markets.


 



For example, an increase in international sales would expose us
to foreign currency fluctuations where an unfavorable change in
the exchange rate of foreign currencies against the
U.S. dollar would result in lower revenues when translated
into U.S. dollars although operating expenditures would be
lower as well. Historically the effect of changes in foreign
currency exchange rates on revenue and operating expenses has
been immaterial. However, as our international operations grow,
the effect of changes in the foreign currency exchange rates
could be greater in terms of revenue and operating expenses.
These factors and other factors could harm our ability to gain
future international revenues and, consequently, materially
impact our business, results of operations, and financial
condition. The expansion of our existing international
operations and entry into additional international markets will
require significant management attention and financial
resources. Our failure to manage our international operations
and the associated risks effectively could limit the future
growth of our business.





13





Table of Contents







This excerpt taken from the INFA 10-K filed Feb 28, 2007.
Our international operations expose us to greater risks, including but not limited to those regarding intellectual property, collections, exchange rate fluctuations, and regulations, which could limit our future growth.
 
We have significant operations outside the United States, including software development centers in India, Ireland, Israel, the Netherlands, and the United Kingdom, sales offices in Europe, including France, Germany, the Netherlands, Switzerland, and the United Kingdom, as well as in countries in Asia-Pacific, and customer support centers in India, the Netherlands, and the United Kingdom. Additionally, we have recently opened sales offices in Brazil, China, India, Japan, South Korea, and Taiwan, and we plan to continue to expand our international operations in the Asia-Pacific market. Our international operations face numerous risks. For example, in order to sell our products in certain foreign countries, our products must be localized, that is, customized to meet local user needs, and in order to meet the requirements of certain markets, particularly some in Asia, our product must be double-byte enabled. Developing internationalized versions of our products for foreign markets is difficult, requires us to incur additional expenses, and can take longer than we anticipate. We currently have limited experience in internationalizing products and in testing whether these internationalized products will be accepted in the target countries. We cannot ensure that our internationalization efforts will be successful.
 
In addition, we have only a limited history of marketing, selling, and supporting our products and services internationally. As a result, we must hire and train experienced personnel to staff and manage our foreign operations. However, we have experienced difficulties in recruiting, training, managing, and retaining an international staff, in particular related to sales management and sales personnel, which have affected our ability to increase sales productivity, and related to turnover rates and wage inflation in India, which have increased costs. We may continue to experience such difficulties in the future.
 
We must also be able to enter into strategic distributor relationships with companies in certain international markets where we do not have a local presence. If we are not able to maintain successful strategic distributor relationships internationally or recruit additional companies to enter into strategic distributor relationships, our future success in these international markets could be limited.
 
Business practices in the international markets that we serve may differ from those in North America and may require us to include terms in our software license agreements, such as extended payment or warranty terms, or performance obligations that may require us to defer license revenues and recognize them ratably over the warranty term or contractual period of the agreement. For example, in 2004, we were unable to recognize a portion of license fees for two large software license agreements signed in Europe in the third quarter of 2004. We deferred the license revenues related to these software license agreements in September 2004 due to extended warranties that contained provisions for additional unspecified deliverables and began amortizing the deferred revenues balances to license revenues in September 2004 for a two- to five-year period. Although historically we have infrequently entered into software license agreements that require ratable recognition of license


12


Table of Contents

revenue, we may enter into software license agreements in the future that may include non-standard terms related to payment, maintenance rates, warranties, or performance obligations.
 
Our software development centers in India, Ireland, Israel, the Netherlands, and the United Kingdom also subject our business to certain risks, including the following risks:
 
  n   greater difficulty in protecting our ownership rights to intellectual property developed in foreign countries, which may have laws that materially differ from those in the United States;
 
  n   communication delays between our main development center in Redwood City, California and our development centers in India, Ireland, Israel, the Netherlands, and the United Kingdom as a result of time zone differences, which may delay the development, testing, or release of new products;
 
  n   greater difficulty in relocating existing trained development personnel and recruiting local experienced personnel, and the costs and expenses associated with such activities; and
 
  n   increased expenses incurred in establishing and maintaining office space and equipment for the development centers.
 
Additionally, our international operations as a whole are subject to a number of risks, including the following:
 
  n   greater risk of uncollectible accounts and longer collection cycles;
 
  n   greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;
 
  n   greater risk of a failure of our foreign employees to comply with both U.S. and foreign laws, including antitrust regulations, the Foreign Corrupt Practices Act, and any trade regulations ensuring fair trade practices;
 
  n   potential conflicts with our established distributors in countries in which we elect to establish a direct sales presence;
 
  n   our limited experience in establishing a sales and marketing presence and the appropriate internal systems, processes, and controls in Asia-Pacific, especially China, Hong Kong, South Korea, and Taiwan;
 
  n   fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business, if we continue to not engage in hedging activities; and
 
  n   general economic and political conditions in these foreign markets.
 
These factors and other factors could harm our ability to gain future international revenues and, consequently, materially impact our business, results of operations, and financial condition. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. Our failure to manage our international operations and the associated risks effectively could limit the future growth of our business.
 
Although we believe we currently have adequate internal control over financial reporting, we are required to assess our internal control over financial reporting on an annual basis, and any future adverse results from such assessment could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
 
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”), and the rules and regulations promulgated by the SEC to implement SOX 404, we are required to furnish an annual report in our Form 10-K regarding the effectiveness of our internal control over financial reporting. The report’s assessment of our internal control over financial reporting as of the end of our fiscal year must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.
 
Management’s assessment of internal control over financial reporting requires management to make subjective judgments and, because this requirement to provide a management report has only been in effect since 2004, some of our judgments will be in areas that may be open to interpretation. Therefore, we may have difficulties in assessing the effectiveness of our internal controls, and our auditors, who are required to issue an attestation report along with our management report, may not agree with management’s assessments.
 
During the past two years, our organizational structure has increased in complexity. For example, during 2005 and 2006, we expanded our presence in the Asia-Pacific region, where business practices can differ from those in other regions of the world and can create internal controls risks. To address potential risks, we recognize revenue on transactions derived in this


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region only when the cash has been received and all other revenue recognition criteria have been met. We also have provided business practices training to our sales teams. While our organizational structure has increased in complexity as a result of our international expansion, our capital structure has also increased in complexity as a result of the issuance of the Notes in March 2006. In July 2006, we discovered a “significant deficiency” in the manner in which we accounted for the shares of Common Stock issued upon the conversion of the Notes for purposes of determining our weighted average diluted shares outstanding and diluted earnings per share. As a result, we issued a press release and filed a related Current Report on Form 8-K/A to correct the weighted average diluted shares outstanding and diluted earnings per share. Finally, our reorganization of various foreign entities in April 2006, which required a change in some of our internal controls over financial reporting, and the assessment of the impact for our adoption of Financial Accounting Standards Board Interpretations (“FIN 48”) No. 48, Accounting for Uncertainty in Income Taxes, further add to the reporting complexity and increase the potential risks of our ability to maintain the effectiveness of our internal controls. Overall, the combination of our increased complexity and the ever increasing regulatory complexity make it more critical for us to attract and retain qualified and technically competent finance employees.
 
Although we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate.
 
If we are unable to assert that our internal control over financial reporting is effective in any future period (or if our auditors are unable to provide an attestation report regarding the effectiveness of our internal controls, or qualify such report or fail to provide such report in a timely manner), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.
 
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