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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 0-28030
i2 TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2294945
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11701 LUNA ROAD 75234
DALLAS, TEXAS (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (469) 357-1000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.00025 PAR VALUE
(Title of Class)
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 [X] No [ ]
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of Common Stock on March 20,
2000 as reported on the Nasdaq National Market, was approximately $15.0 billion
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of the Registrant's Common Stock).
As of March 20, 2000, the Registrant had 157,356,216 outstanding shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
In addition to the historical information contained herein, the discussion
in this Form 10-K contains certain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that involve risks and uncertainties, such as
statements concerning: growth and future operating results; future consumer
benefits attributable to our products; developments in our markets and strategic
focus; new products and product enhancements; potential acquisitions and the
integration of acquired businesses; products and technologies; strategic
relationships; and future economic, business and regulatory conditions. The
cautionary statements made in this Form 10-K should be read as being applicable
to all related forward-looking statements whenever they appear in this Form
10-K. Our actual results could differ materially from the results discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under the section
captioned "Factors That May Affect Future Results" in Item 1 of this Form 10-K
as well as those cautionary statements and other factors set forth elsewhere
herein.
References in this Form 10-K to the terms "optimal" and "optimized" and
words to that effect are not necessarily intended to connote the mathematically
optimal solution, but may connote near-optimal solutions which reflect practical
considerations such as customer requirements as to response time and precision
of the results.
OUR COMPANY
i2 is a leading global provider of intelligent eBusiness solutions that
help enterprises optimize business processes both internally and among trading
partners. Our solutions enable enterprises to significantly improve
efficiencies, collaborate with suppliers and customers, respond to market
demands and engage in dynamic business interactions over the Internet. Our
solutions consider the real conditions of companies to optimize key business
processes -- from product design to customer relationships. We have recently
launched TradeMatrix, a robust platform of business-to-business solutions,
services and marketplaces, which will allow customers, partners, suppliers and
service providers to do business together in real time. TradeMatrix offers a
full breadth of services that include planning, procurement, commerce,
fulfillment, customer care, retail, strategic sourcing and product development.
Our RHYTHM product suite principally includes solutions for supply chain
management, customer management, product lifecycle management, inter-process
planning and strategic planning, which provide the basis for these value-added
services offered to marketplace participants. We recently have signed agreements
to develop and host public and private Internet-based electronic marketplaces
with our customers and partners in the automotive, aerospace, high-tech,
softgoods and consumer packaged goods industries. Our RHYTHM software
applications, along with new software solutions and services designed
specifically for the TradeMatrix environment, are used to power these electronic
marketplaces. We also provide services such as consulting, training and
maintenance in support of these offerings.
We provide dynamic software solutions to leading companies in industries
such as aerospace and defense, automotive, chemicals, durable and non-durable
consumer goods, high-tech hardware, software and electronics, industrial
equipment, logistics, metals, pulp and paper, pharmaceuticals, retail,
semiconductors, textiles and apparel and telecommunications. Our customers
include Alliant Foodservice, Barnes & Noble, Bristol-Myers Squibb, British
American Tobacco, British Steel, Caterpillar, Compaq, Ericsson, Ford, Frito-Lay,
General Electric, General Motors, Hewlett-Packard, IBM, Merck, 3M, Nike, Nokia,
Nortel, Philips, Ryder Logistics, Siemens, Sun Microsystems, Texas Instruments,
Tech Data, Toshiba, United Technologies, US Steel and VF Corporation.
Our executive offices are located at One i2 Place, 11701 Luna Road, Dallas,
Texas 75234, and our telephone number is (469) 357-1000.
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RECENT DEVELOPMENTS
On March 12, 2000, we entered into a definitive agreement to acquire Aspect
Development, Inc. ("Aspect"), a developer of collaborative solutions for
business-to-business marketplaces. Pursuant to the agreement, we will exchange
all of the outstanding capital stock of Aspect and will assume all outstanding
stock options of Aspect, for approximately 44.9 million shares of our common
stock and options. The transaction will be accounted for as a purchase, is
subject to regulatory and i2 and Aspect stockholder approvals, and is expected
to close in the third quarter of this year.
Also on March 12, 2000, we entered into a definitive agreement to acquire
SupplyBase, Inc. ("SupplyBase"), a developer of interactive database products,
services and supply chain management tools. Under the agreement, we will issue
approximately 1.8 million shares of our common stock for all of the outstanding
capital stock and stock options of SupplyBase. The transaction will be accounted
for as a purchase, is subject to regulatory approval and SupplyBase stockholder
approval, and is expected to close in the second quarter of this year.
These strategic acquisitions will result in substantial one-time charges
along with ongoing substantial amortization of intangibles to our earnings.
INDUSTRY BACKGROUND
Today's increasingly competitive business environment has forced many
companies in diverse industries to increase efficiencies while improving
flexibility and responsiveness to changing market conditions. In addition to
facing higher competitive standards with respect to product quality, variety and
price, businesses also recognize the need to shorten lead times, adjust
production for frequent changes in customer requirements and quote more accurate
and reliable delivery dates. Furthermore, a company's trading network may span
multiple continents, requiring suppliers in one part of the world to collaborate
with a plant in another to serve customers in yet a third location. These forces
are prompting companies to collaborate with a broad range of suppliers and
customers to improve efficiencies across multi-enterprise value chains or
marketplaces.
The growth of the Internet and the proliferation of software applications
are accelerating these changes by enabling a ubiquitous, platform-independent
communications network. This platform independence has prompted demands for a
dynamic, open and highly integrated environment among customers, suppliers and
other trading partners. In response to these evolving market forces, many
companies have sought to re-engineer their business processes to reduce
manufacturing cycle times, shift from mass production to order-driven
manufacturing, increase the use of outsourcing and share information more
readily with vendors and customers over the Internet.
The Internet also is impacting other core business concerns, including
customer relationships and product management. In order to integrate and
optimize new business solutions, organizations are seeking eBusiness initiatives
such as web-based sales, one-to-one marketing, online customer service, supply
chain management and web-based fulfillment. To successfully achieve the desired
benefits from these eBusiness initiatives, organizations require a comprehensive
end-to-end software solution that integrates and optimizes key business
processes -- from customer management to distribution -- with real time
visibility and collaboration capabilities among trading partners. In addition,
many organizations need solutions and services that enable them to quickly and
cost-effectively deploy and optimize Internet-based marketplace trading
capabilities.
THE i2 SOLUTION
We provide our customers with dynamic software solutions and services
designed to optimize and integrate key business processes such as supply chain
management, customer management and product lifecycle management. Our solutions
also enable web-based real time collaboration and order fulfillment capabilities
in both business-to-business and business-to-consumer exchanges. Customers are
using our solutions to design or re-engineer their business models in pursuit of
increased market share and enhanced competitiveness, by making business
decisions more intelligently, or through what we call "intelligent eBusiness."
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Our solutions for intelligent eBusiness build upon our powerful foundation
of advanced planning and optimization capabilities. Our products can help build
competitive advantage and profitability by combining operational excellence,
customer intimacy and product leadership. TradeMatrix leverages our advanced
optimization and execution capabilities to provide value-added services to
buyers, sellers, designers and service providers within multiple digital
marketplaces.
Our approach to customer relationships is centered on the creation of value
for our customers. As part of this dedication to providing value for our
customers, in 1995 we established a goal of generating more than $50 billion in
total value for our customers by 2005, through growth and savings. We have
reported over $7.6 billion of value delivered to date toward this goal.
i2 -- A HISTORY OF INNOVATION
We have offered supply chain management solutions since the company was
founded 12 years ago. Our founders, Sanjiv Sidhu and Ken Sharma, developed a
dynamic solution to optimize the flow of materials within a factory. This
solution, Factory Planner, is our flagship product, and it has helped our
customers maximize the profitability of the factory, while reducing their
materials and inventory costs.
We have expanded this solution to the entire supply chain -- which includes
all of the factories, the distribution centers, the transportation processes and
the demand planning and fulfillment pieces. We have continued to apply
innovative solutions to the supply chain, product design and customer management
processes. These solutions are encompassed within our RHYTHM suite of products.
As companies design new products, they also can plan for the unique
manufacturing and logistics requirements associated with the design.
As the marketplace changed, we introduced the concept of Marketplace
services, which consist of a portfolio of shared information services, to enable
public and private digital trading communities to optimize both planning and
trading processes. These services provide enhanced decision making within
business-to-consumer and business-to-business environments, from collaboration
with strategic partners to fulfilling and tracking multi-vendor orders for
customers. Selected services from the RHYTHM suite of products and from the
Marketplace services portfolio are assembled into a public or private
Internet-based trading community. Private trading communities, like the one
announced with Sun Microelectronics, a division of Sun Microsystems, address a
known set of participants, such as a company and its customers, suppliers or
service providers. Public trading communities offer open participation for a
target industry.
These concepts and solutions have now evolved into TradeMatrix, a dynamic
Internet marketplace of business-to-business and business-to-consumer services.
TradeMatrix is a digital community where customers, partners, suppliers and
providers gather to do business in real time. TradeMatrix encompasses both
private and public electronic marketplaces and is powered by our RHYTHM suite of
products, along with new software solutions and services designed specifically
for the TradeMatrix environment. This new technology allows users to leverage
the Internet to develop the right product offerings, speed the product offerings
to market and streamline processes to minimize costs. As the lead member of the
TradeMatrix platform, we will provide a large portion of the technology that
powers TradeMatrix. However, as part of the RHYTHM and TradeMatrix eBusiness
solutions, technology partners will not only add components to the framework,
but also will contribute to the technology design.
STRATEGY
Our objectives are to expand our leadership position in providing
intelligent eBusiness solutions, and continue to help create significant value
for our customers. Our strategy for achieving these objectives is comprised of
the following elements:
Expand Intelligent eBusiness Product Offerings. We believe that we
have gained significant experience in eBusiness methodologies through our
planning and optimization product and service offerings and relationships
with customers and partners. We intend to continue to leverage this
experience, together with our expertise in advanced software technology, to
extend the scope and depth of
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our suite of intelligent eBusiness solutions to enable our customers to
optimize a broader range of intra-and inter-enterprise functions.
Enhance Support for Customers' eBusiness Initiatives. Our planning and
optimization solutions have enabled emerging and established businesses to
design or re-engineer their supply chains to realize the efficiencies
resulting from their eBusiness initiatives. Our TradeMatrix platform, which
is powered by our RHYTHM software applications, will allow customers to use
our software in a hosted, web-based environment for collaboration, order
fulfillment and other functions. Our RHYTHM software applications also can
be integrated with disparate systems, such as transaction-based enterprise
resource planning applications. We believe that TradeMatrix will allow us
to provide value-added services to multiple marketplaces and their
participants, further advancing our customers' eBusiness initiatives
through dynamic trading and digital marketplace facilitation and
collaboration. We also are working with customers to develop their own open
online e-marketplaces. Recently, we signed an agreement with Toyota Motor
Sales USA to develop and operate iStarXchange, an electronic marketplace
serving the automotive replacement parts market for the auto service and
repair industry.
Expand Expertise in Targeted Vertical Markets. We currently are
focusing on selected vertical markets, such as aerospace and defense,
automotive, chemicals, consumer goods, high-tech hardware, software and
electronics, industrial equipment, logistics, metals, pulp and paper,
pharmaceuticals, retail, semiconductors, textiles and apparel and
telecommunications. At the same time, we are evaluating the benefits that
our solutions could provide to other vertical markets. Each industry faces
unique problems and issues that must be addressed by focused intelligent
eBusiness applications. We will continue to leverage the highly flexible
nature of our core RHYTHM planning and optimization software to develop and
maintain our family of pre-configured templates tailored to address the
particular requirements of targeted vertical markets.
Invest Aggressively to Build Market Share. We have made and will
continue to make substantial investments to expand our sales and marketing,
research and development, consulting and administrative infrastructure,
balanced with our goals for increasing profitability. We believe that such
investments are necessary to increase our market share and to capitalize on
the growth opportunities in the emerging intelligent eBusiness market.
Acquire or Invest in Complementary Businesses, Products and
Technologies. We continue to believe that select acquisitions or
investments may provide opportunities to broaden our product offerings and
provide more advanced technologies for eBusiness. For example, the
acquisition of Sales Marketing Administration Research Tracking
Technologies, Inc., or SMART, enhanced our eBusiness product portfolio by
providing advanced customer management capabilities. Recently, we have
entered into agreements to acquire Aspect and SupplyBase to enhance our
business-to-business platform. We may in the future pursue additional
acquisitions or investments in businesses, products and technologies, or
enter into joint ventures, which complement or expand our business.
Continue to Form Strategic Alliances. We intend to expand and seek
additional strategic relationships with leading enterprise software and
eBusiness vendors to integrate the RHYTHM technology into their software
products and to create joint-marketing opportunities. Consistent with this
strategy, IBM and Ariba recently agreed to form a strategic alliance to
deliver the industry's first end-to-end solution for business-to-business
e-commerce and collaboration. In addition, we intend to augment our sales
efforts by establishing and expanding relationships with other
complementary eBusiness vendors and systems consulting and integration
firms to more rapidly penetrate our targeted markets. We currently have
relationships with Andersen Consulting, Deloitte & Touche, Ernst & Young,
KPMG Peat Marwick and PricewaterhouseCoopers, among others. Recently,
PricewaterhouseCoopers agreed to co-develop our next generation of customer
management solutions and to jointly develop, sell and deliver end-to-end
intelligent eBusiness solutions.
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PRODUCTS
Our intelligent eBusiness software products operate as flexible, integrated
solutions and are available in single and multi-site configurations, with
various extensions. Our solutions are designed to assist our customers in
improving current business processes, return on assets, profitability and
customer service levels. As a result of these and other advantages, our
solutions enable customers to also increase market share, enhance their
competitive advantage and deliver on their promises to their customers.
RHYTHM SUITE
Our RHYTHM suite of integrated software products principally includes
solutions for supply chain management, customer management, product lifecycle
management, inter-process planning and strategic planning that allow companies
to manage customer relationships, accelerate product innovation and synchronize
supply chain processes across all vendors and suppliers.
SUPPLY CHAIN MANAGEMENT. Our supply chain management solution is designed
to achieve operational excellence throughout a customer's extended supply chain.
This solution is composed of three sub-processes:
- Demand Planning. Demand planning analyzes customers' buying patterns
and develops aggregate, collaborative forecasts. Demand planning feeds into
the supply planning process, and subsequently the demand fulfillment
process. Demand planning involves long-term, intermediate-term and
short-term time horizons.
- Supply Planning. Supply planning optimally positions enterprise
resources to meet demand. This is a planning-level sub-process that spans
the strategic and tactical supply-planning processes. Long-term planning,
inventory planning, distribution planning, collaborative procurement,
transportation planning and supply allocation are all part of this
sub-process.
- Demand Fulfillment. Demand fulfillment provides fast, accurate and
reliable delivery date responses to customer orders. Demand fulfillment is
primarily an execution level sub-process that includes order capturing,
customer verification, order promising, backlog management and order
fulfillment.
Available extensions to our supply chain management solution include
products for data warehousing and reporting capabilities as well as
Internet-based collaboration tools that enable an enterprise and its trading
partners to share and collaborate on demand forecasts and procurement
requirements.
CUSTOMER MANAGEMENT. Our customer management solutions enable increased
customer intimacy and improved business process effectiveness. These solutions
are designed to improve customer satisfaction and maximize return on marketing,
sales and customer service investments. Our customer management solutions span
the following sub-processes:
- Marketing. Marketing identifies, segments and profiles customers,
delivering personalized marketing content and creating purchasing intent
through customized marketing offers that best match customer needs.
- Commerce. Commerce configures, prices and executes sales
transactions -- either directly or through indirect channels -- and
provides real time order fulfillment.
- Customer Care. Customer care sustains long-term customer loyalty
through high-quality customer interaction, service and maintenance
programs, while lowering overall service expenses and assets deployed.
PRODUCT LIFECYCLE MANAGEMENT. Our product lifecycle management solutions
consist of several modules that span all the major phases in the typical product
development and product lifecycle processes, from early concept definition,
through development, test and launch, to product phase-out and replacement.
These solutions plan and optimize product portfolios based on financial
objectives, resource constraints, account supply chain data and other product
development systems. They provide integrated information about product
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lifecycles, demand forecasts, marketing efforts, production capabilities,
development time and resource bottlenecks.
INTER-PROCESS PLANNING. Our inter-process planning solutions balance
resource requirements among the supply chain management, customer management and
product life cycle management processes to achieve enterprise-wide efficiency
and responsiveness.
STRATEGIC PLANNING. Our strategic planning solutions consist of simulation
tools to support supply chain network design processes such as rationalization
of distribution centers, plant closings and service territory assignments. These
solutions are designed for use in understanding the financial impact of
decisions, monitoring key metrics, reviewing periodic strategic plans or
optimizing the supply chain when major changes occur such as mergers or
divestitures.
TRADEMATRIX SERVICES AND SOLUTIONS
TradeMatrix is an intelligent Internet business platform that offers
value-added services tailored for buyers, sellers, designers, service providers
and end-customers spanning multiple digital marketplaces. TradeMatrix offers a
full breadth of services that include planning, procurement, commerce,
fulfillment, customer care, retail, strategic sourcing and product development.
Its web site is www.tradematrix.com. TradeMatrix uniquely leverages our advanced
optimization and execution capabilities to improve decision-making across these
multiple digital marketplaces. We believe that TradeMatrix will be unique in its
ability to intuitively handle diverse workflows and market mechanisms that will
allow it to become a one-stop destination for many dynamic trading activities.
TradeMatrix will enable buyers to procure both direct and indirect materials,
provide sellers with services to expand market presence and enhance brand
management, offer designer services focused on product development to reduce
time-to-market, and provide value-added service providers with tools to enhance
customer relationships. TradeMatrix is built on open standards, enabling the
participation of leading marketplace partners and technologies. The following
are some of the services that TradeMatrix currently offers.
- TradeMatrix Planning Solution enables companies to forecast demand and
optimally position enterprise resources to meet market demands.
TradeMatrix Planning Solutions are composed of various individual
services that can be combined to form a comprehensive solution. These
services encompass demand management, inventory planning, master planning
and replenishment planning workflows.
- TradeMatrix Procurement Service is a hosted procurement service that
enables users to reduce the cost of purchasing and procuring labor, while
lowering inventory and decreasing time-to-market for new products.
TradeMatrixes' hosted eProcurement solution addresses industry-specific
procurement needs from qualification through sourcing, ordering,
monitoring, reporting and analysis. The TradeMatrix solution is
characterized by a thorough understanding of industry-specific business
processes and workflows and supports both direct and indirect
procurement.
- TradeMatrix Commerce Service enables companies to proactively manage
customer interactions across the entire customer lifecycle, including
relationships within marketing, selling, customer collaboration, order
processing and order monitoring. Through Commerce Service, companies can
create targeted marketing campaigns, personalize customer interactions,
facilitate all elements of e-commerce transactions, make real time
multi-enterprise order fulfillment promises and provide order tracking
and tracing.
- TradeMatrix Fulfillment Solution optimally responds to customer requests
and manages multi-enterprise customer orders, thereby improving customer
service. Our Fulfillment Solution encompasses the entire process,
starting from when the order is taken from a customer to when the product
arrives at the customer's door. The Fulfillment Solution prioritizes the
promise made to the customer, while optimally sourcing the inventory and
coordinating delivery to the customer.
- TradeMatrix Customer Care Solution allows participants' customers to
access information quickly, resolve problems and receive support
instantly. Customer Care leverages online customer support from
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automated help desks and call centers and allows customers to research,
order and schedule service. Companies can collaborate with customers to
schedule service, track and fulfill returns and exchanges and manage and
maintain a spare and replacement part inventory.
- TradeMatrix Retail Solution gives companies an opportunity to capture
more demand, minimize product obsolescence and maximize storage
effectiveness. Retail Solutions addresses the complexities of retail,
whether online or brick-and-mortar. Retailers of all kinds can more
effectively determine what products to launch and promote, plan and shape
demand for these products, replenish stock as needed, and analyze
performance (such as promotions). Retailers can use these services to
collaborate and trade with vendors, distributors and packers.
- TradeMatrix Strategic Sourcing Solution allows companies to source
components for design or manufacturing based on preferred vendor
relationships, vendor capabilities or vendor consolidation. These
capabilities are offered through our relationship with Aspect Development
and other content providers. We have recently announced agreements to
acquire Aspect Development and SupplyBase.
- TradeMatrix Product Development Solution allows companies to accelerate
the overall product development process. TradeMatrix provides a secure
and scalable Internet-based collaboration platform to enable rapid
communication among design partners, from the initial planning phase
through sourcing, development and into production. Through Product
Development Solutions, companies can capture and prioritize customer
requirements, secure multi-enterprise design collaboration and project
coordination, search vendor and component databases, optimize product
launch and integrate with key supply chain planning systems.
PRODUCT DEVELOPMENT
We originally introduced our RHYTHM software in 1992 and have subsequently
added a number of new products and product enhancements. We have adopted a
strategy of periodically reinventing our products in order to meet our
customers' needs, and we strive to ensure that each new generation of RHYTHM is
compatible with previous releases. We focus our ongoing product development
efforts on broadening the functionality of our RHYTHM suite of products and
services to more fully address various eBusiness initiatives. The RHYTHM suite
is the engine underlying the TradeMatrix platform. These services and solutions
are evolving and have been developed using an intelligent eBusiness architecture
that is (1) modular, so that components may be easily substituted; (2) flexible,
to quickly respond to changing business conditions; (3) open, to support
multiple protocols; and (4) scalable, to the handle the large volumes of queries
and transactions that are typical in an eBusiness environment.
Our internal development staff has developed the RHYTHM products and
TradeMatrix platform through small project teams focused on independent
components of the software under development. We maintain product release
planning procedures to ensure integration, testing and version control among the
different project development teams. We maintain development centers in
Bangalore and Mumbai, India; Cambridge, Massachusetts; Austin and Dallas, Texas;
Parsippany, New Jersey; San Francisco, California; Ulvila, Finland; and Toronto,
Ontario.
Research and development expenses, while significant, have declined
gradually as a percentage of revenues in recent periods as we have continued to
focus on development of new and enhanced products. Research and development
expenses were $132.3 million in 1999, representing 23.2% of total revenues,
$94.2 million in 1998, representing 25.5% of total revenues, and $57.4 million
in 1997, representing 25.9% of total revenues.
CUSTOMER SERVICE AND SUPPORT
We believe that providing a high level of customer service and technical
support is necessary to achieve rapid product implementation which, in turn, is
essential to customer satisfaction and continued license sales and revenue
growth. We have expanded our service and support centers geographically and now
have support centers across the U.S. and in Australia, Belgium, Brazil, Canada,
Denmark, France, Germany, India, Japan,
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Mexico, Singapore, South Africa, Taiwan and the United Kingdom. Accordingly, we
are committed to continue recruiting and maintaining a high-quality technical
support team. Our customer service and support activities consist of the
following:
Maintenance and Product Updates. We provide ongoing product support
services under our license agreements. Maintenance contracts are typically sold
to customers at the time of the initial RHYTHM license and may be renewed for
additional periods. Under our maintenance agreements with our customers, we
provide, without additional charge, product updates and enhancements to the
RHYTHM products previously purchased by the customer. Customers that do not
renew their maintenance agreements but wish to obtain product updates and new
version releases are generally required to purchase such items from us at market
prices. Ongoing support and maintenance services are provided on up to a
seven-day week, 24-hour day basis.
Hosting Services. Our TradeMatrix platform delivers eBusiness applications
and technology across a network, hosted in a centralized, managed environment.
With a simple browser and network connection, companies can access TradeMatrix
offerings. While the customer typically owns the applications, we may own or
outsource the hardware, manage the application and server architecture, maintain
and upgrade software and provide customer support. Our TradeMatrix platform
provides companies with immediate access to the benefits of our dynamic
eBusiness solutions, allows companies to more efficiently access applications by
reducing customers' needs to build and maintain complex technology, and
leverages our complete software architecture and infrastructure for supporting
applications hosting.
Consulting. We offer our customers on-site consulting services aimed at
assisting in the implementation of our solutions and services and integration
with the customers' existing systems. We receive hourly, daily or structured
fees for these services. These consulting services are concentrated on making
implementation cost-effective for customers by enabling them to independently
perform as many of the integration tasks as possible. We also leverage the use
of third party consulting firms to more rapidly penetrate our target market.
Training. We offer an intensive education training program for our
customers and our third-party implementation providers. Classes are offered at
in-house facilities at our offices and customer locations. These classes focus
on supply chain management principles as well as the implementation and use of
RHYTHM products.
SALES AND MARKETING
We market our software and services primarily through our direct sales
organization augmented by other sales channels, including eBusiness providers
and systems consulting and integration firms. At December 31, 1999, we conducted
sales and other related activities through several offices in the U.S. and
additional offices in Australia, Belgium, Brazil, Canada, Denmark, Finland,
France, Germany, India, Italy, Japan, Korea, Mexico, Singapore, South Africa,
Taiwan and the United Kingdom. Our direct sales organization consists of
regionally based sales representatives and sales engineers supported by
personnel with experience in the aerospace and defense, automotive, chemicals,
durable and non-durable consumer goods, high-tech hardware, software and
electronics, industrial equipment, logistics, metals, pulp and paper,
pharmaceuticals, retail, semiconductors, textiles and apparel and
telecommunications industries.
We currently have joint marketing agreements with a number of eBusiness
providers, including IBM and Siebel, and several systems consulting and
integration firms, including PricewaterhouseCoopers. These joint marketing
agreements generally provide the vendors with non-exclusive rights to market
RHYTHM products and access to marketing materials and product training.
Furthermore, the vendors receive a specified commission for license revenues
generated by the vendor during the term of the agreement, which commissions
generally vary from zero to 30% of the sales price of the license. By using
these indirect sales channels, we seek to capitalize on the installed base of
other eBusiness providers and obtain favorable product recommendations from
systems consulting and integration firms, thereby increasing our products'
market coverage. Furthermore, we have negotiated contracts with other software
providers, where these companies can offer their products to customers through
our TradeMatrix platform. We will receive a specified commission on those sales
while the other provider will receive license revenues. There can be no
assurance that any of these joint marketing and development agreements will be
beneficial to us or that these relationships will be sustained.
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CUSTOMERS
As of December 31, 1999, we had licensed RHYTHM products to over 700
customers since inception. The following is a partial list of companies that
have licensed more than $1.0 million of RHYTHM products:
AUTOMOTIVE/INDUSTRIAL/
CHEMICAL
Caterpillar
Dresser Rand
Eaton
Ford
GE Plastics
GM/EDS
Navistar
Occidental Chemical
Polimeri
Renault
United Technologies
Yazaki
HIGH TECH/ELECTRONICS/
TELECOM
Acer
Altera
Apple
Applied Materials
AST Research
Bell Microproducts
Canon
Casio
Celestica
Compaq
Dallas Semiconductor
Dell
EMC
Ericsson
Fujitsu
Gateway 2000
Hewlett-Packard
IBM
Integrated Device
Technologies
Iomega
Lucent Technologies
Matsushita
Maxtor
Microage
Micron Electronics
Motorola
NEC
Nokia
Nortel
Philips
Quantum
Samsung
Seagate
Seiko Epson
Silicon Graphics
ST Microelectronics
Siemens
Sun Microsystems
Texas Instruments
Thomson
Toshiba
United Microelectronics
Tech Data
Tokyo Electron
Xircom
CONSUMER/GOODS/RETAIL
Alliant Foodservice
Barnes & Noble
British American Tobacco
Delta Faucet
Dekor
Dobbs International
Dole
E&J Gallo Winery
Frito-Lay
Haworth
Herman Miller
LFI
Lipton
3M
Nike
Polo Ralph Lauren
Russell
Sara Lee Knit Products
Sherwin Williams
Steelcase
VF Corporation
Whirlpool
LOGISTICS
Con-Way
Mark VII
Ryder Logistics
United Parcel Service
MEDICAL/PHARMACEUTICAL
Abbott Laboratories
Bristol-Myers Squibb
Johnson & Johnson Medical
Meditronic
Merck
Tyco Healthcare
METALS
Bethlehem Steel
British Steel
Iscor Limited
LTV
National Steel
Sidmar
Timken
Weirton
US Steel
Vacuumschmelze
PULP AND PAPER
CSS Industries
Fletcher Challenge
Sonoco
OTHER
GE Capital
KPMG
Newport News Shipbuilding
We provide our RHYTHM software products to customers under non-exclusive,
non-transferable license agreements. As is customary in the software industry,
in order to protect our intellectual property rights, we do not sell or transfer
the title to our products under these license agreements. Under our standard
form of license agreement, license software may be used solely for the
customer's internal operations.
Under our TradeMatrix platform the software applications reside in one
location, and from any client computer the end users automatically gain access
to the most current business data and applications. Our TradeMatrix platform is
based on an application service provider architecture, which is comprised of
data
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servers, application servers and computers or devices running a web browser.
Internet computing centralizes business information and applications, allowing
them to be managed more effectively and efficiently.
COMPETITION
The markets in which we operate are highly competitive. Our competitors are
diverse and offer a variety of solutions directed at various segments of the
supply chain as well as the enterprise as a whole. Competitors include:
- vendors establishing electronic marketplaces and indirect procurement
capabilities, such as Ariba and Commerce One;
- enterprise resource application software vendors such as SAP AG,
PeopleSoft Inc., Oracle Corporation and Baan Company, N.V., each of which
currently offers sophisticated enterprise resource planning, or ERP,
solutions that currently or may in the future incorporate applications
competitive with our products;
- supply chain software vendors including Manugistics Group, Inc. and
Logility, Inc.;
- other business application software vendors which may broaden their
product offerings by internally developing, or by acquiring or partnering
with independent developers of, advanced planning and scheduling
software;
- internal development efforts by corporate information technology
departments; and
- companies offering standardized or customized products for mainframe
and/or mid-range computer systems.
In connection with specific customer solicitations, a number of ERP vendors
have from time to time jointly marketed our products as a complement to their
own systems. We believe that as our market share increases, and as the ranges of
products offered by us and these ERP vendors expand and increasingly overlap,
relationships which were cooperative in the past will become more competitive.
We believe that additional ERP vendors are focusing significant resources on
increasing the functionality of their own planning and scheduling modules, and
at least two other ERP vendors have acquired independent developers of advanced
planning and scheduling software which compete with RHYTHM.
PROPRIETARY RIGHTS AND LICENSES
We regard our trademarks, copyrights, trade secrets, technology and other
proprietary rights as critical to our business. To protect our proprietary
rights, we primarily rely on a combination of copyright, trademark and trade
secret laws, confidentiality procedures, license agreements and contractual
provisions. We license our software products in object code (machine-readable)
format to customers under license agreements and we do not sell or otherwise
transfer title of our software products to our customers. Our non-exclusive,
non-transferable license agreements generally allow the use of our software
products solely by the customer for internal purposes without the right to
sublicense or transfer our software products.
Trademarks are important to our business as we use them in our marketing
and promotional activities as well as with the delivery of our software
products. Our registered trademarks include i2, i2 Technologies and design,
RHYTHM, RHYTHMLINK, Global Supply Chain Management, MOA and PLANET. We have
filed trademark applications in the U.S. and numerous foreign countries for
TradeMatrix, TradeMatrix.com, Rhythm Transportation Enabled Planning,
Heterocasting, EBPO, Electronic Business Process Optimization, FreightMatrix,
FreightMatrix.com, eServiceMatrix, eserviceMatrix.com, SoftgoodsMatrix,
SoftgoodsMatrix.com, AutoMatrix, AutoMatrix.com and B2A.
We own 13 U.S. patents which predominantly relate to planning systems and
interactive report generation. These patents expire at various times through
2018. We also depend on trade secrets and proprietary know-how for certain
unpatented aspects of our business. To protect our proprietary information, we
enter into confidentiality agreements with our employees, consultants and
licensees, and generally control
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access to and distribution of our proprietary information. From time to time we
resell some software that we license from third parties.
EMPLOYEES
As of December 31, 1999, we had approximately 2,800 full-time employees,
including approximately 970 primarily engaged in research and development
activities and approximately 730 engaged in sales and marketing activities. Our
future success depends in significant part upon the continued service of our key
technical and senior management personnel and our continuing ability to attract
and retain highly qualified technical and managerial personnel. None of our
employees are represented by collective bargaining units and we have never
experienced a work stoppage. We believe that employee relations are very good.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating our company and our business.
Our financial results may vary significantly from quarter-to-quarter and we
may fail to meet expectations, which may negatively impact the price of our
stock. Our operating results have varied significantly from quarter-to-quarter
in the past, and we expect our operating results to continue to vary from
quarter-to-quarter in the future, due to a variety of factors, many of which are
outside of our control. Factors that could affect quarterly operating results
include:
- volume and timing of customer orders;
- length of the sales cycle;
- customer budget constraints;
- announcement or introduction of new products or product enhancements by
us or our competitors;
- changes in prices of our products and those of our competitors;
- foreign currency exchange rate fluctuations;
- market acceptance of new products;
- mix of direct and indirect sales;
- changes in our strategic relationships; and
- changes in our business strategy.
Furthermore, customers may defer or cancel their purchases of products if
they experience a downturn in their business or if there is a downturn in the
general economy. We will continue to determine our investment and expense levels
based on expected future revenues. A significant portion of our expenses is not
variable in the short term, and we cannot reduce our costs quickly to respond to
decreases in revenues. Therefore, if revenues are below expectations, this
shortfall is likely to adversely and disproportionately affect our operating
results. In addition, we may reduce our prices or accelerate investment in
research and development efforts in response to competitive pressures or to
pursue new market opportunities. Any of these activities may further limit our
ability to adjust spending in response to revenue fluctuations. Revenues may not
grow at historical rates in future periods, or they may not grow at all.
Accordingly, we may not maintain positive operating margins in future quarters.
Any of these factors could cause our operating results to be below the
expectations of public market analysts and investors, and the price of our
common stock may fall.
We anticipate seasonal fluctuations in revenues, which may cause volatility
in our stock price. The market price of our common stock has been volatile in
the past, and the market price of our common stock may be volatile in the
future. Historically, our revenues have tended to be strongest in the fourth
quarter of the year. We believe that our seasonality is due to the calendar year
budgeting cycles of many of our customers and our compensation policy that
rewards sales personnel for achieving annual revenue quotas. In future
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periods, these seasonal trends may cause our quarter-to-quarter operating
results to vary, which may result in failing to meet the expectations of public
market analysts and investors.
We depend on significant individual license sales. Therefore, our operating
results for a given period could suffer serious harm if we fail to close the
large sales we targeted for that period. We generally derive a significant
portion of revenues in each quarter from a small number of relatively large
sales. For example, in each quarter of 1999, in the last three quarters of 1998
and in each quarter of 1997, one or more customers individually accounted for at
least 10% of our total software license revenues in each respective quarter.
Moreover, due to customer purchasing patterns, we typically realize a
significant portion of our software license revenues in the last few weeks of a
quarter. As a result, we are subject to significant variations in license
revenues and results of operations if we incur any delays in customer orders. If
in any future period we fail to close one or more substantial license sales that
we have targeted to close in that period, this failure could seriously harm our
operating results for that period.
We may not remain competitive, and increased competition could seriously
harm our business. Our competitors offer a variety of eBusiness including supply
chain and other core processes. These competitors include:
- vendors establishing electronic marketplaces and indirect procurement
capabilities, such as Ariba and Commerce One;
- enterprise resource application software vendors such as SAP AG,
PeopleSoft Inc., Oracle Corporation and Baan Company, N.V., each of which
currently offers sophisticated enterprise resource planning, or ERP,
solutions that currently or may in the future incorporate applications
competitive with our products;
- supply chain software vendors including Manugistics Group, Inc. and
Logility, Inc.;
- other business application software vendors which may broaden their
product offerings by internally developing, or by acquiring or partnering
with independent developers of, advanced planning and scheduling
software;
- internal development efforts by corporate information technology
departments; and
- companies offering standardized or customized products for mainframe
and/or mid-range computer systems.
Historically, a number of enterprise resource planning vendors have from
time to time jointly marketed our products as a complement to their own systems.
However, as we attempt to increase our market share and expand our product
offerings, and as enterprise resource planning vendors expand their own product
offerings, our relationships with these vendors have and may continue to become
more competitive. We believe that enterprise resource planning vendors are
focusing significant resources on establishing and increasing the functionality
of their own eBusiness solutions, and other enterprise resource planning vendors
have recently acquired independent developers of advanced planning and
scheduling software which compete with RHYTHM.
Relative to us, many of our competitors have:
- longer operating histories;
- significantly greater financial, technical, marketing and other
resources;
- greater name recognition;
- a broader range of products to offer; and
- a larger installed base of customers.
Current and potential competitors have established, or may establish,
cooperative relationships among themselves or with third parties to enhance
their products, which may result in increased competition. In
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addition, we expect to experience increasing price competition as we compete for
market share, and we may not be able to compete successfully with our existing
or new competitors. If we experience increased competition, substantial harm may
result to our business, operating results and financial condition.
Our strategy of establishing and promoting our TradeMatrix is unproven and
may be unsuccessful. As part of our business strategy, we are offering the
TradeMatrix platform to trading community participants in digital marketplaces.
This strategy is unproven, and currently we are providing only a limited portion
of our intended TradeMatrix services in only a small number of digital trading
communities. We have limited experience developing and operating digital
marketplaces, and we cannot be certain that these trading communities will be
operated effectively, that enterprises will join and remain in these trading
communities, that we will develop and provide successfully all intended
TradeMatrix services, or that we will generate significant revenues from these
services. To date, we have not generated significant revenues from these
services. If this business strategy is flawed, or if we are unable to execute
effectively, our business, operating results and financial condition could be
substantially harmed.
In addition, we expect to rely on third parties' efforts to promote our
TradeMatrix platform. Because our revenues from these sources are likely to be
largely based on subscriptions to or utilization of our digital marketplaces,
any failure by these third parties to successfully promote our TradeMatrix
platform, or any reluctance to participate in our digital marketplaces on the
part of suppliers, manufacturers, distributors, logistics providers or
customers, could harm our business, results of operations and financial
condition.
Rapid growth in our operations could continue to strain our managerial and
operational resources. We have experienced rapid growth. Revenues have increased
to $571.1 million in 1999 from $369.2 million in 1998 and from $221.8 million in
1997. Our employee count has increased to approximately 2,800 at December 31,
1999, from approximately 2,200 at December 31, 1998, and from approximately
1,200 at December 31, 1997. We have also increased the scope of our operating
and financial systems and the geographic distribution of our operations and
customers. This growth has strained our management and operations, and they will
continue to be strained if rapid growth continues. Our officers and other key
employees will need to implement and improve our operational, customer support
and financial control systems and effectively expand, train and manage our
employee base. Further, we expect that we will be required to manage an
increasing number of relationships with various customers and other third
parties. We may not be able to manage future expansion successfully, and our
inability to do so would harm our business, operating results and financial
condition.
Any decrease in demand for our RHYTHM suite of products and services could
significantly reduce our revenues. We derive substantially all of our revenues
from licenses of our RHYTHM suite of products and related services.
RHYTHM-related revenues, including maintenance and consulting contracts, will
continue to account for substantially all of our revenues for the foreseeable
future. As a result, our future operating results will depend upon continued
market acceptance of RHYTHM and enhancements thereto. However, RHYTHM may not
achieve continued market acceptance. Competition, technological change or other
factors could decrease demand for, or market acceptance of, RHYTHM. Any decrease
in demand or market acceptance of RHYTHM could substantially harm our business,
operating results and financial condition.
We are investing significant resources in developing and marketing our
intelligent eBusiness solutions. The market for these solutions is new and
evolving, and, if this market does not develop as we anticipate, or if we are
unable to develop acceptable solutions, serious harm would result to our
business. We currently derive a substantial portion of our revenues from
licenses for decision-support software products associated with supply chain
management software and related services. However, we are investing significant
resources in further developing and marketing enhanced products and services to
facilitate eBusiness over public and private networks. For the first few months
after we introduce new products and services, the demand for and market
acceptance of those products and services are subject to a high level of
uncertainty, especially where acquisition of our products or services requires a
large capital commitment or other significant commitment of resources. Adoption
of eBusiness software solutions, particularly by those individuals and
enterprises that have historically relied upon traditional means of commerce and
communication, will require a broad acceptance of new and substantially
different methods of conducting business and exchanging information. These
products
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and services involve a new approach to the method of conducting business, and,
as a result, intensive marketing and sales efforts may be necessary to educate
prospective customers regarding the uses and benefits of these products and
services in order to generate demand. The market for this broader functionality
may not develop, competitors may develop superior products and services, or we
may not develop acceptable solutions to address this functionality. Any one of
these events could seriously harm our business, operating results and financial
condition.
Rapid adoption of our TradeMatrix platforms could reduce our software
licensing revenues. Our current revenue model is mainly focused on license
revenue, with additional revenues earned from consulting, maintenance and
training. The TradeMatrix platform offers a more diverse and expansive set of
service offerings that will generate additional revenue streams for hosting,
transaction processing and set-up fees. The TradeMatrix pricing model differs
from our historical model of deriving revenues from licenses of the RHYTHM suite
of products, which we largely recognize upon executing a contract and delivering
software. Under the TradeMatrix model, up-front license fees may be less
substantial and the fees derived from subscriptions to our utilization of the
digital marketplace services may be more robust. We can not predict the rate at
which our customers will adopt the TradeMatrix platform or whether these
expanded service offerings will adversely impact our license revenues.
We do not have significant experience in hosting electronic marketplaces
and may not adequately predict the volume of traffic. If the volume of traffic
on the web site for our TradeMatrix platform increases, the platform may
experience slower response times or other problems. We will rely on several
third parties to expand, manage and maintain the necessary computer equipment,
software, Internet and telecommunication services required for efficient access
to TradeMatrix as demand increases. Any delays in response time or performance
problems could cause TradeMatrix users to perceive this service as not
functioning properly and therefore cause them to reduce or discontinue use of
our products and services.
Our TradeMatrix platform may experience performance problems or delays as a
result of service interruptions. We must protect our network infrastructure and
equipment against damage from human error, physical or electronic security
breaches, power loss and other facility failures, fire, earthquake, flood,
telecommunications failure, sabotage, vandalism and other similar events.
Despite precautions we have taken, a natural disaster or other unanticipated
problems at our data centers could result in interruptions in our services or
significant damage to equipment supporting the platform. In addition, failure of
any of our telecommunications providers to provide consistent data
communications capacity could result in interruptions in our services. Each of
these could experience outages, delays and other difficulties due to system
failures unrelated to our systems. Any damage to or failure of our systems or
service providers could result in reductions in, or terminations of, services
supplied to our customers, which could have a material adverse effect on our
business.
If we publish inaccurate catalog content data, our business could
suffer. The accurate publication of catalog content is critical to our
customers' businesses. Our TradeMatrix platform contains content management
tools that help suppliers manage the collection and publication of catalog
content. Any defects or errors in these tools or the failure of these tools to
accurately publish catalog content could deter businesses from participating in
the TradeMatrix marketplaces, damage our business reputation, harm our ability
to win new customers and potentially expose us to legal liability. In addition,
from time to time some of our customers may submit inaccurate pricing or other
inaccurate catalog information. Even though such inaccuracies are not caused by
our work and are not within our control, such inaccuracies could deter current
and potential customers from using our products and could harm our business,
operating results and financial condition.
The markets in which we compete experience rapid technological change. If
we do not respond to the technological advances we could seriously harm our
business. Enterprises are increasing their focus on decision-support solutions
for eBusiness challenges. As a result, they are requiring their application
software vendors to provide greater levels of functionality and broader product
offerings. Moreover, competitors continue to make rapid technological advances
in computer hardware and software technology and frequently introduce new
products, services and enhancements. We must continue to enhance our current
product line and develop and introduce new products and services that keep pace
with the technological developments of
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our competitors. We must also satisfy increasingly sophisticated customer
requirements. If we cannot successfully respond to the technological advances of
others, or if our new products or product enhancements and services do not
achieve market acceptance, these events could seriously harm our business,
operating results and financial condition.
If use of the Internet for commerce and communication does not increase as
we anticipate, our business will suffer. We are offering new and enhanced
products and services, which depend on increased acceptance and use of the
Internet as a medium for commerce and communication. Rapid growth in the use of
the Internet is a recent phenomenon. As a result, acceptance and use may not
continue to develop at historical rates, and a sufficiently broad base of
business customers may not adopt or continue to use the Internet as a medium of
commerce. Demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty, and there
exist few proven services and products.
Our business could be seriously harmed if:
- use of the Internet and other online services does not continue to
increase or increases more slowly than expected;
- the necessary communication and computer network technology underlying
the Internet and other online services does not effectively support any
expansion that may occur;
- new standards and protocols are not developed or adopted in a timely
manner; or
- for any other reason -- such as concerns about security, reliability,
cost, ease of use, accessibility or quality of service -- the Internet
does not create a viable commercial marketplace, inhibiting the
development of electronic commerce and reducing the need for and
desirability of our products and services.
Future regulation of the Internet may slow its growth, resulting in
decreased demand for our products and services and increased costs of doing
business. Due to increasing popularity and use of the Internet, it is possible
that state and federal regulators could adopt laws and regulations that impose
additional burdens on companies conducting business online. For example, the
growth and development of the market for Internet-based services may prompt
calls for more stringent consumer protection laws. Moreover, the applicability
to the Internet of existing laws in various jurisdictions governing issues such
as property ownership, sales tax, libel and personal privacy is uncertain and
may take years to resolve. Any new legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could decrease the expansion of the Internet, causing
our costs to increase and our growth to be harmed.
Concerns that our products do not adequately protect the privacy of
consumers could inhibit sales of our products. One of the principal features of
our customer management software applications is the ability to develop and
maintain profiles of consumers for use by businesses. Typically, these products
capture profile information when consumers, business customers and employees
visit a web site and volunteer information in response to survey questions
concerning their backgrounds, interests and preferences. Our products augment
these profiles over time by collecting usage data. Although we have designed our
customer management products to enable the development of applications that
permit web site visitors to prevent the distribution of any of their personal
data beyond that specific web site, privacy concerns may nevertheless cause
visitors to resist providing the personal data necessary to support this
profiling capability. If we cannot adequately address consumers' privacy
concerns, these concerns could seriously harm our business, financial condition
and operating results.
If our encryption technology fails to ensure the security of our customers'
online transactions, serious harm to our business could result. The secure
exchange of value and confidential information over public networks is a
significant concern of consumers engaging in online transactions and
interaction. Our customer management software applications use encryption
technology to provide the security necessary to effect the secure exchange of
value and confidential information. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments could
result in a compromise or breach of the
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algorithms that these applications use to protect customer transaction data. If
any compromise or breach were to occur, it could seriously harm our business,
financial condition and operating results.
We may not successfully integrate or realize the intended benefits of our
recent acquisitions. We acquired InterTrans Logistics Solutions Limited, or
ITLS, in April 1998 and SMART in July 1999. In addition, we have acquired other
businesses and products to help broaden and strengthen our product portfolio.
The success of these acquisitions will depend primarily on our ability to:
- retain, motivate and integrate the acquired personnel;
- integrate multiple information systems; and
- integrate acquired software with our existing products and services.
We may encounter difficulties in integrating our operations and products
with those of ITLS, SMART and others. We may not realize the benefits that we
anticipated when we made these acquisitions. Our failure to successfully
integrate our operations and products with those of ITLS, SMART and others could
seriously harm our business, operating results and financial condition.
We may make future acquisitions or enter into joint ventures that may not
be successful. In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. In furtherance of this strategy, in March 2000 we entered
into agreements to acquire Aspect and SupplyBase. Management's negotiations of
potential acquisitions or joint ventures and management's integration of
acquired businesses, products or technologies could divert their time and
resources. Future acquisitions could cause us to issue dilutive equity
securities, incur debt or contingent liabilities, amortize goodwill and other
intangibles, or write off in-process research and development and other
acquisition-related expenses that could seriously harm our financial condition
and operating results. We expect that we will be required to amortize a
significant amount of goodwill and write-off significant amounts of in-process
research and development and other acquisition-related expenses if we complete
the pending Aspect and SupplyBase acquisitions. Further, we may not be able to
integrate any acquired business, product or technology with our existing
operations or train, retain and motivate personnel from the acquired business.
If we are unable to fully integrate an acquired business, product or technology
or train, retain and motivate personnel from the acquired business, we may not
receive the intended benefits of that acquisition.
We face risks associated with international sales and operations that could
harm our company. Our international operations are subject to risks inherent in
international business activities. In addition, we may expand our international
operations in the future which would increase our exposure to these risks. The
risks we face internationally include:
- difficulties and costs of staffing and managing geographically disparate
operations;
- longer accounts receivable payment cycles in certain countries;
- compliance with a variety of foreign laws and regulations;
- unexpected changes in regulatory requirements;
- overlap of different tax structures;
- greater difficulty in safeguarding intellectual property;
- import and export licensing requirements;
- trade restrictions;
- changes in tariff rates;
- political instability; and
- general economic conditions in international markets.
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Changes in the value of the U.S. Dollar, as compared to the currencies of
foreign countries where we transact business, could harm our operating
results. To date, our international revenues have been denominated primarily in
U.S. dollars. The majority of our international expenses and some revenues have
been denominated in currencies other than the U.S. dollar. Therefore, changes in
the value of the U.S. dollar as compared to these other currencies may adversely
affect our operating results. As our international operations expand, we will
use an increasing number of foreign currencies, causing our exposure to currency
exchange rate fluctuations to increase. Although we have implemented limited
hedging programs to mitigate our exposure to currency fluctuations, currency
exchange rate fluctuations have caused, and will continue to cause, currency
transaction gains and losses. While these transactional gains and losses have
not been material to date, they may harm our business, results of operations or
financial condition in the future.
We depend on our strategic partners and other third parties. If we fail to
derive benefits from our existing and future strategic relationships, our
business will suffer. From time to time, we have collaborated with other
companies, including IBM and PricewaterhouseCoopers, in areas such as product
development, marketing, distribution and implementation. Maintaining these and
other relationships is a meaningful part of our business strategy. However, some
of our current and potential strategic partners are either actual or potential
competitors, which may impair the viability of these relationships. In addition,
some of our relationships have failed to meet expectations and may fail to meet
expectations in the future. We may not be able to enter into successful new
strategic relationships in the future.
The loss of any of our key personnel or our failure to attract additional
personnel could seriously harm our company. We rely upon the continued service
of a relatively small number of key technical and senior management personnel,
particularly Sanjiv Sidhu, our chairman and chief executive officer. Our future
success depends on retaining our key employees and our continuing ability to
attract, train and retain other highly qualified technical and managerial
personnel. Very few of our key technical personnel and none of our senior
management personnel are bound by employment agreements. As a result, our
employees could leave with little or no prior notice. In the past, we have had
difficulty recruiting qualified personnel. We may not be able to attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. Our loss of any of our key technical and senior management
personnel or our inability to attract, train and retain additional qualified
personnel could seriously harm our business, operating results and financial
condition.
If we fail to adequately protect our intellectual property rights or face a
claim of intellectual property infringement by a third party, we could lose our
intellectual property rights or be liable for significant damages. We rely
primarily on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect our proprietary
rights. In addition, we generally license RHYTHM products to end users in object
code (machine-readable) format, and our license agreements generally allow the
use of RHYTHM products solely by the customer for internal purposes without the
right to sublicense or transfer the RHYTHM products. However, these measures
afford only limited protection. Unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that we regard as proprietary.
Although we believe software piracy may be a problem, we are not able to
determine the extent to which piracy of our software products exists. Policing
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent misappropriation of our technology. This is
particularly true in foreign countries where the laws may not protect
proprietary rights to the same extent as the laws of the United States and may
not provide us with an effective remedy against piracy.
As the number of products and competitors continues to grow, the
functionality of products in different industry segments is increasingly
overlapping. As a result, we increasingly may be subject to claims of
intellectual property infringement. Although we are not aware that any of our
products infringe upon the proprietary rights of third parties, third parties
may claim infringement by us with respect to current or future products. Any
infringement claims, with or without merit, could be time-consuming, result in
costly litigation or damages, cause product shipment delays or the loss or
deferral of sales, or require us to enter into royalty or licensing agreements.
If we enter into royalty or licensing agreements in settlement of any litigation
or claims, these agreements may not be on terms acceptable to us. Unfavorable
royalty and licensing agreements could seriously harm our business, operating
results and financial condition.
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We resell some software that we license from third parties. Although we may
continue this practice, third-party software licenses may not continue to be
available to us on commercially reasonable terms. Our inability to maintain or
obtain any of these software licenses will delay or reduce our product shipments
until we can identify, license and integrate equivalent software. Any loss of
these licenses or delay or reduction in product shipments could harm our
business, operating results and financial condition.
Our products' failure to remain compatible with existing and new computers
and software operating systems would seriously harm our business. Our RHYTHM
software can operate on hardware platforms from Digital Equipment,
Hewlett-Packard, IBM and Sun Microsystems and operating systems from Sun
Microsystems and Microsoft. RHYTHM can access data from most widely-used
structured query language databases, including Informix, Oracle and Sybase. If
additional hardware or software platforms gain significant market acceptance, we
may be required to attempt to adapt RHYTHM to those platforms in order to remain
competitive. However, those platforms may not be architecturally compatible with
RHYTHM's software product design, and we may not be able to adapt RHYTHM to
those additional platforms on a timely basis, or at all. Any failure to maintain
compatibility with existing platforms or to adapt to new platforms that achieve
significant market acceptance would seriously harm our business, operating
results and financial condition.
Our software is complex and may contain undetected errors. Our software
programs are complex and may contain undetected errors or "bugs." Although we
conduct extensive testing, we may not discover bugs until our customers install
and use a given product or until the volume of services that a product provides
increases. On occasion, we have experienced delays in the scheduled introduction
of new and enhanced products because of bugs. Undetected errors could result in
loss of customers or reputation, adverse publicity, loss of revenues, delay in
market acceptance, diversion of development resources, increased insurance costs
or claims against us by customers, any of which could seriously harm our
business, operating results and financial condition.
Releases and problems with new products may cause purchasing delays, which
would harm our revenues. Customers may delay their purchasing decisions in
anticipation of our new or enhanced products, or products of competitors. Delays
in customer purchasing decisions could seriously harm our business and operating
results. Moreover, significant delays in the general availability of new
releases, significant problems in the installation or implementation of new
releases, or customer dissatisfaction with new releases could seriously harm our
business, operating results and financial condition.
Our failure to successfully recruit and retain technical and implementation
personnel could reduce our license revenues or limit the growth of our license
revenues. A shortage of qualified technical sales support personnel could harm
our ability to expand sales and enter into new vertical markets. We will depend
on our trained implementation personnel or those of independent consultants to
implement our products and services. A shortage in the number of trained
implementation personnel could limit our ability to implement our software and
services on a timely and effective basis. Delayed or ineffective implementation
of our software and services may limit our ability to expand our revenues and
may result in customer dissatisfaction and harm to our reputation. Any of these
events could seriously harm our business, operating results and financial
condition.
We may be subject to product liability claims. Our license agreements
typically seek to limit our exposure to product liability claims from our
customers. However, these contract provisions may not preclude all potential
claims. Additionally, our general liability insurance may be inadequate to
protect us from all liabilities that we may face. Product liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. As a result, any claim, whether or not successful, could
harm our reputation and business, operating results and financial condition.
Our executive officers and directors have voting control. Our executive
officers and directors together beneficially own approximately 43% of the total
voting power of our company. Accordingly, these stockholders will be able to
determine the composition of our Board of Directors, will retain the voting
power to approve all matters requiring stockholder approval and will continue to
have significant influence over our affairs.
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Our charter and by-laws have anti-takeover provisions. Provisions of our
Certificate of Incorporation and our Bylaws as well as the Delaware General
Corporation Law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. We are subject to the
provisions of Section 203 of the Delaware General Corporation Law, which
restricts certain business combinations with interested stockholders. The
combination of these provisions may inhibit a non-negotiated merger or other
business combination.
Our stock price historically has been volatile, which may make it more
difficult for you to resell our common stock when you want at prices you find
attractive. The market price of our common stock has been volatile in the past,
and the market price of our common stock may be volatile in the future. The
following factors may significantly affect the market price of the common stock:
- quarterly variations in our results of operations;
- the announcement of new products, product enhancements, joint ventures
and other alliances by us or our competitors;
- technological innovations by us or our competitors; and
- general market conditions or market conditions specific to particular
industries.
In particular, the stock prices of many companies in the technology and emerging
growth sectors have fluctuated widely due to events unrelated to their operating
performance. These fluctuations may harm the market price of our common stock.
If we are required to register as an investment company, we would become
subject to substantial regulation, which would interfere with our ability to
implement our business plan. We have substantial cash, cash equivalents and
short-term investments. We plan to continue investing these assets in short-term
instruments consistent with prudent cash management policy and not primarily for
the purpose of achieving investment returns. Investment in securities primarily
for the purpose of achieving investment returns could result in our being
classified as an "investment company" under the Investment Company Act of 1940.
The Investment Company Act requires the registration of companies that are
primarily in the business of investing, reinvesting or trading securities or
that fail to meet certain statistical tests regarding their composition of
assets and sources of income, even though they consider themselves not to be
primarily engaged in investing, reinvesting or trading securities. We believe
that we are primarily engaged in a business other than investing, reinvesting or
trading securities and, therefore, are not an investment company within the
meaning of the Investment Company Act. If the Investment Company Act required us
to register as an investment company, we would become subject to substantial
regulation with respect to our capital structure, management, operations, and
transactions with affiliated persons and other matters. Application of the
provisions of the Investment Company Act to us may materially and adversely
affect our business, prospects and operating results.
ITEM 2. PROPERTIES
Our primary offices are located in approximately 180,000 square feet of
space in Dallas, Texas, under a lease expiring in May 2010, and approximately
195,400 square feet of space in Irving, Texas, under leases expiring between
October 2000 and July 2003. We also lease space for our other offices in the
United States, Australia, Belgium, Brazil, Canada, China, Denmark, France,
Germany, India, Italy, Japan, Korea, Mexico, Singapore, South Africa, Sweden,
Taiwan and the United Kingdom. These leases expire at various dates through
2023.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded publicly on the Nasdaq National Market under the
symbol "ITWO." The following table lists the high and low per share sales prices
for our common stock as reported by the Nasdaq National Market for the periods
indicated. On January 14, 2000, our Board of Directors approved a two-for-one
split of our common stock. The stock split was paid as a 100% dividend on
February 17, 2000, to holders of record as of February 3, 2000. All share and
per share amounts included herein have been adjusted to reflect the stock split
as though it had occurred at the beginning of the periods presented.
HIGH LOW
------- ------
Fourth quarter of 1999..................................... $109.00 $18.69
Third quarter of 1999...................................... 24.19 13.06
Second quarter of 1999..................................... 21.78 8.88
First quarter of 1999...................................... 18.00 11.25
Fourth quarter of 1998..................................... 15.97 4.63
Third quarter of 1998...................................... 21.13 6.32
Second quarter of 1998..................................... 20.00 13.50
First quarter of 1998...................................... 16.41 12.53
As of March 20, 2000, there were 157,356,216 shares of our common stock
outstanding held by approximately 680 holders of record.
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain any earnings for use in our business and do not
anticipate paying any cash dividends in the foreseeable future. Future
dividends, if any, will be determined by our Board of Directors.
During 1999, we issued an aggregate of 4,190,112 shares of our common stock
to employees pursuant to exercises of stock options (with exercise prices
ranging from $0.0044 to $3.03 per share) under our stock option plans which were
deemed exempt from registration under Section 5 of the Securities Act of 1933 in
reliance upon Rule 701 thereunder. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to, or for sale in connection with, any
distribution thereof and appropriate legends were affixed to the share
certificates issued in each such transaction.
On December 10, 1999, we issued an aggregate principal amount of $350
million of our 5 1/4% convertible subordinated notes due 2006, which were sold
at par less an underwriting discount of 2.75% of the principal amount of the
notes. The net proceeds of this offering, after giving effect to discounts,
commissions, premiums and expenses, were approximately $339.9 million. These
securities were issued and sold to Goldman, Sachs & Co., Morgan Stanley & Co.
Incorporated and Credit Suisse First Boston Corporation, as the initial
purchasers, in reliance on the exemption from registration under the Securities
Act of 1933, as amended provided by Section 4(2) thereof. In connection with
this transaction, each of the initial purchasers represented that it was a
"qualified institutional buyer" within the meaning of the Securities and
Exchange Act of 1934. The notes are convertible at the option of the holder into
shares of common stock at a conversion price of approximately $75.99 per share
at any time until maturity. The notes are traded on the Private Offerings,
Resales and Trading through Automated Linkages (PORTAL) Market of the National
Association of Securities Dealers, Inc. We do not intend to apply for listing of
the notes on any securities exchange or for inclusion of the notes in any
automated quotation system.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes included elsewhere in this report. The following statements of operations
data for the years ended December 31, 1997, 1998 and 1999, and the balance sheet
data as of December 31, 1998 and 1999, have been derived from consolidated
financial statements which have been audited by Arthur Andersen LLP, independent
public accountants, as set forth in their report included elsewhere in this
document. The statement of operations data for the year ended December 31, 1996,
and the balance sheet data as of December 31, 1996, and 1997, have been derived
from consolidated financial statements which have been audited by Arthur
Andersen LLP. The statement of operations data for the year ended December 31,
1995, and the balance sheet data as of December 31, 1995, have been derived from
unaudited consolidated financial statements. Amounts shown are in thousands,
except per share data.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses..................... $ 24,162 $ 62,063 $141,766 $234,316 $352,597
Services.............................. 10,837 30,569 58,218 91,726 147,893
Maintenance........................... 3,462 8,881 21,792 43,115 70,620
-------- -------- -------- -------- --------
Total revenues................ 38,461 101,513 221,776 369,157 571,110
-------- -------- -------- -------- --------
Costs and expenses:
Cost of software licenses............. 390 260 2,746 7,967 17,981
Cost of services and maintenance...... 7,601 21,761 48,422 77,459 125,934
Sales and marketing................... 10,487 35,484 77,071 129,978 194,752
Research and development.............. 8,503 23,559 57,392 94,199 132,278
General and administrative............ 5,286 11,108 24,984 38,191 53,188
In-process research and development
and acquisition-related
expenses(1)........................ -- 1,133 9,306 7,618 6,552
-------- -------- -------- -------- --------
Total costs and expenses...... 32,267 93,305 219,921 355,412 530,685
-------- -------- -------- -------- --------
Operating income........................ 6,194 8,208 1,855 13,745 40,425
Other income (expense) net.............. (167) 1,671 3,309 8,753 7,642
-------- -------- -------- -------- --------
Income (loss) before income taxes....... 6,027 9,879 5,164 22,498 48,067
Provision for income taxes.............. 2,054 4,705 6,916 17,279 24,552
-------- -------- -------- -------- --------
Net income (loss)....................... $ 3,973 $ 5,174 $ (1,752) $ 5,219 $ 23,515
======== ======== ======== ======== ========
Net income (loss) per share............. $ 0.04 $ 0.04 $ (0.01) $ 0.04 $ 0.16
======== ======== ======== ======== ========
Net income (loss) per share, assuming
dilution.............................. $ 0.03 $ 0.04 $ (0.01) $ 0.03 $ 0.14
======== ======== ======== ======== ========
Weighted average common shares
outstanding........................... 90,656 119,580 128,884 143,588 150,419
Weighted average common shares
outstanding, assuming dilution........ 121,788 136,232 128,884 157,060 167,839
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................... $ 8,122 $ 59,694 $151,889 $155,998 $579,391
Working capital......................... 7,408 62,636 167,877 182,778 585,039
Total assets............................ 28,251 113,546 264,923 344,808 861,549
Total debt.............................. -- 600 2,114 5,032 350,000
Total stockholders' equity.............. 10,378 75,236 192,964 228,986 332,168
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- ---------------
(1) We incurred acquisition-related expenses related to business combinations of
$1.1 million in 1996, $9.3 million in 1997, $7.6 million in 1998 and $6.6
million in 1999, including write-offs of in-process research and development
of $1.1 million in 1996, $4.6 million in 1997, $4.7 million in 1998 and $3.3
million in 1999. The remaining costs included amortization of goodwill and
acquired technology and investment banking, legal and accounting fees and
expenses. Excluding these expenses, net income and net income per share,
assuming dilution, would have been $6.3 million and $0.05 per share in 1996,
$5.0 million and $0.03 per share in 1997, $12.8 million and $0.08 per share
in 1998, and $30.1 million and $0.18 per share in 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis below contains forward-looking statements,
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, that involve risks and uncertainties,
such as statements of our plans, objectives, expectations and intentions. Such
forward-looking statements generally are accompanied by words such as "plan,"
"estimate," "expect," "believe," "should," "would," "could," "anticipate," "may"
or other words that convey uncertainty of future events or outcomes. The
forward-looking statements in this discussion and analysis are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The section above under Part I, Item I entitled "Factors That May Affect
Future Results" sets forth certain factors that could cause our actual future
results to differ materially from those statements.
OVERVIEW
i2 is a leading global provider of intelligent eBusiness solutions that
help enterprises optimize business processes both internally and among trading
partners. Our solutions enable enterprises to significantly improve
efficiencies, collaborate with suppliers and customers, respond to market
demands and engage in dynamic business interactions over the Internet. Our
solutions consider the real conditions of companies to optimize key business
processes -- from product design to customer relationships. We have recently
launched TradeMatrix, a robust platform of business-to-business solutions,
services and marketplaces, which will allow customers, partners, suppliers and
service providers to do business together in real time. TradeMatrix offers a
full breadth of services that include planning, procurement, commerce,
fulfillment, customer care, retail, strategic sourcing and product development.
Our RHYTHM product suite principally includes solutions for supply chain
management, customer management, product lifecycle management, inter-process
planning and strategic planning, which provide the basis for these value-added
services offered to marketplace participants. We recently have signed agreements
to develop and host public and private Internet-based electronic marketplaces
with our customers and partners in the automotive, aerospace, high-tech,
softgoods and consumer packaged goods industries. Our RHYTHM software
applications, along with new software solutions and services designed
specifically for the TradeMatrix environment, are used to power these electronic
marketplaces. We also provide services such as consulting, training and
maintenance in support of these offerings.
In July 1999, we acquired Sales Marketing Administration Research Tracking
Technologies, Inc., or SMART. Under the terms of the acquisition agreement, we
agreed to issue up to 4.2 million shares of common stock for all of the
outstanding capital stock and options of SMART. In connection with the SMART
acquisition, we incurred expenses of $2.1 million that included, among other
things, investment, legal and accounting fees and expenses. The transaction was
accounted for as a pooling-of-interests. Accordingly, our financial statements
include the financial position, results of operations and cash flows of SMART
for all periods presented.
All share and per share amounts in this Form 10-K have been adjusted to
reflect a two-for-one stock split of our common stock effected as a 100%
dividend on February 17, 2000.
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RECENT DEVELOPMENTS
On March 12, 2000, we entered into a definitive agreement to acquire Aspect
Development, Inc. ("Aspect"), a developer of collaborative solutions for
business-to-business marketplaces. Pursuant to the agreement, we will exchange
all of the outstanding capital stock of Aspect and will assume all outstanding
stock options of Aspect, for approximately 44.9 million shares of our common
stock and options. The transaction will be accounted for as a purchase, is
subject to regulatory and i2 and Aspect stockholder approvals, and is expected
to close in the third quarter of this year.
Also on March 12, 2000, we entered into a definitive agreement to acquire
SupplyBase, Inc. ("SupplyBase"), a developer of interactive database products,
services and supply chain management tools. Under the agreement, we will issue
approximately 1.8 million shares of our common stock for all of the outstanding
capital stock and stock options of SupplyBase. The transaction will be accounted
for as a purchase, is subject to regulatory approval and SupplyBase stockholder
approval, and is expected to close in the second quarter of this year.
These strategic acquisitions will result in substantial one-time charges
along with ongoing substantial amortization of intangibles to our earnings.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of total revenues represented by certain items reflected in our consolidated
statements of operations:
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ------ ------
Revenues:
Software licenses......................................... 63.9% 63.5% 61.7%
Services.................................................. 26.3 24.8 25.9
Maintenance............................................... 9.8 11.7 12.4
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
Costs and expenses:
Cost of software licenses................................. 1.2 2.2 3.1
Cost of services and maintenance.......................... 21.8 21.0 22.1
Sales and marketing....................................... 34.8 35.2 34.1
Research and development.................................. 25.9 25.5 23.2
General and administrative................................ 11.3 10.3 9.3
In-process research and development and
acquisition-related expenses........................... 4.2 2.1 1.1
----- ----- -----
Total costs and expenses.......................... 99.2 96.3 92.9
----- ----- -----
Operating income............................................ 0.8 3.7 7.1
Other income, net........................................... 1.5 2.4 1.3
----- ----- -----
Income before income taxes.................................. 2.3 6.1 8.4
Provision for income taxes.................................. 3.1 4.7 4.3
----- ----- -----
Net income (loss)........................................... (0.8)% 1.4% 4.1%
===== ===== =====
Revenues
Our revenues consist of software license revenues, service revenues and
maintenance revenues. Software license revenues consist of sales of software
licenses which, for periods subsequent to December 31, 1997, are recognized in
accordance with the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." Under SOP
97-2, software license revenues are recognized upon execution of a contract and
delivery of software, provided that the license fee is fixed and determinable,
no significant production, modification or customization of the software is
required and collection is considered
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probable by management. For periods prior to December 31, 1997, software license
revenues were recognized in accordance with SOP 91-1, "Software Revenue
Recognition." Under SOP 91-1, software license revenues were recognized upon
execution of a contract and shipment of the software, provided that no
significant vendor obligations remained outstanding, amounts were due within one
year and collection was considered probable by management. The application of
SOP 97-2 did not have a material impact on our consolidated financial statements
for the year ended December 31, 1998. In 1999, software license revenues were
recognized in accordance with SOP 97-2, as modified by SOP 98-9, "Modification
of SOP 97-2, Software Revenue Recognition with respect to Certain Transactions."
Service revenues primarily are derived from fees for implementation, consulting
and training services and are recognized as the services are performed.
Maintenance revenues are derived from customer support agreements generally
entered into in connection with initial license sales and subsequent renewals.
Maintenance revenues are recognized ratably over the term of the maintenance
period. Payments for maintenance fees are generally made in advance.
Total revenues increased 54.7% to $571.1 million in 1999 from $369.2
million in 1998, and increased 66.5% in 1998 from $221.8 million in 1997. We
derive substantially all of our revenues from licenses associated with our
RHYTHM suite of software products, as well as related services and maintenance.
Software Licenses. Revenues from software licenses increased 50.5% to
$352.6 million in 1999 from $234.3 million in 1998, and increased 65.3% in 1998
from $141.8 million in 1997. Software license revenues constituted 61.7% of
total revenues in 1999, 63.5% in 1998 and 63.9% in 1997. The increases in the
dollar amount of software license revenues were due to increased customer
awareness of the potential benefits derived from deploying our software
solutions. To date, sales of software licenses have been derived principally
from direct sales to customers. Although we believe that direct sales will
continue to account for a majority of software license revenues, our strategy is
to increase the level of indirect sales activities. We expect that sales of our
software products through sales alliances, distributors, resellers and other
indirect channels will increase as a percentage of software license revenues.
However, our efforts to expand indirect sales may not be successful, or these
relationships may not continue in the future.
Services. Revenues from services increased 61.3% to $147.9 million in 1999
from $91.7 million in 1998, and increased 57.6% in 1998 from $58.2 million in
1997. Services revenues constituted 25.9% of total revenues in 1999, 24.8% in
1998, and 26.3% in 1997. The increases in the dollar amount of services revenues
were due primarily to an increase in the number of RHYTHM licenses sold and a
significant investment in our consulting organization as a result of the
increased demand for our solutions. The increases also were due to an increase
in the use of third-party consultants to provide implementation services to our
customers, which has allowed us to more rapidly penetrate international markets.
Service revenues as a percentage of total revenues have fluctuated, and are
expected to continue to fluctuate, on a period-to-period basis based upon the
demand for implementation, training and consulting services.
Maintenance. Revenues from maintenance increased 63.8% to $70.6 million in
1999 from $43.1 million in 1998, and increased 97.7% in 1998 from $21.8 million
in 1997. Maintenance revenues constituted 12.4% of total revenues in 1999, 11.7%
in 1998 and 9.8% in 1997. The increases in the dollar amount of maintenance
revenues were primarily due to the continued increase in the number of RHYTHM
licenses sold and a high percentage of maintenance agreement renewals. We expect
that maintenance revenues both in dollar amount and as a percentage of total
revenues will continue to increase from the levels achieved in 1999.
Concentration of Revenues. In 1999, one customer accounted for more than
10% of total revenues. While on an annual basis no individual customer accounted
for more than 10% of total revenues in 1998 or 1997, we generally derive a
significant portion of our software license revenues in each quarter from a
small number of relatively large sales. For example, in each quarter of 1999, in
the last three quarters of 1998 and in each quarter of 1997, one or more
customers individually accounted for at least 10% of total software license
revenues during that quarter. While we believe that the loss of any one of these
customers would not seriously harm our business, operating results or financial
condition, our inability to consummate one or more substantial license sales in
any future period could seriously harm our operating results for that period.
International Revenues. We recognized $181.2 million of revenues from
international sources in 1999, representing approximately 32% of total revenues,
$73.2 million in 1998, representing approximately 20% of
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total revenues, and $66.7 million in 1997, representing approximately 30% of
total revenues. Our revenues from international sources were generated primarily
from customers located in Asia, Canada and Europe. Revenues generated from the
European region in 1999, 1998 and 1997 were 16%, 11% and 15% of total revenues,
respectively. The increase in revenues from international sources as a
percentage of total revenues in 1999 was due primarily to increased levels of
sales execution from our international sales force and management team. We
believe that continued growth and profitability may require further expansion in
international markets. To increase the level of international sales, we have
utilized and may continue to utilize substantial resources to expand existing
international operations and establish additional international operations. We
cannot be certain that our investments in international operations will produce
desired levels of revenues or profitability.
Costs and Expenses
Cost of Software Licenses. Cost of software licenses consists primarily of:
- commissions paid to third parties in connection with joint marketing and
other related agreements;
- royalty fees associated with third-party software included with sales of
RHYTHM;
- the cost of user documentation; and
- the cost of reproduction and delivery of the software.
Cost of software licenses was $18.0 million in 1999, representing 5.1% of
software license revenues, $8.0 million in 1998, representing 3.4% of software
license revenues, and $2.7 million in 1997, representing 1.9% of software
license revenues. The increases in cost of software licenses were due primarily
to an increase in commissions to third parties in connection with joint
marketing and other related agreements and the amount of royalty fees associated
with third-party software included with sales of RHYTHM. We expect the cost of
software licenses to vary in the future depending upon the level of third-party
services.
Cost of Services and Maintenance. Cost of services and maintenance was
$125.9 million in 1999, representing 57.6% of total services and maintenance
revenues, $77.5 million in 1998, representing 57.4% of total services and
maintenance revenues, and $48.4 million in 1997, representing 60.5% of total
services and maintenance revenues. The dollar increases in cost of services and
maintenance were due to an increase in the number of consultants, product
support and training staff and the increased use of third-party consultants to
provide implementation services. In addition, consulting and support centers
were established and expanded in Europe, Canada and Asia in recent years. We
expect to continue to increase the number of our consulting, product support and
training personnel in the foreseeable future as a means to maintain and
strengthen our position in different geographic and vertical markets.
Consequently, the cost of services and maintenance as a percentage of total
services and maintenance revenues may increase in the future. To the extent that
our revenues do not increase at anticipated rates, the hiring of additional
personnel could seriously harm our profit margins.
Sales and Marketing. Sales and marketing expenses were $194.8 million in
1999, representing 34.1% of total revenues, $130.0 million in 1998, representing
35.2% of total revenues, and $77.1 million in 1997, representing 34.8% of total
revenues. The increases in the dollar amount of sales and marketing expenses
were due to continued expansion of our direct sales force, increased sales
commissions as a result of the higher revenue levels, continued investment in
strengthening our international selling presence and increased marketing and
promotional activities as a result of our expanded suite of intelligent
eBusiness solutions. We expect these expenses will continue to increase in
absolute dollars and may increase as a percentage of total revenues.
Research and Development. Research and development expenses were $132.3
million in 1999, representing 23.2% of total revenues, $94.2 million in 1998,
representing 25.5% of total revenues, and $57.4 million in 1997, representing
25.9% of total revenues. The increases in the dollar amount of research and
development expenses were due to the hiring of additional research and
development personnel and other related costs incurred to support our growing
solution footprint. We expect that the dollar amount of research and
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development expenses will increase as we continue to invest in developing new
products, applications and product enhancements for existing products and
intelligent eBusiness solutions.
In accordance with Statement of Financial Accounting Standards, or SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers. To
date, the establishment of technological feasibility of our products and general
release of such software have substantially coincided. As a result, software
development costs qualifying for capitalization have been insignificant and we
have not capitalized any software development costs.
General and Administrative. General and administrative expenses were $53.2
million in 1999, representing 9.3% of total revenues, $38.2 million in 1998,
representing 10.3% of total revenues, and $25.0 million in 1997, representing
11.3% of total revenues. The increases in the dollar amount of general and
administrative expenses were primarily the result of increased staffing and
related costs associated with the growth of our business. The decrease in
general and administrative expenses as a percentage of total revenues was due
primarily to the increase in revenues and our ability to leverage our base of
resources to support a larger organization. We expect that the dollar amount of
general and administrative expenses will continue to increase in the foreseeable
future.
In-Process Research and Development and Acquisition-Related Expenses. In
the recent past, we have sought to expand the depth of our current product
offerings through various technology or business acquisitions. Some of these
acquisitions involve technology that is not yet determined to be technologically
feasible and has no alternative future use in its then-current stage of
development. In such instances, in accordance with appropriate accounting
guidelines, the portion of the purchase price allocated to in-process research
and development is expensed immediately upon acquisition. Further, the final
purchase price on certain transactions is ultimately dependent upon certain
events such as payouts based on the attainment of specified revenue targets for
the acquired products or technologies. Such future earnouts, if any, may be
considered as additional costs to acquire the company. We acquired SMART in
1999, InterTrans Logistics Solutions Limited, or ITLS, in 1998 and Think Systems
Corporation and Optimax Systems Corporation in 1997. These acquisitions were
each accounted for as a pooling-of-interests. Accordingly, our consolidated
financial statements include the financial position, results of operations and
cash flows of these companies. Additionally, in 1999, 1998 and 1997, we
completed other business acquisitions which were accounted for using the
purchase method.
We incurred $6.6 million in 1999, $7.6 million in 1998 and $9.3 million in
1997 in certain acquisition-related expenses, of which $3.3 million in 1999,
$4.7 million in 1998 and $4.6 million in 1997 represented the write-off of
in-process research and development. The remaining costs primarily consisted of
investment banking, legal and accounting fees and expenses and amortization of
intangibles. See Note 3 in the Notes to Consolidated Financial Statements for
further discussion.
Other Income, Net
Other income, net was $7.6 million in 1999, representing 1.3% of total
revenues, $8.8 million in 1998, representing 2.4% of total revenues, and $3.3
million in 1997, representing 1.5% of total revenues. Other income, net includes
interest income, interest expense and bank fees, foreign currency gains and
losses and miscellaneous income. Included in other income, net for 1998 was a
gain of $1.8 million on the sale of SMART's hosting business.
Provision for Income Taxes
We recorded income tax expense of $24.6 million in 1999, $17.3 million in
1998 and $6.9 million in 1997. Our effective income tax rates were 51.1% in
1999, 76.8% in 1998 and 133.9% in 1997. The fluctuations in our effective income
tax rates were primarily due to the non-deductibility of certain subsidiaries'
losses and the in-process research and development and certain other
acquisition-related expenses. Excluding the effects of
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certain subsidiaries' losses, the in-process research and development and
certain other acquisition-related expenses, our effective tax rate was 38.1% in
1999, 38.5% in 1998 and 34.2% in 1997.
Net Income Per Share
Net income per share is calculated in accordance with SFAS No. 128,
"Earnings Per Share." This method requires calculation of both net income per
share and net income per share, assuming dilution. Net income per share excludes
the potentially dilutive effect of common stock equivalents such as stock
options, while net income per share, assuming dilution includes such potentially
dilutive effects. Future weighted-average shares outstanding calculations could
be impacted by the following factors:
- the ongoing issuance of common stock associated with stock option
exercises;
- the issuance of common shares associated with our employee stock purchase
program;
- any fluctuations in our stock price, which could cause changes in the
number of common stock equivalents included in the net income per share,
assuming dilution computation;
- the issuance of common stock to effect business combinations should we
enter into such transactions;
- the issuance of common stock or warrants to effect joint marketing, joint
development, or other such arrangements should we enter into such
transactions; and
- assumed or actual conversions of debt into common stock with respect to
the convertible notes issued in December 1999.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations and met our capital
expenditure requirements primarily through cash flows from operations and sales
of debt and equity securities. Our liquidity and financial position consisted of
$585.0 million of working capital at December 31, 1999, as compared to $182.8
million at December 31, 1998. The increases in working capital were primarily
related to an increase in cash, cash equivalents and short-term investments to
$579.4 million at December 31, 1999 from $156.0 million at December 31, 1998.
The increase in cash, cash equivalents and short-term investments is primarily
due to the net proceeds from our convertible note offering in December 1999 of
$339.9 million. Cash flows from operations were $86.6 million in 1999, $13.9
million in 1998 and $3.9 million in 1997. Operating cash flows increased in 1999
as compared to 1998 and increased in 1998 as compared to 1997 primarily due to
an increase in net income, deferred revenues, accrued liabilities and the tax
benefit from stock option activity. The tax benefit from stock option activity
is primarily the result of disqualifying dispositions of stock acquired under
our stock plans.
Accounts receivable, net of allowance for doubtful accounts, increased to
$157.6 million at December 31, 1999 from $127.7 million at December 31, 1998
primarily due to strong fourth quarter revenues in 1999. Days' sales outstanding
was 83 days and 99 days for the quarter ending December 31, 1999 and the year
ending December 31, 1999, respectively. Accounts receivable and days' sales
outstanding can fluctuate for a variety of reasons, including:
- the amount and timing of revenues earned;
- our collection experience;
- negotiated payment terms;
- the amount of receivables generated from international customers which
generally have longer payment terms compared to customers in the U.S.;
and
- the number of large sales for which some amounts may not be due upon
execution of the contract.
We believe that the allowance for doubtful accounts at December 31, 1999 is
adequate to cover any collection difficulties with respect to accounts
receivable. However, a significant portion of our accounts
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receivable are derived from sales of large licenses, often to new customers with
whom we do not have a payment history. Accordingly, there can be no assurance
that the allowance will be adequate to cover any receivables that are later
determined to be uncollectible, particularly if one or more large receivables
become uncollectible.
Cash used in investing activities, primarily for capital expenditures and
short-term investments, was $65.4 million for 1999 as compared to $102.7 million
for 1998 and $18.0 million for 1997. Cash used in investing activities was
higher in 1998 primarily due to the January 1998 investment of the net proceeds
from our public offering at the end of 1997, at which time the proceeds were
invested primarily in financial instruments classified as cash equivalents. At
December 31, 1999, we did not have any material commitments for capital
expenditures.
Cash provided by financing activities was $371.7 million for 1999 as
compared to $14.2 million for 1998 and $109.8 million for 1997. Cash provided by
financing activities for 1999 includes the net proceeds of $339.9 million from
our convertible note offering in December 1999. Cash provided by financing
activities for 1997 includes the net proceeds of $89.4 million from our public
offering of common stock at the end of 1997.
On December 10, 1999, we issued an aggregate principal amount of $350
million of our 5 1/4% convertible subordinated notes due 2006, which were sold
at par less an underwriting discount of 2.75% of the principal amount of the
notes. The net proceeds of this offering, after giving effect to discounts,
commissions, premiums and expenses, was approximately $339.9 million. The notes
are convertible at the option of the holder into shares of common stock at a
conversion price of approximately $75.99 per share at any time prior to
maturity. The net proceeds from the offering are being used for working capital
and other general corporate purposes.
In August 1999, we entered into one-year revolving credit facilities
agreement with an aggregate borrowing capacity of $30.0 million. The agreement
is unsecured and contains customary restrictive covenants, including covenants
requiring us to maintain certain financial ratios. We are not subject to a
borrowing base limitation and borrowings thereunder bear interest at LIBOR plus
0.75% to 1.75% depending on certain cash ratios. The maximum borrowings
available under the facility were reduced by the value of outstanding letters of
credit issued by the lender on our behalf, $14.2 million of which were
outstanding at December 31, 1999. At December 31, 1999, there were no borrowings
outstanding under this agreement and we were in compliance with all covenants.
We may in the future pursue additional acquisitions of businesses, products
and technologies (in addition to the pending Aspect and SupplyBase
transactions), or enter into joint venture arrangements, that could complement
or expand our business. Any material acquisition or joint venture could result
in a decrease to our working capital depending on the amount, timing and nature
of the consideration to be paid.
We believe that existing cash and cash equivalent balances, short-term
investment balances, available borrowings under revolving credit agreements and
potential cash flows from operations will satisfy our working capital and
capital expenditure requirements for the next 12 months. However, any material
acquisitions of complementary businesses, products or technologies or joint
venture arrangements could require us to obtain additional equity or debt
financing. There can be no assurance that such financing would be available on
acceptable terms, if at all.
YEAR 2000 ISSUES
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish 21st century dates from 20th
century dates due to the two-digit date fields used by many computer systems and
software programs. This inability to distinguish whether "00" means 1900 or
2000, may have resulted in failures or the creation of erroneous results. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished leading up to 2000 was
effective and prevented such problems.
We believe that current versions of our software products, including
software licensed from third parties, are Year 2000 compliant. However, some
customers may be running earlier versions of the software products developed by
companies that we have acquired that may not be Year 2000 compliant, and we have
encouraged
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those customers to migrate to current product versions. Moreover, our products
are often integrated into enterprise systems involving complicated software
products developed by other vendors. Year 2000 problems inherent in a customer's
transactional software programs might significantly limit that customer's
ability to realize the intended benefits of our products.
We are not currently aware of any material operational issues or costs
associated with preparing and maintaining our computer and technology systems
for the Year 2000. However, we may experience material unanticipated problems
and costs caused by undetected errors or defects, which could seriously harm our
business. These include, without limitation, delay or loss of revenues,
diversion of development resources, damage to our reputation, increased service
and warranty costs, or liability from our customers. In addition, some experts
have predicted significant litigation against software vendors regarding Year
2000 compliance issues. Due to the unprecedented nature of any existing or
future litigation, it is uncertain whether or to what extent we may be impacted.
We have not been a party to any litigation or arbitration proceeding to date
involving products or services related to Year 2000 issues. However, in the
future, we may need to defend our products or services in those proceedings, or
to negotiate resolutions of claims based on Year 2000 issues. The costs of
defending and resolving Year 2000-related disputes, and any liability for Year
2000-related damages, could harm our business, operating results and financial
condition.
We do not currently have any information concerning the Year 2000
compliance status of our customers. Our current or future customers may incur
significant expenses to achieve Year 2000 compliance. If our customers are not
Year 2000 compliant, they may experience material costs to remedy problems, or
they may face litigation costs. In either case, Year 2000 issues could reduce or
eliminate the budgets that current or potential customers could have for or
delay purchases of our products and services. As a result, our business could be
seriously harmed. We are also subject to external forces that might generally
affect industry and commerce, such as utility or transportation company Year
2000 compliance failure interruptions.
To date, we have incurred approximately $433,000 of expenses in compliance
and remediation work which was funded from operating cash flows. We may incur
additional costs related to the Year 2000 plan for administrative personnel to
finish managing the project, outside contractor assistance, technical support
for our products, product engineering and customer satisfaction. Computer
experts have warned that there may still be residual consequences of the change
in centuries. Any such difficulties could result in a decrease in sales of our
products, an increase in the allocation of resources to address our customers'
problems with the Year 2000 without additional revenue commensurate with such
resource dedication, or an increase in litigation costs relating to losses
suffered by our customers due to Year 2000 problems.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, issued SFAS No.
133. SFAS No. 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS No. 133 requires that all
derivatives be recognized at fair value in the balance sheet, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of hedging
relationship that exists. SFAS No. 133 will be effective for fiscal years
beginning after June 15, 2000. We do not expect SFAS No. 133 to have a material
effect on our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Foreign Exchange. Our revenues originating outside the U.S. in 1999, 1998
and 1997 were 32%, 20% and 30% of total revenues, respectively. Revenues
generated from the European region in 1999, 1998 and 1997 were 16%, 11% and 15%
of total revenues, respectively. International sales are made mostly from our
foreign sales subsidiaries in the local countries and are typically denominated
in U.S. dollars. Any gains or losses from hedging activities have not been
material to date. Our subsidiaries incur most of their expenses in the local
currency.
Our international business is subject to risks typical of an international
business, including, but not limited to: differing economic conditions, changes
in political climate, differing tax structures, other
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31
regulations and restrictions and foreign exchange rate volatility. Accordingly,
our future results could be materially adversely impacted by changes in these or
other factors.
Interest Rates. We invest our cash in a variety of financial instruments,
including bank time deposits, money market funds and taxable and tax-advantaged
variable rate and fixed rate obligations of corporations, municipalities, and
local, state and national governmental entities and agencies. These investments
are denominated in U.S. dollars. Cash balances in foreign currencies overseas
are operating balances and are invested in short-term time deposits of the local
operating bank.
Interest income on our investments is presented in "Other income, net." We
account for our investment instruments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." All of the
cash equivalents and short-term investments are treated as available-for-sale
under SFAS No. 115.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates, or we may suffer losses
in principal if forced to sell securities which have seen a decline in market
value due to changes in interest rates. Our investment securities are held for
purposes other than trading. While certain of our investment securities had
maturities in excess of one year, we intend to liquidate such securities within
one year. The weighted-average interest rate on investment securities at
December 31, 1999 was 5.3%. The book value of securities held at December 31,
1999 approximates fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included in Part IV Item 14(a)(1)
and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Certain information required by Part III is omitted from this report
because we will file a definitive Proxy Statement pursuant to Regulation 14A
(the "Proxy Statement") no later than 120 days after the end of the fiscal year
covered by this report, and certain information to be included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
Proxy Statement under the sections captioned "Proposal 1 -- Election of
Directors, "Executive Compensation -- Directors and Executive Officers" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Principal Stockholders."
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Proxy Statement under the section captioned "Executive Compensation -- Certain
Transactions with Management."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Consolidated Financial Statements. The following consolidated
financial statements of i2 Technologies, Inc., are filed as part
of this Form 10-K on the pages indicated:
PAGE
---
Report of Independent Public Accountants.................... F-1
Consolidated Balance Sheets at December 31, 1998 and 1999... F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999............................ F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1998 and 1999................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999............................ F-5
Notes to Consolidated Financial Statements.................. F-6
2. Consolidated Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts............ S-1
Schedules other than the one listed above are omitted as the
required information is inapplicable or the information is
presented in the consolidated financial statements or related
notes.
3. Exhibits. The exhibits to this Form 10-K have been included only
with the copy of this Form 10-K filed with the Securities and
Exchange Commission. Copies of individual exhibits will be
furnished to stockholders upon written request to i2 and payment
of a reasonable fee.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1* -- Agreement and Plan of Reorganization, dated May 12, 1999,
by and among i2, Intelligent Acquisition Corp. and Sales
Marketing Administration Tracking Technologies, Inc.
(filed as Exhibit 2.1 to i2's Registration Statement on
Form S-4 (Reg. No. 333-79681)(the "Form S-4").
2.2* -- Agreement and Plan of Reorganization, dated March 12,
2000, by and among i2, Hoya Merger Corp. and Aspect
Development, Inc. (filed as Exhibit 1 to the Schedule 13D
filed by i2 on March 22, 2000 with respect to Aspect
Development, Inc. and incorporated herein by reference).
2.3 -- Agreement and Plan of Reorganization, dated March 12,
2000, by and among i2, Starfish Merger Corporation and
SupplyBase, Inc. (The schedules and exhibits which are
referenced in the table of contents and elsewhere in such
Agreement are hereby incorporated by reference. Such
schedules and exhibits which are not included as exhibits
to this Form 10-K will be furnished supplementally to the
Commission upon request.)
3.1* -- Restated Certificate of Incorporation (filed as Exhibit
3.1 to i2's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999)
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33
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.2* -- Amended and Restated Bylaws (filed as Exhibit 3.1 to i2's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998)
4.1* -- Specimen Common Stock certificate (filed as Exhibit 4.1
to i2's Registration Statement on Form S-1 (Reg No.
333-1752) (the "Form S-1"))
4.2* -- Indenture, dated as of December 10, 1999 between i2 and
Chase Bank of Texas, National Association, as trustee,
including the form of note set forth in Section 2.2
thereof (filed as Exhibit 4.2 to i2's Registration
Statement on Form S-3 (Reg. No. 333-31342) (the "Form
S-3"))
4.3* -- Registration Rights Agreement, dated as of December 10,
1999 between i2 and Goldman, Sachs & Co., Morgan Stanley
Dean Witter and Credit Suisse First Boston (filed as
Exhibit 4.3 to the Form S-3)
10.1* -- Form of Registration Rights Agreement, dated April 1,
1996, among i2, Sanjiv S. Sidhu and Sidhu-Singh Family
Investments, Ltd. (filed as Exhibit 10.2 to the Form S-1)
10.2* -- 1995 Stock Option/Stock Issuance Plan (filed as Exhibit
99.7 to i2's Registration Statement on Form S-8 (Reg. No.
333-85791) (the "1999 S-8"))
10.3* -- Form of Indemnification Agreement between i2 and each of
its officers and directors (filed as Exhibit 10.4 to the
Form S-1)
10.4* -- Form of Employee Proprietary Information Agreement
between i2 and each of its employees (filed as Exhibit
10.9 to the Form S-1)
10.5* -- Lease Agreement, dated July 14, 1995, between i2 and TRST
Irving, Inc. (filed as Exhibit 10.10 to the Form S-1)
10.6* -- Lease Agreement, dated June 29, 1990, as amended, between
the i2 and Park West E-2 Associates (filed as Exhibit
10.11 to the Form S-1)
10.7* -- Second Amendment of Lease Agreement between i2 and TRST
Irving, Inc. dated as of February 23, 1996 (filed as
Exhibit 10.1 to i2's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996)
10.8* -- Third Amendment to Lease Agreement between i2 and TRST
Irving, Inc. dated as of July 25, 1996 (filed as Exhibit
10.1 to i2's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (the "September 1996
10-Q"))
10.9* -- Fifth Amendment to Lease Agreement between i2 and
Principal Mutual Life Insurance Company dated as of
August 29, 1996 (filed as Exhibit 10.2 to the September
1996 10-Q)
10.10* -- Fourth Amendment to Lease Agreement between i2 and TRST
Irving, Inc. dated as of December 19, 1996 (filed as
Exhibit 10.17 to i2's Annual Report on Form 10-K for the
year ended December 31, 1996)
10.11* -- Employee Stock Purchase Plan (filed as Exhibit 99.1 to
the 1999 Form S-8)
10.12* -- International Employee Stock Purchase Plan (filed as
Exhibit 99.4 to the 1999 Form S-8)
10.13* -- Think Systems Corporation 1996 Incentive Stock Plan
(filed as Exhibit 99.3 to i2's Registration STATEMENT on
Form S-8 (Reg. No. 333-28147) (the "Think/ Optimax S-8"))
10.14* -- Think Systems Corporation 1997 Incentive Stock Plan
(filed as Exhibit 99.1 to the Think/Optimax S-8)
10.15* -- Optimax Systems Corporation Stock Option Plan (filed as
Exhibit 99.10 to the Think/Optimax S-8)
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34
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.16* -- InterTrans Logistics Solutions Limited 1997 Stock
Incentive Plan (filed as Exhibit 99.7 to i2's
Registration Statement on Form S-8 (Reg. No. 333-53667))
10.17* -- SMART Technologies, Inc., 1996 Stock Option/Stock
Issuance Plan (filed as Exhibit 99.13 to 1999 Form S-8)
10.18* -- Lease with One Colinas Crossing dated March 24, 1999
between Colinas Crossing, LP and i2 (filed as Exhibit
99.6 to i2's Current Report on Form 8-K dated November
30, 1999 (the "November 1999 8-K"))
10.19* -- Lease with Two Colinas Crossing dated August 3, 1999
between Colinas Crossing, LP and i2 (filed as Exhibit
99.7 to the November 1999 8-K)
16.1* -- Letter Regarding Change in Certifying Accountant (filed
as Exhibit 16.1 to i2's Current Report on Form 8-K filed
on April 21, 1999)
21.1 -- List of subsidiaries
23.1 -- Consent of Arthur Andersen LLP
24.1 -- Power of Attorney, pursuant to which amendments to this
Form 10-K may be filed, is included on this signature
page contained in Part IV of this Form 10-K
27.1 -- Financial Data Schedule for the year ended December 31,
1999
- ---------------
* Incorporated herein by reference to the indicated filing
(b) Reports on Form 8-K.
We filed two reports on Form 8-K (Item 5) on November 30, 1999, (i) one
containing a press release announcing our intention to raise capital through a
private offering of convertible subordinated notes and (ii) the other providing
selected financial data, management's discussion and analysis of financial
condition and results of operations and consolidated financial statements for
the July 1999 acquisition of SMART.
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
I2 TECHNOLOGIES, INC.
Dated: March 21, 2000
By: /s/ WILLIAM M. BEECHER
----------------------------------
William M. Beecher
Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby severally constitutes and appoints Sanjiv S. Sidhu and
William M. Beecher, and each or any of them, his true and lawful
attorneys-in-fact and agents, each with the power of substitution and
resubstitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ SANJIV S. SIDHU Chairman of the Board March 21, 2000
- ----------------------------------------------------- and Chief Executive Officer
Sanjiv S. Sidhu (Principal executive officer)
/s/ WILLIAM M. BEECHER Executive Vice President March 21, 2000
- ----------------------------------------------------- and Chief Financial Officer
William M. Beecher (Principal financial officer)
/s/ NANCY F. BRIGHAM Controller (Principal March 21, 2000
- ----------------------------------------------------- accounting officer)
Nancy F. Brigham
/s/ HARVEY B. CASH Director March 21, 2000
- -----------------------------------------------------
Harvey B. Cash
/s/ THOMAS J. MEREDITH Director March 21, 2000
- -----------------------------------------------------
Thomas J. Meredith
/s/ SANDEEP R. TUNGARE Director March 21, 2000
- -----------------------------------------------------
Sandeep R. Tungare
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36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
i2 Technologies, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of i2 Technologies,
Inc. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the three years ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of i2 Technologies, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for the three years ended December 31, 1999 in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
January 14, 2000 (except with respect to the matters
discussed in the second paragraph of Note 8 and
Note 13, as to which the dates are February 17,
2000 and March 12, 2000, respectively)
F-1
37
I2 TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
DECEMBER 31,
-------------------
1998 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 62,611 $454,585
Short-term investments.................................... 93,387 124,806
Accounts receivable, net of allowance for doubtful
accounts of $8,551 and $17,474, respectively........... 127,677 157,586
Prepaids and other current assets......................... 9,407 10,607
Deferred income taxes..................................... 5,070 15,868
-------- --------
Total current assets.............................. 298,152 763,452
Furniture and equipment, net................................ 31,628 50,483
Deferred income taxes and other assets...................... 15,028 47,614
-------- --------
Total assets...................................... $344,808 $861,549
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,675 $ 20,039
Accrued liabilities....................................... 23,301 40,803
Accrued compensation and related expenses................. 21,924 40,443
Short-term debt........................................... 2,032 --
Notes payable to stockholders............................. 3,000 --
Deferred revenue.......................................... 51,229 72,617
Income taxes payable...................................... 2,213 4,511
-------- --------
Total current liabilities......................... 115,374 178,413
Deferred income taxes....................................... 448 968
Long-term debt.............................................. -- 350,000
-------- --------
Total liabilities................................. 115,822 529,381
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000 shares
authorized, none issued................................ -- --
Common stock, $0.00025 par value, 500,000 shares
authorized, 146,500 and 155,412 shares issued and
outstanding, respectively.............................. 36 39
Additional paid-in capital................................ 214,922 297,879
Accumulated other comprehensive loss...................... (833) (4,126)
Retained earnings......................................... 14,861 38,376
-------- --------
Total stockholders' equity........................ 228,986 332,168
-------- --------
Total liabilities and stockholders' equity........ $344,808 $861,549
======== ========
See accompanying notes.
F-2
38
i2 TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Revenues:
Software licenses......................................... $141,766 $234,316 $352,597
Services.................................................. 58,218 91,726 147,893
Maintenance............................................... 21,792 43,115 70,620
-------- -------- --------
Total revenues.................................... 221,776 369,157 571,110
Costs and expenses:
Cost of software licenses................................. 2,746 7,967 17,981
Cost of services and maintenance.......................... 48,422 77,459 125,934
Sales and marketing....................................... 77,071 129,978 194,752
Research and development.................................. 57,392 94,199 132,278
General and administrative................................ 24,984 38,191 53,188
In-process research and development and
acquisition-related expenses........................... 9,306 7,618 6,552
-------- -------- --------
Total costs and expenses.......................... 219,921 355,412 530,685
-------- -------- --------
Operating income............................................ 1,855 13,745 40,425
Other income, net........................................... 3,309 8,753 7,642
-------- -------- --------
Income before income taxes.................................. 5,164 22,498 48,067
Provision for income taxes.................................. 6,916 17,279 24,552
-------- -------- --------
Net income (loss)........................................... $ (1,752) $ 5,219 $ 23,515
======== ======== ========
Net income (loss) per share................................. $ (0.01) $ 0.04 $ 0.16
======== ======== ========
Net income (loss) per share, assuming dilution.............. $ (0.01) $ 0.03 $ 0.14
======== ======== ========
Weighted average common shares outstanding.................. 128,884 143,588 150,419
Weighted average common shares outstanding, assuming
dilution.................................................. 128,884 157,060 167,839
Comprehensive income (loss):
Net income................................................ $ (1,752) $ 5,219 $ 23,515
Foreign currency translation adjustments, net of income
tax.................................................... (277) (454) (3,293)
-------- -------- --------
Total comprehensive income (loss)........................... $ (2,029) $ 4,765 $ 20,222
======== ======== ========
See accompanying notes.
F-3
39
i2 TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL OTHER TOTAL
---------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL LOSS EARNINGS EQUITY
------- ------ ---------- ------------- -------- -------------
Balance at December 31, 1996....... 123,876 $30 $ 63,914 $ (102) $11,394 $ 75,236
Exercise of options and issuance
under stock purchase plan..... 6,050 2 4,416 -- -- 4,418
Common stock issued, net of
offering costs................ 8,004 2 89,427 -- -- 89,429
Tax benefit of stock options..... -- -- 10,106 -- -- 10,106
Amortization of deferred
compensation.................. -- -- 740 -- -- 740
Issuance of SMART preferred stock
which was exchanged for i2
common stock in merger........ 1,240 -- 15,064 -- -- 15,064
Foreign currency translation..... -- -- -- (277) -- (277)
Net loss......................... -- -- -- -- (1,752) (1,752)
------- --- -------- ------- ------- --------
Balance at December 31, 1997....... 139,170 34 183,667 (379) 9,642 192,964
Exercise of options and issuance
under stock purchase plan..... 7,176 2 11,278 -- -- 11,280
Shares issued in acquisition..... 154 -- 2,708 -- -- 2,708
Tax benefit of stock options..... -- -- 16,669 -- -- 16,669
Amortization of deferred
compensation.................. -- -- 600 -- -- 600
Foreign currency translation..... -- -- -- (454) -- (454)
Net income....................... -- -- -- -- 5,219 5,219
------- --- -------- ------- ------- --------
Balance at December 31, 1998....... 146,500 36 214,922 (833) 14,861 228,986
Exercise of options and issuance
under stock purchase plan..... 8,630 3 36,388 -- -- 36,391
Shares issued in acquisition..... 282 -- 4,800 -- -- 4,800
Tax benefit of stock options..... -- -- 41,329 -- -- 41,329
Amortization of deferred
compensation.................. -- -- 440 -- -- 440
Foreign currency translation..... -- -- -- (3,293) -- (3,293)
Net income....................... -- -- -- -- 23,515 23,515
------- --- -------- ------- ------- --------
Balance at December 31, 1999....... 155,412 $39 $297,879 $(4,126) $38,376 $332,168
======= === ======== ======= ======= ========
See accompanying notes.
F-4
40
i2 TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
-------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (1,752) $ 5,219 $ 23,515
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-off of in-process research and development....... 4,564 4,674 3,267
Depreciation and amortization.......................... 6,016 12,211 16,427
Provision for losses on receivables.................... 3,903 4,640 8,923
Amortization of deferred compensation.................. 740 600 440
Deferred income taxes.................................. (4,169) (10,709) (26,651)
Tax benefit from stock option exercises................ 10,106 16,669 41,329
Changes in operating assets and liabilities:
Accounts receivable, net............................. (43,818) (55,701) (38,832)
Prepaids and other assets............................ (2,871) (4,466) (10,196)
Accounts payable..................................... 2,790 3,843 8,182
Accrued liabilities.................................. 6,249 9,404 18,913
Accrued compensation and related expenses............ 11,452 5,808 17,362
Deferred revenue..................................... 11,728 19,485 21,388
Income taxes payable................................. (996) 2,213 2,493
-------- --------- --------
Net cash provided by operating activities......... 3,942 13,890 86,560
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable -- stockholders.......................... 1,000 -- --
Business acquisitions, net of acquired cash............... (4,826) (4,148) (500)
Purchases of furniture and equipment...................... (17,694) (19,712) (33,496)
Net (purchases) sales of short-term investments........... 3,493 (78,849) (31,419)
-------- --------- --------
Net cash used in investing activities............. (18,027) (102,709) (65,415)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit.................... 1,542 943 --
Payments on revolving line of credit...................... (885) (1,600) (2,032)
Proceeds from issuance of debt............................ 800 2,032 500
Payments on debt.......................................... (458) (1,457) (3,500)
Advances from stockholders, net........................... (65) 3,000 4,000
Payments on advances from stockholders.................... -- -- (4,000)
Issuance of SMART preferred stock which was exchanged for
i2 common stock in merger.............................. 15,064 -- --
Net proceeds from issuance of common stock................ 89,429 -- --
Net proceeds from issuance of convertible debt............ -- -- 339,875
Net proceeds from sale of common stock to employees and
exercise of stock options.............................. 4,418 11,279 36,831
-------- --------- --------
Net cash provided by financing activities......... 109,845 14,197 371,674
-------- --------- --------
Effect of exchange rates on cash.......................... (72) (118) (845)
Net increase (decrease) in cash and cash equivalents........ 95,688 (74,740) 391,974
Cash and cash equivalents at beginning of period............ 41,663 137,351 62,611
-------- --------- --------
Cash and cash equivalents at end of period.................. $137,351 $ 62,611 $454,585
======== ========= ========
See accompanying notes.
F-5
41
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
i2 is a leading global provider of intelligent eBusiness solutions that
help enterprises optimize business processes both internally and among trading
partners. Our solutions enable enterprises to significantly improve
efficiencies, collaborate with suppliers and customers, respond to market
demands and engage in dynamic business interactions over the Internet. Our
solutions consider the real conditions of companies to optimize key business
processes -- from product design to customer relationships. We have recently
launched TradeMatrix, a robust platform of business-to-business solutions,
services and marketplaces, which will allow customers, partners, suppliers and
service providers to do business together in real time. TradeMatrix offers a
full breadth of services that include planning, procurement, commerce,
fulfillment, customer care, retail, strategic sourcing and product development.
Our RHYTHM product suite principally includes solutions for supply chain
management, customer management, product lifecycle management, inter-process
planning and strategic planning, which provide the basis for these value-added
services offered to marketplace participants. We recently have signed agreements
to develop and host public and private Internet-based electronic marketplaces
with our customers and partners in the automotive, aerospace, high-tech,
softgoods and consumer packaged goods industries. Our RHYTHM software
applications, along with new software solutions and services designed
specifically for the TradeMatrix environment, are used to power these electronic
marketplaces. We also provide services such as consulting, training and
maintenance in support of these offerings.
In 1997, we acquired Think Systems Corporation (Think) and Optimax Systems
Corporation (Optimax). In 1998, we acquired InterTrans Logistics Solutions
Limited (ITLS). In 1999, we acquired Sales Marketing Administration Research
Tracking Technologies, Inc. (SMART). Each of these business combinations was
accounted for as a pooling-of-interests. Accordingly, the accompanying
consolidated financial statements give retroactive effect to the combinations
for all periods presented (see Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the results of i2 and our subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and cash equivalents and short-term investments. Cash equivalents
include liquid investments with maturity periods of three months or less at the
date of purchase. Short-term investments include those investments with
maturities in excess of three months. All of our cash equivalents and short-term
investments are classified as available-for-sale. The difference between cost
and fair value of these investments was immaterial at December 31, 1998 and
1999. Therefore, no adjustment has been made to the historical carrying value of
the investments and no unrealized gains or losses have been recorded as a
component of stockholders' equity. Realized gains and losses to date have not
been material. The cost of debt securities sold is based on the specific
identification method.
Our debt securities include the following (in thousands):
DECEMBER 31,
-------------------
1998 1999
-------- --------
U.S. Government......................................... $ 1,449 $342,923
State and Local Municipalities.......................... 21,440 1,300
Corporations............................................ 104,884 162,047
-------- --------
$127,773 $506,270
======== ========
F-6
42
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
While certain of our securities had maturities in excess of one year, we
intend to liquidate such securities within one year. At December 31, 1998 and
1999, $34.4 million and $37.0 million of corporate debt securities were included
in cash and cash equivalents, respectively. Interest income earned in 1997, 1998
and 1999 was $3.2 million, $7.6 million, and $8.7 million, respectively.
Financial Instruments. Financial instruments that potentially subject us to
a concentration of credit risk consist principally of investments and accounts
receivable. Cash, cash equivalents and short-term investments are held with
financial institutions with high credit standings. Our customer base consists of
large numbers of geographically diverse customers dispersed across many
industries. As a result, concentration of credit risk with respect to accounts
receivables is not significant. However, we periodically perform credit
evaluations of our customers and maintain reserves for potential losses. We have
used and expect to continue to use foreign exchange contracts to hedge the risk
in receivables denominated in foreign currencies. Risk of non-performance by
counterparties to such contracts is minimal due to the size and credit standings
of the financial institutions used. Our foreign exchange contracts outstanding
at December 31, 1997, 1998 and 1999 were not material. Gains and losses on
foreign exchange contracts have also not been material to date.
Depreciation and Amortization. Furniture and equipment are recorded at cost
and are depreciated over their useful lives ranging from three to seven years
using the straight-line method. Leasehold improvements are amortized over the
expected term of the lease or estimate useful life, whichever is shorter.
Acquired technology and other intangible assets related to business acquisitions
are amortized on a straight-line basis over periods of two to five years. We
review our intangible assets for impairment on a quarterly basis to determine
whether an adjustment to the carrying value is needed. Amortization of goodwill,
acquired technology and other intangible assets was not material for the years
ended December 31, 1997, 1998 and 1999.
Capitalized Research and Development Costs. In accordance with Statement of
Financial Accounting Standards, or SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed," software
development costs are expensed as incurred until technological feasibility has
been established, at which time such costs are capitalized until the product is
available for general release to customers. To date, the establishment of
technological feasibility of our products and general release of such software
have substantially coincided. As a result, software development costs qualifying
for capitalization under SFAS 86 have been insignificant and, therefore, we have
not capitalized any such costs.
Revenue Recognition. Our revenues consist of software license revenues,
service revenues and maintenance revenues. Software license revenues consist of
sales of software licenses which are recognized in accordance with the American
Institute of Certified Public Accountants' Statement of Position, or SOP 97-2,
"Software Revenue Recognition." Under SOP 97-2, software license revenues are
recognized upon execution of a contract and delivery of software, provided that
the license fee is fixed and determinable, no significant production,
modification or customization of the software is required and collection is
considered probable by management. As of January 1, 1998, software license
revenues are recognized in accordance with SOP 97-2, as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions." Service revenues are primarily derived from fees for
implementation, consulting and training services and are generally recognized
under service agreements in connection with initial license sales and subsequent
renewals. Maintenance revenues are recognized ratably over the term of the
maintenance period. Payments for maintenance fees are generally made in advance.
Amounts received in advance of satisfying revenue recognition criteria are
classified as deferred revenue in the accompanying consolidated balance sheets.
We generally warrant that our products will function substantially in
accordance with documentation provided to customers for approximately six to
twelve months following initial shipment to the customer. As of December 31,
1999, we had not incurred any significant expenses related to warranty claims.
F-7
43
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income Per Share. We compute net income per share in accordance with
the provisions of SFAS No. 128, "Earnings per Share." Net income per share is
based upon the weighted-average number of common shares outstanding and excludes
the effect of potentially dilutive common stock issuable upon exercise of stock
options or convertible debt. Net income per share, assuming dilution, includes
the effect of potentially dilutive common stock issuable upon exercise of stock
options using the treasury stock method and shares issuable under the conversion
feature of our convertible notes. Share and per share amounts for all periods
presented have also been adjusted to reflect a stock split during 1998 and 2000
(see Note 8). The computations give retroactive effect to the exchange of common
shares in connection with the Think, Optimax, ITLS and SMART acquisitions (see
Note 3). Reconciliations of the net income (loss) per share computations for the
years ended December 31, 1997, 1998 and 1999 are included in Note 8.
Stock-Based Compensation Plans. We elected to continue to account for our
stock-based compensation plans under the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." As discussed
in Note 8, the alternative fair value accounting provided for under SFAS No.
123, "Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options.
However, SFAS No. 123 requires disclosure of pro forma information regarding net
income and net income per share based on fair value accounting for stock-based
compensation plans.
Foreign Currency Translation. The functional currency for the majority of
our foreign subsidiaries is the local currency. Assets and liabilities are
translated at rates in effect at the balance sheet date and statement of
operations amounts are translated at average rates for the period. The resulting
translation adjustments are disclosed as a separate component of stockholders'
equity and comprehensive income. Transaction gains and losses are recorded in
"other income, net" in the consolidated statement of operations.
Reclassifications. Certain prior year financial statement items have been
reclassified to conform to the current year's format.
Comprehensive Income. Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," requires companies to report an additional
measure of income on the income statement or to create a new financial statement
that shows the new measure of income. Comprehensive income includes foreign
currency translation gains and losses that have been previously excluded from
net income and reflected instead in stockholders' equity.
3. BUSINESS COMBINATIONS.
The following table represents the acquisitions from 1997 through 1999 that
were accounted for as a pooling-of-interests:
i2 SHARES
COMPANY DATE ISSUED
- ------- ---------- ------------
Think............................................... May 1997 15.4 million
Optimax............................................. May 1997 5.4 million
ITLS................................................ April 1998 6.6 million
SMART............................................... July 1999 4.2 million
The consolidated financial statements give retroactive effect to these
combinations for all periods presented.
F-8
44
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The separate revenues and net income (loss) of i2 (including Think, Optimax
and ITLS) and SMART (prior to acquisition date) and the combined amounts
presented in the consolidated financial statements follow (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Total revenues:
i2......................................... $213,692 $361,916 $569,246
SMART...................................... 8,084 7,241 1,864
-------- -------- --------
$221,776 $369,157 $571,110
======== ======== ========
Net income (loss):
i2......................................... $ 3,998 $ 19,983 $ 33,536
SMART...................................... (5,750) (14,764) (10,021)
-------- -------- --------
$ (1,752) $ 5,219 $ 23,515
======== ======== ========
We also acquired certain other businesses in 1997, 1998, and 1999 for an
aggregate purchase price of $5.0 million, $9.2 million, and $5.3 million
respectively, which included cash, stock, assumed liabilities and acquisition
costs. The total purchase price payable to the shareholders of certain of the
acquired companies may increase in the future depending upon the achievement of
specified revenue targets associated with the acquired technologies through the
year 2000. These acquisitions were accounted for using the purchase accounting
method. Accordingly, we allocated the purchase prices based on the fair value of
assets acquired and liabilities assumed. A portion of the purchase price of
these transactions was identified, using proven valuation procedures and
techniques, as intangible assets. This allocation represents the estimated fair
value based on risk-adjusted cash flows related to the in-process R&D projects.
The revenue projections used to value the in-process R&D were based on estimates
of relevant market sizes and growth factors, expected trends in technology and
the nature and expected timing of new product introductions by us and our
competitors. At the date of each acquisition, the products under development had
not reached technological feasibility and had no alternative future use.
Accordingly, $4.7 million and $3.3 million in 1998 and 1999 respectively, were
expensed as in-process research and development at each acquisition date. The
value assigned to in-process R&D is comprised of various research and
development projects. These projects include the introduction of new
technologies as well as revisions of enhancements to certain acquired
technologies. There is risk associated with the completion of the projects, and
there is no assurance that each will attain either technological feasibility or
commercial success.
During 1999, we incurred a total of approximately $6.6 million in
acquisition related expenses in connection with the SMART acquisition, as well
as other purchase acquisitions. These costs included investment banking, legal
and accounting fees and expenses, amortization of acquisition-related intangible
assets and the write-off of in-process R&D.
During 1998, we incurred a total of approximately $7.6 million in
acquisition related expenses in connection with the ITLS acquisition, as well as
other purchase acquisitions. These costs included investment banking, legal and
accounting fees and expenses, amortization of acquisition-related intangible
assets and the write-off of in-process R&D.
During 1997, we incurred approximately $9.3 million in acquisition-related
expenses in connection with the Think and Optimax acquisitions, as well as other
purchase acquisitions, of which $4.6 million represents the write-off of
in-process R&D. The remaining costs included investment banking, legal and
accounting fees and expenses and amortization of acquisition-related intangible
assets.
F-9
45
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following (in thousands):
DECEMBER 31,
-------------------
1998 1999
-------- --------
Computer equipment...................................... $ 42,583 $ 52,701
Furniture and fixtures.................................. 9,950 19,388
Leasehold improvements.................................. 2,008 16,406
-------- --------
54,541 88,495
Less: Accumulated depreciation.......................... (22,913) (38,012)
-------- --------
$ 31,628 $ 50,483
======== ========
5. LINES OF CREDIT
At December 31, 1998, we had a $15.0 million revolving credit agreement
that expired in October 1999, was unsecured and contained customary restrictive
covenants, including covenants requiring us to maintain certain financial
ratios. The revolving credit agreement was not subject to a borrowing base
limitation and the borrowings thereunder bore interest at LIBOR plus 0.75% to
1.75%, depending on certain cash ratios. The maximum borrowings available under
the facility were reduced by the value of outstanding letters of credit issued
by the lender on our behalf, $6.7 million of which were outstanding at December
31, 1998. At December 31, 1998, there were no borrowings outstanding under this
agreement and we were in compliance with all covenants. In August 1999, we
entered into one-year revolving credit facilities with an aggregate borrowing
capacity of $30.0 million with substantially the same terms as the prior credit
facility. The maximum borrowings available under the facility were reduced by
the value of outstanding letters of credit issued by the lender on our behalf,
$14.2 million of which were outstanding at December 31, 1999. At December 31,
1999, there were no borrowings outstanding under this agreement and we were in
compliance with all covenants.
At December 31, 1998, SMART had an $8.0 million line of credit with a
financial institution bearing interest at the financial institution's prime rate
(8.5% at December 31, 1998). Interest was due monthly and the line matured in
October 2001. The advances on the line were collateralized by all of the assets
of SMART. As of December 31, 1998, the outstanding balance was $2.0 million,
which we have repaid concurrent with the acquisition of SMART in July 1999.
6. BORROWINGS
DECEMBER 31,
------------------
1998 1999
------- --------
SMART line of credit with a financial institution, bearing
interest at prime (8.5% at December 31,1998).............. $ 2,032 $ --
SMART note payable to a stockholder, bearing interest at
7%........................................................ 3,000 --
5 1/4% Convertible subordinated notes, interest payable on
June 15 and December 15; due December 15, 2006............ -- 350,000
------- --------
5,032 350,000
Less: current maturities of long-term debt.................. (5,032) --
------- --------
Long-term debt, less current maturities..................... $ -- $350,000
======= ========
All SMART debt outstanding as of December 31, 1998 was paid concurrent with
the acquisition of SMART in July 1999.
F-10
46
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 10, 1999, we issued an aggregate principal amount of $350
million of our 5 1/4% convertible subordinated notes due 2006, which were sold
at par less an underwriting discount of 2.75% of the principal amount of the
notes. The net proceeds of this offering, after giving effect to discounts,
commissions, premiums and expenses, was approximately $339.9 million. These
securities were issued and sold to Goldman, Sachs & Co., Morgan Stanley & Co.
Incorporated and Credit Suisse First Boston Corporation, as the initial
purchasers, in reliance on the exemption from registration under the Securities
Act of 1933, as amended provided by Section 144A thereof. In connection with
this transaction, each of the initial purchasers represented that it was a
"qualified institutional buyer" within the meaning of the Securities and
Exchange Act of 1934. The notes are convertible at the option of the holder into
shares of common stock at a conversion price of approximately $75.99 per share
at any time prior to maturity. The net proceeds from the offering will be used
for working capital and other general corporate purposes.
7. COMMITMENTS
We lease our office facilities and certain office equipment under operating
leases that expire at various dates through 2023. We have renewal options for
most of our operating leases. Total rent expense incurred during 1997, 1998 and
1999 was approximately $5.3 million, $9.3 million and $17.2 million,
respectively.
Future minimum lease payments under all noncancellable operating leases as
of December 31, 1999 are as follows (in thousands):
2000........................................................ $ 26,235
2001........................................................ 24,408
2002........................................................ 20,116
2003........................................................ 13,910
2004 and thereafter......................................... 71,102
--------
Total minimum lease payments...................... $155,771
========
8. STOCKHOLDERS' EQUITY
Stock Splits. On April 22, 1998, our Board of Directors (our "Board")
approved a two-for-one stock split of our common stock. Subsequently, our
stockholders at our 1998 annual meeting of stockholders approved the increase in
authorized shares of common stock. The stock split was paid as a 100% dividend
on June 2, 1998.
On January 14, 2000, our Board approved a two-for-one stock split. The
stock split was paid as a 100% dividend on February 17, 2000. All share and per
share amounts included herein have been adjusted to reflect the stock splits as
though they had occurred at the beginning of the initial periods presented.
Public Offerings. In December 1997, we completed a secondary offering of
12,000,000 shares of our common stock. We sold a total of 8,000,000 of those
shares of common stock, resulting in net proceeds to us of $89.4 million after
deducting offering expenses and the underwriting discount of $3.6 million.
F-11
47
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income (Loss) Per Share. Reconciliations of the net income (loss) per
share and net income (loss) per share, assuming dilution, computations for the
years ended December 31, 1997, 1998 and 1999 are as follows (amounts in
thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Weighted average common shares outstanding........... 128,884 143,588 150,419
Common shares issuable upon exercise of stock
options, net of shares assumed to be repurchased... -- 13,472 17,139
Common shares issuable upon conversion of debt....... -- -- 281
-------- -------- --------
Weighted average common shares outstanding, assuming
dilution........................................... 128,884 157,060 167,839
======== ======== ========
Net income (loss).................................... $ (1,752) $ 5,219 $ 23,515
======== ======== ========
Net income (loss) per share.......................... $ (.01) $ .04 $ .16
======== ======== ========
Net income (loss) per share, assuming dilution....... $ (.01) $ .03 $ .14
======== ======== ========
Potentially dilutive securities are excluded from the net income (loss) per
share, assuming dilution computation when the exercise price of the securities
exceeds the average fair value of our common stock for a particular period. For
the years ended 1997, 1998 and 1999, approximately 17,264,000, 198,000, and
3,518,000 stock options, respectively, were excluded from the net income (loss)
per share, assuming dilution computation as the impact was antidilutive.
We incurred a net loss for the year ended December 31, 1997. As a result,
the common shares issuable upon exercise of stock options would have been
anti-dilutive to the net loss per share and were excluded from the dilutive
computation.
Employee Stock Purchase Plan. In March 1996, the Board adopted and the
stockholders approved an Employee Stock Purchase Plan. In November 1996, the
Board adopted an International Employee Stock Purchase Plan for employees of our
wholly owned subsidiaries. The Employee Stock Purchase Plan and the
International Employee Stock Purchase Plan (collectively, the "Purchase Plans")
are designed to allow our eligible employees to purchase shares of common stock
through periodic payroll deductions. We have reserved 5,000,000 shares of common
stock for issuance under the Purchase Plans.
Payroll deductions may not exceed the lesser of 15% of a participant's base
salary or $25,000 per year, and employees may purchase a maximum of 4,000 shares
per purchase period under the Purchase Plans. The purchase price per share will
be 85% of the lesser of the fair market value of our common stock on the start
of the purchase period or the fair market value at the end of the purchase
period. Participation may be terminated at any time by the employee and
automatically ends upon termination of employment.
1995 Stock Option/Stock Issuance Plan. In September 1995, the stockholders
and the Board approved the 1995 Stock Option/Stock Issuance Plan, which replaced
our original 1992 Stock Plan. All options outstanding under the 1992 Stock Plan
were incorporated into the 1995 Plan. Under the 1995 Plan, the amount of shares
of common stock originally reserved for issuance was 40,000,000 shares which was
subsequently increased to 48,000,000 shares in 1996. The amount of shares of
common stock reserved for issuance was increased to 62,000,000 shares in 1997
and 86,000,000 shares in 1999. In January 2000, the Board approved a 40,000,000
share increase which will bring the total reserved for issuance to 126,000,000
shares, subject to the approval of our stockholders. The 1995 Plan is divided
into the following three equity programs: (i) the Discretionary Option Grant
Program, (ii) the Stock Issuance Program and (iii) the Automatic Option Grant
Program.
F-12
48
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Discretionary Option Grant Program provides for the grant of incentive
stock options to employees and for the grant of nonqualified stock options to
employees, directors and consultants. Exercise prices may not be less than 100%
and 85% of the fair market value at the date of grant for incentive options and
nonqualified stock options, respectively. Options granted under the
Discretionary Option Grant Program generally vest in four equal annual
increments and expire after ten years. Some options granted under the
Discretionary Option Grant Program are immediately exercisable, subject to a
right of repurchase at the original exercise price for all unvested shares.
Under the Stock Issuance Program, the Board or a committee of the Board, or
the Plan Administrator, may grant shares of our common stock to any person at
any time, at such prices and on such terms as established by the Plan
Administrator. The purchase price per share cannot be less than 85% of the fair
market value of our common stock on the issuance date.
Under the Automatic Option Grant Program, each person who is first elected
or appointed as a non-employee Board member shall automatically be granted a
nonqualified option to purchase 4,000 shares of our common stock at the fair
market value on the date of grant. On the date of each Annual Meeting of
Stockholders, each non-employee Board member shall automatically be granted an
additional option to purchase 4,000 shares of our common stock, subject to
certain conditions.
Think Stock Option Plans. Think's Board of Directors adopted and its
shareholders approved stock option plans for employees, directors and
consultants of Think, or the Think Plans. Under the Think Plans, the Think Board
of Directors granted incentive and nonqualified stock options to employees,
directors and consultants at prices not less than the estimated fair market
value of Think's common stock at the date of grant. The options generally vest
over a five-year period commencing on or before the date of grant. The maximum
amount of shares that may be granted under the Plans shall not exceed 3,800,000.
Each option shall expire not more than 10 years from the date of the grant. In
connection with the acquisition of Think, we assumed all of the options
outstanding under the Think Plans, which are now exercisable into i2 common
stock.
Optimax Stock Option Plan. Optimax's Board of Directors adopted and its
shareholders approved the Optimax Systems Corporation Stock Option Plan, or the
Optimax Plan. Under the Optimax Plan, the Optimax Board of Directors granted
nonqualified stock options to employees of Optimax at prices equal to the
estimated fair market value of Optimax's common stock on the date of grant. The
options generally vest over a five-year period commencing on or before the date
of grant. The maximum amount of shares that may be granted under the Plan shall
not exceed 1,250,000. Each option shall expire not more than 10 years from the
date of the grant. In connection with the acquisition of Optimax, we assumed all
such options, which are now exercisable into i2 common stock.
ITLS Stock Option Plan. ITLS' Board of Directors adopted and its
shareholders approved the ITLS 1997 Stock Option Plan, or the ITLS Plan. Under
the ITLS Plan, the ITLS Board of Directors granted incentive and nonqualified
stock options to employees of ITLS at prices equal to the estimated fair market
value of ITLS' common stock on the date of grant. The options generally vest
over a four-year period commencing on date of grant. The maximum amount of
shares that may be granted under the Plan shall not exceed 100,000. Each option
shall expire not more than 10 years from the date of the grant. In connection
with the acquisition of ITLS, we assumed all such options, which are now
exercisable into i2 common stock.
SMART Stock Option Plan. SMART's Board of Directors adopted and its
shareholders approved the 1996 Stock Option/Stock Issuance Plan, or the SMART
Plan. Under the SMART Plan, the SMART Board of Directors granted incentive and
nonqualified stock options to employees of SMART at prices equal to the
estimated fair market value of SMART's common stock on the date of grant. The
vesting schedule and term of each grant was determined by SMART's Board of
Directors. The maximum amount of shares that may be granted under the Plan shall
not exceed 2,000,000. Each option shall expire not more than 10 years from the
F-13
49
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of the grant. In connection with the acquisition of SMART, we assumed all
such options, which are now exercisable into i2 common stock.
Option activity under our stock option plans is as follows:
OPTIONS OUTSTANDING
SHARES -----------------------------
AVAILABLE NUMBER WEIGHTED-AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
----------- ---------- ----------------
Balance, December 31, 1996................. 8,399,426 18,995,432 $ .77
Authorized............................... 15,413,396 -- --
Granted.................................. (13,136,834) 13,136,834 7.34
Exercised................................ -- (5,784,584) .32
Canceled................................. 1,159,760 (1,159,760) 7.43
----------- ----------
Balance, December 31, 1997................. 11,835,748 25,187,922 3.99
Authorized............................... -- -- --
Granted.................................. (19,854,798) 19,854,798 8.64
Exercised................................ -- (6,693,990) .85
Canceled................................. 8,491,028 (8,491,028) 11.30
----------- ----------
Balance, December 31, 1998................. 471,978 29,857,702 5.71
Authorized............................... 24,000,000 -- --
Granted.................................. (17,548,410) 17,548,410 24.68
Exercised................................ -- (7,668,490) 3.35
Canceled................................. 3,070,188 (3,070,188) 9.84
----------- ----------
Balance, December 31, 1999................. 9,993,756 36,667,434 14.93
=========== ==========
OPTIONS OUTSTANDING
-----------------------------
NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE
---------- ----------------
December 31, 1997........................................ 12,265,522 $ .45
==========
December 31, 1998........................................ 8,897,338 $1.97
==========
December 31, 1999........................................ 7,056,795 $4.66
==========
In October 1998, the Board approved a plan to reprice a portion of our
outstanding stock options, excluding options held by certain executive officers.
As a result, 7,515,370 options with exercise prices ranging from $7.00 to $16.41
per share were repriced at $6.97 per share, the fair market value on the date of
repricing. For any unvested options included in this repricing, the vesting
schedule was restarted with a vesting period of four years. The repricing has
been reflected in the above table as part of the options granted and canceled
during 1998.
Under the 1995 Plan, each outstanding option and unvested stock issuance
will be subject to accelerated vesting under certain circumstances upon an
acquisition of us in a merger or asset sale, except to the extent our repurchase
rights with respect to the underlying shares are to be assigned to the successor
corporation. In addition, the Plan Administrator has the discretion to
accelerate vesting of outstanding options upon consummation of any other
transaction that results in a change in control.
All options outstanding at December 31, 1999, are incentive options except
for 17,423,881 options, which are nonqualified stock options.
F-14
50
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other information regarding options outstanding and options exercisable as
of December 31, 1999, is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING WEIGHTED-
RANGE OF EXERCISE NUMBER AVERAGE CONTRACTUAL NUMBER AVERAGE
PRICES OF SHARES EXERCISE PRICE LIFE (YEARS) OF SHARES EXERCISE PRICE
- ----------------- ---------- --------------- ------------- ---------- ---------------
$ .004-$ 3.03 2,969,310 $ .56 4.7 2,872,982 $ .57
3.04- 4.87 227,766 4.33 7.9 200,661 4.25
4.88- 6.97 10,358,686 6.72 8.7 1,796,854 6.69
6.98- 3.92 9,558,218 9.45 8.2 2,171,870 8.36
13.93- 18.00 6,534,888 16.28 9.4 14,428 16.22
18.01- 24.00 3,503,408 20.62 9.6 0 --
24.01- 48.00 2,167,488 40.95 9.9 0 --
48.01- 75.00 350,100 70.02 9.9 0 --
75.01- 100.00 997,570 93.28 10.0 0 --
---------- ---------
Total 36,667,434 14.93 $8.6 7,056,795 4.66
========== =========
Pro Forma Net Income (Loss) and Net Income (Loss) Per Share. Pro forma
information regarding net income (loss) and net income (loss) per share has been
determined as if we had accounted for our employee stock options and shares
issued under the Purchase Plans using the fair value method of SFAS No. 123. The
fair value for the stock options issued under the 1995 Plan was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997, 1998 and 1999, respectively: risk-free
interest rates of 6.2%, 5.2% and 5.6%; volatility factors of the expected market
price of our common stock of 0.66, 0.75 and 0.84; a weighted-average expected
life of the options of 4, 3 and 3 years; and no dividend yields. The fair value
of the stock options issued under the Think Plans was estimated at the date of
grant using the minimum value method for non-public companies permitted by SFAS
No. 123 with the following assumptions for 1997: a weighted-average risk-free
interest rate of 6.2%; no dividends; and a weighted-average expected life of the
options of 7 years. The fair values of stock options issued under the Optimax
Plan, ITLS Plan and SMART Plan are not presented as the impact is immaterial.
The fair value for the shares issued under the Purchase Plans was estimated
as of the initial day of the purchase period using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1997, 1998 and
1999, respectively: risk free interest rates of 5.4%, 5.0% and 5.0%; volatility
factors of the expected market price of our common stock of 0.66, 0.75 and 0.84;
a weighted-average expected life of the purchase right of 0.5 years; and no
dividend yields. The weighted-average fair values of the purchase rights granted
under the Purchase Plans during 1997, 1998 and 1999 were $6.06, $4.60 and $5.63,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and Purchase
Plans' shares.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period and the
estimated fair value of the Purchase Plans' shares is amortized to expense over
the purchase period.
F-15
51
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Our pro forma information follows (in thousands, except per share amounts):
1997 1998 1999
------- ------- -------
Pro forma net income (loss)............................. $(7,433) $(9,232) $(3,652)
Pro forma net income (loss) per share................... (0.06) (0.06) (.02)
Pro forma net income (loss) per share, assuming
dilution.............................................. (0.06) (0.06) (.02)
Information regarding exercise prices and fair values of options granted is
as follows:
1997 1998 1999
----------- ----------- -----------
Number of options issued at fair market value
of stock.................................... 13,136,834 19,854,798 17,548,410
Weighted-average exercise price per share..... $ 7.34 $ 8.64 $ 24.68
Weighted-average fair value of options........ $ 4.23 $ 4.62 $ 4.29
9. INCOME TAXES
Our provision for income taxes consists of the following (in thousands):
1997 1998 1999
------- ------- -------
Current:
Federal............................................... $ 9,702 $21,982 $24,604
State................................................. 1,224 2,490 3,120
Foreign............................................... 158 3,278 12,310
Deferred:
Federal............................................... (1,629) (4,752) (7,558)
State................................................. (40) (185) (990)
Foreign............................................... (2,499) (5,534) (6,934)
------- ------- -------
Total......................................... $ 6,916 $17,279 $24,552
======= ======= =======
Our provision for income taxes reconciles to the amount computed by
applying the statutory U.S. federal rate of 35% for 1997, 1998 and 1999 to
income before income taxes as follows (in thousands):
1997 1998 1999
------ ------- -------
Expense computed at statutory rate....................... $1,807 $ 7,874 $16,824
Non-deductible in-process research and development and
acquisition costs...................................... 3,164 2,635 2,294
State taxes, net of federal tax benefit.................. 770 1,536 1,050
Stock option compensation................................ 200 205 205
Research and development tax credits..................... (584) (1,375) (1,185)
Non-deductible meals and entertainment................... 385 518 1,062
Valuation allowance for net deferred tax asset........... 2,122 5,661 1,904
Other.................................................... (948) 225 2,398
------ ------- -------
Provision for income taxes..................... $6,916 $17,279 $24,552
====== ======= =======
F-16
52
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities at December 31, 1998 and 1999, are
comprised of the following (in thousands):
1998 1999
------- --------
Deferred tax assets:
Foreign tax credits....................................... $ 2,685 $ 4,030
Deferred revenue.......................................... 1,723 2,604
Accrued liabilities....................................... 2,466 8,287
Bad debt allowance........................................ 2,735 6,158
Research and development tax credits...................... 2,066 4,075
Net operating losses...................................... 14,316 28,485
Other..................................................... 1,748 3,165
------- --------
Total deferred tax asset.......................... 27,739 56,804
Deferred tax liabilities:
Depreciation.............................................. (328) --
Acquired intangible assets................................ (469) (662)
Other..................................................... (3,005) (3,723)
------- --------
Total deferred tax liability................................ (3,802) (4,385)
Valuation allowance for net deferred tax asset.............. (8,519) (10,423)
------- --------
Net deferred tax asset............................ $15,418 $ 41,996
======= ========
We consider the earnings of foreign subsidiaries to be permanently
reinvested outside the United States. Accordingly, no United States income tax
on these earnings has been provided. Aggregate unremitted earnings of foreign
subsidiaries, for which U.S. income taxes have not been provided, totaled
approximately $25.3 million as of December 31, 1999.
At December 31, 1998 and 1999, we had approximately $19.0 million and $56.5
million of U.S. federal net operating loss carryforwards and research and
development carryforwards of approximately $0.4 million and $4.1 million,
respectively. At December 31, 1998 and 1999, we had $19.4 million and $22.3
million of foreign net operating loss carryforwards, respectively. The federal
net operating loss carryforwards and research and development carryforwards
expire in the years 2011 through 2019 and are subject to certain annual
limitations. The foreign net operating loss carryforwards have no expiration.
We paid income taxes of approximately $2.8 million, $5.9 million and $3.2
million in 1997, 1998 and 1999, respectively.
Management regularly evaluates the realizability of its deferred tax assets
given the nature of its operations and given the tax jurisdictions in which it
operates. We adjust our valuation allowance from time to time based on such
evaluations. The valuation allowance increased by approximately $1.9 million
during 1999 due to uncertainties regarding the realization of net operating loss
carryforwards.
10. EMPLOYEE RETIREMENT PLAN
We have established 401(k) retirement plans, (or the "Retirement Plans")
that cover a majority of our employees. Eligible employees may contribute up to
18% of their compensation, subject to certain limitations, to the Retirement
Plans. We may make contributions to the Retirement Plans at the discretion of
the Board. As of December 31, 1999, no contributions by us had been made.
F-17
53
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS
We are principally engaged in the design, development, marketing and
support of our RHYTHM suite of intelligent eBusiness solutions, including
software applications and related service offerings. Historically, substantially
all revenues result from the licensing of our software products and related
consulting and customer support (maintenance) services. Our chief operating
decision-maker reviews financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by geographic region for
purposes of making operating decisions and assessing financial performance.
Accordingly, we consider ourselves to be in a single industry segment,
specifically the license, implementation and support of our software
applications and related services.
Revenues are attributable to regions based on the locations of the
customers' operations. The following geographic information presents total
revenues for the years ended December 31, 1997, 1998 and 1999 (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
United States........................................ $155,070 $295,933 $389,912
Europe............................................... 34,707 39,739 93,844
Asia................................................. 20,280 21,095 60,111
Other................................................ 11,719 12,390 27,243
-------- -------- --------
$221,776 $369,157 $571,110
======== ======== ========
12. MAJOR CUSTOMERS
During 1999, one customer accounted for approximately $36.8 million, or
10%, of total revenues. During 1998 and 1997, no individual customer accounted
for more than 10% of total revenues.
13. SUBSEQUENT EVENTS
On March 12, 2000, we entered into a definitive agreement to acquire Aspect
Development, Inc., a developer of collaborative solutions for
business-to-business marketplaces. Pursuant to the agreement, we will exchange
all of the outstanding capital stock of Aspect and will assume all outstanding
stock options of Aspect, in exchange for approximately 44.9 million shares of
our common stock and options. The transaction will be accounted for as a
purchase, is subject to regulatory approval and i2 and Aspect stockholder
approvals, and is expected to close in the third quarter of this year.
Also on March 12, 2000, we entered into a definitive agreement to acquire
SupplyBase, Inc., a developer of high-end, interactive database products,
services and supply chain management tools. Under the agreement, we will issue
approximately 1.8 million shares of our common stock for all of the outstanding
capital stock and stock options of SupplyBase. The transaction will be accounted
for as a purchase, is subject to regulatory approval and SupplyBase stockholder
approval, and is expected to close in the second quarter of this year.
These strategic acquisitions will result in substantial one-time charges
along with ongoing substantial amortization of intangibles to our earnings.
F-18
54
i2 TECHNOLOGIES, INC.
SCHEDULE II TO CONSOLIDATED FINANCIAL STATEMENTS
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
---------- ---------- ---------- ----------
Allowance for Doubtful Accounts (in thousands)
Year Ended 12/31/99................................ 8,551 11,065 (2,142) 17,474
Year Ended 12/31/98................................ 4,578 4,924 (951) 8,551
Year Ended 12/31/97................................ 1,269 4,155 (846) 4,578
F-19
55
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1* -- Agreement and Plan of Reorganization, dated May 12, 1999,
by and among i2, Intelligent Acquisition Corp. and Sales
Marketing Administration Tracking Technologies, Inc.
(filed as Exhibit 2.1 to i2's Registration Statement on
Form S-4 (Reg. No. 333-79681)(the "Form S-4").
2.2* -- Agreement and Plan of Reorganization, dated March 12,
2000, by and among i2, Hoya Merger Corp. and Aspect
Development, Inc. (filed as Exhibit 1 to the Schedule 13D
filed by i2 on March 22, 2000 with respect to Aspect
Development, Inc. and incorporated herein by reference).
2.3 -- Agreement and Plan of Reorganization, dated March 12,
2000, by and among i2, Starfish Merger Corporation and
SupplyBase, Inc. (The schedules and exhibits which are
referenced in the table of contents and elsewhere in such
Agreement are hereby incorporated by reference. Such
schedules and exhibits which are not included as exhibits
to this Form 10-K will be furnished supplementally to the
Commission upon request.)
3.1* -- Restated Certificate of Incorporation (filed as Exhibit
3.1 to i2's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999)
3.2* -- Amended and Restated Bylaws (filed as Exhibit 3.1 to i2's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998)
4.1* -- Specimen Common Stock certificate (filed as Exhibit 4.1
to i2's Registration Statement on Form S-1 (Reg No.
333-1752) (the "Form S-1"))
4.2* -- Indenture, dated as of December 10, 1999 between i2 and
Chase Bank of Texas, National Association, as trustee,
including the form of note set forth in Section 2.2
thereof (filed as Exhibit 4.2 to i2's Registration
Statement on Form S-3 (Reg. No. 333-31342) (the "Form
S-3"))
4.3* -- Registration Rights Agreement, dated as of December 10,
1999 between i2 and Goldman, Sachs & Co., Morgan Stanley
Dean Witter and Credit Suisse First Boston (filed as
Exhibit 4.3 to the Form S-3)
10.1* -- Form of Registration Rights Agreement, dated April 1,
1996, among i2, Sanjiv S. Sidhu and Sidhu-Singh Family
Investments, Ltd. (filed as Exhibit 10.2 to the Form S-1)
10.2* -- 1995 Stock Option/Stock Issuance Plan (filed as Exhibit
99.7 to i2's Registration Statement on Form S-8 (Reg. No.
333-85791) (the "1999 S-8"))
10.3* -- Form of Indemnification Agreement between i2 and each of
its officers and directors (filed as Exhibit 10.4 to the
Form S-1)
10.4* -- Form of Employee Proprietary Information Agreement
between i2 and each of its employees (filed as Exhibit
10.9 to the Form S-1)
10.5* -- Lease Agreement, dated July 14, 1995, between i2 and TRST
Irving, Inc. (filed as Exhibit 10.10 to the Form S-1)
10.6* -- Lease Agreement, dated June 29, 1990, as amended, between
the i2 and Park West E-2 Associates (filed as Exhibit
10.11 to the Form S-1)
10.7* -- Second Amendment of Lease Agreement between i2 and TRST
Irving, Inc. dated as of February 23, 1996 (filed as
Exhibit 10.1 to i2's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996)
56
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.8* -- Third Amendment to Lease Agreement between i2 and TRST
Irving, Inc. dated as of July 25, 1996 (filed as Exhibit
10.1 to i2's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (the "September 1996
10-Q"))
10.9* -- Fifth Amendment to Lease Agreement between i2 and
Principal Mutual Life Insurance Company dated as of
August 29, 1996 (filed as Exhibit 10.2 to the September
1996 10-Q)
10.10* -- Fourth Amendment to Lease Agreement between i2 and TRST
Irving, Inc. dated as of December 19, 1996 (filed as
Exhibit 10.17 to i2's Annual Report on Form 10-K for the
year ended December 31, 1996)
10.11* -- Employee Stock Purchase Plan (filed as Exhibit 99.1 to
the 1999 Form S-8)
10.12* -- International Employee Stock Purchase Plan (filed as
Exhibit 99.4 to the 1999 Form S-8)
10.13* -- Think Systems Corporation 1996 Incentive Stock Plan
(filed as Exhibit 99.3 to i2's Registration STATEMENT on
Form S-8 (Reg. No. 333-28147) (the "Think/ Optimax S-8"))
10.14* -- Think Systems Corporation 1997 Incentive Stock Plan
(filed as Exhibit 99.1 to the Think/Optimax S-8)
10.15* -- Optimax Systems Corporation Stock Option Plan (filed as
Exhibit 99.10 to the Think/Optimax S-8)
10.16* -- InterTrans Logistics Solutions Limited 1997 Stock
Incentive Plan (filed as Exhibit 99.7 to i2's
Registration Statement on Form S-8 (Reg. No. 333-53667))
10.17* -- SMART Technologies, Inc., 1996 Stock Option/Stock
Issuance Plan (filed as Exhibit 99.13 to 1999 Form S-8)
10.18* -- Lease with One Colinas Crossing dated March 24, 1999
between Colinas Crossing, LP and i2 (filed as Exhibit
99.6 to i2's Current Report on Form 8-K dated November
30, 1999 (the "November 1999 8-K"))
10.19* -- Lease with Two Colinas Crossing dated August 3, 1999
between Colinas Crossing, LP and i2 (filed as Exhibit
99.7 to the November 1999 8-K)
16.1* -- Letter Regarding Change in Certifying Accountant (filed
as Exhibit 16.1 to i2's Current Report on Form 8-K filed
on April 21, 1999)
21.1 -- List of subsidiaries
23.1 -- Consent of Arthur Andersen LLP
24.1 -- Power of Attorney, pursuant to which amendments to this
Form 10-K may be filed, is included on this signature
page contained in Part IV of this Form 10-K
27.1 -- Financial Data Schedule for the year ended December 31,
1999
- ---------------
* Incorporated herein by reference to the indicated filing