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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, 1998
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)
909 E. LAS COLINAS BLVD., 16TH FLOOR 75039
IRVING, TEXAS (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (214) 860-6000
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 February 1,
1999 as reported on the Nasdaq National Market, was approximately $1.1 billion
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of the Registrant's Common Stock).
As of February 1, 1999, the Registrant had 71,792,000 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 customer
benefits attributable to the Company's products; developments in the Company's
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. The Company's 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 "Additional 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.
i2 is the leading provider of client/server-based eBPO software products
for supply chain management and related business process optimization
applications. i2's advanced supply chain management solutions include demand
forecasting, raw materials procurement, work-in-process, distribution and
transportation planning, optimization and collaboration within and between
enterprises. i2 has enabled businesses to re-engineer their supply chains to
realize significant increases in revenues, reductions in expenses and reductions
in asset investments by improving the efficiency and effectiveness of
determining when, where, what and how much to buy, make, move, store and sell.
Advanced Manufacturing Research estimates the market for supply chain planning
solutions will grow from $1.4 billion in 1998 to $6.8 billion in 2002.
As the Internet becomes an increasingly significant global medium for
business-to-business and business-to-consumer online commerce, existing and new
businesses in a wide variety of vertical markets are seeking to capitalize on
this growth. The Company believes its software enables its customers to benefit
from the growth of the Internet by supporting new Internet/online storefronts
and enabling re-engineering of supply chains to facilitate e-commerce
transactions. Forrester Research estimates the market for goods and services
transacted via e-commerce over the Internet to be as much as $80 billion in 1998
and to increase to as much as $3.2 trillion in 2003.
i2's RHYTHM supply chain management products are designed to provide
customers with an end-to-end solution, enabling customers to model complex,
multi-enterprise supply chains to rapidly generate integrated solutions to
challenges such as demand volatility, production bottlenecks, supply
interruptions and distribution alternatives. RHYTHM utilizes a unique,
constraint-based methodology, which simultaneously considers a broad range of
factors -- from changing revenue forecasts to machine capacities to individual
customer commitments -- to optimize all aspects of the supply chain. RHYTHM's
advanced decision support capabilities enable companies to make more timely and
better informed planning, scheduling and resource allocation decisions in order
to improve throughput, operating efficiency, customer satisfaction and return on
assets. The Company is currently extending its suite of supply chain management
eBPO products to enable customers to optimize a broader range of enterprise
functions, including customer management, product lifecycle management,
interprocess planning and strategic planning.
The Company's executive offices are located at 909 E. Las Colinas Blvd.,
Irving, Texas 75039, and its telephone number is (214) 860-6000.
RHYTHM, RHYTHMLINK, i2 and the i2 Technologies logo are registered
trademarks of the Company.
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INDUSTRY BACKGROUND
Today's increasingly competitive business environment has forced many
companies to increase efficiency while improving their 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 supply chain may span multiple
continents, tying suppliers in one part of the world 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 supply chains. The growth of the Internet
and intranets and the proliferation of middleware applications and integration
expertise are accelerating these changes by enabling a ubiquitous,
platform-independent communications network. The combination of these forces has
created a dynamic, complex and highly interdependent business environment. In
response to these evolving market forces, many companies have sought to
reengineer their business processes to reduce manufacturing cycle times, shift
from mass-production to order-driven manufacturing, increase use of outsourcing
and share information with vendors and customers. The implementation of software
solutions to optimize business processes has become a key component of these
reengineering initiatives. The Company believes that companies are increasingly
recognizing efficient business process optimization as a critical source of
competitive advantage in this rapidly changing business environment.
THE TRADITIONAL APPROACH
Companies have traditionally applied information technology to supply chain
management through Manufacturing Resource Planning ("MRP") systems, which
provide limited flexibility to accommodate rapidly changing business conditions
and customer requirements. In order to respond to an increasingly competitive
business environment and related complex supply chain issues, many companies
have adopted Enterprise Resource Planning ("ERP") systems, which integrate MRP
solutions with other enterprise management applications such as financial,
accounting and human resources. Although ERP systems provide substantial
benefits primarily by integrating financial and other controls with multi-plant
manufacturing coordination, the capabilities of many ERP systems remain limited
by the planning and scheduling methodologies utilized in their MRP modules.
Various ERP vendors are mitigating these limitations by internally developing,
or by acquiring or partnering with independent developers of, advanced planning
and scheduling software. Traditionally, enterprises in many industries have not
focused on utilizing advanced optimization technology in other business
processes such as customer management and product lifecycle management.
Some of the significant limitations of traditional MRP systems and the MRP
modules of ERP systems are as follows:
Designed for Transaction Processing and Reporting; Limited Decision
Support. Traditional solutions were designed to collect and report large
amounts of historical transaction data, rather than provide sophisticated
analysis of relevant information to support critical business decisions in
real-time. While these solutions help customers unify disparate information
resources within the enterprise and contribute to business process
reengineering efforts, the Company believes that they are not well-suited
to enable customers to make rapid, highly complex business decisions.
Traditional solutions were also not designed to access and integrate data
from disparate transaction systems, legacy systems, databases and other
data repositories, limiting their utility in business planning activities.
Limited Representation of Business Processes. The Company believes
that traditional solutions lack the flexibility and functionality needed to
create a highly accurate model of business processes because they often
employ fixed assumptions regarding critical operating constraints such as
available production capacity and supplier lead times. Since this approach
cannot adequately capture complex real-world constraints and
interdependencies, it may result in the development of infeasible or
suboptimal plans. In addition, traditional solutions calculate plans and
schedules for individual, local segments of the production and supply
process, without considering the consequences to the entire process. For
example,
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an increase in customer demand might result in the purchase of additional
raw materials without determining whether manufacturing capacity is
available to process those materials. This approach incorrectly assumes
that optimizing production for an individual step within the production
process will lead to an optimal result for the manufacturing operation or
supply chain as a whole.
Sequential Planning. Traditional planning methodologies model business
processes such as supply chain management as a sequence of discrete steps.
For example, traditional solutions begin by developing a demand forecast
from which a distribution plan is developed to determine the distribution
center, warehouse or factory source which will be used to
manufacture/distribute the products without regard to transportation or
manufacturing constraints. A transportation plan is then generated to
determine the optimal methods to ship the products without addressing the
constraints of the remaining parts of the supply chain. A master production
schedule is then generated which is used to develop a materials requirement
plan, which in turn is used to arrive at a capacity requirements plan. A
financial plan is then often generated independently. Because the process
does not address all constraints simultaneously, the initial planning cycle
is rarely feasible or optimal. Moreover, as resources become constrained,
sequential planning requires that the entire supply chain model be
completely regenerated from the beginning to identify and resolve
conflicts. As a result, the planning process often requires numerous manual
iterations to develop a feasible solution. Once an initial plan has been
developed, the time-consuming nature of sequential planning limits a
manager's ability to rapidly evaluate subsequent changes, such as material
shortages and revisions in customer orders. Accordingly, a manager's
ability to respond to changes and to effect corrective action may be
delayed.
Limited Integration and Functionality. Traditional solutions may
provide selected business process planning modules, but generally do not
provide integrated functionality across all business processes. For
example, several ERP vendors have acquired planning products which address
specific supply chain challenges, but fail to provide global visibility and
optimization across demand forecasting, manufacturing planning, plant
scheduling, distribution and transportation. In addition, traditional
solutions often offer only limited functionality within these areas. For
example, MRP and ERP systems often provide limited "available-to-promise"
functionality by simply processing orders on a "first-come, first-served"
basis, without considering other constraints or business objectives.
Furthermore, traditional solutions typically assume complete independence
of supply and demand and financial goals. Often, however, the overabundance
or scarcity of a certain product can directly or indirectly impact demand
for that product and related products. Complex interrelationships and
interdependencies are not adequately accounted for in traditional planning
methodologies, leading to potentially inaccurate conclusions and
recommendations.
Lengthy Implementation Cycles. Due to the broad scope, complexity and
associated re-engineering requirements of ERP systems, many companies have
found the implementation of such systems to be costly and time consuming.
Such factors often delay or limit the realization of benefits associated
with the implementation of ERP systems.
THE i2 SOLUTION
i2 is the leading provider of client/server-based eBPO software products
for supply chain management and related business process optimization
applications. i2's RHYTHM supply chain management products are designed to
provide customers with an end-to-end solution, enabling customers to model
complex, multi-enterprise supply chains to rapidly generate integrated solutions
to challenges such as demand volatility, production bottlenecks, supply
interruptions and distribution alternatives. RHYTHM utilizes a unique,
constraint-based methodology, which simultaneously considers a broad range of
factors -- from changing revenue forecasts to machine capacities to individual
customer commitments -- to optimize all aspects of the supply chain. RHYTHM's
advanced decision support capabilities enable companies to make more timely and
better informed planning, scheduling and resource allocation decisions in order
to improve throughput, operating efficiency, customer satisfaction and return on
assets. The Company is currently extending its suite of supply chain management
eBPO products to enable customers to optimize a broader range of enterprise
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functions, including customer management, product lifecycle management,
interprocess planning and strategic planning.
RHYTHM products are designed to help businesses increase throughput, reduce
inventory, decrease cycle times, improve customer delivery date performance and,
consequently, enhance return on assets. The Company's software products are also
designed to enable customers to reduce costs, increase market share and enhance
their competitive advantage. i2's approach to customer relationships is centered
on the identification of potential savings and the creation of value for
customers. As part of this dedication to providing value for customers, i2 has
established a goal of generating more than $50 billion in total value for its
customers by the year 2005 through growth and savings. Although RHYTHM is
usually deployed as a stand-alone alternative to MRP products, RHYTHM is often
implemented in conjunction with, or as a complement to, existing MRP and ERP
solutions. RHYTHM's data structures, methodologies and application logic
differentiate it from existing solutions in the following ways:
Integrated Decision Support. RHYTHM's memory-resident, object-oriented
design allows for very rapid analysis and response to planning and
scheduling issues. RHYTHM identifies production and scheduling problems as
circumstances change, proposes optimal solutions and allows for automatic
or manual corrective action. i2's software also allows managers to perform
real-time simulations which gauge the impact of potential local actions on
business processes. The Company believes that this decision support
functionality enables customers to better manage business processes to
reduce costs, maximize throughput and improve return on assets. In
addition, the Company's software enables customers to plan elements of
their business processes collaboratively with business partners.
Accurate Representation of Business Processes. RHYTHM is designed to
incorporate a broad range of specific, real-world constraints and thereby
enhance the accuracy of business process models and improve their
decision-making utility. RHYTHM distinguishes between hard constraints,
those which are not subject to change or flexibility (e.g., a machine's
maximum rated production capacity), and soft constraints, those which may
be altered in order to arrive at an optimal solution (e.g., preferred
sources for materials). RHYTHM's incorporation of object-oriented data
structures represents a significant advance in the creation of complex
business process models.
Concurrent Planning. In contrast to sequential planning, concurrent
planning views all the steps in the manufacturing process simultaneously.
Upon identification of a planning or scheduling change, RHYTHM immediately
propagates the effect of the change upstream and downstream, from the point
of origin, throughout the supply chain model to derive a revised, optimal
solution. For example, an unforeseen loss of production capacity would
automatically signal for a reduction in raw material procurement as well as
the potential rescheduling of customer delivery dates. Because RHYTHM
presents an integrated model of the supply chain, from demand forecasting
to raw material procurement, work-in-process, distribution and
transportation to customer delivery, it is able to provide solutions which
optimize the efficiency of the supply chain as a whole rather than summing
a series of local optimizations.
Global Integration and Advanced Functionality. RHYTHM provides
customers with a fully integrated, end-to-end supply chain management
solution, from demand forecasting to manufacturing planning, plant
scheduling, distribution and transportation. This enables customers to
address a broad range of supply chain issues and to gain visibility across
their entire supply chains to identify, evaluate and address these issues
rapidly and effectively. Additionally, RHYTHM analyzes complex
supply/demand interrelationships in order to more accurately represent
real-world supply chain mechanics. RHYTHM's architecture is designed to
enable easy integration with a broad range of transactional, legacy and
other decision support software programs, enabling customers to leverage
their investments in these systems. The Company is currently extending its
suite of eBPO products to enable customers to optimize a broader range of
enterprise functions, including customer management, product lifecycle
management, interprocess planning and strategic planning.
Ease of Implementation. RHYTHM is designed as a broadly applicable
software solution which is adaptable for customers in a wide range of
industries. In addition, RHYTHM is designed to integrate easily with many
existing client/server and legacy MRP and ERP systems. As a result,
functional
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implementation at a single site can generally be completed within three to
four months depending on the scope and complexity of the installation
project. The Company's goal is for the customer to realize a significant
return on its investment within a year of licensing.
STRATEGY
The Company's objectives are to maintain its leadership position in eBPO
software, help create significant value for its customers and continue to
increase its market share of the supply chain management and related business
process optimization markets. The Company's strategy for achieving these
objectives is as follows:
Expand eBPO Product Offerings. i2 believes that it has gained
significant experience in supply chain management methodologies through its
work with its existing customer base. The Company intends to continue to
leverage this experience, together with its expertise in advanced software
technology, to extend the scope and depth of its suite of eBPO products to
enable customers to optimize a broader range of enterprise functions
including customer management, product lifecycle management, interprocess
planning and strategic planning. The eBPO suite of products is designed to
complement standard ERP solutions. While ERP systems are focused on
transaction processing and reporting, eBPO solutions are designed to
determine the optimal means of employing assets while simultaneously
addressing both supply chain and financial goals.
Enhance Support for Customers' Internet/e-Commerce Initiatives. The
Company's eBPO solutions, particularly its supply chain management
software, have enabled traditional and new businesses to reengineer their
supply chains to realize the efficiency and effectiveness required by
e-commerce initiatives. The Company's software also is designed to support
leading Internet/online storefronts. Forrester Research estimates the
market for goods and services transacted via e-commerce over the Internet
to be as much as $80 billion in 1998 and to increase to as much as $3.2
trillion in 2003. The Company believes it is well positioned to enhance and
extend its support of its customers' e-commerce initiatives.
Expand Expertise in Multiple Targeted Vertical Markets. The Company is
focused on selected vertical markets such as High Tech, Automotive,
Consumer Goods, Metals, Medical/Pharmaceutical, Paper, Retail and other
industries. The Company will continue to leverage the highly flexible
nature of the core RHYTHM business process optimization software to develop
and maintain its family of pre-configured templates tailored to address the
particular requirements of these existing and new targeted vertical
markets.
Invest Aggressively to Build Market Share. The Company has made and
continues to make substantial investments to expand its sales and
marketing, research and development, consulting and administrative
infrastructure. i2 believes that such investments are necessary to increase
its market share and to capitalize on the growth opportunities in the
emerging eBPO software market.
Acquire Complementary Businesses, Products and Technologies. The
Company believes that certain acquisitions will provide the opportunity to
broaden its product offerings and provide more comprehensive decision
support and supply chain management solutions. For example, the Company's
May 1997 acquisition of Think Systems Corporation and Optimax Systems
Corporation significantly extended its capabilities in demand planning and
manufacturing scheduling, and its April 1998 acquisition of InterTrans
Logistics Solutions Limited significantly extended its capabilities in
transportation planning. The Company may in the future pursue additional
acquisitions of businesses, products and technologies, or enter into joint
venture arrangements, which complement or expand its business.
Continue to Develop Collaborative, e-Business Solutions. The Company's
Global Decision Support Architecture has been designed to enable RHYTHM to
easily access data from a broad range of customer data repositories, enable
smoother communications and data translations between RHYTHM and disparate
enterprise software systems, provide a multi-dimensional, uniform user
interface and enable a greater level of collaborative planning across the
Internet and supply chain within and between
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enterprises. i2 believes that customers must be able to integrate the
variety of applications that they use to run their business and that, over
time, application integration and collaborative, multi-enterprise planning
will be critical to enable customers to derive significant additional value
from eBPO.
Interoperate with a Broad Range of Software Platforms and
Applications. The Company believes that most larger companies operate in
heterogeneous computing environments, with diverse data repositories,
transaction and legacy systems and new Internet/online storefronts.
Therefore, the Company's software must be able to interact and interoperate
with a broad range of software platforms and products, including
particularly the Internet, in order to successfully manage complex,
multi-enterprise supply chains. The Company's strategy is to establish and
maintain cooperative relationships with a broad range of hardware and
software vendors while maintaining platform-neutral, Internet compatible
architecture. In this regard, the Company is working together with legacy
and ERP vendors such as SAP AG, Oracle Corporation, Baan Company N.V. and
PeopleSoft, Inc. to establish and maintain the necessary complex interfaces
between the Company's software and such vendor's transaction-based systems.
In addition, the Company strives to balance its relationships with platform
and transaction system vendors to avoid becoming too closely aligned with
any individual vendor.
Build Strategic Alliances and Broaden Distribution Channels. The
Company intends to expand and seek additional strategic relationships with
MRP and ERP vendors to integrate RHYTHM with their software products to
create joint-marketing opportunities. In addition, the Company intends to
augment its sales efforts by establishing and expanding relationships with
other complementary business application software vendors and systems
consulting and integration firms. The Company is leveraging third-part
implementation services with large, international consulting firms such as
Andersen Consulting, Deloitte & Touche, Ernst & Young, KPMG Peat Marwick
and PricewaterhouseCoopers to enable it to more rapidly penetrate its
target market. In addition, the Company has established direct sales
offices in international markets and intends to continue to expand its U.S.
and international sales forces.
PRODUCTS
RHYTHM operates as a flexible, integrated solution and is available in
single- and multi-site configurations. RHYTHM is currently composed of a supply
chain management suite and various extensions.
RHYTHM Supply Chain Management Suite. The Supply Chain Management
suite of products focuses on the basic supply chain backbone. This suite
includes Demand Planner, which forecasts demand, Supply Chain Planner,
which coordinates and optimizes planning and scheduling scenarios, Factory
Planner, which manages complex manufacturing operations, Transportation
Planner, which optimizes transportation routes and vehicle loads, Demand
Fulfillment, which optimizes delivery date commitments, and Scheduler,
which determines the optimum sequence of jobs.
Available extensions to the Supply Chain Management Suite include the
following:
RHYTHM Active Data Warehouse. Active Data Warehouse serves as a single
repository for plans and actual information. It is based upon a common data
model implemented in a relational database, linked to a multi-dimensional
database for On-Line Analytical Processing (OLAP) reporting.
RHYTHM Reporter. Various reporting products provide multi-dimensional
reporting environments for RHYTHM and packages of predefined reports. These
reports include both actual and planned performance reviews.
RHYTHM Global Collaboration. Global Collaboration enables a company to
share product requirements and components with its suppliers. It
continuously updates both plans and requirements based upon the inputs of
supply chain partners.
RHYTHM Global Demand Manager. Global Demand Manager supports
collaborative forecasting between suppliers and customers. Sales forecasts
are generated by the supplier and compared against future requirements
calculated by customers.
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RHYTHMLINK. RHYTHMLINK facilitates communication and data exchange
between RHYTHM and other applications such as databases, report writers and
ERP solutions by using industry accepted standard technologies and
interfaces. RHYTHMLINK is designed to enable companies to rapidly integrate
and implement the RHYTHM products with its existing information resources.
All of the Company's current products are available in English and many are
available in German, French, Japanese and Spanish.
In September 1998, the Company announced several products in various stages
of development, each of which is being developed to more fully address the
business-to-business and business-to-consumer collaboration using new workflow
and Internet standards embodied by eBPO. These products are grouped in the
following suites:
RHYTHM Customer Management. The Customer Management suite of products
is being designed to facilitate customer sales and provide service support.
This suite will focus on customer-specific product configurations by
enabling fast, accurate sales quotations as well as the ability to manage
diversified product lines. The suite also will optimize a customer's spare
parts management strategy.
RHYTHM Product Lifecycle Management. This suite will plan and optimize
product portfolios based on financial objectives, resource constraints,
account supply chain data and other product development systems. It will
provide integrated information about product lifecycles, demand forecasts,
marketing efforts, production capabilities, development time and resource
bottlenecks.
RHYTHM InterProcess Planner. This suite will integrate and optimize
processes across other RHYTHM product suites. InterProcess Planner is being
designed to optimize other related business processes at any point in time
as each business process is optimized.
RHYTHM Strategy Planner. This suite will consist of simulation tools
to support supply chain network design processes such as rationalization of
distribution centers, plant closings and service territory assignments.
Strategy Planner is being designed for use for periodic strategic planning
reviews or to optimize the supply chain when major changes occur, such as
mergers or divestitures.
There can be no assurance that the Company will be successful in further
developing these or any other new products, that the Company will not experience
difficulties that could delay or prevent successful development, introduction
and sales of these products, or that its new products and enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance.
During 1998, the sales prices for RHYTHM software packages, other than for
two significantly large sales, generally ranged from approximately $100,000 to
approximately $10.9 million. The price for an individual RHYTHM product package
is determined based upon a number of factors, including the RHYTHM modules and
extensions purchased, the number of servers, users and sites in the customer's
system, as well as the complexity of the customer's supply chain.
RHYTHM is a client/server solution which can operate on hardware platforms
from Digital Equipment, Hewlett-Packard, IBM and Sun Microsystems using
Microsoft's Windows NT operating system or the UNIX variant supported by each
hardware platform. RHYTHM is written in C++ language and utilizes a fully
object-oriented data structure for representing operations, resources and
constraints in supply chains. Once a model is defined, the entire representation
is loaded into random access memory ("RAM") and all processing by RHYTHM takes
place in RAM. A typical supply chain model implemented in the Company's system
may occupy as much as two gigabytes of RAM. RHYTHM reads and writes data to a
wide variety of databases and data structures, and is operable in conjunction
with a wide variety of ERP systems. The Company believes that the combination of
its object-oriented and memory-resident technologies permit RHYTHM to achieve
accuracy and speed advantages over traditional planning and scheduling solutions
PRODUCT DEVELOPMENT
The Company originally introduced its RHYTHM software in 1992 and has
subsequently released a number of product enhancements as well as acquired
significant products. The Company has adopted a
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strategy of periodically reinventing its products in order to meet its
customers' needs, and strives to ensure that each new generation of RHYTHM is
compatible with previous releases. On-going product development efforts are
focused on broadening the functionality of RHYTHM to more fully address various
eBPO initiatives, including customer management, product lifecycle management,
interprocess management and strategic planning.
RHYTHM products have been developed by the Company's internal developmental
staff through small project teams focused on independent components of the
software under development. The Company maintains product release planning
procedures to ensure integration, testing and version control among the
different project development teams. The Company operates its research and
development department in a "technology neutral" environment which makes it
possible to operate within industry standards and yet be independent of
particular database formats, hardware platforms, network protocols and
interfaces. The Company maintains significant development centers in Bangalore
and Mumbai, India; Cambridge, Massachusetts; Dallas, Texas; Parsippany, New
Jersey; and Toronto, Ontario.
Research and development expenses have increased significantly in recent
periods as the Company has continued to focus on development of new and enhanced
products. Research and development expenses were $84.2 million, $52.7 million
and $21.9 million in 1998, 1997 and 1996, representing 23.2%, 24.7% and 21.8% of
total revenues, respectively.
CUSTOMER SERVICE AND SUPPORT
The Company believes 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. The Company has expanded its service and support centers
geographically and now has support centers across the U.S. and in Australia,
Belgium, Canada, Denmark, France, Germany, India, Japan, Mexico, Singapore,
South Africa, Taiwan and the United Kingdom. Accordingly, the Company is
committed to continue recruiting and maintaining a high-quality technical
support team. The Company's customer service and support activities consist of
the following:
Training. The Company offers an intensive education and training program
for its customers and its third-party implementation providers. Classes are
offered at in-house facilities at certain of the Company's offices and at
customer locations. These classes focus on supply chain management principles as
well as the implementation and use of RHYTHM products.
Consulting. The Company offers its customers on-site consulting services
aimed at assisting in the implementation of RHYTHM and integration with the
customers' existing systems. The Company receives hourly 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. The Company also leverages the use of
third-party consulting firms to more rapidly penetrate its target market.
Maintenance and Product Updates. The Company provides ongoing product
support services under its license agreements. Maintenance contracts are
typically sold to customers for a one-year term at the time of the initial
RHYTHM license and may be renewed for additional periods. Under its maintenance
agreements with its customers, the Company provides, 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 the Company at market prices. Ongoing support and
maintenance services are provided on up to a seven-day week, 24-hour day basis.
SALES AND MARKETING
The Company markets its software and services primarily through its direct
sales organization augmented by other sales channels, including business
application software vendors and systems consulting and integration firms. At
December 31, 1998, the Company conducted sales and other activities through
several
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offices in the U.S. and additional offices in Australia, Belgium, Brazil,
Canada, Denmark, France, Germany, Italy, Japan, Korea, Singapore, South Africa,
Taiwan and the United Kingdom. The Company's direct sales organization consists
of regionally based sales representatives and sales engineers supported by
personnel with experience in the aerospace, apparel, automotive, consumer
products, furniture, high-tech, industrial, metals, paper, pharmaceuticals,
process, retail and textiles industries.
The Company currently has joint-marketing agreements with a number of
business application software vendors, including Oracle Corporation and System
Software Associates, Inc., and several systems consulting and integration firms.
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 vary from zero to 40% of the sales price of the license. By
using these indirect sales channels, the Company is seeking to capitalize on the
installed base of other software vendors and obtain favorable product
recommendations from systems consulting and integration firms, thereby
increasing RHYTHM's market coverage. There can be no assurance that any of these
joint-marketing and development agreements will be beneficial to the Company or
that such relationships will be sustained.
CUSTOMERS
As of December 31, 1998, the Company had licensed RHYTHM products to over
600 customers since inception. The following is a partial list of companies that
have licensed more than $1.0 million of RHYTHM products:
AUTOMOTIVE/INDUSTRIAL Samsung METALS
Ford ST Microelectronics Bethlehem Steel
Navistar Siemens Semiconductors British Steel
Silicon Graphics Broken Hill Proprietary
CONSUMER ELECTRONICS/ Sun Microsystems Iscor Limited
HIGH TECHNOLOGY Texas Instruments National Steel
Acer Thomson Consumer Sidmar
Altera Toshiba Timken
Applied Materials CONSUMER GOODS US Steel
AST Research 3M
Canon British American Tobacco PAPER
Casio Dole CSS Industries
Compaq Computer E&J Gallo Winery Fletcher Challenge
Dell Computer Frito-Lay Sonoco
Fujitsu Lipton
Gateway 2000 Sara Lee Knit Products OTHER
Hewlett-Packard Sherwin Williams Con-Way
IBM Steelcase Dresser Rand
Integrated Device VF Services GE Capital
Technology GE Plastics
Iomega MEDICAL/PHARMACEUTICAL Haworth
Lucent Technologies Abbott Laboratories Herman Miller
Maxtor Bristol-Myers Squibb LFI
Microage Johnson & Johnson Medical Newport News Shipbuilding
Motorola Medtronic Occidental Chemical
Philips Semiconductors Polimeri
Quantum Ryder Logistics
The Company provides its software products to customers under
non-exclusive, non-transferable license agreements. As is customary in the
software industry, in order to protect its intellectual property rights, the
Company does not sell or transfer title to its products to its customers. Under
the Company's current standard form of license agreement, licensed software may
be used solely for the customer's internal operations.
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COMPETITION
The markets in which the Company operates are highly competitive. The
Company's 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: (i) enterprise resource application software vendors such
as SAP AG, PeopleSoft, Inc., Oracle Corporation and Baan Company, N.V., each of
which currently offers sophisticated ERP solutions that currently or may in the
future incorporate applications competitive with the Company's products; (ii)
supply chain software vendors including Manugistics Group, Inc. and Logility,
Inc.; (iii) 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; (iv)
internal development efforts by corporate information technology departments;
and (v) 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 the Company's products as a complement
to their own systems. The Company believes that as its market share increases,
and as the ranges of products offered by the Company and these ERP vendors
expand and increasingly overlap, relationships which were cooperative in the
past will become more competitive, thereby increasing the overall level of
competition the Company faces. Specifically, in 1997, the Company and SAP AG
terminated a license and distribution agreement, and SAP AG is currently
marketing a suite of advanced planning and scheduling products which may compete
directly with RHYTHM. The Company believes 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
recently acquired independent developers of advanced planning and scheduling
software which compete with RHYTHM.
Many of the Company's 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 than the Company, each of which could provide them
with a significant competitive advantage over the Company. In addition, the
Company expects to experience increasing price competition as the Company and
its competitors compete for market share. There can be no assurance that the
Company will be able to compete successfully with existing or new competitors or
that competition will not have a material adverse effect on the Company's
business, operating results and financial condition.
PROPRIETARY RIGHTS AND LICENSES
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. In addition, the Company generally licenses
RHYTHM products to end users in object code (machine-readable) format, and the
Company's 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, the Company believes that the foregoing
measures afford only limited protection. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as the laws of the U.S.
Furthermore, there can be no assurance that the Company's competitors will not
independently develop technology similar to that of the Company. The Company may
increasingly be subject to claims of intellectual property infringement as the
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Although
the Company is not aware that any of its products infringes upon the proprietary
rights of third parties, there can be no assurance that third parties will not
claim infringement by the Company with respect to current or future products.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, which could
have a material adverse effect upon the Company's business, operating results
and financial condition.
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The Company resells certain software which it licenses from third parties,
and may in the future resell other software of third parties. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms. The loss of or inability to
maintain or obtain any of these software licenses could result in delays or
reductions in product shipments until equivalent software could be identified,
licensed and integrated, which could adversely affect the Company's business,
operating results and financial condition.
EMPLOYEES
As of December 31, 1998, the Company had 2,244 full-time employees,
including 743 primarily engaged in research and development activities and 564
engaged in sales and marketing activities. The Company's future success depends
in significant part upon the continued service of its key technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel. Competition for such personnel is
intense and there can be no assurance that the Company can retain its key
managerial and technical employees or that it can attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. None of
the Company's employees are represented by collective bargaining units and the
Company has never experienced a work stoppage. The Company believes that its
employee relations are very good.
ADDITIONAL 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 the Company and its business.
Our Financial Results May Vary Significantly from Quarter to Quarter. Our
operating results have varied significantly from quarter to quarter in the past
and will 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
our 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;
- 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 our 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
our expected future revenues. A significant portion of our expenses are not
variable in the short term and cannot be quickly reduced to respond to decreases
in revenues. Therefore, if our revenues are below our expectations, our
operating results and net income are likely to be adversely and
disproportionately affected. In addition, we may reduce our prices or accelerate
our investment in research and development efforts in response to competitive
pressures or to pursue new market opportunities. Any one of these activities may
further limit our ability to adjust spending in response to revenue
fluctuations. Our revenues may not grow at historical rates in future periods,
or they may not grow at all. Because of this, we may not maintain positive
operating margins in future quarters.
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We experience seasonal fluctuations in our operating results. Historically,
our operating results have tended to be strongest in the fourth quarter of the
year and to increase only modestly in the first quarter of the following 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 periods, we expect that these
seasonal trends may cause first quarter operating results to remain consistent
with, or decrease from, the level achieved in the preceding quarter.
We Depend on Significant Individual Sales. 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 the second, third and
fourth quarters of 1998 and each quarter of 1997 and 1996, one or more customers
each accounted for at least 15% of our total software license revenues in that
quarter. If in any future period we fail to close one or more substantial
license sales that have been targeted to close in that period, our operating
results for that period could be materially affected. 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 may
experience significant variations in our license revenues and results of
operations if we incur any delays in customer orders.
Our Markets are Highly Competitive. The markets for our products are highly
competitive. Our competitors offer a variety of solutions directed at various
segments of the supply chain as well as the enterprise as a whole. Our
competitors include:
- Enterprise resource application software vendors such as SAP AG,
PeopleSoft, Inc., Oracle Corporation and Baan Company, N.V. Each of these
vendors currently offers sophisticated enterprise resource planning
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.;
- Business application software vendors who may broaden their product
offerings by internally developing, or by acquiring or partnering with
independent developers of, advanced planning and scheduling software;
- Corporate information technology departments which may develop their own
advanced planning and scheduling software; and
- Companies offering standardized or customized products for mainframe
and/or mid-range computer systems.
Historically, a number of enterprise resource planning vendors have jointly
marketed our products as a complement to their own systems. However, as we
increase our market share and expand our product offerings, and as enterprise
resource planning vendors expand their own product offerings, we believe our
relationships with these vendors will become more competitive. Specifically, in
1997, our license and distribution agreement with SAP AG was terminated, and SAP
AG is currently marketing a suite of advanced planning and scheduling products
which may compete directly with RHYTHM. We believe that other enterprise
resource planning vendors are focusing significant resources on increasing the
functionality of their own planning and scheduling modules. At least two other
enterprise resource planning vendors have 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.
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In addition, we expect to experience increasing price competition as we compete
for market share. We may not be able to compete successfully with our existing
or new competitors. If we experience increased competition, it may have a
damaging effect on our business, operating results and financial condition.
We May Not be Able to Manage our Growth. Our business has grown rapidly in
recent years. Revenues have increased to $361.9 million in 1998 from $213.7
million in 1997 and from $100.5 million in 1996. Our employee count has
increased to 2,244 at December 31, 1998 from 1,191 at December 31, 1997 and from
721 at December 31, 1996. We have also increased the scope of our operating and
financial systems and the geographic distribution of our operations and
customers. Our management and operations have been strained by this growth and
will continue to be strained should rapid growth continue. Our officers and
other key employees must continue to implement and improve our operational,
customer support and financial control systems and effectively expand, train and
manage our employee base. If they fail to do so, our future operating results
will be adversely affected. We may not be able to manage future expansion
successfully, and our inability to do so would damage our business, operating
results and financial condition.
We Face Risks of a Developing Market. We currently derive a substantial
portion of our revenues from licenses for supply chain management software and
related services. However, we are investing significant resources in developing
and marketing broader functionality for eBPO solutions, such as customer
management, product lifecycle management, interprocess planning and strategic
planning. The market for this broader functionality may not develop, competitors
may develop superior products or we may not develop acceptable solutions to
address this functionality. Any one of these events could seriously damage our
business, operating results and financial condition.
We Have Significant Product Concentration. We currently derive
substantially all of our revenues from RHYTHM licenses 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. 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 would have a damaging effect on our business,
operating results and financial condition.
Our Market Experiences Rapid Technological Change. Enterprises are
increasing their focus on decision support for business process optimization
challenges. As a result, they are requiring their application software vendors
to provide greater levels of functionality and broader product offerings.
Moreover, competitors in our market continue to make rapid technological
advances in computer hardware and software technology and frequently introduce
new products and enhancements. We must continue to enhance our current product
line and develop and introduce new products that keep pace with the
technological developments of 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
do not achieve market acceptance, our business, operating results and financial
condition could be seriously damaged.
We Must Integrate our Recent Acquisitions. In April 1998, we acquired
InterTrans Logistics Solutions Limited ("ITLS"). In May 1997, we acquired Think
Systems Corporation ("Think") and Optimax Systems Corporation ("Optimax"). 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 RHYTHM.
We may encounter difficulties in integrating our operations and products with
those of ITLS, Think or Optimax. We may not realize the integration benefits we
anticipated when we made these acquisitions. Our failure to successfully
integrate our operations and products with those of ITLS, Think and Optimax
could seriously damage our business, operating results and financial condition.
We May Make Future Acquisitions or Enter Into Joint Ventures. In the
future, we may acquire additional businesses, products and technologies, or
enter into joint venture arrangements, that could
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complement or expand our business. 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. Any
future acquisitions could require 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. Further, we may not be able to integrate any acquired business,
products or technologies with our existing operations. If we are unable to fully
integrate an acquired business, product or technology, we may not receive the
intended benefits of that acquisition.
Our International Operations Expose Us to Risks. We derived approximately
20%, 31% and 22% of our total revenues in 1998, 1997 and 1996, respectively,
from customers located outside of the U.S. To continue our growth and
profitability, we will need to expand our sales in international markets.
Further penetration of international markets will require us to expand our
existing foreign operations, to establish additional foreign operations and to
translate our software and manuals into additional foreign languages. Expansion
may be costly and time-consuming and may not generate returns for a significant
period of time, if at all. If we are unable to expand our international
operations or translate our software and manuals into foreign languages in a
timely manner, our further penetration of international markets would be limited
and our business, results of operations and financial condition could be
adversely affected.
Our international operations are subject to risks inherent in international
business activities, including:
- Difficulty in 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; and
- General economic conditions in international markets.
In particular, countries in the Asia-Pacific and Latin American regions have
recently experienced weaknesses in their currency, banking and equity markets.
These weaknesses could adversely affect the demand for our products, the U.S.
dollar value of our foreign currency denominated sales and, ultimately, our
business, operating results and financial condition.
We May Experience Currency Fluctuations. To date, our international
operations revenues have primarily been denominated in U.S. dollars. The
majority of our international operations expenses and some sales have been
denominated in currencies other than the U.S. dollar. Therefore, our operating
results may be adversely affected by changes in the value of the U.S. dollar. As
our international operations expand, our exposure to exchange rate fluctuations
will increase as we use an increasing number of foreign currencies. We have
implemented limited hedging programs to mitigate our exposure to currency
fluctuations. Despite these hedging programs, exchange rate fluctuations have
caused, and will continue to cause, currency transaction gains and losses. While
these gains and losses have not been material to date, they may have a damaging
effect on our business, results of operations or financial condition in future
periods.
Risks Associated with Strategic Relationships. From time to time, we have
collaborated with other companies, including Oracle Corporation and System
Software Associates, Inc., in areas such as product development, marketing,
distribution and implementation. Maintaining these and other relationships is a
meaningful part of our business strategy. However, most of our current and
potential strategic partners are either actual or potential competitors with us.
In addition, some of our relationships have failed to meet
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expectations. For instance, our license and distribution relationship with SAP
AG was terminated in 1997, and SAP AG is currently marketing a suite of products
which may compete directly with RHYTHM. Our current collaborative relationships
may not prove to be beneficial to us, and they may not be sustained. We may not
be able to enter into successful new strategic relationships in the future.
We Depend Upon our Key Personnel. We rely upon the continued service of a
relatively small number of key technical and senior management personnel.
However, only a few of these individuals have employment agreements with us. 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. 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. Kanna (Ken) N. Sharma, our
Vice-Chairman of the Board and Executive Vice President, has been diagnosed with
a brain tumor. While Mr. Sharma is currently providing services to the Company,
he may not be able to continue to do so in the future. If we lose any of our key
technical and senior management personnel or if we are unable to attract and
retain additional qualified personnel, our business, operating results and
financial condition could be seriously damaged.
We May be Unable to Protect our Intellectual Property and Proprietary
Rights. We rely primarily on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
our proprietary rights. However, these measures afford us 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 unable to determine the extent to which
piracy of our software products exists. The laws of some foreign countries do
not protect our proprietary rights to the same extent as the laws of the United
States.
The number of products and competitors in our industry segment continues to
grow and the functionality of products in different industry segments are
increasingly overlapping. As a result, we may increasingly 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, cause product shipment delays or the loss or deferral of
sales or require us to enter into royalty or licensing agreements. If we are
required to enter into royalty or licensing agreements, they may not be on terms
acceptable to us. Unfavorable royalty and licensing agreements could seriously
damage our business, operating results and financial condition.
We resell certain software which we license from third parties. In the
future, we may continue this practice. Third-party software licenses may not
continue to be available to us on commercially reasonable terms. The loss of, or
inability to maintain or obtain, any of these software licenses could delay or
reduce our product shipments until equivalent software could be identified,
licensed and integrated. Any delay or reduction in product shipments could
damage our business, operating results and financial condition.
Our Software Products May be Incompatible with New Platforms. RHYTHM is a
client/server solution which can operate on hardware platforms from Digital
Equipment (recently acquired by Compaq Computer), Hewlett-Packard, IBM and Sun
Microsystems and operating systems from Sun Microsystems and Microsoft. RHYTHM
can access data from most widely used SQL (structured query language) databases,
including Informix, Oracle and Sybase. If additional hardware or software
platforms gain significant market acceptance, we may be required to port RHYTHM
to those platforms in order to remain competitive. Such platforms may not be
architecturally compatible with RHYTHM's software product design, and we may not
be able to port RHYTHM to those additional platforms on a timely basis, or at
all. Any failure to maintain compatibility with existing platforms or to port to
new platforms that achieve significant market acceptance would seriously damage
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." Despite our
testing, bugs may be discovered only after our product has been installed and
used by customers. We have on occasion experienced delays in the scheduled
introduction of new and enhanced products because of bugs. Undetected errors
could result in adverse
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publicity, loss of revenues, delay in market acceptance or claims against us by
customers, any of which could seriously damage our business, operating results
and financial condition.
Pending Releases of New Products May Cause Purchasing Delays. Customers may
delay their purchasing decisions in anticipation of new or enhanced RHYTHM
products or products of competitors. Delays in customer purchasing decisions
could have a material adverse effect on 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 damage our business,
operating results and financial condition.
We Depend on our Technical and Implementation Personnel. Our technical
sales personnel typically support RHYTHM sales. Our ability to expand sales and
enter into new vertical markets could be affected by a shortage of qualified
technical sales support personnel. We depend on our trained implementation
personnel or those of independent consultants to implement RHYTHM. A shortage in
the number of trained implementation personnel could limit our ability to
implement our software on a timely and effective basis. Delayed or ineffective
implementation of our software may limit our ability to expand our revenues and
may result in customer dissatisfaction and damage to our reputation. Any of
these events could seriously damage our business, operating results and
financial condition.
Year 2000 Risks May Affect Us. Many older computer systems and software
products currently in use are coded to accept only two-digit entries in the date
code field. These date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. Significant uncertainty exists in the
software industry concerning the potential effects associated with such
compliance. We believe that current versions of our software products are Year
2000 compliant. However, some customers may be running earlier versions of the
software products developed by companies we have acquired that are not Year 2000
compliant, and we are encouraging such customers to migrate to current product
versions. Moreover, our products are generally 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
offered by RHYTHM. We may in the future be subject to claims based on Year 2000
problems in others' products, custom scripts created by third parties to
interface with our products or issues arising from the integration of multiple
products within an overall system. We have not been a party to any litigation or
arbitration proceeding to date involving our products or services and related to
Year 2000 issues. However, there can be no assurance that we will not in the
future be required to defend our products or services in such 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 damage our business, operating results and financial
condition. We believe that Year 2000 issues may affect the purchasing patterns
of customers and potential customers in a variety of ways. Many companies are
expending significant resources to correct, patch or replace their current
software systems to achieve Year 2000 compliance. These expenditures may result
in reduced funds available to purchase our products. Any of the foregoing could
damage our business, operating results and financial condition.
We May Become Subject to Product Liability Claims. Our license agreements
with customers typically contain provisions designed to limit our exposure to
product liability claims. However, these contract provisions may not preclude
all potential claims. 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 damage our reputation and
business, operating results and financial condition.
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Possible Volatility of Price of Common Stock. The market price of our
Common Stock has been volatile in the past and may be volatile in the future.
The market price of the Common Stock may be significantly affected by the
following factors:
- Quarterly variations in our results of operations;
- Our announcement of new products or product enhancements or similar
announcements by our competitors;
- Our technological innovations or those of 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 adversely affect the market price of the
Common Stock.
Our Executive Officers Have Voting Control. As of December 31, 1998, our
executive officers beneficially owned approximately 55% of our outstanding
Common Stock. As a result, these stockholders, acting in concert, could control
all matters submitted to our stockholders for a vote, including the election of
directors and the approval of mergers and other business combination
transactions. Sanjiv S. Sidhu, Chairman of the Board and Chief Executive
Officer, Kanna (Ken) N. Sharma, Vice Chairman of the Board, Executive Vice
President and Secretary and Sandeep (Sandy) R. Tungare, President, Demand
Management, constitute three of the five members of our Board of Directors.
Consequently, they have significant influence in directing the actions of the
Board of Directors.
We Have Anti-Takeover Provisions. Provisions of our Certificate of
Incorporation and Bylaws as well as Delaware 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 have the effect
of inhibiting a non-negotiated merger or other business combination.
ITEM 2. PROPERTIES
The Company's primary offices are located in approximately 121,000 square
feet of space in Irving, Texas and approximately 73,000 square feet in Dallas,
Texas under leases expiring in October 2000 and July 2003, respectively. The
Company also leases space for its other offices in the United States, Australia,
Belgium, Canada, Denmark, France, Germany, India, Japan, Singapore, South
Africa, Taiwan and the United Kingdom. These leases expire at various dates
through 2003.
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
The Company's 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 the Common Stock as reported by the Nasdaq National Market for
the periods indicated:
HIGH LOW
------ ------
Fourth quarter of 1998...................................... $31 15/16 $ 9 1/4
Third quarter of 1998....................................... 42 1/4 12 5/8
Second quarter of 1998...................................... 40 27
First quarter of 1998....................................... 32 13/16 25 1/16
Fourth quarter of 1997...................................... $27 13/16 $20 1/8
Third quarter of 1997....................................... 28 15 3/4
Second quarter of 1997...................................... 25 13
First quarter of 1997....................................... 22 7/8 12 7/8
As of February 1, 1999, there were 71,792,000 shares of the Common Stock
outstanding held by approximately 570 holders of record.
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends in the foreseeable future. Future
dividends, if any, will be determined by the Company's Board of Directors.
During 1998, the Company issued an aggregate 2,318,444 shares of its Common
Stock to employees pursuant to exercises of stock options (with exercise prices
ranging from $0.01 to $6.06 per share) under the Company's 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.
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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" in Item 7 of this Form 10-K and the consolidated
financial statements and notes thereto included in Item 14 of this Form 10-K.
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1994(1) 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues:
Software licenses....................... $11,178 $24,162 $ 61,073 $139,798 $230,961
Services................................ 5,013 10,837 30,515 53,437 88,972
Maintenance............................. 1,168 3,462 8,881 20,457 41,983
------- ------- -------- -------- --------
Total revenues.................. 17,359 38,461 100,469 213,692 361,916
------- ------- -------- -------- --------
Costs and expenses:
Cost of software licenses............... 366 390 260 2,744 7,959
Cost of services and maintenance........ 3,196 7,601 21,761 46,004 76,020
Sales and marketing..................... 4,780 10,487 35,182 73,526 121,978
Research and development................ 3,644 8,503 21,886 52,741 84,151
General and administrative.............. 2,188 5,286 10,425 21,810 33,845
In-process research and development and
acquisition-related expenses(2)...... -- -- 1,133 9,306 7,618
------- ------- -------- -------- --------
Total costs and expenses........ 14,174 32,267 90,647 206,131 331,571
------- ------- -------- -------- --------
Operating income.......................... 3,185 6,194 9,822 7,561 30,345
Other income (expense), net............... (127) (167) 1,681 3,353 6,917
------- ------- -------- -------- --------
Income before income taxes................ 3,058 6,027 11,503 10,914 37,262
Provision for income taxes................ 1,306 2,054 4,705 6,916 17,279
------- ------- -------- -------- --------
Net income................................ $ 1,752 $ 3,973 $ 6,798 $ 3,998 $ 19,983
======= ======= ======== ======== ========
Net income per share...................... $ 0.04 $ 0.09 $ 0.12 $ 0.06 $ 0.29
======= ======= ======== ======== ========
Net income per share, assuming dilution... $ 0.03 $ 0.07 $ 0.10 $ 0.06 $ 0.26
======= ======= ======== ======== ========
Weighted average common shares
outstanding............................. 41,940 43,538 58,000 62,652 70,004
Weighted average common shares
outstanding, assuming dilution.......... 53,178 58,752 65,974 70,932 76,388
DECEMBER 31,
--------------------------------------------------
1994(1) 1995(1) 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $ 4,066 $ 8,122 $ 59,421 $141,971 $154,878
Working capital........................... 1,814 7,408 64,028 161,041 191,344
Total assets.............................. 11,366 28,251 111,789 250,263 339,224
Total stockholders' equity................ 2,598 10,378 75,214 183,760 234,975
- ------------
(1) The consolidated statement of income data for the year ended December 31,
1994 and the consolidated balance sheet data at December 31, 1994 and 1995
are derived from unaudited consolidated financial statements.
(2) During 1997 and 1998, the Company incurred approximately $9.3 million and
$7.6 million in certain acquisition-related expenses, including $4.6 million
and $4.7 million of write-offs of in-process research and development,
respectively. The remaining costs included investment banking, legal and
accounting fees and expenses.
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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 the plans, objectives, expectations and intentions of i2
Technologies, Inc. (the "Company"). Such forward-looking statements are
generally 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 below entitled
"Factors That May Affect Future Results" sets forth certain factors that could
cause actual future results of the Company to differ materially from those
statements.
OVERVIEW
i2 is the leading provider of client/server-based eBPO software products
for supply chain management and related business process optimization
applications. i2's advanced supply chain management solutions include demand
forecasting, raw materials procurement, work-in-process, distribution and
transportation planning, optimization and collaboration within and between
enterprises. i2 has enabled businesses to re-engineer their supply chains to
realize significant increases in revenues, reductions in expenses and reductions
in asset investments by improving the efficiency and effectiveness of
determining when, where, what and how much to buy, make, move, store and sell.
As the Internet becomes an increasingly significant global medium for
business-to-business and business-to-consumer online commerce, existing and new
businesses in a wide variety of vertical markets are seeking to capitalize on
this growth. The Company believes its software enables its customers to benefit
from the growth of the Internet by supporting new Internet/online storefronts
and enabling re-engineering of supply chains to facilitate e-commerce
transactions.
Since inception, the Company has significantly increased its investment in
sales and marketing, service and support, research and development and general
and administrative personnel and infrastructure. As a result of these
investments, together with the increasing awareness of the benefits of supply
chain management in general and increased market acceptance of the Company's
products in particular, the Company's revenues in 1998, 1997 and 1996 were
substantially higher than the levels achieved in prior years. In order to
capture additional market share, the Company expects to continue to increase
staffing levels and incur additional associated costs in future periods through
both direct efforts and potential acquisitions. However, there can be no
assurance that the Company's revenues will grow in future periods or that the
Company will maintain the substantial growth rates in revenues it realized in
1998, 1997 and 1996.
The sales cycle for the Company's products is typically six to nine months,
and license revenues for a particular period are substantially dependent on
orders received and software functionality delivered in that period.
Furthermore, the Company has experienced, and expects to continue to experience,
significant variation in the size of individual sales. As a result of these and
other factors, the Company's results have varied significantly in the past and
are likely to be subject to significant fluctuations in the future. Accordingly,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily indicative of the results to be expected for any
future period.
From time to time, the Company has selectively acquired complementary
businesses, products and technologies. The Company's consolidated financial
statements periodically have been restated to reflect the pooling accounting
treatment of certain of these transactions. In May 1997, the Company acquired
Think Systems Corporation ("Think") and Optimax Systems Corporation ("Optimax")
for 7.7 million and 2.7 million shares of Common Stock, respectively. Each
acquisition was accounted for as a pooling of interests. In April 1998, the
Company acquired InterTrans Logistics Solutions Limited ("ITLS") for 3.3 million
shares of Common Stock in a transaction accounted for as a pooling of interests.
The Company acquired certain other businesses in 1998 for an aggregate purchase
price of $9.2 million, which included cash, stock, assumed liabilities and
acquisition costs in transactions accounted for using the purchase accounting
method.
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All share and per share amounts included in this Form 10-K have been
adjusted to reflect a two-for-one split of the Common Stock effected as a
dividend on June 2, 1998.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
of total revenues represented by certain items reflected in the Company's
consolidated statements of income:
YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
Revenues:
Software licenses......................................... 60.8% 65.4% 63.8%
Services.................................................. 30.4 25.0 24.6
Maintenance............................................... 8.8 9.6 11.6
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Cost of software licenses................................. 0.2 1.3 2.2
Cost of services and maintenance.......................... 21.7 21.5 21.0
Sales and marketing....................................... 35.0 34.4 33.7
Research and development.................................. 21.8 24.7 23.2
General and administrative................................ 10.4 10.2 9.4
In-process research and development and
acquisition-related expenses........................... 1.1 4.4 2.1
----- ----- -----
Total costs and expenses.......................... 90.2 96.5 91.6
----- ----- -----
Operating income............................................ 9.8 3.5 8.4
Other income, net........................................... 1.7 1.6 1.9
----- ----- -----
Income before income taxes.................................. 11.5 5.1 10.3
Provision for income taxes.................................. 4.7 3.2 4.8
----- ----- -----
Net income.................................................. 6.8% 1.9% 5.5%
===== ===== =====
Revenues
The Company's 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 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 the Company's consolidated financial statements for the year
ended December 31, 1998. In 1999, software license revenues will be 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." The Company
believes it is currently in compliance with SOP 97-2, as modified by SOP 98-9.
Service revenues are primarily 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.
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Total revenues increased 69.4% to $361.9 million in 1998 from $213.7
million in 1997, and increased 112.7% in 1997 from $100.5 million in 1996. The
Company currently derives substantially all of its revenues from licenses
associated with its RHYTHM suite of software products as well as related
services and maintenance. The Company expects that revenues from the expanded
suite of RHYTHM products will continue to account for substantially all of the
Company's revenues in the foreseeable future. As a result of the Company's
dependence on the continued market acceptance of the RHYTHM suite of products
and enhancements thereto, there can be no assurance that total revenues will
continue to increase at the rates experienced in prior periods, if at all.
Software Licenses. Revenues from software licenses increased 65.2% to
$231.0 million in 1998 from $139.8 million in 1997, and increased 128.9% in 1997
from $61.1 million in 1996. Software license revenues constituted 63.8%, 65.4%
and 60.8% of total revenues in 1998, 1997 and 1996, respectively. The
significant increases in the dollar amount of software license revenues were
primarily due to an increased customer awareness of the benefits derived from
deploying the Company's decision-support solutions, a substantial investment in
the Company's infrastructure to support the growing demand for the Company's
products and continued strength in key targeted vertical markets. To date, sales
of software licenses have principally been derived from direct sales to
customers. Although the Company believes that direct sales will continue to
account for the majority of software license revenues, the Company's strategy is
to continue to increase the level of indirect sales activities. The Company
expects that sales of its software products through sales alliances,
distributors, resellers and other indirect channels will continue to increase as
a percentage of software license revenues. However, there can be no assurance
that the Company's efforts to expand indirect sales will be successful.
Services. Revenues from services increased 66.5% to $89.0 million in 1998
from $53.4 million in 1997, and increased 75.1% in 1997 from $30.5 million in
1996. Service revenues constituted 24.6%, 25.0% and 30.4% of total revenues in
1998, 1997, and 1996, respectively. The significant increases in the dollar
amount of service revenues were primarily due to the significant increase in the
number of RHYTHM licenses sold and a significant investment in the Company's
consulting organization as a result of the increased demand for the Company's
products. The increases were also due to an increase in the use of third-party
consultants to provide implementation services to the Company's customers, which
has allowed the Company 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 105.2% to $42.0 million in
1998 from $20.5 million in 1997, and increased 130.3% in 1997 from $8.9 million
in 1996. Maintenance revenues constituted 11.6%, 9.6% and 8.8% of total revenues
in 1998, 1997 and 1996, respectively. The significant 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. The Company expects that maintenance revenues both in dollar
amount and as a percentage of total revenues will continue to increase from the
levels achieved in 1998.
Concentration of Revenues. During 1996, one customer accounted for
approximately 11% of total revenues. While on an annual basis, no individual
customer accounted for more than 10% of total revenues in 1998 or 1997, the
Company generally derives a significant portion of its software license revenues
in each quarter from a small number of relatively large sales. For example, in
the second, third and fourth quarters of 1998 and in each quarter of 1997, one
or more customers each accounted for at least 15% of total software license
revenues. While the Company believes that the loss of any of these particular
customers would not have a material adverse effect upon the Company's business,
operating results or financial condition, an inability to consummate one or more
substantial license sales in any future period could have a material adverse
effect on the Company's operating results for that period.
International Revenues. The Company recognized $73.2 million, $66.7 million
and $21.8 million of revenues from international sources in 1998, 1997 and 1996,
representing approximately 20%, 31% and 22% of total revenues, respectively. The
Company's revenues from international sources were primarily generated
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24
from customers located in Asia-Pacific, Canada and Europe. In 1998, 1997 and
1996, revenues from customers located in Europe accounted for approximately 11%,
16% and 11% of total revenues, respectively. The decrease in revenues from
international sources as a percentage of total revenues in 1998 was primarily
due to the strength of sales efforts in the U.S., reorganization of the
Company's international management team which resulted in a lower than expected
level of sales execution, and overall weakness in certain international
economies, primarily in the Asia-Pacific region, resulting in decreased levels
of customer spending in those markets. The Company believes that continued
growth and profitability will require further expansion of its sales in
international markets. In order to successfully increase international sales,
the Company has utilized and will continue to utilize substantial resources to
expand existing international operations, establish additional international
operations and hire additional personnel.
Costs and Expenses
Cost of Software Licenses. Cost of software licenses consists primarily of
(i) commissions paid to third parties in connection with joint marketing and
other related agreements; (ii) royalty fees associated with third-party software
included with the sales of RHYTHM; (iii) the cost of user documentation and (iv)
the cost of reproduction and delivery of the software. Cost of software licenses
was $8.0 million, $2.7 million and $260,000 in 1998, 1997 and 1996, representing
3.5%, 2.0% and 0.4% of software license revenues, respectively. The increases in
cost of software licenses were primarily due to an increase in commissions paid
to third parties in connection with joint marketing and other related
agreements. The Company expects cost of software licenses to vary in the future
depending upon the amount of commissions due to other third parties in
connection with joint marketing and other related agreements and the amount of
royalty fees associated with third-party software included with the sales of
RHYTHM.
Cost of Services and Maintenance. Cost of services and maintenance consists
primarily of personnel costs associated with implementation, consulting and
training services. Cost of services and maintenance also includes the cost of
providing software maintenance to customers such as hotline telephone support
and packaging and shipping costs related to new releases of software and updated
user documentation. Cost of services and maintenance was $76.0 million, $46.0
million, and $21.8 million in 1998, 1997 and 1996, representing 58.1%, 62.3% and
55.2% of total services and maintenance revenues, respectively. The dollar
increases in cost of services and maintenance were due to the 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-Pacific in the last few years. The Company expects to continue to
increase the number of its consulting, product support and training personnel in
the foreseeable future as a means to expand into 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 the Company's license sales do not increase at
anticipated rates, the hiring of additional personnel could adversely affect the
Company's gross margins.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel costs, commissions, office facilities, travel, promotional events such
as trade shows, seminars and technical conferences, advertising and public
relations programs. Sales and marketing expenses were $122.0 million, $73.5
million and $35.2 million in 1998, 1997 and 1996, representing 33.7%, 34.4% and
35.0% of total revenues, respectively. The increases in the dollar amount of
sales and marketing expenses were due to continued expansion of the Company's
direct sales force, increased sales commissions as a result of the higher
revenue levels, continued investment in strengthening the Company's
international selling presence, and increased marketing and promotional
activities as a result of the Company's expanded suite of products. The Company
expects these types of expenses will continue to increase in the foreseeable
future.
Research and Development. Research and development expenses include
personnel and related overhead costs for product development, enhancements,
upgrades, quality assurance and testing. Research and development expenses were
$84.2 million, $52.7 million and $21.9 million in 1998, 1997 and 1996,
representing 23.2%, 24.7% and 21.8% of total revenues, respectively. The
increases in the dollar amount of research and development expenses were
primarily due to the hiring of additional research and development
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personnel and other related costs incurred to support the Company's growing
strategic product footprint. The Company expects that the dollar amount of
research and development expenses will continue to increase as the Company
continues to invest in developing new products, applications and product
enhancements for new and existing vertical markets.
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed" ("FAS 86"), 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 the Company's products and general release of such
software have substantially coincided. As a result, software development costs
qualifying for capitalization under FAS 86 have been insignificant, and
therefore, the Company has not capitalized any such costs.
General and Administrative. General and administrative expenses consist
primarily of the personnel and other costs of the finance, human resources,
information systems, administrative and executive departments of the Company and
the fees and expenses associated with legal, accounting and other services.
General and administrative expenses were $33.8 million, $21.8 million and $10.4
million in 1998, 1997 and 1996, representing 9.4%, 10.2% and 10.4% of total
revenues, respectively. 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 the Company's business during these
periods. The decreases in general and administrative expenses as a percentage of
total revenues were primarily due to the increase in revenues and the Company's
ability to leverage its base of resources to support a larger organization. The
Company expects 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. From
time to time, the Company has sought to expand the depth of its current product
offerings through various technology or business acquisitions. Some of these
business combinations involve technology that is not yet determined to be
technologically feasible and has no alternative future use in its current stage
of development at the acquisition date. 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 future events such as payouts based on the attainment of future
revenue targets for the acquired products or technologies. Such future earnouts,
if any, may be considered additional cost of the acquired company and would be
allocated based on the initial valuation of the acquired and in-process
technologies and resulting purchase price allocation.
In 1997, the Company incurred approximately $9.3 million in certain
acquisition-related expenses in connection with business combinations, of which
$4.6 million represents the write-off of in-process research and development.
The remaining costs primarily consisted of investment banking, legal and
accounting fees and expenses. In 1998, the Company incurred a total of
approximately $7.6 million in certain acquisition-related expenses in connection
with business combinations, of which $4.7 million represents the write-off of
in-process research and development. The remaining costs primarily consisted of
investment banking, legal and accounting fees and expenses.
Other Income, Net
Other income, net consists primarily of interest income on short-term
investments and overnight repurchase agreements offset by interest expense, if
any. Other income, net was $6.9 million, $3.4 million and $1.7 million in 1998,
1997 and 1996, representing 1.9%, 1.6% and 1.7% of total revenues, respectively.
The increases in the dollar amount of other income, net were primarily due to
interest earned on higher balances of cash, cash equivalents and short-term
investments resulting from net proceeds of the public offerings of Common Stock
in 1997 and 1996.
Provision for Income Taxes
The Company recorded income tax expense of $17.3 million, $6.9 million and
$4.7 million in 1998, 1997 and 1996, respectively. The Company's effective
income tax rates were 46.4%, 63.4% and 40.9% in 1998, 1997
25
26
and 1996, respectively. The fluctuations in the Company's effective income tax
rate is primarily due to the non-deductibility of certain of the in-process
research and development and acquisition-related expenses. Excluding the effects
of the in-process research and development and acquisition-related expenses, the
Company's effective tax rate was 38.5%, 34.2% and 37.2%, in 1998, 1997 and 1996,
respectively.
Net Income Per Share
The Company's net income per share is calculated in accordance with
Statement of Financial Accounting Standards 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 dilutive effect of
common stock equivalents such as stock options, while net income per share,
assuming dilution includes such dilutive effects. Future shares outstanding will
be impacted by the following factors: (i) the ongoing issuance of Common Stock
associated with stock option exercises; (ii) the issuance of Common Stock
associated with the Company's employee stock purchase program; (iii) any
fluctuations in the Company's stock price, which could cause changes in the
number of Common Stock equivalents included in the earnings per share, assuming
dilution computation; and (iv) the issuance of Common Stock, or equivalents
thereto, to effect future corporate transactions, including business
combinations, should the Company enter into such transactions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations and met its capital
expenditure requirements primarily through cash flows from operations and sales
of equity securities. Cash flows from operations were $25.0 million, $7.9
million and $8.0 million in 1998, 1997 and 1996, respectively. Operating cash
flows increased in 1998 as compared to 1997 primarily due to an increase in net
income, deferred revenues and the tax benefit from stock option activity, offset
by an increase in accounts receivable. The tax benefit from stock option
activity is primarily the result of disqualifying dispositions of stock acquired
under the Company's stock plans. Operating cash flows decreased in 1997 as
compared to 1996 primarily due to an increase in accounts receivable partially
offset by increases in the tax benefit from stock option activity, accrued
liabilities and accrued compensation and related expenses.
Accounts receivable, net of allowance for doubtful accounts, increased to
$126.0 million at December 31, 1998 from $75.0 million at December 31, 1997,
primarily due to strong fourth quarter revenues in 1998. Accounts receivable can
fluctuate for a variety of reasons, including (i) the amount and timing of
revenues earned; (ii) the Company's collection experience; (iii) the amount of
receivables generated from international customers which generally have longer
payment terms compared to customers in the U.S.; and (iv) the number of large
sales for which some amounts may not be due upon execution of the contract. The
Company believes that the allowance for doubtful accounts at December 31, 1998
is adequate to cover any collection difficulties with respect to accounts
receivable. However, a significant portion of the Company's accounts receivable
are derived from sales of large licenses, often to new customers with whom the
Company does 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 was $101.5 million for 1998 as compared
to $16.1 million for 1997. Cash used in investing activities was higher in 1998
than in 1997 primarily due to the investment of the net proceeds from the
December 1997 public offering of Common Stock. At the end of 1997, the proceeds
from that offering were invested primarily in financial instruments classified
as cash equivalents.
Cash provided by financing activities was $10.6 million for 1998 as
compared to $94.3 million for 1997. Cash provided by financing activities for
1997 includes the Company's net proceeds of $89.4 million from its December 1997
public offering of Common Stock. Cash provided by financing activities for 1996
includes the Company's net proceeds of $43.7 million from its May 1996 initial
public offering of Common Stock.
At December 31, 1998, the Company had $191.3 million of working capital,
including $154.9 million in cash, cash equivalents and short-term investments as
compared to $161.0 million of working capital as of
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27
December 31, 1997, including $142.0 million in cash, cash equivalents and
short-term investments. At December 31, 1998, the Company did not have any
material commitments for capital expenditures.
The Company may in the future pursue additional acquisitions of businesses,
products and technologies, or enter into joint venture arrangements, that could
complement or expand the Company's business. Any material acquisition or joint
venture could result in a decrease to the Company's working capital, depending
on the amount, timing and nature of the consideration to be paid.
In October 1998, the Company entered into a one-year, $15.0 million
revolving credit agreement. The revolving credit agreement is not subject to a
borrowing base limitation and borrowings under the agreement bear interest at
various customary market rates. The maximum borrowings available under the
facility are reduced by the value of outstanding letters of credit issued by the
lender on behalf of the Company, $6.7 million of which were outstanding at
December 31, 1998. This facility contains customary restrictive covenants,
including covenants requiring the Company to maintain certain financial ratios.
At December 31, 1998, there were no borrowings outstanding under this agreement.
The Company believes that existing cash and cash equivalent balances,
short-term investment balances, available borrowings under the revolving credit
agreement and potential cash flow from operations will satisfy the Company's
working capital and capital expenditure requirements for at least the next 12
months. The Company is currently considering various alternatives for obtaining
additional equity or debt financing. Any material acquisitions of complementary
businesses, products or technologies could require the Company to obtain such
financing. There can be no assurance that such financing will be available on
acceptable terms, if at all.
YEAR 2000 ISSUES
Many older computer systems and software products currently in use are
coded to accept only two-digit entries in the date code field. These date code
fields will need to accept four-digit entries to distinguish 21st century dates
from 20th century dates. As a result, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance. Based on the Company's
assessment, the Company believes that its current versions of its software
products are Year 2000 compliant. However, the Company believes some customers
are running earlier versions of the software products developed by acquired
companies that are not Year 2000 compliant, and the Company has been encouraging
such customers to migrate to current product versions. Moreover, the Company's
products are generally 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 offered by RHYTHM. The
Company may in the future be subject to claims based on Year 2000 problems in
others' products, custom scripts created by third parties to interface with the
Company's products or issues arising from the integration of multiple products
within an overall system. Although the Company has not been a party to any
litigation or arbitration proceeding to date involving its products or services
related to Year 2000 compliance issues, there can be no assurance that the
Company will not in the future be required to defend its products or services in
such 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 of the Company for Year 2000-related damages, including consequential
damages, could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company believes that Year 2000 issues may affect the purchasing
patterns of customers and potential customers in a variety of ways. Many
companies are expending significant resources to correct, patch or replace their
current software systems to achieve Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products such as those offered by
the Company. Any of the foregoing could result in a material adverse effect on
the Company's business, operating results and financial condition.
The Company's plan to resolve Year 2000 issues includes assessment,
remediation and testing of internal management and other information systems.
The completed assessment indicated that a portion of the
27
28
Company's information systems could be affected. As of December 31, 1998,
remediation and testing of such systems was 75% complete with an expected
completion date of September 30, 1999; however, system compliance testing will
continue in conjunction with the Company's overall information systems
initiatives throughout 1999. Areas being addressed include reviews of the
Company's telephone and voice mail systems, security systems and other office
support systems. No information technology initiatives have been deferred by the
Company as a result of its Year 2000 project. In 1998, the Company incurred
approximately $50,000 of expenses related to correction of Year 2000 issues. The
Company currently expects to incur expenses of approximately $250,000 during
1999 in connection with the correction of Year 2000 issues. Such expenses are
being funded through operating cash flows, and are expected to be less than 2.5%
of the Company's information technology budget for 1999.
Management of the Company believes that an effective plan is in place to
resolve the Year 2000 issues in a timely manner. Although the Company has not
yet completed all necessary phases of its Year 2000 program, the Company does
not believe that material exposure to significant business interruption exists
as a result of Year 2000 compliance issues or that the cost of remedial actions
will have a material adverse effect on its business, financial condition or
results of operations. The Company currently has no contingency plans in place
in the event it does not complete all phases of its Year 2000 plan. The Company
intends to evaluate the status of completion throughout 1999 to determine
whether such a plan is necessary.
28
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Foreign Exchange. The Company's revenue originating outside the U.S. in
1998, 1997 and 1996 was 20%, 31% and 22% of total revenues, respectively.
Revenues generated from the European region in 1998, 1997 and 1996 was 11%, 16%
and 11% of total revenues, respectively. International sales are made mostly
from the Company's foreign sales subsidiaries in the local countries and are
typically denominated in U.S. dollars. These subsidiaries incur most of their
expenses in the local currency.
The Company's 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
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors. The effect of foreign exchange rate fluctuations on
the Company in 1998, 1997 and 1996 was not material.
Interest Rates. The Company invests its cash in a variety of financial
instruments, including bank time deposits, 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 the Company's investments is carried in "Other income,
net." The Company accounts for its investment instruments in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). All of the cash
equivalents and short-term investments are treated as available-for-sale under
SFAS 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, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates. The Company's
investment securities are held for purposes other than trading. While certain of
the investment securities had maturities in excess of one year, the Company
intends to liquidate such securities within one year. The weighted-average
interest rate on investment securities at December 31, 1998 was 5.3%. The fair
value of securities held at December 31, 1998 was $128.3 million.
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 Form 10-K
because the Company will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Form 10-K, 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."
29
30
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."
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 Auditors.............................. F-1
Covered by Report of Independent Auditors:
Consolidated Balance Sheets at December 31, 1997 and 1998... F-2
Consolidated Statements of Income for the years ended
December 31, 1996, 1997 and 1998............................ F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998............................ F-5
Notes to Consolidated Financial Statements (except Notes 12
and 13)..................................................... F-6
Not Covered by Report of Independent Auditors:
Notes 12 and 13 of the Notes to Consolidated Financial
Statements.................................................. F-18
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.
Exhibits. The exhibits to this Form 10-K have been included only
3. 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 the Company and
payment of a reasonable fee.
30
31
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1* -- Agreement and Plan of Merger, dated May 15, 1997, by and
among the Company. TSC Acquisition Corporation and Think
Systems Corporation (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated May 15, 1997
(the "May 1997 8-K"))
2.2* -- Agreement and Plan of Merger, dated May 15, 1997, by and
among the Company, OSC Acquisition Corporation and
Optimax Systems Corporation (filed as Exhibit 2.2 to the
May 1997 8-K)
3.1* -- Restated Certificate of Incorporation (filed as Exhibit
3.2 to the Company's Quarterly Report on 10-Q for the
quarter ended September 30, 1998 (the "September 1998
10-Q"))
3.2* -- Amended and Restated Bylaws (filed as Exhibit 3.1 to the
September 1998 10-Q)
4.1* -- Specimen Common Stock certificate (filed as Exhibit 4.1
to the Company's Registration Statement on Form S-1 (Reg.
No. 333-1752) (the "Form S-1"))
10.1* -- Form of Registration Rights Agreement, dated April 1,
1996, among the Company, 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
10.3 to the Company's Registration Statement on Form S-8
(Reg. No. 333-53667) (the "1998 S-8"))
10.3* -- Form of Indemnification Agreement between the Company 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 the Company and each of its employees (filed as
Exhibit 10.9 to the Form S-1)
10.5* -- Lease Agreement, dated July 14, 1995, between the Company
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 Company and Park West E-2 Associates (filed as
Exhibit 10.11 to the Form S-1)
10.7*# -- Software License Agreement, dated August 31, 1995,
between the Company and Minnesota Mining and
Manufacturing (filed as Exhibit 10.12 to the Form S-1)
10.8* -- Second Amendment of Lease Agreement between the Company
and TRST Irving, Inc. dated as of February 23, 1996
(filed as Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996)
10.9* -- Third Amendment to Lease Agreement between the Company
and TRST Irving, Inc. dated as of July 25, 1996 (filed as
Exhibit 10.1 to the Company's Quarterly Report for the
quarter ended September 30, 1996 (the "September 1996
10-Q"))
10.10* -- Fifth Amendment to Lease Agreement between the Company
and Principal Mutual Life Insurance Company dated as of
August 29, 1996 (filed as Exhibit 10.2 to the September
1996 10-Q)
10.11* -- Fourth Amendment to Lease Agreement between the Company
and TRST Irving, Inc. dated as of December 19, 1996
(filed as Exhibit 10.17 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996)
10.12* -- Registration Rights Agreement, dated May 15, 1997, by and
among the Company and each of the former shareholders of
Think Systems Corporation (filed as Exhibit 99.3 to the
May 1997 8-K)
10.13* -- Registration Rights Agreement, dated May 15, 1997, by and
among the Company and each of the former shareholders of
Optimax Systems Corporation (filed as Exhibit 99.4 to the
May 1997 8-K)
10.14* -- Employee Stock Purchase Plan (filed as Exhibit 99.8 to
the Company's Registration Statement on Form S-8 (Reg.
No. 333-03703))
10.15* -- International Employee Stock Purchase Plan (filed as
Exhibit 99.1 to the Company's Registration Statement on
Form S-8 (Reg. No. 333-27009))
31
32
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.16* -- Think Systems Corporation 1996 Incentive Stock Plan
(filed as Exhibit 99.3 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-28147) (the
"Think/Optimax S-8"))
10.17* -- Think Systems Corporation 1997 Incentive Stock Plan
(filed as Exhibit 99.1 to the Think/Optimax S-8)
10.18* -- Optimax Systems Corporation Stock Option Plan (filed as
Exhibit 99.10 to the Think/Optimax S-8)
10.19* -- InterTrans Logistics Solutions Limited 1997 Stock
Incentive Plan (filed as Exhibit 99.7 to the 1998 S-8)
21.1 -- List of subsidiaries
23.1 -- Consent of Ernst & Young LLP
24.1 -- Power of Attorney, pursuant to which amendments to this
Form 10-K may be filed, is included on the signature page
contained in Part IV of this Form 10-K.
27.1 -- Financial Data Schedule
- ---------------
* Incorporated herein by reference to the indicated filing.
+ Management contract or compensation plan.
# Confidential treatment previously granted.
(b) Reports on Form 8-K.
None.
32
33
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: February 2, 1999 By: /s/ DAVID F. CARY
----------------------------------
David F. Cary
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
David F. Cary, 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 and Chief February 2, 1999
- ----------------------------------------------------- Executive Officer
Sanjiv S. Sidhu (Principal executive officer)
Vice Chairman of the Board, February 2, 1999
- ----------------------------------------------------- Executive Vice President and
Kanna N. Sharma Secretary
/s/ SANDEEP R. TUNGARE Director and President, Demand February 2, 1999
- ----------------------------------------------------- Management
Sandeep R. Tungare
/s/ DAVID F. CARY Chief Financial Officer (Principal February 2, 1999
- ----------------------------------------------------- finance and accounting officer)
David F. Cary
/s/ HARVEY B. CASH Director February 2, 1999
- -----------------------------------------------------
Harvey B. Cash
/s/ THOMAS J. MEREDITH Director February 2, 1999
- -----------------------------------------------------
Thomas J. Meredith
33
34
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
i2 Technologies, Inc.
We have audited the accompanying consolidated balance sheets of i2
Technologies, Inc. and its subsidiaries (the Company) as of December 31, 1997
and 1998, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedule listed in
the index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of i2
Technologies, Inc. and its subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 18, 1999
F-1
35
i2 TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
1997 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $127,433 $ 61,491
Short-term investments.................................... 14,538 93,387
Accounts receivable, net of allowance for doubtful
accounts of $4,263 and $8,406, respectively............ 75,037 126,033
Prepaids and other current assets......................... 3,836 9,164
Income tax receivable..................................... 1,097 --
Deferred income taxes..................................... 3,823 5,070
-------- --------
Total current assets.............................. 225,764 295,145
Furniture and equipment, net................................ 20,895 29,116
Deferred income taxes and other assets...................... 3,604 14,963
-------- --------
Total assets...................................... $250,263 $339,224
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,712 $ 10,814
Accrued liabilities....................................... 11,284 22,146
Accrued compensation and related expenses................. 15,357 21,165
Revolving line of credit.................................. 657 --
Deferred revenue.......................................... 29,713 47,463
Income taxes payable...................................... -- 2,213
-------- --------
Total current liabilities......................... 64,723 103,801
Deferred income taxes....................................... 1,780 448
-------- --------
Total liabilities................................. 66,503 104,249
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized, none issued................................ -- --
Common Stock, $0.00025 par value, 200,000,000 shares
authorized, 67,810,274 and 71,471,762 shares issued and
outstanding, respectively.............................. 17 18
Additional paid-in capital................................ 166,727 197,958
Retained earnings......................................... 17,016 36,999
-------- --------
Total stockholders' equity........................ 183,760 234,975
-------- --------
Total liabilities and stockholders' equity........ $250,263 $339,224
======== ========
See accompanying notes.
F-2
36
i2 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
Revenues:
Software licenses......................................... $ 61,073 $139,798 $230,961
Services.................................................. 30,515 53,437 88,972
Maintenance............................................... 8,881 20,457 41,983
-------- -------- --------
Total revenues.................................... 100,469 213,692 361,916
-------- -------- --------
Costs and expenses:
Cost of software licenses................................. 260 2,744 7,959
Cost of services and maintenance.......................... 21,761 46,004 76,020
Sales and marketing....................................... 35,182 73,526 121,978
Research and development.................................. 21,886 52,741 84,151
General and administrative................................ 10,425 21,810 33,845
In-process research and development and
acquisition-related expenses........................... 1,133 9,306 7,618
-------- -------- --------
Total costs and expenses.......................... 90,647 206,131 331,571
-------- -------- --------
Operating income............................................ 9,822 7,561 30,345
Other income, net........................................... 1,681 3,353 6,917
-------- -------- --------
Income before income taxes.................................. 11,503 10,914 37,262
Provision for income taxes.................................. 4,705 6,916 17,279
-------- -------- --------
Net income.................................................. $ 6,798 $ 3,998 $ 19,983
======== ======== ========
Net income per share........................................ $ 0.12 $ 0.06 $ 0.29
Net income per share, assuming dilution..................... $ 0.10 $ 0.06 $ 0.26
Weighted average common shares outstanding.................. 58,000 62,652 70,004
Weighted average common shares outstanding, assuming
dilution.................................................. 65,974 70,932 76,388
See accompanying notes.
F-3
37
i2 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------------- ---------- ------------- ------------- -------------
Balance at December 31, 1995......... 53,768 $13 $4,145 $6,220 $10,378
Exercise of stock options and
issuance under stock purchase
plan............................ 1,038 -- 1,816 -- 1,816
Common stock issued, net of
offering costs of $4,288........ 4,780 2 43,714 -- 43,716
Tax benefit of stock options....... -- -- 1,353 -- 1,353
Amortization of deferred
compensation.................... -- -- 784 -- 784
Issuance of Think preferred stock
which was exchanged for i2
common stock in merger.......... 554 -- 5,100 -- 5,100
Issuance of ITLS preferred stock
which was exchanged for i2
common stock in merger.......... 786 -- 5,269 -- 5,269
Net income......................... -- -- -- 6,798 6,798
------------- ---------- ------------- ------------- -------------
Balance at December 31, 1996......... 60,926 15 62,181 13,018 75,214
Exercise of stock options and
issuance under stock purchase
plan............................ 2,884 1 4,273 -- 4,274
Common stock issued, net of
offering costs of $3,573........ 4,000 1 89,427 -- 89,428
Tax benefit of stock options....... -- -- 10,106 -- 10,106
Amortization of deferred
compensation.................... -- -- 740 -- 740
Net income......................... -- -- -- 3,998 3,998
------------- ---------- ------------- ------------- -------------
Balance at December 31, 1997......... 67,810 17 166,727 17,016 183,760
Exercise of stock options and
issuance under stock purchase
plan............................ 3,585 1 11,254 -- 11,255
Common stock issued in
acquisition..................... 77 -- 2,708 -- 2,708
Tax benefit of stock options....... -- -- 16,669 -- 16,669
Amortization of deferred
compensation.................... -- -- 600 -- 600
Net income......................... -- -- -- 19,983 19,983
------------- ---------- ------------- ------------- -------------
Balance at December 31, 1998......... 71,472 $18 $197,958 $36,999 $234,975
============= ========== ============= ============= =============
See accompanying notes.
F-4
38
i2 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
-------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 6,798 $ 3,998 $ 19,983
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-off of acquired in-process research and
development.......................................... -- 4,564 4,674
Depreciation and amortization.......................... 3,052 5,194 10,809
Provision for losses on receivables.................... 1,085 3,903 4,640
Amortization of deferred compensation.................. 784 740 600
Deferred income taxes.................................. (348) (4,169) (10,709)
Tax benefit from stock option exercises................ 1,353 10,106 16,669
Changes in operating assets and liabilities:
Accounts receivable, net............................. (24,701) (42,670) (55,636)
Income tax receivable................................ 1,151 (1,097) 1,097
Prepaids and other assets............................ (1,397) (1,306) (5,194)
Accounts payable..................................... 3,107 2,754 3,102
Accrued liabilities.................................. 3,967 5,417 9,186
Accrued compensation and related expenses............ 2,594 11,452 5,808
Deferred revenue..................................... 10,470 9,978 17,750
Income taxes payable................................. 99 (996) 2,213
-------- -------- ---------
Net cash provided by operating activities......... 8,014 7,868 24,992
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable -- stockholders.......................... (1,000) 1,000 --
Business acquisitions..................................... -- (4,826) (4,148)
Purchases of furniture and equipment...................... (8,978) (15,751) (18,535)
Net (purchases) sales of short-term investments........... (18,031) 3,493 (78,849)
-------- -------- ---------
Net cash used in investing activities............. (28,009) (16,084) (101,532)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit.................... -- 1,542 943
Payments on revolving line of credit...................... -- (885) (1,600)
Proceeds from long-term debt.............................. 400 -- --
Payments on long-term debt................................ (1,653) (100) --
Advances from stockholders, net........................... (1,385) -- --
Issuance of Think and Optimax preferred stock which was
exchanged for i2 common stock in merger................ 5,100 -- --
Issuance of ITLS preferred stock which was exchanged for
i2 common stock in merger.............................. 5,269 -- --
Net proceeds from sale of common stock.................... 43,716 89,428 --
Net proceeds from sale of common stock to employees and
exercise of stock options.............................. 1,816 4,274 11,255
-------- -------- ---------
Net cash provided by financing activities......... 53,263 94,259 10,598
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 33,268 86,043 (65,942)
Cash and cash equivalents at beginning of period............ 8,122 41,390 127,433
-------- -------- ---------
Cash and cash equivalents at end of period.................. $ 41,390 $127,433 $ 61,491
======== ======== =========
See accompanying notes.
F-5
39
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
i2 is the leading provider of client/server based eBPO software products
for supply chain management and related business process optimization
applications. i2's advanced supply chain management solutions include demand
forecasting, raw materials procurement, work-in-process, distribution and
transportation planning, optimization and collaboration within and between
enterprises. i2 has enabled businesses to re-engineer their supply chains to
realize significant increases in revenues, reductions in expenses and reductions
in asset investments by improving the efficiency and effectiveness of
determining when, where, what and how much to buy, make, move, store and sell.
As the Internet becomes an increasingly significant global medium for
business-to-business and business-to-consumer online commerce, existing and new
businesses in a wide variety of vertical markets are seeking to capitalize on
this growth. The Company believes its software enables its customers to benefit
from the growth of the Internet by supporting new Internet/online storefronts
and enabling re-engineering of supply chains to facilitate e-commerce
transactions.
In May 1997, the Company acquired Think Systems Corporation, a demand
planner software company and Optimax Systems Corporation, a scheduling and
sequencing software company. In April 1998, the Company acquired InterTrans
Logistics Solutions Limited, a transportation and logistics software company.
Each of these business combinations was accounted for as a pooling of interests,
and accordingly, the accompanying consolidated financial statements give
retroactive effect to the combinations (see Note 3). Also, see Note 3 for
discussion of business acquisitions in 1997 and 1998 accounted for as purchases.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its 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 highly 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. Certain debt securities have maturity
dates beyond one year. However, the Company's intent is to liquidate such
securities within one year. All of the Company's 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, 1997 and
1998. 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
separate 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.
The Company's debt securities include the following (in thousands):
DECEMBER 31,
-------------------
1997 1998
-------- --------
U.S. Government......................................... $ 11,500 $ 1,449
State and Local Municipalities.......................... 55,000 21,440
Corporations............................................ 40,600 104,884
-------- --------
$107,100 $127,773
======== ========
At December 31, 1997 and 1998, $92.6 million and $34.4 million,
respectively, of debt securities were included in cash and cash equivalents.
Interest income earned in 1996, 1997 and 1998 was $1.9 million, $3.1 million and
$7.3 million, respectively.
F-6
40
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial Instruments. Financial instruments that potentially subject the
Company 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. As of December 31, 1997
and 1998, approximately 29% and 22%, respectively, of accounts receivable were
concentrated with three customers. The Company generally does not require
collateral on accounts receivable as the Company's customers are generally
large, well-established companies. The Company's customer base consists of
geographically diverse companies dispersed across many industries. The Company
periodically performs credit evaluations of its customers and maintains reserves
for potential losses. The Company has used in the past and expects to use in the
future foreign exchange contracts to hedge the risk that receivables denominated
in foreign currencies may be adversely affected by changes in foreign currency
exchange rates. Risk of non-performance by counterparties to such contracts is
minimal due to the size and credit standings of the financial institutions used.
The Company's foreign exchange contracts outstanding at December 31, 1997 and
1998 were not material. Gains and losses on foreign exchange contracts have not
been material to date.
Depreciation and Amortization. Furniture and equipment are recorded at cost
and are depreciated using the straight-line method over seven years for office
furniture and fixtures and three years for computer equipment. Leasehold
improvements are amortized over the shorter of their useful lives or the
remaining lease terms.
Software Development Costs. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed," ("FAS 86") 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 the Company's products and general release of such
software have substantially coincided. As a result, software development costs
qualifying for capitalization under FAS 86 have been insignificant and
therefore, the Company has not capitalized such costs.
Revenue Recognition. The Company's revenues consist of software license
revenues, service revenues and maintenance revenues. Software license revenues
consist of sales of software licenses, which are recognized upon execution of a
contract and delivery of the 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.
Service revenues are primarily 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.
Customer payment terms vary. Amounts received in advance of satisfying
revenue recognition criteria are classified as deferred revenue in the
accompanying consolidated balance sheets.
The Company generally warrants that its 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, 1998, the Company had not incurred any significant expenses
related to warranty claims.
Net Income Per Share. The Company computes 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 dilutive potential common stock issuable upon
exercise of stock options. Net income per share, assuming dilution, includes the
effect of dilutive potential common stock issuable upon exercise of stock
options using the treasury stock method. Share and per share amounts for all
periods presented have also been adjusted to reflect a stock split during 1998
effected as a dividend (see Note 7). The computations give retroactive effect to
the exchange of common shares in connection with the
F-7
41
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Think, Optimax and ITLS acquisitions (see Note 3). Reconciliations of the net
income per share computations for the years ended December 31, 1996, 1997 and
1998 are included in Note 7.
Stock-Based Compensation Plans. The Company accounts for its stock-based
compensation plans utilizing the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," because, as
discussed in Note 7, 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
the Company's foreign subsidiaries is the local currency. Assets and liabilities
are translated at rates in effect at the balance sheet date and the resulting
translation adjustments are recorded directly to stockholders' equity. Income
statement amounts are translated at average rates for the period. Transaction
gains and losses are recorded in other income, net in the statement of income.
To date, translation adjustments and foreign currency gains and losses have not
been significant and accordingly, have not been separately presented.
Reclassifications. Certain prior year financial statement items have been
reclassified to conform to the current year's format.
Recent Accounting Pronouncements. There have been recent pronouncements by
the Financial Accounting Standards Board and the AICPA that may require certain
changes in accounting policies of the Company and which may also affect
disclosure requirements. These recent pronouncements do not affect the current
year's accounting or reporting requirements and are mentioned here for
informational purposes only.
SFAS No. 133: "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 is effective beginning in 2000. The adoption of SFAS 133 is
not expected to have a material impact on the financial position or results of
operations of the Company.
SOP 98-1: "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires companies to capitalize qualifying
computer software costs that are incurred during the application development
stage and amortize them over the software's estimated useful life. SOP 98-1 is
for the Company effective January 1, 1999. The adoption of SOP 98-1 is not
expected to have a material impact on the financial position or results of
operations of the Company.
SOP 98-9: "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions" which modifies certain provisions of SOP 97-2.
The Company's accounting policy on software revenue recognition is currently in
compliance with SOP 97-2, as amended by SOP 98-9, and adoption of these SOPs, as
currently issued, is not expected to have a material impact on the financial
position or results of operations of the Company.
3. BUSINESS COMBINATIONS
In 1997, the Company acquired Think Systems Corporation ("Think") and
Optimax Systems Corporation ("Optimax"). Under the terms of these agreements,
the Company agreed to issue up to 7.7 million shares and 2.7 million shares of
its common stock for all the outstanding capital stock and all unexpired and
unexercised options of Think and Optimax, respectively.
During 1997, the Company incurred approximately $9.3 million in certain
acquisition-related expenses in connection with the business combinations
involving Think, Optimax and others, of which $4.6 million
F-8
42
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
represents the write-off of in-process research and development. The remaining
costs included, among other things, investment banking, legal and accounting
fees and expenses.
In April 1998, the Company acquired InterTrans Logistics Solutions Limited
("ITLS"). ITLS provides software designed to manage both the daily operations
and the tactical and strategic planning aspects of transportation and logistics
activities across the supply chain. Under the terms of the agreement, the
Company agreed to issue up to 3.3 million shares of its common stock for all of
the outstanding capital stock and all unexpired and unexercised options of ITLS.
Also in 1998, the Company acquired certain other businesses for purchase
prices that aggregate $9.2 million, 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 certain revenue targets associated with the
acquired or in-process technologies. These acquisitions were accounted for using
the purchase accounting method. Accordingly, the Company allocated the purchase
prices based on the fair value of assets acquired and liabilities assumed,
including the estimated fair value of intangible assets. These intangible assets
include $4.7 million for acquired in-process research and development
("in-process R&D"). 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 are 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 the Company and its
competitors. At the date of each acquisition, the products under development had
not reached technological feasibility and had no alternative future use.
Accordingly, these costs were expensed as of each respective acquisition date.
Because estimating the fair value of in-process R&D involves many uncertain
factors including the difficulty of completing development of certain projects
and technological uncertainties, there can be no assurance that in-process R&D
projects will attain either technological feasibility or commercial success.
During 1998, the Company incurred a total of approximately $7.6 million in
certain acquisition-related expenses in connection with the business
combinations involving ITLS and others, of which $4.7 million represents the
write-off of in-process R&D. The remaining costs included, among other things,
investment banking, legal and accounting fees and expenses.
The Think, Optimax and ITLS acquisitions were each accounted for as a
pooling of interests, and accordingly, the consolidated financial statements
give retroactive effect to the acquisitions and include the combined operations
of i2 Technologies, Think, Optimax and ITLS for all periods presented.
4. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following (in thousands):
DECEMBER 31,
-------------------
1997 1998
-------- --------
Computer equipment...................................... $ 26,289 $ 40,850
Furniture and fixtures.................................. 5,256 9,230
-------- --------
31,545 50,080
Less accumulated depreciation........................... (10,650) (20,964)
-------- --------
$ 20,895 $ 29,116
======== ========
5. BORROWINGS
At December 31, 1998, the Company had a $15.0 million revolving credit
agreement that expires in October 1999, is unsecured and contains customary
restrictive covenants, including covenants requiring the Company to maintain
certain financial ratios. The revolving credit agreement is not subject to a
borrowing
F-9
43
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
base limitation and the borrowings thereunder bear interest at the lenders'
prime lending rate. This facility contains customary restrictive covenants,
including covenants requiring the Company to maintain certain financial ratios.
The maximum borrowings available under the facility are reduced by the value of
outstanding letters of credit issued by the lender on behalf of the Company,
$6.7 million of which were outstanding at December 31, 1998. At December 31,
1998, there were no borrowings outstanding under this agreement. The Company is
currently considering various alternatives for obtaining additional equity or
debt financing.
6. COMMITMENTS
The Company leases its office facilities and certain office equipment under
operating leases that expire at various dates through 2003. The Company has
renewal options for most of its operating leases. Total rent expense incurred
during 1996, 1997 and 1998 was approximately $2.4 million $4.9 million and $8.6
million, respectively.
Future minimum lease payments under all noncancellable operating leases as
of December 31, 1998 are as follows (in thousands):
1999............................................... $ 8,936
2000............................................... 6,815
2001............................................... 4,603
2002............................................... 3,797
2003 and thereafter................................ 2,809
-------
Total minimum lease payments............. $26,960
=======
7. STOCKHOLDERS' EQUITY
Public Offerings. In May 1996, the Company completed the initial public
offering of 5,060,000 shares of its common stock. A total of 4,780,800 of those
shares of common stock were sold by the Company resulting in net proceeds to the
Company of $43.7 million after deducting offering expenses and the underwriting
discount of $4.3 million. In December 1997, the Company completed a public
offering of 6,000,000 shares of its common stock. A total of 4,000,000 of those
shares of common stock were sold by the Company resulting in net proceeds to the
Company of $89.4 million after deducting offering expenses and the underwriting
discount of $3.6 million.
Stock Split. On April 22, 1998, the Company's Board of Directors (the
"Board") approved a two-for-one stock split of the Company's common stock. The
stock split was approved by the Company's stockholders at the Company's 1998
annual meeting of stockholders. The stock split was paid as a 100-percent stock
dividend on June 2, 1998 to stockholders of record on May 26, 1998. All share
and per share amounts included herein have been restated to reflect the stock
split as though it had occurred at the beginning of the initial period
presented.
F-10
44
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income per Share. Reconciliations of the net income per share and net
income per share, assuming dilution, computations for the years ended December
31, 1996, 1997 and 1998 are as follows (amounts in thousands, except per share
amounts):
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
NET INCOME PER SHARE:
Weighted-average common shares outstanding.............. 58,000 62,652 70,004
Net income.............................................. $ 6,798 $ 3,998 $19,983
======= ======= =======
Net income per share.................................... $ 0.12 $ 0.06 $ 0.29
======= ======= =======
NET INCOME PER SHARE, ASSUMING DILUTION:
Weighted-average common shares outstanding.............. 58,000 62,652 70,004
Common shares issuable on exercise of stock options, net
of shares assumed to be repurchased at the average
market price.......................................... 7,974 8,280 6,384
------- ------- -------
Weighted-average common shares outstanding, assuming
dilution.............................................. 65,974 70,932 76,388
======= ======= =======
Net income.............................................. $ 6,798 $ 3,998 $19,983
======= ======= =======
Net income per share, assuming dilution................. $ 0.10 $ 0.06 $ 0.26
======= ======= =======
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 its
wholly-owned subsidiaries. The Employee Stock Purchase Plan and the
International Employee Stock Purchase Plan (collectively, the "Purchase Plans")
are designed to allow eligible employees of the Company to purchase shares of
Common Stock through periodic payroll deductions. The Company has reserved
1,000,000 shares of Common Stock for issuances 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 2,000 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 the 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 with the Company.
1992 Stock Plan. Under the Company's 1992 Stock Plan, the Board granted
incentive stock options to employees of the Company and nonqualified options to
a consultant of the Company. The options generally vest over a four-year period
commencing on or before the date of grant.
1995 Stock Option/Stock Issuance Plan. In September 1995, the stockholders
and the Board approved the 1995 Stock Option/Stock Issuance Plan (the "1995
Plan") which replaced the 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 20,000,000
shares which was subsequently increased to 24,000,000 shares in 1996. The amount
of shares of Common Stock reserved for issuance was again increased to
31,000,000 shares in 1997. 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.
The Discretionary Option Grant Program provides for the grant of incentive
stock options ("Incentive Options") to employees of the Company and for the
grant of nonqualified stock options to employees, directors and consultants of
the Company. Exercise prices may not be less than 100% and 85% of the fair
F-11
45
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market value at the date of grant for Incentive Options and nonqualified
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 by the Company at the
original exercise price for all unvested shares.
Under the Stock Issuance Program, the Board or a committee of the Board
(the "Plan Administrator") may grant shares of the Company's Common Stock to any
person at any time, at such price 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 the Company's 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 2,000 shares of the Company's 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 2,000 shares of the Company's 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 (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. In connection with the
acquisition of Think, all of the options outstanding under the Think Plans were
assumed by the Company.
Optimax Stock Option Plan. During 1996, Optimax's Board of Directors
adopted and its shareholders approved the Optimax Systems Corporation Stock
Option Plan (the "Optimax Stock Option Plan"). Under the Optimax Stock Option
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. In connection with
the acquisition of Optimax, all such options were assumed by the Company.
ITLS Stock Option Plan. During 1997, ITLS' Board of Directors adopted and
its shareholders approved the ITLS 1997 Stock Option Plan (the "ITLS Stock
Option Plan"). Under the ITLS Stock Option 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. In connection with the acquisition of ITLS, all such options were assumed
by the Company.
F-12
46
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under the Company's stock option plans is as follows:
OPTIONS OUTSTANDING
SHARES -----------------------------
AVAILABLE NUMBER WEIGHTED-AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
---------- ---------- ----------------
Balance, December 31, 1995................... 1,294,642 7,298,874 $ 0.09
Authorized................................. 5,366,250 -- --
Granted.................................... (3,212,634) 3,212,634 4.86
Issued..................................... (1,230) -- 7.17
Exercised.................................. -- (916,116) 0.83
Canceled................................... 175,344 (175,344) 5.86
---------- ----------
Balance, December 31, 1996................... 3,622,372 9,420,048 1.54
Authorized................................. 7,706,698 -- --
Granted.................................... (6,241,990) 6,241,990 15.37
Exercised.................................. -- (2,744,388) 0.62
Canceled................................... 565,272 (565,272) 15.21
---------- ----------
Balance, December 31, 1997................... 5,652,352 12,352,378 8.11
Authorized................................. -- -- --
Granted.................................... (9,655,587) 9,655,587 17.54
Exercised.................................. -- (3,312,895) 1.69
Canceled................................... 4,147,638 (4,147,638) 23.06
---------- ----------
Balance, December 31, 1998................... 144,403 14,547,432 11.57
========== ==========
OPTIONS EXERCISABLE
----------------------------
NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
December 31, 1996......................................... 6,104,824 0.54
=========
December 31, 1997......................................... 6,061,520 0.89
=========
December 31, 1998......................................... 4,322,573 3.93
=========
In October 1998, the Board approved a plan to reprice a portion of the
Company's outstanding stock options, excluding options held by executive
officers. As a result, 3,757,685 options with exercises prices ranging from
$14.00 to $32.81 per share were repriced at $13.94 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 the Company in a merger or asset sale, except to the extent the
Company's 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 of the Company.
All options outstanding at December 31, 1998 are Incentive Options except
for 5,456,182 options, which are nonqualified options.
F-13
47
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other information regarding options outstanding and options exercisable as
of December 31, 1998 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING WEIGHTED
RANGE OF EXERCISE NUMBER OF AVERAGE CONTRACTUAL NUMBER OF AVERAGE
PRICES SHARES EXERCISE PRICE LIFE (YEARS) SHARES EXERCISE PRICE
- ----------------- ---------- -------------- ------------ --------- --------------
$ 0.01-$ 6.06 3,539,740 $ 0.72 5.0yrs. 3,380,241 $ 0.72
9.74- 13.94 6,565,332 13.35 9.7 160,196 11.87
13.94- 27.84 4,442,360 17.58 8.7 782,136 16.19
---------- ---------
Total 14,547,432 11.57 8.3 4,322,573 3.93
========== =========
The Company recorded deferred compensation expense of $2.7 million in 1995
and the first quarter of 1996 for the difference between the grant price and the
deemed fair market value of the Company's Common Stock underlying certain
options granted. This amount is being amortized over the vesting period of the
individual options, generally four years. The income tax benefits from
disqualifying dispositions related to employee stock transactions have been
recorded as an increase in additional paid-in capital.
Pro Forma Net Income and Net Income per Share. Pro forma information
regarding net income and net income per share has been determined as if the
Company had accounted for its 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 1996, 1997 and 1998, respectively: risk-free interest rates of
6.2%, 6.2% and 5.2%; volatility factors of the expected market price of the
Company's Common Stock of 0.46, 0.66 and 0.75; a weighted-average expected life
of the options of 4, 4 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 1996 and 1997, respectively:
weighted-average risk-free interest rates of 6.5% and 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 Stock Option Plan and the ITLS Stock
Option 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 1996, 1997 and
1998, respectively: risk free interest rates of 5.2%, 5.4% and 5.0%; volatility
factors of the expected market price of the Company's Common Stock of 0.46, 0.66
and 0.75; 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 1996, 1997 and 1998 were $6.15, $12.12
and $9.20, 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 the Company's 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 Plan
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 Plan shares is amortized to expense over
the purchase period.
F-14
48
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's pro forma information follows (in thousands, except per share
amounts):
1996 1997 1998
------ ------- ------
Pro forma net income (loss)............................... $5,877 $(1,683) $5,532
Pro forma net income (loss) per share..................... 0.10 (0.03) 0.08
Pro forma net income (loss) per share, assuming
dilution................................................ 0.09 (0.03) 0.08
Information regarding exercise prices and fair values of options granted is
as follows:
1996 1997 1998
---------- ---------- ----------
Number of options issued at fair market value of
stock.......................................... 2,592,094 6,241,990 9,655,587
Weighted-average exercise price per share........ $ 5.58 $ 15.37 $ 17.54
Weighted-average fair value of options........... $ 2.28 $ 8.45 $ 9.23
Number of options issued at less than fair market
value of stock................................. 620,540 -- --
Weighted-average exercise price per share........ $ 1.85 -- --
Weighted-average fair value of options........... $ 2.11 -- --
8. INCOME TAXES
The Company's provision for income taxes consists of the following (in
thousands):
1996 1997 1998
------ ------- -------
Current:
Federal................................................ $3,630 $ 9,702 $21,982
State.................................................. 390 1,224 2,490
Foreign................................................ 414 158 3,278
Deferred
Federal................................................ 272 (1,629) (4,752)
State.................................................. (79) (40) (185)
Foreign................................................ 78 (2,499) (5,534)
------ ------- -------
Total.......................................... $4,705 $ 6,916 $17,279
====== ======= =======
The Company's provision for income taxes reconciles to the amount computed
by applying the statutory U.S. federal rate of 34% for 1996, 35% for 1997 and
35% for 1998 to income before income taxes as follows (in thousands):
1996 1997 1998
------ ------ -------
Expense computed at statutory rate........................ $3,911 $3,820 $13,041
Non-deductible in-process research and development and
acquisition costs....................................... 385 3,164 2,635
State taxes, net of federal tax benefit................... 266 770 1,536
Stock option compensation................................. 215 200 205
Research and development tax credits...................... (414) (584) (1,375)
Other..................................................... 342 (454) 1,237
------ ------ -------
Provision for income taxes...................... $4,705 $6,916 $17,279
====== ====== =======
F-15
49
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities at December 31, 1997 and 1998 are
comprised of the following (in thousands):
1997 1998
------- -------
Deferred tax assets:
Foreign tax credits....................................... $ 617 $ 2,685
Deferred revenue.......................................... 578 402
Accrued liabilities....................................... 570 2,348
Bad debt allowance........................................ 1,349 2,735
Research and development tax credits...................... 868 2,066
Net operating losses...................................... 1,712 7,273
Other..................................................... 295 1,700
------- -------
Total deferred tax asset.......................... 5,989 19,209
------- -------
Deferred tax liabilities:
Depreciation.............................................. (379) (317)
Acquired intangible assets................................ -- (469)
Other..................................................... (663) (3,005)
------- -------
Total deferred tax liability...................... (1,042) (3,791)
------- -------
Net deferred tax asset............................ $ 4,947 $15,418
======= =======
The Company considers the earnings of foreign subsidiaries to be
permanently reinvested outside the U.S. Accordingly, no U.S. income tax on these
earnings has been provided. The Company believes that any U.S. income taxes due
upon the repatriation of such earnings would be fully offset by foreign tax
credits.
At December 31, 1998, certain subsidiaries of the Company had approximately
$1.0 million of federal net operating loss carryforwards and $19.4 million of
foreign net operating loss carryforwards available to offset future taxable
income of the subsidiaries. The federal net operating loss carryforwards expire
in the years 2010 through 2013 and are subject to certain annual limitations.
Approximately $2.1 million of the foreign net operating loss carryforwards
expire in the years 2003 through 2005 while the remaining net operating loss
carryforwards have no expiration.
The Company paid income taxes of approximately $2.0 million, $2.8 million
and $5.9 million in 1996, 1997 and 1998, respectively.
9. EMPLOYEE RETIREMENT PLAN
The Company has established 401(k) retirement plans (the "Retirement
Plans") that cover a majority of the Company's employees. Eligible employees may
contribute up to 18% of their compensation, subject to certain limitations, to
the Retirement Plans. The Company may make contributions to the Retirement Plans
at the discretion of the Board. As of December 31, 1998, no contributions had
been made by the Company.
10. SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's
F-16
50
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
chief decision maker, as defined under SFAS 131, is the Chief Executive Officer.
To date, the Company has viewed its operations as principally one segment,
software sales and associated services. As a result, the financial information
disclosed herein, materially represents all of the financial information related
to the Company's principal operating segment.
Revenues from international sources were approximately $21.8 million, $66.7
million and $73.2 million in 1996, 1997 and 1998, respectively. The Company's
revenues from international sources were primarily generated from customers
located in Asia-Pacific, Canada and Europe. In 1996, 1997 and 1998, revenues
from customers located in Europe accounted for 11%, 16% and 11% of total
revenues, respectively.
11. MAJOR CUSTOMERS
For the years ended December 31, 1997 and 1998, no individual customer
accounted for more than 10% of total revenues. For the year ended December 31,
1996, one customer accounted for approximately 11% of total revenues.
12. YEAR 2000 ISSUES -- UNAUDITED
Many older computer systems and software products currently in use are
coded to accept only two-digit entries in the date code field. These date code
fields will need to accept four-digit entries to distinguish 21st century dates
from 20th century dates. As a result, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance. Based on the Company's
assessment, the Company believes that its current versions of its software
products are Year 2000 compliant. However, the Company believes some customers
are running earlier versions of the software products developed by acquired
companies that are not Year 2000 compliant, and the Company has been encouraging
such customers to migrate to current product versions. Moreover, the Company's
products are generally 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 offered by RHYTHM. The
Company may in the future be subject to claims based on Year 2000 problems in
others' products, custom scripts created by third parties to interface with the
Company's products or issues arising from the integration of multiple products
within an overall system. Although the Company has not been a party to any
litigation or arbitration proceeding to date involving its products or services
related to Year 2000 compliance issues, there can be no assurance that the
Company will not in the future be required to defend its products or services in
such 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 of the Company for Year 2000-related damages, including consequential
damages, could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company believes that Year 2000 issues may affect the purchasing
patterns of customers and potential customers in a variety of ways. Many
companies are expending significant resources to correct, patch or replace their
current software systems to achieve Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products such as those offered by
the Company. Any of the foregoing could result in a material adverse effect on
the Company's business, operating results and financial condition.
The Company's plan to resolve Year 2000 issues includes assessment,
remediation and testing of internal management and other information systems.
The completed assessment indicated that a portion of the Company's information
systems could be affected. As of December 31, 1998, remediation and testing of
such systems was 75% complete with an expected completion date of September 30,
1999; however, system compliance testing will continue in conjunction with the
Company's overall information systems initiatives throughout 1999. Areas being
addressed include reviews of the Company's telephone and voice mail systems,
F-17
51
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
security systems and other office support systems. No information technology
initiatives have been deferred by the Company as a result of its Year 2000
project. In 1998, the Company incurred approximately $50,000 of expenses related
to correction of Year 2000 issues. The Company currently expects to incur
expenses of approximately $250,000 during 1999 in connection with correction of
Year 2000 issues. Such expenses are being funded through operating cash flows,
and are expected to be less than 2.5% of the Company's information technology
budget for 1999.
Management of the Company believes that an effective plan is in place to
resolve the Year 2000 issues in a timely manner. Although the Company has not
yet completed all necessary phases of its Year 2000 program, the Company does
not believe that material exposure to significant business interruption exists
as a result of Year 2000 compliance issues or that the cost of remedial actions
will have a material adverse effect on its business, financial condition or
results of operations. The Company currently has no contingency plans in place
in the event it does not complete all phases of its Year 2000 plan. The Company
intends to evaluate the status of completion throughout 1999 to determine
whether such a plan is necessary.
13. QUARTERLY INFORMATION -- UNAUDITED
The following tables set forth unaudited consolidated statement of income
data for the eight quarters ended December 31, 1998. This data has been derived
from unaudited interim consolidated financial statements that, in the opinion of
management, have been prepared on a basis consistent with the Company's audited
consolidated financial statements and include all adjustments (consisting only
of normal recurring adjustments, except as noted otherwise) necessary for a fair
presentation of such information when read in conjunction with the audited
consolidated financial statements and notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period.
THREE MONTHS ENDED
--------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
1997 1997 1997 1997 1998 1998 1998 1998
------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
Revenues:
Software licenses........................ $23,517 $34,300 $38,207 $43,774 $44,945 $52,686 $59,775 $ 73,555
Services................................. 10,961 12,305 14,119 16,052 18,761 21,491 23,324 25,396
Maintenance.............................. 4,020 4,372 5,770 6,295 7,742 9,394 11,082 13,765
------- ------- ------- ------- ------- ------- ------- --------
Total revenues..................... 38,498 50,977 58,096 66,121 71,448 83,571 94,181 112,716
------- ------- ------- ------- ------- ------- ------- --------
Costs and Expenses:
Cost of software licenses................ 1,304 1,218 82 140 2,146 2,002 1,529 2,282
Cost of services and maintenance......... 9,053 10,874 12,819 13,258 15,262 16,719 19,388 24,651
Sales and marketing...................... 14,183 17,743 19,016 22,584 24,817 28,452 31,627 37,082
Research and development................. 9,183 12,638 15,122 15,798 18,361 19,290 22,054 24,446
General and administrative............... 4,283 5,796 5,785 5,946 6,674 7,592 8,710 10,869
In-process research and development and
acquisition-related expenses........... -- 5,649 -- 3,657 -- 6,484 560 574
------- ------- ------- ------- ------- ------- ------- --------
Total costs and expenses........... 38,006 53,918 52,824 61,383 67,260 80,539 83,868 99,904
------- ------- ------- ------- ------- ------- ------- --------
Operating income (loss).................... 492 (2,941) 5,272 4,738 4,188 3,032 10,313 12,812
Other income, net.......................... 752 702 777 1,122 1,442 1,947 1,774 1,754
------- ------- ------- ------- ------- ------- ------- --------
Income (loss) before income taxes.......... 1,244 (2,239) 6,049 5,860 5,630 4,979 12,087 14,566
Provision (benefit) for income taxes....... 486 (919) 2,782 4,567 2,167 4,413 4,870 5,829
------- ------- ------- ------- ------- ------- ------- --------
Net income (loss).......................... $ 758 $(1,320) $ 3,267 $1,293 $3,463 $ 566 $ 7,217 $ 8,737
======= ======= ======= ======= ======= ======= ======= ========
Net income (loss) per share................ $ 0.01 $(0.02) $ 0.05 $ 0.02 $ 0.05 $ 0.01 $ 0.10 $ 0.12
======= ======= ======= ======= ======= ======= ======= ========
Net income (loss) per share, assuming
dilution................................. $ 0.01 $(0.02) $ 0.05 $ 0.02 $ 0.05 $ 0.01 $ 0.10 $ 0.11
======= ======= ======= ======= ======= ======= ======= ========
Weighted average common shares
outstanding.............................. 61,174 61,678 62,724 64,824 68,432 69,484 70,325 71,227
Weighted average common shares outstanding,
assuming dilution........................ 69,848 61,678 71,028 72,596 76,414 76,534 75,233 76,824
F-18
52
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1* -- Agreement and Plan of Merger, dated May 15, 1997, by and
among the Company. TSC Acquisition Corporation and Think
Systems Corporation (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated May 15, 1997
(the "May 1997 8-K"))
2.2* -- Agreement and Plan of Merger, dated May 15, 1997, by and
among the Company, OSC Acquisition Corporation and
Optimax Systems Corporation (filed as Exhibit 2.2 to the
May 1997 8-K)
3.1* -- Restated Certificate of Incorporation (filed as Exhibit
3.2 to the Company's Quarterly Report on 10-Q for the
quarter ended September 30, 1998 (the "September 1998
10-Q"))
3.2* -- Amended and Restated Bylaws (filed as Exhibit 3.1 to the
September 1998 10-Q)
4.1* -- Specimen Common Stock certificate (filed as Exhibit 4.1
to the Company's Registration Statement on Form S-1 (Reg.
No. 333-1752) (the "Form S-1"))
10.1* -- Form of Registration Rights Agreement, dated April 1,
1996, among the Company, 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
10.3 to the Company's Registration Statement on Form S-8
(Reg. No. 333-53667) (the "1998 S-8"))
10.3* -- Form of Indemnification Agreement between the Company 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 the Company and each of its employees (filed as
Exhibit 10.9 to the Form S-1)
10.5* -- Lease Agreement, dated July 14, 1995, between the Company
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 Company and Park West E-2 Associates (filed as
Exhibit 10.11 to the Form S-1)
10.7*# -- Software License Agreement, dated August 31, 1995,
between the Company and Minnesota Mining and
Manufacturing (filed as Exhibit 10.12 to the Form S-1)
10.8* -- Second Amendment of Lease Agreement between the Company
and TRST Irving, Inc. dated as of February 23, 1996
(filed as Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996)
10.9* -- Third Amendment to Lease Agreement between the Company
and TRST Irving, Inc. dated as of July 25, 1996 (filed as
Exhibit 10.1 to the Company's Quarterly Report for the
quarter ended September 30, 1996 (the "September 1996
10-Q"))
10.10* -- Fifth Amendment to Lease Agreement between the Company
and Principal Mutual Life Insurance Company dated as of
August 29, 1996 (filed as Exhibit 10.2 to the September
1996 10-Q)
10.11* -- Fourth Amendment to Lease Agreement between the Company
and TRST Irving, Inc. dated as of December 19, 1996
(filed as Exhibit 10.17 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996)
10.12* -- Registration Rights Agreement, dated May 15, 1997, by and
among the Company and each of the former shareholders of
Think Systems Corporation (filed as Exhibit 99.3 to the
May 1997 8-K)
53
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.13* -- Registration Rights Agreement, dated May 15, 1997, by and
among the Company and each of the former shareholders of
Optimax Systems Corporation (filed as Exhibit 99.4 to the
May 1997 8-K)
10.14* -- Employee Stock Purchase Plan (filed as Exhibit 99.8 to
the Company's Registration Statement on Form S-8 (Reg.
No. 333-03703))
10.15* -- International Employee Stock Purchase Plan (filed as
Exhibit 99.1 to the Company's Registration Statement on
Form S-8 (Reg. No. 333-27009))
10.16* -- Think Systems Corporation 1996 Incentive Stock Plan
(filed as Exhibit 99.3 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-28147) (the
"Think/Optimax S-8"))
10.17* -- Think Systems Corporation 1997 Incentive Stock Plan
(filed as Exhibit 99.1 to the Think/Optimax S-8)
10.18* -- Optimax Systems Corporation Stock Option Plan (filed as
Exhibit 99.10 to the Think/Optimax S-8)
10.19* -- InterTrans Logistics Solutions Limited 1997 Stock
Incentive Plan (filed as Exhibit 99.7 to the 1998 S-8)
21.1 -- List of subsidiaries
23.1 -- Consent of Ernst & Young LLP
24.1 -- Power of Attorney, pursuant to which amendments to this
Form 10-K may be filed, is included on the signature page
contained in Part IV of this Form 10-K.
27.1 -- Financial Data Schedule
- ---------------
* Incorporated herein by reference to the indicated filing.
+ Management contract or compensation plan.
# Confidential treatment previously granted.
(b) Reports on Form 8-K.
None.