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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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,
IRVING, TEXAS 75039
(Address of principal executive offices) (Zip code)
(214) 860-6000
(Registrant's telephone number, including area code)
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 at least the past 90 days.
Yes No X
---- ----
As of April 30, 1996, the Registrant had outstanding 24,407,240 shares of
Common Stock, $.00025 par value.
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i2 TECHNOLOGIES, INC.
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1995 and
March 31, 1996 3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 1995 and March 31, 1996 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1995 and March 31, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
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(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 5,930 $ 10,014
Short-term investments -- 2,459
Accounts receivable, net 7,919 4,554
Contract receivables, net 1,176 1,636
Income tax receivable 1,151 981
Prepaid and other current assets 543 797
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Total current assets 16,719 20,441
Furniture and equipment, net 3,127 4,170
Deferred income taxes and other assets 64 63
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Total assets $ 19,910 $ 24,674
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,048 $ 1,366
Accrued liabilities 1,618 2,110
Current portion of long-term debt 278 309
Current portion of deferred revenue 7,474 11,093
Income taxes payable 425 102
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Total current liabilities 10,843 14,980
Long-term debt 1,075 990
Deferred revenue 291 235
Deferred income taxes 141 121
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Total liabilities 12,350 16,326
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Commitments
Stockholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares authorized,
none issued -- --
Common Stock, $.00025 par value, 50,000,000 shares
authorized, 21,703,242 and 21,868,835 shares issued
and outstanding, respectively 5 6
Additional paid-in capital 2,169 3,130
Deferred compensation (1,739) (2,420)
Retained earnings 7,125 7,632
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Total stockholders' equity 7,560 8,348
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Total liabilities and stockholders' equity $ 19,910 $ 24,674
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See accompanying notes.
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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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Three Months Ended March 31,
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1995 1996
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Revenues:
Software licenses $ 2,546 $ 9,620
Services 815 1,844
Maintenance 578 1,208
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Total revenues 3,939 12,672
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Costs and expenses:
Cost of software licenses 5 1,515
Cost of services and maintenance 570 1,567
Sales and marketing 1,143 4,893
Research and development 518 2,708
General and administrative 516 1,292
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Total costs and expenses 2,752 11,975
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Operating income 1,187 697
Other income 3 127
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Income before income taxes 1,190 824
Provision for income taxes 407 317
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Net income $ 783 $ 507
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Net income per share $ 0.03 $ 0.02
Weighted average common and common equivalent
shares outstanding 23,268 25,110
</TABLE>
See accompanying notes.
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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
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Three Months Ended March 31,
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1995 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 783 $ 507
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 122 640
Provision for losses on receivables 9 182
Amortization of deferred compensation -- 229
Deferred income taxes 11 (35)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,482) 3,291
Increase in contract receivables (854) (568)
Decrease in income tax receivable -- 170
(Increase) decrease in prepaid and other assets 12 (238)
Increase in accounts payable 17 318
Increase (decrease) in accrued liabilities (47) 492
Increase (decrease) in income taxes payable 43 (323)
Increase in deferred revenue 637 3,563
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Net cash provided by (used in) operating activities (749) 8,228
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment (393) (1,683)
Purchases of short-term investments -- (2,459)
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Net cash used in investing activities (393) (4,142)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 100 --
Payments on long-term debt (23) (54)
Net proceeds from exercise of stock options -- 52
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Net cash provided by (used in) financing activites 77 (2)
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Net increase (decrease) in cash and cash equivalents (1,065) 4,084
Cash and cash equivalents at beginning of period 3,422 5,930
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Cash and cash equivalents at end of period $ 2,357 $ 10,014
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</TABLE>
See accompanying notes.
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i2 TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of i2 Technologies, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (consisting only of normal recurring
entries) which, in the opinion of the Company's management, are necessary for a
fair presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission's rules
and regulations. These financial statements should be read in conjunction with
the audited financial statements and notes thereto for the year ended December
31, 1995, included in the Company's Registration Statement on Form S-1, as
filed with the Securities and Exchange Commission on February 28, 1996, as
amended (Registration No. 333-01752).
The results of operations for the three months ended March 31, 1996
are not necessarily indicative of results that may be expected for any other
interim period or for the full year.
2. NET INCOME PER SHARE
Net income per common share is computed based upon the weighted
average number of common shares outstanding and the effect of dilutive common
stock equivalents from the exercise of stock options using the treasury stock
method. In accordance with Securities and Exchange Commission Staff Accounting
Bulletins and Staff Policy, common and common equivalent shares issued during
the twelve month period prior to the date of the initial filing of the
Company's Registration Statement on Form S-1 have been included in the net
income per share calculation for the three months ended March 31, 1995 as if
they were outstanding for the entire period using the treasury stock method.
Fully diluted earnings per share is the same as, or not materially different
from, primary earnings per share and accordingly, is not presented. Share and
per share amounts for 1995 have been adjusted to reflect the April 1995
two-for-one stock split and the December 1995 two-for-one stock split.
3. SHORT-TERM INVESTMENTS
Management determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates such designation as
of each subsequent balance sheet date. The Company considers its securities as
"available-for-sale" and, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", would record its investments at fair value. However, as
the difference between cost and fair value was immaterial, 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.
4. DEFERRED COMPENSATION EXPENSE
The Company recorded deferred compensation expense of $910,000 for the
difference between the grant price and the deemed fair value of certain of the
Company's common stock options granted in the first quarter of 1996. This
amount is being amortized over the vesting period of the individual options,
generally four years. Compensation expense recognized in the first quarter of
1996 totaled $229,000 and at March 31, 1996, deferred compensation totaled
$2,420,000.
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5. STOCK-BASED EMPLOYEE COMPENSATION
The Company accounts for stock-based compensation plans utilizing the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees". In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which became effective for the Company beginning January 1, 1996. SFAS No. 123
requires expanded disclosures of stock-based compensation arrangements and
encourages (but does not require) compensation cost to be measured based on the
fair value of the equity instrument awarded. However, companies are allowed to
continue to apply the provisions of APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. As such, the Company will only be required to supplement its year-end
financial statements with additional disclosure of its stock-based compensation
arrangements.
6. SUBSEQUENT EVENTS
On May 1, 1996, the Company completed the initial public offering of
its Common Stock. A total of 2,390,400 shares of Common Stock were sold by the
Company resulting in net proceeds to the Company of approximately $43.8 million
after deducting estimated expenses of the offering of $650,000 and the
underwriting discount.
On May 11, 1996, the board of directors approved an increase in the
number of shares authorized for issuance under the Company's 1995 Stock
Option/Stock Issuance Plan from 10,000,000 shares to 12,000,000 shares. This
action taken by the board of directors is subject to the approval of the
Company's stockholders, which is expected at the Company's 1997 annual meeting.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, markets and sells supply chain management
software under the name "Rhythm". Supply chain management encompasses the
planning and scheduling of manufacturing and related logistics, from raw
materials procurement through work-in-process to customer delivery.
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
shipment of the software, provided that no significant vendor obligations
remain outstanding, amounts are due within one year and collection is
considered probable by management. Service revenues are derived from fees for
consulting, training and development services and are recognized as services
are performed. Maintenance revenues are derived from customer support
agreements generally entered into in connection with the 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.
This report contains forward-looking statements that involve risks and
uncertainties. The actual future results of the Company could differ
materially from those statements. Factors that could cause or contribute to
such differences include, but are not limited to, uncertainties regarding
market acceptance of new products and product enhancements, delays in the
introduction of new products, and risks associated with managing the Company's
rapid growth, as well as those factors discussed in the Company's Prospectus
dated April 25, 1996 relating to the initial public offering of its Common
Stock.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that selected items in the Condensed Consolidated Statements of
Income bear to total revenues. The period to period comparisons of financial
results are not necessarily indicative of future results.
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Three Months Ended March 31,
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1995 1996
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Revenues:
Software licenses 64.6% 75.9%
Services 20.7 14.6
Maintenance 14.7 9.5
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Total revenues 100.0 100.0
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Costs and expenses:
Cost of software licenses 0.1 11.9
Cost of services and maintenance 14.5 12.4
Sales and marketing 29.0 38.6
Research and development 13.2 21.4
General and administrative 13.1 10.2
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Total costs and expenses 69.9 94.5
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Operating income 30.1 5.5
Other income 0.1 1.0
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Income before income taxes 30.2 6.5
Provision for income taxes 10.3 2.5
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Net income 19.9% 4.0%
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REVENUES
Total revenues increased 221.7% to $12.7 million in the quarter ended
March 31, 1996 from $3.9 million in the quarter ended March 31, 1995. The
Company currently derives all of its revenues from Rhythm licenses and related
services and maintenance. The Company expects that Rhythm related revenues
will continue to account for substantially all of the Company's revenues for
the foreseeable future. As a result of the Company's dependence on the
continued market acceptance of Rhythm 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 277.9%
to $9.6 million in the quarter ended March 31, 1996 from $2.5 million in the
quarter ended March 31, 1995. Revenues from software licenses constituted
75.9% and 64.6% of total revenues in the quarters ended March 31, 1996 and
1995, respectively. The significant increases in software license revenues
were primarily due to the growing market acceptance of Rhythm, the continued
expansion of the Company's sales and marketing organization and the release of
an additional module of the Rhythm software product in the first quarter of
1996. These factors contributed to increases in the number of Rhythm licenses
sold and the average dollar amount of software license revenue recognized from
individual license agreements in the quarter ended March 31, 1996 as compared
to the quarter ended March 31, 1995. In addition, in the quarter ended March
31, 1996, the Company recognized license revenues from a sale which included
complimentary software provided by a third-party vendor. The Company did not
recognize any license revenues from third-party vendors in the quarter ended
March 31, 1995.
SERVICES. Revenues from services increased 126.4% to $1.8 million in
the quarter ended March 31, 1996 from $815,000 in the quarter ended March 31,
1995. Service revenues constituted 14.6% and 20.7% of total revenues in the
quarters ended March 31, 1996 and 1995, respectively. The significant increase
in the dollar amount of service revenues was primarily due to an increase in
the number of Rhythm licenses sold during 1995 and 1996. However, service
revenues decreased as a percentage of total revenues due to the sale of
additional software licenses to existing customers who did not require
significant additional implementation and training services. This contributed
to the increase in software license revenue without a corresponding increase in
service revenues. Notwithstanding the foregoing, the Company expects that
service revenues as a percentage of total revenues will continue to fluctuate
on a period to period basis.
MAINTENANCE. Revenues from maintenance increased 108.9% to $1.2
million in the quarter ended March 31, 1996 from $578,000 in the quarter ended
March 31, 1995. Maintenance revenues constituted 9.5% and 14.7% of total
revenues in the quarters ended March 31, 1996 and 1995, respectively. The
significant increase in dollar amount of maintenance revenues was primarily due
to a continued increase in the installed base of clients who have licensed
Rhythm and a high percentage of maintenance agreement renewals. However,
maintenance revenues decreased as a percentage of total revenues due to a
significant increase in license revenues for which the related maintenance
revenues will be recognized ratably over the term of the maintenance period.
During the quarter ended March 31, 1995, the Company also received several
royalty payments on maintenance agreements resulting from Rhythm being
integrated into a third party's software product. The Company expects that the
dollar amount of maintenance revenues will continue to increase, but should not
vary significantly from the percentage of total revenues achieved in the
quarter ended March 31, 1996.
COSTS AND EXPENSES
COST OF SOFTWARE LICENSES. Cost of software licenses consists
primarily of (i) the cost of reproduction and delivery of the software, (ii)
the cost of user documentation and (iii) royalty fees associated with
third-party software included with the sales of Rhythm. Cost of software
licenses was $1.5 million and $5,000 in the quarters ended March 31, 1996 and
1995, representing 15.7% and 0.2% of software license revenues, respectively.
The increases in cost of software licenses both in dollar amount and as a
percentage of software license revenues were primarily due to the royalty paid
to a third-party vendor in connection with a sale that included complementary
software provided by such vendor. Although the Company did not incur expense
obligations during 1995 under its agreements with third-party software vendors,
the Company expects to continue to include third-party software with sales of
Rhythm to the extent requested by customers.
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COST OF SERVICES AND MAINTENANCE. Cost of services and maintenance
consists primarily of costs associated with consulting, training and
development services. Cost of services and maintenance also includes the cost
of providing software maintenance to customers such as hotline telephone
support, new releases of software and updated user documentation, none of which
costs have been significant to date. Cost of services and maintenance was $1.6
million and $570,000 in the quarters ended March 31, 1996 and 1995,
representing 51.3% and 40.9% of service and maintenance revenues, respectively.
The increases in cost of services and maintenance both in dollar amount and as
a percentage of service and maintenance revenues were primarily due to the
increase in the number of personnel providing consulting and training services
to customers. The Company expects to continue to increase the number of
training and implementation consultants in the future.
SALES AND MARKETING. Sales and marketing expenses include 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 $4.9 million and $1.1 million in
the quarters ended March 31, 1996 and 1995, representing 38.6% and 29.0% of
total revenues, respectively. The increases in sales and marketing expenses
both in dollar amount and as a percentage of total revenues were primarily due
to (i) increased staffing as the Company established new domestic and
international sales offices and expanded its existing direct sales force, (ii)
increased sales commissions associated with significantly higher revenues and
(iii) increased marketing activities.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.7
million and $518,000 in the quarters ended March 31, 1996 and 1995,
representing 21.4% and 13.2% of total revenues, respectively. The increases in
research and development expenses both in dollar amount and as a percentage of
total revenues were primarily due to the hiring of additional research and
development personnel and other related costs incurred in connection with
expanding the Company's research and development department. During the third
quarter of 1995, the Company also established a wholly owned subsidiary in
Canada primarily for research and development activities. 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.
In accordance with Statement of Financial Accounting Standards No. 86,
software development expenses 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 have been
insignificant, and therefore, the Company has not capitalized any software
development costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
include 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 and accounting requirements.
General and administrative expenses were $1.3 million and $516,000 in the
quarters ended March 31, 1996 and 1995, representing 10.2% and 13.1% of total
revenues, respectively. The increase in dollar amount of general and
administrative expenses was primarily the result of increased staffing and
related costs associated with the growth of the Company's business during 1995
and the first quarter of 1996. The decrease in general and administrative
expenses as a percentage of total revenues was primarily due to 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.
OTHER INCOME
Other income consists primarily of interest income on overnight
repurchase agreements and short-term investments partially offset by interest
expense on the Company's outstanding debt. Other income was $127,000 and
$3,000 in the quarters ended March 31, 1996 and 1995, representing 1.0% and
0.1% of total revenues, respectively. The increases in other income both in
dollar amount and as a percentage of total revenues were primarily due to
higher balances of cash, cash equivalents and short-term investments partially
offset by increased interest expense due to higher borrowings under the
Company's credit agreements.
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PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $317,000 and $407,000 in
the quarters ended March 31, 1996 and 1995, respectively. The Company's
effective income tax rate was 38.5% in the quarter ended March 31, 1996 as
compared to 34.2% in the quarter ended March 31, 1995. The Company's effective
income tax rate was higher in the first quarter of 1996 due to the
non-deductibility of the amortization of deferred compensation expense and
higher effective state income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has primarily financed its operations
and met its capital expenditure requirements through cash flows from operations
and long-term borrowings. The Company's operating activities for the quarter
ended March 31, 1996 provided cash of $8.2 million. Cash provided by
operations was primarily attributable to net income of $507,000, a decrease in
accounts receivable of $3.3 million, an increase in deferred revenue of $3.6
million and depreciation and amortization expense of $696,000. Cash used in
investing activities for the quarter ended March 31, 1996 was primarily related
to the purchase of $1.7 million of computer equipment and office furniture and
$2.5 million of short-term investments. At March 31, 1996, the Company did not
have material commitments for capital expenditures.
As of March 31, 1996, the Company had $5.5 million of working
capital, including $10.0 million in cash and cash equivalents and $2.5 million
in short-term investments. Accounts receivable decreased to $4.6 million at
March 31, 1996 from $7.9 million at December 31, 1995 and the average days'
sales outstanding, excluding contract receivables, was 42 days at March 31,
1996 as compared to 66 days at December 31, 1995. The decrease in accounts
receivable balance and average days' sales outstanding was primarily due to the
collection of several large trade receivable balances outstanding at December
31, 1995. As a significant portion of the Company's software license revenues
are usually generated and billed in the last month of a quarter, the Company
expects its average days' sales outstanding to increase in future periods from
the level at March 31, 1996. Average days' sales outstanding can fluctuate for
a variety of reasons including the timing and billing of receivables in which
the related revenues may not yet be recognizable. Contract receivables consist
primarily of contractually scheduled amounts due from customers that, based on
negotiations with the individual customers, provide for terms which are longer
than typical trade terms. Contract receivables increased from $1.2 million at
December 31, 1995 to $1.6 million at March 31, 1996 primarily due to the
extended payment terms of a significant license agreement partially offset by
collections of contract receivables outstanding at December 31, 1995. Based
upon the nature of the Company's customers and its past collection experience,
the Company does not expect to encounter collection difficulties with respect
to such accounts that would have a material effect on the Company. Total
deferred revenue increased to $11.3 million at March 31, 1996 from $7.8 million
at December 31, 1995 primarily as a result of payments received from several
customers for software to be delivered during 1996.
The Company has a revolving credit agreement with NationsBank of
Texas, N.A. (the "Lender") which expires on June 1, 1997. The maximum amount
of borrowings under the credit agreement is $3.0 million subject to a borrowing
base limitation consisting, in the aggregate, of 75% of eligible accounts
receivable, 50% of license revenue receivables to be collected within one year
and 100% of cash and certain cash equivalents. Borrowings under the revolving
credit agreement bear interest at the Lender's prime lending rate plus 1%
(resulting in a rate of 9.25% at March 31, 1996). At March 31, 1996, the
Company had $100,000 of borrowings outstanding under the revolving credit
agreement, with the unused portion fully available to the Company. At March
31, 1996, the Company also had outstanding borrowings in the aggregate amount
of $1.2 million under additional credit agreements with the Lender, which
includes $309,000 of current maturities, at interest rates of approximately
9.25% per annum, incurred primarily for equipment purchases. Amounts
outstanding under these additional credit agreements are scheduled to be paid
in monthly installments through June 1, 2000. The Company's credit agreements
with the Lender are collateralized by a security interest in substantially all
of the Company's assets. Furthermore, such credit agreements include a number
of financial covenants and restrictions, including the following: (i)
maintenance of minimum tangible net worth of at least 120% of the tangible net
worth of the Company as of the end of a specified prior fiscal year, (ii)
maintenance of a ratio of total liabilities (less deferred revenue) to tangible
net worth of not more than 2-to-1, (iii) maintenance of a fixed charge coverage
ratio of not less than 3-to-1, (iv) restrictions on granting liens or security
interests in assets, (v) restrictions on any sale of assets of the Company,
other than in the ordinary course of its business, or any merger, consolidation
or change of control of the
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Company, (vi) restrictions on lending or advancing funds to any person or
entity in excess of $100,000 and (vii) restrictions on permitting the Company's
current Chief Executive Officer to reduce his current involvement in the
management of the Company's operations.
On May 1, 1996, the Company completed the initial public offering of
its Common Stock. A total of 2,390,400 shares of Common Stock was sold by the
Company resulting in net proceeds to the Company of approximately $43.8 million
after deducting estimated expenses of the offering of $650,000 and the
underwriting discount. The Company currently intends to use the net proceeds
of the offering for working capital and general corporate purposes, including
financing accounts receivable and capital expenditures made in the ordinary
course of business, as well as for possible repayment of amounts outstanding
under the revolving and credit agreements. The Company may also apply a
portion of the net proceeds of the offering to acquire businesses, products and
technologies that are complementary to the Company.
The Company believes that existing cash and cash equivalent balances,
short-term investment balances, net proceeds from the initial public offering,
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. However, any
material acquisitions of complementary businesses, products or technologies
could require the Company to obtain additional sources of financing.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results are dependent upon continued
market acceptance of Rhythm and enhancements thereto. A decline in demand for,
or market acceptance of, Rhythm as a result of competition, technological
change or other factors would have a material adverse effect on the Company's
business, operating results and financial condition.
A significant portion of the Company's revenues in any quarter are
typically derived from a limited number of large, non-recurring license sales.
For example, a single customer accounted for a majority of the Company's
revenues in the quarter ended March 31, 1996 and a different customer accounted
for a majority of the Company's revenues in the quarter ended March 31, 1995.
In addition, like many software companies, the Company typically realizes a
significant portion of its software license revenues in the last month of a
quarter. License agreements entered into during a quarter may not meet the
Company's revenue recognition criteria and as such, the Company could meet or
exceed its forecast of license activity without meeting its forecast for
revenues. The Company's sales cycle is typically six to nine months and varies
substantially from customer to customer. In addition, sales derived through
indirect channels, which may have lower margins than direct sales and are
harder to predict, may in the future increase as a percentage of total
revenues. As a result of these and other factors, the Company's quarterly
results are likely to be subject to significant fluctuations in the future.
There can be no assurance that the Company's historical growth rates or
operating margins can be sustained in the future.
Quarterly fluctuations also depend on factors such as the size and
timing of significant orders, increased competition, the timing of release and
market acceptance of new or enhanced versions of the Company's products,
changes in pricing policies of the Company or its competitors, budgeting cycles
of its customers, changes in operating expenses, foreign currency exchange rate
fluctuations and general economic factors. Furthermore, the Company believes
that the purchase of its products is relatively discretionary and generally
involves a significant commitment of capital (which during 1995, other than for
one significant large sale, generally ranged from approximately $150,000 to
$3.5 million). As a result, purchases of the Company's products may be
deferred or canceled in the event of a downturn in any potential customer's
business or the economy in general.
The Company's expense levels are based, in part, on its expected
future revenues. If revenues are below expectations, operating results and net
income are likely to be adversely and disproportionately affected because a
significant portion of the Company's expenses do not vary with revenues. The
Company may choose to reduce prices or invest significant resources in research
and development efforts in response to competition or to pursue new market
opportunities. There can be no assurance that revenues will grow in future
periods, that they will grow at historical rates, or that the Company will
remain profitable.
12
<PAGE> 13
The Company recorded noncash deferred compensation of approximately
$910,000 during the first quarter of 1996 in connection with certain options
granted during such quarter. Amortization of deferred compensation was
$229,000 in the quarter ended March 31, 1996 and the unamortized balance of
deferred compensation at March 31, 1996 was $2.4 million. The unamortized
balance of the deferred compensation will be expensed ratably over the vesting
periods of the options (primarily four years) and therefore, will continue to
impact the Company's operating results through 2000.
13
<PAGE> 14
i2 TECHNOLOGIES, INC.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
By written consent dated March 28, 1996, a majority of the Company's
stockholders approved the Company's Employee Stock Purchase Plan, to
be effective upon the effectiveness of the Registration Statement
relating to the Company's initial public offering of its Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Index
<TABLE>
<CAPTION>
Number Exhibit Description
------ ------------------------------------------------------------
<S> <C>
10.1 Second Amendment to Lease Agreement between i2 Technologies, Inc.
and TRST Irving, Inc. dated as of February 23, 1996
11.1 Statement of Computation of Net Income Per Share
27.1 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1996.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements 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.
------------------------------------------
May 28, 1996 /s/ Sanjiv S. Sidhu
------------ ------------------------------------------
(Date) Sanjiv S. Sidhu
Chairman of the Board and Chief Executive
Officer (Principal executive officer)
May 28, 1996 /s/ David F. Cary
------------ ------------------------------------------
(Date) David F. Cary
Vice President and Chief Financial Officer
(Principal finance and accounting officer)
15
<PAGE> 16
Index to Exhibits
<TABLE>
<CAPTION>
Number Exhibit Description
- - ------ -------------------
<S> <C>
10.1 Second Amendment to Lease Agreement between i2 Technologies, Inc.
and TRST Irving, Inc. dated as of February 23, 1996
11.1 Statement of Computation of Net Income Per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO
LEASE AGREEMENT
THIS SECOND AMENDMENT TO LEASE AGREEMENT (this "AMENDMENT") is by and
between TRST IRVING, INC., a Texas corporation ("LANDLORD"), and i2
TECHNOLOGIES, INC., a Delaware corporation ("TENANT").
RECITALS
A. Landlord and Tenant have previously entered into a certain
Lease Agreement dated July 14, 1995 (the "ORIGINAL LEASE"), with respect to
Suite No. 1600 in the office building located at 909 Las Colinas Boulevard,
Irving, Texas. (Except as otherwise provided herein, all terms with initial
capital letters have the same meaning ascribed to them in the Original Lease.)
B. The Original Lease has been amended by a certain First
Amendment to Lease Agreement dated ____________, 1996, whereby Landlord and
Tenant confirmed an increase in the Basic Rental. (The Original Lease, as
amended by such first amendment, is hereinafter referred to as the "LEASE.")
C. Tenant has exercised its right of first refusal, and
accordingly, will lease an additional 10,926 square feet of rentable space in
the Building. Landlord and Tenant desire to amend the Lease to include such
additional space.
AGREEMENTS
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained in this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Landlord and Tenant hereby agree as follows:
1. The Basic Lease Information, which sets forth various
definitions, is hereby amended as follows:
a. The definition of Premises is amended to read as follows:
"Premises: (i) Suite No. 1600 (the "Initial
Lease Area"), containing 36,534
rentable square feet, and (ii) Suite
No. 1400 (the "Additional Lease
Area"), containing 10,926 rentable
square feet, in the office building
known as Computer Associates Tower,
909 E. Las Colinas Blvd. (the
"Building") located in the City of
Irving, Dallas County, Texas,
described on Exhibit 'I'. The
Premises are outlined on the plan
attached to the Lease as Exhibit
'A'."
1
<PAGE> 2
b. The definition of Term is amended to read as follows:
"Term: Commencing on the Commencement Date
and ending on October 31, 2000,
subject to adjustment or earlier
termination as provided in the
Lease. As used herein, the term
'Commencement Date' shall mean
October 15, 1995 with respect to the
Initial Lease Area, and the earlier
of (i) the date upon which Tenant
commences business in the Additional
Lease Area, or (ii) August 1, 1996
with respect to the Additional Lease
Area."
c. The definition of Basic Rental is amended to read as follows:
Basic Rental: Payable monthly based on the
following annual amounts: Subject
to increase in accordance with
Exhibit 'C,' (i) the annual Basic
Rental for the Initial Lease Area
will be $15.94 per rentable square
foot per year during the first
twelve (12) month period (months
1-12), $15.94 per rentable square
foot per year during the second
twelve (12) month period (months
13-24), $16.44 per rentable square
foot per year during the third
twelve (12) month period (months
25-36), $16.94 per rentable square
foot per year during the fourth
twelve (12) month period (months
37-48), and $17.44 per rentable
square foot per year during the last
twelve (12) month period (months
49-60); and (ii) the annual Basic
Rental for the Additional Lease Area
will be $20.00 per rentable square
foot per year throughout the entire
Term of the Additional Lease Area."
2. Exhibit "A" attached to this Amendment is hereby substituted
for the Exhibit "A" attached to the Lease.
3. Tenant accepts the Additional Lease Area in its "as is"
condition. The Additional Lease Area shall be completed in accordance with
Exhibit "B" attached hereto and incorporated herein for all purposes.
4. In addition to the parking spaces Tenant is entitled to use
pursuant to, and in accordance with, Exhibit "E" attached to the Lease, Tenant
will also be permitted to use thirty-one (31) undesignated vehicular parking
spaces in the Parking Garage during the initial Term of the Additional Lease
Area (i.e., Tenant's rights to such additional parking spaces will not commence
until August 1, 1996). Tenant may use such additional parking spaces at no
charge during the first 27 months of such Term, but Tenant will pay $40.00 per
space per month during the last 24 months of the Term of the Lease. Tenant's
use of such parking spaces will be subject to such terms,
2
<PAGE> 3
conditions and regulations as are from time to time charged or applicable to
patrons of the Parking Garage. If, for any reason, Landlord fails or is unable
to provide, or Tenant is not permitted to use, all or any portion of the
parking spaces to which it is entitled under this paragraph, then Tenant's
obligation to pay for such spaces shall be abated for so long as Tenant does
not have the use thereof; this abatement shall be in full settlement of all
claims that Tenant might otherwise have against Landlord because of Landlord's
failure or inability to provide Tenant with such parking spaces. If Tenant
sublets any portion of the Premises or assigns any of its interest in the
Lease, then the total parking spaces allocated to Tenant under the Lease, as
amended hereby, shall be reduced to the extent the ratio between the rentable
square feet of the Premises and the parking spaces granted to Tenant under the
Lease as amended hereby exceeds the Building standard ratio of parking space
per rentable square foot as established by Landlord from time to time.
5. Landlord and Tenant hereby confirm that Tenant has the right
to renew the Lease as it relates to the Additional Lease Area upon the terms
and conditions set forth in the Renewal Option described in Exhibit "F"
attached to the Lease.
6. Landlord will pay The Amend Group a commission for the leasing
of the Additional Lease Area pursuant to a separate agreement between Landlord
and The Amend Group.
7. Except as amended hereby the Lease remains in full force and
effect. As of the effective date of this Amendment, Landlord and Tenant each
acknowledges to the other that neither party is in default under the Lease, as
amended hereby. This Amendment may be executed in two or more counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
8. Tenant will have access to the Additional Lease Area to
complete the leasehold improvements on June 1, 1996. In the event Tenant is
not given access as of June 1st, the Commencement Date for the Additional Lease
Area will be extended to be sixty (60) days from the date Tenant has access to
such area.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment
to be effective as of the latest date accompanying a signature below.
LANDLORD
TRST IRVING, INC., a Texas corporation
Date: , 1996 By:
---------------- ------------------------------------
Printed Name:
--------------------------
Title:
---------------------------------
3
<PAGE> 4
TENANT
i2 TECHNOLOGIES, INC., a Delaware
corporation
Date: , 1996 By:
---------------- ------------------------------------
Printed Name:
--------------------------
Title:
---------------------------------
4
<PAGE> 5
EXHIBIT A
(Graphical depiction of floor plan)
<PAGE> 6
EXHIBIT B
TENANT FINISH-WORK: ALLOWANCE
1. Tenant accepts the Additional Lease Area in its "as is" condition on
the date that this Amendment is entered into and shall have the
benefit of all existing improvements in the Additional Lease Area
only.
2. Tenant shall provide to Landlord for its approval space plans of the
Additional Lease Area prior to commencing working drawings. Following
Landlord's written approval of such space plans, such approval not to
be unreasonably withheld or delayed (such determination to be
communicated within five (5) working days following submission by
Tenant), Tenant shall provide to Landlord for its approval final
working drawings, prepared by The Amend Group, of all improvements
that Tenant proposes to install in the Additional Lease Area; such
working drawings shall include the partition layout, ceiling plan,
electrical outlets and switches, telephone outlets, drawings for any
modifications to the mechanical and plumbing systems of the Building,
and detailed plans and specifications for the construction of the
improvements called for under this Exhibit in accordance with all
applicable governmental laws, codes, rules, and regulations. Landlord
agrees to communicate its determination regarding the acceptability of
such working drawing within ten (10) days following their submission
by Tenant. Further, if any of Tenant's proposed construction work
will affect the Building's HVAC, electrical, mechanical, or plumbing
systems, then the working drawings pertaining thereto shall be
prepared by the Building's engineer of record, whom Tenant shall at
its cost engage for such purpose. Landlord's approval of such working
drawings shall not be unreasonably withheld, provided that (a) they
comply with all applicable governmental laws, codes, rules, and
regulations, (b) such working drawings are sufficiently detailed to
allow construction of the improvements in a good and workmanlike
manner, and (c) the improvements depicted thereon conform to the rules
and regulations promulgated from time to time by Landlord for the
construction of tenant improvements (a copy of which has been
delivered to Tenant). As used herein, "Working Drawings" shall mean
the final working drawings approved by Landlord, as amended from time
to time by any approved changes thereto, and "Work" shall mean all
improvements to be constructed in accordance with and as indicated on
the Working Drawings. Approval by Landlord of the Working Drawings
shall not be a representation or warranty of Landlord that such
drawings are adequate for any use, purpose, or condition, or that such
drawings comply with any applicable law or code, but shall merely be
the consent of Landlord to the performance of the Work. All changes
in the Work must receive the prior written approval of Landlord, and
in the event of any such approved change Tenant shall, upon completion
of the Work, furnish Landlord with an accurate, reproducible
"as-built" plan (e.g., sepia) of the improvements as constructed,
which plan shall be incorporated into the Lease by this reference for
all purposes, as well as copies of all operating manuals,
specifications and warranties on equipment installed and connected to
the Building's systems.
3. The Work shall be performed only by contractors and subcontractors
approved in writing by Landlord, which approval shall not be
unreasonably withheld. All contractors and
<PAGE> 7
subcontractors shall be required to procure and maintain (a) insurance
against such risks, in such amounts, and with such companies as
Landlord may reasonably require and (b) payment and performance bonds
covering the cost of the Work and otherwise reasonably satisfactory to
Landlord. Certificates of such insurance, with paid receipts
therefor, and copies of such bonds must be received by Landlord before
the Work is commenced. The Work shall be performed in a good and
workmanlike manner that is free of defects and is in strict
conformance with the Working Drawings, and shall be performed in such
a manner and at such times as to maintain harmonious labor relations
and not to interfere with or delay Landlord's other contractors, the
operation of the Building, and the occupancy thereof by other tenants.
All contractors and subcontractors shall contact Landlord and schedule
time periods during which they may use Building facilities in
connection with the Work (e.g., elevators, excess electricity, etc.).
4. Tenant shall bear the entire cost of performing the Work (including,
without limitation, design of the Work and preparation of the Working
Drawings, costs of construction labor and materials, electrical usage
during construction, additional janitorial services, general tenant
signage, related taxes and insurance costs, all of which costs are
herein collectively called the "Total Construction Costs") in excess
of the Construction Allowance (hereinafter defined).
5. Landlord shall provide to Tenant a construction allowance (the
"Construction Allowance") equal to the lesser of (a) $22.08 per
rentable square foot in the Additional Lease Area, or (b) the Total
Construction Costs, as adjusted for any Landlord approved changes to
the Work. Tenant shall not become entitled to the Construction
Allowance until the Work has been substantially completed and Tenant
has caused to be delivered to Landlord (i) all invoices from
contractors, subcontractors, and suppliers evidencing the cost of
performing the Work, together with lien waivers from such parties, and
a consent of the surety to the finished Work (if applicable), and (ii)
a certificate of occupancy from the appropriate governmental
authority, if applicable to the Work, or evidence of governmental
inspection and approval of the Work. Landlord agrees that a portion
of the Construction Allowance may be allocated as follows:
a. Up to $2.00 per rentable square foot of the Additional Lease
Area may be paid to The Amend Group for architectural and
engineering design;
b. Up to $1.50 per rentable square foot of the Additional Lease
Area may be paid to The Amend Group for construction
management fees.
6. Tenant or its agent shall supervise the Work, make disbursements
required to be made to the contractor. Landlord or its agent
(Landlord's Construction Manager) shall supervise the Work, and act as
a liaison between the contractor and Tenant and coordinate the
relationship between the Work, the Building, and the Building's
systems. In consideration for such construction supervision
services, Tenant shall pay to Landlord or its Agent a construction
supervision fee equal to five percent (5%) of the Total Construction
Costs.
7. To the extent not inconsistent with this Exhibit, Sections 8a. and 8c
of the Lease shall
<PAGE> 8
govern the performance of the Work and the Landlord's and Tenant's
respective rights and obligations regarding the improvements installed
pursuant thereto.
8. a. Tenant will install Building standard ceiling and lighting in
all areas of the Additional Lease Area where the existing
ceiling is exposed.
b. Any existing condition above the ceiling, at the exterior
walls, or around the interior core (stairs, restrooms,
mechanical rooms, electrical rooms, elevator lobbies, and
elevator) which requires work to bring into compliance with
existing codes will be at the expense of Landlord, provided
any changes thereto resulting from Tenant's desired
improvements that require or necessitate work to bring into
compliance shall be at Tenant's expense.
c. Tenant shall be responsible to cause restrooms in the
Additional Lease Area to comply with applicable ADA standards
for handicapped persons. Landlord shall be responsible for
complying with tall applicable ADA standards for the Common
Areas.
d. Normal wear would include holes in walls to hang pictures or
shelving, marks and scratches on the walls, and any electrical
or mechanical equipment that can wear out with use.
e. Tenant shall prepare the bid package in accordance with AIA
procedures.
f. A minimum of five contractors (acceptable to Landlord, and two
of which shall be recommended by Landlord) shall bid the work.
g. Tenant will contract with the lowest qualified bidder among the
contractors.
h. Tenant shall not become entitled to the Construction Allowance
or a portion thereof until the following occurs: Each
installment of work has been substantially completed in a
workmanlike manner acceptable to the Landlord's Construction
Manager. The Construction Allowance will be paid in not more
than three installments and not more often than monthly within
thirty (30) days after Landlord's Construction Manager's
receipt of invoice from Tenant or Tenant's Construction
Manger, which shall include (i) all invoices from contractors,
subcontractor, and suppliers evidencing the costs of
performing the work, together with lien waivers from such
parties, and a consent of the surety to the finished work (if
applicable) and (ii) with respect to the third and final
payment only, a certificate of occupancy from the appropriate
governmental authority, if applicable to the Work, or evidence
of governmental inspection and approval of the Work. In no
event shall any one installment invoice by Tenant exceed
one-third of the total amount of the Construction Allowance
(or as the case may be, the total amount of the Construction
Allowance and the Allowance Increase) except for the third and
final installment invoice, if necessary.
<PAGE> 1
EXHIBIT 11.1
i2 TECHNOLOGIES, INC.
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1995 1996
------------ ------------
<S> <C> <C>
PRIMARY NET INCOME PER SHARE (1):
Weighted average number of common shares outstanding 16,000 21,804
Common shares issuable on exercise of stock options,
net of shares assumed to be repurchased at the
average market price (2) 6,359 3,306
Common shares related to SAB No. 64 and 83 (2) (3) 909 --
---------- ----------
Weighted average common and common
equivalent shares outstanding 23,268 25,110
========== ==========
Net income $ 783 $ 507
========== ==========
Net income per share $ 0.03 $ 0.02
========== ==========
FULLY DILUTED NET INCOME PER SHARE:
Weighted average number of common shares outstanding 16,000 21,804
Common shares issuable on exercise of stock options,
net of shares assumed to be repurchased at the
period-end market price, if higher than the
average market price (2) 6,359 3,451
Common shares related to SAB No. 64 and 83 (2) (3) 909 --
---------- ----------
Weighted average common and common
equivalent shares outstanding 23,268 25,255
========== ==========
Net income $ 783 $ 507
========== ==========
Net income per share $ 0.03 $ 0.02
========== ==========
</TABLE>
(1) The Company reports primary net income per share as the effect of dilutive
securities is less than 3%.
(2) In computing these amounts, the funds used in applying the treasury stock
method include the compensation related to stock options which will be
charged to expense in the future.
(3) Common and common equivalent shares issued within 12 months of the initial
filing of the Company's Registration Statement on Form S-1 are included in
this line item for the three months ended March 31, 1995. See Note 2 of
Notes to Condensed Consolidated Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 10,014
<SECURITIES> 2,459
<RECEIVABLES> 4,922
<ALLOWANCES> 368
<INVENTORY> 0
<CURRENT-ASSETS> 20,441
<PP&E> 5,735
<DEPRECIATION> 1,565
<TOTAL-ASSETS> 24,674
<CURRENT-LIABILITIES> 14,980
<BONDS> 0
<COMMON> 6
0
0
<OTHER-SE> 8,342
<TOTAL-LIABILITY-AND-EQUITY> 24,674
<SALES> 9,620
<TOTAL-REVENUES> 12,672
<CGS> 1,515
<TOTAL-COSTS> 3,082
<OTHER-EXPENSES> 8,893
<LOSS-PROVISION> 182
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> 824
<INCOME-TAX> 317
<INCOME-CONTINUING> 507
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 507
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
