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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, 1997
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 X No
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As of April 30, 1997, the Registrant had outstanding 24,964,654 shares of
Common Stock, $.00025 par value.
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i2 TECHNOLOGIES, INC.
TABLE OF CONTENTS
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Page
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PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1996 and
March 31, 1997 3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 1996 and March 31, 1997 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1996 and March 31, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II OTHER INFORMATION
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 data)
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December 31, March 31,
1996 1997
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(unaudited)
ASSETS
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Current assets:
Cash and cash equivalents $ 31,759 $ 34,993
Short-term investments 18,031 24,794
Accounts receivable, net 25,504 17,249
Contract receivables, net 3,050 9,579
Prepaid and other current assets 1,898 2,168
Deferred income taxes 385 1,053
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Total current assets 80,627 89,836
Furniture and equipment, net 7,636 8,800
Deferred income taxes 811 565
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Total assets $ 89,074 $ 99,201
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,310 $ 4,983
Accrued liabilities 6,586 8,907
Current portion of deferred revenue 16,113 20,332
Income taxes payable 350 641
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Total current liabilities 27,359 34,863
Long-term debt 100 100
Deferred revenue 266 257
Deferred income taxes 28 28
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Total liabilities 27,753 35,248
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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, 24,612,117 and 24,822,589 shares issued
and outstanding, respectively 6 6
Additional paid-in capital 49,963 50,753
Deferred compensation (1,865) (1,680)
Retained earnings 13,217 14,874
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Total stockholders' equity 61,321 63,953
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Total liabilities and stockholders' equity $ 89,074 $ 99,201
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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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1996 1997
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Revenues:
Software licenses $ 9,620 $ 20,947
Services 1,844 7,833
Maintenance 1,208 3,385
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Total revenues 12,672 32,165
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Costs and expenses:
Cost of software licenses 1,515 1,836
Cost of services and maintenance 1,567 6,967
Sales and marketing 4,893 11,822
Research and development 2,708 6,734
General and administrative 1,292 2,803
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Total costs and expenses 11,975 30,162
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Operating income 697 2,003
Other income 127 727
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Income before income taxes 824 2,730
Provision for income taxes 317 1,073
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Net income $ 507 $ 1,657
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Net income per share $ 0.02 $ 0.06
Weighted average common and common
equivalent shares outstanding 25,110 28,231
</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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1996 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 507 $ 1,657
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 640 781
Amortization of deferred compensation 229 185
Deferred income taxes (35) (422)
Tax benefit of stock options -- 703
Changes in operating assets and liabilities:
Accounts receivable, net 3,365 8,255
Contract receivables, net (460) (6,529)
Income tax receivable 170 --
Prepaid and other assets (238) (270)
Accounts payable 318 673
Accrued liabilities 492 2,321
Income taxes payable (323) 291
Deferred revenue 3,563 4,210
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Net cash provided by operating activities 8,228 11,855
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment (1,683) (1,945)
Purchases of short-term investments (2,459) (18,763)
Proceeds from maturities of short-term investments -- 12,000
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Net cash used in investing activities (4,142) (8,708)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (54) --
Net proceeds from exercise of stock options 52 87
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Net cash provided by (used in) financing activities (2) 87
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Net increase in cash and cash equivalents 4,084 3,234
Cash and cash equivalents at beginning of period 5,930 31,759
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Cash and cash equivalents at end of period $ 10,014 $ 34,993
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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, 1996, included in the Company's Annual Report on Form 10-K.
The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of results that may be expected for any other interim
period or for the full year.
Certain prior year financial statement items have been reclassified to
conform to the current year's format.
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.
Fully diluted earnings per share is the same as, or not materially different
from, primary earnings per share and accordingly, is not presented. In
February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which is
required to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements, the Company will be
required to present "basic" earnings per share which excludes the effect of
common stock equivalents. Basic earnings per share for the quarters ended
March 31, 1996 and 1997 was $0.02 and $0.07, respectively. The Company will
also be required to present "diluted" earnings per share which includes the
effect of common stock equivalents. Diluted earnings per share for the
quarters ended March 31, 1996 and 1997 was $0.02 and $0.06, respectively.
3. SUBSEQUENT EVENT
On April 1, 1997, the Company completed the acquisition of the Operations
Planning Group ("OPG"), a business activity of Computer Sciences Corporation
("CSC"), for a purchase price of $1 million. OPG provides Operation Planning
Environment ("OPE") optimization software for planning and scheduling for
customers in the consumer packaged goods industry. The Company has assumed and
is committed to the contractual obligations of the OPE customer base, and as
part of the agreement, all employees of OPG became employees of the Company. The
acquisition will be accounted for under the purchase accounting method, and a
substantial portion of the purchase price will be recorded as in-process
research and development and expensed during the second quarter of 1997.
Additionally, the Company has agreed to make available a certain amount of
consulting revenue opportunities to CSC within a three year period from the date
of the acquisition. If the agreed upon consulting revenue opportunities are not
made available to CSC, the Company will be required to make an additional cash
payment to CSC at the end of the three year period equal to the gross profit
typically realized on such consulting revenue. Such payment, if any, would be
recorded as an increase in the purchase price.
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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 client/server based decision
support software products for supply chain management and other applications.
The Company also provides services such as consulting, training and maintenance
related to these products. 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 supply
chain management software solution, Rhythm(R), enables customers to model
complex, multi-site supply chains and rapidly generate integrated solutions to
planning and scheduling problems such as production bottlenecks, supply
interruptions and customer order changes. Rhythm utilizes a unique,
constraint-based methodology which simultaneously considers a broad range of
constraints -- from machine capabilities to individual customer commitments --
to optimize all aspects of the supply chain including manufacturing and
logistics.
This report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements and other statements made
elsewhere in this report are made in reliance on the Private Securities
Litigation Reform Act of 1995. The section below entitled "Factors That May
Affect Future Results" sets forth and incorporates by reference certain factors
that could cause actual future results of the Company to differ materially from
these statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
that selected items in the unaudited 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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1996 1997
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Revenues:
Software licenses 75.9% 65.1%
Services 14.6 24.4
Maintenance 9.5 10.5
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Total revenues 100.0 100.0
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Costs and expenses:
Cost of software licenses 11.9 5.7
Cost of services and maintenance 12.4 21.7
Sales and marketing 38.6 36.8
Research and development 21.4 20.9
General and administrative 10.2 8.7
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Total costs and expenses 94.5 93.8
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Operating income 5.5 6.2
Other income 1.0 2.3
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Income before income taxes 6.5 8.5
Provision for income taxes 2.5 3.3
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Net income 4.0% 5.2%
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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 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
implementation, consulting and training services and are recognized as the
services are performed. Maintenance revenues are derived from customer support
agreements generally entered into in connection with initial license sales and
subsequent renewals. Maintenance revenues are recognized ratably over the term
of the maintenance period. Payments for maintenance fees are generally made in
advance.
Total revenues increased 153.8% to $32.2 million in the quarter ended March
31, 1997 from $12.7 million in the quarter ended March 31, 1996. 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 in 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 117.7% to
$20.9 million in the quarter ended March 31, 1997 from $9.6 million in the
quarter ended March 31, 1996. Software license revenues constituted 65.1% and
75.9% of total revenues in the quarters ended March 31, 1997 and 1996,
respectively. The significant increase in the dollar amount of software
license revenues was primarily due to growing market acceptance of the
Company's software products, a substantial investment in the Company's
infrastructure and continued expansion into new geographic and vertical
markets. These factors contributed to an increase in the number of Rhythm
licenses sold during the quarter ended March 31, 1997 as compared to the
quarter ended March 31, 1996. 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 a majority of software
license revenues, the Company's strategy is to increase the level of indirect
sales activities. In this regard, the Company has entered into reselling
agreements with other software providers such as SAP AG and Systems Software
Associates. As a result, the Company expects that sales of its software
products through sales alliances, distributors, resellers and other indirect
channels will 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 324.8% to $7.8 million in the
quarter ended March 31, 1997 from $1.8 million in the quarter ended March 31,
1996. Service revenues constituted 24.4% and 14.6% of total revenues in the
quarters ended March 31, 1997 and 1996, respectively. The significant
increases in 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. These 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, consulting and training services.
MAINTENANCE. Revenues from maintenance increased 180.2% to $3.4 million in
the quarter ended March 31, 1997 from $1.2 million in the quarter ended March
31, 1996. Maintenance revenues constituted 10.5% and 9.5% of total revenues in
the quarters ended March 31, 1997 and 1996, respectively. These increases 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 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, 1997.
INTERNATIONAL REVENUES. The Company's international revenues, primarily
generated from customers located in Asia, Canada and Europe, were approximately
37% and 19% of total revenues in the quarters ended March 31, 1997 and 1996,
respectively. The significant increase in international revenues as a
percentage of total revenues was primarily due to the continued international
expansion of the Company's sales operations. The
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Company believes that continued growth and profitability will require 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) the cost of reproduction and delivery of the software, (ii) the cost of
user documentation, (iii) royalty fees associated with third-party software
included with the sales of Rhythm and (iv) commissions paid to third-parties in
connection with joint marketing and other related agreements. Cost of software
licenses was $1.8 million and $1.5 million in the quarters ended March 31, 1997
and 1996, representing 8.8% and 15.7% of software license revenues,
respectively. The decrease in cost of software licenses as a percent of
software license revenues was primarily due to royalties paid to a third-party
vendor in the first quarter of 1996 in connection with a significant software
license sale that included complementary software provided by such vendor.
Royalty fees and third-party commissions were $1.8 million and $1.5 million in
the quarters ended March 31, 1997 and 1996, respectively, while the cost of
reproduction and delivery of software and the cost of user documentation were
immaterial for those periods. The Company expects to continue to include
third-party software with sales of Rhythm to the extent requested by customers.
COST OF SERVICES AND MAINTENANCE. Cost of services and maintenance
consists primarily of 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,
new releases of software and updated user documentation, none of which costs
have been significant to date. Cost of services and maintenance was $7.0
million and $1.6 million in the quarters ended March 31, 1997 and 1996,
representing 62.1% and 51.3% 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 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 in
Canada, Europe and Japan in the latter half of 1996. The Company expects to
continue to increase the number of its consulting, product support and training
staff in the foreseeable future as a means to expand into different geographic
and vertical markets. To the extent that the Company's license sales do not
increase at anticipated rates, the hiring of additional consultants could
adversely affect the Company's gross margins.
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 $11.8 million and $4.9 million in the
quarters ended March 31, 1997 and 1996, representing 36.8% and 38.6% of total
revenues, respectively. The increase in dollar amount of sales and marketing
expenses was 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 as a result of significantly
higher revenues and (iii) increased marketing and promotional activities. The
decrease in sales and marketing expenses as a percentage of total revenue was
primarily due to the commissions associated with a higher percentage of license
revenue in the first quarter of 1996 and a significant investment in the
Company's sales and marketing organization in the first quarter of 1996. The
Company expects to continue to significantly increase its sales and marketing
activities in order to expand its international sales operations and to enter
into new vertical markets. The Company believes that the dollar amount of
sales and marketing expenses will continue to increase, but should not vary
significantly as a percentage of total revenues from the level experienced in
the quarter ended March 31, 1997.
RESEARCH AND DEVELOPMENT. Research and development expenses were $6.7
million and $2.7 million in the quarters ended March 31, 1997 and 1996,
representing 20.9% and 21.4% of total revenues, respectively. The increase in
research and development expenses was 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.
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 vertical markets.
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In accordance with Statement of Financial Accounting Standards No. 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 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, accounting and other requirements. General
and administrative expenses were $2.8 million and $1.3 million in the quarters
ended March 31, 1997 and 1996, representing 8.7% and 10.2% 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 1996 and the first
quarter of 1997. The decrease in general and administrative expenses as a
percentage of total revenues was primarily due to the substantial increase in
total 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.
OTHER INCOME
Other income consists primarily of interest income on short-term
investments and overnight repurchase agreements partially offset by interest
expense on the Company's outstanding debt. Other income was $727,000 and
$127,000 in the quarters ended March 31, 1997 and 1996, representing 2.3% and
1.0% of total revenues, respectively. The increase in other income both in
dollar amount and as a percentage of total revenues was primarily due to
interest earned on higher balances of cash, cash equivalents and short-term
investments resulting from net proceeds of the initial public offering of the
Company's common stock which was completed in May 1996 and a decrease in
interest expense due to the repayment of a majority of the Company's
outstanding debt in June 1996.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $1.1 million and $317,000 in the
quarters ended March 31, 1997 and 1996, respectively. The Company's effective
income tax rate was 39.3% in the quarter ended March 31, 1997 as compared to
38.5% in the quarter ended March 31, 1996. The Company's effective income tax
rate was higher in the first quarter of 1997 primarily due to a higher federal
income tax rate as a result of the significant increase in the Company's
profitability.
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,
long-term borrowings and during 1996, through sales of equity securities. The
Company's operating activities provided cash of $11.9 million in the quarter
ended March 31, 1997 as compared to $8.2 million in the quarter ended March 31,
1996. Operating cash flows have increased primarily due to increases in net
income, accrued liabilities and deferred revenue and a decrease in accounts
receivable partially offset by an increase in contract receivables. Accrued
liabilities have increased primarily as a result of increased royalties, third-
party commissions, accrued compensation and related expenses. Deferred revenues
have increased primarily as a result of the growth in customer licensing
activity and the associated deferrals of service and maintenance revenue for
which the money has been received but the services have not been performed.
Accounts receivable, net of allowance for doubtful accounts, decreased to
$17.2 million at March 31, 1997 from $25.5 million at December 31, 1996,
primarily due to the collection of several large trade receivable balances
outstanding at December 31, 1996. 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, net of allowance for doubtful accounts,
increased from $3.1 million at December 31,
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1996 to $9.6 million at March 31, 1997 primarily due to the extended payment
terms of several license agreements partially offset by billings of contract
receivables outstanding at December 31, 1996. 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's financial position or results of
operations.
Average days' sales outstanding, including contract receivables, was 77
days for the quarter ended March 31, 1997 as compared to 74 days for the year
ended December 31, 1996. The increase in average days outstanding was
primarily due to an increase in receivables from customers located in foreign
countries which tend to have longer payment terms compared to customers located
in the United States. 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.
Cash used in investing activities was $8.7 million in the quarter ended
March 31, 1997 as compared to $4.1 million in the quarter ended March 31, 1996.
The increase in cash used in investing activities was primarily due to the
increase in the net purchases of short-term investments. At March 31, 1997,
the Company did not have any material commitments for capital expenditures.
As of March 31, 1997, the Company had $55.0 million of working capital,
including $35.0 million in cash and cash equivalents and $24.8 million in
short-term investments as compared to $53.3 million of working capital as of
December 31, 1996, including $31.8 million in cash and cash equivalents and
$18.0 million in short-term investments. The increase in working capital was
primarily due to a decrease in accounts receivable which was partially offset
by an increase in contract receivables.
The Company has a revolving credit agreement with NationsBank of Texas,
N.A. (the "Lender") which expires on June 1, 1998, 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 base limitation and the borrowings thereunder bear
interest at the Lender's prime lending rate (8.50% at March 31, 1997). At
March 31, 1997, the Company had $100,000 of borrowings outstanding under the
revolving credit agreement, and the maximum amount of borrowings allowable
under the revolving credit agreement was $3.0 million.
The Company is actively reviewing acquisition candidates with leading-edge
products and technologies that could enhance the Company's product offering. The
technologies associated with the products of the acquired businesses would be
incorporated into the Company's existing internally developed products or would
be used in developing new client/server, open systems products. On April 1,
1997, the Company completed the acquisition of the Operations Planning Group
("OPG"), a business activity of Computer Sciences Corporation, for a purchase
price of $1 million. The acquisition will be accounted for under the purchase
accounting method, and a substantial portion of the purchase price will be
recorded as in-process research and development and expensed during the second
quarter of 1997. The Company is currently involved in the evaluation of, and
discussions with, one or more additional acquisition candidates, but the Company
has not reached any agreements with respect to any future acquisitions. 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.
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. However, any material acquisitions of complementary businesses,
products or technologies could require the Company to obtain additional sources
of financing.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Numerous factors may affect the Company's business and results of
operations. These factors include, but are not limited to, the potential for
significant fluctuations in quarterly results; the reliance on Rhythm and
related products and services for substantially all of the Company's revenues;
the level and intensity of competition in the supply chain management market;
the Company's ability to continue to improve its infrastructure (including
personnel and systems) to manage the substantial growth of the Company; the
timing of the release and market acceptance of new or enhanced
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versions of the Company's software products; the international expansion of the
Company's operations; the complexity of the Company's existing software
products and new products expected to be developed; and general economic and
business conditions. The discussion below addresses some of these factors.
For a more thorough discussion of these and other factors that may affect the
Company's future results, see "Item 1 - Business" of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
MARKET ACCEPTANCE
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.
POTENTIAL FOR SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS; OPERATING
LEVERAGE
The Company's quarterly revenues, expenses and operating results have
varied significantly in the past and are likely to vary significantly from
quarter to quarter in the future. Because the purchase of a supply chain
management software solution generally involves a significant commitment of
capital, the sales cycle associated with the purchase of the Company's products
is typically six to nine months and subject to a number of significant risks,
including customers' budgetary constraints, timing of budget cycles and
concerns about the introduction of new products by the Company or its
competitors, factors over which the Company has little or no control.
Furthermore, 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. As a result, the timing of significant orders is unpredictable and,
like many other software companies, the Company typically realizes a
significant portion of its software license revenues in the last month of a
quarter. In addition, the amount of revenues associated with particular
licenses can vary significantly based upon the number of software modules
purchased and the number of sites and users involved in the installation. The
Company has experienced and may continue to experience from time to time very
large, individual license sales which can cause significant variations in
quarterly license revenues. Moreover, small delays in customer orders can
cause significant variability in the Company's license revenues and results of
operations for any particular period.
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 also choose to reduce prices, invest significant resources in
research and development efforts or pursue new market opportunities in response
to competition. There can be no assurance that revenues will grow in future
periods, that they will grow at historical rates, or that the Company will
maintain positive operating margins in future quarters.
COMPLEXITY OF SOFTWARE PRODUCTS; RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
Rhythm is a client/server solution which can operate on platforms from
Digital Equipment, Hewlett-Packard, IBM, Sun Microsystems, Solaris and
Microsoft and can access data from most widely used SQL (structured query
language) databases, including Informix, Oracle and Sybase. Based upon demand
in the marketplace, the Company may identify additional platforms on which to
port its software products; however, such platforms may not be architecturally
compatible with Rhythm's software product design. Therefore, no assurance can
be given concerning the continued successful porting of the Company's software
products on these or additional platforms, the timing of completion of any such
ports or the acceptance of the Company's applications in the marketplace.
The market for the Company's software products is characterized by rapid
technological advances, evolving industry standards in computer hardware and
software technology, changes in customer requirements and frequent new product
introductions and enhancements. The Company's future success will depend upon
its ability to continue to enhance its current product line and to develop and
introduce new products that keep pace with technological developments, satisfy
increasingly sophisticated customer requirements and achieve market acceptance.
There can be no assurance that the Company will be successful in developing and
marketing, on a timely and cost-effective basis,
12
<PAGE> 13
fully functional product enhancements or new products that respond to
technological advances by others, or that its new products will achieve market
acceptance. The Company's failure to successfully develop and market product
enhancements or new products could have a material adverse effect on the
Company's business, operating results and financial condition.
As a result of the complexities inherent in client/server computing
environments and the broad functionality and performance demanded by customers
for supply chain management products, major new products and product
enhancements can require long development and testing periods. In addition,
software programs as complex as those offered by the Company may contain
undetected errors or "bugs" when first introduced or as new versions are
released that, despite testing by the Company, are discovered only after a
product has been installed and used by customers. While the Company has on
occasion experienced delays in the scheduled introduction of new and enhanced
products and products containing bugs, to date the Company's business has not
been materially adversely affected by delays or the release of products
containing errors. There can be no assurance, however, that errors will not be
found in future releases of the Company's software, or that such errors will
not impair the market acceptance of these products and adversely affect the
Company's business, operating results and financial condition.
While the Company generally takes steps to avoid interruptions of sales
often associated with the pending availability of new products, customers may
delay their purchasing decisions in anticipation of the general availability of
new or enhanced Rhythm products, which could have a material adverse effect on
the Company's business and operating results. Moreover, significant delays in
the general availability of such new releases, significant problems in the
installation or implementation of such new releases, or customer
dissatisfaction with such new releases, could have a material adverse effect on
the Company's business, operating results and financial condition.
INTERNATIONAL OPERATIONS AND CURRENCY FLUCTUATIONS
The Company has utilized, and intends to continue to utilize substantial
resources to expand existing international operations, establish additional
international operations and hire additional personnel. International
expansion of the Company's operations has required, and will continue to
require the Company to translate its software and manuals into foreign
languages. To date, the Company has translated its software into Asian,
European and Latin American languages. To the extent the Company is unable to
expand its international operations or translate its software and manuals into
foreign languages in a timely manner, it is likely to adversely impact the
Company's operating results. In addition, even if international operations are
successfully expanded, there can be no assurance that the Company will be able
to maintain or increase international market demand for its products.
The Company's international operations are subject to risks inherent in
international business activities, including, in particular, management of an
organization spread over various countries, 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, foreign currency exchange rate fluctuations and
general economic conditions. To date, the Company's revenues from
international operations have primarily been denominated in United States
dollars. However, to the extent significant sales have been in the past or are
in the future denominated in foreign currencies, the Company has implemented
and intends in the future to implement hedging programs to mitigate its
exposure to foreign currency fluctuations. As a result of the continued
expansion of the Company's international operations, the fluctuations in the
value of foreign currencies in which the Company conducts its business have
caused and will continue to cause currency transaction gains and losses. To
date, currency transaction gains and losses have not been material. However,
due to the number of foreign currencies involved, the constantly changing
currency exposures and volatility of currency exchange rates, the Company
cannot predict the effect of exchange rate fluctuations upon future operating
results. Other risks associated with international operations include import
and export licensing requirements, trade restrictions and changes in tariff
rates.
13
<PAGE> 14
i2 TECHNOLOGIES, INC.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Index
-------------
Number Exhibit Description
------ --------------------------
11.1 Statement of Computation of Net Income Per Share
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1997.
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 14, 1997 /s/ Sanjiv S. Sidhu
------------ -------------------------------------------------
(Date) Sanjiv S. Sidhu
Chairman of the Board and Chief Executive Officer
(Principal executive officer)
May 14, 1997 /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 Page
- --------- ------------------- ----
<S> <C> <C>
11.1 Statement of Computation of Net Income Per Share 17
27.1 Financial Data Schedule 18
</TABLE>
16
<PAGE> 1
EXHIBIT 11.1
i2 TECHNOLOGIES, INC.
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------
1996 1997
----------------- -----------------
<S> <C> <C>
Primary net income per share (1):
Weighted average number of common shares outstanding 21,804 24,735
Common shares issuable on exercise of stock options,
net of shares assumed to be repurchased at the
average market price (2) 3,306 3,496
----------------- -----------------
Weighted average common and common
equivalent shares outstanding 25,110 28,231
================= =================
Net income $ 507 $ 1,657
================= =================
Net income per share $ 0.02 $ 0.06
================= =================
Fully diluted net income per share:
Weighted average number of common shares outstanding 21,804 24,735
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) 3,451 3,492
----------------- -----------------
Weighted average common and common
equivalent shares outstanding 25,255 28,227
================= =================
Net income $ 507 $ 1,657
================= =================
Net income per share $ 0.02 $ 0.06
================= =================
</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.
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 34,993
<SECURITIES> 24,794
<RECEIVABLES> 18,137
<ALLOWANCES> 888
<INVENTORY> 0
<CURRENT-ASSETS> 89,836
<PP&E> 12,818
<DEPRECIATION> 4,018
<TOTAL-ASSETS> 99,201
<CURRENT-LIABILITIES> 34,863
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 63,947
<TOTAL-LIABILITY-AND-EQUITY> 99,201
<SALES> 20,947
<TOTAL-REVENUES> 32,165
<CGS> 1,836
<TOTAL-COSTS> 30,162
<OTHER-EXPENSES> (727)
<LOSS-PROVISION> 772
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 2,730
<INCOME-TAX> 1,073
<INCOME-CONTINUING> 1,657
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,657
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
