<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 1, 1997
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i2 TECHNOLOGIES, INC.
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(Exact name of registrant as specified in charter)
Delaware 0-28030 75-2294945
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
909 E. Las Colinas Blvd., 16th Floor, Irving, Texas 75039
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(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (214) 860-6000
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(Former name or former address, if changed since last report.)
<PAGE> 2
ITEM 5. OTHER EVENTS.
On May 15, 1997, i2 Technologies, Inc. (the "Registrant") acquired
Think Systems Corporation, a New Jersey corporation ("Think"), by statutory
merger of a wholly owned subsidiary of the Registrant with and into Think (the
"Think Merger"). In connection with the Think Merger, the Registrant entered
into an agreement to acquire all of the outstanding capital stock of Think
Systems Private Limited, an Indian corporation ("Think India") controlled by
the former principal shareholders of Think. The acquisition of Think India is
subject to a number of conditions, including requisite Indian regulatory
approval.
Also on May 15, 1997, the Registrant acquired Optimax Systems
Corporation, a Delaware corporation ("Optimax"), by statutory merger of a
wholly owned subsidiary of the Registrant with and into Optimax.
Additional information regarding each merger is presented in the
Registrant's previously filed Current Report on Form 8-K dated May 15, 1997 and
Current Report on Form 8-K dated June 12, 1997, as amended.
Each merger was accounted for as a pooling of interests. The
Registrant is providing supplemental management's discussion and analysis of
financial condition and results of operations and supplemental condensed
consolidated financial statements which give retroactive effect to the mergers
and include the combined operations of the Registrant, Think, Think India and
Optimax for all periods presented. The supplemental condensed consolidated
financial statements will become the historical financial statements of the
Registrant after financial statements that include the date of consummation of
the mergers are issued.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits.
<TABLE>
<CAPTION>
<S> <C>
No. Description
--- -------------
11.1 Supplemental Statement of Computation of Net Income per Share.
27.1 Supplemental Financial Data Schedule.
99.1 Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Registrant for the Three
Months ended March 31, 1996 and 1997.
</TABLE>
-2-
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<TABLE>
<CAPTION>
<S> <C>
99.2 The following Supplemental Condensed Consolidated Financial
Statements of the Registrant: Page
----
<S> <C> <C>
1. Supplemental Condensed Consolidated Balance Sheets
as of December 31, 1996 and March 31, 1997 .................................F-1
2. Supplemental Condensed Consolidated Statements of
Income for the Three Months Ended March 31,
1996 and 1997...............................................................F-2
3. Supplemental Condensed Consolidated Statements of
Cash Flows for the Three Months Ended March 31,
1996 and 1997...............................................................F-3
4. Notes to Supplemental Condensed Consolidated Financial
Statements..................................................................F-4
</TABLE>
-3-
<PAGE> 4
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 hereunto duly authorized.
i2 TECHNOLOGIES, INC.
Dated: July 1, 1997 By: /s/ David F. Cary
--------------------------------------
David F. Cary,
Vice President and
Chief Financial Officer
-4-
<PAGE> 5
EXHIBIT INDEX
Exhibit
Number
- -------
11.1 Supplemental Statement of Computation of Net Income per Share.
27.1 Supplemental Financial Data Schedule.
99.1 Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Registrant for the Three
Months ended March 31, 1996 and 1997.
99.2 The following Supplemental Condensed Consolidated Financial
Statements of the Registrant:
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
1. Supplemental Condensed Consolidated Balance Sheets
as of December 31, 1996 and March 31, 1997 ..............................F-1
2. Supplemental Condensed Consolidated Statements of
Income for the Three Months Ended March 31,
1996 and 1997 ...........................................................F-2
3. Supplemental Condensed Consolidated Statements of
Cash Flows for the Three Months Ended March 31,
1996 and 1997 .............................................. ............F-3
4. Notes to Supplemental Condensed Consolidated Financial
Statements...............................................................F-4
</TABLE>
<PAGE> 1
EXHIBIT 11.1
i2 TECHNOLOGIES, INC.
SUPPLEMENTAL STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1997
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<S> <C> <C>
PRIMARY NET INCOME PER SHARE (1):
Weighted average number of common shares outstanding 25,798 29,007
Common shares issuable on exercise of stock options,
net of shares assumed to be repurchased at the
average market price (2) 3,560 4,445
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Weighted average common and common
equivalent shares outstanding 29,358 33,452
======= =======
Net income $ 1,526 $ 1,491
======= =======
Net income per share $ 0.05 $ 0.04
======= =======
FULLY DILUTED NET INCOME PER SHARE:
Weighted average number of common shares outstanding 25,798 29,007
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) 3,705 4,492
------- -------
Weighted average common and common
equivalent shares outstanding 29,503 33,499
======= =======
Net income $ 1,526 $ 1,491
======= =======
Net income per share $ 0.05 $ 0.04
======= =======
</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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 38,359
<SECURITIES> 24,794
<RECEIVABLES> 32,517
<ALLOWANCES> 1,171
<INVENTORY> 0
<CURRENT-ASSETS> 98,418
<PP&E> 15,863
<DEPRECIATION> 5,662
<TOTAL-ASSETS> 109,817
<CURRENT-LIABILITIES> 38,346
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 71,107
<TOTAL-LIABILITY-AND-EQUITY> 109,817
<SALES> 22,583
<TOTAL-REVENUES> 35,765
<CGS> 1,291
<TOTAL-COSTS> 34,074
<OTHER-EXPENSES> (754)
<LOSS-PROVISION> 772
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 2,445
<INCOME-TAX> 954
<INCOME-CONTINUING> 1,491
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,491
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
<PAGE> 1
EXHIBIT 99.1
i2 TECHNOLOGIES, INC.
SUPPLEMENTAL MANAGMENT'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 related 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 to demand forecasting.
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 supply chain problems such as demand forecasting,
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 changing revenue forecasts -- 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 Supplemental Condensed
Consolidated Statements of Income bear to total revenues. The period to period
comparisons of financial results are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1997
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<S> <C> <C>
Revenues:
Software licenses 72.3% 63.1%
Services 18.5 26.2
Maintenance 9.2 10.7
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Total revenues 100.0 100.0
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Costs and expenses:
Cost of software licenses 0.1 3.6
Cost of software and maintenance 16.2 22.8
Sales and marketing 37.7 38.1
Research and development 20.0 21.1
General and administrative 11.1 9.7
------- -------
Total costs and expenses 85.1 95.3
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Operating income 14.9 4.7
Other income 0.9 2.1
------- -------
Income before income taxes 15.8 6.8
Provision for income taxes 5.9 2.6
------- -------
Net income 9.0% 4.2%
======= =======
</TABLE>
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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 132.3% to $35.8 million in the quarter ended
March 31, 1997 from $15.4 million in the quarter ended March 31, 1996. The
Company currently derives substantially 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 102.8%
to $22.6 million in the quarter ended March 31, 1997 from $11.1 million in the
quarter ended March 31, 1996. Software license revenues constituted 63.1% and
72.3% 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. 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 229.0% to $9.4 million in
the quarter ended March 31, 1997 from $2.8 million in the quarter ended March
31, 1996. Service revenues constituted 26.2% and 18.5% of total revenues in
the quarters ended March 31, 1997 and 1996, respectively. The significant
increase in the dollar amount of service revenues was 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. This increase was 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 170.2% to $3.8
million in the quarter ended March 31, 1997 from $1.4 million in the quarter
ended March 31, 1996. Maintenance revenues constituted 10.7% and 9.2% of total
revenues in the quarters ended March 31, 1997 and 1996, respectively. The
increase in dollar amount of maintenance revenues was 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.
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INTERNATIONAL REVENUES. The Company's international revenues, primarily
generated from customers located in Asia, Canada and Europe, were approximately
33% and 16% 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 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 $1.3 million and $15,000 in the quarters ended
March 31, 1997 and 1996, representing 5.7% and 0.1% 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 an increase in commissions paid to third-parties in connection with
joint marketing and other related agreements.
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 $8.2
million and $2.5 million in the quarters ended March 31, 1997 and 1996,
representing 61.9% and 58.4% of total services and maintenance revenues,
respectively. The increases in cost of services and maintenance both in dollar
amount and as a percentage of total services 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 $13.6 million and $5.8 million in
the quarters ended March 31, 1997 and 1996, representing 38.1% and 37.7% of
total revenues, respectively. The increases in sales and marketing expenses
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 as a result of significantly higher
revenues and (iii) increased marketing and promotional activities. 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 $7.5
million and $3.1 million in the quarters ended March 31, 1997 and 1996,
representing 21.1% and 20.0% 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 $3.5 million and $1.7
million in the quarters ended March 31, 1997 and 1996, representing 9.7% and
11.1% 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 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 $754,000 and
$133,000 in the quarters ended March 31, 1997 and 1996, representing 2.1% and
0.9% 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 $954,000 and $905,000 in
the quarters ended March 31, 1997 and 1996, respectively. The Company's
effective income tax rate was 39.0% in the quarter ended March 31, 1997 as
compared to 37.2% 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 expected federal income tax rate in 1997.
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 through sales of equity securities. The
Company's operating activities provided cash of $11.2 million in the quarter
ended March 31, 1997 as compared to $9.6 million in the quarter ended March 31,
1996. Operating cash flows have increased primarily due to an increase in
accrued liabilities and a decrease in accounts receivable. Accrued liabilities
have increased primarily as a result of increased third-party commissions,
accrued compensation and related expenses.
Accounts receivable, net of allowance for doubtful accounts, decreased
to $31.3 million at March 31, 1997 from $33.6 million at December 31, 1996,
primarily due to the collection of several large trade receivable balances
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.
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<PAGE> 5
Average days' sales outstanding was 82 days for the quarter ended
March 31, 1997 as compared to 76 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 $9.0 million in the quarter
ended March 31, 1997 as compared to $4.5 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 $60.1 million of working
capital, including $38.4 million in cash and cash equivalents and $24.8 million
in short-term investments as compared to $58.8 million of working capital as of
December 31, 1996, including $36.1 million in cash and cash equivalents and
$18.0 million in short-term investments.
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 continues to review acquisition and joint venture
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. 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
integration of recent acquisitions; dependence upon key personnel; the timing
of the release and market acceptance of new or enhanced versions of the
Company's software products; intellectual property rights; 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 the discussion under the caption
"Factors That May Effect Future Results" in Exhibit 99.2 to the Company's
Current Report on Form 8-K dated June 12, 1997, as amended.
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.
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<PAGE> 6
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.
INTEGRATION OF RECENT ACQUISITIONS
The acquisitions of Think Systems Corporation ("Think") and Optimax
Systems Corporation ("Optimax") involve the integration of companies that have
previously operated independently. Among the factors considered by the
Company's Board of Directors in connection with its approval of each
acquisition was the opportunity for the Company to broaden its product offering
and provide a more comprehensive solution by incorporating the Think and
Optimax software solutions into Rhythm. However, no assurance can be given
that the Company will not encounter difficulties in integrating the respective
operations of the Company, Think and Optimax or that the benefits expected from
such integration will be realized. In addition, there can be no assurance that
the Company will not experience the loss of key Think and Optimax personnel.
Failure to successfully integrate Think's and Optimax's respective operations
into the Company's operations could have a material adverse effect on the
Company's business, operating results and financial condition.
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,
fully functional product enhancements or new products that respond to
technological advances by others, or that its new
6
<PAGE> 7
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.
7
<PAGE> 1
EXHIBIT 99.2
i2 TECHNOLOGIES, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
---------------- ----------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,078 $ 38,359
Short-term investments 18,031 24,794
Accounts receivable, net 33,615 31,346
Prepaid and other current assets 3,219 3,308
Deferred income taxes -- 611
---------------- ----------------
Total current assets 90,943 98,418
Furniture and equipment, net 8,934 10,201
Deferred income taxes and other assets 1,256 1,198
---------------- ----------------
Total assets $ 101,133 $ 109,817
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,583 $ 5,175
Accrued liabilities 8,184 10,370
Current portion of deferred revenue 18,932 22,147
Income taxes payable 363 654
Deferred income taxes 57 --
---------------- ---------------
Total current liabilities 32,119 38,346
Long-term debt 100 100
Deferred revenue 266 257
---------------- ----------------
Total liabilities 32,485 38,703
---------------- ----------------
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, 28,883,410 and 29,097,169 shares issued
and outstanding, respectively 7 7
Additional paid-in capital 58,074 58,864
Deferred compensation (1,865) (1,680)
Retained earnings 12,432 13,923
---------------- ----------------
Total stockholders' equity 68,648 71,114
---------------- ----------------
Total liabilities and stockholders' equity $ 101,133 $ 109,817
================ ================
</TABLE>
See accompanying notes.
F-1
<PAGE> 2
i2 TECHNOLOGIES, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION> Three Months ended March 31,
------------------------------------
1996 1997
--------------- ----------------
<S> <C> <C>
Revenues:
Software licenses $ 11,135 $ 22,583
Services 2,848 9,370
Maintenance 1,411 3,812
--------------- ----------------
Total revenues 15,394 35,765
--------------- ----------------
Costs and expenses:
Cost of software licenses 15 1,291
Cost of services and maintenance 2,487 8,158
Sales and marketing 5,809 13,607
Research and development 3,080 7,540
General and administrative 1,705 3,478
--------------- ----------------
Total costs and expenses 13,096 34,074
--------------- ----------------
Operating income 2,298 1,691
Other income 133 754
--------------- ----------------
Income before income taxes 2,431 2,445
Provision for income taxes 905 954
--------------- ----------------
Net income $ 1,526 $ 1,491
=============== ================
Net income per share $ 0.05 $ 0.04
Weighted average common and common
equivalent shares outstanding 29,358 33,452
</TABLE>
See accompanying notes.
F-2
<PAGE> 3
i2 TECHNOLOGIES, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,526 $ 1,491
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 716 931
Amortization of deferred compensation 229 185
Deferred income taxes 698 (582)
Tax benefit of stock options -- 703
Changes in operating assets and liabilities:
Accounts receivable, net 418 2,269
Income tax receivable 170 --
Prepaid and other assets (288) (117)
Accounts payable 761 592
Accrued liabilities 397 2,186
Income taxes payable (284) 291
Deferred revenue 5,233 3,206
--------------- ---------------
Net cash provided by operating activities 9,576 11,155
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment (2,030) (2,198)
Purchases of short-term investments (2,459) (18,763)
Proceeds from maturities of short-term investments -- 12,000
--------------- ---------------
Net cash used in investing activities (4,489) (8,961)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (54) --
Advances from stockholders, net (471) --
Net proceeds from exercise of stock options 52 87
--------------- ---------------
Net cash provided by (used in) financing (473) 87
activities --------------- ---------------
Net increase in cash and cash equivalents 4,614 2,281
Cash and cash equivalents at beginning of period 7,383 36,078
--------------- ---------------
Cash and cash equivalents at end of period $ 11,997 $ 38,359
=============== ===============
</TABLE>
See accompanying notes.
F-3
<PAGE> 4
i2 TECHNOLOGIES, INC.
NOTES TO SUPPLEMENTAL 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.
In May 1997, the Company acquired Think Systems Corporation ("Think"),
a demand planner developer; acquired Optimax Systems Corporation ("Optimax"), a
scheduling and sequencing software company; and entered into an agreement to
acquire Think Systems Private Limited ("Think India"), an offshore development
house (see Note 3).
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 Current Report on Form 8-K dated June 12,
1997, as amended.
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 $0.06 and $0.05, 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 $0.05 and $0.04, respectively. All
net income per share computations give retroactive effect to the exchange of
common shares in connection with the Think, Think India and Optimax mergers
(see Note 3).
3. BUSINESS COMBINATIONS
On May 15, 1997, the Company entered into definitive agreements to
merge with Think and Optimax and to acquire Think India. Under the terms of
these agreements, the Company will issue 3,823,337 shares, 1,372,618 shares and
35,663 shares of its common stock for all the outstanding capital stock and all
unexpired and unexercised options of Think, Optimax and Think India,
respectively. The acquisition of Think India is subject to a number of
conditions, including requisite Indian regulatory approval. The Company
expects to obtain the necessary regulatory approvals by the end of 1997.
F-4
<PAGE> 5
Think provides premium demand chain solutions, including an integrated
line of flexible, client/server- based software applications, for sales,
marketing and logistics departments representing a variety of industries
including consumer packaged goods, high technology, pharmaceutical, apparel,
automotive and other product driven specializations. Think India is controlled
by the former principal shareholders of Think and is engaged primarily in
research and development services provided to Think. Optimax develops, markets
and implements supply chain sequencing software using unique genetic algorithms
for customer-driven, make-to-order manufacturing.
Each of these business combinations was accounted for as a pooling of
interests, and accordingly, the accompanying condensed consolidated financial
statements give retroactive effect to the mergers and include the combined
operations of i2 Technologies, Think, Optimax and Think India for all periods
presented. The following is a summary of the results of operations of the
separate entities for periods prior to the mergers (in thousands):
<TABLE>
<CAPTION>
i2 Technologies
(Prior to Think Pooling
Mergers) Think Optimax India Adjustments Combined
------------------ ----------- ----------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended
March 31, 1997:
Revenues $32,165 $3,382 $1,024 $451 $(1,257) $35,765
(Net)income (loss) 1,657 (586) 74 186 160 1,491
Three Months Ended
March 31, 1996:
Revenues $12,672 $2,306 $427 $142 $(153) $15,394
(Net)income (loss) 507 47 61 (5) 916 1,526
</TABLE>
Pooling adjustments have been recorded to eliminate (i) revenues and
expenses associated with software license royalties, consulting services and
maintenance charges provided to i2 Technologies by Think, and (ii) revenues and
expenses associated with research and development services provided to Think by
Think India.
The Company expects to incur approximately $5.3 million in certain
expenses related to these transactions. These costs include, among other
things, investment banking, legal and accounting fees and expenses. The
Company anticipates that these expenses will be recorded in the second quarter
of 1997.
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 cash purchase price of $1.0 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 in return for maintenance revenue, 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.
F-5
