<PAGE> 1
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
Pursuant to Rule 424(a)
Registration No. 333-38579
SUBJECT TO COMPLETION, DATED OCTOBER 23, 1997
5,000,000 SHARES
i2 TECHNOLOGIES LOGO
i2 TECHNOLOGIES, INC.
COMMON STOCK
(PAR VALUE $0.00025 PER SHARE)
------------------
Of the 5,000,000 shares of Common Stock offered, 4,000,000 shares are being
offered hereby in the United States and 1,000,000 shares are being offered in a
concurrent international offering outside the United States. The public offering
price and the aggregate underwriting discount per share will be identical for
both offerings. See "Underwriting".
Of the 5,000,000 shares of Common Stock being offered, 2,500,000 shares are
being sold by the Company and 2,500,000 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders". The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholders.
The last reported sale price of the Common Stock, which is quoted under the
symbol "ITWO", on the Nasdaq National Market on October 22, 1997 was $51.50 per
share. See "Price Range of Common Stock".
SEE "RISK FACTORS" ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
Total(3)....................... $ $ $ $
</TABLE>
- ---------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deducting estimated expenses of $400,000 payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 600,000 shares at the public offering price per
share, less the underwriting discount, solely to cover over-allotments.
Additionally, the Company has granted the International Underwriters a
similar option with respect to an additional 150,000 shares as part of the
concurrent international offering. If such options are exercised in full,
the total public offering price, underwriting discount and proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting".
------------------
The shares offered hereby are offered severally by the U.S. Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York, on
or about ,1997, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
DEUTSCHE MORGAN GRENFELL
HAMBRECHT & QUIST
UBS SECURITIES
------------------
The date of this Prospectus is , 1997.
<PAGE> 2
- --------------------------------------------------------------------------------
LOGO
[ILLUSTRATION OF INTERCONNECTED ICONS (REPRESENTING SUPPLIERS, MANUFACTURING
FACILITIES, WAREHOUSES AND CUSTOMERS) DEPICTING THE INTERCONNECTIVITY OF
SPECIFIED INTERNAL SUPPLY CHAIN CONSTRAINTS (MANUFACTURING CAPACITIES AND
FINISHED GOODS INVENTORY) WITH SPECIFIED EXTERNAL SUPPLY CHAIN CONSTRAINTS
(SUPPLIER LEAD TIMES AND CUSTOMER DELIVERY DUE DATES) ACROSS A MULTI-ENTERPRISE
SUPPLY CHAIN.]
i2 Technologies' Rhythm software enables businesses to plan and schedule
all of the elements of a supply chain by simultaneously considering internal
constraints, such as manufacturing facility capacities and human resource
availability, and external constraints, such as supplier lead times and
customer requirements.
-------------------------
CERTAIN PERSONS PARTICIPATING IN THESE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERINGS. IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY)
ALSO MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES
EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE> 3
AVAILABLE INFORMATION
i2 Technologies, Inc. ("i2" or the "Company") is subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the Commission's Regional Offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such materials may
be obtained from the web site that the Commission maintains at
http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. The Company
will provide without charge to each person, including any beneficial owner, to
whom a copy of the Prospectus is delivered, upon the written or oral request of
such person, a copy of any or all of the documents which are incorporated herein
by reference, other than exhibits to such information (unless such exhibits are
specifically incorporated by reference into such documents). Requests should be
submitted to Brent Anderson, Manager of Investor Relations, 909 E. Las Colinas
Blvd., 16th Floor, Irving, Texas 75039; telephone (214) 860-6000.
---------------
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed with the Commission (File No. 0-28030)
pursuant to the Exchange Act are incorporated herein by reference.
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997;
3. The Company's Current Reports on Form 8-K dated May 15, 1997, June
12, 1997 (as amended by Amendment No. 1 on Form 8-K/A filed on July 1,
1997) and July 1, 1997;
4. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A (File No. 0-28030), as filed with the
Commission on March 20, 1996; and
5. All other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offerings of the Common
Stock.
Any statement contained in a document or a portion of which is incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed to constitute a part of this
Prospectus.
---------------
The Company's executive offices are located at 909 E. Las Colinas Blvd.,
16th Floor, Irving, Texas 75039, and its telephone number is (214) 860-6000.
The Company's logo and "Rhythm" are registered trademarks of the Company.
In this Prospectus, reference to "dollars" and "$" are United States
dollars.
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus, including
information under "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." References in this Prospectus to
the terms "optimal" and "optimized" and words to that effect are not necessarily
intended to connote the mathematically optimal solution, but may connote
near-optimal solutions which reflect practical considerations such as customer
requirements as to response time and precision of the results. Unless otherwise
indicated herein, all information contained in this Prospectus assumes no
exercise of the Underwriters' over-allotment options.
THE COMPANY
i2 Technologies, Inc. ("i2" or the "Company") is a leading provider of
client/server-based decision support software products for supply chain
management and related applications. Supply chain management encompasses the
planning and scheduling of manufacturing and related logistics, including demand
forecasting, raw materials procurement, work-in-process, distribution and
transportation across multiple enterprises. i2's client/server software
solution, Rhythm, is designed to provide customers with an end-to-end supply
chain management solution, enabling customers to model complex, multi-enterprise
supply chains to rapidly generate integrated solutions to supply chain
challenges such as demand volatility, production bottlenecks, supply
interruptions and distribution alternatives. Rhythm utilizes a unique,
constraint-based methodology which simultaneously considers a broad range of
factors -- from changing revenue forecasts to machine capacities to individual
customer commitments -- to optimize all aspects of the supply chain. Rhythm's
advanced decision-support capabilities enable companies to make better informed
and more timely planning, scheduling and resource allocation decisions in order
to improve throughput, operating efficiency, customer satisfaction and return on
assets. The Company's software products and services are designed to enable
customers to reduce costs, increase market share and enhance their competitive
advantage.
The Company's strategy is to expand its leadership position in the supply
chain management market by focusing on creating maximum value for its customers,
broadening its product offerings and investing aggressively to build market
share. i2's approach to customer relationships is centered on the identification
of potential savings and the creation of value for customers. As part of this
dedication to providing value for customers, i2 has established a goal of
generating more than $50 billion in total value for its customers by the year
2005 through growth and savings. To date, the Company has licensed Rhythm to
over 200 customers, including 3M, Bristol-Myers Squibb, British American
Tobacco, Compaq Computer, Dell Computer, Digital Equipment, E&J Gallo Winery,
Herman Miller, Johnson & Johnson Medical, Lucent Technologies, Motorola, Philips
Semiconductors, SGS Thomson Microelectronics, Siemens Semiconductors, Texas
Instruments, Timken, Toshiba, US Steel and VF Services. The Company markets its
software and services primarily through its direct sales organization, augmented
by indirect sales channels including systems consulting and integration firms
and business application software vendors.
4
<PAGE> 5
THE OFFERINGS
Common Stock offered by the Company......... 2,500,000 shares
Common Stock offered by the Selling
Stockholders................................ 2,500,000 shares
Common Stock to be outstanding after the
offerings(1)................................ 32,435,769 shares
Nasdaq National Market symbol............... ITWO
Use of Proceeds............................. For general corporate purposes,
including working capital and
potential acquisitions.
- ---------------
(1) Excludes (i) 5,624,639 shares of Common Stock issuable upon exercise of
options outstanding at September 30, 1997 with exercise prices ranging from
$0.0175 to $43.875 per share and with a weighted average exercise price of
$11.28 per share and (ii) approximately 45,000 shares of Common Stock
anticipated to be issued on October 31, 1997 under the Company's employee
stock purchase plans.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
In the second quarter of 1997, the Company acquired Think Systems
Corporation and Optimax Systems Corporation. Each acquisition was accounted for
as a pooling of interests and, accordingly, the Company's consolidated financial
statements were restated to give retroactive effect to the acquisitions for all
periods presented. The Company's restated consolidated financial statements for
the years ended December 31, 1994, 1995 and 1996 are included in the Company's
Current Report on Form 8-K dated June 12, 1997, as amended, which is
incorporated by reference in this Prospectus. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues............................... $ 3,355 $ 6,599 $14,203 $30,527 $87,916 $57,163 $138,650
Operating income(1).................... 272 1,239 3,113 4,766 9,671 5,017 7,770
Net income(1).......................... 232 709 1,736 3,065 7,202 3,888 5,311
Net income per share(1)................ $ 0.01 $ 0.03 $ 0.07 $ 0.11 $ 0.23 $ 0.13 $ 0.16
Shares used in computing net
income per share..................... 21,196 23,751 25,871 28,533 31,774 31,369 33,639
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
AS
ACTUAL ADJUSTED(2)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 63,421 $187,587
Total assets................................................ 136,394 260,560
Total stockholders' equity.................................. 81,726 205,892
</TABLE>
- ---------------
(1) In the second quarter of 1997, the Company incurred approximately $5.6
million in certain acquisition-related expenses in connection with the
business combinations involving Optimax Systems Corporation, Think Systems
Corporation and the Operations Planning Group of Computer Sciences
Corporation. These costs included, among other things, investment banking,
legal and accounting fees and expenses and the write-off of in-process
research and development. The acquisition-related expenses resulted in a
one-time charge to the Company's operating results.
(2) Adjusted to reflect the sale by the Company of 2,500,000 shares of Common
Stock in the offerings at an assumed offering price of $51.50 per share. See
"Use of Proceeds" and "Capitalization."
5
<PAGE> 6
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained or incorporated by reference in this Prospectus
before purchasing the Common Stock offered hereby. In addition to the historical
information contained and incorporated by reference herein, the discussion in
and incorporated by reference in this Prospectus contains certain
forward-looking statements, within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, that involve risks and uncertainties,
such as statements concerning: growth and future operating results; future
customer benefits attributable to the Company's products; developments in the
Company's markets and strategic focus; new products and product enhancements;
potential acquisitions and the integration of acquired businesses, products and
technologies; strategic relationships; and future economic, business and
regulatory conditions. The cautionary statements made in this Prospectus should
be read as being applicable to all related forward-looking statements whenever
they appear or are incorporated by reference in this Prospectus. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include those discussed below as
well as those cautionary statements and other factors set forth elsewhere
herein.
POTENTIAL FOR SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS; DEPENDENCE ON
SIGNIFICANT INDIVIDUAL SALES
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
varies substantially and is subject to a number of significant risks, including
customers' budgetary constraints, timing of budget cycles and concerns about the
pricing or introduction of new products by the Company or its competitors,
factors over which the Company has little or no control. In addition, other
factors include foreign currency exchange rate fluctuations, the mix of direct
or indirect sales, changes in joint-marketing relationships, and changes in the
Company's strategy. 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.
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 generally derives a
significant portion of its software license revenues in each quarter from a
small number of relatively large sales. For example, in each quarter of 1996 and
each quarter in the first nine months of 1997, one or more customers each
accounted for at least 15% of total software license revenues in such quarter.
While the Company believes that the loss of any of these particular customers
would not have an adverse effect, an inability to consummate one or more
substantial license sales in any future period could have a material adverse
effect on the Company's operating results for that period. Moreover, similar to
many other software companies, the Company typically realizes a significant
portion of its software license revenues in the last month or even the last week
of a quarter. The Company also believes that the tendency of customers to delay
placing orders for software products until near the end of a quarter has become
more pronounced in recent periods. As a result, small delays in customer orders
can cause significant variability in the Company's license revenues and results
of operations for any particular period. For all of the foregoing reasons,
revenues are difficult to forecast.
The Company intends to continue to invest heavily in its sales and
marketing, consulting and research and development organizations, and sets
investment and expense levels based on 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 are not variable in the short term, and cannot be quickly reduced to
respond to anticipated decreases in revenues. In addition, the Company may
reduce prices or accelerate its investment in research and development efforts
in response to competition or to pursue new market opportunities. Any one of
these activities may further limit the Company's ability to adjust spending in
response to fluctuations in revenue
6
<PAGE> 7
levels. 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.
The Company's quarterly results of operations are subject to certain
seasonal fluctuations. Historically, the Company's revenues have tended to be
strongest in the fourth quarter of the year and to increase only modestly in the
first quarter of the following year. The Company believes that this seasonality
is due to the calendar year budgeting cycles of many of its customers and to
compensation policies that tend to compensate sales personnel for achieving
annual revenue quotas. The Company expects that in future periods these seasonal
trends may cause first quarter revenues to remain consistent with, or decrease
from, the level achieved in the preceding quarter.
COMPETITION
The markets in which the Company operates are highly competitive. The
Company's competitors are diverse and offer a variety of solutions directed at
various segments of the supply chain as well as the enterprise as a whole.
Competitors include: (i) enterprise resource application software vendors such
as SAP AG ("SAP"), PeopleSoft, Inc., Oracle Corporation ("Oracle") and Baan
Company N.V. ("Baan"), each of which currently offers sophisticated Enterprise
Resource Planning ("ERP") solutions that may incorporate supply chain management
modules or advanced planning and scheduling software; (ii) other suppliers of
advanced planning and scheduling software, including Manugistics Group, Inc.;
(iii) other business application software vendors who may broaden their product
offerings by internally developing, or by acquiring or partnering with
independent developers of, advanced planning and scheduling software; (iv)
internal development efforts by corporate information technology departments;
and (v) companies offering standardized or customized products for mainframe
and/or mid-range computer systems.
In connection with specific customer solicitations, a number of ERP vendors
have from time to time jointly marketed the Company's products as a complement
to their own systems. The Company believes that as its market share increases,
and as the ranges of products offered by the Company and these ERP vendors
expand and increasingly overlap, relationships which were cooperative in the
past will become more competitive, thereby increasing the overall level of
competition the Company faces. Specifically, the Company and SAP recently
terminated a license and distribution agreement, and SAP has announced its
intention to develop a suite of advanced planning and scheduling products which
are expected to be directly competitive with Rhythm. The Company believes that
additional ERP vendors are focusing significant resources on increasing the
functionality of their own planning and scheduling modules, and at least two ERP
vendors have recently acquired independent developers of advanced planning and
scheduling software which compete with Rhythm.
Many of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
greater name recognition, a broader range of products to offer and a larger
installed base of customers than the Company, each of which could provide them
with a significant competitive advantage over the Company. In addition, the
Company expects to experience increasing price competition as the Company and
its competitors compete for market share. There can be no assurance that the
Company will be able to compete successfully with existing or new competitors or
that competition will not have a material adverse effect on the Company's
business, operating results and financial condition.
MANAGEMENT OF GROWTH
The Company's business has grown rapidly in recent years, with revenues
increasing from $30.5 million in 1995 to $87.9 million in 1996 and to $138.7
million in the first nine months of 1997. The Company's recent expansion has
resulted in substantial growth in the number of its employees (from 260 at
December 31, 1995 to 582 at December 31, 1996 to 956 at September 30, 1997), the
scope of its operating and financial systems and the geographic distribution of
its operations and customers. This recent rapid growth has placed, and if
continued will continue to place, a significant strain on the
7
<PAGE> 8
Company's management and operations. Accordingly, the Company's future operating
results will depend on the ability of its officers and other key employees to
continue to implement and improve its operational, customer support and
financial control systems, and to effectively expand, train and manage its
employee base. There can be no assurance that the Company will be able to manage
any future expansion successfully, and any inability to do so would have a
material adverse effect on the Company's business, operating results and
financial condition.
PRODUCT CONCENTRATION; DEPENDENCE ON PRODUCT LINE EXPANSION
The Company currently derives all of its revenues from Rhythm licenses and
related services. The Company expects that Rhythm-related revenues, including
maintenance and consulting contracts, will continue to account for substantially
all of the Company's revenues for the foreseeable future. As a result, the
Company's future operating results are dependent upon continued market
acceptance of Rhythm and enhancements thereto. There can be no assurance that
Rhythm will achieve continued market acceptance. 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.
As enterprises increasingly focus on decision support for supply chain
management challenges, they are requiring greater levels of functionality and
broader product offerings from their application software vendors. Moreover, the
market for the Company's software products is characterized by rapid
technological advances, evolving industry standards in computer hardware and
software technology, and frequent 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 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.
INTEGRATION OF RECENT ACQUISITIONS; POTENTIAL FUTURE ACQUISITIONS
In April 1997, the Company completed the acquisition of the Operations
Planning Group ("OPG"), a business activity of Computer Sciences Corporation. In
May 1997, the Company acquired Think Systems Corporation, a New Jersey
corporation ("Think"), and Optimax Systems Corporation, a Delaware corporation
("Optimax"). The success of acquisitions depends primarily on the Company's
ability to retain, motivate and integrate the acquired personnel with the
Company's operations and the Company's ability to integrate acquired software
with Rhythm. No assurance can be given that the Company will not encounter
difficulties in integrating the respective operations and products of the
Company, OPG, Think and Optimax or that the benefits expected from such
integration will be realized. Failure to successfully integrate OPG's, Think's
and Optimax's respective operations and products into the Company's operations
and products could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company may in the future pursue additional acquisitions of businesses,
products and technologies, or enter into joint venture arrangements, that could
complement or expand the Company's business. The negotiation of potential
acquisitions or joint ventures as well as the integration of an acquired
business, product or technology could cause diversion of management's time and
resources. Future acquisitions by the Company could result in potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities, amortization of goodwill and other intangibles, research and
development write-offs and other acquisition-related expenses. In this regard,
the Company holds an option expiring in February 1998 to acquire the remaining
interest in a minority owned subsidiary for a purchase price of up to
approximately $6 million. If such acquisition is consummated, a substantial
portion of such purchase price could potentially be written-off as in-process
research and development.
8
<PAGE> 9
Further, no assurances can be given that any acquired business will be
successfully integrated with the Company's operations. If any such acquisition
were to occur, there can be no assurance that the Company will receive the
intended benefits of the acquisition. Future acquisitions, whether or not
consummated, could have a material adverse effect on the Company's business,
operating results and financial condition.
INTERNATIONAL OPERATIONS AND CURRENCY FLUCTUATIONS
The Company derived approximately 9%, 7%, 23% and 29% of its total revenues
from customers located outside of the United States in 1994, 1995, 1996 and the
first nine months of 1997, respectively. The Company believes that continued
growth and profitability will require expansion of its sales in international
markets. Further penetration of international markets will require the Company
to expand existing foreign operations, to establish additional foreign
operations and to translate its software and manuals into additional foreign
languages. This expansion may be costly and time-consuming and may not generate
returns for a significant period of time, if at all. To the extent that the
Company is unable to expand its international operations or translate its
software and manuals into foreign languages in a timely manner, the Company's
ability to further penetrate international markets would be adversely affected,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company's international operations are subject to risks inherent in
international business activities, including: difficulty in staffing and
managing geographically disparate operations; longer accounts receivable payment
cycles in certain countries; compliance with a variety of foreign laws and
regulations; unexpected changes in regulatory requirements; overlap of different
tax structures; greater difficulty in safeguarding intellectual property; import
and export licensing requirements; trade restrictions; changes in tariff rates;
and general economic conditions in international markets. There can be no
assurance that the Company's business, results of operations or financial
condition will not be adversely affected by these or other factors that may
affect international operations.
To date, the Company's revenues from international operations have
primarily been denominated in United States dollars. As a result, the Company's
sales in international markets may be adversely affected by a strengthening
United States dollar. Certain sales and the majority of the expenses incurred by
the Company's international operations are denominated in currencies other than
the United States dollar. In addition, with the expansion of international
operations, the number of foreign currencies in which the Company must operate
will increase, resulting in increased exposure to exchange rate fluctuations.
The Company has implemented limited hedging programs to mitigate its exposure to
currency fluctuations. Notwithstanding these hedging programs, exchange rate
fluctuations have caused and will continue to cause currency transaction gains
and losses. While such currency transaction gains and losses have not been
material to date, there can be no assurance that currency transaction losses
will not have a material adverse effect on the Company's business, results of
operations or financial condition in future periods.
RISKS ASSOCIATED WITH STRATEGIC RELATIONSHIPS
The Company has from time to time established relationships with other
companies, including Baan, System Software Associates, Inc. ("SSA") and Marcam
Corporation ("Marcam"), involving collaboration in areas such as product
development, marketing, distribution and implementation. The maintenance of
these relationships and the development of other such relationships is a
meaningful part of the Company's business strategy. However, most of the
Company's current and potential strategic partners are either potential
competitors of the Company or are currently competitive with the Company to some
degree. In addition, certain of the Company's cooperative relationships have
failed to meet expectations, such as the Company's recently terminated license
and distribution relationship with SAP. There can be no assurance that the
Company's current collaborative relationships will be beneficial to the Company,
that such relationships will be sustained, or that the Company will be able to
enter into successful new strategic relationships in the future.
9
<PAGE> 10
DEPENDENCE UPON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued service of a relatively small number of key technical and senior
management personnel, few of whom are bound by an employment agreement. The
Company's future success also depends on its continuing ability to attract,
train and retain other highly qualified technical and managerial personnel.
Competition for such personnel is intense, and the Company has at times in the
past experienced difficulty in recruiting qualified personnel. There can be no
assurance that the Company will retain its key technical and managerial
employees or that it will be successful in attracting, assimilating and
retaining other highly qualified technical and managerial personnel in the
future. Kanna (Ken) N. Sharma, the Company's Vice Chairman of the Board and
Executive Vice President, has recently been diagnosed with a brain tumor. While
Mr. Sharma is currently providing services to the Company, there can be no
assurance as to how long he will be able to continue to do so. The loss of any
member of the Company's key technical and senior management personnel or the
inability to attract and retain additional qualified personnel could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management."
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; USE OF LICENSED TECHNOLOGY
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. In addition, the Company generally licenses
Rhythm products to end users in object code (machine-readable) format, and the
Company's license agreements generally allow the use of Rhythm products solely
by the customer for internal purposes without the right to sublicense or
transfer the Rhythm products. However, the Company believes that the foregoing
measures afford only limited protection. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to as great an extent as the laws of the United
States. Furthermore, there can be no assurance that the Company's competitors
will not independently develop technology similar to that of the Company. The
Company may increasingly be subject to claims of intellectual property
infringement as the number of products and competitors in the Company's industry
segment grows and the functionality of products in different industry segments
overlaps. Although the Company is not aware that any of its products infringes
upon the proprietary rights of third parties, there can be no assurance that
third parties will not claim infringement by the Company with respect to current
or future products. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
The Company has in the past and may in the future resell certain software
which it licenses from third parties. There can be no assurance that these third
party software licenses will continue to be available to the Company on
commercially reasonable terms. The loss of or inability to maintain any of these
software licenses could result in delays or reductions in product shipments
until equivalent software could be identified, licensed and integrated, which
could adversely affect the Company's business, operating results and financial
condition.
COMPLEXITY OF SOFTWARE PRODUCTS; RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS
Rhythm is a client/server solution which can operate on hardware platforms
from Digital Equipment, Hewlett-Packard, IBM and Sun Microsystems and operating
systems from Sun Microsystems and Microsoft, and can access data from most
widely used SQL (structured query language) databases, including Informix,
Oracle and Sybase. To the extent that additional hardware or software platforms
gain
10
<PAGE> 11
significant market acceptance, the Company may be required to port Rhythm to
such platforms in order to remain competitive. Such platforms may not be
architecturally compatible with Rhythm's software product design, and there can
be no assurance that the Company will be able to port Rhythm to such additional
platforms on a timely basis or at all. Any failure to maintain compatibility
with existing platforms or to port to new platforms that achieve significant
market acceptance would 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 any 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. See "Business -- Products"
and "-- Product Development."
DEPENDENCE ON IMPLEMENTATION PERSONNEL
The implementation of Rhythm requires the services of highly trained
implementation personnel working directly for the Company or for independent
consultants. A shortage in the number of trained implementors, either within the
Company or with third party consulting firms, could limit the Company's ability
to implement its software on a timely and effective basis. Delayed or
ineffective implementation of the Company's software may limit the Company's
ability to expand its revenues and may result in customer dissatisfaction and
damage the Company's reputation, each of which could have a material adverse
effect on the Company's business, operating results and financial condition.
YEAR 2000 COMPLIANCE
Many older computer systems and software products currently in use are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, in less than three years, computer systems
and/or software used by many companies may need to be upgraded to comply with
such "Year 2000" requirements. Significant uncertainty exists in the software
industry concerning the potential effects associated with such compliance.
Although the Company currently offers software products that are designed to be
Year 2000 compliant, there can be no assurance that the Company's software
products contain all necessary date code changes.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced funds available to purchase software products such as those offered
by the Company. Additionally, Year 2000 problems inherent in a customer's
transactional software programs might
11
<PAGE> 12
significantly limit that customer's ability to realize the intended benefits
offered by Rhythm. Any of the foregoing could result in a material adverse
effect on the Company's business, operating results and financial condition.
PRODUCT LIABILITY
While the Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims, it is possible that such limitation of liability provisions
may not be effective under the laws of certain jurisdictions. Although the
Company has not experienced any product liability claims to date, there can be
no assurance that the Company will not be subject to such claims in the future.
A successful product liability claim brought against the Company could have a
material adverse effect on the Company's business, operating results and
financial condition. Moreover, defending such a suit, regardless of its merits,
could entail substantial expense and require the time and attention of key
management personnel, either of which could have a material adverse effect on
the Company's business, operating results and financial condition.
VOLATILITY OF MARKET PRICE
The market price of the Common Stock has been and can be expected to be
significantly affected by factors such as quarterly variations in the Company's
results of operations, the announcement of new products or product enhancements
by the Company or its competitors, technological innovations by the Company or
its competitors, and general market conditions or market conditions specific to
particular industries. In particular, the stock prices for many companies in the
technology and emerging growth sectors have experienced wide fluctuations which
have often been unrelated to the operating performance of such companies. Such
fluctuations may adversely affect the market price of the Common Stock. See
"Price Range of Common Stock."
CONTROL BY MANAGEMENT
Upon completion of the offerings (assuming no exercise of the Underwriters'
over-allotment options), the Company's executive officers will beneficially own
approximately 54.7% of the Company's outstanding Common Stock. Consequently, the
Company's executive officers are able to control the outcome of all matters
submitted for stockholder action, including the election of members to the
Company's Board of Directors and the approval of significant change in control
transactions, and effectively control the management and affairs of the Company,
which may have the effect of delaying or preventing a change in control of the
Company. In addition, Messrs. Sidhu, Sharma and Tungare constitute three of the
five members of the Board of Directors and, therefore, have significant
influence in directing the actions of the Board of Directors. See "Management"
and "Principal and Selling Stockholders."
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation, as amended (the "Charter"), and
Bylaws, as amended (the "Bylaws"), contain certain provisions that may have the
effect of discouraging, delaying or preventing a change in control of the
Company or unsolicited acquisition proposals that a stockholder might consider
favorable, including provisions: authorizing the issuance of "blank check"
preferred stock; providing for a Board of Directors with staggered, three-year
terms; requiring super-majority voting to effect certain amendments to the
Charter and Bylaws; limiting the persons who may call special meetings of
stockholders; prohibiting stockholder action by written consent; and
establishing advance notice requirements for nominations for election to the
Board of Directors or for proposing matters that can be acted upon at
stockholder meetings. Certain provisions of Delaware law and the Company's stock
incentive plans may also have the effect of discouraging, delaying or preventing
a change in control of the Company or unsolicited acquisition proposals.
12
<PAGE> 13
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE; CONCURRENT OFFERINGS
Sales of substantial amounts of the Common Stock in the public market
following the offerings could have an adverse effect on the prevailing market
price of the Common Stock and impair the Company's ability to raise capital
through the sale of equity securities.
Upon completion of the offerings, the Company will have outstanding
32,435,769 shares of Common Stock (33,185,769 shares if the Underwriters'
over-allotment options are exercised in full), assuming no exercise of
outstanding options or other issuances under employee stock plans following
September 30, 1997. The Company, each of its directors and its executive
officers and the Selling Stockholders, who will beneficially own an aggregate of
approximately 60.8% of the Common Stock following the offerings (assuming no
exercise of the Underwriters' over-allotment options), have each agreed (the
"Lock-Ups") that, for a period ending 90 days after the date of this Prospectus,
subject to certain exceptions, they will not, without the prior written consent
of Goldman, Sachs & Co., offer to sell, sell, contract to sell, grant any option
to purchase, make any short sale of or otherwise dispose of any shares of Common
Stock or any securities which are substantially similar to the Common Stock or
which are convertible or exchangeable for securities which are substantially
similar to the Common Stock, except pursuant to the offerings. See
"Underwriting." Following the expirations of such lock-up agreements, all of
such shares will be eligible for immediate sale in the public market, subject in
some cases to compliance with the volume and manner of sale requirements of Rule
144 under the Securities Act ("Rule 144").
At September 30, 1997, the Company had in effect under the Securities Act
registration statements relating to the resale of approximately 1,550,000 shares
of Common Stock issued in connection with the Company's acquisitions of Think
and Optimax. Of such registered shares, approximately 531,000 shares may be sold
immediately in the public market and the remaining approximately 1,019,000
shares are subject to the 90-day Lock-Ups. In addition, in May 1998 an
additional 1,677,000 shares of Common Stock issued in connection with the Think
and Optimax acquisitions will become eligible for immediate sale in the public
market, subject in some cases to the volume and manner of sale requirements of
Rule 144.
Furthermore, 15,090,000 shares of the Common Stock held by the Company's
Chief Executive Officer and included in the shares owned by the directors,
executive officers and Selling Stockholders described above will be, following
the expiration of the 90-day Lock-Ups, entitled to certain piggyback
registration rights.
USE OF PROCEEDS
Based on an assumed offering price of $51.50 per share, the Company will
receive approximately $124.2 million from the sale of shares of Common Stock to
be sold by the Company pursuant to the offerings (approximately $161.5 million
if the Underwriters' over-allotment options are exercised in full) after
deducting the estimated underwriting discount and estimated offering expenses
payable by the Company. The Company will not receive any proceeds from the sale
of Common Stock by the Selling Stockholders.
The Company currently intends to use the net proceeds of the offerings for
working capital and other general corporate purposes, including financing the
Company's growth and capital expenditures made in the ordinary course of its
business. The Company may also apply a portion of the net proceeds of the
offerings to acquire businesses, products and technologies that complement or
expand the Company's business. While there are no current agreements or
negotiations with respect to any such transactions, the Company from time to
time evaluates such opportunities. Pending such uses, the net proceeds will be
invested in government securities and other short-term, investment-grade
instruments.
13
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and such capitalization as adjusted to reflect the sale by
the Company of 2,500,000 shares of Common Stock in the offerings at an assumed
offering price of $51.50 per share and the application of the estimated net
proceeds therefrom. See "Use of Proceeds." This table should be read in
conjunction with the Company's consolidated financial statements and the other
financial information included and incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares
authorized,
none issued............................................ $ -- $ --
Common Stock, $0.00025 par value, 50,000,000 shares
authorized, 29,935,769 shares issued and outstanding;
and 32,435,769 shares issued and outstanding, as
adjusted(1)............................................ 7 8
Additional paid-in capital................................ 65,286 189,451
Deferred compensation..................................... (1,310) (1,310)
Retained earnings......................................... 17,743 17,743
------- --------
Total stockholders' equity............................. 81,726 205,892
------- --------
Total capitalization.............................. $81,726 $205,892
======= ========
</TABLE>
- ---------------
(1) Excludes (i) 5,624,639 shares of Common Stock issuable upon exercise of
options outstanding as of September 30, 1997 with exercise prices ranging
from $0.0175 to $43.875 per share and with a weighted average exercise price
of $11.28 per share and (ii) approximately 45,000 shares of Common Stock
anticipated to be issued on October 31, 1997 under the Company's employee
stock purchase plans.
PRICE RANGE OF COMMON STOCK
The Common Stock has been quoted on the Nasdaq National Market under the
symbol "ITWO" since its initial public offering on April 26, 1996. Prior to the
initial public offering, there had been no public market for the Common Stock.
The following table lists the high and low per share sales prices for the Common
Stock as reported by the Nasdaq National Market for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996:
Second Quarter (beginning April 26)....................... $58.50 $20.00
Third Quarter............................................. 43.50 23.75
Fourth Quarter............................................ 44.50 33.00
1997:
First Quarter............................................. 45.75 25.75
Second Quarter............................................ 50.00 26.00
Third Quarter............................................. 56.00 31.50
Fourth Quarter (through October 22)....................... 55.63 40.88
</TABLE>
On October 22, 1997, the last sale price of the Common Stock as reported by
the Nasdaq National Market was $51.50 per share.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future. Future dividends, if any, will be determined by the
Company's Board of Directors.
14
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Company's consolidated financial statements and
the notes thereto and the other financial information included or incorporated
by reference in this Prospectus. The statement of income data for the years
ended December 31, 1994, 1995 and 1996 and the balance sheet data at December
31, 1995 and 1996 have been derived from consolidated financial statements which
have been audited by Ernst & Young LLP, independent auditors, and are included
in the Company's Current Report on Form 8-K dated June 12, 1997, as amended,
incorporated by reference in this Prospectus. The statement of income data for
the years ended December 31, 1992 and 1993 and the balance sheet data at
December 31, 1992, 1993 and 1994 have been derived from unaudited consolidated
financial statements. The statement of income data for the nine months ended
September 30, 1996 and 1997 and the balance sheet data at September 30, 1997
have been derived from unaudited interim consolidated financial statements. The
unaudited interim 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Software licenses.................... $ 1,052 $ 4,324 $ 9,833 $20,535 $ 57,508 $ 38,499 $ 92,696
Services............................. 2,231 1,957 3,334 6,767 22,230 13,342 32,565
Maintenance.......................... 72 318 1,036 3,225 8,178 5,322 13,389
------- ------- ------- ------- -------- -------- --------
Total revenues................ 3,355 6,599 14,203 30,527 87,916 57,163 138,650
------- ------- ------- ------- -------- -------- --------
Costs and expenses:
Cost of software licenses............ 10 76 95 135 151 92 2,573
Cost of services and maintenance..... 1,039 1,360 2,200 5,606 18,631 11,932 29,694
Sales and marketing.................. 545 1,529 4,381 9,866 33,724 22,646 48,617
Research and development............. 739 1,251 2,483 5,506 17,005 11,222 30,879
General and administrative........... 750 1,144 1,931 4,648 8,734 6,254 13,468
In-process research and development
and acquisition costs(1)........... -- -- -- -- -- -- 5,649
------- ------- ------- ------- -------- -------- --------
Total costs and expenses...... 3,083 5,360 11,090 25,761 78,245 52,146 130,880
------- ------- ------- ------- -------- -------- --------
Operating income(1).................... 272 1,239 3,113 4,766 9,671 5,017 7,770
Other income (expense), net............ (18) (74) (83) (117) 1,805 1,179 2,065
------- ------- ------- ------- -------- -------- --------
Income before income taxes............. 254 1,165 3,030 4,649 11,476 6,196 9,835
Provision for income taxes............. 22 456 1,294 1,584 4,274 2,308 4,524
------- ------- ------- ------- -------- -------- --------
Net income(1).......................... $ 232 $ 709 $ 1,736 $ 3,065 $ 7,202 $ 3,888 $ 5,311
======= ======= ======= ======= ======== ======== ========
Net income per share(1)................ $ 0.01 $ 0.03 $ 0.07 $ 0.11 $ 0.23 $ 0.13 $ 0.16
Shares used in computing net income per
share................................ 21,196 23,751 25,871 28,533 31,774 31,369 33,639
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------- SEPT. 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ (67) $ 265 $ 1,900 $ 6,185 $ 58,824 $ 63,421
Total assets......................................... 1,275 3,844 9,597 23,322 101,133 136,394
Long-term debt, less current portion................. 289 283 670 1,075 100 --
Total stockholders' equity........................... 66 780 2,516 8,677 68,648 81,726
</TABLE>
- ---------------
(1) In the second quarter of 1997, the Company incurred approximately $5.6
million in certain acquisition-related expenses in connection with the
business combinations involving Optimax Systems Corporation, Think Systems
Corporation and the Operations Planning Group of Computer Sciences
Corporation. These costs include, among other things, investment banking,
legal and accounting fees and expenses and the write-off of in-process
research and development. The acquisition-related expenses resulted in a
one-time charge to the Company's operating results.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the historical information contained and incorporated by
reference herein, the discussion and analysis below contains certain
forward-looking statements, within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, that involve risks and uncertainties,
such as statements concerning: growth and future operating results; future
customer benefits attributable to the Company's products; developments in the
Company's markets and strategic focus; new products and product enhancements;
potential acquisitions and the integration of acquired businesses, products and
technologies; strategic relationships; and future economic, business and
regulatory conditions. The cautionary statements made in this Prospectus should
be read as being applicable to all related forward-looking statements whenever
they appear or are incorporated by reference in this Prospectus. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include those discussed below as
well as those cautionary statements and other factors set forth elsewhere
herein.
OVERVIEW
The Company is a leading provider of 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, including demand forecasting,
raw materials procurement, work-in-process, distribution and transportation
across multiple enterprises. i2's client/server software solution, Rhythm, is
designed to provide customers with an end-to-end supply chain management
solution, enabling customers to model complex, multi-enterprise supply chains to
rapidly generate integrated solutions to supply chain challenges such as demand
volatility, production bottlenecks, supply interruptions and distribution
alternatives. Rhythm utilizes a unique, constraint-based methodology which
simultaneously considers a broad range of factors -- from changing revenue
forecasts to machine capabilities to individual customer commitments -- to
optimize all aspects of the supply chain.
Since inception, the Company has significantly increased its investment in
sales and marketing, service and support, research and development and general
and administrative staff and accelerated such investment beginning in the last
quarter of 1995. As a result of these investments, together with the increasing
awareness of the benefits of supply chain management in general and increased
market acceptance of the Company's products in particular, the Company's
revenues in 1996 and the first nine months of 1997 were substantially higher
than the levels achieved in the comparable prior year periods. However, the
Company has experienced decreases in operating margins in 1995 and 1996 as a
result of such increased staffing. Operating margins for the first nine months
of 1997 decreased primarily due to costs and expenses related to acquisitions.
In order to capture additional market share, the Company expects to continue to
increase staffing levels and incur additional associated costs in future
periods. However, there can be no assurance that the Company's revenues will
grow in future periods or that the Company will maintain the substantial growth
rates in revenues it realized in 1996 and the first nine months of 1997.
The sales cycle for the Company's products is typically six to nine months,
and license fee revenues for a particular period are substantially dependent on
orders received and software functionality delivered in that period.
Furthermore, the Company has experienced, and expects to continue to experience,
significant variation in the size of individual sales. As a result of these and
other factors, the Company's results have varied significantly in the past and
are likely to be subject to significant fluctuations in the future. Accordingly,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily indicative of the results to be expected for any
future period. See "Risk Factors -- Potential for Significant Fluctuations in
Quarterly Results; Dependence on Significant Individual Sales."
16
<PAGE> 17
In May 1997, the Company acquired Think Systems Corporation, a New Jersey
corporation ("Think"). 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. The Think merger culminates
an ongoing relationship commenced pursuant to a January 1996 agreement between
the Company and Think to integrate Think's demand management decision support
software and the Company's Rhythm suite of planning and optimization software
products. Approximately 3.8 million shares of Common Stock have been issued or
are issuable to the former Think shareholders and optionholders in exchange for
all of the capital stock of Think and all unexpired and unexercised options to
acquire Think capital stock.
Also in May 1997, the Company acquired Optimax Systems Corporation, a
Delaware corporation ("Optimax"). Optimax develops, markets and implements
supply chain sequencing software using unique genetic algorithms for
customer-driven, make-to-order manufacturing. Approximately 1.4 million shares
of Common Stock have been issued or are issuable to the former Optimax
stockholders and optionholders in exchange for all of the capital stock of
Optimax and all unexpired and unexercised options to acquire Optimax capital
stock.
For accounting purposes, the Think and Optimax acquisitions were each
treated as a pooling of interests. Accordingly, the Company's consolidated
financial statements have been restated to give retroactive effect to the Think
and Optimax acquisitions and include the combined operations of the Company,
Think and Optimax for all periods presented. The following discussion and
analysis should be read in conjunction with such consolidated financial
statements.
In April 1997, the Company acquired the Operations Planning Group ("OPG"),
a business activity of Computer Sciences Corporation, for a cash purchase price
of $1.0 million. OPG provides operation planning environment optimization
software for planning and scheduling for customers in the consumer packaged
goods industry. The acquisition was accounted for under the purchase accounting
method.
In the second quarter of 1997, the Company incurred approximately $5.6
million in certain expenses related to the Think, Optimax and OPG acquisitions.
These costs included, among other things, investment banking, legal and
accounting fees and expenses and the write-off of in-process research and
development. See "Risk Factors -- Integration of Recent Acquisitions; Potential
Future Acquisitions."
17
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
of total revenues represented by certain items reflected in the Company's
consolidated statements of income:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses............................. 69.2% 67.2% 65.4% 67.4% 66.8%
Services...................................... 23.5 22.2 25.3 23.3 23.5
Maintenance................................... 7.3 10.6 9.3 9.3 9.7
----- ----- ----- ----- -----
Total revenues........................ 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of software licenses..................... 0.7 0.5 0.2 0.2 1.8
Cost of services and maintenance.............. 15.5 18.4 21.2 20.9 21.4
Sales and marketing........................... 30.8 32.3 38.4 39.6 35.1
Research and development...................... 17.5 18.0 19.3 19.6 22.3
General and administrative.................... 13.6 15.2 9.9 10.9 9.7
In-process research and development
and acquisition costs...................... -- -- -- -- 4.1
----- ----- ----- ----- -----
Total costs and expenses.............. 78.1 84.4 89.0 91.2 94.4
----- ----- ----- ----- -----
Operating income................................ 21.9 15.6 11.0 8.8 5.6
Other income (expense), net..................... (0.6) (0.4) 2.1 2.0 1.5
----- ----- ----- ----- -----
Income before income taxes...................... 21.3 15.2 13.1 10.8 7.1
Provision for income taxes...................... 9.1 5.2 4.9 4.0 3.3
----- ----- ----- ----- -----
Net income...................................... 12.2% 10.0% 8.2% 6.8% 3.8%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
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.
In the first nine months of 1997, total revenues increased 142.6% to $138.7
million from $57.2 million in the first nine months of 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. See "Risk Factors -- Product
Concentration; Dependence on Product Line Expansion."
SOFTWARE LICENSES. In the first nine months of 1997, revenues from software
licenses increased 140.8% to $92.7 million from $38.5 million in the first nine
months of 1996. The significant increase in software license revenues was
primarily due to an increased awareness of the benefits of supply chain
18
<PAGE> 19
management, 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. 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. See "Business -- Sales and Marketing."
SERVICES. In the first nine months of 1997, revenues from services
increased 144.1% to $32.6 million from $13.3 million in the first nine months of
1996. 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. The 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. In the first nine months of 1997, revenues from maintenance
increased 151.6% to $13.4 million from $5.3 million in the first nine months of
1996. The significant increase in the 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
maintenance revenues as a percentage of total revenues should not vary
significantly from the percentage of total revenues achieved in the nine months
ended September 30, 1997.
CONCENTRATION OF REVENUES. The Company generally derives a significant
portion of its software license revenues in each quarter from a small number of
relatively large sales. For example, in each quarter of 1996 and each quarter in
the first nine months of 1997, one or more customers each accounted for at least
15% of total software license revenues in such quarter. While the Company
believes that the loss of any of these particular customers would not have a
material adverse effect upon the Company's business, operating results or
financial condition, an inability to consummate one or more substantial license
sales in any future period could have a material adverse effect on the Company's
operating results for that period.
INTERNATIONAL REVENUES. The Company's international revenues, primarily
generated from customers located in Asia, Canada and Europe, were approximately
29% and 19% of total revenues in the first nine months of 1997 and 1996,
respectively. The increase in international revenues as a percentage of total
revenues was primarily due to the continued expansion of the Company's
international sales and consulting operations as well as software localization
efforts. 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. See "Risk Factors -- International Operations and Currency
Fluctuations."
COSTS AND EXPENSES
COST OF SOFTWARE LICENSES. Cost of software licenses consists primarily of
(i) commissions paid to third parties in connection with joint marketing and
other related agreements, (ii) royalty fees associated with third-party software
included with the sales of Rhythm, (iii) the cost of user documentation and (iv)
the cost of reproduction and delivery of the software. Cost of software licenses
was $2.6 million and $92,000 in the first nine months of 1997 and 1996,
representing 2.8% and 0.2% of software license revenues, respectively. The
significant increase in cost of software licenses both in dollar amount and as
19
<PAGE> 20
a percentage of software license revenues was primarily due to an increase in
commissions paid to third parties in connection with joint marketing and other
related agreements. Cost of software licenses decreased significantly in the
third quarter of 1997 as compared to the second quarter of 1997 as a result of
the termination of the license and distribution agreement with SAP pursuant to
which the Company was required to pay SAP a commission on Rhythm products sold
to SAP's customers. The Company expects cost of software licenses to vary in the
future depending upon the amount of commissions due to other third parties in
connection with joint marketing and other related agreements and the amount of
royalty fees associated with third party software included with the sales of
Rhythm.
COST OF SERVICES AND MAINTENANCE. Cost of services and maintenance consists
primarily of 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 $29.7 million and
$11.9 million in the first nine months of 1997 and 1996, representing 64.6% and
63.9% of total services and maintenance revenues, respectively. The increase in
cost of services and maintenance both in dollar amount and as a percentage of
services and maintenance revenues was 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 and expanded in Canada, Europe
and Japan in the last three months of 1996 and the first nine months of 1997.
The Company expects to continue to increase the number of its consulting,
product support and training personnel in the foreseeable future as a means to
expand into different geographic and vertical markets. To the extent that the
Company's license sales do not increase at anticipated rates, the hiring of
additional personnel could adversely affect the Company's gross margins.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel costs, commissions, office facilities, travel, promotional events such
as trade shows, seminars and technical conferences, advertising and public
relations programs. Sales and marketing expenses were $48.6 million and $22.6
million in the first nine months of 1997 and 1996, representing 35.1% and 39.6%
of total revenues, respectively. The increase in the 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 revenues was primarily due to the Company's ability to leverage its
growing base of sales and marketing resources to significantly increase
revenues. The Company expects to continue to increase its sales and marketing
activities in order to expand its international sales operations and to enter
into new vertical markets. As a result, the Company believes that the dollar
amount of sales and marketing expenses will continue to increase.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of the personnel and related costs associated with the Company's
research and development activities. Research and development expenses were
$30.9 million and $11.2 million in the first nine months of 1997 and 1996,
representing 22.3% and 19.6% of total revenues, respectively. The increase in
research and development expenses both in dollar amount and as a percentage of
total revenues 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 centers, particularly its
international development facilities. 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.
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 capitaliza-
20
<PAGE> 21
tion have been insignificant, and therefore, the Company has not capitalized any
software development costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of the personnel and other costs of the finance, human resources,
information systems, administrative and executive departments of the Company and
the fees and expenses associated with legal, accounting and other services.
General and administrative expenses were $13.5 million and $6.3 million in the
first nine months of 1997 and 1996, representing 9.7% and 10.9% of total
revenues, respectively. The increase in the 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 nine months 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.
IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION COSTS. The Company
incurred approximately $5.6 million in certain acquisition-related expenses in
connection with the acquisitions of Think, Optimax and OPG which were recorded
in the second quarter of 1997. These costs included, among other things,
investment banking, legal and accounting fees and expenses and the write-off of
in-process research and development.
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 debt. Other income was $2.1 million and $1.2 million in
the first nine months of 1997 and 1996, representing 1.5% and 2.0% of total
revenues, respectively. The increase in the dollar amount of other income 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
debt in June 1996.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $4.5 million and $2.3 million in
the first nine months of 1997 and 1996, respectively. The Company's effective
income tax rate was 46.0% in the first nine months of 1997 as compared to 37.2%
in the first nine months of 1996. The Company's effective income tax rate was
higher in the first nine months of 1997 primarily due to the non-deductibility
of certain of the acquisition-related expenses.
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
REVENUES
Total revenues increased 188.0% to $87.9 million in 1996 from $30.5 million
in 1995, and increased 114.9% in 1995 from $14.2 million in 1994. 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. See "Risk Factors -- Product
Concentration; Dependence on Product Line Expansion."
SOFTWARE LICENSES. Revenues from software licenses increased 180.0% to
$57.5 million in 1996 from $20.5 million in 1995, and increased 108.8% in 1995
from $9.8 million in 1994. Software license revenues constituted 65.4%, 67.2%
and 69.2% of total revenues in 1996, 1995 and 1994, respectively.
21
<PAGE> 22
The significant increases in software license revenues were 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. To date, sales of software licenses have
principally been derived from direct sales to customers.
SERVICES. Revenues from services increased 228.5% to $22.2 million in 1996
from $6.8 million in 1995, and increased 103.0% in 1995 from $3.3 million in
1994. Service revenues constituted 25.3%, 22.2%, and 23.5% of total revenues in
1996, 1995, and 1994, respectively. The significant increases in the dollar
amount of service revenues were primarily due to the significant increase in the
number of Rhythm licenses sold and a significant investment in the Company's
consulting organization as a result of the increased demand for the Company's
products. The increases in 1996 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.
MAINTENANCE. Revenues from maintenance increased 153.6% to $8.2 million in
1996 from $3.2 million in 1995, and increased 211.3% in 1995 from $1.0 million
in 1994. Maintenance revenues constituted 9.3%, 10.6% and 7.3% of total revenues
in 1996, 1995 and 1994, respectively. The significant increases in maintenance
revenues were primarily due to the continued increase in the number of Rhythm
licenses sold and a high percentage of maintenance agreement renewals.
CONCENTRATION OF REVENUES. The Company generally derives a significant
portion of its software license revenue in each quarter from a small number of
relatively large sales. During 1996, one customer accounted for approximately
13% of total revenues. During 1995, this same customer accounted for
approximately 11% of total revenues, and one other customer accounted for
approximately 10% of total revenues. While the Company believes that the loss of
either of these particular customers would not have a material adverse effect
upon the Company's business, operating results or financial condition, an
inability to consummate one or more substantial license sales in any future
period could have a material adverse effect on the Company's operating results
for that period.
INTERNATIONAL REVENUES. The Company recognized $20.6 million, $2.2 million
and $1.3 million of international revenues in 1996, 1995 and 1994, representing
approximately 23%, 7% and 9% of total revenues, respectively. The Company's
international revenues were primarily generated from customers located in Asia,
Canada and Europe. In 1996, revenues from customers located in Europe accounted
for approximately 13% of total revenues. The significant increase in
international revenues in 1996 was primarily due to the international expansion
of the Company's sales operations which began in the last quarter of 1995. See
"Risk Factors -- International Operations and Currency Fluctuations."
COSTS AND EXPENSES
COST OF SOFTWARE LICENSES. Cost of software licenses was $151,000, $135,000
and $95,000 in 1996, 1995 and 1994, representing 0.3%, 0.7% and 1.0% of software
license revenues, respectively.
COST OF SERVICES AND MAINTENANCE. Cost of services and maintenance was
$18.6 million, $5.6 million and $2.2 million in 1996, 1995 and 1994,
representing 61.3%, 56.1% and 50.3% 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, consultants were hired during 1995 and
1996 to expand into different geographic and vertical markets and major
consulting and support centers were established in Canada, Europe and Japan in
1996.
SALES AND MARKETING. Sales and marketing expenses were $33.7 million, $9.9
million and $4.4 million in 1996, 1995 and 1994, representing 38.4%, 32.3% and
30.8% of total revenues, respectively. The increases in sales and marketing
expenses both in dollar amount and as a percentage of total revenues were
primarily due to (i) increased staffing as the Company established new domestic
and international
22
<PAGE> 23
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.
RESEARCH AND DEVELOPMENT. Research and development expenses were $17.0
million, $5.5 million and $2.5 million in 1996, 1995 and 1994, representing
19.3%, 18.0% and 17.5% of total revenues, respectively. The increases in
research and development expenses both in dollar amount and as a percentage of
total revenues were primarily due to the hiring of additional research and
development personnel and other related costs incurred in connection with
expanding the Company's research and development department.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $8.7
million, $4.6 million and $1.9 million in 1996, 1995 and 1994, representing
9.9%, 15.2% and 13.6% of total revenues, respectively. The increases in the
dollar amount of general and administrative expenses were primarily the result
of increased staffing and related costs associated with the growth of the
Company's business during these periods. The decrease in general and
administrative expenses as a percentage of total revenues in 1996 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 increase in
general and administrative expenses as a percentage of total revenues in 1995
was primarily due to the continued development of its corporate management and
related support functions and its move to a larger facility.
OTHER INCOME (EXPENSE)
Other income (expense) was $1.8 million, ($117,000) and ($83,000) in 1996,
1995 and 1994, representing 2.1%, (0.4%) and (0.6%) of total revenues,
respectively. The increases in other income (expense) both in dollar amount and
as a percentage of total revenues in 1996 were 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 $4.3 million, $1.6 million and
$1.3 million in 1996, 1995 and 1994, respectively. The Company's effective
income tax rates were 37.2%, 34.1% and 42.7% in 1996, 1995 and 1994,
respectively. The Company's effective income tax rate was higher in 1996 than in
1995 due to the non-deductibility of the amortization of deferred compensation
expense and higher effective state income tax rates. The Company's effective
income tax rate was lower in 1995 than in 1996 and 1994 due to Canadian research
and development tax credits and lower effective state income tax rates. The
Company's effective income tax rate was higher in 1994 than in 1996 and 1995 due
to operating losses incurred by Think for which no income tax benefits were
recognized due to Think's status as an S-Corporation.
23
<PAGE> 24
QUARTERLY FINANCIAL RESULTS
The following tables set forth unaudited consolidated statement of income
data for the seven quarters ended September 30, 1997, as well as such data
expressed as a percentage of the Company's total revenues for the periods
indicated. This data has been derived from unaudited interim consolidated
financial statements that, in the opinion of management, have been prepared on a
basis consistent with the Company's audited consolidated financial statements
and include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such information when read in conjunction
with the audited consolidated financial statements and notes thereto. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------
1996 1997
--------------------------------------- -----------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30
-------- ------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses.......................... $11,135 $11,517 $15,847 $19,009 $22,583 $33,290 $36,823
Services................................... 2,848 4,460 6,034 8,888 9,370 10,605 12,590
Maintenance................................ 1,411 1,825 2,086 2,856 3,812 4,128 5,449
------- ------- ------- ------- ------- ------- -------
Total revenues....................... 15,394 17,802 23,967 30,753 35,765 48,023 54,862
------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of software licenses.................. 15 28 49 59 1,291 1,217 65
Cost of services and maintenance........... 2,487 4,043 5,402 6,699 8,158 9,838 11,698
Sales and marketing........................ 5,809 7,615 9,222 11,078 13,607 17,005 18,005
Research and development................... 3,080 3,421 4,721 5,783 7,540 10,438 12,901
General and administrative................. 1,705 2,125 2,424 2,480 3,478 4,909 5,081
In-process research and development and
acquisition costs(1)..................... -- -- -- -- -- 5,649 --
------- ------- ------- ------- ------- ------- -------
Total costs and expenses............. 13,096 17,232 21,818 26,099 34,074 49,056 47,750
------- ------- ------- ------- ------- ------- -------
Operating income (loss)(1)................... 2,298 570 2,149 4,654 1,691 (1,033) 7,112
Other income, net............................ 133 463 583 626 754 627 684
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes............ 2,431 1,033 2,732 5,280 2,445 (406) 7,796
Provision (benefit) for income taxes......... 905 385 1,018 1,966 954 (16) 3,586
------- ------- ------- ------- ------- ------- -------
Net income (loss)(1)......................... $ 1,526 $ 648 $ 1,714 $ 3,314 $ 1,491 $ (390) $ 4,210
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share(1)............... $ 0.05 $ 0.02 $ 0.06 $ 0.10 $ 0.04 $(0.01) $ 0.12
Shares used in computing net income (loss)
per share.................................. 29,358 31,807 32,670 33,063 33,452 29,259 34,070
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software licenses........................... 72.3% 64.7% 66.1% 61.8% 63.1% 69.3% 67.1%
Services.................................... 18.5 25.0 25.2 28.9 26.2 22.1 23.0
Maintenance................................. 9.2 10.3 8.7 9.3 10.7 8.6 9.9
------- ------- ------- ------- ------- ------- -------
Total revenues........................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of software licenses................... 0.1 0.2 0.2 0.2 3.6 2.5 0.1
Cost of services and maintenance............ 16.2 22.7 22.5 21.8 22.8 20.5 21.3
Sales and marketing......................... 37.7 42.8 38.5 36.0 38.1 35.4 32.8
Research and development.................... 20.0 19.2 19.7 18.8 21.1 21.8 23.5
General and administrative.................. 11.1 11.9 10.1 8.1 9.7 10.2 9.3
In-process research and development and
acquisition costs(1)...................... -- -- -- -- -- 11.8 --
------- ------- ------- ------- ------- ------- -------
Total costs and expenses.............. 85.1 96.8 91.0 84.9 95.3 102.2 87.0
------- ------- ------- ------- ------- ------- -------
Operating income (loss)(1)................... 14.9 3.2 9.0 15.1 4.7 (2.2) 13.0
------- ------- ------- ------- ------- ------- -------
Net income (loss)(1)......................... 9.9% 3.6% 7.2% 10.8% 4.2% (0.8)% 7.7%
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) In the second quarter of 1997, the Company incurred approximately $5.6
million in certain acquisition-related expenses in connection with the
business combinations involving Optimax Systems Corporation, Think Systems
Corporation and the Operations Planning Group of Computer Sciences
Corporation. These costs included, among other things, investment banking,
legal and accounting fees and expenses and the write-off of in-process
research and development. The acquisition-related expenses resulted in a
one-time charge to the Company's operating results.
24
<PAGE> 25
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 sales of equity securities. The Company's operating
activities provided cash of $14.8 million for the nine months ended September
30, 1997 as compared to $8.0 million for the nine months ended September 30,
1996. Operating cash flows have increased primarily due to an increase in
accrued liabilities and the tax benefit from stock option activity, partially
offset by an increase in accounts receivable. Accrued liabilities have increased
primarily as a result of increased accrued compensation and related expenses.
The tax benefit from stock option activity is primarily the result of
disqualifying dispositions of stock acquired under the Company's stock plans.
Accounts receivable, net of allowance for doubtful accounts, increased to
$51.7 million at September 30, 1997 from $33.6 million at December 31, 1996,
primarily due to the continued significant increases in revenues. 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 was 81 days for the quarter ended September
30, 1997 as compared to 76 days for the year ended December 31, 1996. Average
days' sales outstanding can fluctuate for a variety of reasons including the
timing and billing of receivables for which the related revenues may not yet be
recognizable.
Cash used in investing activities was $15.6 million for the nine months
ended September 30, 1997 as compared to $31.6 million in the nine months ended
September 30, 1996. The decrease in cash used in investing activities was
primarily due to the initial investment of proceeds from the Company's initial
public offering in May 1996. At September 30, 1997, the Company did not have any
material commitments for capital expenditures.
Cash provided by financing activities was $1.3 million for the nine months
ended September 30, 1997 as compared to $43.6 million for the nine months ended
September 30, 1996. The amounts shown for the nine month period ended September
30, 1996 include the Company's net proceeds from its initial public offering in
April 1996 of approximately $43.7 million.
As of September 30, 1997, the Company had $63.4 million of working capital,
including $36.6 million in cash and cash equivalents and $22.9 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 may in the future pursue additional acquisitions of businesses,
products and technologies, or enter into joint venture arrangements, that could
complement or expand the Company's business. Any material acquisition or joint
venture could result in a decrease to the Company's working capital depending on
the amount, timing and nature of the consideration to be paid.
The Company has a revolving credit agreement with NationsBank of Texas,
N.A. (the "Lender") which expires in June 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. At September 30, 1997, the Company had no
borrowings outstanding under the revolving credit agreement.
The Company believes that the net proceeds generated by the sale of Common
Stock by the Company in the offerings, 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 equity or debt financing. There can be no assurance that such
financing will be available on acceptable terms, if at all.
25
<PAGE> 26
BUSINESS
i2 Technologies, Inc. ("i2" or the "Company") is a leading provider of
client/server-based decision support software products for supply chain
management and related applications. Supply chain management encompasses the
planning and scheduling of manufacturing and related logistics, including demand
forecasting, raw materials procurement, work-in-process, distribution and
transportation across multiple enterprises. i2's client/server software
solution, Rhythm, is designed to provide customers with an end-to-end supply
chain management solution, enabling customers to model complex, multi-enterprise
supply chains to rapidly generate integrated solutions to supply chain
challenges such as demand volatility, production bottlenecks, supply
interruptions and distribution alternatives. Rhythm utilizes a unique,
constraint-based methodology which simultaneously considers a broad range of
factors -- from changing revenue forecasts to machine capacities to individual
customer commitments -- to optimize all aspects of the supply chain. Rhythm's
advanced decision-support capabilities enable companies to make better informed
and more timely planning, scheduling and resource allocation decisions in order
to improve throughput, operating efficiency, customer satisfaction and return on
assets. The Company's software products and services are designed to enable
customers to reduce costs, increase market share and enhance their competitive
advantage.
INDUSTRY BACKGROUND
Today's increasingly competitive business environment has forced many
companies to increase manufacturing efficiency while improving their flexibility
and responsiveness to changing market conditions. In addition to facing higher
competitive standards with respect to product quality, variety and price,
businesses also recognize the need to shorten lead times, adjust production for
frequent changes in customer requirements and quote more accurate and reliable
delivery dates. Furthermore, a company's supply chain may span multiple
continents, tying suppliers in one part of the world with a plant in another to
serve customers in yet a third location. These forces are prompting companies to
work closely and collaboratively with a broad range of suppliers and customers
to improve efficiencies across multi-enterprise supply chains. The growth of the
Internet and intranets is accelerating these changes by providing a ubiquitous,
platform-independent communications network. The combination of these forces has
created a dynamic, complex and highly interdependent business environment. In
response to these evolving market forces, many companies have sought to
reengineer their business processes to reduce manufacturing cycle times, shift
from mass-production to order-driven manufacturing, increase use of outsourcing
and share information with vendors and customers. The implementation of software
solutions to manage various elements of the supply chain has become a key
component of these reengineering initiatives. The Company believes that
companies are increasingly recognizing efficient supply chain management as a
critical source of competitive advantage in this rapidly changing business
environment.
THE TRADITIONAL APPROACH
Companies have traditionally applied information technology to supply chain
management through Manufacturing Resource Planning ("MRP") systems, which
provide limited flexibility to accommodate rapidly changing business conditions
and customer requirements. In order to respond to an increasingly competitive
business environment and related complex supply chain issues, many companies
have adopted Enterprise Resource Planning ("ERP") systems, which integrate MRP
solutions with other enterprise management applications such as financial,
accounting and human resources. Although ERP systems provide substantial
benefits primarily by integrating financial and other controls with multi-plant
manufacturing coordination, the supply chain decision support capabilities of
many ERP systems remain limited by the planning and scheduling methodologies
utilized in their MRP modules. Various ERP vendors are mitigating these
limitations by internally developing, or by acquiring or partnering with
independent developers of, advanced planning and scheduling software.
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Some of the significant limitations of traditional MRP systems and the MRP
modules of ERP systems are as follows:
LIMITED DECISION SUPPORT. Traditional solutions collect and report
large amounts of transactional data, rather than provide sophisticated
analysis of relevant information to support critical business decisions in
real-time. While these solutions help customers unify disparate information
resources within the enterprise and contribute to business process
reengineering efforts, the Company believes that they are not well-suited
to enable customers to make rapid, highly complex business decisions.
LIMITED REPRESENTATION OF SUPPLY CHAIN. The Company believes that
traditional solutions lack the flexibility and functionality needed to
create a highly accurate model of the supply chain because they often
employ fixed assumptions regarding critical operating constraints such as
available production capacity and supplier lead times. Since this approach
cannot adequately capture complex real-world constraints and
interdependencies, it may result in the development of infeasible or
suboptimal plans. In addition, traditional solutions calculate plans and
schedules for individual, local segments of the production and supply
process, without considering the consequences to the entire process. For
example, an increase in customer demand might result in the purchase of
additional raw materials without determining whether manufacturing capacity
is available to process those materials. This approach incorrectly assumes
that optimizing production for an individual step within the production
process will lead to an optimal result for the manufacturing operation or
supply chain as a whole.
SEQUENTIAL PLANNING. Traditional planning methodologies model the
supply chain as a sequence of discrete steps. For example, traditional
solutions begin by developing a demand forecast from which a distribution
plan is developed to determine the distribution center, warehouse, or
factory source which will be used to manufacture/distribute the products
without regard to transportation or manufacturing constraints. A
transportation plan is then generated to determine the optimal
transportation methods to be used to ship the products without addressing
the constraints of the remaining parts of the supply chain. A master
production schedule is then generated which is used to develop a materials
requirement plan, which in turn is used to arrive at a capacity
requirements plan. Because the process does not address all constraints
simultaneously, the initial planning cycle is rarely feasible or optimal.
Moreover, as resources become constrained, sequential planning requires
that the entire supply chain model be completely regenerated from the
beginning to identify and resolve conflicts. As a result, the planning
process often requires numerous manual iterations to develop a feasible
solution. Once an initial plan has been developed, the time-consuming
nature of sequential planning limits a manager's ability to rapidly
evaluate subsequent changes, such as material shortages and revisions in
customer orders. Accordingly, a manager's ability to respond to changes and
to effect corrective action may be delayed.
LIMITED INTEGRATION AND FUNCTIONALITY. Traditional solutions may
provide selected supply chain planning modules, but generally do not
provide integrated functionality across the entire supply chain, including
demand forecasting, manufacturing planning, plant scheduling, distribution
and transportation. For example, several ERP vendors have acquired planning
products which address specific supply chain challenges, but fail to
provide global visibility and optimization across the entire supply chain.
In addition, traditional solutions often offer only limited functionality
within these areas. For example, MRP and ERP systems often provide limited
"available-to-promise" functionality, which simply processes orders on a
"first-come, first-served" basis, without considering other constraints or
business objectives. Furthermore, traditional solutions typically assume
complete independence of supply and demand. Often, however, the
overabundance or scarcity of a certain product can directly or indirectly
impact demand for that product and related products. Complex
interrelationships and interdependencies are not adequately accounted for
in traditional planning methodologies, leading to potentially inaccurate
conclusions and recommendations.
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LENGTHY IMPLEMENTATION CYCLES. Due to the broad scope, complexity and
associated re-engineering requirements of ERP systems, many companies have
found the implementation of such systems to be costly and time consuming.
Such factors often delay or limit the realization of benefits associated
with the implementation of ERP systems.
THE i2 SOLUTION
i2 is a leading provider of client/server-based decision support software
products for supply chain management and related applications. The Company's
Rhythm products enable businesses to plan and schedule the principal elements of
the supply chain by simultaneously considering internal constraints, such as
manufacturing facility capacities, human resource availability, alternate cost
strategies and distribution requirements, and external constraints, such as
supplier lead times and customer requirements. Rhythm utilizes object-oriented
technology to model specific characteristics of a customer's operations, and
focuses primarily on supply chain management functions such as raw materials
procurement, capacity planning, distribution requirements and due date
scheduling. Rhythm also incorporates an advanced forecasting module which
provides the ability to view and manipulate multi-dimensional data and analyze
the causal relationships between customer demand and internal and external
events.
Rhythm is designed to help businesses increase throughput, reduce
inventory, decrease cycle times, improve customer delivery date performance and,
consequently, enhance return on assets. The Company's software products are also
designed to enable customers to reduce costs, increase market share and enhance
their competitive advantage. i2's approach to customer relationships is centered
on the identification of potential savings and the creation of value for
customers. As part of this dedication to providing value for customers, i2 has
established a goal of generating more than $50 billion in total value for its
customers by the year 2005 through growth and savings. Although Rhythm is
usually deployed as a stand-alone alternative to MRP products, Rhythm is often
implemented in conjunction with, or as a complement to, existing MRP and ERP
solutions. Rhythm's data structures, methodologies and application logic
differentiate it from existing solutions in the following ways:
DECISION SUPPORT. Rhythm's memory-resident, object-oriented design
allows for very rapid analysis and response to planning and scheduling
issues. Rhythm identifies production and scheduling problems as
circumstances change, proposes optimal solutions and allows for automatic
or manual corrective action. i2's software also allows managers to perform
real-time simulations which gauge the impact of potential local actions on
the supply chain. The Company believes that this decision support
functionality enables customers to better manage complex supply chain
issues in an effort to reduce costs, maximize throughput and improve return
on assets.
ACCURATE REPRESENTATION OF SUPPLY CHAIN. Rhythm is designed to
incorporate a broad range of specific, real-world constraints and thereby
enhance the accuracy of the supply chain model and improve its
decision-making utility. Rhythm distinguishes between hard constraints,
those which are not subject to change or flexibility (e.g., a machine's
maximum rated production capacity), and soft constraints, those which may
be altered in order to arrive at an optimal solution (e.g., preferred
sources for materials). Rhythm's incorporation of object-oriented data
structures represents a significant advance in the creation of complex
supply chain models.
CONCURRENT PLANNING. In contrast to sequential planning, concurrent
planning views all the steps in the manufacturing process simultaneously.
Upon identification of a planning or scheduling change, Rhythm immediately
propagates the effect of the change upstream and downstream, from the point
of origin, throughout the supply chain model to derive a revised, optimal
solution. For example, an unforeseen loss of production capacity would
automatically signal for a reduction in raw material procurement as well as
the potential rescheduling of customer delivery dates. Because Rhythm
presents an integrated model of the supply chain, from demand forecasting
to raw material procurement, work-in-process, distribution and
transportation to customer delivery, it is able to
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provide solutions which optimize the efficiency of the supply chain as a
whole rather than summing a series of local optimizations.
GLOBAL INTEGRATION AND ADVANCED FUNCTIONALITY. Rhythm provides
customers with a fully integrated, end-to-end supply chain management
solution, from demand forecasting to manufacturing planning, plant
scheduling, distribution and transportation. This enables customers to
address a broad range of supply chain issues and to gain visibility across
their entire supply chains to identify, evaluate and address these issues
rapidly and effectively. Additionally, Rhythm analyzes complex
supply/demand interrelationships in order to more accurately represent
real-world supply chain mechanics. Rhythm's architecture is designed to
enable easy integration with a broad range of transactional, legacy and
other decision support software programs, enabling customers to leverage
their investments in these systems. Rhythm also provides advanced
functionality for its customers across the supply chain. For example,
Rhythm's available-to-promise functionality allows customers to commit to
requested delivery dates based on a global view of materials, capacity and
related business constraints, while considering a broad range of
pre-defined user business objectives such as maximizing sales to higher
profit margin customers rather than assimilating them on a "first-come,
first-served" basis. In addition, the Company's multi-dimensional demand
forecasting module allows users to forecast, plan and influence demand by
evaluating more than 30 potential internal and external causal
relationships.
EASE OF IMPLEMENTATION. Rhythm is designed as a broadly applicable
software solution which is rapidly adaptable for customers in a range of
industries. In addition, Rhythm is designed to integrate easily with many
existing client/server and legacy MRP and ERP systems. As a result,
functional implementation at a single site can generally be completed
within three to four months depending on the scope and complexity of the
installation project. The Company's goal is for the customer to realize a
significant return on its investment within a year of licensing.
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SEQUENTIAL VS. CONCURRENT PLANNING
The following diagrams illustrate certain differences between traditional,
sequential planning and Rhythm's concurrent, constraint-based planning
methodologies:
<TABLE>
<C> <C>
RHYTHM'S CONCURRENT,
TRADITIONAL SEQUENTIAL CONSTRAINT-BASED
PLANNING PLANNING
--------------------------- ---------------------------
[Illustration of linear flowchart, depicting [Illustration of non-linear flowchart, depicting
traditional solutions' sequential planning Rhythm's concurrent planning methodology.]
methodology.] Rhythm's concurrent planning methodology
Traditional planning methodologies model the simultaneously considers critical business
supply chain as a sequence of discrete steps. As constraints, and rapidly generates an optimal
resource constraints are identified, the entire plan.
supply chain must be completely regenerated to
identify and resolve conflicts.
</TABLE>
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STRATEGY
The Company's objectives are to maintain its leadership position in
decision-support supply chain management software, help create significant value
for its customers and continue to increase its market share of the supply chain
management market. The Company's strategy for achieving these objectives is as
follows:
EXPAND PRODUCT OFFERINGS
i2 believes that it has gained significant experience in supply chain
management methodologies through its work with its existing customer base. The
Company intends to continue to leverage this experience, together with its
expertise in advanced software technology, to expand the scope of its supply
chain management software to more fully address certain components of the supply
chain. For example, the Company is currently developing additional functionality
for Rhythm in the areas of transportation logistics. The Company is also
focusing on selected vertical markets such as Metals, Automotive, Consumer
Packaged Goods and other industries. Although the Rhythm software is standard
across all industries, the Company is forming groups to identify and understand
the needs of particular industries. The Company is leveraging the highly
flexible nature of Rhythm to develop a series of pre-configured user interfaces
tailored to address the requirements of such specific industries.
INVEST AGGRESSIVELY TO BUILD MARKET SHARE
The Company has made and continues to make substantial investments to
expand its sales and marketing, research and development, consulting and
administrative infrastructure. i2 believes that such investments are necessary
to increase its market share and to capitalize on the growth opportunities in
the supply chain management software market.
INTEROPERATE WITH A BROAD RANGE OF SOFTWARE PLATFORMS AND APPLICATIONS
The Company believes that most larger companies operate in heterogenous
computing environments, with diverse data repositories and transaction and
legacy systems. Therefore, the Company's software must be able to interact and
interoperate with a broad range of software platforms and products in order to
successfully manage complex, multi-enterprise supply chains. The Company's
strategy is to establish and maintain cooperative relationships with a broad
range of hardware and software vendors while maintaining platform-neutral
architecture. In addition, the Company strives to balance its relationships with
platform vendors to avoid becoming too closely aligned with any individual
vendor.
FOCUS ON DEVELOPING COLLABORATIVE, MULTI-ENTERPRISE SOLUTIONS
The Company has recently announced efforts to develop a Global Decision
Support Architecture. This architecture is being designed to enable Rhythm to
easily access data from a broad range of customer data repositories, enable
smoother communications and data translations between Rhythm and disparate
enterprise software systems, provide a multi-dimensional, uniform user interface
and enable a greater level of collaborative planning across the supply chain. i2
believes that, over time, application integration and collaborative,
multi-enterprise planning will be critical to enable customers to derive
significant additional value from supply chain management.
BUILD STRATEGIC ALLIANCES AND BROADEN DISTRIBUTION CHANNELS
The Company intends to expand and seek additional strategic relationships
with MRP and ERP vendors to integrate Rhythm with their software products to
create joint-marketing opportunities. In addition, the Company intends to
augment its sales efforts by establishing and expanding relationships with other
complementary business application software vendors and systems consulting and
integration firms. The Company is leveraging third-party implementation services
with large, international consulting firms such as Andersen Consulting, Deloitte
& Touche and KPMG Peat Marwick to enable it to more
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rapidly penetrate its target market. In addition, the Company has established
direct sales offices in international markets and intends to continue to expand
its United States and international sales forces.
ACQUIRE COMPLEMENTARY BUSINESSES, PRODUCTS AND TECHNOLOGIES
The Company believes that selective acquisitions will provide the
opportunity to broaden its product offerings and provide more comprehensive
decision support and supply chain management solutions. For example, the
Company's acquisition in May 1997 of Think Systems Corporation and Optimax
Systems Corporation significantly extended its capabilities in demand planning
and manufacturing scheduling. The Company may in the future pursue additional
acquisitions of businesses, products and technologies, or enter into joint
venture arrangements, which complement or expand its business.
PRODUCTS
Rhythm operates as a flexible, integrated supply chain management solution
and is available in single-site and multi-site configurations. Rhythm is
currently composed of the following modules and extensions:
MODULES
SUPPLY CHAIN PLANNER(TM). Supply Chain Planner ("SCP") is the base product
required for all Rhythm applications. It coordinates and optimizes all planning
and scheduling scenarios and holds the object framework. SCP contains the logic
common to all Rhythm modules and extensions and provides the means to control
them concurrently.
DEMAND PLANNER(TM). Demand Planner is used to forecast customer demand. It
uses many statistical techniques and multiple forecast approaches to anticipate
changes in demand, including changes as a result of promotions, advertising
campaigns, pricing policies or market perceptions.
FACTORY PLANNER(TM). Factory Planner ("FP") is designed to perform
single-site planning. FP manages complex manufacturing operations involving
large numbers of resources and operational steps, and is engineered to solve
common factory planning problems such as managing complex bills of materials and
alternate routings. Through FP, users can input their manufacturing forecast,
desired levels of finished goods, back-orders and other demands or constraints,
set tolerances for changes in the levels of the manufacturing forecast and set
target inventory levels. Through an interactive user interface, FP allows the
user to reallocate materials, change quantities, expedite purchases, move
quantities and perform "what if" simulations under modified constraints to
produce a master production schedule.
MASTER PLANNER(TM). Master Planner ("MP") integrates two or more Factory
Planner modules implemented at multiple sites. MP controls and enables
multi-site scheduling, sourcing, allocation and forecasting. MP facilitates the
development of an optimal solution for multi-site installations.
ADVANCED SCHEDULER(TM). Advanced Scheduler ("AS") provides additional
scheduling functionality for plans produced by Factory Planner or Master
Planner. AS outputs a detailed schedule and sequencing plan which considers
set-up times, material availability and other user-defined constraints. AS'
planning algorithms include constraint-based routines to recommend sequencing of
work loads to optimize the user's key resources.
SEQUENCER(TM). Sequencer is used to schedule assembly lines and other
sequential production facilities. Sequencer utilizes genetic algorithms to
optimize the sequence of orders through manufacturing operations to increase
throughput, balance workloads and achieve other optimization goals.
DISTRIBUTION PLANNER(TM). Distribution Planner ("DP") integrates
manufacturing and distribution planning and scheduling. DP enables
implementation of automated allocation, sourcing and transportation solutions
and provides planners with the ability to manipulate distribution requirements
to achieve strategic customer service goals.
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TRANSPORTATION PLANNER(TM). Transportation Planner ("TP") determines the
most feasible plan of utilizing transportation resources to move inventory from
one location in the supply chain to another. TP allows users to consolidate
orders or shipments into loads, select the appropriate mode and carrier, as well
as schedule and route the loads in order to determine the most efficient method
of shipping inventory. TP is currently provided by a third party software
provider.
EXTENSIONS
AVAILABLE-TO-PROMISE(TM). Available-to-Promise ("ATP") automatically
determines the quantity of goods deliverable by a requested date, as well as the
date upon which a complete order may be delivered based upon materials,
capacity, distribution capability, customer allocations, supplier allocations
and related business constraints. ATP is used to quote delivery dates to
customers on a real-time basis.
STRATEGY-DRIVEN PLANNER(TM). Strategy-Driven Planner ("SDP") allows users
to specify business rules on how Rhythm will resolve problems found within the
supply chain. SDP incorporates "trade-off" logic which takes into account the
users' preferences regarding operational, financial and other measures.
RHYTHMLINK(TM). RhythmLink facilitates communication and data exchange
between Rhythm and other applications such as databases, report writers and ERP
solutions by using industry accepted standard technologies and interfaces.
RhythmLink is designed to enable companies to rapidly integrate and implement
the Rhythm products with its existing information resources.
All of the Company's products are currently available in English and many
of the products are available in German, French, Japanese and Spanish.
During the last twelve months, the sales prices for Rhythm software
packages, other than for two significant large sales, generally ranged from
approximately $150,000 to approximately $5.5 million. The price for an
individual Rhythm product package is determined based upon a number of factors,
including the Rhythm modules and extensions purchased, the number of servers,
users and sites in the customer's system, as well as the complexity of the
customer's supply chain.
Rhythm is a client/server solution which can operate on hardware platforms
from Digital Equipment, Hewlett-Packard, IBM and Sun Microsystems and operating
systems from Sun Microsystems and Microsoft, and can access data from most
widely used SQL databases, including Informix, Oracle and Sybase. Rhythm is
written in C++ language and utilizes a fully object-oriented data structure for
representing operations, resources and constraints in supply chains. Once a
model is defined, the entire representation is loaded into random access memory
("RAM"). A typical supply chain model implemented in the Company's system may
occupy as much as two gigabytes of RAM. The Company believes that the
combination of its object-oriented and memory-resident technologies permit
Rhythm to achieve accuracy and speed advantages over traditional planning and
scheduling solutions.
PRODUCT DEVELOPMENT
The Company originally introduced its Rhythm software in 1992 and has
subsequently released a number of product enhancements as well as acquired
significant products. The Company has adopted a strategy of periodically
reinventing its products in order to meet its customers' needs, and strives to
ensure that each new generation of Rhythm is compatible with previous releases.
On-going product development efforts are focused on broadening the functionality
of Rhythm to more fully address certain areas of supply chain management,
including transportation logistics. The Company also licenses certain third
party software including an advanced transportation module.
In October 1997, the Company announced several products in various stages
of development, each of which is designed for multi-enterprise supply chain
collaboration. Within this broader line of products under development, the
Company plans to release a decision support architecture that will enable
customers to implement comprehensive planning and decision support solutions
that exchange information in diverse environments regardless of data structures
and platforms employed. The Company also
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plans to release a product which will provide a single graphical model of an
organization's entire supply chain and present a real-time view of the
performance of individual elements of the supply chain as well as the supply
chain as a whole. There can be no assurance that the Company will be successful
in developing these or any other new products, that the Company will not
experience difficulties that could delay or prevent successful development,
introduction and sales of these products, or that its new products and
enhancements will adequately meet the requirements of the marketplace and
achieve market acceptance.
Rhythm products have been developed by the Company's internal developmental
staff through small project teams focused on independent components of the
software under development. The Company maintains product release planning
procedures to ensure integration, testing and version control among the
different project development teams. The Company operates its research and
development department in a "technology neutral" environment which makes it
possible to operate within industry standards and yet be independent of
particular database formats, hardware platforms, network protocols and
interfaces. The Company maintains significant development centers in Bangalore
and Mumbai, India; Cambridge, Massachusetts; Dallas, Texas; Parsippany, New
Jersey; and Toronto, Ontario.
Research and development expenses have increased significantly in recent
periods as the Company has continued to focus on development of new and enhanced
products. Research and development expenses were $2.5 million, $5.5 million,
$17.0 million and $30.9 million in 1994, 1995, 1996 and the first nine months of
1997, representing 17.5%, 18.0%, 19.3% and 22.3% of total revenues,
respectively.
CUSTOMER CASE STUDIES
The following case studies illustrate the selection, use and proposed
implementation of Rhythm software by certain of the Company's customers. There
can be no assurance that new or existing customers will achieve any of the
benefits described below.
TIMKEN
The Timken Company's Steel Business ("Timken"), one of i2's earliest major
customers, manufactures specialty alloy steel bars and seamless tubing for
industrial users including the automotive industry and oil rig manufacturers.
CHALLENGE. Timken's typical finished product may go through as many as 15
to 25 sequential operations. Timken's objective was to process smaller orders
faster and more economically in order to more effectively compete in the
specialty steel marketplace. However, the company's raw material is usually
melted at high tonnages to achieve economies of scale, and is then forced
through production, often resulting in excess inventory in material queues.
Timken's challenge was to create a smooth flow for the up to 10,000 orders that
work their way through Timken's four plants at any one time.
RESULT. Timken reports that, since implementing Rhythm, manufacturing cycle
time has been cut by up to 40 percent, inventories have been reduced by
approximately 15 percent, and manufacturing throughput increased to record
levels. Based on this successful deployment in its Steel Business, The Timken
Company purchased a worldwide license for Rhythm in 1996 and plans to deploy the
software in all of its steel and bearing facilities.
HERMAN MILLER
Herman Miller Inc. ("Herman Miller") is a large office systems
manufacturer.
CHALLENGE. Herman Miller produces a broad range of office systems -- from
panel and office wall systems to desks, chairs and accessories. The company
estimates that approximately 80 percent of its business is project-based,
requiring coordination of the company's diverse operating units to produce and
ship systems to customers' specifications. For example, walls and partitions are
produced in the Systems plant; desks and hanging components in the Work Surfaces
plant; chairs in the Seating plant;
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and metal file cabinets in the Storage plant. Prior to installing Rhythm, Herman
Miller's lead times averaged five to six weeks, with approximately 80 percent of
customer orders shipped on time.
RESULT. Since implementing Rhythm, Herman Miller reports that its lead time
has been reduced to four weeks -- with some product lines shipping in as little
as one week -- and approximately 95 percent on time. Rhythm also helps the
company to reduce its reliance on distribution centers. Because the entire
production process is planned simultaneously, the components of an order may be
shipped to the customer directly from the plant, in the sequence they are
needed. For example, a customer would receive panel systems and partitions, then
furniture, then accessories, according to their specifications, directly from
the plants. The company currently directly ships approximately 40 percent of its
orders and expects that number to rise to approximately 70 percent within two
years.
CUSTOMER SERVICE AND SUPPORT
The Company believes that providing a high level of customer service and
technical support is necessary to achieve rapid product implementation which, in
turn, is essential to customer satisfaction and continued license sales and
revenue growth. During 1996 and 1997, the Company expanded its service and
support centers geographically and now has major support centers in Australia,
Belgium, Canada, Japan and across the United States. The Company also has
established support centers in Denmark, Germany, Mexico and Singapore.
Accordingly, the Company is committed to continue recruiting and maintaining a
high-quality technical support team. The Company's customer service and support
activities consist of the following:
TRAINING
The Company offers an intensive education and training program for its
customers and its third-party implementation providers. Classes are offered at
in-house facilities at certain of the Company's offices and at customer
locations. These classes focus on supply chain management principles as well as
the implementation and use of Rhythm products.
CONSULTING
The Company offers its customers on-site consulting services aimed at
assisting in the implementation of Rhythm and integration with the customers'
existing systems. The Company receives hourly fees for these services. These
consulting services are concentrated on making implementation cost-effective for
customers by enabling them to independently perform as many of the integration
tasks as possible. The Company also leverages the use of third-party consulting
firms to more rapidly penetrate its target market.
MAINTENANCE AND PRODUCT UPDATES
The Company provides ongoing product support services under its license
agreements. Maintenance contracts are typically sold to customers for a one-year
term at the time of the initial Rhythm license and may be renewed for additional
periods. Under its maintenance agreements with its customers, the Company
provides, without additional charge, product updates and releases of new
versions to Rhythm products previously purchased by the customer. Customers that
do not renew their maintenance agreements but wish to obtain product updates and
new version releases are generally required to purchase such items from the
Company at market prices. Ongoing support and maintenance services are provided
on up to a seven-day week, 24-hour day basis.
SALES AND MARKETING
The Company markets its software and services primarily through its direct
sales organization augmented by other sales channels, including business
application software vendors and systems consulting and integration firms. At
September 30, 1997, the Company conducted sales and other activities through
several offices in the United States and additional offices in Australia,
Belgium, Brazil,
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Canada, Denmark, France, Germany, Japan, Korea, Singapore and the United
Kingdom. The Company's direct sales organization consists of regionally based
sales representatives and sales engineers supported by personnel with experience
in the aerospace, apparel, automotive, consumer products, furniture, high-tech,
industrial, metals, paper, pharmaceuticals, process, retail and textiles
industries.
The Company currently has joint-marketing agreements with a number of
business application software vendors, including SAP, SSA, Baan and Marcam, and
several systems consulting and integration firms. These joint-marketing
agreements generally provide the vendors with non-exclusive rights to market
Rhythm products and access to marketing materials and product training.
Furthermore, the vendors receive a specified commission for license revenues
generated by the vendor during the term of the agreement, which commissions vary
from zero to 40% of the sales price of the license. By using these indirect
sales channels, the Company is seeking to capitalize on the installed base of
other software vendors and obtain favorable product recommendations from systems
consulting and integration firms, thereby increasing Rhythm's market coverage.
CUSTOMERS
As of September 30, 1997, the Company had licensed Rhythm products to
approximately 200 customers. The following is a list of certain companies that
have licensed more than $750,000 of Rhythm products since December 31, 1994:
CONSUMER ELECTRONICS/ HIGH TECHNOLOGY
American Microsystems
AST Research
AVEX Electronics
Compaq Computer
Dell Computer
Digital Equipment
Fujitsu
Hewlett-Packard
IBM
Komag
Lucent Technologies
Motorola
Philips Semiconductors
SGS Thomson Microelectronics
Siemens Semiconductors
Texas Instruments
Toshiba
METALS
Altos Hornos Mexico
Bethlehem Steel
Broken Hill Proprietary
Iscor Limited
Mannesmann
Timken
US Steel
Wheeling Pittsburgh
PAPER
CSS Industries
Fletcher Challenge
Sonoco
MEDICAL/PHARMACEUTICAL
Abbott Laboratories
Bristol-Myers Squibb
Johnson & Johnson Medical
Rhone Poulenc Rorer
US Surgical
CONSUMER PACKAGED GOODS
3M
British American Tobacco
Consumer Packaging
E&J Gallo Winery
EMI Compact Disk
OTHER
Baker Hughes INTEQ
Ford Motor Company
GE Capital
Haworth
Herman Miller
Newport News Shipbuilding
Occidental Chemical
Sara Lee Knit Products
VF Services
The Company provides its software products to customers under
non-exclusive, non-transferable license agreements. As is customary in the
software industry, in order to protect its intellectual property rights, the
Company does not sell or transfer title to its products to its customers. Under
the Company's current standard form of license agreement, licensed software may
be used solely for the customer's internal operations.
COMPETITION
The markets in which the Company operates are highly competitive. The
Company's competitors are diverse and offer a variety of solutions directed at
various segments of the supply chain as well as the enterprise as a whole.
Competitors include: (i) enterprise resource application software vendors such
as SAP, PeopleSoft, Inc., Oracle and Baan, each of which currently offers
sophisticated ERP solutions that may incorporate supply chain management modules
or advanced planning and scheduling software;
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(ii) other supplies of advanced planning and scheduling software including
Manugistics Group, Inc.; (iii) other business application software vendors who
may broaden their product offerings by internally developing, or by acquiring or
partnering with independent developers of, advanced planning and scheduling
software; (iv) internal development efforts by corporate information technology
departments; and (v) companies offering standardized or customized products for
mainframe and/or mid-range computer systems.
In connection with specific customer solicitations, a number of ERP vendors
have from time to time jointly marketed the Company's products as a complement
to their own systems. The Company believes that as its market share increases,
and as the ranges of products offered by the Company and these ERP vendors
expand and increasingly overlap, relationships which were cooperative in the
past will become more competitive, thereby increasing the overall level of
competition the Company faces. Specifically, the Company and SAP recently
terminated a license and distribution agreement, and SAP has announced its
intention to develop a suite of advanced planning and scheduling products which
are expected to be directly competitive with Rhythm. The Company believes that
additional ERP vendors are focusing significant resources on increasing the
functionality of their own planning and scheduling modules, and at least two ERP
vendors have recently acquired independent developers of advanced planning and
scheduling software which compete with Rhythm.
Many of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
greater name recognition, a broader range of products to offer and a larger
installed base of customers than the Company, each of which could provide them
with a significant competitive advantage over the Company. In addition, the
Company expects to experience increasing price competition as the Company and
its competitors compete for market share. There can be no assurance that the
Company will be able to compete successfully with existing or new competitors or
that competition will to have a material adverse effect on the Company's
business, operating results and financial condition.
PROPRIETARY RIGHTS AND LICENSES
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. In addition, the Company generally licenses
Rhythm products to end users in object code (machine-readable) format, and the
Company's license agreements generally allow the use of Rhythm products solely
by the customer for internal purposes without the right to sublicense or
transfer the Rhythm products. However, the Company believes that the foregoing
measures afford only limited protection. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exist, software piracy can be expected to be a
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as the laws of the United
States. Furthermore, there can be no assurance that the Company's competitors
will not independently develop technology similar to that of the Company. The
Company may increasingly be subject to claims of intellectual property
infringement as the number of products and competitors in the Company's industry
segment grows and the functionality of products in different industry segments
overlaps. Although the Company is not aware that any of its products infringes
upon the proprietary rights of third parties, there can be no assurance that
third parties will not claim infringement by the Company with respect to current
or future products. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
The Company has in the past and may in the future resell certain software
which it licenses from third parties. There can be no assurance that these
third-party software licenses will continue to be available to
37
<PAGE> 38
the Company on commercially reasonable terms. The loss of or inability to
maintain or obtain any of these software licenses could result in delays or
reductions in product shipments until equivalent software could be identified,
licensed and integrated, which could adversely affect the Company's business,
operating results and financial condition.
EMPLOYEES
As of September 30, 1997, the Company had 956 full-time employees,
including 393 primarily engaged in research and development activities and 246
engaged in sales and marketing activities. The Company's future success depends
in significant part upon the continued service of its key technical and senior
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel. Competition for such personnel is
intense and there can be no assurance that the Company can retain its key
managerial and technical employees or that it can attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. None of
the Company's employees are represented by collective bargaining units and the
Company has never experienced a work stoppage. The Company believes that its
employee relations are good.
38
<PAGE> 39
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of the Company as of September 30, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Sanjiv S. Sidhu................ 40 Chairman of the Board and Chief Executive Officer
Kanna (Ken) N. Sharma.......... 57 Vice Chairman of the Board, Executive Vice
President and Secretary
Sandeep (Sandy) R. Tungare..... 40 Director and President, Demand Management
Gregory A. Brady............... 37 President, Worldwide Operations
David F. Cary.................. 42 Vice President and Chief Financial Officer
Harvey B. Cash................. 59 Director
Thomas J. Meredith............. 47 Director
</TABLE>
Mr. Sidhu founded the Company in 1988 and has served as its Chairman of the
Board since its incorporation in 1989. Mr. Sidhu has served as the Company's
Chief Executive Officer since December 1994, and previously served in various
other executive capacities with the Company. Before founding the Company, Mr.
Sidhu held various positions with Texas Instruments Incorporated ("Texas
Instruments"), a publicly held electronics manufacturer, most recently as a
member of the technical staff of Texas Instruments' Artificial Intelligence
Laboratory. Mr. Sidhu holds a B.S. in chemical engineering from Osmania
University and a M.S. in chemical engineering from Oklahoma State University.
Mr. Sharma joined the Company in July 1990. Since June 1995, Mr. Sharma has
served as the Company's Vice Chairman of the Board, Executive Vice President and
Secretary and previously served in a variety of senior management positions with
the Company. Before joining the Company, Mr. Sharma served as Vice President and
co-founder of Business Technology Management, Inc., a management consulting
company for manufacturing companies, from July 1987 to July 1990; Executive Vice
President of Operations at Creative Output, Inc., a supplier of planning and
scheduling software, from March 1982 to July 1987; and in various positions with
Texas Instruments from November 1966 to February 1982, most recently as
Department Manager of Information Systems and Services. Mr. Sharma holds a B.S.
in electrical engineering from the Benares Hindu University Institute of
Technology.
Mr. Tungare joined the Company in May 1997 as President, Demand Management
following the merger of the Company and Think Systems Corporation. Mr. Tungare
founded Think in 1986 and served as its President and Chief Executive Officer
until it was acquired by the Company in May 1997. Mr. Tungare was appointed to
the Company's Board of Directors in May 1997 in connection with the Think
acquisition. Mr. Tungare holds a B.S. in science from Bombay University and an
M.B.A. from Rutgers University.
Mr. Brady joined the Company in December 1994 as President, Field
Operations, and became President, Worldwide Operations, in September 1996. From
1988 until joining the Company, Mr. Brady held a variety of positions with
Oracle Corporation, an enterprise application software vendor, most recently
serving as Vice President of Worldwide Applications. Mr. Brady holds a B.S. in
business from the University of Indiana.
Mr. Cary joined the Company in July 1992 and has served as its Vice
President and Chief Financial Officer since April 1994. Mr. Cary served in
various other capacities with the Company between July 1992 and April 1994.
Before joining the Company, Mr. Cary was an Accounting System Controller for
ComputerLand Texas, a distributor of computer equipment, from December 1991 to
June 1992. Mr. Cary is a Certified Public Accountant and holds a B.S. in
accounting from San Francisco State University and an M.B.A. from Southern
Methodist University.
39
<PAGE> 40
Mr. Cash has served as a director of the Company since January 1996. Mr.
Cash has served as a general or limited partner of various venture capital
companies affiliated with InterWest Partners, a venture capital firm, since
1985. Mr. Cash is Chairman of the Board of Cyrix Corporation, a publicly held
microprocessor company, and currently serves on the board of directors of the
following public companies: ProNet, Inc., a manufacturer of paging devices;
Aurora Electronics, Inc., a distributor of recycled integrated circuit boards
and computer components; BenchMarq Microelectronics, Inc., a developer of chips
and chipsets for portable electronic devices; AMX Corporation, a manufacturer of
remote control systems; Ciena Corporation, a manufacturer of systems for long
distance fiberoptic networks; and Liberte Investors Inc. In addition, Mr. Cash
is a director of several privately held companies. Mr. Cash holds a B.S. in
electrical engineering from Texas A&M University and an M.B.A. from Western
Michigan University.
Mr. Meredith has served as a director of the Company since July 1996. Mr.
Meredith has served as the Senior Vice President and Chief Financial Officer for
Dell Computer Corporation ("Dell") since November 1992. From 1990 until joining
Dell, Mr. Meredith was Vice President and Treasurer of Sun Microsystems, Inc.
Prior thereto, he was co-founder and general manager of Amdahl Capital
Corporation, a captive financing company for Amdahl Corporation, a mainframe
computer manufacturer. Mr. Meredith holds a B.S. in political science from St.
Francis College, a J.D. from Duquesne University of Law and an L.L.M. in
taxation from Georgetown University.
40
<PAGE> 41
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 30, 1997, and as
adjusted to reflect the sale of shares offered hereby, by (i) each person who is
known by the Company to own beneficially more than five percent of the Common
Stock, (ii) each of the Company's directors and executive officers, (iii) all
current executive officers and directors as a group, and (iv) each of the other
Selling Stockholders.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES OWNED SHARES TO BE
BEFORE THE OWNED AFTER
OFFERINGS(1) NUMBER OF THE OFFERINGS(1)(2)
-------------------- SHARES BEING --------------------
NAME NUMBER PERCENT OFFERED NUMBER PERCENT
---- ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
Sanjiv S. Sidhu(3)..................... 16,000,000 53.4% 910,000 15,090,000 46.5%
Sidhu-Singh Family Investments,
Ltd. ................................ 3,400,000 11.4 0 3,400,000 10.5
Kanna (Ken) N. Sharma(4)............... 3,172,000 10.6 1,000,000 2,172,000 6.7
The K-B Sharma Limited Partnership..... 1,700,000 5.7 828,000 872,000 2.7
Sandeep (Sandy) R. Tungare(5)(6)....... 1,111,716 3.7 200,000 911,716 2.8
Gregory A. Brady(7).................... 460,793 1.5 125,000 335,793 1.0
David F. Cary(8)....................... 152,818 * 0 152,818 *
Harvey B. Cash(9)...................... 20,000 * 0 20,000 *
Thomas J. Meredith(10)................. 10,750 * 0 10,750 *
All directors and executive officers as
a group (seven persons)(11).......... 20,928,077 69.8 2,235,000 18,693,077 57.5
Other Selling Stockholders:
Vidhya Tungare(6).................... 541,317 1.8 100,000 441,317 1.4
Ravi B. Reddy(6)(12)................. 570,399 1.9 100,000 470,399 1.4
Pratibha Reddy(6).................... 541,317 1.8 100,000 441,317 1.4
InSight Venture Partners II,
L.P.(6)........................... 225,821 * 65,000 160,821 *
The Bianca D. Sharma Charitable
Remainder Trust One............... 22,000 * 22,000 0 *
</TABLE>
- ---------------
* Indicates less than 1%.
(1) Beneficial ownership is calculated in accordance with the rules of the
Commission in accordance with Rule 13d-3(d)(i). In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person that
are currently exercisable or become exercisable within 60 days following
November 18, 1997 (the anticipated date of the offerings) are deemed
outstanding. However, such shares are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Unless
otherwise indicated in the footnotes to this table, the persons and
entities named in the table have sole voting and sole investment power with
respect to all shares beneficially owned, subject to community property
laws where applicable.
(2) Assumes no exercise of the Underwriters' over-allotment options.
(3) Includes 3,400,000 shares owned by Sidhu-Singh Family Investments, Ltd. for
which Mr. Sidhu serves as a general partner. In such capacity, Mr. Sidhu
may be deemed to be a beneficial owner of such shares. All of the shares
offered by Mr. Sidhu are offered by Mr. Sidhu individually and are being
included in the offerings pursuant to a Registration Rights Agreement among
the Company, Mr. Sidhu and Sidhu-Singh Family Investments, Ltd.
(4) Includes 1,700,000 shares held by The K-B Sharma Limited Partnership. Mr.
Sharma is the President of Sharma Management, L.L.C., which is the general
partner of The K-B Sharma Limited Partnership. In such capacity, Mr. Sharma
may be deemed to be a beneficial owner of such shares. Also includes
500,000 shares held by the Kanna N. Sharma Inter Vivos QTIP, 266,666 shares
held by the Nila K. Sharma Exempt 1997 Trust, 100,000 shares held by the
Nathan S. Sharma Exempt 1997 Trust, 100,000 shares held by the Stefan M.
Sharma Exempt 1997 Trust and 22,000 shares held by The Bianca D. Sharma
Charitable Remainder Trust One. Mr. Sharma may be deemed to be a beneficial
owner of such shares. The shares offered by Mr. Sharma represent 150,000
shares
41
<PAGE> 42
offered by Mr. Sharma individually, 828,000 shares offered by The K-B
Sharma Limited Partnership and 22,000 shares offered by The Bianca D.
Sharma Charitable Remainder Trust One.
(5) Mr. Tungare has served as a director of the Company since the Company's
acquisition of Think Systems Corporation. The shares owned by Mr. Tungare
include 17,195 shares purchasable upon the exercise of options and 541,317
shares owned by his spouse. The shares offered by Mr. Tungare include
100,000 shares offered by his spouse.
(6) The shares offered by such stockholder in the offerings are being included
pursuant to a Registration Rights Agreement entered into by the Company as
a condition to the Company's acquisition of Think Systems Corporation.
(7) Includes 222,500 shares that were unvested as of October 23, 1997 and
subject to repurchase by the Company.
(8) Includes 33,750 shares that were unvested as of October 23, 1997 and
subject to repurchase by the Company. Also includes 3,333 shares
purchasable upon the exercise of options.
(9) Represents shares purchasable upon the exercise of options. If such options
are exercised, 15,000 of these shares would be unvested and subject to
repurchase by the Company.
(10) Includes 5,000 shares owned by a trust for the benefit of Mr. Meredith's
family. Also includes 5,750 shares purchasable upon the exercise of
options. If such options are exercised, 750 of these shares would be
unvested and subject to repurchase by the Company.
(11) Includes an aggregate of 46,278 shares purchasable upon the exercise of
options and 272,000 shares (including shares underlying unexercised
options) that were unvested as of October 23, 1997 and subject to
repurchase by the Company. See notes (3), (4), (5) and (7) through (10).
(12) Includes 17,195 shares purchasable upon the exercise of options.
The Company will pay all costs and expenses of the offering, other than the
underwriting discount relating to shares sold by the Selling Stockholders, the
fees and disbursements of legal counsel for the Selling Stockholders and stock
transfer and other taxes attributable to the sale of shares by the Selling
Stockholders which will be borne by the Selling Stockholders.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, Austin, Texas. Certain legal matters
in connection with the offerings will be passed upon for the Underwriters by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
EXPERTS
The supplemental consolidated financial statements of i2 Technologies, Inc.
included in the Company's Form 8-K/A filed July 1, 1997 (Amendment No. 1 to the
Current Report on Form 8-K dated June 12, 1997), have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon included
therein and incorporated herein by reference. Such supplemental consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
42
<PAGE> 43
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the U.S.
Underwriters named below, and each of such U.S. Underwriters, for whom Goldman,
Sachs & Co., Deutsche Morgan Grenfell Inc., Hambrecht & Quist LLC and UBS
Securities LLC are acting as representatives, has severally agreed to purchase
from the Company and the Selling Stockholders, the respective number of shares
of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
----------- ---------
<S> <C>
Goldman, Sachs & Co. .......................................
Deutsche Morgan Grenfell Inc. ..............................
Hambrecht & Quist LLC.......................................
UBS Securities LLC..........................................
---------
Total............................................. 4,000,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus and in part to certain securities dealers at such price less
a concession of $ per share. The U.S. Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.
The Company and the Selling Stockholders have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters of
the international offering (the "International Underwriters") providing for the
concurrent offer and sale of 1,000,000 shares of Common Stock in an
international offering outside the United States. The offering price and
aggregate underwriting discounts and commissions per share for the two offerings
will be identical. The closing of the offering made hereby is a condition to the
closing of the international offering, and vice versa. The representatives of
the International Underwriters are Goldman Sachs International, Morgan Grenfell
and Co. Limited, Hambrecht & Quist LLC and UBS Limited.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons, which term shall mean, for
U-1
<PAGE> 44
purposes of this paragraph: (a) any individual who is a resident of the United
States or (b) any corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof and whose
office most directly involved with the purchase is located in the United States.
Each of the International Underwriters has agreed pursuant to the Agreement
Between that, as a part of the distribution of the shares offered as a part of
the international offering, and subject to certain exceptions, it will (i) not,
directly or indirectly, offer, sell or deliver shares of Common Stock (a) in the
United States or to any U.S. persons or (b) to any person who it believes
intends to reoffer, resell or deliver the shares in the United States or to any
U.S. persons, and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the public offering price, less an amount not greater than the selling
concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 600,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the U.S. Underwriters exercise their over-allotment option, the U.S.
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
4,000,000 shares of Common Stock offered. The Company has granted the
International Underwriters a similar option to purchase up to an aggregate of
150,000 additional shares of Common Stock.
The Company, each of its directors and its executive officers and the
Selling Stockholders have agreed that, until 90 days following the date of the
Prospectus, subject to certain exceptions, they will not offer to sell, sell,
contract to sell, grant any option to purchase, make any short sale of or
otherwise dispose of any shares of Common Stock or any securities which are
substantially similar to the shares of Common Stock or which are convertible or
exchangeable for securities which are substantially similar to the shares of the
Common Stock without the prior written consent of Goldman, Sachs & Co., except
for the shares of Common Stock offered in connection with the concurrent U.S.
and international offerings.
In connection with the offerings, the Underwriters may purchase and sell
the Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions, "passive" market making (see below)
and purchases to cover syndicate short positions created in connection with the
offerings. Stabilizing transactions consist of certain bids or purchases for the
purpose of preventing or retarding a decline in the market price of the Common
Stock; and syndicate short positions involve the sale by the Underwriters of a
greater number of shares of Common Stock than they are required to purchase from
the Company and the Selling Stockholders in the offerings. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Common Stock sold in the
offerings for their account may be reclaimed by the syndicate if such shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock, which may be higher than the price that might otherwise prevail in
the open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected in the Nasdaq National Market or
otherwise.
As permitted by Rule 103 under the Exchange Act, certain Underwriters (and
selling group members, if any) that are market makers ("passive market makers")
in the Common Stock may make bids for or purchases of the Common Stock in the
Nasdaq National Market until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that (1) a passive market
maker's net daily purchases of the Common Stock may not exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calendar months (or any 60 consecutive days ending within the 10 days)
immediately preceding the filing date of the registration statement of which
this Prospectus forms a part, (2) a passive market maker may not effect
transactions or display bids for
U-2
<PAGE> 45
the Common Stock at a price that exceeds the highest independent bid for the
Common Stock by persons who are not passive market makers and (3) bids made by
passive market makers must be identified as such.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
The U.S. Underwriters and the International Underwriters have agreed to
reimburse the Company for certain expenses incurred in connection with preparing
the Registration Statement of which this Prospectus is a part and consummating
the offerings as well as to pay the Selling Stockholders certain other amounts
in connection therewith.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Common Stock, including shares initially sold in the
international offering, to persons located in the United States.
Goldman, Sachs & Co. rendered advisory services to the Company in
connection with the Company's acquisitions of Think and Optimax in May 1997 and
received a customary fee for such services.
U-3
<PAGE> 46
[ILLUSTRATION OF THREE COMPUTER SCREENS DEPICTING THE OPERATION OF RHYTHM'S WEB-
BASED ORDER ENTRY INTERFACE CAPTIONED "ONE OF I2'S RHYTHM SOLUTIONS FOR SUPPLY
CHAIN MANAGEMENT."]
THE FOLLOWING CAPTION APPEARS NEXT TO THE FIRST COMPUTER SCREEN:
"RHYTHM CAN ACCEPT CUSTOMER ORDER INFORMATION FROM A VARIETY OF SOURCES
INCLUDING DIRECTLY FROM THE INTERNET."
THE FOLLOWING CAPTION APPEARS NEXT TO THE SECOND COMPUTER SCREEN:
"BECAUSE RHYTHM HAS REAL-TIME VISIBILITY INTO A COMPANY'S SUPPLY CHAIN
CAPABILITY, THE IMPACT OF A NEW ORDER IS IMMEDIATELY APPARENT. IF THE REQUESTED
DELIVERY DATE IS UNWORKABLE, RHYTHM CAN SUGGEST ALTERNATE DATES BY RE-ALLOCATING
RESOURCES."
THE FOLLOWING CAPTION APPEARS NEXT TO THE THIRD COMPUTER SCREEN:
"PROVIDED THAT A FEASIBLE PLAN HAS BEEN DETERMINED, THE ORDER IS ACCEPTED. WHILE
THIS PROCESS CAN TAKE SEVERAL DAYS USING A TRADITIONAL SOLUTION, RHYTHM ENABLES
THE ENTIRE PROCESS TO BE ACCOMPLISHED IN MINUTES OR EVEN SECONDS UTILIZING REAL-
TIME, ACCURATE INFORMATION."
LOGO
<PAGE> 47
=========================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 3
Documents Incorporated by Reference..... 3
Prospectus Summary...................... 4
Risk Factors............................ 6
Use of Proceeds......................... 13
Capitalization.......................... 14
Price Range of Common Stock............. 14
Dividend Policy......................... 14
Selected Consolidated Financial Data.... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 16
Business................................ 26
Management.............................. 39
Principal and Selling Stockholders...... 41
Legal Matters........................... 42
Experts................................. 42
Underwriting............................ U-1
</TABLE>
=========================================================
=========================================================
5,000,000 SHARES
i2 TECHNOLOGIES, INC.
COMMON STOCK
(PAR VALUE $0.00025 PER SHARE)
------------------
i2 Technologies logo
------------------
GOLDMAN, SACHS & CO.
DEUTSCHE MORGAN GRENFELL
HAMBRECHT & QUIST
UBS SECURITIES
REPRESENTATIVES OF THE UNDERWRITERS
=========================================================
