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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0 - 28030
i2 TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2294945
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
909 E. LAS COLINAS BLVD., 16TH FLOOR,
IRVING, TEXAS 75039
(Address of principal executive offices) (Zip code)
(214) 860-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes [X] No [ ]
As of May 5, 1998, the Registrant had outstanding 34,694,405 shares of Common
Stock, $0.00025 par value.
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i2 TECHNOLOGIES, INC.
TABLE OF CONTENTS
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1997 and
March 31, 1998 3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 1997 and March 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1997 and March 31, 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II OTHER INFORMATION
Item 2. Changes in Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ -----------
(unaudited)
ASSETS
Current assets:
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Cash and cash equivalents .................. $ 125,853 $ 93,145
Short-term investments ..................... 14,538 74,249
Accounts receivable, net ................... 71,209 66,513
Prepaid and other current assets ........... 3,363 1,779
Income tax receivable ...................... 1,097 --
Deferred income taxes ...................... 3,823 6,240
---------- ----------
Total current assets ................... 219,883 241,926
Furniture and equipment, net ................... 18,592 18,807
Deferred income taxes and other assets ......... 727 1,361
---------- ----------
Total assets ........................... $ 239,202 $ 262,094
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 6,855 $ 9,036
Accrued liabilities ........................ 23,987 27,254
Current portion of deferred revenue ........ 26,367 34,067
Income taxes payable ....................... -- 1,187
Deferred income taxes ...................... 230 --
---------- ----------
Total current liabilities .............. 57,439 71,544
Deferred revenue ............................... 518 369
Deferred income taxes .......................... 828 160
---------- ----------
Total liabilities ...................... 58,785 72,073
---------- ----------
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, 32,325,554 and
32,798,447 shares issued and outstanding,
respectively ............................. 8 8
Additional paid-in capital ................. 161,881 167,465
Deferred compensation ...................... (1,125) (927)
Retained earnings .......................... 19,653 23,475
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Total stockholders' equity ............. 180,417 190,021
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Total liabilities and stockholders'
equity ............................... 239,202 $ 262,094
========== =========
</TABLE>
See accompanying notes.
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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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Three Months Ended March 31,
----------------------------
1997 1998
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Revenues:
Software licenses .......................... $ 22,583 $ 42,429
Services ................................... 9,370 16,515
Maintenance ................................ 3,812 7,445
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Total revenues ......................... 35,765 66,389
---------- ----------
Costs and expenses:
Cost of software licenses .................. 1,291 2,908
Cost of services and maintenance ........... 8,158 13,831
Sales and marketing ........................ 13,607 22,907
Research and development ................... 7,540 15,882
General and administrative ................. 3,478 6,104
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Total costs and expenses ............... 34,074 61,632
---------- ----------
Operating income ............................... 1,691 4,757
Other income ................................... 754 1,457
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Income before income taxes ..................... 2,445 6,214
Provision for income taxes ..................... 954 2,392
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Net income ..................................... $ 1,491 $ 3,822
========== ==========
Net income per share ........................... $ 0.05 $ 0.12
Net income per share, assuming dilution ........ $ 0.04 $ 0.10
Weighted average common shares outstanding ..... 29,007 32,636
Weighted average common shares outstanding,
assuming dilution ............................ 33,344 36,547
</TABLE>
See accompanying notes.
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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
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Three Months Ended March 31,
----------------------------
1997 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 1,491 $ 3,822
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ........................................ 931 2,001
Amortization of deferred compensation ............... 185 198
Deferred income taxes ............................... (582) (3,979)
Tax benefit of stock options ........................ 703 4,281
Changes in operating assets and liabilities:
Accounts receivable, net .......................... 2,269 4,696
Income tax receivable/payable ..................... 291 2,284
Prepaid and other assets .......................... (117) 1,614
Accounts payable .................................. 592 2,181
Accrued liabilities ............................... 2,186 3,267
Deferred revenue .................................. 3,206 7,551
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Net cash provided by operating activities ....... 11,155 27,916
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment .................. (2,198) (2,216)
Purchases of short-term investments ................... (18,763) (74,249)
Proceeds from maturities of short-term investments .... 12,000 14,538
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Net cash used in investing activities ........... (8,961) (61,927)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options ........... 87 1,303
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Net cash provided by financing activities ....... 87 1,303
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Net increase (decrease) in cash and cash equivalents .... 2,281 (32,708)
Cash and cash equivalents at beginning of period ........ 36,078 125,853
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Cash and cash equivalents at end of period .............. $ 38,359 $ 93,145
========== ==========
</TABLE>
See accompanying notes.
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i2 TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of i2 Technologies, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (consisting only of normal recurring entries)
which, in the opinion of the Company's management, are necessary for a fair
presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission's rules
and regulations. These financial statements should be read in conjunction with
the audited financial statements and notes thereto for the year ended December
31, 1997, included in the Company's Annual Report on Form 10-K.
The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of results that may be expected for any other interim
period or for the full year.
Certain prior year financial statement items have been reclassified to
conform to the current year's format.
2. NET INCOME PER SHARE
The Company computes net income per share in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share." Net income per share is based upon the weighted average
number of common shares outstanding and excludes the effect of dilutive
potential common stock from the exercise of stock options. Net income per share,
assuming dilution, includes the effect of dilutive potential common stock from
the exercise of stock options using the treasury stock method. Reconciliations
of the net income per share and net income per share, assuming dilution,
computations for the three months ended March 31, 1997 and 1998 are as follows
(amounts in thousands, except per share amounts):
<TABLE>
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Three Months Ended March 31,
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1997 1998
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NET INCOME PER SHARE:
Weighted-average common shares outstanding ................. 29,007 32,636
========== ==========
Net income ................................................. $ 1,491 $ 3,822
========== ==========
Net income per share ....................................... $ 0.05 $ 0.12
========== ==========
NET INCOME PER SHARE, ASSUMING DILUTION:
Weighted-average common shares outstanding ................. 29,007 32,636
Common shares issuable on exercise of stock options,
net of shares assumed to be repurchased at the
average market price (1) ................................... 4,337 3,911
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Weighted-average common shares outstanding, assuming
dilution ................................................... 33,344 36,547
========== ==========
Net income ................................................. $ 1,491 $ 3,822
========== ==========
Net income per share, assuming dilution .................... $ 0.04 $ 0.10
========== ==========
</TABLE>
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(1) In computing these amounts, the funds used in applying the treasury stock
method include the compensation related to stock options which will be
charged to expense in the future and the tax effects of nonqualified stock
options.
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3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which requires that all items that are
recognized under accounting standards as components of comprehensive income be
reported in the financial statements. The provisions of SFAS No. 130 are
effective for the Company beginning in 1998. For the quarter ended March 31,
1998, the Company had no additional reportable items of comprehensive income.
Additionally, the Company anticipates that the adoption of SFAS No. 130 will not
have a material effect on the Company's financial statement presentation in the
future.
4. SUBSEQUENT EVENTS
INCREASE IN AUTHORIZED SHARES. On April 1, 1998, the Company's Board of
Directors approved an increase in the authorized number of shares of the
Company's common stock from 50,000,000 to 200,000,000 shares. The increase is
subject to stockholder approval at the Company's annual meeting to be held on
May 26, 1998.
STOCK SPLIT. On April 22, 1998, the Company's Board of Directors
approved a two-for-one split of the Company's common stock to be paid as a
100-percent stock dividend on June 2, 1998 to stockholders of record on May 26,
1998. The stock split is subject to stockholder approval of an increase in
authorized shares of the Company's common stock at the Company's annual meeting
to be held on May 26, 1998. Share and per share amounts included in this Form
10-Q have not been restated to reflect the stock split.
RECENT ACQUISITIONS. In April 1998, the Company acquired InterTrans
Logistics Solutions ("ITLS") of Markham, Ontario. ITLS provides software
designed to manage both the daily operations and the tactical and strategic
planning aspects of transportation and logistics activities across the supply
chain. Under the terms of the agreement, the Company will issue up to 1.66
million shares of its common stock for all of the outstanding capital stock and
all unexpired and unexercised options of ITLS. The Company will account for the
ITLS acquisition as a pooling of interests. The Company expects to incur
approximately $3 million in certain expenses related to this acquisition. These
costs include, amount other things, investment banking, legal and accounting
fees and expenses. These expenses will be recorded in the second quarter of
1998. The accompanying condensed consolidated financial statements have not been
restated to reflect the acquisition.
In May 1998, the Company acquired a configurator solutions software
vendor in exchange for approximately 38,000 shares of the Company's common stock
and $1.8 million in cash. This acquisition will be accounted for under the
purchase accounting method, and a substantial portion of the purchase price is
expected to be recorded as in-process research and development and expensed
during the second quarter of 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is the 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.
This report contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that involve risks and uncertainties, such as statements
concerning: growth and future operating results; 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. These forward-looking statements and other statements
made elsewhere in this report are made in reliance on the Private Securities
Litigation Reform Act of 1995. The section below entitled "Factors That May
Affect Future Results" sets forth and incorporates by reference certain factors
that could cause actual future results of the Company to differ materially from
these statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that selected items in the unaudited Condensed Consolidated
Statements of Income bear to total revenues. The period to period comparisons of
financial results are not necessarily indicative of future results.
<TABLE>
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Three Months Ended March 31,
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1997 1998
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Revenues:
Software licenses ............................. 63.1% 63.9%
Services ...................................... 26.2 24.9
Maintenance ................................... 10.7 11.2
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Total revenues ............................... 100.0 100.0
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Costs and expenses:
Cost of software licenses ..................... 3.6 4.4
Cost of services and maintenance .............. 22.8 20.8
Sales and marketing ........................... 38.1 34.5
Research and development ...................... 21.1 23.9
General and administrative .................... 9.7 9.2
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Total costs and expenses ..................... 95.3 92.8
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Operating income ............................... 4.7 7.2
Other income ................................... 2.1 2.2
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Income before income taxes ..................... 6.8 9.4
Provision for income taxes ..................... 2.6 3.6
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Net income ..................................... 4.2% 5.8%
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REVENUES
The Company's revenues consist of software license revenues, service
revenues and maintenance revenues. Software license revenues consist of sales of
software licenses which, for periods subsequent to December 31, 1997, are
recognized in accordance with the American Institute of Certified Public
Accountants' Statement of Position ("SOP") 97-2, "Software Revenue Recognition."
Under SOP 97-2, software license revenues are recognized upon execution of a
contract and delivery of software, provided that the license fee is fixed and
determinable, no significant production, modification or customization of the
software is required and collection is considered probable by management. For
periods prior to December 31, 1997, software license revenues were recognized in
accordance with SOP 91-1, "Software Revenue Recognition." Under SOP 91-1,
software license revenues were recognized upon execution of a contract and
shipment of the software, provided that no significant vendor obligations
remained outstanding, amounts were due within one year and collection was
considered probable by management. The application of SOP 97-2 did not have a
material impact on the Company's consolidated financial statements for the
quarter ended March 31, 1998. However, there can be no assurance that SOP 97-2
will not have a material impact on the Company's revenue recognition in the
future, which could be material to the Company's consolidated financial
statements. Service revenues are primarily derived from fees for implementation,
consulting and training services and are recognized as the services are
performed. Maintenance revenues are derived from customer support agreements
generally entered into in connection with initial license sales and subsequent
renewals. Maintenance revenues are recognized ratably over the term of the
maintenance period. Payments for maintenance fees are generally made in advance.
Total revenues increased 85.6% to $66.4 million in the quarter ended
March 31, 1998 from $35.8 million in the quarter ended March 31, 1997. The
Company currently derives substantially all of its revenues from RHYTHM licenses
and related services and maintenance. The Company expects that RHYTHM related
revenues will continue to account for substantially all of the Company's
revenues in the foreseeable future. As a result of the Company's dependence on
the continued market acceptance of RHYTHM and enhancements thereto, there can be
no assurance that total revenues will continue to increase at the rates
experienced in prior periods, if at all.
SOFTWARE LICENSES. Revenues from software licenses increased 87.9% to
$42.4 million in the quarter ended March 31, 1998 from $22.6 million in the
quarter ended March 31, 1997. Software license revenues constituted 63.9% and
63.1% of total revenues in the quarters ended March 31, 1998 and 1997,
respectively. The significant increase in the dollar amount of software license
revenues was primarily due to an increased awareness of the benefits of supply
chain management, growing market acceptance of the Company's software products
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.
SERVICES. Revenues from services increased 76.3% to $16.5 million in
the quarter ended March 31, 1998 from $9.4 million in the quarter ended March
31, 1997. Service revenues constituted 24.9% and 26.2% of total revenues in the
quarters ended March 31, 1998 and 1997, respectively. The significant increase
in the dollar amount of service revenues was primarily due to the significant
increase in the number of RHYTHM licenses sold and a significant investment in
the Company's consulting organization as a result of the increased demand for
the Company's products. 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. Revenues from maintenance increased 95.3% to $7.4 million
in the quarter ended March 31, 1998 from $3.8 million in the quarter ended March
31, 1997. Maintenance revenues constituted 11.2% and 10.7% of total revenues in
the quarters ended March 31, 1998 and 1997, respectively. The significant
increase in the dollar
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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 quarter ended March 31, 1998.
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 1997, one or more
customers each accounted for at least 15% of total software license revenues in
such quarter. However, in the first quarter of 1998, no one customer accounted
for more than 15% of total software license revenues. While the Company believes
that the loss of any of these particular customers would not have a material
adverse effect upon the Company's business, operating results or financial
condition, an inability to consummate one or more substantial license sales in
any future period could have a material adverse effect on the Company's
operating results for that period.
INTERNATIONAL REVENUES. The Company's international revenues, primarily
generated from customers located in Asia, Canada and Europe, were approximately
$15.2 million and $11.9 million in the quarters ended March 31, 1998 and 1997,
representing 23% and 33% of total revenues, respectively. 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. However, there can be no assurance
that international revenues will increase in the future.
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 $2.9 million and $1.3 million in the quarters ended March 31, 1998 and 1997,
representing 6.9% and 5.7% of software license revenues, respectively. The
increase in the dollar amount of cost of software licenses was primarily due to
an increase in commissions paid to third parties in connection with joint
marketing and other related agreements and an increase in royalty fees primarily
due to the sale of InterTrans Logistics Solutions ("ITLS") software products
included with the sales of RHYTHM. 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
and packaging and shipping costs related to new releases of software and updated
user documentation, none of which costs have been significant to date. Cost of
services and maintenance was $13.8 million and $8.2 million in the quarters
ended March 31, 1998 and 1997, representing 57.7% and 61.9% of total services
and maintenance revenues, respectively. The increase in the dollar amount of
cost of services and maintenance 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. The decrease in cost
of services and maintenance as a percentage of total services and maintenance
revenues was primarily due to the Company's ability to leverage its growing base
of consultants, product support and training staff to serve its growing customer
base. 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 $22.9 million and $13.6
million in the quarters ended March
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31, 1998 and 1997, representing 34.5% and 38.1% 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 and sales and marketing expenses as a percentage of total revenues will
increase from the level attained in the quarter ended March 31, 1998.
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
$15.9 million and $7.5 million in the quarters ended March 31, 1998 and 1997,
representing 23.9% and 21.1% 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,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers. To
date, the establishment of technological feasibility of the Company's products
and general release of such software have substantially coincided. As a result,
software development costs qualifying for capitalization have been
insignificant, and therefore, the Company has not capitalized any software
development costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses 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 $6.1 million and $3.5 million in the
quarters ended March 31, 1998 and 1997, representing 9.2% and 9.7% 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 these
periods. The Company expects that the dollar amount of general and
administrative expenses will continue to increase in the foreseeable future.
OTHER INCOME
Other income consists primarily of interest income on short-term
investments and overnight repurchase agreements. Other income was $1.5 million
and $754,000 in the quarters ended March 31, 1998 and 1997, representing 2.2%
and 2.1% 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
public offering of the Company's common stock which was completed in December
1997.
PROVISION FOR INCOME TAXES
The Company recorded income tax expense of $2.4 million and $954,000 in
the quarters ended March 31, 1998 and 1997, respectively. The Company's
effective income tax rate was 38.5% in the quarter ended March 31, 1998 as
compared to 39.0% in the quarter ended March 31, 1997.
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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. Cash flows from operations
were $27.9 million and $11.2 million for the quarters ended March 31, 1998 and
1997, respectively. Operating cash flows increased primarily due to (i)
increases in net income, accounts payable, accrued liabilities and the tax
benefit from stock option activity and (ii) a decrease 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, decreased
to $66.5 million at March 31, 1998 from $71.2 million at December 31, 1997, and
quarter-end days' sales outstanding decreased to 91 days at March 31, 1998 from
104 days at December 31, 1997. Such decreases were primarily due to the
collection of several large trade receivable balances outstanding at December
31, 1997. Accounts receivable and days' sales outstanding can fluctuate for a
variety of reasons including (i) the amount and timing of revenues earned, (ii)
the Company's collection experience, (iii) the amount of receivables generated
from international customers which generally have longer payment terms compared
to customers in the United States and (iv) the number of large sales for which
some amounts may not be due upon execution of the contract. The Company believes
that the allowance for doubtful accounts at March 31, 1998 is adequate to cover
any collection difficulties with respect to accounts receivable. However, a
significant portion of the Company's accounts receivable are derived from sales
of large licenses, often to new customers with which the Company does not have a
payment history. Accordingly, there can be no assurance that the allowance will
be adequate to cover any receivables which are later determined to be
uncollectible, particularly if one or more large receivables becomes
uncollectible.
Cash used in investing activities was $61.9 million for the quarter
ended March 31, 1998 as compared to $9.0 million for the quarter ended March 31,
1997. The increase in cash used in investing activities was primarily due to the
investment in financial instruments classified as short-term investments of a
significant portion of the proceeds from the public offering of the Company's
common stock which was completed in December 1997. Such funds were initially
invested primarily in financial instruments classified as cash equivalents
during the fourth quarter of 1997. At March 31, 1998, the Company did not have
any material commitments for capital expenditures.
Cash provided by financing activities was $1.3 million for the quarter
ended March 31, 1998 as compared to $87,000 for the quarter ended March 31,
1997. The increase in cash provided by financing activities represents an
increase in net proceeds received by the Company upon the exercise of stock
options by its employees.
As of March 31, 1998, the Company had $170.4 million of working
capital, as compared to $162.4 million as of December 31, 1997. The increase in
working capital was primarily related to an increase in cash, cash equivalents
and short-term investments to $167.4 million at March 31, 1998 from $140.4
million at December 31, 1997. The increase in cash, cash equivalents and
short-term investments was primarily due to the collection of several large
trade receivable balances outstanding at December 31, 1997.
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. In April 1998, the
Company acquired InterTrans Logistics Solutions ("ITLS") of Markham, Ontario.
ITLS provides software designed to manage both the daily operations and the
tactical and strategic planning aspects of transportation and logistics
activities across the supply chain. Under the terms of the agreement, the
Company will issue up to 1.66 million shares of its common stock for all of the
outstanding capital stock and all unexpired and unexercised options of ITLS. The
Company expects to incur approximately $3 million in certain expenses related to
this acquisition. The Company will account for the ITLS acquisition as a pooling
of interests. In May 1998, the Company acquired a configurator solutions
software vendor in exchange for approximately 38,000 shares of the Company's
common stock and $1.8 million in cash. This acquisition will be accounted for
under the purchase accounting method, and a substantial portion of the purchase
price is expected to be recorded as in-process research and development and
expensed during the second quarter of 1998. Any material acquisition or joint
12
<PAGE> 13
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 March 31, 1998, the Company had no
borrowings outstanding under the revolving credit agreement.
The Company is currently evaluating what actions, if any, will be
necessary to make its internal systems Year 2000 compliant. Although any
expenses associated with these actions cannot presently be determined, the
Company does not currently expect such expenses to materially adversely affect
its financial position or results of operations.
The Company believes that existing cash and cash equivalent balances,
short-term investment balances, available borrowings under the revolving credit
agreement and potential cash flow from operations will satisfy the Company's
working capital and capital expenditure requirements for at least the next 12
months. However, any material acquisitions of complementary businesses, products
or technologies could require the Company to obtain additional equity or debt
financing. There can be no assurance that such financing will be available on
acceptable terms, if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Numerous factors may affect the Company's business and results of
operations. These factors include, but are not limited to, the potential for
significant fluctuations in quarterly results; dependence on significant
individual sales; competition; management of growth; product concentration;
dependence on product line expansion; integration of recent acquisitions;
potential future acquisitions; international operations and currency
fluctuations; risks associated with strategic relationships; dependence upon key
personnel; intellectual property and proprietary rights; use of licensed
technology; complexity of software products; rapid technological change and new
products; dependence on technical and implementation personnel; year 2000
compliance issues; product liability claims; and volatility of stock price. The
discussion below addresses some of these factors. For a more thorough discussion
of these and other factors that may affect the Company's future results, see the
"Item 1 - Business" of the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
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. Additional 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 1997,
one or more customers each accounted for at least 15% of total software license
revenues in such quarter. However, in the first quarter of 1998, no one customer
accounted for more than 15% of total software license revenues. 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
13
<PAGE> 14
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 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 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 and Baan Company N.V.,
each of which currently offers sophisticated ERP solutions that currently or may
in the future incorporate supply chain management modules or advanced planning
and scheduling software; (ii) other suppliers of supply chain software including
Manugistics Group, Inc. and Logility, 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, in 1997, the Company and SAP
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.
14
<PAGE> 15
INTEGRATION OF RECENT ACQUISITIONS; POTENTIAL FUTURE ACQUISITIONS
In April 1998, the Company acquired InterTrans Logistics Solutions
("ITLS") of Markham, Ontario and in May 1998, the Company acquired a
configurator solutions software vendor. The success of acquisitions depends
primarily on the Company's ability to (i) retain, motivate and integrate the
acquired personnel with the Company's operations, (ii) integrate multiple
information systems and (iii) 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 and the
recently acquired companies, or that the benefits expected from such
integration will be realized. Failure to successfully integrate the recently
acquired companies' 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. 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 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. In particular,
countries in the Asia Pacific region have recently experienced weaknesses in
their currency, banking and equity markets. In the future, these weaknesses
could adversely affect the demand for the Company's products, the U.S. dollar
value of the Company's foreign currency denominated sales and ultimately the
Company's results of operations. 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.
15
<PAGE> 16
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 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.
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 two 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. Based
on the Company's assessment, the Company believes that its current versions of
its software products are Year 2000 compliant. However, the Company believes
some customers are running earlier versions of the software products developed
by acquired companies that are not Year 2000 compliant, and the Company has been
encouraging such customers to migrate to current product versions. Moreover, the
Company's products are generally integrated into enterprise systems involving
complicated software products developed by other vendors. Year 2000 problems
inherent in a customer's transactional software programs might significantly
limit that customer's ability to realize the intended benefits offered by
RHYTHM. The Company may in the future be subject to claims based on Year 2000
problems in others' products, custom scripts created by third parties to
interface with the Company's products or issues arising from the integration of
multiple products within an overall system. Although the Company has not been a
party to any litigation or arbitration proceeding to date involving its products
or services and related to Year 2000 compliance issues, there can be no
assurance that the Company will not in the future be required to defend its
products or services in such proceedings, or to negotiate resolutions of claims
based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, and any liability of the Company for Year 2000-related
damages, including consequential damages, could have a material adverse effect
on the Company's business, operating results and financial condition.
The Company believes that 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
16
<PAGE> 17
current hardware and 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. Any of the foregoing could result in a
material adverse effect on the Company's business, operating results and
financial condition.
The Company utilizes third-party vendor equipment, telecommunication
products and software products which may or may not be Year 2000 compliant.
Although the Company is currently taking steps to address the impact, if any, of
the Year 2000 compliance issue surrounding such third-party products, failure of
any critical technology components to be Year 2000 compliant may have an adverse
impact on business operations or require the Company to incur unanticipated
expenses to remedy any problems.
17
<PAGE> 18
i2 TECHNOLOGIES, INC.
PART II
All capitalized terms used and not defined in Part II of this Form 10-Q
shall have the meanings assigned to them in Part I of this Form 10-Q.
ITEM 2. CHANGES IN SECURITIES.
From January 1 through March 31, 1998, the Company issued an aggregate
255,145 shares of its common stock to employees pursuant to exercises of stock
options (with exercise prices ranging from $0.0175 to $12.11 per share) under
the Company's 1992 Stock Plan and 1995 Stock Option/Stock Issuance Plan which
were deemed exempt from registration under Section 5 of the Securities Act of
1933 in reliance upon Rule 701 thereunder. In addition, the recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to, or for sale in connection
with, any distribution thereof and appropriate legends were affixed to the share
certificates issued in each such transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Index
-------------
Number Exhibit Description
------ ----------------------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
During the quarter ended March 31, 1998, the Company filed the
following Current Report on Form 8-K:
The Company filed a Form 8-K dated March 24, 1998
(Item 5) reporting the execution of a definitive
agreement to acquire InterTrans Logistics Solutions of
Markham, Ontario.
After March 31, 1998, the Company filed the following Current
Report on Form 8-K:
The Company filed a Form 8-K dated May 5, 1998 (Item 5)
reporting the completion of the acquisition of InterTrans
Logistics Solutions of Markham, Ontario.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
i2 TECHNOLOGIES, INC.
---------------------
May 8, 1998 /s/ Sanjiv S. Sidhu
----------- -------------------
(Date) Sanjiv S. Sidhu
Chairman of the Board and Chief Executive Officer
(Principal executive officer)
May 8, 1998 /s/ David F. Cary
----------- -----------------
(Date) David F. Cary
Vice President and Chief Financial Officer
(Principal finance and accounting officer)
19
<PAGE> 20
Index to Exhibits
Number Exhibit Description
- ------ -------------------
27.1 Financial Data Schedule
20
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 93,145
<SECURITIES> 74,249
<RECEIVABLES> 70,987
<ALLOWANCES> (4,474)
<INVENTORY> 0
<CURRENT-ASSETS> 241,926
<PP&E> 30,039
<DEPRECIATION> (11,232)
<TOTAL-ASSETS> 262,094
<CURRENT-LIABILITIES> 71,544
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0
0
<COMMON> 8
<OTHER-SE> 190,013
<TOTAL-LIABILITY-AND-EQUITY> 262,094
<SALES> 42,429
<TOTAL-REVENUES> 66,389
<CGS> 2,908
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<OTHER-EXPENSES> (1,457)
<LOSS-PROVISION> 1,013
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<INCOME-PRETAX> 6,214
<INCOME-TAX> 2,392
<INCOME-CONTINUING> 3,822
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<EXTRAORDINARY> 0
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