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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 June 30, 1999
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 the past 90 days.
Yes X No
--- ---
As of August 13, 1999, the Registrant had outstanding 75,937,392 shares of
Common Stock, $.00025 par value.
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i2 TECHNOLOGIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1998 and
June 30, 1999 3
Condensed Consolidated Statements of Income for the Three and
Six Months Ended June 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II OTHER INFORMATION
Item 2. Changes in Securities 20
Item 4. Submission of Matters to a Vote of Security Holders. 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
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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, June 30,
1998 1999
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 61,491 $103,874
Short-term investments ........................................... 93,387 85,287
Accounts receivable, net ......................................... 126,033 137,663
Prepaid and other current assets ................................. 9,164 11,382
Income tax receivable ............................................ -- 2,466
Deferred income taxes ............................................ 5,070 7,549
-------- --------
Total current assets ........................................ 295,145 348,221
Furniture and equipment, net ........................................... 29,116 32,049
Deferred income taxes and other assets ................................. 14,963 21,646
-------- --------
Total assets ................................................ $339,224 $401,916
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 10,814 $ 14,319
Accrued liabilities .............................................. 43,311 53,776
Deferred revenue ................................................. 47,463 59,555
Income taxes payable ............................................. 2,213 --
-------- --------
Total current liabilities ................................... 103,801 127,650
Deferred income taxes .................................................. 448 308
-------- --------
Total liabilities ........................................... 104,249 127,958
-------- --------
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000,000 shares authorized,
none issued ................................................. -- --
Common Stock, $0.00025 par value, 200,000,000 shares
authorized, 71,471,762 and 73,854,415 shares issued
and outstanding, respectively ............................... 18 18
Additional paid-in capital ....................................... 197,958 224,664
Retained earnings ................................................ 36,999 49,276
-------- --------
Total stockholders' equity .................................. 234,975 273,958
-------- --------
Total liabilities and stockholders' equity .................. $339,224 $401,916
======== ========
</TABLE>
See accompanying notes.
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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
1998 1999 1998 1999
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software licenses ........................ $52,686 $ 79,243 $ 97,631 $153,239
Services ................................. 21,491 36,311 40,252 65,095
Maintenance .............................. 9,394 15,851 17,136 30,287
------- -------- -------- --------
Total revenues ....................... 83,571 131,405 155,019 248,621
------- -------- -------- --------
Costs and expenses:
Cost of software licenses ................ 2,002 3,429 4,148 6,588
Cost of services and maintenance ......... 16,719 30,995 31,981 59,958
Sales and marketing ...................... 28,452 42,893 53,269 83,592
Research and development ................. 19,290 29,434 37,651 57,462
General and administrative ............... 7,592 12,058 14,266 23,160
Acquisition-related expenses ............. 6,484 274 6,484 577
------- -------- -------- --------
Total costs and expenses ............. 80,539 119,083 147,799 231,337
------- -------- -------- --------
Operating income .............................. 3,032 12,322 7,220 17,284
Other income, net ............................. 1,947 1,606 3,389 2,924
------- -------- -------- --------
Income before income taxes .................... 4,979 13,928 10,609 20,208
Provision for income taxes .................... 4,413 5,397 6,580 7,931
------- -------- -------- --------
Net income .................................... $ 566 $ 8,531 $ 4,029 $ 12,277
======= ======== ======== ========
Net income per share .......................... $ 0.01 $ 0.12 $ 0.06 $ 0.17
Net income per share, assuming dilution ....... $ 0.01 $ 0.11 $ 0.05 $ 0.16
Weighted average common shares outstanding .... 69,484 73,147 69,024 72,523
Weighted average common shares outstanding,
assuming dilution ........................ 76,534 79,628 76,484 79,194
</TABLE>
See accompanying notes.
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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................... $ 4,029 $ 12,277
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-off of in-process research and development ......... 3,819 --
Depreciation and amortization ............................ 6,260 7,138
Provision for doubtful accounts .......................... 1,736 3,626
Deferred income taxes .................................... (8,822) (8,639)
Tax benefit of stock options ............................. 10,069 16,625
Changes in operating assets and liabilities:
Accounts receivable, net ............................. (6,559) (15,256)
Income tax receivable/payable ........................ 2,301 (4,679)
Prepaid and other assets ............................. (764) (4,176)
Accounts payable ..................................... 625 3,505
Accrued liabilities .................................. 9,157 10,465
Deferred revenue ..................................... 10,717 12,092
--------- ---------
Net cash provided by operating activities ....... 32,568 32,978
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition, net of acquired cash .................... (1,822) --
Purchases of furniture and equipment .......................... (7,728) (8,776)
Net sales (purchases) of short-term investments ............... (22,485) 8,100
--------- ---------
Net cash used in investing activities ........... (32,035) (676)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on revolving line of credit ...................... (657) --
Proceeds from sales of common stock and exercise of
stock options ............................................ 5,290 10,081
--------- ---------
Net cash provided by financing activities ....... 4,633 10,081
--------- ---------
Net increase in cash and cash equivalents ........................... 5,166 42,383
Cash and cash equivalents at beginning of period .................... 127,433 61,491
--------- ---------
Cash and cash equivalents at end of period .......................... $ 132,599 $ 103,874
========= =========
</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 our wholly-owned subsidiaries. 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 our 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 related notes for the three-year period ended
December 31, 1998, included in our Annual Report on Form 10-K.
The results of operations for the three and six months ended June 30,
1999 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
We compute earnings 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.
We exclude potentially dilutive securities from our net income per
share, assuming dilution computation when the exercise price of the securities
exceeds the average fair value of our common stock. For the three and six months
ended June 30, 1999, we excluded 1,790,952 and 1,812,952 employee stock options,
respectively, from the net income per share computation. For the three and six
months ended June 30, 1998, we excluded 234,800 and 1,684,030 employee stock
options, respectively, from the earnings per share computation.
Reconciliations of net income per share and net income per share,
assuming dilution computations for the three and six months ended June 30, 1998
and 1999 are as follows (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding ............. 69,484 73,147 69,024 72,523
Common shares issuable upon exercise of stock
options, net of shares assumed to be
repurchased ......................................... 7,050 6,481 7,460 6,671
------- ------- ------- -------
Weighted average common shares outstanding, assuming
dilution ............................................ 76,534 79,628 76,484 79,194
======= ======= ======= =======
Net income ............................................. $ 566 $ 8,531 $ 4,029 $12,277
======= ======= ======= =======
Net income per share ................................... $ 0.01 $ 0.12 $ 0.06 $ 0.17
======= ======= ======= =======
Net income per share, assuming dilution ................ $ 0.01 $ 0.11 $ 0.05 $ 0.16
======= ======= ======= =======
</TABLE>
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3. BUSINESS COMBINATIONS
In April 1998, we completed the acquisition of ITLS. Under the terms of
the agreement, we have agreed to issue approximately 3.3 million shares of our
common stock for all of the outstanding capital stock and all unexpired and
unexercised options of ITLS. The ITLS acquisition was accounted for as a pooling
of interests, and accordingly, the accompanying condensed consolidated financial
statements give retroactive effect to the combination and include the combined
operations of the Company and ITLS for all periods presented.
In connection with the ITLS acquisition, we incurred expenses which
included, among other things, investment banking, legal and accounting fees and
expenses. Also in the second quarter of 1998, we completed an acquisition,
accounted for using the purchase method, for a total purchase price of $5.0
million, which included approximately 77,000 shares of our common stock, cash
and acquisition costs. A substantial portion of the purchase price represented
the value of in-process research and development and was expensed in the second
quarter of 1998. For the three and six months ended June 30, 1998, the total of
all acquisition-related expenses resulted in a one-time charge to our operating
results of $6.5 million, or $0.08 per share, assuming dilution.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, (SFAS No. 133), "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133 establishes new standards of accounting and
reporting for derivative instruments and hedging activities. SFAS 133 requires
that all derivatives be recognized at fair value in the balance sheet, and that
the corresponding gains or losses be reported either in the statement of
operations or as a component of comprehensive income, depending on the type of
hedging relationship that exists. SFAS 133 will be effective for fiscal years
beginning after June 15, 2000.
In December 1998, the Accounting Standards Executive Committee,
released Statement of Position 98-9 ("SOP 98-9"), "Software Revenue
Recognition with Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to
require that an entity recognize revenue by means of the "residual method" when
(1) there is vendor-specific objective evidence (VSOE) of the fair values of all
undelivered elements in a multiple-element arrangement that is not accounted for
using long-term contract accounting, (2) VSOE of fair value does not exist for
one or more of the delivered elements in the arrangement, and (3) all revenue
recognition criteria in SOP 97-2 other than the requirement for VSOE of the fair
value of each delivered element of the arrangement are satisfied. Under the
residual method, the arrangement fee is recognized as follows: (1) the total
fair value of the undelivered elements, as indicated by VSOE, is deferred and
subsequently recognized in accordance with the relevant sections of SOP 97-2 and
(2) the difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized as revenue related to the delivered
elements. The provisions of SOP 98-9 that extend the deferral of certain
paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions that are
entered into in fiscal years beginning after March 15, 1999 and prohibits any
retroactive application. We believe that SOP 98-9 will have no material effect
on our results of operations.
5. SEGMENT AND GEOGRAPHIC INFORMATION
We are principally engaged in the design, development, marketing and
support of our RHYTHM family of products and intelligent eBusiness offerings.
Substantially all revenues result from the licensing of our software products
and related services and maintenance. Our chief operating decision maker reviews
financial information presented on a consolidated basis, accompanied by
disaggregated information about revenues by geographic region for purposes of
making operating decisions and assessing financial performance. Accordingly, we
consider ourselves to be in a single industry segment, specifically the license,
implementation and support of our software applications.
6. SUBSEQUENT EVENT
On July 15, 1999, we completed the acquisition of Sales Marketing
Administration Research Tracking Technologies, Inc. ("SMART") of Austin, Texas.
SMART develops software applications that help companies use
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the world wide web to build and extend relationships with customers, partners
and suppliers. Under the terms of the agreement, we will issue up to 2.1 million
shares of our common stock for all of the capital stock and outstanding options
of SMART. We will account for the SMART acquisition as a pooling of interests.
We expect to incur approximately $2.0 million in certain expenses related to
this acquisition. These costs include, among other things, investment banking,
legal and accounting fees and expenses. These expenses will be recognized in the
third quarter of 1999. The accompanying condensed consolidated financial
statements have not been restated to reflect the acquisition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 our 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. Such
forward-looking statements are generally accompanied by words such as "plan,"
"estimate," "expect," "believe," "should," "would," "could," "anticipate," "may"
or other words that convey uncertainty of future events or outcomes. 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 our actual future
results to differ materially from these statements.
OVERVIEW
We are a leading provider of advanced software solutions for supply
chain optimization and intelligent e-business. Our RHYTHM family of products and
service offerings are designed to help companies optimize business processes
both internally and among trading partners. Optimization is delivered in the
form of operating efficiencies, enhanced return on assets and potentially
increased sales. Intelligent eBusiness leverages these solutions with the
advantages of the Internet to enhance collaboration within and among enterprises
and their customers. We are the leading provider of global supply chain
optimization solutions within our RHYTHM family of products, which model complex
supply chains and rapidly generate integrated solutions for planning and
scheduling problems. Our solutions for intelligent eBusiness will also include
solutions for optimal product lifecycle management, customer relationship
management, inter-process planning and strategic planning. Our collaborative
communities of trading partners encourage real-time interactions among partners,
customers and internal organizations to achieve high customer satisfaction,
improved profitability and sustainable growth for all members of the community.
We also provide related exchange services for dynamic, real-time integration
among trading partners, as well as other consulting, training and maintenance
services.
Our products enable businesses to optimize their business processes,
and those of their trading partners, to realize increases in revenue, reductions
in expenses and reductions in asset investments by improving the efficiency and
effectiveness of determining when, where, what and how much to buy, make, move,
store and sell. Independent industry analysts estimate that the market for
supply chain management solutions may grow from $2.6 billion in 1998 to $18.6
billion in 2003. As the Internet becomes an increasingly significant global
medium for business-to-business and business-to-consumer online commercial
activities, existing and new businesses in a wide variety of vertical markets
are seeking to capitalize on this growth. Our software solutions enable our
customers to benefit from the growth of the Internet by supporting new
Internet/online customer-facing applications that integrate with our intelligent
back-end software and enabling re-engineering of global supply chains to
facilitate and fulfill electronic commerce transactions. Independent industry
analysts estimate that the worldwide market for goods and services transacted
through means of electronic commerce may grow from $80 billion in 1998 to $3.2
trillion in 2003.
In April 1998, we completed the acquisition of 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 acquisition agreement, we agreed to issue approximately 3.3 million
shares of our common stock for all of the outstanding capital stock and all
unexpired and unexercised options of ITLS, the majority of which was issued in
the second quarter of 1998. The ITLS acquisition was accounted for as a pooling
of interests, and accordingly, the Condensed Consolidated Financial Statements
included elsewhere herein give retroactive effect to the acquisition and include
the combined operations of i2 and ITLS for all periods presented. The following
discussion and analysis should be read in conjunction with such Condensed
Consolidated Financial Statements. Also in the second quarter of 1998, we
completed an acquisition, accounted for using the purchase method, for a
purchase price of $5.0 million, of which a substantial portion of the purchase
price was recorded as in-process research and development and expensed in the
second quarter of 1998 along with other acquisition-related expenses in
connection with the ITLS acquisition.
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On July 15, 1999, we completed the acquisition of Sales Marketing
Administration Research Tracking Technologies, Inc. ("SMART") of Austin, Texas,
which develops software applications that help companies use the world wide web
to build and extend relationships with customers, partners and suppliers. Under
the terms of the agreement, we will issue up to 2.1 million shares of our common
stock for all of the capital stock and outstanding options of SMART. We will
account for the SMART acquisition as a pooling of interests. We expect to incur
approximately $2.0 million in certain expenses related to this acquisition.
These costs include, among other things, investment banking, legal and
accounting fees and expenses. These expenses will be recognized in the third
quarter of 1999.
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>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software licenses ................. 63.1% 60.3% 63.0% 61.6%
Services .......................... 25.7 27.6 26.0 26.2
Maintenance ....................... 11.2 12.1 11.0 12.2
-------- -------- -------- --------
Total revenues ................. 100.0 100.0 100.0 100.0
-------- -------- -------- --------
Costs and expenses:
Cost of software licenses ......... 2.4 2.6 2.7 2.7
Cost of services and maintenance .. 20.0 23.6 20.6 24.1
Sales and marketing ............... 34.0 32.6 34.3 33.6
Research and development .......... 23.1 22.4 24.3 23.1
General and administrative ........ 9.1 9.2 9.2 9.3
Acquisition-related expenses ...... 7.8 0.2 4.2 0.2
-------- -------- -------- --------
Total costs and expenses ....... 96.4 90.6 95.3 93.0
-------- -------- -------- --------
Operating income ...................... 3.6 9.4 4.7 7.0
Other income, net ..................... 2.3 1.2 2.2 1.2
-------- -------- -------- --------
Income before income taxes ............ 6.0 10.6 6.8 8.1
Provision for income taxes ............ 5.3 4.1 4.2 3.2
-------- -------- -------- --------
Net income ............................ 0.7% 6.5% 2.6% 4.9%
======== ======== ======== ========
</TABLE>
REVENUES
Our revenues consist of software license revenues, service revenues and
maintenance revenues. Software license revenues consist of sales of software
licenses which are recognized in accordance with the American Institute of
Certified Public Accountants' Statement of Position 97-2 ("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. As of January 1, 1999, software license revenues are recognized
in accordance with SOP 97-2, as modified by SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions." 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
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revenues are recognized ratably over the term of the maintenance period.
Payments for maintenance fees are generally made in advance.
Total revenues increased 57% to $131.4 million in the quarter ended
June 30, 1999 from $83.6 million in the quarter ended June 30, 1998. In the
first six months of 1999, total revenues increased 60% to $248.6 million from
$155.0 million in the first six months of 1998. We currently derive
substantially all of our revenues from licenses associated with our RHYTHM
solutions as well as related services and maintenance. We expect that revenues
from the expanded family of RHYTHM solutions will continue to account for
substantially all of our revenues in the foreseeable future. As a result of our
dependence on the continued market acceptance of our RHYTHM solutions, 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 50% to
$79.2 million in the quarter ended June 30, 1999 from $52.7 million in the
quarter ended June 30, 1998. In the first six months of 1999, revenues from
software licenses increased 57% to $153.2 million from $97.6 million in the
first six months of 1998. The increases in software license revenues were
primarily due to an increased customer awareness of the benefits derived from
deploying our software solutions and continued strength in key targeted vertical
markets. To date, sales of software licenses have been derived principally from
direct sales to customers. Although we believe that direct sales will continue
to account for a majority of software license revenues, our strategy is to
continue to increase the level of indirect sales activities. We expect that
sales of our software products through sales alliances, distributors, resellers
and other indirect channels will continue to increase as a percentage of
software license revenues. However, there can be no assurance that our efforts
to expand indirect sales will be successful. There can also be no assurance that
these relationships will continue in the future.
SERVICES. Revenues from services increased 69% to $36.3 million in the
quarter ended June 30, 1999 from $21.5 million in the quarter ended June 30,
1998. In the first six months of 1999, revenues from services increased 62% to
$65.1 million from $40.3 million in the first six months of 1998. The increases
in service revenues were primarily due to the increase in the number of RHYTHM
licenses sold and resulting consulting and implementation services. The
increases were also due to an increase in the use of third-party consultants to
provide implementation services to our customers which has allowed us 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 69% to $15.9 million
in the quarter ended June 30, 1999 from $9.4 million in the quarter ended June
30, 1998. In the first six months of 1998, revenues from maintenance increased
77% to $30.3 million from $17.1 million in the first six months of 1998. The
increases in the dollar amount of maintenance revenues were primarily due to the
continued increase in the number of RHYTHM licenses sold and a high percentage
of maintenance agreement renewals. We expect that maintenance revenues in dollar
amount will continue to increase.
CONCENTRATION OF REVENUES. We generally derive a significant portion of
our software license revenues in each quarter from a small number of relatively
large sales. For example, in the first and second quarters of 1999 and the
second, third and fourth quarters of 1998, one or more customers each accounted
for at least 15% of total software license revenues. In recent periods, these
large transactions have tended to be follow-on licenses with existing customers.
While we believe that the loss of any one of these customers would not seriously
harm our business, operating results or financial condition, an inability to
consummate one or more substantial license sales in any future period could
seriously harm our operating results for that period.
INTERNATIONAL REVENUES. Our international revenues, primarily generated
from customers located in Europe, Asia and Canada, in the three and six months
ended June 30, 1999, were approximately 28% and 31% of total revenues,
respectively, compared to approximately 17% and 19% of total revenues in the
three and six months ended June 30, 1998. The increases in international
revenues were due in part to the growing deployment of our products at existing
customers' international sites. We believe that continued growth and
profitability will require further expansion in international markets. In order
to successfully increase the level of international sales, we have utilized and
will continue to utilize substantial resources to expand existing international
operations and establish additional international operations.
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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 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
$3.4 million and $2.0 million in the quarters ended June 30, 1999 and 1998,
representing 4.3% and 3.8% of software license revenues, respectively. Cost of
software licenses was $6.6 million and $4.1 million in the first six months of
1999 and 1998, representing 4.3% and 4.2% of software license revenues,
respectively. The increases in the dollar amount of the cost of software
licenses were primarily due to increases in the amount of royalty fees
associated with third-party software included with sales of RHYTHM and increases
in commissions paid to third parties in connection with joint marketing and
other related agreements.
COST OF SERVICES AND MAINTENANCE. Cost of services and maintenance
consists primarily of costs associated with implementation, consulting and
training services. Cost of services and maintenance also includes the cost of
providing software maintenance to customers such as telephone support and
packaging and shipping costs related to new releases of software and updated
user documentation. Cost of services and maintenance was $31.0 million and $16.7
million in the quarters ended June 30, 1999 and 1998, representing 59.4% and
54.1% of total services and maintenance revenues, respectively. These same
expenses were $60.0 million and $32.0 million in the first six months of 1999
and 1998, representing 62.9% and 55.7% of total services and maintenance
revenue, respectively. The increases in cost of services and maintenance were
primarily due to increases in the number of consultants, product support and
training staff and the increased use of third-party consultants to provide
implementation services. We expect to continue to increase the number of our
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 our license sales do not increase at anticipated rates, the hiring of
additional personnel could seriously harm our 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 $42.9 million and $28.5
million in the quarters ended June 30, 1999 and 1998, representing 32.6% and
34.0% of total revenues, respectively. These same expenses were $83.6 million
and $53.3 million in the first six months of 1999 and 1998, representing 33.6%
and 34.4% of total revenues, respectively. The increases in the dollar amount of
sales and marketing expenses were primarily due to continued expansion of our
direct sales force, increased sales commissions as a result of higher revenues,
continued investment in strengthening our international selling presence, and
increased marketing and promotional activities as a result of our expanded suite
of products. We believe that the dollar amount of sales and marketing expenses
will continue to increase and sales and marketing expenses as a percentage of
total revenues may also increase from the levels experienced in the three and
six month periods ended June 30, 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses were $29.4
million and $19.3 million in the quarters ended June 30, 1999 and 1998,
representing 22.4% and 23.1% of total revenues, respectively. These same
expenses were $57.5 million and $37.7 million in the first six months of 1999
and 1998, representing 23.1% and 24.3% of total revenues, respectively. The
increases in the dollar amount of research and development expenses were
primarily due to the hiring of additional research and development personnel and
other related costs incurred to support our growing strategic product footprint.
We expect that the dollar amount of research and development expenses will
continue to increase as we continue to invest in developing new products,
applications and product enhancements for existing and 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 our products and general
release of such software have substantially coincided. As a result, software
development costs qualifying for capitalization have been insignificant, and
therefore, we have not capitalized any software development costs.
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<PAGE> 13
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
the personnel and other costs of our finance, human resources, information
systems, administrative and executive departments and the fees and expenses
associated with legal, accounting and other requirements. General and
administrative expenses were $12.1 million and $7.6 million in the quarters
ended June 30, 1999 and 1998, representing 9.2% and 9.1% of total revenues,
respectively. These same expenses were $23.2 million and $14.3 million in the
first six months of 1999 and 1998, representing 9.3% and 9.2% of total revenues,
respectively. The increases were primarily the result of increased staffing and
related costs associated with the growth of our business. We expect that the
dollar amount of general and administrative expenses will continue to increase
in the foreseeable future.
OTHER INCOME, NET
Other income, net consists primarily of interest income on short-term
investments and overnight repurchase agreements partially offset by interest
expense. Other income, net was $1.6 million and $1.9 million in the quarters
ended June 30, 1999 and 1998, representing 1.2% and 2.3% of total revenues,
respectively. Other income, net was $2.9 million and $3.4 million in the first
six months of 1999 and 1998, representing 1.2% and 2.2% of total revenues,
respectively. The decreases in other income, net were primarily due to decreased
returns on our cash, cash equivalents and short-term investment balances due to
the overall lower interest rate environment in 1999 as compared to the same
period in 1998.
PROVISION FOR INCOME TAXES
Our effective tax rates for the three and six month periods ended June
30, 1999 were 38.7% and 39.2%, respectively, compared to 88.6% and 62.0%,
respectively, for the three and six months ended June 30, 1998. The effective
tax rates for the three and six months ended June 30, 1999 and 1998 varied from
the U.S. statutory rate due primarily to the non-deductibility of certain
acquisition-related expenses.
NET INCOME PER SHARE
Our net income per share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". This method
requires calculation of both net income per share and net income per share,
assuming dilution. Net income per share excludes the dilutive effect of common
stock equivalents such as stock options, while net income per share, assuming
dilution includes such dilutive effects. Future weighted-average shares
outstanding calculations will be impacted by the following factors: (i) the
ongoing issuance of common stock associated with stock option exercises; (ii)
the issuance of common shares associated with our employee stock purchase
program; (iii) any fluctuations in our stock price, which could cause changes in
the number of common stock equivalents included in the earnings per share,
assuming dilution computation; and (iv) the issuance of common stock to effect
business combinations should we enter into such transactions.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have primarily financed our operations and met our
capital expenditure requirements through cash flows from operations, long-term
borrowings and sales of equity securities. Working capital at June 30, 1999 was
$220.6 million as compared to $191.3 million as of December 31, 1998. The
increase in working capital was primarily related to an increase in cash, cash
equivalents and short-term investments to $189.2 million at June 30, 1999 from
$154.9 million at December 31, 1998. Cash flows from operations were $33.0
million and $32.6 million for the six months ended June 30, 1999 and 1998,
respectively. Operating cash flows resulting from increases in net income and
the tax benefit from stock option activity were offset somewhat by increases in
accounts receivable. The tax benefit from stock option exercises is primarily
the result of disqualifying dispositions of stock acquired under our stock
plans.
Accounts receivable, net of allowance for doubtful accounts, increased
to $137.7 million at June 30, 1999 from $126.0 million at December 31, 1998.
Quarter-end days' sales outstanding decreased to 95 days at June 30, 1999 from
102 days at December 31, 1998. Accounts receivable and days' sales outstanding
can fluctuate for a variety of reasons including: (i) the amount and timing of
revenues earned; (ii) our collection experience; (iii) the amount of receivables
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<PAGE> 14
generated from international customers which generally have longer payment terms
compared to customers in the U.S. and (iv) the number of large sales for which
some amounts may not be due upon execution of the contract. We believe that the
allowance for doubtful accounts at June 30, 1999 is adequate to cover any
collection difficulties with respect to accounts receivable. However, a
significant portion of our accounts receivable are derived from sales of large
licenses, often to new customers with whom we do 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 $0.7 million for the six months
ended June 30, 1999 as compared to $32.0 million for the six months ended June
30, 1998. Cash used in investing activities was unusually large in the first six
months of 1998 due to the investment of the December 1997 equity offering
proceeds. At June 30, 1999, we did not have any material commitments for capital
expenditures.
Cash provided by financing activities was $10.1 million for the six
months ended June 30, 1999 as compared to $4.6 million for the six months ended
June 30, 1998. The increase in cash provided by financing activities was due
primarily to an increase in the net proceeds received upon the exercise of stock
options by employees, as well as increased proceeds from our employee stock
purchase plans.
We may in the future pursue additional acquisitions of businesses,
products and technologies, or enter into joint venture arrangements, that could
complement or expand our business. Any material acquisition or joint venture
could result in a decrease to our working capital depending on the amount,
timing and nature of the consideration to be paid.
In 1998, we entered into a $15.0 million revolving credit agreement.
The revolving credit agreement is not subject to a borrowing base limitation and
borrowings under the agreement bear interest at various customary market rates.
The maximum borrowings available under the facility are reduced by the value of
outstanding letters of credit issued by the lender on our behalf, $12.0 million
of which were outstanding at June 30, 1999. This facility contains customary
restrictive covenants, including covenants requiring us to maintain certain
financial ratios. At June 30, 1999, there were no borrowings outstanding under
this agreement.
We believe that existing cash and cash equivalent balances, short-term
investment balances, available borrowings under revolving credit arrangements
and potential cash flow from operations will satisfy our working capital and
capital expenditure requirements for at least the next twelve months. However,
any material acquisitions of complementary businesses, products or technologies
or joint venture arrangements could require us to obtain additional equity or
debt financing. There can be no assurance that such financing will be available
on acceptable terms, if at all.
YEAR 2000 ISSUES
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, 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 our assessment,
we believe that current versions of our software products, including software
licensed from third parties, are Year 2000 compliant. However, we believe some
customers are running earlier versions of the software products developed by
acquired companies that are not Year 2000 compliant, and we have been
encouraging such customers to migrate to current product versions. Moreover, our
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. We 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 our products or issues
arising from the integration of multiple products within an overall system.
Although we have not been a party to any litigation or arbitration proceeding to
date involving our products or services related to Year 2000 compliance issues,
there can be no assurance that we will not in the future be required to defend
our 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 for Year 2000-related damages,
including consequential damages, could seriously harm our business, operating
results and financial condition.
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<PAGE> 15
We believe that Year 2000 issues may affect the purchasing patterns of
customers and potential customers in a variety of ways. Many companies are
expending significant resources to correct, patch or replace their current
software systems to achieve Year 2000 compliance. These expenditures may result
in reduced funds available to purchase products such as those offered by us. Any
of the foregoing could seriously harm our business, operating results and
financial condition.
Our plan to resolve Year 2000 issues includes assessment, remediation
and testing of internal management and other information systems. As of June 30,
1999, remediation and testing of such systems was substantially complete;
however, system compliance testing will continue in conjunction with our overall
information systems initiatives throughout 1999. We have not deferred any
information technology initiatives as a result of our Year 2000 project. In the
first six months of 1999, we incurred approximately $250,000 of expenses related
to correction of Year 2000 issues. We currently expect additional expenses
during the remainder of 1999 in connection with the correction of Year 2000
issues to be minimal. Such expenses are being funded through operating cash
flows.
We believe that an effective plan is in place to resolve the Year 2000
issues by the Fall of 1999. Although we have not yet completed all necessary
testing in conjunction with our Year 2000 program, we do not believe that
material exposure to significant business interruption exists as a result of
Year 2000 compliance issues or that the cost of remedial actions will seriously
harm our business, financial condition or results of operations. Accordingly, we
currently have no contingency plans in place in the event we do not complete all
phases of our Year 2000 program. We will continue to evaluate the status of
completion throughout the remainder of 1999 to determine whether such a
contingency plan is necessary.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Numerous factors may affect our business and future 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 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; and product liability claims. The discussion below addresses some of
these factors. For a more thorough discussion of these and other factors that
may affect our business and future results, see the discussion under the caption
"Additional Factors That May Affect Future Results" in our Annual Report on Form
10-K filed February 3, 1999.
OUR FINANCIAL RESULTS MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER
Our operating results have varied significantly from quarter to quarter
in the past and it is expected that our operating results will continue to vary
from quarter to quarter in the future due to a variety of factors, many of which
are outside of our control.
Factors that could affect quarterly operating results include:
- Volume and timing of customer orders;
- Length of the sales cycle;
- Customer budget constraints;
- Announcement or introduction of new products or product enhancements by
us or our competitors;
- Changes in prices of our products and those of our competitors;
- Foreign currency exchange rate fluctuations;
- Market acceptance of new products; - Mix of direct and indirect sales;
- Changes in our strategic relationships; and
- Changes in business strategy.
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<PAGE> 16
Furthermore, customers may defer or cancel their purchases of products
if they experience a downturn in their business or if there is a downturn in the
general economy. We will continue to determine our investment and expense levels
based on expected future revenues. A significant portion of our expenses are not
variable in the short term and cannot be quickly reduced to respond to decreases
in revenues. Therefore, if revenues are below expectations, operating results
are likely to be adversely and disproportionately affected. In addition, we may
reduce prices or accelerate investment in research and development efforts in
response to competitive pressures or to pursue new market opportunities. Any one
of these activities may further limit our ability to adjust spending in response
to revenue fluctuations. Revenues may not grow at historical rates in future
periods, or they may not grow at all. Because of this, we may not maintain
positive operating margins in future quarters.
WE ANTICIPATE SEASONAL FLUCTUATIONS IN REVENUE.
Historically, our revenues have tended to be strongest in the fourth
quarter of the year. We believe that our seasonality is due to the calendar year
budgeting cycles of many of our customers and our compensation policy that
rewards sales personnel for achieving annual revenue quotas. In future periods,
these seasonal trends may cause our quarter-to-quarter operating results to
vary.
INCREASED COMPETITION COULD SERIOUSLY HARM OUR BUSINESS.
Our competitors offer a variety of solutions directed at various
segments of the supply chain as well as other business processes and the
enterprise as a whole. These competitors include:
- Enterprise resource application software vendors such as SAP,
PeopleSoft, Oracle and Baan, each currently offering sophisticated
enterprise software solutions that incorporate or may in the future
incorporate competitive applications;
- Supply chain software vendors, including Manugistics and Logility;
- E-commerce software and online enterprise relationship management
application providers, including BroadVision, Open Market and Silknet
Software;
- Business application software vendors who may broaden their product
offerings by internally developing, or by acquiring or partnering with
independent developers of, electronic business process optimization
software;
- Corporate information technology departments which may develop their own
electronic business process optimization software;
- Web content developers engaged to develop custom software or to
integrate other application software into custom solutions; and
- Companies offering standardized or customized products for mainframe
and/or mid-range computer systems.
Historically, a number of enterprise resource planning vendors have
jointly marketed our products as a complement to their own systems. However, as
we attempt to increase our market share and expand our product offerings, and as
enterprise resource planning vendors expand their own product offerings,
relationships with these vendors may become more competitive. Specifically, in
1997, our license and distribution agreement with SAP was terminated, and SAP is
currently marketing a suite of advanced planning and scheduling products that
compete with RHYTHM. In addition, Oracle has recently announced an advanced
planning product. We believe that other enterprise resource planning vendors are
focusing significant resources on increasing the functionality of their own
planning and scheduling modules. At least two other enterprise resource planning
vendors have acquired independent developers of advanced planning and scheduling
software which compete with RHYTHM.
Relative to us, many of our 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.
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<PAGE> 17
Current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to enhance
their products. In addition, we expect to experience increasing price
competition as we compete for market share and may not be able to compete
successfully with our existing or new competitors. If we experience increased
competition, substantial harm may result to our business, operating results and
financial condition.
WE ARE INVESTING SIGNIFICANT RESOURCES IN DEVELOPING OUR EBPO SOLUTIONS. THE
MARKET FOR THESE SOLUTIONS IS NEW AND EVOLVING AND OUR BUSINESS WOULD BE
SERIOUSLY HARMED IF THIS MARKET DOES NOT DEVELOP AS WE ANTICIPATE OR IF WE ARE
UNABLE TO DEVELOP ACCEPTABLE SOLUTIONS.
We currently derive a substantial portion of our revenues from licenses
for decision-support software products associated with supply chain management
software and related services. However, we are investing significant resources
in further developing and marketing broader functionality for electronic
business process optimization, or eBPO, solutions, such as customer management,
product lifecycle management, inter-process planning and strategic planning. We
intend to offer enhanced products and services to facilitate intelligent
eBusiness over public and private networks. Demand and market acceptance for
recently introduced products and services are subject to a high level of
uncertainty, especially where acquisition of the product requires a large
capital commitment or other significant commitment of resources. This
uncertainty is compounded by the risks that consumers and enterprises will not
adopt our intelligent eBusiness software solutions and that an appropriate
infrastructure necessary to support increased commerce and communication on the
Internet will fail to develop. Adoption of intelligent eBusiness solutions,
particularly by those individuals and enterprises that have historically relied
upon traditional means of commerce and communication, will require a broad
acceptance of new and substantially different methods of conducting business and
exchanging information. These products and services involve a new approach to
the conduct of business and, as a result, intensive marketing and sales efforts
may be necessary to educate prospective customers regarding the uses and
benefits of these products and services in order to generate demand. The market
for this broader functionality may not develop, competitors may develop superior
products or we may not develop acceptable solutions to address this
functionality. Any one of these events could seriously harm our business,
operating results and financial condition.
THE MARKETS IN WHICH WE COMPETE EXPERIENCE RAPID TECHNOLOGICAL CHANGE AND OUR
BUSINESS WOULD BE SERIOUSLY HARMED IF WE DO NOT RESPOND TO THE TECHNOLOGICAL
ADVANCES OF THE MARKETPLACE.
Enterprises are increasing their focus on decision-support solutions for
business process optimization challenges. As a result, they are requiring their
application software vendors to provide greater levels of functionality and
broader product offerings. Moreover, competitors continue to make rapid
technological advances in computer hardware and software technology and
frequently introduce new products and enhancements. We must continue to enhance
our current product line and develop and introduce new products that keep pace
with the technological developments of our competitors. We must also satisfy
increasingly sophisticated customer requirements. If we cannot successfully
respond to the technological advances of others or if our new products or
product enhancements do not achieve market acceptance, our business, operating
results and financial condition could be seriously harmed.
WE MAY NOT SUCCESSFULLY INTEGRATE OR REALIZE THE INTENDED BENEFITS OF OUR RECENT
ACQUISITIONS.
In April, 1998, we acquired InterTrans Logistics Solutions Limited, or
ITLS, and in July, 1999, we acquired Sales Marketing Administration Research
Tracking Technologies, Inc., or SMART Technologies. In addition, we have
acquired other businesses and products to help broaden and strengthen our
product portfolio. The success of these acquisitions depends primarily on our
ability to:
- Retain, motivate and integrate the acquired personnel;
- Integrate multiple information systems; and
- Integrate acquired software with our RHYTHM suite of products.
We may encounter difficulties in integrating our operations and products with
those of ITLS, SMART Technologies and others. We may not realize the benefits
anticipated when these acquisitions were made. Our failure
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to successfully integrate our operations and products with those of ITLS, SMART
Technologies and others could seriously harm our business, operating results and
financial condition.
WE MAY MAKE FUTURE ACQUISITIONS OR ENTER INTO JOINT VENTURES THAT MAY NOT BE
SUCCESSFUL.
In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. Management's negotiations of potential acquisitions or
joint ventures and management's integration of acquired businesses, products or
technologies could divert their time and resources. Any future acquisitions
could require us to issue dilutive equity securities, incur debt or contingent
liabilities, amortize goodwill and other intangibles, or write-off in-process
research and development and other acquisition-related expenses. Further, we may
not be able to integrate any acquired business, products or technologies with
our existing operations. If we are unable to fully integrate an acquired
business, product or technology, we may not receive the intended benefits of
that acquisition.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS THAT COULD HARM
OUR COMPANY.
To continue our growth and maintain profitability, we will need to
expand our sales in international markets. Further penetration of international
markets will require us to expand our existing foreign operations, to establish
additional foreign operations and to translate our software and manuals into
additional foreign languages. Expansion may be costly and time-consuming and may
not generate returns for a significant period of time, if at all. If we are
unable to expand our international operations or translate our software and
manuals into foreign languages in a timely manner, our further penetration of
international markets would be limited. In addition, our 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 and Latin American regions have
recently experienced weaknesses in their currency, banking and equity markets.
These weaknesses could have a damaging effect on the demand for our products,
the U.S. dollar value of our foreign currency denominated sales and, ultimately,
our business, operating results and financial condition.
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY CHANGES IN THE VALUE OF THE
U.S. DOLLAR AS COMPARED TO THE CURRENCIES OF FOREIGN COUNTRIES WHERE WE TRANSACT
BUSINESS.
To date, our international operations revenues have primarily been
denominated in U.S. dollars. The majority of our international operations
expenses and some sales have been denominated in currencies other than the U.S.
dollar. Therefore, our operating results may be adversely affected by changes in
the value of the U.S. dollar as compared to these other currencies. As our
international operations expand, our exposure to currency exchange rate
fluctuations will increase as we use an increasing number of foreign currencies.
We have implemented limited hedging programs to mitigate our exposure to
currency fluctuations. Despite these hedging programs, currency exchange rate
fluctuations have caused, and will continue to cause, currency transaction gains
and losses. While these gains and losses have not been material to date, they
may have a damaging effect on our business, results of operations or financial
condition in future periods.
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IF OUR PRODUCTS DO NOT REMAIN COMPATIBLE WITH EXISTING AND NEW COMPUTERS AND
SOFTWARE OPERATING SYSTEMS OUR BUSINESS WOULD BE SERIOUSLY HARMED.
Our RHYTHM software can operate on hardware platforms from Digital
Equipment, Hewlett-Packard, IBM and Sun Microsystems and operating systems from
Sun Microsystems and Microsoft. RHYTHM can access data from most widely used
structured query language databases, including Informix, Oracle and Sybase. If
additional hardware or software platforms gain significant market acceptance, we
may be required to port RHYTHM to those platforms in order to remain
competitive. Such platforms may not be architecturally compatible with RHYTHM's
software product design, and we may not be able to port RHYTHM to those
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 seriously damage our business, operating
results and financial condition.
Our customer management products are client/server solutions that can
operate on any hardware platform that can use the Windows NT operating system.
If additional operating systems gain significant market acceptance, we may be
required to modify these products to make them compatible with those operating
systems in order to remain competitive. Such operating systems may not be
architecturally compatible with our product design, and we may not be able to
make them compatible with those additional operating systems on a timely basis,
or at all. Any failure to maintain compatibility with existing operating systems
or to make our products compatible with new operating systems that achieve
significant market acceptance would seriously harm our business, operating
results and financial condition.
OUR SOFTWARE IS COMPLEX AND MAY CONTAIN UNDETECTED ERRORS.
Our software programs are complex and may contain undetected errors or
"bugs." Despite testing, bugs may be discovered only after the product has been
installed and used by customers or when the volume of services provided
increases. We have on occasion experienced delays in the scheduled introduction
of new and enhanced products because of bugs. Undetected errors could result in
adverse publicity, loss of revenues, delay in market acceptance or claims
against us by customers, any of which could seriously damage our business,
operating results and financial condition.
PENDING RELEASES OF NEW PRODUCTS MAY CAUSE PURCHASING DELAYS, WHICH WOULD
SERIOUSLY HARM OUR LICENSE REVENUES.
Customers may delay their purchasing decisions in anticipation of new or
enhanced products or products of competitors. Delays in customer purchasing
decisions could seriously harm our business and operating results. Moreover,
significant delays in the general availability of new releases, significant
problems in the installation or implementation of new releases, or customer
dissatisfaction with new releases, could seriously damage our business,
operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning market risk is contained on Page 29 of our 1998
Annual Report on Form 10-K and is incorporated by reference to such annual
report.
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i2 TECHNOLOGIES, INC.
PART II
ITEM 2. CHANGES IN SECURITIES.
From April 1 through June 30, 1999, we issued approximately 1,259,302
shares of our common stock to employees pursuant to exercises of stock options
(with exercise prices ranging from $0.01 to $6.06 per share) under our stock
plans. These issuances 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
restrictive transfer legends were affixed to the share certificates issued in
each such transaction.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our Annual Meeting of Stockholders held on May 24, 1999 in Irving,
Texas, our stockholders voted on the following matters:
1. The election of two Class II Directors to serve until the annual
stockholders' meeting in 2002, or until their successors have been elected and
qualified. The nominees of the Board of Directors were elected.
<TABLE>
<CAPTION>
Name of Nominee Number of Votes For Number of Votes Withheld Number of Abstentions
--------------- ------------------- ------------------------ ---------------------
<S> <C> <C> <C>
Sandeep (Sandy) R. Tungare 54,413,102 505,550 17,384,378
Harvey B. Cash 54,599,757 318,895 17,384,378
</TABLE>
2. Approval of an amendment to our 1995 Stock Option/Stock Issuance
Plan (the "1995 Plan") to increase the number of shares of our common stock
authorized to be issued under the 1995 Plan by 12,000,000 shares. The amendment
was approved.
<TABLE>
<S> <C>
Number of Votes For ................ 40,925,056
Number of Votes Against ............ 5,068,151
Number of Votes Withheld ........... 39,476
Number of Broker Non-Votes ......... 8,885,969
Number of Abstentions .............. 17,384,378
</TABLE>
3. Approval of an amendment to our Employee Stock Purchase Plan (the
"Purchase Plan") to increase the number of shares of our common stock authorized
to be issued in the aggregate under the Purchase Plan and the International
Employee Stock Purchase Plan by 1,500,000 shares. The amendment was approved.
<TABLE>
<S> <C>
Number of Votes For ................ 45,895,685
Number of Votes Against ............ 88,587
Number of Votes Withheld ........... 48,411
Number of Broker Non-Votes ......... 8,885,969
Number of Abstentions .............. 17,384,378
</TABLE>
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4. Approval of an amendment to our Restated Certificate of
Incorporation to increase the number of authorized shares of our common stock
from 200,000,000 to 500,000,000. The amendment was approved.
<TABLE>
<S> <C>
Number of Votes For ................ 54,008,205
Number of Votes Against ............ 859,270
Number of Votes Withheld ........... 25,241
Number of Broker Non-Votes ......... 25,936
Number of Abstentions .............. 17,384,378
</TABLE>
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 June 30, 1999, we filed the following
Current Reports on Form 8-K:
We filed a Form 8-K dated April 16, 1999 (Item 4)
reporting a change in our certifying accountants.
We filed a Form 8-K dated May 12, 1999 (Item 5) announcing
a proposed acquisition of Sales Marketing Administration
Research Tracking Technologies, Inc. ("SMART").
After June 30, 1999, we filed the following Current Report on
Form 8-K:
We filed a Form 8-K dated July 15, 1999 (Item 2) reporting
completion of the acquisition of SMART.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on our behalf by the
undersigned, thereunto duly authorized.
i2 TECHNOLOGIES, INC.
August 16, 1999 /s/ Sanjiv S. Sidhu
--------------- ------------------------------
(Date) Sanjiv S. Sidhu
Chairman of the Board and
Chief Executive Officer
(Principal executive officer)
August 16, 1999 /s/ William M. Beecher
--------------- ------------------------------
(Date) William M. Beecher
Chief Financial Officer
(Principal finance and
accounting officer)
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Exhibit Description
- ------ -------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001009304
<NAME> i2 TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 103,874
<SECURITIES> 85,287
<RECEIVABLES> 137,663
<ALLOWANCES> 11,183
<INVENTORY> 0
<CURRENT-ASSETS> 348,221
<PP&E> 59,665
<DEPRECIATION> (27,616)
<TOTAL-ASSETS> 401,916
<CURRENT-LIABILITIES> 127,650
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 273,940
<TOTAL-LIABILITY-AND-EQUITY> 401,916
<SALES> 153,239
<TOTAL-REVENUES> 248,621
<CGS> 6,588
<TOTAL-COSTS> 231,337
<OTHER-EXPENSES> (2,924)
<LOSS-PROVISION> 3,626
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> 20,208
<INCOME-TAX> 7,931
<INCOME-CONTINUING> 12,277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,277
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.16
</TABLE>
