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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 September 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)
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<S> <C>
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, TX 75039
(Address of principal executive offices) (Zip code)
</TABLE>
(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 November 5, 1999, the Registrant had outstanding 76,923,366 shares of
Common Stock, $.00025 par value.
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i2 TECHNOLOGIES, INC.
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999 3
Condensed Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 62,611 $ 67,946
Short-term investments ......................................... 93,387 121,094
Accounts receivable, net ....................................... 127,677 157,195
Deferred income taxes .......................................... 5,070 9,594
Prepaids and other ............................................. 9,407 13,594
-------- --------
Total current assets ...................................... 298,152 369,423
Furniture and equipment, net ......................................... 31,628 43,022
Deferred income taxes ................................................ 11,079 30,845
Other assets ......................................................... 3,949 5,955
-------- --------
Total assets .............................................. $344,808 $449,245
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 11,675 $ 22,930
Accrued liabilities ............................................ 44,392 68,882
Deferred revenue ............................................... 51,229 66,496
Short-term debt ................................................ 2,032 --
Notes payable to stockholders................................... 3,000 --
Income taxes payable ........................................... 2,213 16,542
-------- --------
Total current liabilities ................................. 114,541 174,850
Deferred income taxes ................................................ 448 292
-------- --------
Total liabilities ......................................... 114,989 175,142
-------- --------
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000 shares authorized,
none issued ............................................... -- --
Common Stock, $0.00025 par value, 500,000 shares
authorized, 73,250 and 76,227 shares issued
and outstanding, respectively ............................. 18 19
Additional paid-in capital ..................................... 214,940 251,123
Retained earnings .............................................. 14,861 22,961
-------- --------
Total stockholders' equity ................................ 229,819 274,103
-------- --------
Total liabilities and stockholders' equity ................ $344,808 $449,245
======== ========
</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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<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software licenses ........................... $ 60,120 $ 88,596 $160,514 $242,051
Services .................................... 23,884 39,293 66,113 104,388
Maintenance ................................. 11,427 18,407 28,938 49,403
-------- -------- -------- --------
Total revenues .......................... 95,431 146,296 255,565 395,842
-------- -------- -------- --------
Costs and expenses:
Cost of software licenses ................... 1,530 5,229 5,681 11,821
Cost of services and maintenance ............ 19,927 31,210 52,630 91,183
Sales and marketing ......................... 33,898 49,305 90,914 136,127
Research and development .................... 24,728 33,024 67,371 95,106
General and administrative .................. 9,692 13,456 25,851 39,054
In-process research and development and
acquisition-related expenses .............. 560 4,248 7,044 4,825
-------- -------- -------- --------
Total costs and expenses ................ 90,335 136,472 249,491 378,116
-------- -------- -------- --------
Operating income ................................. 5,096 9,824 6,074 17,726
Other income, net ................................ 1,776 2,017 7,090 4,419
-------- -------- -------- --------
Income before income taxes ....................... 6,872 11,841 13,164 22,145
Provision for income taxes ....................... 4,870 6,114 11,450 14,045
-------- -------- -------- --------
Net income ....................................... $ 2,002 $ 5,727 $ 1,714 $ 8,100
======== ======== ======== ========
Net income per share ............................. $ 0.03 $ 0.08 $ 0.02 $ 0.11
Net income per share, assuming dilution .......... $ 0.03 $ 0.07 $ 0.02 $ 0.10
Weighted average common shares outstanding ....... 72,115 75,839 71,350 74,752
Weighted average common shares outstanding,
assuming dilution ........................... 77,375 82,699 78,349 81,709
</TABLE>
See accompanying notes.
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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
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<CAPTION>
Nine Months Ended September 30,
------------------------------
1998 1999
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................................... $ 1,714 $ 8,100
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-off of in-process research and development .......... 4,379 1,900
Gain on sale of hosting business .......................... (1,816) --
Depreciation and amortization ............................. 8,807 12,232
Provision for doubtful accounts ........................... 3,138 6,886
Deferred income taxes ..................................... (5,872) (24,446)
Tax benefit of stock options .............................. 12,932 17,876
Changes in operating assets and liabilities:
Accounts receivable, net ............................. (29,547) (36,404)
Income tax receivable/payable ........................ 2,357 14,329
Prepaid and other assets ............................. (3,590) (4,349)
Accounts payable ..................................... 1,277 11,255
Accrued liabilities .................................. 14,420 24,190
Deferred revenue ..................................... 12,576 15,267
--------- ---------
Net cash provided by operating activities ........ 20,775 46,836
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of acquired cash .................... (1,822) (500)
Purchases of furniture and equipment ........................... (13,609) (22,070)
Net purchases of short-term investments ........................ (52,925) (27,707)
--------- ---------
Net cash used in investing activities ............ (68,356) (50,277)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on revolving line of credit ....................... (662) (2,032)
Proceeds on sale of hosting business ........................... 2,500 --
Proceeds from issuance of notes payable to stockholders ........ -- 500
Payments on notes payable to stockholders ...................... -- (3,500)
Proceeds from issuance of other long-term debt ................. -- 4,000
Payments on other long-term debt ............................... -- (4,000)
Proceeds from issuance of common stock ......................... 6,126 13,808
--------- ---------
Net cash provided by financing activities ........ 7,964 8,776
--------- ---------
Net increase (decrease) in cash and cash equivalents ................. (39,617) 5,335
Cash and cash equivalents at beginning of period ..................... 137,351 62,611
--------- ---------
Cash and cash equivalents at end of period ........................... $ 97,734 $ 67,946
========= =========
</TABLE>
See accompanying notes.
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i2 TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited 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 condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring entries, except
where noted) which, in the opinion of 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. The interim results are not necessarily indicative of results
that may be expected for any other interim period or for the full year 1999.
Certain prior year financial statement items have been reclassified to
conform to the current year's format.
2. BUSINESS COMBINATIONS
In April 1998, we acquired InterTrans Logistics Solutions, or ITLS.
Under the terms of the acquisition agreement, we agreed to issue approximately
3.3 million shares of common stock for all of the outstanding capital stock and
options of ITLS. In connection with the ITLS acquisition, we incurred expenses
that included, among other things, investment banking, legal and accounting fees
and expenses.
In addition, in the second and third quarters of 1998, we completed
other business acquisitions, accounted for using the purchase method, for an
aggregate purchase price of $6.6 million, which included stock, cash,
acquisition costs and the assumption of net liabilities. A portion of the
purchase price of these transactions represented the value of in-process
research and development and was expensed immediately. The amounts allocated to
in-process research and development were determined through established
valuation techniques in the software industry and were expensed upon acquisition
because technological feasibility had not been established and no alternative
future uses existed. Research and development costs to bring the acquired
technologies or products to technological feasibility are not expected to have a
material impact on our future results of operations, cash flows or liquidity.
The total purchase price payable to the shareholders of certain of these
acquired companies may increase in the future depending upon the achievement of
specified revenue targets associated with the acquired or in-process
technologies through the year 2000.
In July 1999, we acquired Sales Marketing Administration Research
Tracking Technologies, Inc., or SMART, which develops software applications that
help companies use the Internet to build and extend relationships with
customers, partners and suppliers. Under the terms of the acquisition agreement,
we agreed to issue approximately 2.1 million shares of common stock for all of
the outstanding capital stock and options of SMART. In connection with the SMART
acquisition, we incurred expenses that included, among other things, investment
banking, legal and accounting fees and expenses.
In addition, in the third quarter of 1999, we completed other business
acquisitions, accounted for using the purchase method, for an aggregate purchase
price of $5.3 million, which included stock, cash and acquisition costs. A
portion of the purchase price of these transactions represented the value of
in-process research and development and was expensed immediately. The amounts
allocated to in-process research and development are based on preliminary
estimates and could be subject to revision upon completion of a formal
valuation. These amounts were expensed upon
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acquisition because technological feasibility had not been established and no
alternative future uses existed. Research and development costs to bring the
acquired technologies or products to technological feasibility are not expected
to have a material impact on our future results of operations, cash flows or
liquidity.
For the nine months ended September 30, 1998, the total of all
acquisition-related expenses resulted in a one-time charge to our operating
results of $7.0 million, or $0.09 per share, assuming dilution. For the nine
months ended September 30, 1999, the total of all acquisition-related expenses
resulted in a one-time charge to our operating results of $4.8 million, or $0.06
per share, assuming dilution.
The ITLS and SMART acquisitions were each accounted for as a pooling of
interests and, accordingly, the accompanying condensed consolidated financial
statements give retroactive effect to the combinations and include the combined
operations of i2, ITLS and SMART for all periods presented.
The individual results of operations for i2 (including ITLS) and SMART
and the combined amounts presented in the consolidated financial statements
follow (in thousands, unaudited):
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i2 SMART COMBINED
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SIX MONTHS ENDED JUNE 30, 1999:
Revenues ............................. $ 248,621 $ 924 $ 249,545
Net income (loss) .................... 12,277 (9,902) 2,375
</TABLE>
3. BORROWINGS
In August 1999, we entered into a one-year, $30.0 million revolving
credit agreement. This facility is unsecured and contains customary restrictive
covenants, including covenants requiring us to maintain certain financial
ratios. The revolving credit agreement is not subject to a borrowing base
limitation and borrowings thereunder bear interest at LIBOR plus 0.75% to 1.75%,
depending on certain cash ratios. The maximum borrowings available under the
facility are reduced by the value of outstanding letters of credit issued by the
lender on our behalf, $14.2 million of which were outstanding at September 30,
1999. At September 30, 1999, there were no borrowings outstanding under this
agreement and we were in compliance with all covenants.
4. GAIN ON SALE OF HOSTING BUSINESS
In July 1998, SMART sold its hosting business for cash consideration of
$2.5 million, resulting in a gain of $1.8 million, which is included in other
income, net for the nine months ended September 30, 1998.
5. NET INCOME PER SHARE
Net income per share is computed in accordance with the provisions of
Statement of Financial Accounting Standards, or 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 potentially dilutive common stock
from the exercise of stock options. Net income per share, assuming dilution,
includes the effect of potentially dilutive common stock from the exercise of
stock options using the treasury stock method.
Potentially dilutive securities are excluded from the net income per
share, assuming dilution computation when the exercise price of the securities
exceeds the average fair value of our common stock for a particular period. For
the three and nine months ended September 30, 1998, 2,210,040 and 30,500 stock
options, respectively, were excluded from the net income per share, assuming
dilution computation. For the three and nine months ended September 30, 1999,
291,725 and 2,087,008 employee stock options, respectively, were excluded from
the net income per share, assuming dilution computation.
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Reconciliations of net income per share and net income per share,
assuming dilution computations for the three and nine months ended September 30,
1998 and 1999 are as follows (amounts in thousands, except per share amounts):
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Three Months Ended Nine Months Ended
Sept 30, Sept 30,
------------------- ------------------
1998 1999 1998 1999
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Weighted average common shares outstanding ....... 72,115 75,839 71,350 74,752
Common shares issuable upon exercise of
stock options, net of shares assumed
to be repurchased ............................. 5,260 6,860 6,999 6,957
------- ------- ------- -------
Weighted average common shares outstanding,
assuming dilution ............................. 77,375 82,699 78,349 81,709
======= ======= ======= =======
Net income ....................................... $ 2,002 $ 5,727 $ 1,714 $ 8,100
======= ======= ======= =======
Net income per share ............................. $ 0.03 $ 0.08 $ 0.02 $ 0.11
======= ======= ======= =======
Net income per share, assuming dilution .......... $ 0.03 $ 0.07 $ 0.02 $ 0.10
======= ======= ======= =======
</TABLE>
6. SEGMENT AND GEOGRAPHIC INFORMATION
We are principally engaged in the design, development, marketing and
support of our RHYTHM suite of intelligent eBusiness solutions, including
software applications and related service offerings. Historically, substantially
all revenues result from the licensing of our software products and related
consulting and customer support (maintenance) services. 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 and related services.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, issued 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. SFAS
133 will not have a material effect on our consolidated financial position or
results of operations.
In December 1998, the American Institute of Certified Public
Accountants issued Statement of Position, or SOP, 98-9 "Modifications of SOP
97-2, Software Revenue Recognition with Respect to Certain Transactions", which
requires recognition of revenue using the "residual method" in a multiple
element arrangement when fair value does not exist for one or more of the
undelivered elements in the arrangement. Under the "residual method", the total
fair value of the undelivered elements is deferred and subsequently recognized
in accordance with SOP 97-2, "Software Revenue Recognition". We have been in
compliance with SOP 97-2, as modified by SOP 98-9, since January 1, 1999.
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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 sections below entitled "Year 2000 Issues" and "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
i2 is a leading provider of intelligent eBusiness solutions that help
enterprises optimize business processes both internally and among trading
partners. Our solutions enable enterprises to significantly improve
efficiencies, collaborate with suppliers and customers, respond to market
demands and engage in dynamic business interactions over the Internet. Our
RHYTHM product suite principally includes solutions for supply chain management,
customer management, product lifecycle management, inter-process planning and
strategic planning. We are launching public and private Internet-based
marketplaces, or eMarketplaces, which consist of communities of trading partners
that, among other things, enable real-time collaboration and exchange of
information among suppliers, manufacturers, distributors, logistics providers
and customers. In addition, our recently announced TradeMatrix portal solution
is designed to provide value-added services for eMarketplace participants
spanning multiple digital marketplaces, which is intended to foster enhanced
collaboration within and between enterprises.
In July 1999, we acquired Sales Marketing Administration Research
Tracking Technologies, Inc., or SMART, which develops software applications that
help companies use the Internet to build and extend relationships with
customers, partners and suppliers. Under the terms of the acquisition agreement,
we agreed to issue approximately 2.1 million shares of common stock for all of
the outstanding capital stock and options of SMART. The SMART acquisition was
accounted for as a pooling of interests. We incurred $2.1 million in certain
expenses related to this acquisition. These costs include, among other things,
investment banking, legal and accounting fees and expenses. These expenses were
recognized in the third quarter of 1999.
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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 Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Software licenses ............................ 63.0% 60.6% 62.8% 61.1%
Services ..................................... 25.0 26.9 25.9 26.4
Maintenance .................................. 12.0 12.5 11.3 12.5
----- ----- ----- -----
Total revenues ............................ 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Cost of software licenses .................... 1.6 3.6 2.2 3.0
Cost of services and maintenance ............. 20.9 21.3 20.6 23.0
Sales and marketing .......................... 35.5 33.7 35.6 34.4
Research and development ..................... 25.9 22.6 26.4 24.0
General and administrative ................... 10.2 9.2 10.1 9.9
In-process research and development and
acquisition-related expenses ............... 0.6 2.9 2.7 1.2
----- ----- ----- -----
Total costs and expenses .................. 94.7 93.3 97.6 95.5
----- ----- ----- -----
Operating income ................................. 5.3 6.7 2.4 4.5
Other income, net ................................ 1.9 1.4 2.8 1.1
----- ----- ----- -----
Income before income taxes ....................... 7.2 8.1 5.2 5.6
Provision for income taxes ....................... 5.1 4.2 4.5 3.6
----- ----- ----- -----
Net income ....................................... 2.1% 3.9% 0.7% 2.0%
===== ===== ===== =====
</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 SOP 97-2. 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. 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.
SOFTWARE LICENSES. Revenues from software licenses increased 47% to
$88.6 million in the quarter ended September 30, 1999 from $60.1 million in the
quarter ended September 30, 1998. In the first nine months of 1999, revenues
from software licenses increased 51% to $242.1 million from $160.5 million in
the first nine months of 1998. The increases in software license revenues were
primarily due to an increased customer awareness of the potential benefits
derived from deploying our software solutions, continued strength in key
targeted vertical markets and expansion into additional vertical markets, such
as automotive and industrial and consumer goods. To date, sales of software
licenses have been derived principally from direct sales to customers. Although
we believe that direct sales will continue to
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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 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 64% to $39.3 million in the
quarter ended September 30, 1999 from $23.9 million in the quarter ended
September 30, 1998. In the first nine months of 1999, revenues from services
increased 58% to $104.4 million from $66.1 million in the first nine months of
1998. The increases in service revenues were primarily due to the increase in
the number of RHYTHM licenses sold and resulting demand for 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 61% to $18.4 million
in the quarter ended September 30, 1999 from $11.4 million in the quarter ended
September 30, 1998. In the first nine months of 1999, revenues from maintenance
increased 71% to $49.4 million from $28.9 million in the first nine 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 each quarter of 1999 and each of the last three
quarters of 1998, one or more customers individually accounted for at least 15%
of total software license revenues. 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, Canada and Latin America, in the three
and nine months ended September 30, 1999, were approximately 22% and 28% of
total revenues, respectively, compared to approximately 17% and 18% of total
revenues in the three and nine months ended September 30, 1998. The increases in
international revenues were due to the growing deployment of our products at new
and existing customers' international sites. We believe that continued growth
and profitability will require further expansion in international markets. 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. We cannot be
certain that our investments in international operations will produce desired
levels of revenues or profitability.
COSTS AND EXPENSES
COST OF SOFTWARE LICENSES. Cost of software licenses consists primarily
of (1) commissions paid to third parties in connection with joint marketing and
other related agreements, (2) royalty fees associated with third-party software
included with sales of RHYTHM, (3) the cost of user documentation and (4) the
cost of reproduction and delivery of the software. Cost of software licenses was
$5.2 million and $1.5 million in the quarters ended September 30, 1999 and 1998,
representing 5.9% and 2.5% of software license revenues, respectively. Cost of
software licenses was $11.8 million and $5.7 million in the first nine months of
1999 and 1998, representing 4.9% and 3.5% of software license revenues,
respectively. The increases in cost of software licenses were primarily due to
an increase in the amount of royalty fees associated with third-party software
included with sales of RHYTHM and an increase in commissions paid to third
parties in connection with joint marketing and other related agreements.
COST OF SERVICES AND MAINTENANCE. Cost of services and maintenance
consists primarily of costs associated with implementation, consulting and
training services. Cost of services and maintenance also includes the cost of
providing software maintenance to customers such as telephone support and
packaging and shipping costs related to new releases of software and updated
user documentation. Cost of services and maintenance was $31.2 million and $19.9
million in the quarters ended September 30, 1999 and 1998, representing 54.1%
and 56.4% of total services and
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maintenance revenues, respectively. These same expenses were $91.2 million and
$52.6 million in the first nine months of 1999 and 1998, representing 59.3% and
55.4% of total services and maintenance revenue, respectively. The increases in
cost of services and maintenance were primarily due to the increase in the
number of consultants, product support and training staff and the increased use
of third-party consultants to provide implementation services. 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 profit 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 $49.3 million and $33.9
million in the quarters ended September 30, 1999 and 1998, representing 33.7%
and 35.5% of total revenues, respectively. These same expenses were $136.1
million and $90.9 million in the first nine months of 1999 and 1998,
representing 34.4% and 35.6% 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 intelligent eBusiness solutions.
We expect these expenses will continue to increase in absolute dollars and may
increase as a percentage of total revenues from the levels experienced in the
three and nine month periods ended September 30, 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses were $33.0
million and $24.7 million in the quarters ended September 30, 1999 and 1998,
representing 22.6% and 25.9% of total revenues, respectively. These expenses
were $95.1 million and $67.4 million in the first nine months of 1999 and 1998,
representing 24.0% and 26.4% 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 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 SFAS 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; therefore, we have not capitalized any
software development costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
the personnel and other costs of our finance, legal, accounting, human
resources, information systems and executive departments. General and
administrative expenses were $13.5 million and $9.7 million in the quarters
ended September 30, 1999 and 1998, representing 9.2% and 10.2% of total
revenues, respectively. These same expenses were $39.1 million and $25.9 million
in the first nine months of 1999 and 1998, representing 9.9% and 10.1% of total
revenues, respectively. The increases in the dollar amounts 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.
IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION-RELATED EXPENSES.
In the recent past, we have sought to expand the depth of our current product
offerings through various technology or business acquisitions. At the time of
acquisition, some of these acquisitions involve technology that is not yet
determined to be technologically feasible and has no alternative future use in
its then-current stage of development. In such instances, in accordance with
appropriate accounting guidelines, the portion of the purchase price allocated
to in-process research and development is expensed immediately upon acquisition.
Further, the final purchase price on certain transactions is ultimately
dependent upon future events such as payouts based on the attainment of
specified revenue targets for the acquired products or technologies. Such future
earnouts, if any, may be considered additional cost of the acquired company and
would be allocated to in-process research and development, acquired technology,
goodwill or a combination of the three, based on the initial valuation of the
acquired and in-process technologies and resulting
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purchase price allocation. None of the business acquisitions accounted for using
the purchase method of accounting in the first nine months of 1998 or 1999 were
material to our results of operations or financial position, and therefore, no
separate disclosures have been made.
We acquired SMART in July 1999 and ITLS in April 1998. Both of these
acquisitions were accounted for as a pooling of interests. Additionally, in the
third quarter of 1999 and the second and third quarters of 1998, we completed
other business acquisitions, accounted for using the purchase method, for which
a portion of the purchase prices was recorded as in-process research and
development. For the nine months ended September 30, 1999 and 1998, we incurred
a total of $4.8 million and $7.0 million, respectively, in acquisition-related
expenses, which included, among other things, investment banking, legal and
accounting fees and expenses and the write-off of in-process research and
development. See Note 2 in the Notes to Condensed Consolidated Financial
Statements for further discussion.
OTHER INCOME, NET
Other income, net typically consists of interest income on short-term
investments and overnight repurchase agreements partially offset by interest
expense. Other income, net was $2.0 million and $1.8 million in the quarters
ended September 30, 1999 and 1998, representing 1.4% and 1.9% of total revenues,
respectively. Other income, net was $4.4 million and $7.1 million in the first
nine months of 1999 and 1998, representing 1.1% and 2.8% of total revenues,
respectively. Included in other income, net for the nine months ended September
30, 1998 was a gain of $1.8 million on the sale of SMART's hosting business. The
decline in other income, net for the nine months ended September 30, 1999 was
primarily attributable to decreased returns on cash, cash equivalents and
short-term investment balances due to the overall lower interest rate
environment in 1999 (as compared to the same periods in 1998) as well as
increased interest expense on SMART indebtedness, which was repaid in the third
quarter of 1999.
PROVISION FOR INCOME TAXES
The effective income tax rates for the three and nine months ended
September 30, 1999 were 51.6% and 63.4%, respectively, compared to 70.9% and
87.0%, respectively, for the three and nine months ended September 30, 1998. The
effective income tax rates for the three and nine months ended September 30,
1999 and 1998 differed from the U.S. statutory rate due primarily to the
non-deductibility of SMART's pre-acquisition losses, the in-process research and
development and certain other acquisition-related expenses. Excluding the
effects of SMART's pre-acquisition losses, the in-process research and
development and certain other acquisition-related expenses, our effective tax
rates for both the three and nine months ended September 30, 1999, and 1998 was
approximately 38% and 38.5%, respectively.
NET INCOME PER SHARE
Net income per share is calculated in accordance with SFAS 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 potentially dilutive effect of common stock equivalents such as stock
options, while net income per share, assuming dilution includes such potentially
dilutive effects. Future weighted-average shares outstanding calculations will
be impacted by the following factors: (1) the ongoing issuance of common stock
associated with stock option exercises; (2) the issuance of common shares
associated with our employee stock purchase program; (3) any fluctuations in our
stock price, which could cause changes in the number of common stock equivalents
included in the net income per share, assuming dilution computation; and (4) the
issuance of common stock to effect business combinations should we enter into
such transactions.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations and met our capital
expenditure requirements primarily through cash flows from operations, long-term
borrowings and sales of equity securities. Our liquidity and financial position
consisted of $194.6 million of working capital as of September 30, 1999 compared
to $183.6 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 $189.0 million at September 30, 1999 from $156.0 million at
December 31, 1998. Cash flows from operations were $46.8 million and $20.8
million for the nine months ended September 30, 1999 and 1998, respectively.
Operating cash flows resulting from increased income and increases in accounts
payable, accrued liabilities and income tax payable were partially offset by an
increase in accounts receivable.
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Accounts receivable, net of allowance for doubtful accounts, increased
to $157.2 million at September 30, 1999 from $127.7 million at December 31,
1998. Quarter-end days' sales outstanding decreased to 99 days at September 30,
1999 from 102 days at December 31, 1998. Accounts receivable and days' sales
outstanding can fluctuate for a variety of reasons, including (1) the amount and
timing of revenues earned; (2) collection experience; (3) the amount of
receivables generated from international customers, which generally have longer
payment terms compared to customers in the U.S. and (4) 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 September 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 $50.3 million for the nine months
ended September 30, 1999 as compared to $68.4 million for the nine months ended
September 30, 1998. Cash used in investing activities was unusually large in the
first nine months of 1998 due to the investment of the December 1997 equity
offering proceeds. At September 30, 1999, we did not have any material
commitments for capital expenditures.
Cash provided by financing activities was $8.8 million for the nine
months ended September 30, 1999 as compared to $8.0 million for the nine months
ended September 30, 1998. The slight increase in cash provided by financing
activities was due to an increase in the net proceeds received upon the exercise
of employee stock options and proceeds from our employee stock purchase plans,
offset by the repayment of SMART indebtedness.
In August 1999, we entered into a one-year, $30.0 million revolving
credit agreement. The facility is unsecured and contains customary restrictive
covenants, including covenants requiring us to maintain certain financial
ratios. The revolving credit agreement is not subject to a borrowing base
limitation and borrowings thereunder bear interest at LIBOR plus 0.75% to 1.75%,
depending on certain cash ratios. The maximum borrowings available under the
facility are reduced by the value of outstanding letters of credit issued by the
lender on our behalf, $14.2 million of which were outstanding at September 30,
1999. At September 30, 1999, there were no borrowings outstanding under this
agreement and we were in compliance with all covenants.
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.
We believe that existing cash and cash equivalent balances, short-term
investment balances, available borrowings under the revolving credit agreement
and potential cash flows from operations will satisfy our working capital and
capital expenditure requirements for 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 would 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
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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.
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
September 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 the fourth quarter of
1999. We have not deferred any information technology initiatives as a result of
our Year 2000 project. In the first nine months of 1999, we incurred
approximately $350,000 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 in a timely manner. 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. We have not fully determined the
risks associated with the reasonably worst-case scenario and have not formulated
a contingency plan to address Year 2000 issues. We do not expect to have a
specific contingency plan in place in the future.
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
"Risks Related to i2 and SMART as a Combined Company" in our Form S-4 filed June
23, 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;
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- 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.
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 eBusiness processes. These
competitors include:
- Enterprise resource application software vendors such as SAP,
PeopleSoft, Oracle and Baan, each currently offering or marketing
competitive software solutions;
- Supply chain software vendors, including Manugistics and
Logility;
- Vendors of products and services for eBusiness;
- Other software vendors who may broaden their product offerings by
internally developing, or by acquiring or partnering with
independent developers of eBusiness solutions;
- Corporate information technology departments which may develop
their own eBusiness 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 three 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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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 AND MARKETING OUR
INTELLIGENT EBUSINESS 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 our other
intelligent eBusiness 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 our products or services 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 demand and
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 and services 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, services and enhancements. We must continue
to enhance our current product line and develop and introduce new products and
services 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 and services 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 ITLS, and in July 1999, we acquired SMART.
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 and others. We may not realize the benefits anticipated
when these acquisitions were made. Our failure to successfully integrate
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our operations and products with those of ITLS, SMART 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 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 could 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
experienced weaknesses in their currency, banking and equity markets. Such
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 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
and certain other operating systems. 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
ADVERSELY AFFECT OUR LICENSE REVENUES.
Customers may delay their purchasing decisions in anticipation of our
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 July 1 through September 30, 1999, we issued approximately 177,563
shares of common stock to employees pursuant to exercises of stock options (with
exercise prices ranging from $0.02 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Index
Number Exhibit Description
------ --------------------------------------------
3.1 Certificate of Incorporation, as amended
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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.
---------------------------------------
November 15, 1999 /s/ Sanjiv S. Sidhu
----------------- -------------------
(Date) Sanjiv S. Sidhu
Chairman of the Board and Chief
Executive Officer
(Principal executive officer)
November 15, 1999 /s/ Nancy F. Brigham
----------------- --------------------
(Date) Nancy F. Brigham
Corporate Controller
(Chief accounting officer)
21
<PAGE> 22
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Certificate of Incorporation, as amended
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
RESTATED
CERTIFICATE OF INCORPORATION
OF
i2 TECHNOLOGIES, INC.
i2 TECHNOLOGIES, INC., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), HEREBY CERTIFIES:
FIRST: That a meeting of the directors of the Corporation held on April
11, 1999, the directors of the Corporation adopted resolutions approving and
declaring advisable the following amendment to the Corporation's Restated
Certificate of Incorporation:
BE IT RESOLVED, that, subject to the approval of the Corporation's
stockholders, the Restated Certificate of Incorporation be amended by
amending paragraphs A and B of the Article thereof numbered "FOURTH" so
that, as amended, said paragraphs shall read in full as follows:
"A. The total number of shares which the Corporation shall have
authority to issue is FIVE HUNDRED AND FIVE MILLION (505,000,000)
shares of capital stock.
B. Of such authorized shares FIVE HUNDRED MILLION (500,000,000)
shares shall be designated "Common Stock," and have a par value of
$.00025."
SECOND: That at a meeting of the stockholders of the Corporation called
and held upon notice in accordance with the provisions of Section 222 of the
General Corporation Law of the State of Delaware, the required percentage of
shares of stock of the Corporation voted in favor of said amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the undersigned officer of i2 Technologies, Inc.
has hereunto set his hand this 31st day of August 1999.
i2 TECHNOLOGIES, INC.
By: /s/ WILLIAM M. BEECHER
-------------------------------------
William M. Beecher
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 67,946
<SECURITIES> 121,094
<RECEIVABLES> 157,195
<ALLOWANCES> 13,994
<INVENTORY> 0
<CURRENT-ASSETS> 369,423
<PP&E> 77,550
<DEPRECIATION> (34,528)
<TOTAL-ASSETS> 449,245
<CURRENT-LIABILITIES> 174,850
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 274,084
<TOTAL-LIABILITY-AND-EQUITY> 449,245
<SALES> 242,051
<TOTAL-REVENUES> 395,842
<CGS> 11,821
<TOTAL-COSTS> 378,116
<OTHER-EXPENSES> (4,419)
<LOSS-PROVISION> (6,886)
<INTEREST-EXPENSE> 667
<INCOME-PRETAX> 22,145
<INCOME-TAX> 14,045
<INCOME-CONTINUING> 8,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,100
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.10
</TABLE>
