<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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i2 TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7372 75-2294945
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
909 E. LAS COLINAS BOULEVARD, 16TH FLOOR
IRVING, TEXAS 75039
(214) 860-6000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
WILLIAM M. BEECHER
CHIEF FINANCIAL OFFICER
i2 TECHNOLOGIES, INC.
909 E. LAS COLINAS BOULEVARD, 16TH FLOOR
IRVING, TEXAS 75039
(214) 860-6000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C>
RONALD G. SKLOSS J. NIXON FOX III, ESQ.
THOMAS R. NELSON JOSEPH F. DANIELS, ESQ.
BROBECK, PHLEGER & HARRISON LLP GRAY CARY WARE & FREIDENRICH LLP
301 CONGRESS AVENUE, SUITE 1200 100 CONGRESS AVENUE, SUITE 1440
AUSTIN, TEXAS 78701 AUSTIN, TEXAS 78701
TELEPHONE: (512) 477-5495 TELEPHONE: (512) 457-7000
FACSIMILE: (512) 477-5813 FACSIMILE: (512) 457-7070
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: At the
effective time of the merger of a wholly owned subsidiary of the Registrant with
and into Sales Marketing Administration Research Tracking Technologies, Inc.
("SMART"), which shall occur as soon as practicable after the effective date of
this Registration Statement and the satisfaction or waiver of all conditions to
the closing of such merger.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering [ ] ______
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [ ] ______
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $0.00025 per
share................................... 2,141,603 $0.0003 $9,758 $2.71
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(1) Based upon the maximum number of shares of common stock of the Registrant
that may be issued pursuant to the merger.
(2) Estimated solely for purposes of calculating the registration fee required
by Section 6(b) of the Securities Act of 1933, as amended (the "Securities
Act"). This fee has been computed pursuant to Rule 457(f)(2) thereof and is
based on a maximum of 29,274,949 shares of SMART common stock to be
exchanged or canceled pursuant to the merger, which includes shares of SMART
common stock issuable upon exercise of all outstanding options and certain
warrants to purchase SMART capital stock and, due to SMART's accumulated
deficit, using one-third of the $0.001 par value per share of SMART capital
stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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[SMART LOGO]
June , 1999
Dear SMART Stockholder:
I am pleased to forward the enclosed consent solicitation/prospectus
requesting your approval of a merger that would result in Sales Marketing
Administration Research Tracking Technologies, Inc., also known as SMART,
becoming a wholly owned subsidiary of i2 Technologies, Inc., and your approval
and adoption of the merger agreement associated with the merger.
We are very excited by the opportunities we envision for the combined
company. Your Board of Directors has carefully studied the terms and conditions
of the merger and unanimously recommends that you approve the merger agreement.
In the materials accompanying this letter you will find a consent
solicitation/prospectus relating to proposals requiring your approval and one or
more written consents. You will receive more than one written consent if you own
shares of different classes of SMART capital stock. This document more fully
describes the merger and the proposals before you. YOU SHOULD READ AND CAREFULLY
CONSIDER THIS CONSENT SOLICITATION/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE
MATTERS REFERRED TO UNDER "RISK FACTORS" STARTING ON PAGE 5.
You should note that certain stockholders of SMART who collectively own
approximately 79% of SMART's outstanding capital stock have agreed to vote their
shares in favor of the merger. However, the merger agreement and the merger must
be approved and adopted by the holders of SMART capital stock representing at
least 90% of the outstanding shares of SMART capital stock and at least a
majority of each class or series of SMART preferred stock, each acting as a
separate class.
On behalf of the SMART Board of Directors, we thank you for your support
and ask you to act by written consent to approve and adopt the merger agreement
and the merger, and, where appropriate, the conversion of SMART Series A
Preferred Stock and Series B Preferred Stock into SMART common stock and the
termination of agreements providing certain rights to holders of SMART preferred
stock.
Sincerely,
Bryan E. Plug
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION OR THE SECURITIES
BEING OFFERED BY I2 OR DETERMINED IF THIS CONSENT SOLICITATION/PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This consent solicitation/prospectus is dated June , 1999 and was first
sent to SMART stockholders on or about June , 1999.
<PAGE> 3
SALES MARKETING ADMINISTRATION RESEARCH
TRACKING TECHNOLOGIES, INC.
11701 STONEHOLLOW DRIVE
AUSTIN, TEXAS 78758
---------------------------------------------
MERGER PROPOSED
YOUR WRITTEN CONSENT IS VERY IMPORTANT.
---------------------------------------------
To the Stockholders of SMART:
The Board of Directors of Sales Marketing Administration Research Tracking
Technologies, also known as SMART, has approved a merger with i2 Technologies
that would result in (1) your receipt of a fraction of a share of i2 common
stock in exchange for each share of your SMART capital stock and (2) SMART
becoming a wholly owned subsidiary of i2. i2 common stock trades on The Nasdaq
National Market under the symbol "ITWO."
The SMART Board of Directors unanimously recommends that:
- All holders of SMART capital stock approve and adopt the merger agreement
and approve the merger;
- All holders of SMART Series A Preferred Stock and Series B Preferred
Stock consent to the conversion of their Series A Preferred Stock and
Series B Preferred Stock into SMART common stock, effective immediately
prior to the merger; and
- All holders of SMART preferred stock and four holders of SMART common
stock consent to the termination of agreements which provide certain
rights to holders of SMART preferred stock, effective immediately prior
to the merger.
These items are described more fully in the consent solicitation/prospectus
attached to this notice. Depending upon the class or classes of SMART capital
stock you hold, you may receive more than one written consent. Please take the
time to complete and return to us the enclosed written consent or consents. If
you sign, date and return a written consent, it will count as your consent to
act in favor of the appropriate proposal. If you fail to return a written
consent, it will count as a vote against the appropriate proposal. You may
consent to these proposals only if you owned shares as of the close of business
on May 12, 1999.
PLEASE RETURN (1) EACH WRITTEN CONSENT BY FACSIMILE USING THE ENCLOSED
COVER SHEET AS SOON AS POSSIBLE, BUT NO LATER THAN JUNE , 1999, TO J. NIXON
FOX III, ESQ., GRAY CARY WARE & FREIDENRICH LLP, AT FACSIMILE NUMBER (512)
457-7070, AND (2) EACH ORIGINAL EXECUTED WRITTEN CONSENT BY MAIL IN THE ENCLOSED
PREPAID ENVELOPE NO LATER THAN JUNE , 1999 TO GRAY CARY WARE & FREIDENRICH
LLP, 100 CONGRESS AVENUE, SUITE 1440, AUSTIN, TEXAS 78701, ATTENTION: J. NIXON
FOX III, ESQ. PLEASE DO NOT SEND ANY SMART STOCK CERTIFICATES AT THIS TIME.
BY ORDER OF THE BOARD OF DIRECTORS
Michael J. Feinstein
General Counsel and Secretary
Austin, Texas
June , 1999
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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SUMMARY..................................................... 1
The Companies............................................. 1
What You Will Receive in the Merger....................... 1
A Portion of Your Shares Will Be Placed In Escrow......... 2
Federal Income Tax Consequences........................... 2
When the Merger Will Occur................................ 2
Rights of Dissenting Stockholders......................... 2
Your Rights as a Stockholder Following the Merger......... 2
Reasons for the Merger.................................... 2
Recommendation of SMART's Board of Directors.............. 3
Interests of Certain Persons in the Merger................ 3
Shares Entitled to Consent................................ 3
Consents Required......................................... 3
Forward-Looking Statements May Prove Inaccurate........... 3
Stockholder Agreements.................................... 3
Employment and Non-Competition Agreements................. 4
Conditions to the Merger.................................. 4
Accounting Treatment...................................... 4
Termination of the Merger Agreement....................... 4
Expenses.................................................. 4
Who Can Help Answer Your Questions........................ 4
RISKS RELATED TO THE MERGER................................. 5
RISKS RELATED TO i2 AND SMART AS A COMBINED COMPANY......... 8
INVESTMENT RISKS............................................ 16
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE............. 17
TRADEMARKS.................................................. 17
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF i2....... 18
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SMART.... 19
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
DATA...................................................... 20
COMPARATIVE PER SHARE DATA.................................. 21
MARKET PRICE AND DIVIDEND INFORMATION....................... 22
SOLICITATION OF WRITTEN CONSENTS OF SMART STOCKHOLDERS...... 23
Requested Date of Receipt of Written Consents............. 23
Matters to be Approved by Written Consent................. 23
Record Date and Shares Entitled to Act by Written
Consent................................................ 23
Action by Written Consent................................. 23
Consents Required......................................... 23
Board Recommendation...................................... 24
THE MERGER.................................................. 25
General................................................... 25
Background of the Merger.................................. 25
Reasons for the Merger.................................... 28
Federal Income Tax Considerations......................... 30
Accounting Treatment...................................... 31
TERMS OF THE MERGER......................................... 32
Conversion of Common Stock and Series C Preferred Stock... 32
Conversion of Series A and Series B Preferred Stock....... 33
Conversion of Options and Warrants........................ 33
</TABLE>
i
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PAGE
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Termination of Rights Agreements.......................... 34
Procedures for Exchanging Stock Certificates.............. 35
Notification Regarding Options............................ 35
Notification Regarding Warrants........................... 35
Operations Following the Merger........................... 35
The Merger Agreement...................................... 36
Related Agreements........................................ 41
Regulatory Matters........................................ 42
Appraisal Rights.......................................... 42
INTERESTS OF CERTAIN PERSONS IN THE MERGER.................. 44
i2 BUSINESS................................................. 46
i2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 57
i2 MANAGEMENT............................................... 68
i2 EXECUTIVE COMPENSATION AND OTHER MATTERS................. 70
i2 SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL
STOCKHOLDERS.............................................. 73
SMART BUSINESS.............................................. 74
SMART MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 80
SMART SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL
STOCKHOLDERS.............................................. 87
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS................................................ 90
DESCRIPTION OF i2 CAPITAL STOCK............................. 98
In General................................................ 98
Common Stock.............................................. 98
Preferred Stock........................................... 98
COMPARISON OF RIGHTS OF STOCKHOLDERS OF i2 AND SMART........ 99
Advance Notice of Stockholder Proposals................... 99
Voting Requirements and Quorum of Stockholder Meetings.... 99
Size of the Board of Directors............................ 101
Electing Directors; Filling Vacancies on the Board of
Directors; Removal of Directors........................ 101
EXPERTS..................................................... 102
LEGAL MATTERS............................................... 103
WHERE YOU CAN FIND MORE INFORMATION......................... 103
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
APPENDIX A -- Agreement and Plan of Merger and
Reorganization............................................ A-1
APPENDIX B -- Escrow Agreement.............................. B-1
APPENDIX C -- Delaware General Corporation Law Section
262 -- Appraisal Rights................................... C-1
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ii
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SUMMARY
The following summary highlights certain information found in greater
detail elsewhere in this document. Even though SMART and i2 have highlighted
what they feel is the information most important to you, SMART and i2 encourage
you to carefully read this entire document and the documents referred to in this
document for a complete understanding of the merger. See "Where You Can Find
More Information" on page 103.
THE COMPANIES (PAGES 46 AND 74)
i2 TECHNOLOGIES, INC.
909 E. Las Colinas Boulevard, 16th Floor
Irving, Texas 75039
Telephone: (214) 860-6000
i2 is a leading provider of electronic business process optimization, or
eBPO, software solutions, licensed as part of the RHYTHM family of products.
eBPO represents a new class of decision-intelligence software solutions that
optimize and integrate core business processes, while driving intelligent
collaboration with business partners. These processes include supply chain
management, customer management and product lifecycle management, as well as
inter-process planning and strategic planning. i2 also provides related services
such as consulting, training and maintenance. i2's products enable businesses to
optimize their business processes to realize increases in revenues, 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. Additionally, i2's software enables its customers to benefit
from the growth of the Internet by supporting new Internet/online customer
facing applications and enabling re-engineering of supply chains to facilitate
competitive e-business and fulfill e-commerce transactions.
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC. (SMART)
11701 Stonehollow Drive
Austin, Texas 78758
Telephone: (512) 719-9100
SMART, acting through its wholly owned subsidiary, SMART Technologies,
Inc., develops Internet-based Enterprise Relationship Management software.
SMART's software utilizes the Internet to provide an interactive and
individually addressable channel for customers with the reach and accessibility
required for large enterprises.
WHAT YOU WILL RECEIVE IN THE MERGER (PAGE 32)
If the merger is completed, you will receive shares of i2 common stock.
Although the total number of shares of i2 common stock to be issued pursuant to
the merger agreement will not change, the share exchange ratio will vary
depending on the average of recent closing prices of i2 common stock and will be
determined at the time the merger is completed and not at the time you consent
to approval of the merger.
Because of the liquidation preferences of the SMART Series C Preferred
Stock, each share of Series C Preferred Stock of SMART is entitled to receive a
fraction of a share of i2 common stock with a value equal to $3.00 calculated
using the average closing price of i2 common stock over the 30 calendar day
period ending three days prior to the closing of the merger. The balance of the
shares of i2 common stock issuable in the merger will be allocated to the
outstanding shares of SMART common stock, outstanding options exercisable for
common stock of SMART and certain warrants to acquire SMART capital stock.
Because of the lower liquidation preferences for the SMART Series A
Preferred and SMART Series B Preferred Stock, holders of SMART Series A
Preferred and SMART Series B Preferred Stock will convert their shares into
shares of SMART common stock immediately prior to the closing. Each share of
SMART Series A Preferred Stock is convertible into three shares of SMART common
stock and each share of SMART Series B Preferred Stock is convertible into one
share of SMART common stock.
The following table reflects the approximate portion of a share of i2
common stock you would receive, depending upon the average of the closing prices
of i2 common stock over the 30 calendar day period ending three days prior to
closing of the merger, and the dollar value of the i2 common
1
<PAGE> 7
stock to be received, per share of SMART capital stock, calculated using the
same average.
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AVERAGE OF CLOSING
PRICES OF SERIES A SERIES B
i2 COMMON STOCK PREFERRED PREFERRED
<S> <C> <C>
$40....................... .2194($8.78) .0731($2.93)
$35....................... .2147($7.52) .0715($2.50)
$30....................... .2083($6.24) .0694($2.08)
$25....................... .1995($4.99) .0665($1.66)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE OF CLOSING
PRICES OF SERIES C COMMON
i2 COMMON STOCK PREFERRED STOCK
<S> <C> <C>
$40....................... .0750($3.00) .0731($2.93)
$35....................... .0857($3.00) .0715($2.50)
$30....................... .1000($3.00) .0694($2.08)
$25....................... .1200($3.00) .0665($1.66)
</TABLE>
The actual market price per share of i2 common stock on the closing date of
the merger may be more or less than an average stock price prior to that time.
On May 26, 1999, the closing price per share of i2 common stock on The NASDAQ
National Market was $31.38, and the average closing price of i2 common stock
over the 30 calendar day period ending three days prior to May 26, 1999 was
$33.03.
A PORTION OF YOUR SHARES WILL BE PLACED IN ESCROW (PAGE 40)
Ten percent (10%) of the shares of i2 common stock you are entitled to
receive will be placed in escrow for a period not to exceed one year from the
closing of the merger. These shares will be used to satisfy any claims made by
i2 prior to the expiration of the one-year period for any damages incurred by i2
as a result of any misrepresentation or breach of any warranty or agreement made
by SMART in the merger agreement. Any of your shares remaining after this
one-year period will be released from escrow and sent to you.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 30)
SMART and i2 expect the merger to be treated as a tax-free reorganization
for federal income tax purposes. As a result, the merger should not result in
you recognizing a gain or loss on your share ownership (other than cash received
in lieu of a fraction of a share or upon exercise of appraisal rights).
WHEN THE MERGER WILL OCCUR (PAGE 36)
Assuming that both SMART and i2 satisfy or waive all of the conditions to
the merger agreement, it is anticipated that the effective time of the merger
will be on or before July 30, 1999. The date of the closing of the merger after
satisfaction of all conditions to the merger, or when otherwise agreed to by
SMART and i2, is referred to in this document as the closing date.
RIGHTS OF DISSENTING STOCKHOLDERS (PAGE 42)
Assuming the condition to closing that the merger be approved by holders of
at least 90% of the outstanding shares of SMART capital stock is satisfied or is
waived, holders of SMART capital stock who did not consent to approve the merger
may be entitled to appraisal rights.
YOUR RIGHTS AS A STOCKHOLDER FOLLOWING THE MERGER (PAGE 99)
At the effective time of the merger, SMART stockholders will become i2
stockholders. There are important differences between the rights of SMART
stockholders and i2 stockholders.
REASONS FOR THE MERGER (PAGE 28)
SMART and i2 have identified several potential advantages of the merger
that they believe will benefit you, SMART and i2.
The merger is anticipated to benefit you by:
- Reducing your exposure to risks inherent in SMART's (1) reliance on a
limited number of products and (2) competition with larger companies with
more diversified product lines and greater financial resources;
- Providing you with investment liquidity through ownership of i2 common
stock, which is quoted on The Nasdaq National Market; and
- Allowing you to participate in the potential for growth of the combined
company after the merger.
The merger is anticipated to benefit SMART by:
- Allowing SMART to utilize i2's large and experienced sales force to sell
SMART's products and services; and
2
<PAGE> 8
- Allowing SMART to market its products through i2's distribution channels
and sell its products with i2's products.
The merger is anticipated to benefit i2 by:
- Enhancing i2's eBPO product portfolio with the addition of SMART's
customer management products;
- Allowing i2 to secure ownership of SMART's technology; and
- Providing i2 access to new vertical markets such as financial services
and telecommunications.
RECOMMENDATION OF SMART'S BOARD OF DIRECTORS
The SMART Board of Directors believes the merger is advisable and in your
best interests and therefore unanimously recommends that (1) all SMART
stockholders consent to approval and adoption of the merger agreement and
approval of the merger, (2) the holders of SMART Series A Preferred Stock and
SMART Series B Preferred Stock consent to the conversion of their shares into
SMART common stock and (3) holders of SMART preferred stock and four holders of
SMART common stock consent to the termination of agreements providing certain
rights to holders of SMART preferred stock.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 44)
You should note that certain officers and directors of SMART have interests
in the merger that are different from, or in addition to, your interests. These
interests relate to potential severance payments, potential accelerated vesting
of stock options and indemnification rights. As a result, directors and officers
may be more likely to vote to approve the merger than SMART stockholders.
SHARES ENTITLED TO CONSENT
You are entitled to submit your written consent or consents if you were a
SMART stockholder as of the close of business on the record date, which is May
12, 1999. At the close of business on the record date, 11,178,281 shares of
SMART common stock, 1,434,783 shares of SMART Series A Preferred Stock,
4,498,606 shares of SMART Series B Preferred Stock and 3,749,999 shares of SMART
Series C Preferred Stock were outstanding and entitled to act by written
consent. You will have one vote for each share of SMART common stock you owned,
or into which your shares of SMART preferred stock were convertible, as of the
record date.
CONSENTS REQUIRED
A condition to the closing of the merger is that the merger agreement and
merger be approved by the holders of at least 90% of the outstanding shares of
SMART capital stock and at least a majority of each class or series of SMART
preferred stock, each acting as a separate class. Conversion of the outstanding
shares of SMART Series A Preferred Stock and SMART Series B Preferred Stock into
SMART common stock will require the written consent of at least a majority of
each such series, each acting as a separate class. The termination of the
agreements providing certain rights to holders of SMART preferred stock must be
approved by at least a majority of the holders of SMART preferred stock and four
holders of SMART common stock. i2 stockholders will not be required to consent
to or vote on the merger.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 17)
Each of SMART and i2 has made forward-looking statements in this document
that are subject to risks and uncertainties. Forward-looking statements include
expectations concerning matters that are not historical facts. Words such as
"believe," "expect," "anticipate" or similar expressions, indicate
forward-looking statements. For more information regarding factors that could
cause actual results to differ from these expectations, you should refer to
"Risk Factors" on page 5.
STOCKHOLDER AGREEMENTS (PAGE 41)
Stockholders of SMART owning approximately 79% of the outstanding SMART
capital stock and more than 51% of each series of SMART preferred stock have
executed agreements which provide that they will consent to the merger.
3
<PAGE> 9
EMPLOYMENT AND NON-COMPETITION AGREEMENTS (PAGE 42)
Certain employees of SMART (including Bryan E. Plug, Chairman of the Board,
President and Chief Executive Officer, and Muneer Hirji, Vice President, Sales)
have entered into employment and non-competition agreements with i2. The
employment and non-competition agreements will become effective upon the
effective time of the merger.
CONDITIONS TO THE MERGER (PAGE 38)
SMART and i2 will complete the merger only if a number of conditions are
either satisfied or waived, including the following:
- The required number of SMART stockholders have approved the merger;
- All shares of SMART Series A Preferred Stock and Series B Preferred Stock
have been converted into SMART common stock, effective immediately prior
to the effective time of the merger;
- Agreements providing certain rights to holders of SMART preferred stock
have been terminated, effective immediately prior to the effective time
of the merger;
- SMART and i2 have received letters from their respective independent
accountants as to the appropriateness of pooling of interests accounting
for the merger;
- There are no material inaccuracies in the representations and warranties
of SMART and i2 in the merger agreement; and
- No legal restraints or prohibitions prevent the completion of the merger.
ACCOUNTING TREATMENT (PAGE 31)
SMART and i2 intend to account for the merger as a pooling of interests for
financial reporting purposes.
TERMINATION OF THE MERGER AGREEMENT (PAGE 41)
Either SMART or i2 may terminate the merger agreement at any time prior to
the effective time of the merger, whether before or after SMART obtains your
approval, if:
- SMART and i2 do not complete the transaction by July 30, 1999; however,
neither SMART nor i2 may terminate the agreement if its breach is the
reason the transaction has not been completed;
- the other party breaches its representations, warranties or obligations
under the merger agreement and the breach has a material effect on the
other party; or
- a law or regulation makes the transaction illegal or any order or
injunction permanently prohibits the transaction.
EXPENSES (PAGE 41)
Whether or not SMART and i2 complete the merger, both have agreed that they
will each pay their own costs and expenses incurred in connection with the
merger, except that the total number of shares of i2 common stock delivered to
SMART stockholders upon the closing of the merger or from escrow may be reduced
by the amount by which SMART's expenses incurred in connection with the merger
exceed $275,000.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have questions about the merger you should contact:
Sales Marketing Administration Research Tracking Technologies, Inc.
11701 Stonehollow Drive
Austin, Texas 78758
Telephone: (512) 719-9100
Attention: Michael Feinstein, General Counsel
4
<PAGE> 10
RISK FACTORS
You should consider the following risk factors when evaluating whether to
approve (1) the merger agreement and the merger, (2) the proposal to convert all
shares of SMART Series A Preferred Stock and Series B Preferred Stock into SMART
common stock and (3) the proposal to terminate the agreements providing certain
rights to holders of SMART preferred stock. You should consider these factors in
conjunction with the other information contained in this document and its
Appendices.
If any of the following risks occur, the business, financial condition or
results of operations of either or both of i2 and SMART may be seriously harmed.
In such case, the trading price of i2 common stock may decline and you may lose
all or part of your investment.
RISKS RELATED TO THE MERGER
EXPECTED BENEFITS OF THE MERGER MAY NOT BE REALIZED IF SMART'S AND i2'S
TECHNOLOGY, OPERATIONS AND PERSONNEL ARE NOT EFFECTIVELY INTEGRATED.
In order to achieve the benefits of the merger, i2 must efficiently combine
SMART's business within i2. The process of coordinating research and
development, sales and marketing and business development efforts and
integrating the companies' product and service offerings will involve
significant cost and effort on behalf of the combined company. The integration
of the companies' products and services may require the partial or wholesale
conversion or redesign of some or all of the technologies, products and services
of either SMART or i2. The combined company intends to offer enterprise
relationship management products, extending i2's customer management solutions.
SMART is in the process of re-writing its software products. Integrating the two
businesses will entail significant diversion of management's time and attention
from the day-to-day business of the combined company. Additionally, the process
of integrating operations could cause an interruption of or loss of momentum in
the activities of the combined company. If SMART and i2 do not integrate their
operations and technologies quickly and smoothly, the anticipated benefits of
the merger may not be realized and serious harm to the combined company's
business, financial condition and results of operations may result. Similarly,
stockholders of the combined company may not achieve value through owning i2
common stock greater than they would have achieved as stockholders of SMART or
i2 as a separate company.
Uncertainty in the marketplace or customer concern regarding the impact of
the merger may result in customers or potential customers of SMART or i2
deferring purchasing decisions until the closing of the merger or thereafter.
Such effects could materially reduce the short-term earnings and earnings per
share of the combined company.
INTEGRATION MAY BE EVEN MORE DIFFICULT DUE TO RECENT AND POTENTIAL FUTURE
ACQUISITIONS.
The challenges of integrating the organizations and operations of SMART and
i2 will be compounded by ongoing efforts associated with the integration of
several recent acquisitions by i2 and potential future acquisitions by the
combined company. The integration of multiple organizations will require a
substantial amount of management resources and attention.
THE TOTAL NUMBER OF SHARES OF i2 COMMON STOCK TO BE ISSUED IN THE MERGER WILL
NOT CHANGE DESPITE POTENTIAL CHANGES IN i2'S STOCK PRICE PRIOR TO THE CLOSING
DATE.
The maximum number of shares of i2 common stock to be issued, including i2
common stock to be reserved for issuance upon exercise of SMART stock options
and certain warrants assumed by i2, is 2,141,603. This amount will not be
adjusted based on fluctuations in the price of i2 common stock prior to the
closing date. Accordingly, the value of the consideration that you will receive
if the merger occurs will depend on both the market price of i2 common stock on
the closing date as well as an average price of i2 common stock prior to
closing, and this value may decrease from the date you submit your written
consent. The closing sale price of i2 common stock on The Nasdaq National Market
on May 12, 1999, the last trading day prior to the public announcement of the
proposed merger, was $34.00, and on May ,
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1999, the most recent practicable date prior to the printing of this document,
was $ . However, neither SMART nor i2 can assure you as to the market
price of i2 common stock at any time before or after the merger.
IF THE MERGER FAILS TO QUALIFY AS A TAX-FREE REORGANIZATION YOU WILL RECOGNIZE
GAIN OR LOSS ON YOUR SMART SHARES.
SMART and i2 have structured the merger to qualify as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended. Although the Internal Revenue Service, or IRS, has not provided a
ruling on the merger, SMART and i2 will each obtain a legal opinion from their
respective counsel that the merger qualifies as a tax-free reorganization. These
opinions neither bind the IRS nor prevent the IRS from adopting a contrary
position. If the merger fails to qualify as a tax-free reorganization, you would
generally recognize gain or loss on each SMART share surrendered in the amount
of the difference between your basis in such share and the fair market value of
the i2 shares and other consideration you receive in exchange for such SMART
share at the time of the merger.
THE MERGER MAY NOT RECEIVE POOLING OF INTERESTS ACCOUNTING TREATMENT.
SMART and i2 intend for the merger to qualify for pooling of interests
accounting treatment for financial reporting purposes. In order for the merger
to be accounted for as a pooling of interests, among other conditions that must
be satisfied, (1) holders of at least 90% of outstanding shares of SMART capital
stock must approve and adopt the merger agreement and approve the merger and (2)
no more than 10% of the consideration exchanged for outstanding SMART capital
stock may consist of cash. If these conditions are not met, the merger will not
receive pooling of interests treatment. SMART and i2 cannot assure you that
these conditions will be met.
In addition, to account for the merger as a pooling of interests, i2, SMART
and their respective affiliates must meet the criteria for pooling of interests
accounting established in opinions published by the Accounting Principles Board
and interpreted by the Financial Accounting Standards Board and the Securities
and Exchange Commission, or SEC. These opinions are complex and the
interpretation of them is subject to change. Completion of the merger is
conditioned, among other things, upon (1) the receipt by SMART of a letter from
its independent accountants that, subject to customary qualifications, they
concur with management's conclusion that no conditions exist that would preclude
SMART from being a party to a business combination for which the pooling of
interests method of accounting would be available and (2) receipt by i2 of a
letter from its independent accountants that, subject to customary
qualifications, they concur with management's conclusion that no conditions
exist that would preclude i2 from accounting for the merger as a pooling of
interests.
The availability of pooling of interests accounting treatment for the
merger also depends, in part, upon circumstances and events occurring after the
effective time of the merger. For example, affiliates of SMART and i2 must not
sell, or otherwise reduce their risk with respect to, any shares of stock,
except for a de minimus number as defined by certain SEC rules and regulations,
of either SMART or i2 from the period beginning 30 days prior to the closing of
the merger until the day that i2 publicly announces financial results covering
at least 30 days of combined operations of SMART and i2 after the merger. If
affiliates of SMART or i2 sell their shares of i2 common stock during that time
despite a contractual obligation not to do so, the merger may not qualify for
pooling of interests accounting treatment. The failure of the merger to qualify
for pooling of interests accounting treatment any reason would harm i2's
reported earnings and, potentially, the price of i2's common stock.
A PORTION OF YOUR SHARES WILL BE HELD IN AN ESCROW ACCOUNT FOR A PERIOD NOT TO
EXCEED ONE YEAR.
Upon completion of the merger, 10% of the aggregate number of shares of i2
common stock issued at the closing of the merger will be delivered to Chase Bank
of Texas, N.A. on behalf of the holders of SMART capital stock as security for
breaches by SMART of any of its representations, warranties or covenants set
forth in the merger agreement. The escrowed shares are to remain in an escrow
account for
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a maximum of one year after the effective time of the merger. If i2 successfully
asserts a claim while the escrowed shares remain in the escrow account, you may
not receive all or part of these escrowed shares.
SMART AND i2 WILL INCUR COSTS ASSOCIATED WITH THE MERGER THAT COULD HARM THE
COMBINED COMPANY'S FINANCIAL RESULTS AND COULD REDUCE THE NUMBER OF SHARES YOU
RECEIVE.
The merger will result in total transaction costs of approximately $275,000
to SMART and approximately $1.7 million to i2. i2's and SMART's transaction
costs are estimated and the actual costs of the transaction may be much larger.
The combined company may incur additional charges in subsequent quarters to
reflect costs associated with the merger. In addition, the total number of
shares of i2 common stock that you and other SMART stockholders receive in the
merger may be reduced by the extent to which SMART's costs related to the
merger, such as legal and accounting fees, exceed $275,000. If the merger is not
completed, SMART and i2 will have incurred significant costs for which they will
have received no benefits.
THE ESCROW AGENT MAY NOT ACT IN THE MANNER YOU DESIRE.
The merger agreement provides that Chase Bank of Texas, N.A. will act as
the escrow agent in certain matters involving the shares of i2 common stock to
be held in escrow. Your consent to approve the merger agreement and the merger
also effectively constitutes acceptance of Chase Bank of Texas, N.A. as escrow
agent to act as such in accordance with the merger agreement and the escrow
agreement by which it is bound. The escrow agent may not act in the manner you
desire and any arbitration orders required to be enforced by the escrow agent
pursuant to the terms of the escrow agreement could have the effect of reducing
the consideration you ultimately receive in the merger.
THE STOCKHOLDERS' AGENT MAY NOT ACT IN THE MANNER YOU DESIRE.
The merger agreement provides that William P. Wood will act as the
stockholders' agent in certain matters involving the shares of i2 common stock
to be held in escrow. As stockholders' agent, Mr. Wood will have the right,
among other things, to compromise and settle claims made by i2 against the
escrowed shares. Your consent to approve the merger agreement and the merger
also effectively constitutes acceptance of Mr. Wood as the stockholders' agent
to act as such in accordance with the merger agreement. The stockholders' agent
may not act in the manner you desire and decisions made by him could have the
effect of reducing the consideration you ultimately receive in the merger.
THE ISSUANCE OF i2 COMMON STOCK AND SMART'S OPERATING LOSSES WILL DILUTE i2'S
EARNINGS PER SHARE.
Up to 2,141,603 shares of i2 common stock are issuable pursuant to the
terms of the merger agreement, or approximately 3% of the total outstanding
number of shares of i2 common stock as of May 7, 1999. In addition, SMART
continues to experience substantial operating losses and i2 expects to incur an
additional one-time charge of approximately $2.0 million related to the merger
during the third quarter of 1999. As a result, i2's earnings per share will be
diluted which may negatively affect the market price of i2 common stock. Any
such negative effect on the market price for i2 common stock may not be limited
to either a certain magnitude or period of time.
YOUR RIGHTS AS A SMART STOCKHOLDER DIFFER FROM THE RIGHTS YOU WILL HAVE AS AN i2
STOCKHOLDER.
Following the merger, you will become a holder of i2 common stock. Certain
material differences exist between the rights of stockholders of SMART under
SMART's Restated Certificate of Incorporation and Bylaws, and the rights of
stockholders of i2 under the i2's Restated Certificate of Incorporation and
Amended and Restated Bylaws, even though both SMART and i2 are Delaware
corporations.
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT SMART'S FUTURE BUSINESS
AND OPERATIONS.
If the merger is not completed for any reason, SMART may be subject to a
number of material risks, including the following:
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- SMART continues to incur substantial operating losses and will need to
immediately and successfully establish new sources of financing, the
availability of which is uncertain;
- Potential customers may defer purchases of SMART products;
- Potential channel partners may refrain from entering into agreements with
SMART; and
- Employee turnover may increase.
The occurrence of any of these factors would likely result in serious harm
to SMART's business, operating results and financial condition.
RISKS RELATED TO i2 AND SMART AS A COMBINED COMPANY
THE FINANCIAL RESULTS OF THE COMBINED COMPANY MAY VARY SIGNIFICANTLY FROM
QUARTER TO QUARTER.
i2's operating results have varied significantly from quarter to quarter in
the past and it is expected that the combined company's 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 its 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
the combined company or its competitors;
- Changes in prices of the combined company's products and those of the
combined company competitors;
- Foreign currency exchange rate fluctuations;
- Market acceptance of new products;
- Mix of direct and indirect sales;
- Changes in the combined company's 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. As a combined company, i2 will continue to determine its
investment and expense levels based on expected future revenues. A significant
portion of i2's and SMART's 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 and net income are likely to
be adversely and disproportionately affected. In addition, the combined company
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 the combined company's 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, the combined company may not maintain positive operating margins in future
quarters.
THE COMBINED COMPANY ANTICIPATES SEASONAL FLUCTUATIONS IN REVENUES.
Historically, i2's revenues have tended to be strongest in the fourth
quarter of the year. i2 believes that its seasonality is due to the calendar
year budgeting cycles of many of its customers and its compensation policy that
rewards sales personnel for achieving annual revenue quotas. In future periods,
these seasonal trends may cause quarter-to-quarter operating results for the
combined company to vary.
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THE COMBINED COMPANY WILL DEPEND ON SIGNIFICANT INDIVIDUAL SALES.
Both i2 and SMART generally derive a significant portion of revenues in
each quarter from a small number of relatively large sales. For example, in the
first quarter of 1999, in the second, third and fourth quarters of 1998 and in
each quarter of 1997 and 1996, one or more customers each accounted for at least
15% of i2's total software license revenues in that quarter. Moreover, due to
customer purchasing patterns, i2 typically realizes a significant portion of its
software license revenues in the last few weeks of a quarter. As a result, i2 is
subject to significant variations in license revenues and results of operations
if it incurs any delays in customer orders. In 1998, software license and
service revenues from SMART's largest customer accounted for approximately 31%
of SMART's total revenues. Additionally, in the first quarter of 1999, service
revenues from SMART's largest customer accounted for approximately 29% of
SMART's total revenue. If in any future period the combined company fails to
close one or more substantial license sales that have been targeted to close in
that period, its operating results for that period could be seriously harmed.
THE MARKETS FOR THE COMBINED COMPANY'S PRODUCTS ARE HIGHLY COMPETITIVE.
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 i2's products as a complement to their own systems. However, as the
combined company attempts to increase its market share and expand its product
offerings, and as enterprise resource planning vendors expand their own product
offerings, relationships with these vendors may become more competitive.
Specifically, in 1997, i2's license and distribution agreement with SAP was
terminated, and SAP is currently marketing a suite of advanced planning and
scheduling products that compete with i2's RHYTHM. In addition, Oracle has
recently announced an advanced planning product. i2 believes 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 the combined company, many of its competitors have:
- Longer operating histories;
- Significantly greater financial, technical, marketing and other
resources;
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- Greater name recognition;
- A broader range of products to offer; and
- A larger installed base of customers.
Certain of SMART's potential competitors, such as Siebel Systems, Vantive,
Clarify, Remedy, SAP and Oracle are likely to bundle their products, if and when
available, in a manner that may discourage users from purchasing products
offered by SMART. Also, current and potential competitors of the combined
company have established or may establish cooperative relationships among
themselves or with third parties to enhance their products. In addition, the
combined company expects to experience increasing price competition as it
competes for market share and may not be able to compete successfully with its
existing or new competitors. If the combined company experiences increased
competition and does not perform well relative to this competition, substantial
harm may result to its business, operating results and financial condition.
THE COMBINED COMPANY MAY NOT BE ABLE TO MANAGE ITS GROWTH.
i2 has experienced rapid growth. Revenues for i2 have increased to $117.2
million in the three-month period ended March 31, 1999 from $71.4 million in the
three-month period ended March 31, 1998, and to $361.9 million in 1998 from
$213.7 million in 1997 and $100.5 million in 1996. i2's employee count has
increased to approximately 2,300 at March 31, 1999 from 2,200 at December 31,
1998 and 1,200 at December 31, 1997. i2 has also increased the scope of its
operating and financial systems and the geographic distribution of its
operations and customers. i2's management and operations have been strained by
this growth and will continue to be strained should rapid growth continue. SMART
has experienced substantial change in its business and operations since its
inception in 1996 which has placed significant demands on SMART's
administrative, operational, financial and other resources. The officers and
other key employees of the combined company will need to implement and improve
its operational, customer support and financial control systems and effectively
expand, train and manage its employee base. If they fail to do so, the combined
company's future operating results will be harmed. The combined company may also
not be able to manage future expansion successfully, and its inability to do so
would harm its business, operating results and financial condition.
THE COMBINED COMPANY FACES RISKS OF A DEVELOPING MARKET.
i2 currently derives a substantial portion of its revenues from licenses
for decision-support software products associated with supply chain management
software and related services. However, i2 is 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. After the
merger, it is intended that the combined company will offer enhanced products
and services and facilitate e-business 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 the combined company's e-business software solutions
and that an appropriate infrastructure necessary to support increased commerce
and communication on the Internet will fail to develop. Adoption of e-business
software 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 the combined company may not
develop acceptable solutions to address this functionality. Any one of these
events could seriously harm the combined company's business, operating results
and financial condition.
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i2 HISTORICALLY HAS SIGNIFICANT PRODUCT CONCENTRATION.
i2 currently derives substantially all of its revenues from licenses of its
RHYTHM suite of products and related services. RHYTHM-related revenues,
including maintenance and consulting contracts, will continue to account for
substantially all of i2's revenues for the foreseeable future. As a result, the
combined company's future operating results will depend upon continued market
acceptance of RHYTHM and enhancements thereto. RHYTHM may not achieve continued
market acceptance. Competition, technological change or other factors could
decrease demand for, or market acceptance of, RHYTHM. Any decrease in demand or
market acceptance of RHYTHM could substantially harm the combined company's
business, operating results and financial condition.
THE MARKETS IN WHICH i2 AND SMART COMPETE EXPERIENCE RAPID TECHNOLOGICAL CHANGE.
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. The combined company must
continue to enhance its current product line and develop and introduce new
products that remain competitive with the technological developments of its
competitors. The combined company must also satisfy increasingly sophisticated
customer requirements. If the combined company cannot remain competitive with
the technological advances of others or if its new products or product
enhancements do not achieve market acceptance, the combined company's business,
operating results and financial condition could be seriously harmed.
NEW AND ENHANCED PRODUCTS WILL DEPEND ON THE INCREASED USE OF THE INTERNET.
The combined company intends to offer new and enhanced products and
services, some of which depend upon the adoption of the Internet as a widely
used medium for commerce and communication. The Internet has experienced, and is
expected to continue to experience, significant growth in the number of users
and amount of traffic. There can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed on it by
this continued growth. In addition, the Internet could lose its viability due to
delays in the development or adoption of new standards and protocols to handle
increased levels of Internet activity or due to increased governmental
regulation. Moreover, certain issues concerning the commercial use of the
Internet (such as security, reliability, cost, ease of use, accessibility and
quality of service) and the subsequent outcomes of such issues may negatively
affect the growth of Internet use or the attractiveness of commerce and
communication on the Internet. Because global commerce and online exchange of
information on the Internet and other similar open wide area networks is
relatively new and evolving, there can be no assurance that the Internet will
prove to be a viable commercial marketplace. If critical issues concerning the
commercial use of the Internet are not favorably resolved, if the necessary
infrastructure and complementary products are not developed, or if the Internet
does not become a viable commercial marketplace, the combined company's
business, financial condition and operating results could be seriously harmed.
PRIVACY CONCERNS MAY HAVE AN EFFECT ON THE COMBINED COMPANY.
One of the principal features of SMART's products is the ability to develop
and maintain profiles of consumers for use by businesses. Typically, profile
information is often captured when consumers, business customers and employees
visit a Web site and volunteer information in response to survey questions
concerning their backgrounds, interests and preferences. Profiles are augmented
over time through the collection of usage data. Although SMART's products are
designed to enable the development of applications that permit Web site visitors
to prevent the distribution of any of their personal data beyond that specific
Web site, privacy concerns may nevertheless cause visitors to be resistant to
providing the personal data necessary to support this profiling capability.
Moreover, even the perception of substantial security and privacy concerns,
whether or not valid, may indirectly inhibit market acceptance of SMART's
products. In addition, such concerns may be heightened by legislative or
regulatory requirements that
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require notification to Web site users that the data captured when visiting Web
sites may be used by marketing entities to unilaterally address product
promotion and advertising to that user.
While neither i2 nor SMART is aware of any such legislation or regulatory
requirements currently in effect in the United States, certain other countries
and political entities, such as the European Community, have adopted such
legislation or regulatory requirements. There can be no assurance that similar
legislation or regulatory requirements will not be adopted in the United States.
If the privacy concerns of consumers are not adequately addressed, the combined
company's business, financial condition and operating results could be seriously
harmed.
THE COMBINED COMPANY MUST PROVIDE ENCRYPTION TECHNOLOGY TO PROTECT ITS
CUSTOMERS.
A significant concern of consumers engaging in online transactions and
interaction is the secure exchange of value and confidential information over
public networks. The software applications developed by SMART use encryption
technology to provide the security necessary to effect the secure exchange of
value and confidential information. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or developments could
result in a compromise or breach of the algorithms used in these applications to
protect customer transaction data. If any such compromise were to occur, it
could seriously harm the combined company's business, financial condition and
operating results.
i2 MUST INTEGRATE ITS RECENT ACQUISITIONS.
In April 1998, i2 acquired InterTrans Logistics Solutions Limited, or ITLS.
In addition, i2 has acquired other businesses and products to help broaden and
strengthen its product portfolio. The success of these acquisitions depends
primarily on i2's ability to:
- Retain, motivate and integrate the acquired personnel;
- Integrate multiple information systems; and
- Integrate acquired software with its RHYTHM suite of products.
i2 may encounter difficulties in integrating its operations and products with
those of ITLS and others. The combined company may not realize the benefits
anticipated when these acquisitions were made. Failure of the combined company
to successfully integrate its operations and products with those of ITLS and
others could seriously harm its business, operating results and financial
condition.
THE COMBINED COMPANY MAY MAKE FUTURE ACQUISITIONS OR ENTER INTO JOINT VENTURES
THAT MAY NOT BE SUCCESSFUL.
In the future, the combined company may acquire additional businesses,
products and technologies, or enter into joint venture arrangements, that could
complement or expand its 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 the combined company 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, the combined company may not be able to
integrate any acquired business, products or technologies with its existing
operations. If the combined company is unable to fully integrate an acquired
business, product or technology, it may not receive the intended benefits of
that acquisition.
INTERNATIONAL SALES AND OPERATIONS POSE ADDITIONAL RISKS.
To continue its growth and establish and maintain profitability, the
combined company will need to expand its sales in international markets. Further
penetration of international markets will require the combined company to expand
its existing foreign operations, to establish additional foreign operations and
to translate its 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 the combined
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company is unable to expand its international operations or translate its
software and manuals into foreign languages in a timely manner, its further
penetration of international markets would be limited. In addition, the combined
company's international operations are subject to risks inherent in
international business activities, including:
- Difficulty in staffing and managing geographically disparate operations;
- Longer accounts receivable payment cycles in certain countries;
- Compliance with a variety of foreign laws and regulations;
- Unexpected changes in regulatory requirements;
- Overlap of different tax structures;
- Greater difficulty in safeguarding intellectual property;
- Import and export licensing requirements;
- Trade restrictions;
- Changes in tariff rates; and
- General economic conditions in international markets.
In particular, countries in the Asia-Pacific 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 the combined
company's products, the U.S. dollar value of its foreign currency denominated
sales and, ultimately, its business, operating results and financial condition.
THE COMBINED COMPANY IS SUBJECT TO CURRENCY FLUCTUATIONS.
To date, i2's international operations revenues have primarily been
denominated in U.S. dollars. The majority of i2's international operations
expenses and some sales have been denominated in currencies other than the U.S.
dollar. Therefore, the combined company's operating results may be adversely
affected by changes in the value of the U.S. dollar as compared to these other
currencies. As the combined company's international operations expand, its
exposure to currency exchange rate fluctuations will increase as it uses an
increasing number of foreign currencies. i2 has implemented limited hedging
programs to mitigate its 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 the
combined company's business, results of operations or financial condition in
future periods.
THERE ARE RISKS ASSOCIATED WITH STRATEGIC RELATIONSHIPS AND INCREASED
COMPETITION FROM STRATEGIC PARTNERS.
From time to time, i2 has collaborated with other companies, including
Oracle and System Software Associates, in areas such as product development,
marketing, distribution and implementation. Maintaining these and other
relationships is a meaningful part of the combined company's business strategy.
However, most of i2's current and potential strategic partners are either actual
or potential competitors with i2, and it is uncertain as to the duration and
benefits to be gained from these relationships. In addition, some of i2's
relationships have failed to meet expectations. For instance, i2's license and
distribution relationship with SAP was terminated in 1997, and SAP is currently
marketing a suite of advanced planning and scheduling products that compete with
i2's RHYTHM. The combined company may not be able to enter into successful new
strategic relationships in the future.
THE COMBINED COMPANY WILL DEPEND UPON ITS KEY PERSONNEL.
Both i2 and SMART rely upon the continued service of a relatively small
number of key technical and senior management personnel. The combined company's
future success depends on retaining its key
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employees and its continuing ability to attract, train and retain other highly
qualified technical and managerial personnel. In addition, SMART employees may
be unwilling to work for a larger company or competitors may recruit SMART
employees prior to the merger and during integration, as is common in high
technology mergers. Moreover, none of i2's and few of SMART's key technical or
senior management personnel are bound by employment agreements. As a result,
employees of the combined company could leave with little or no prior notice. In
the past, i2 and SMART have had difficulty recruiting qualified personnel. The
combined company may not be able to attract, assimilate or retain other highly
qualified technical and managerial personnel in the future. Kanna (Ken) N.
Sharma, formerly i2's Vice-Chairman of the Board and Executive Vice President of
i2, has recently resigned as an officer and director of i2 due to health issues.
If the combined company loses any of its key technical and senior management
personnel or if it is unable to attract and retain additional qualified
personnel, its business, operating results and financial condition could be
seriously damaged.
THE COMBINED COMPANY MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS.
Both i2 and SMART rely primarily on a combination of copyright, trademark
and trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. However, these measures afford only limited
protection. Unauthorized parties may attempt to copy aspects of the combined
company's products or to obtain and use information that it regards as
proprietary. Although both i2 and SMART believe software piracy may be a
problem, neither is able to determine the extent to which piracy of their
software products exists. The laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the United States. The
number of products and competitors continues to grow and the functionality of
products in different industry segments are increasingly overlapping. As a
result, the combined company may increasingly be subject to claims of
intellectual property infringement. Although neither i2 nor SMART is aware that
any of its products infringe upon the proprietary rights of third parties, third
parties may claim infringement by the combined company with respect to current
or future products. Any infringement claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
the loss or deferral of sales or require the combined company to enter into
royalty or licensing agreements. If required to enter into royalty or licensing
agreements, such agreements may not be on terms acceptable to the combined
company. Unfavorable royalty and licensing agreements could seriously damage the
combined company's business, operating results and financial condition.
Both i2 and SMART resell certain software which it licenses from third
parties. In the future, the combined company may continue this practice.
Third-party software licenses may not continue to be available to the combined
company on commercially reasonable terms. The loss of, or inability to maintain
or obtain, any of these software licenses could delay or reduce the combined
company's product shipments until equivalent software could be identified,
licensed and integrated. Any loss of such licenses or delay or reduction in
product shipments could damage the combined company's business, operating
results and financial condition.
THE COMBINED COMPANY'S SOFTWARE PRODUCTS MAY BE INCOMPATIBLE WITH NEW PLATFORMS
OR OPERATING SYSTEMS.
i2's 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,
the combined company 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 the combined company 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 the
combined company's business, operating results and financial condition.
14
<PAGE> 20
SMART's Touchpoints and Touchpoints DNA 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, the
combined company may be required to modify Touchpoints and Touchpoints DNA to
make them compatible with those operating systems in order to remain
competitive. Such operating systems may not be architecturally compatible with
the combined company's product design and the combined company 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 the combined company's products compatible with new operating
systems that achieve significant market acceptance would seriously harm the
combined company's business, operating results and financial condition.
SOFTWARE PRODUCTS OF i2 AND SMART ARE COMPLEX AND MAY CONTAIN UNDETECTED ERRORS.
The software programs of i2 and SMART 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. Both i2 and SMART 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 the combined company by customers,
any of which could seriously damage the combined company's business, operating
results and financial condition.
PENDING RELEASES OF NEW PRODUCTS MAY CAUSE PURCHASING DELAYS.
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 the combined company's 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
the combined company's business, operating results and financial condition.
SALES GROWTH IS DEPENDENT ON TECHNICAL AND IMPLEMENTATION PERSONNEL.
Both i2's and SMART's technical sales personnel typically support sales of
i2's and SMART's products. The ability of the combined company to expand sales
and enter into new vertical markets could be affected by a shortage of qualified
technical sales support personnel. The combined company will depend on its
trained implementation personnel or those of independent consultants to
implement its products. A shortage in the number of trained implementation
personnel could limit the combined company's ability to implement its software
on a timely and effective basis. Delayed or ineffective implementation of the
combined company's software may limit its ability to expand its revenues and may
result in customer dissatisfaction and damage to its reputation. Any of these
events could seriously damage the combined company's business, operating results
and financial condition.
YEAR 2000 RISKS MAY AFFECT THE COMBINED COMPANY.
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. i2 and SMART believe that
current versions of their software products are Year 2000 compliant. However,
some customers may be running earlier versions of the software products produced
by SMART or developed by companies i2 has acquired that may not be Year 2000
compliant, and i2 and SMART are encouraging such customers to migrate to current
product versions. Moreover, i2's products are generally integrated and SMART's
products may be 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 of the products to be
offered by the combined company. The combined company may in the future be
subject to
15
<PAGE> 21
claims based on Year 2000 problems in others' products, custom scripts created
by third parties to interface with its products or issues arising from the
integration of multiple products within an overall system. i2 and SMART have not
been a party to any litigation or arbitration proceeding to date involving their
products or services related to Year 2000 issues. However, the combined company
may be required in the future to defend its products or services in such
proceedings, or to negotiate resolutions of claims based on Year 2000 issues.
The costs of defending and resolving Year 2000-related disputes, and any
liability for Year 2000-related damages could damage the combined company's
business, operating results and financial condition. i2 and SMART 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 offered by the combined company. Any of the foregoing could
damage the combined company's business, operating results and financial
condition.
THE COMBINED COMPANY MAY BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS.
The license agreements of both i2 and SMART typically contain provisions
designed to limit exposure to product liability claims from their customers.
However, these contract provisions may not preclude all potential claims.
Product liability claims could require the combined company to spend significant
time and money in litigation or to pay significant damages. As a result, any
claim, whether or not successful, could damage the combined company's reputation
and business, operating results and financial condition.
INVESTMENT RISKS
i2'S STOCK PRICE HAS HISTORICALLY BEEN VOLATILE, WHICH MAY MAKE IT MORE
DIFFICULT FOR YOU TO RESELL SHARES WHEN YOU WANT AT PRICES YOU FIND ATTRACTIVE.
The market price of i2 common stock has been volatile in the past and may
be volatile in the future. The market price of i2's common stock may be
significantly affected by the following factors:
- Quarterly variations in i2's results of operations;
- The combined company's announcement of new products or product
enhancements or similar announcements by its competitors;
- The combined company's technological innovations or those of its
competitors; and
- General market conditions or market conditions specific to particular
industries.
In particular, the stock prices of many companies in the technology and emerging
growth sectors have fluctuated widely due to events unrelated to their operating
performance. These fluctuations may harm, and there can be no assurance as to,
the market price of i2's common stock.
i2'S CHARTER AND BYLAWS HAVE ANTI-TAKEOVER PROVISIONS.
Provisions of i2's Restated Certificate of Incorporation and i2's Amended
and Restated Bylaws as well as the Delaware General Corporation Law could make
it more difficult for a third party to acquire it, even if doing so would be
beneficial to its stockholders. i2 is subject to the provisions of Section 203
of the Delaware General Corporation Law which restricts certain business
combinations with interested stockholders. The combination of these provisions
may have the effect of inhibiting a non-negotiated merger or other business
combination.
PRIVATELY-SOLD SHARES ELIGIBLE FOR PUBLIC RESALE COULD HAVE A NEGATIVE EFFECT ON
i2'S STOCK PRICE.
As of May 7, 1999, i2 had 73,287,504 shares of common stock outstanding,
and there were outstanding options to purchase approximately 13,658,952 shares
of i2 common stock under stock option plans. i2 has issued shares in connection
with acquisitions and investments have been available for resale pursuant to
currently effective registration statements previously filed by i2 with the SEC.
Sales of substantial amounts of these shares in the public market or the
prospect of these sales could adversely affect the market price of i2 common
stock.
16
<PAGE> 22
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This document 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; future customer benefits
attributable to SMART's or i2's products; developments in SMART's or i2's
markets and strategic focus; new products and product enhancements; potential
acquisitions and the integration of acquired businesses, products and
technologies; strategic relationships; and future economic, business and
regulatory conditions. Such forward-looking statements are generally accompanied
by words such as "project," "believe," "anticipate," "plan," "expect,"
"estimate," "intend," "believe," "should," "would," "could," or "may," or other
words that convey uncertainty of future events or outcomes. Although each of
SMART and i2 believes that such forward-looking statements are reasonable,
neither can assure you that such expectations will prove to be correct. Factors
that could cause actual results to differ materially from these forward-looking
statements are disclosed herein including, without limitation, in the "Risk
Factors" beginning on page 5. These factors and other cautionary statements made
in this document should be read as being applicable to all related
forward-looking statements whenever they appear in this document. Neither SMART
nor i2 undertakes any obligation to update any forward-looking statements.
References in this document to the terms "optimal" and "optimized" and words to
that effect are not necessarily intended to connote the mathematically optimal
solution, but may connote near-optimal solutions which reflect practical
considerations such as customer requirements as to response time and precision
of the results.
TRADEMARKS
This document contains trademarks of SMART and i2, and may contain
trademarks of others.
17
<PAGE> 23
i2 TECHNOLOGIES
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical financial data of i2 has been derived
from the consolidated financial statements of i2. The selected statement of
income data for each of the years in the three-year period ended December 31,
1998, and the selected balance sheet data as of December 31, 1997 and 1998, are
derived from i2's audited consolidated financial statements for such years and
should be read in conjunction with such consolidated financial statements and
the notes thereto that are included elsewhere in this document. The selected
statement of income data for the three month periods ended March 31, 1998 and
1999, and the selected balance sheet data as of March 31, 1999, have been
derived from i2's unaudited consolidated financial statements and the notes
thereto that are included elsewhere in this document. The selected statement of
income data for the year ended December 31, 1995, and the selected balance sheet
data as of December 31, 1996, have been derived from i2's audited consolidated
financial statements not included in this document. The selected statement of
income data for the year ended December 31, 1994, and the selected balance sheet
data as of December 31, 1994 and 1995, have been derived from i2's unaudited
consolidated financial statements not included in this document. Amounts shown
are in thousands, except per share data.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Software licenses............................. $11,178 $24,162 $ 61,073 $139,798 $230,961 $ 44,945 $ 73,996
Services...................................... 5,013 10,837 30,515 53,437 88,972 18,761 28,784
Maintenance................................... 1,168 3,462 8,881 20,457 41,983 7,742 14,436
------- ------- -------- -------- -------- -------- --------
Total revenues.......................... 17,359 38,461 100,469 213,692 361,916 71,448 117,216
------- ------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of software licenses..................... 366 390 260 2,744 7,959 2,146 3,159
Cost of services and maintenance.............. 3,196 7,601 21,761 46,004 76,020 15,262 28,963
Sales and marketing........................... 4,780 10,487 35,182 73,526 121,978 24,817 40,699
Research and development...................... 3,644 8,503 21,886 52,741 84,151 18,361 28,028
General and administrative.................... 2,188 5,286 10,425 21,810 33,845 6,674 11,102
In-process research and development and
acquisition-related expenses(1)............. -- -- 1,133 9,306 7,618 -- 303
------- ------- -------- -------- -------- -------- --------
Total costs and expenses................ 14,174 32,267 90,647 206,131 331,571 67,260 112,254
------- ------- -------- -------- -------- -------- --------
Operating income................................ 3,185 6,194 9,822 7,561 30,345 4,188 4,962
Other income (expense), net..................... (127) (167) 1,681 3,353 6,917 1,442 1,318
------- ------- -------- -------- -------- -------- --------
Income before income taxes...................... 3,058 6,027 11,503 10,914 37,262 5,630 6,280
Provision for income taxes...................... 1,306 2,054 4,705 6,916 17,279 2,167 2,534
------- ------- -------- -------- -------- -------- --------
Net income...................................... $ 1,752 $ 3,973 $ 6,798 $ 3,998 $ 19,983 $ 3,463 $ 3,746
======= ======= ======== ======== ======== ======== ========
Net income per share............................ $ 0.04 $ 0.09 $ 0.12 $ 0.06 $ 0.29 $ 0.05 $ 0.05
======= ======= ======== ======== ======== ======== ========
Net income per share, assuming dilution......... $ 0.03 $ 0.07 $ 0.10 $ 0.06 $ 0.26 $ 0.05 $ 0.05
======= ======= ======== ======== ======== ======== ========
Weighted average common shares outstanding...... 41,940 43,538 58,000 62,652 70,004 68,432 71,906
Weighted average common shares outstanding,
assuming dilution............................. 53,178 58,752 65,974 70,932 76,388 76,414 78,730
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------- AS OF
1994 1995 1996 1997 1998 MARCH 31, 1999
------- ------- -------- -------- -------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................... $ 4,066 $ 8,122 $ 59,421 $141,971 $154,878 $176,018
Working capital................................. 1,814 7,408 64,028 161,041 191,344 198,522
Total assets.................................... 11,366 28,251 111,789 250,263 339,224 367,314
Total stockholders' equity...................... 2,598 10,378 75,214 183,760 234,975 242,994
</TABLE>
- ---------------
(1) During 1996, 1997 and 1998 and the first quarter of 1999, i2 incurred $1.1
million, $9.3 million, $7.6 million and $0.3 million, respectively, of
certain acquisition-related expenses, including $0.9 million, $4.6 million
and $4.7 million in 1996, 1997 and 1998, respectively, of write-offs of
in-process research and development. The remaining costs included
amortization of goodwill and acquired technology, investment banking, legal
and accounting fees and expenses. Excluding these expenses, net income and
net income per share, assuming dilution, would have been $7.9 million and
$0.12 in 1996, $10.7 million and $0.15 per share in 1997, $27.6 million and
$0.36 per share in 1998 and $4.0 million and $0.05 per share in the first
quarter of 1999.
18
<PAGE> 24
SMART
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical financial data of SMART has been derived
from the consolidated financial statements of SMART. The statement of operations
data for each of the years in the three-year period ended December 31, 1998, and
the balance sheet data as of December 31, 1996, 1997 and 1998, have been derived
from SMART's audited consolidated financial statements for such years and should
be read in conjunction with such consolidated financial statements and the notes
thereto that are included elsewhere in this document. The statement of
operations data for the three month periods ended March 31, 1998 and 1999, and
the balance sheet data as of March 31, 1999, have been derived from SMART's
unaudited consolidated financial statements and the notes thereto that are
included elsewhere in this document. Amounts shown are in thousands, except per
share data.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ---------------
1996(1) 1997 1998 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Licenses.................................................. $ 990 $ 1,968 $ 3,355 $ 1,070 $ 75
Professional services..................................... -- 5,231 3,005 959 307
Hosting................................................... 54 885 881 395 --
------- ------- -------- ------- -------
Total revenues...................................... 1,044 8,084 7,241 2,424 382
Costs and expenses:
Licenses.................................................. -- 2 8 3 1
Professional services..................................... -- 1,523 836 29 16
Hosting................................................... -- 895 603 275 --
Development costs......................................... 1,673 4,651 10,048 2,597 2,294
Sales and marketing....................................... 302 3,545 8,000 1,773 2,034
General and administrative................................ 683 3,174 4,346 1,073 1,069
------- ------- -------- ------- -------
Total costs and expenses............................ 2,658 13,790 23,841 5,750 5,414
------- ------- -------- ------- -------
Loss from operations........................................ (1,614) (5,706) (16,600) (3,326) (5,032)
Gain on sale of business(2)................................. -- -- 1,816 -- --
Other income (expense), net................................. (10) (44) 20 75 (240)
------- ------- -------- ------- -------
Net loss.................................................... $(1,624) $(5,750) $(14,764) $(3,251) $(5,272)
======= ======= ======== ======= =======
Basic net loss per share(3)................................. (0.24) $ (0.62) $ (1.46) $ (0.33) $ (0.49)
======= ======= ======== ======= =======
Weighted average common shares outstanding(3)............... 6,899 9,265 10,147 9,721 10,829
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------- AS OF
1996 1997 1998 MARCH 31, 1999
------- ------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 273 $ 9,918 $ 1,121 $ 697
Working capital............................................. (528) 7,246 (7,734) (12,728)
Total assets................................................ 1,757 14,661 5,585 3,959
Total stockholders' equity (deficit)........................ (1,505) (7,110) (21,850) (27,121)
</TABLE>
- ---------------
(1) Financial results are from April 1, 1996 (commencement of operations)
through December 31, 1996. From SMART's incorporation in September 1995 to
March 1996, SMART had no operations and accordingly, financial information
for this period is not presented.
(2) In 1998, SMART sold its Web hosting business, SMARTNAP, which resulted in a
gain of $1.8 million.
(3) Basic net loss per share is calculated by dividing net loss by the weighted
average common shares outstanding for each period. This number of shares
does not include shares issuable upon conversion of SMART preferred stock or
upon exercise of SMART options or warrants to purchase common stock because
including such shares would have an antidilutive effect on the net loss
calculation.
19
<PAGE> 25
i2 AND SMART
SELECTED UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA
The following selected unaudited pro forma combined condensed financial
data is derived from the Unaudited Pro Forma Combined Condensed Financial
Statements and notes thereto included elsewhere in this document, which gives
effect to the merger as a pooling of interests, and should be read in
conjunction with such Unaudited Pro Forma Combined Condensed Financial
Statements and notes thereto.
The selected pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the consolidated operating results or
financial position that would have occurred had the merger been completed at the
beginning of the periods presented, nor is it necessarily indicative of future
operating results or financial position. See "Unaudited Pro Forma Combined
Condensed Financial Statements." Amounts shown are in thousands, except per
share data.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(UNAUDITED):
Revenues................................ $101,513 $221,776 $369,157 $ 73,872 $117,598
Operating income (loss)................. 8,208 1,855 13,745 862 (70)
Net income (loss)....................... 5,174 (1,752) 5,219 212 (1,526)
Net income (loss) per share............. 0.09 (0.03) 0.07 0.00 (0.02)
Net income (loss) per share, assuming
dilution.............................. 0.08 (0.03) 0.07 0.00 (0.02)
Weighted average common shares
outstanding........................... 59,758 64,410 71,762 70,190 73,664
Weighted average common shares
outstanding, assuming dilution........ 68,116 64,410 78,530 78,556 73,664
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
--------------------
<S> <C>
BALANCE SHEET DATA (UNAUDITED):
Cash, cash equivalents and short-term investments........... $176,715
Working capital(1).......................................... 183,794
Total assets................................................ 368,273
Stockholders' equity(1)..................................... 230,566
</TABLE>
- ---------------
(1) Includes $2.0 million of estimated costs associated with the merger. Such
expenses include legal, accounting, printing, investment advisory fees and
expenses and other merger-related costs. These costs will be charged to
operating expenses in the period the merger is completed. These costs are
preliminary and therefore subject to change.
20
<PAGE> 26
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of SMART
and i2 and unaudited pro forma combined per share data after giving effect to
the merger based on the pooling of interests method of accounting. This data
should be read in conjunction with the audited consolidated financial statements
of SMART and i2 and the notes thereto included elsewhere in this document. The
unaudited pro forma combined per share data is not necessarily indicative of the
net income per share or book value per share that would have been achieved had
the merger been completed as of the beginning of the periods presented and
should not be construed as representative of such amounts for any future dates
or periods. Since inception, neither i2 nor SMART has declared or paid a cash
dividend. Accordingly, no cash dividends per share data is presented below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AS OF AND
DECEMBER 31, FOR THE THREE
------------------------ MONTHS ENDED
1996 1997 1998 MARCH 31, 1999
------ ------ ------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
i2 HISTORICAL:
Net income per share................................. $ 0.12 $ 0.06 $ 0.29 $ 0.05
Net income per share, assuming dilution.............. $ 0.10 $ 0.06 $ 0.26 $ 0.05
Book value per share(1).............................. $ 3.37
SMART HISTORICAL:
Net loss per share................................... $(0.24) $(0.62) $(1.46) $(0.49)
Book value (deficit)(2).............................. (1.12)
i2 AND SMART PRO FORMA COMBINED (UNAUDITED):
Net income (loss) per share.......................... $ 0.09 $(0.03) $ 0.07 $(0.02)
Net income (loss) per share, assuming dilution....... $ 0.08 $(0.03) $ 0.07 $(0.02)
Book value per share(1).............................. $ 3.12
EQUIVALENT PRO FORMA COMBINED (UNAUDITED):(3)
Net income (loss) per share.......................... $ 0.01 $ 0.00 $ 0.01 $ 0.00
Net income (loss) per share, assuming dilution....... $ 0.01 $ 0.00 $ 0.01 $ 0.00
Book value per share................................. 0.23
</TABLE>
- ---------------
(1) i2's historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period. i2 pro forma book value per share is computed by dividing pro
forma stockholders' equity, including the effect of pro forma adjustments,
by the pro forma number of shares of i2 common stock outstanding at the end
of the period.
(2) The computation of SMART's historical book value (deficit) per share
includes the carrying value of redeemable preferred stock and the assumed
conversion of all series of preferred stock.
(3) The unaudited equivalent SMART pro forma per share amounts are calculated by
multiplying i2 combined pro forma per share amounts by the assumed average
exchange ratio of .07337 for each outstanding share of SMART capital stock.
This ratio is used only for disclosure purposes in this document. The actual
exchange ratios will not be determinable until the closing of the merger.
21
<PAGE> 27
MARKET PRICE AND DIVIDEND INFORMATION
i2's common stock is traded on The Nasdaq National Market under the symbol
"ITWO." The following table sets forth the range of high and low closing sales
prices reported on The Nasdaq National Market for i2 common stock for the
periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1999
Second Quarter (through June , 1999)................... $ $
First Quarter............................................... 35.56 22.81
YEAR ENDED DECEMBER 31, 1998
Fourth Quarter.............................................. $31.94 $ 9.25
Third Quarter............................................... 42.25 12.63
Second Quarter.............................................. 40.00 27.00
First Quarter............................................... 32.81 25.06
YEAR ENDED DECEMBER 31, 1997
Fourth Quarter.............................................. $27.81 $20.13
Third Quarter............................................... 28.00 15.75
Second Quarter.............................................. 25.00 13.00
First Quarter............................................... 22.88 12.88
DATE PRECEDING PUBLIC ANNOUNCEMENT
May 12, 1999 (Closing Price)................................ $34.00
</TABLE>
There is no established public trading market for SMART capital stock.
RECENT CLOSING PRICES
The closing sales price per share of i2 common stock on The Nasdaq National
Market was $ on June , 1999, the latest practicable trading
day before the mailing of this document for which information was obtainable.
Because the market price of i2 common stock is subject to fluctuation, the
market value of the shares of i2 common stock that you will receive in the
merger may increase or decrease prior to and following the merger. YOU ARE URGED
TO OBTAIN CURRENT MARKET QUOTATIONS FOR I2 COMMON STOCK. NEITHER SMART NOR I2
CAN ASSURE YOU AS TO THE FUTURE PRICES FOR I2 COMMON STOCK.
DIVIDEND INFORMATION
Neither i2 nor SMART has ever paid any cash dividends on their stock, and
both anticipate that they will continue to retain any earnings for the
foreseeable future for use in the operation of their respective businesses.
NUMBER OF STOCKHOLDERS
As of April 23, 1999, there were 519 stockholders of record who held shares
of i2 capital stock and as of May 12, 1999, there were 181 stockholders of
record who held shares of SMART capital stock.
22
<PAGE> 28
SOLICITATION OF WRITTEN CONSENTS OF SMART STOCKHOLDERS
REQUESTED DATE OF RECEIPT OF WRITTEN CONSENTS
SMART requests that you return (1) each written consent by facsimile using
the enclosed cover sheet as soon as possible, but no later than June , 1999,
to J. Nixon Fox III, Esq., Gray Cary Ware & Freidenrich LLP, at facsimile number
(512) 457-7070, and (2) each original executed written consent by mail in the
enclosed prepaid envelope no later than June , 1999 to Gray Cary Ware &
Freidenrich LLP, 100 Congress Avenue, Suite 1440, Austin, Texas 78701,
Attention: J. Nixon Fox III, Esq.
MATTERS TO BE APPROVED BY WRITTEN CONSENT
You are being asked to consider proposals and act by written consent to (1)
approve and adopt the merger agreement and approve the merger, and, where
appropriate, (2) approve the conversion of SMART Series A Preferred Stock and
SMART Series B Preferred Stock into SMART common stock and (3) approve the
termination of the agreements providing certain rights to holders of SMART
preferred stock. See "Terms of the Merger -- Conversion of Series A and Series B
Preferred Stock" and "Terms of the Merger -- Termination of Rights Agreements."
RECORD DATE AND SHARES ENTITLED TO ACT BY WRITTEN CONSENT
You may act by written consent to the matters described above only if you
held shares of SMART capital stock at the close of business on the record date,
which is May 12, 1999. As of the close of business on the record date, the
following shares, held of record by 181 stockholders, were outstanding and
entitled to consent: 11,178,281 shares of SMART common stock; 1,434,783 shares
of SMART Series A Preferred Stock; 4,498,606 shares of SMART Series B Preferred
Stock; and 3,749,999 of SMART Series C Preferred Stock. You are entitled to one
vote for each share of SMART common stock you hold, or into which your shares of
SMART preferred stock were convertible, as of the record date.
ACTION BY WRITTEN CONSENT
The written consent or consents accompanying this document are solicited on
behalf of the SMART Board of Directors. Original solicitation of consents by
mail may be supplemented by telephone, facsimile, letter or personal
solicitation by directors, officers or other employees of SMART. You are
requested to complete, date, sign and promptly return the accompanying written
consent or consents in the accompanying prepaid envelope to SMART. All properly
executed written consents received by SMART prior to the date upon which the
necessary consent is received by SMART to approve each of the respective
proposals will be treated as consents to the proposals included in each
respective written consent, unless revoked prior to such date.
CONSENTS REQUIRED
The approval and adoption of the merger agreement and the approval of the
merger by SMART's stockholders is required by the Delaware General Corporation
Law. It is a condition to the closing of the merger that:
- The merger agreement and the merger be approved by holders of at least
90% of the outstanding shares of SMART capital stock and a majority of
each class or series of SMART preferred stock, each acting as a separate
class;
- The conversion of all outstanding shares of SMART Series A Preferred
Stock and SMART Series B Preferred Stock into SMART common stock prior to
the effective time of the merger be approved by at least a majority of
the Series A Preferred Stock and Series B Preferred Stock, each acting as
a separate class; and
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- The termination of the agreements providing certain rights to holders of
SMART preferred stock, effective as of the effective time of the merger,
prior to the closing of the merger be approved by certain holders of
common stock and at least a majority of the holders of SMART preferred
stock.
For additional information, see "Terms of the Merger -- Conversion of
Series A and Series B Preferred Stock" and "Terms of the Merger -- Termination
of Rights Agreements."
Certain affiliates of SMART who collectively own approximately 79% of
SMART's outstanding capital stock have entered into stockholder agreements
agreeing to consent to the merger and granting a proxy to i2 to vote or execute
a consent with respect to all of their shares.
BOARD RECOMMENDATION
THE SMART BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND THE MERGER AND BELIEVES THAT THE MERGER IS ADVISABLE AND IN THE BEST
INTERESTS OF SMART AND ITS STOCKHOLDERS AND THEREFORE RECOMMENDS THAT YOU
CONSENT TO (1) APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE
MERGER, AND, WHERE APPROPRIATE, (2) APPROVAL OF THE CONVERSION OF SMART SERIES A
PREFERRED STOCK AND SMART SERIES B PREFERRED STOCK INTO SMART COMMON STOCK AND
(3) APPROVAL OF THE TERMINATION OF THE AGREEMENTS PROVIDING CERTAIN RIGHTS TO
HOLDERS OF SMART PREFERRED STOCK.
In considering such recommendation, you should be aware that i2 has agreed
to provide certain employment and severance arrangements to certain directors,
officers and employees of SMART. See "Terms of the Merger -- Related
Agreements -- Employment and Non-Competition Agreements."
YOU ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN
THIS DOCUMENT, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED
WRITTEN CONSENT OR CONSENTS IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
YOU SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR WRITTEN CONSENT OR
CONSENTS. A transmittal form with instructions for the surrender of certificates
for SMART capital stock will be mailed to you as soon as practicable after
completion of the merger. For more information regarding the procedures for
exchanging your SMART stock certificates for i2 stock certificates, please see
the section entitled "Procedures for Exchanging Stock Certificates" on page 35
of this document.
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THE MERGER
GENERAL
The merger agreement provides for the merger of a wholly owned subsidiary
of i2 with and into SMART, so that SMART becomes a wholly owned subsidiary of
i2. The discussion in this document of the merger and the description of the
principal terms and conditions of the merger agreement are subject to and
qualified in their entirety by reference to the merger agreement, a copy of
which is attached to this document as Appendix A and is incorporated herein by
reference. You are urged to read the merger agreement and all other appendices
to this document in their entirety.
BACKGROUND OF THE MERGER
Through 1997, i2 had focused its product development and marketing efforts
on supply chain optimization and related applications. In 1998, i2 expanded its
market strategy to include optimizing other critical business processes through
its electronic business process optimization, or eBPO, strategy with the
objective of providing its customers with a complete solution for the
optimization of key business processes.
In the latter half of 1998, i2 announced its eBPO strategy. One objective
of this strategy was to address software applications targeted at Web-based
commerce and collaborative efforts. i2 intended to use internal development,
partnering and acquisitions to achieve this objective. As part of this strategy,
i2 determined the enterprise relationship management software market to be
attractive because it shares many characteristics that i2 had identified as
market drivers, including the following:
- Rapid and dynamic change within certain sectors;
- Intense competition among its target customers in selected industries;
- Increased profitability pressures and associated requirements to improve
efficiency within these industries;
- The need for businesses to manage large amounts of information; and
- Challenges and opportunities created by the increased use of the Internet
for commercial activities.
By July 1998, SMART's operations had become restricted by its limited
capital resources, and the SMART Board of Directors met in July and August 1998
to discuss strategic alternatives which would strengthen SMART's financial
position. The board discussed strategic partnerships with other companies as
well as equity financings with venture capital firms or other investors.
Management of SMART presented financial forecasts for the fourth quarter of 1998
which indicated the company would continue to experience significant losses as a
result of decreased sales volumes and delays in the release of new versions of
its software products. The board directed management to explore possible
financing alternatives and strategic partnerships in order for SMART to continue
its ongoing operations, more rapidly develop the next version of its software
products, develop new distribution channels and customers and expand
internationally.
In early November 1998, William M. Beecher, i2's Executive Vice President,
Operations and Chief Financial Officer, met with Bryan Plug, President and Chief
Executive Officer of SMART, and various other members of SMART management to
learn about SMART and its products, and initiate an assessment of SMART's
potential as a business partner of i2.
From August to November, 1998, SMART management contacted potential
strategic partners, including i2, and began negotiating a preferred stock
financing with an investor. In late November 1998, SMART management was informed
by this investor that it had withdrawn its proposed term sheet for this equity
financing, and management continued its discussions with other potential
investors in SMART preferred stock.
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In early December 1998, SMART management met with Gregory Brady, i2's
President, and Sandeep Tungare, i2's President, Demand Management, at SMART's
headquarters. Various presentations were made by SMART management, including a
review of SMART's corporate strategy, market overview, product overview and
financial position. The participants then discussed the possibility of i2
investing in SMART.
In December of 1998, the SMART Board of Directors considered a proposal for
a preferred stock financing with an investor pursuant to a term sheet that had
been offered by this investor, which was subsequently withdrawn later that
month.
In January and February of 1999, Mr. Plug of SMART and Mr. Tungare of i2
met via telephone conference on several occasions to discuss a strategic
investment by i2.
On January 12, 1999, Mr. Tungare sent a written proposal to SMART proposing
various financing and/or alliance alternatives. The SMART Board of Directors met
to discuss and compare the i2 proposal with a separate equity financing
proposal.
During January and February 1999, SMART considered various proposals for
preferred stock financings. On January 21, 1999, the SMART Board of Directors
met and directed management to draft and deliver a term sheet to i2 regarding
such a financing. During the period between January 25 and 29, 1999, i2
performed due diligence and SMART and i2 intensively negotiated the terms of the
proposed financing, but on January 29, the parties were unable to reach
agreement and terminated the discussions.
On February 16, 1999, at a meeting of i2 management, Mr. Tungare suggested
that a possible business combination of SMART and i2 might be beneficial to the
two companies. Later in the day, Messrs. Tungare and Plug met via telephone
conference. At this meeting, Mr. Tungare indicated to Mr. Plug that i2 would be
interested in exploring the potential for a combination of their two companies.
On February 19, 1999, a director of SMART, spoke with Mr. Tungare and
proposed additional discussions between i2 and SMART regarding the potential
combination of SMART and i2.
On February 20 and February 21, 1999, the SMART Board of Directors
discussed whether to pursue further discussions with i2 regarding possible
transactions between i2 and SMART. The directors considered whether pursuit of
those discussions would risk the withdrawal by investors from an anticipated
financing transaction. After lengthy discussion, the board directed management
to pursue discussions with i2 regarding a merger of i2 and SMART.
On February 21, 1999, the SMART Board of Directors met to discuss, and then
approved, a $1.5 million loan from i2 that had been negotiated by SMART
management, and designated Andrew Heller, a director of SMART, and Messrs.
Benson and Plug as members of a special committee of the SMART Board of
Directors to negotiate the terms of future agreements with i2. On February 22,
1999, SMART and i2 entered into a loan agreement regarding the aforementioned
$1.5 million loan, the proceeds of which would be used for general corporate
purposes.
During the period between February 22 and February 24, 1999, the SMART
special committee negotiated with i2 the terms and conditions upon which SMART
would merge with i2. The special committee visited i2's offices in Irving, Texas
on February 24, 1999 to negotiate the aggregate price to be paid by i2 for
SMART. After several hours of discussions, the SMART special committee decided
to terminate discussions with i2.
On February 25, 1999, the SMART Board of Directors compared the proposals
currently being offered by prospective investors and i2 and further considered
(1) whether the preferred stock financing would be sufficient to meet SMART's
long-term capital requirements, (2) the risks associated with delaying the
preferred stock financing in order to pursue the combination with i2, (3) the
risks associated with the i2 combination not being consummated after
negotiations with i2 and (4) the benefits and risks to SMART and its
stockholders of a combination with i2. The board determined that the combination
with i2 was in the best interests of SMART and its stockholders. The board then
directed management to delay the closing of the preferred stock financing in
order to pursue the merger with i2.
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On February 26, 1999, Messrs. Plug and Tungare met at i2 headquarters. Mr.
Tungare presented to Mr. Plug proposed terms on which i2 would acquire SMART. At
the time of this proposal, Mr. Plug said he would consider i2's proposal and
reply to i2 following his consultation with the SMART Board of Directors.
During late February and early March, 1999, i2 conducted a due diligence
review of SMART and evaluated alternatives to an acquisition that might be more
attractive from its perspective.
On or about March 5, 1999, Messrs. Tungare and Plug came to a tentative
agreement on proposed terms of the business combination and discussed various
topics, including management and personnel issues surrounding the potential
business combination of SMART and i2.
On March 5, 1999, the two companies entered into a second loan agreement
whereby i2 loaned $1.5 million to SMART to be used for general corporate
purposes.
On March 16, 1999, i2 held a board meeting at which Messrs. Brady, Beecher
and Tungare provided the i2 board with a status report on SMART, the terms for
the proposed transaction and a valuation analysis of SMART. The i2 Board of
Directors considered the potential benefits and risks of the proposed merger, as
discussed below under "-- Reasons for the Merger," and "Risk Factors -- Risks
Related to the Merger." The i2 Board of Directors considered the potential
benefits and risks of the proposed merger, as discussed below under "-- Reasons
for the Merger," and "Risk Factors -- Risks Related to the Merger." After a
lengthy discussion, the board concluded that it was in the strategic interest of
i2 to pursue a transaction along the lines proposed.
From March 23, 1999 through March 31, 1999, SMART and i2, together with
their legal advisors, negotiated and revised the terms of the merger and the
merger agreement and continued their legal, financial and business due diligence
of each other.
On March 31, 1999, the SMART Board of Directors met to discuss the terms
and conditions of the merger and merger agreement with i2 as proposed at that
time. Prior to the meeting, drafts of the merger agreement and related
agreements had been provided to each of the directors. The terms of the proposed
merger, including the proposed ratios by which shares of i2 common stock would
be exchanged for each share of SMART capital stock were discussed. SMART's
management team summarized their due diligence investigation with respect to i2,
and i2's background, products, recent financial performance and current
financial condition. The SMART Board of Directors then considered the potential
benefits of the proposed merger, the risks of the proposed merger and potential
reasons not to undertake the merger, as discussed below under "-- Reasons for
the Merger," and "Risk Factors -- Risks Related to the Merger," and alternatives
to the merger, including a preferred stock financing or a strategic partnership.
After this discussion, the board determined that the merger and the merger
agreement were advisable and in the best interests of SMART and its
stockholders, approved the merger and the merger agreement and resolved to
recommend the approval and adoption of the merger agreement by the stockholders
of SMART. The board of Directors authorized management, on behalf of SMART, to
execute and deliver the merger agreement and any other agreements, instruments
and documents contemplated by the merger agreement.
On April 11, 1999, the i2 Board of Directors met to discuss the status of
the negotiations and review the terms of the proposed merger. Prior to the
meeting, drafts of the merger agreement and related agreements had been provided
to each of the directors. i2's management discussed the results of i2's due
diligence investigations with respect to SMART, including but not limited to,
SMART's recent financial performance and product development efforts. After
lengthy discussions, the board determined that the merger and the merger
agreement were advisable and in the best interests of i2 and its stockholders
and approved the merger and the merger agreement. The board authorized
management, on behalf of i2, to execute the merger agreement and other documents
contemplated by the merger agreement with such changes as the officers of i2
deemed necessary or appropriate.
On April 29, 1999, SMART repaid the loans from i2.
On May 3, 1999, the SMART Board of Directors met to discuss changes that
had been negotiated by SMART management and i2 in the proposed merger agreement
and the terms and conditions of the merger. After detailed discussion of the
results of the negotiations with respect to the merger agreement,
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the SMART Board of Directors determined that the modified merger agreement was
advisable, and in the best interests of SMART's stockholders, approved the
modified merger agreement and authorized management to execute the modified
merger agreement and any other agreements, with such changes as management
deemed necessary, and any instruments and documents contemplated by the modified
merger agreement, and resolved to recommend the approval and adoption of the
merger agreement by the stockholders of SMART.
On May 12, 1999, the merger agreement was executed and the parties issued a
press release announcing its execution.
REASONS FOR THE MERGER
i2's Reasons for the Merger
The i2 Board of Directors has identified several potential benefits of the
merger that it believes will contribute to the success of i2 after the
effectiveness of the merger. These potential benefits include:
- Enhancing i2's eBPO product portfolio with the addition of SMART's
customer management products;
- Allowing i2 to secure ownership of SMART's technology which may offer i2
competitive advantages in its eBPO strategy;
- Adding capable software development teams, which will augment i2's
ability to deliver new products to the marketplace;
- Offering customers of SMART and i2 a more comprehensive software solution
than either could offer independently;
- Gaining significant domain expertise in Web-based business applications
and additional depth in its core decision-support knowledge base;
- Maintaining i2's competitiveness in the markets in which it serves; and
- Providing i2 access to new vertical markets, such as financial services
and telecommunications.
SMART's Reasons for the Merger
SMART's Board of Directors has determined that many opportunities for SMART
and its stockholders will result from the merger. Specifically, it is
anticipated that the merger will provide SMART with opportunities to:
- Utilize the resources of the combined company to develop additional
applications and improved functionality for SMART's existing products;
- Utilize i2's large and experienced sales force to sell SMART's products
and services;
- Utilize i2's greater financial resources to reduce the risks associated
with the ongoing refinement of a complete customer-driven enterprise
relationship management software solution;
- Gain greater market strength by combining with a larger company;
- Market its products through i2's distribution channels and sell its
products with i2's products; and
- Avoid raising additional funds, which would likely be achieved through
the issuance of convertible debt or equity, which would likely dilute
existing stockholders.
In addition, it is anticipated that the merger will provide you with
opportunities to:
- Reduce your exposure to risks inherent in SMART's (1) reliance on a
limited number of products and (2) competition with larger companies with
more diversified product lines and greater financial resources;
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- Gain greater investment liquidity through ownership of i2 common stock,
which is quoted on The Nasdaq National Market;
- Participate in the potential for growth of the combined company after the
merger; and
- Benefit from the merger's qualification as a tax-free reorganization.
Factors Considered by the SMART Board of Directors
The SMART Board of Directors considered a number of factors (in addition to
the matters described above) in its analysis of the merger, including:
- The technology, products, management, business partners, distribution
channels, competitive positions, customers and future prospects of SMART
and i2;
- The current financial condition of SMART;
- The long-term opportunities and prospects of SMART as a stand-alone
company and of SMART and i2 as a combined company;
- The consideration to be received by SMART stockholders in the merger;
- The current and historical market prices of, and volatility and trading
information with respect to, i2 common stock;
- The expected tax-free treatment to SMART and its stockholders;
- The terms and conditions of the merger agreement;
- The potential impact of the merger on employees, customers and strategic
partners of SMART;
- The potential conflicts between the interests of SMART stockholders and
the interests of certain SMART executive officers and directors; and
- Possible alternative financing strategies or strategic relationships for
SMART, based on prior discussions held with other potential partners and
the likelihood of these transactions occurring on terms favorable to
SMART and its stockholders.
The SMART Board of Directors also considered a variety of potential
negative factors in its deliberations on the merger, including:
- The risk to holders of SMART capital stock that the consideration they
will receive as a result of the merger could be significantly reduced in
the event of a decline in i2's stock price;
- The impact of the loss of SMART's status as an independent company on
stockholders, employees and strategic partners of SMART;
- The risk that the potential benefits sought in the merger might not be
fully realized;
- The impact of the proposed transaction on alternative potential strategic
transactions involving SMART;
- The risk that, despite the efforts of SMART and i2, key technical and
management personnel might not remain employees of SMART; and
- The other risks described under "Risk Factors" in this document.
The foregoing discussion of the information and factors considered by the
SMART Board of Directors is not intended to be exhaustive but is believed to
include all material factors considered the SMART Board of Directors. In view of
the complexity and wide variety of information and factors, both positive and
negative, considered by the SMART Board of Directors, it did not find it
practical to quantify, rank or otherwise assign relative or specific weights to
the factors considered. In addition, the SMART Board of Directors did not reach
any specific conclusion with respect to each of the factors considered, or any
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aspect of any particular factor, but, rather, conducted an overall analysis of
the factors described above, including thorough discussions with SMART's
management and legal, financial and accounting advisors. In considering the
factors described above, individual members of the SMART Board of Directors may
have given different weight to different factors. The SMART Board of Directors
considered all of these factors as a whole and believed the factors supported
its determination to approve the merger. After taking into consideration all of
the factors set forth above, the SMART Board of Directors concluded that the
merger was advisable to, and in the best interests of, SMART and its
stockholders and that SMART should proceed with the merger.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material federal income tax
considerations relevant to the exchange of shares of SMART capital stock for i2
common stock pursuant to the merger that are generally applicable to you. This
discussion assumes that you hold your shares as capital assets. This discussion
is based on currently existing provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), existing and the proposed Treasury Regulations under
the Code and current administrative rulings and court decisions, all of which
are subject to change. Any such change, which may or may not be retroactive,
could alter the tax consequences to you as described herein.
You should be aware that this discussion does not deal with all federal
income tax considerations that may be relevant to you in light of your
particular circumstances, such as if you:
- Are a dealer in securities;
- Are subject to the alternative minimum tax provisions of the Code;
- Are subject to special treatment under the Code (such as insurance
companies, tax-exempt organizations or financial institutions);
- Are a foreign person;
- Do not hold your SMART capital stock as capital assets;
- Hold your shares in a hedging transaction or as part of a straddle or
conversion transaction; or
- Acquired your shares in connection with stock option or stock purchase
plans or in other compensatory transactions.
In addition, the following discussion does not address the tax consequences
of the merger under foreign, state or local tax laws, the tax consequences of
transactions effectuated prior or subsequent to, or concurrently with, the
merger (whether or not any such transactions are undertaken in connection with
the merger), including, without limitation, any transaction in which shares of
SMART capital stock are acquired or shares of i2 common stock are disposed of,
or the tax consequences of the assumption by i2 of the SMART options.
ACCORDINGLY, YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES TO YOU OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES AND APPLICABLE TAX RETURN REPORTING
REQUIREMENTS.
The merger is intended to constitute a tax-free "reorganization" within the
meaning of Section 368(a) of the Code. In the event the merger qualifies as a
reorganization, the merger will generally result in the following federal income
tax consequences to you:
- You will recognize no gain or loss solely upon your receipt of i2 common
stock in exchange for SMART capital stock in the merger (except to the
extent of cash received in lieu of a fractional share of i2 common
stock).
- The aggregate tax basis of i2 common stock you receive in the merger
(reduced by any tax basis attributable to fractional shares that you are
deemed to dispose of) will be the same as the aggregate tax basis of
SMART capital stock surrendered in exchange for such shares.
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- The holding period of i2 common stock you receive in the merger will
include the period for which SMART capital stock surrendered in exchange
therefor was considered to be held, provided that you held the SMART
capital stock surrendered as a capital asset at the time of the merger.
- Cash payments you receive in lieu of a fractional share will be treated
for federal income tax purposes as if such fractional share of i2 common
stock had been issued in the merger and then redeemed by i2. If you
receive such cash in this manner, you will recognize gain or loss, upon
such payment, measured by the difference (if any) between the amount of
cash received and the basis in such fractional share.
The parties are not requesting and will not request a ruling from the
Internal Revenue Service, or IRS, in connection with the merger. The merger is
conditioned upon the receipt by i2 of a tax opinion from Brobeck, Phleger &
Harrison LLP and the receipt by SMART of a tax opinion from Gray Cary Ware &
Freidenrich LLP to the effect that the merger will constitute a tax-free
reorganization. You should be aware that the tax opinions do not bind the IRS
and the IRS is therefore not precluded from successfully asserting a contrary
opinion.
A successful IRS challenge to the tax-free reorganization status of the
merger would result in you recognizing taxable gain or loss with respect to each
share of common stock of SMART surrendered equal to the difference between your
basis in such share and the fair market value, as of the close of the merger, of
i2 common stock received in exchange for such share. In such event, your
aggregate basis in i2 common stock so received would equal its fair market value
and your holding period for such stock would begin the day after the merger.
You will be required to retain records and file with your federal income
tax return a statement setting forth certain facts relating to the merger.
THE PRECEDING DISCUSSION DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE MERGER. YOU ARE URGED TO
CONSULT YOUR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE
MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND
EFFECT OF FEDERAL, STATE, LOCAL AND OTHER APPLICABLE TAX LAWS AND THE EFFECTS OF
ANY PROPOSED CHANGES IN THE TAX LAWS.
ACCOUNTING TREATMENT
The merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting principles.
Under the pooling of interests method of accounting, the historical book values
of the assets, liabilities and stockholders' equity (deficit) of SMART will be
carried over and combined with the consolidated balance sheet of i2. In
addition, the historical i2 statements of operations will be restated to combine
its results with the historical results of SMART for all periods presented.
Consummation of the merger is conditioned upon receipt by SMART and i2 of
letters from their independent accountants regarding the accounting firms'
concurrence with SMART management's and i2 management's conclusions as to the
appropriateness of pooling of interests accounting for the merger under
Accounting Principles Board Opinion No. 16, and the related interpretations of
the American Institute of Certified Public Accountants, the Financial Accounting
Standards Board and the rules and regulations of the SEC.
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TERMS OF THE MERGER
The merger agreement is attached as Appendix A to this document and is
incorporated here by this reference. SMART and i2 encourage you to read the
merger agreement in its entirety. It is the legal document governing the merger,
and in the event of any discrepancy between the terms of the merger agreement
and the following summary, the merger agreement will control.
CONVERSION OF COMMON STOCK AND SERIES C PREFERRED STOCK
Upon the completion of the merger, up to 2,141,603 shares of i2 common
stock are issuable (including i2 common stock to be reserved for issuance upon
exercise of certain SMART options and warrants assumed by i2) in exchange for
the acquisition by i2 of all outstanding SMART capital stock, all unexpired and
unexercised options and certain warrants to purchase SMART common stock. Under
the SMART Restated Certificate of Incorporation, SMART preferred stock is
entitled to receive a liquidation preference at the effective time of any merger
of SMART with another company in which the stockholders of SMART before the
merger have less than 50% of the voting power of the surviving corporation. This
includes the proposed merger. The liquidation preference of the SMART Series A
Preferred Stock, SMART Series B Preferred Stock and SMART Series C Preferred
Stock is currently $1.15, $0.86 and $3.00 per share, or an aggregate of
$1,650,000, $3,868,801, and $11,249,997, respectively. The value of i2 common
stock for purposes of determining how many shares will be received by holders of
SMART preferred stock in payment of their liquidation preferences is equal to
the average closing price per share of i2 common stock as quoted on The Nasdaq
National Market over the 30 calendar day period ending three days prior to the
closing date (the "i2 Stock Price").
Based upon recent prices of i2 common stock, the i2 common stock to be
issued in exchange for the SMART common stock issuable upon conversion of SMART
Series A Preferred Stock and SMART Series B Preferred Stock will likely be more
valuable than the liquidation preference that would be paid in shares of i2
common stock in exchange for shares of SMART Series A and SMART Series B
Preferred Stock in the merger. However, based upon recent prices of i2 common
stock, the i2 common stock that would be issued in exchange of the SMART common
stock issuable upon conversion of SMART Series C Preferred Stock would likely be
less valuable than the liquidation preference payable in shares of i2 common
stock in exchange for shares of SMART Series C Preferred Stock. See
"Summary -- What You Will Receive In the Merger." It is a condition to the
closing of the merger that all outstanding shares of SMART Series A and Series B
Preferred Stock will be converted into SMART common stock prior to the effective
time of the merger, and holders of SMART Series C Preferred Stock will elect to
exchange all or part of their Series C Preferred Stock for shares of i2 common
stock in accordance with their liquidation preference, pursuant to SMART's
Restated Certificate of Incorporation.
Specifically, shares of i2 common stock will be distributed to SMART
stockholders as follows:
- If you are a holder of SMART Series C Preferred Stock and have not
exercised your appraisal rights, each share that you hold will be
converted into the right to receive a fraction of a share of i2 common
stock equal to the quotient obtained by dividing (1) $3.00, your per
share liquidation preference, by (2) the i2 Stock Price.
- If you are a holder of SMART common stock and you have not exercised your
appraisal rights, each share of common stock that you hold will be
converted into the right to receive a fraction of a share of i2 common
stock equal to the quotient obtained by dividing (1) 2,141,603 minus the
number of shares to be issued to holders of SMART Series C Preferred
Stock by (2) the sum of (a) the number of shares of all issued and
outstanding shares of SMART common stock as of the effective time of the
merger and (b) the number of whole shares of SMART common stock issuable
upon exercise of all options and warrants to purchase shares of SMART
common stock outstanding as of the effective time of the merger (other
than the bridge warrants and outstanding options for unvested option
shares held by persons that have ceased to be employees of SMART prior to
the closing date) (the "Common Exchange Ratio").
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No fractional shares of i2 common stock will be issued in the merger.
Instead, if you would otherwise be entitled to a fraction of a share of i2
common stock, you will receive an amount of cash equal to the product of that
fraction multiplied by the i2 Stock Price.
CONVERSION OF SERIES A AND SERIES B PREFERRED STOCK
It is a condition to the closing of the merger in the merger agreement that
all outstanding shares of SMART's Series A Preferred Stock and SMART Series B
Preferred Stock be converted into SMART common stock prior to the effective time
of the merger. Assuming the proposal effecting such conversion has been approved
by the required numbers of holders of SMART Series A Preferred Stock and SMART
Series B Preferred Stock, each outstanding share of SMART Series A Preferred
Stock and SMART Series B Preferred Stock will be automatically converted into
shares of SMART common stock pursuant to the SMART Restated Certificate of
Incorporation immediately prior to the effective time of the merger. Upon the
completion of the merger, each such share of SMART common stock will then be
converted into the right to receive (1) that number of shares of i2 common stock
as is equal to the Common Exchange Ratio and (2) cash for any fraction of a
share of i2 common stock they are to receive equal to the product of that
fraction of a share multiplied by the i2 Stock Price.
CONVERSION OF OPTIONS AND WARRANTS
Options to Purchase SMART Common Stock. As of May 12, 1999, there were
options to purchase 5,423,292 shares of SMART common stock outstanding, each of
which was granted pursuant to SMART's 1996 Stock Option/Stock Issuance Plan.
Additional options may be granted by SMART in the normal course of business
prior to the closing of the merger. Upon completion of the merger, each such
option outstanding prior to the effective time of the merger will be assumed by
i2 and automatically converted into an option to purchase the number of shares
of SMART common stock equal to the product of (1) the number of shares of SMART
common stock that were issuable upon exercise of such option immediately prior
to the effective time of the merger and (2) the Common Exchange Ratio. To avoid
fractional shares, the number of shares of i2 common stock subject to an assumed
SMART option will be rounded down to the nearest whole share. The per share
exercise price of any given option after the effective time of the merger will
be determined by dividing the exercise price of the option immediately prior to
the effective time of the merger by the Common Exchange Ratio, rounded up to the
nearest whole cent. The other terms of the SMART options, including vesting
schedules, will remain unchanged. As soon as practicable after the closing date,
i2 will file a Registration Statement on Form S-8 with the SEC with respect to
the shares of i2 common stock issuable upon exercise of the assumed SMART
options.
Bridge Warrants. In connection with, and as an inducement to, the purchase
by certain investors and the issuance by SMART of a series of subordinated
convertible promissory notes in October 1998, SMART issued to certain investors
warrants to purchase an aggregate of 250,000 shares of SMART Series C Preferred
Stock at an exercise price of $3.00 per share (the "Bridge Warrants"). At the
effective time of the merger, each outstanding Bridge Warrant will be assumed by
i2 and exchangeable for warrants to purchase the number of shares of i2 common
stock equal to the product of (1) the number of shares of SMART Series C
Preferred Stock issuable on exercise of the Bridge Warrants and (2) the Series C
Exchange Ratio. The per share exercise price of a Bridge Warrant after the
effective time of the merger will be determined by dividing the exercise price
of any given Bridge Warrant immediately prior to the effective time of the
merger by the Series C Exchange Ratio, rounded up to the nearest whole cent. i2
has agreed to file an appropriate registration statement for the resale by the
holders of the shares of i2 common stock issued upon exercise of these warrants.
Series B Warrants. In connection with, and as an inducement to, the making
of certain loans by Imperial Bank to SMART, SMART issued to Imperial Bank and
Imperial Bancorp warrants to purchase an aggregate of 36,047 shares of SMART
Series B Preferred Stock at an exercise price of $0.86 per share (the "Series B
Warrants"). At the effective time of the merger, each Series B Warrant
outstanding will be assumed by i2 and exchangeable for warrants to purchase the
number of shares of i2 common stock equal
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to the product of (1) the number of shares of SMART common stock into which the
Series B Preferred Stock issuable on exercise of the Series B Warrants are
convertible and (2) the Common Exchange Ratio. The per share exercise price of a
Series B Warrant after the effective time of the merger will be determined by
dividing the exercise price of any given Series B Warrant immediately prior to
the effective time of the merger by the Common Exchange Ratio, rounded up to the
nearest whole cent. i2 has agreed to file an appropriate registration statement
for the resale by the holders of the shares of i2 common stock issued upon
exercise of these warrants.
As of the record date, outstanding SMART options and warrants were
exercisable for an aggregate of 5,714,963 shares of SMART common stock,
including shares of common stock issuable upon conversion of convertible
securities issuable upon exercise of warrants.
TERMINATION OF RIGHTS AGREEMENTS
It is a condition to the closing of the merger in the merger agreement that
all provisions of all agreements among SMART and any of its securityholders or
optionholders, or among any SMART securityholders or optionholders, providing
for registration rights, rights of first refusal, rights of co-sale, relating to
the voting of SMART securities or requiring SMART to obtain the consent or
approval of any such securityholders or optionholders prior to taking or failing
to take any action, shall be terminated effective immediately prior to the
closing date, except to the extent that such provisions would otherwise cease to
apply to SMART and i2 securities upon the closing date. As a result, the
following three agreements, among others, must be terminated as a condition to
the closing of the merger:
Investors' Rights Agreement. SMART and the holders of SMART preferred stock
are parties to a Second Amended and Restated Investors' Rights Agreement, dated
October 30, 1997, which provides the holders of SMART preferred stock with,
among other things:
- Rights with regard to the registration of the resale of their SMART
preferred stock under the Securities Act of 1933, as amended;
- Indemnification by SMART with respect to any liabilities arising from
such registration;
- The right to purchase a portion of new equity securities issued by SMART;
- The right to receive certain financial information and inspect the books
and records of SMART; and
- Restrictions on resale of their SMART preferred stock under certain
circumstances.
Termination of this agreement requires the written consent of SMART and the
holders of at least the majority of SMART common stock issuable upon the
conversion of the SMART preferred stock.
Co-Sale Agreement. SMART, the holders of SMART preferred stock, and Mark
Benson, Jasiph DeCoux, Andrew Heller and Jason Parrish are parties to a Second
Amended and Restated Co-Sale and First Refusal Agreement, dated October 30,
1997, which provides the holders of SMART preferred stock a right of first
refusal to purchase any shares proposed to be transferred by, and a right of
co-sale in connection with any such transfer by, Messrs. Benson, DeCoux, Heller
and Parrish. Termination of this agreement requires the written consent of the
majority of the shares of SMART common stock held by Messrs. Benson, DeCoux,
Heller and Parrish and the holders of a majority of the shares of SMART
preferred stock.
Voting Agreement. SMART and certain holders of SMART common stock and
holders of SMART preferred stock are parties to a Voting Agreement, dated
October 30, 1997 which provides, among other things, for the election or removal
of persons to the SMART Board of Directors as designated by certain groups,
including the holders of SMART preferred stock, the holders of SMART common
stock and the holders of SMART Series C Preferred Stock, and that SMART would
enter into indemnification agreements with such designees. Termination of this
agreement requires the written consent of the holders of a majority of the
shares of SMART common stock held by Messrs. Benson, DeCoux, Heller and Parrish
and the holders of a majority of shares of SMART preferred stock.
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PROCEDURES FOR EXCHANGING STOCK CERTIFICATES
As soon as practicable after the effective time of the merger, a letter of
transmittal with instructions will be mailed to you for use in exchanging your
SMART capital stock certificates for i2 common stock certificates. Upon
surrender of your SMART capital stock certificate for cancellation to the
exchange agent in connection with the merger, together with such letter of
transmittal, duly completed and validly executed in accordance with its
instructions, you will be entitled to receive a certificate representing the
number of whole shares of i2 common stock equal to the appropriate exchange
ratio multiplied by the number of shares represented by the SMART capital stock
certificate being exchanged. No fraction of a share of i2 common stock will be
issued. Instead, if you would otherwise be entitled to a fraction of a share of
i2 common stock (after aggregating all fractional shares of i2 common stock to
be received by you), you will receive from i2 an amount of cash, rounded up to
the nearest whole cent, equal to the product of such fraction multiplied by the
i2 Stock Price.
Immediately after the effective time of the merger, each certificate
representing outstanding shares of SMART capital stock will be deemed for all
corporate purposes, other than the payment of dividends, to evidence the
ownership of (1) the number of full shares of i2 common stock into which such
shares of SMART capital stock shall have been so converted as a result of the
merger and (2) the right to receive an amount in cash in lieu of the issuance of
any fractional shares. No dividends or other distributions with respect to i2
common stock with a record date after the effective time of the merger will be
paid to the holder of any unsurrendered SMART capital stock certificate with
respect to the shares of i2 common stock they represent until the holder of
record of such certificate surrenders such certificate. Subject to applicable
law, following surrender of any such certificate, the record holder of such
certificate will be paid at the time of such surrender, without interest, the
amount of any dividends or other distributions with a record date after the
effective time of the merger payable with respect to such shares.
If any certificate for shares of i2 common stock is to be issued to you in
a name other than that in which your surrendered SMART capital stock certificate
is registered, it will be a condition of the issuance of the i2 common stock
that (1) your surrendered SMART capital stock certificate be properly endorsed
and otherwise in proper form for transfer and (2) you pay to i2 or any agent
designated by it any transfer or other taxes required by reason of such name
change, or establish to the satisfaction of i2 or any agent designated by it
that such tax has been paid or is not payable.
YOU SHOULD NOT SUBMIT YOUR CERTIFICATES FOR EXCHANGE UNTIL YOU HAVE
RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS REFERRED TO ABOVE.
NOTIFICATION REGARDING OPTIONS
Following the effective time of the merger, each outstanding SMART option
will be assumed by i2 automatically and no action will be required on the part
of the optionholder to convert such holder's SMART options into options to
purchase a fraction of a share of i2 common stock, as described above in
"Conversion of Options and Warrants."
NOTIFICATION REGARDING WARRANTS
Following the effective time of the merger, i2 will issue to each person
who, immediately prior thereto, was a holder of an outstanding SMART Series B
Warrant or Bridge Warrant a document evidencing the assumption of such warrant
by i2. Such assumption will be automatic and no action will be required on the
part of the holder of the warrant to convert such holder's warrant into a
warrant to purchase shares of i2 common stock.
OPERATIONS FOLLOWING THE MERGER
Upon completion of the merger, SMART will become a wholly owned subsidiary
of i2. The membership of the i2 Board of Directors will remain unchanged as a
result of the merger. You will become a stockholder of i2 and your rights as a
stockholder will be governed by the i2's Restated
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Certificate of Incorporation and Amended and Restated Bylaws and the laws of the
State of Delaware. See "Comparison of Rights of Stockholders of SMART and i2."
THE MERGER AGREEMENT
Effective Time of the Merger
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the merger agreement, SMART and i2 intend to close the
merger pursuant to the merger agreement and file a certificate of merger with
the Secretary of State of Delaware. The merger will become effective upon such
filing. It is anticipated that, assuming all conditions are met, the effective
time of the merger will occur on or before July 30, 1999, or as soon as
practicable thereafter.
Representations, Warranties and Covenants
The merger agreement contains various representations and warranties of the
parties, including representations by SMART and i2 as to their organization and
capitalization, their authority to enter into the merger agreement and to
consummate the transactions contemplated thereby, the existence of certain
liabilities and the absence of certain material undisclosed liabilities and
changes in their businesses. Such representations and warranties will survive
the completion of the merger for a period of one year after the effective time
of the merger; provided, however, that any claims with regard to such
representations and warranties made by SMART relating to SMART's tax liabilities
and payment thereof, and made by either party involving fraud or intentional
misrepresentation will survive for a period equal to the statute of limitations
for such matters.
Under the terms of the merger agreement, for the period from May 12, 1999
and continuing until the earlier of the termination of the merger agreement or
the effective time of the merger, each of SMART and i2 has agreed, except to the
extent expressly contemplated by the merger agreement or as consented to in
writing by the other to carry on its and its subsidiaries' business in the
usual, regular and ordinary course in substantially the same manner as conducted
prior to the closing date. SMART further agreed:
- To pay and to cause its subsidiaries to pay debts and taxes when
commercially reasonable, subject to good faith disputes over such debts
or taxes and i2's consent to the filing of material tax returns;
- To pay or perform other obligations when due; and
- To use its reasonable efforts consistent with past practice and policies
to preserve intact its present business organizations, keep available the
services of its present officers and key employees and preserve its
relationships with customers, suppliers, distributors, licensors,
licensees and others having business dealings with it, to the end that
its goodwill and ongoing businesses shall be unimpaired at the effective
time of the merger.
In addition, SMART has agreed that it will not, among other things, do,
cause or permit any of the following, or allow, cause or permit any of its
subsidiaries to do, cause or permit any of the following, without the prior
written consent of i2:
- Cause or permit any amendments to its certificate of incorporation or
bylaws;
- Declare or pay any dividends on or make any other distributions, whether
in cash, stock or property, in respect of any of its capital stock, or
split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock, other than any
issuance of SMART common stock upon exercise of outstanding options or
upon exercise of outstanding warrants, in each case outstanding as of the
date of the merger agreement except for issuances of options contemplated
therein, or repurchase or otherwise acquire, directly or indirectly, any
shares of its capital stock except from former employees, directors and
consultants in accordance with agreements providing for the repurchase of
shares in connection with any termination of service to it;
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- Accelerate, amend or change the period of exercisability or vesting of
options or other rights granted under its stock plans, or lower the
exercise price of such options or authorize cash payments in exchange for
any options or other rights granted under any of such plans;
- Enter into any material contract or commitment, or violate, amend or
otherwise modify or waive any of the terms of any of its material
contracts, other than in the ordinary course of business consistent with
past practice, except as provided in the merger agreement;
- Issue, deliver, sell, authorize or propose the issuance, delivery or sale
of, or purchase or propose the purchase of, any shares of its capital
stock or securities convertible into, or subscriptions, rights, warrants
or options to acquire, or other agreements or commitments of any
character obligating it to issue any such shares or other convertible
securities, other than the issuance of shares of its common stock
pursuant to the exercise of stock options or warrants therefor
outstanding as of the date of the merger agreement, upon conversion of
the SMART Series A Preferred Stock and Series B Preferred Stock, and the
issuance of options to purchase a certain number of shares of SMART
common stock to employees hired after the date of the merger agreement or
for bonuses to existing employees (with certain limitations placed upon
the number of shares issuable to any individual);
- Transfer to any person or entity any rights to its intellectual property
other than in the ordinary course of business consistent with past
practice;
- Enter into or amend any agreements pursuant to which any other party is
granted exclusive marketing or other exclusive rights with respect to any
of its products or technology, except as provided in the merger
agreement;
- Sell, lease, license or otherwise dispose of or encumber any of its
properties or assets which are material, individually or in the
aggregate, to its business, taken as a whole, except in the ordinary
course of business consistent with past practice;
- Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others, other than in connection with a loan from i2;
- Enter into any operating lease in excess of $10,000;
- Pay, discharge or satisfy in an amount in excess of $5,000 in any one
case or $15,000 in the aggregate, any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise)
arising other than in the ordinary course of business, other than the
payment, discharge or satisfaction of liabilities reflected or reserved
against in SMART's financial statements, except as otherwise provided in
the merger agreement;
- Make any capital expenditures, capital additions or capital improvements
except in the ordinary course of business and consistent with past
practice;
- Materially reduce the amount of any material insurance coverage provided
by existing insurance policies;
- Terminate or waive any right or rights which individually or in the
aggregate would reasonably be expected to be material in value to SMART,
other than in the ordinary course of business;
- Adopt or amend any employee benefit or stock purchase or option plan
(except as expressly contemplated in the merger agreement), or hire any
new director level or officer level employee, pay any special bonus or
special remuneration to any employee or director or increase the salaries
or wage rates of its employees other than pursuant to normal adjustments
in accordance with past practice, except as otherwise provided in the
merger agreement;
- Grant, pay or agree to any provisions regarding severance or termination
pay to any director, officer or other employee, except as set forth in
the merger agreement;
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- Commence a lawsuit or take any action in connection with any existing or
threatened lawsuit, administrative proceeding, mediation, arbitration or
other similar proceeding other than (a) for the routine collection of
bills, (b) in such cases where it in good faith determines that failure
to commence suit would result in the material impairment of a valuable
aspect of its business, the waiver of any right or claim, and/or the
violation of any statute of limitations, statutory or judicial deadline,
provided that it consults with i2 prior to the filing of such a suit or
taking of such action, or (c) for a breach of the merger agreement or any
other agreement between SMART and i2;
- Acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire any assets which are material, individually or in the
aggregate, to its business;
- Other than in the ordinary course of business, make or change any
material election in respect of taxes, adopt or change any accounting
method in respect of taxes, file any material tax return or any amendment
to a material tax return, enter into any closing agreement, settle any
claim or assessment in respect of taxes, or consent to any extension or
waiver of the limitation period applicable to any claim or assessment in
respect of taxes;
- Revalue any of its assets, including without limitation writing down the
value of inventory or writing off notes or accounts receivable other than
in the ordinary course of business; or
- Take, or agree in writing or otherwise to take, any of the actions
described above, or any action which would make any of its
representations or warranties contained in the merger agreement untrue or
incorrect or prevent it from performing or cause it not to perform its
covenants thereunder.
No Solicitation
SMART has further agreed that SMART and its subsidiaries and the officers,
directors, employees or other agents of SMART and its subsidiaries will not,
directly or indirectly, prior to the earlier of the termination of the merger
agreement, the effective time of the merger and July 30, 1999, (1) solicit,
initiate, engage or participate in any discussions or negotiations or enter into
any agreement or arrangement regarding (a) the sale of a material amount of the
assets of SMART or its subsidiary, (b) any merger, business combination,
restructuring, recapitalization, liquidation or similar transaction involving
SMART or its subsidiary or (c) the sale or transfer of shares of SMART capital
stock, (2) enter into any new strategic or marketing alliance except as provided
for in the merger agreement or (3) afford access to the properties, books or
records of SMART to any person that has advised SMART that it may be considering
making, or that has made, a proposal for such a transaction, except to the
extent required under Section 220 of the DGCL and except with respect to i2.
Conditions to the Merger
Each party's respective obligation to complete the merger is subject to,
among other things, the approval of the merger agreement and the merger by the
requisite consent of the stockholders of SMART, the SEC having declared the
registration statement, of which this document is a part, effective and the
satisfaction prior to the close of the merger of the additional following
conditions: (1) the absence of any temporary restraining order, injunction or
other legal action or regulatory restraint or prohibition preventing the merger
or rendering the merger illegal, nor shall any proceeding brought by an
administrative agency or commission or other governmental authority or
instrumentality, foreign or domestic, seeking any of the foregoing be pending;
(2) all approvals, waivers and consents of any governmental entity necessary for
the completion of the transactions contemplated by the merger agreement shall
have been obtained; and (3) i2, SMART, Chase Bank of Texas, N.A. and William P.
Wood shall have entered into an escrow agreement as described below.
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The obligations of SMART to effect the merger are subject to, among other
things, unless waived in writing by SMART, (1) the receipt of a certificate or
certificates signed on behalf of i2 by both its President and Chief Financial
Officer to the effect that (a) the representations and warranties of i2 in the
merger agreement shall be true and correct as of the closing date as though such
representations and warranties were made on and as of such time and (b) i2 shall
have performed or complied in all material respects with all covenants,
obligations, conditions and agreements required by it as of the closing date,
(2) the filing with The Nasdaq National Market of a Notification Form for
Listing of Additional Shares with respect to the shares of i2 common stock
issuable in connection with the merger and (3) the receipt by SMART of a written
opinion of i2's legal counsel as to certain legal matters and the receipt by i2
of its legal counsel's opinion as to certain tax matters.
The obligations of i2 to effect the merger are subject to, among other
things, the satisfaction at or prior to the closing date of each of the
following conditions, unless waived in writing by i2:
- The representations and warranties of SMART in the merger agreement shall
be true and correct as of the closing date as though such representations
and warranties were made on and as of such time, and i2 shall have
received a certificate to such effect signed on behalf of SMART by its
President and its current principal accounting officer;
- SMART shall have performed or complied in all material respects with all
covenants, obligations and agreements required by them as of the close of
the merger and i2 shall have received a certificate executed on behalf of
SMART by its President and its current principal accounting officer to
such effect;
- i2 shall have been furnished with evidence satisfactory to it of the
consent or approval of those persons whose consent or approval shall be
required in connection with the merger;
- No temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
or regulatory restraint or provision limiting or restricting i2's conduct
or operation of the business of SMART and its subsidiaries, following the
merger shall be in effect, nor shall any proceeding brought by an
administrative agency or commission or other governmental entity,
domestic or foreign, seeking the foregoing be pending;
- There shall not have occurred any event which causes a material adverse
change in the condition, whether financial or otherwise, properties,
assets, liabilities, business, operations or results of operations of
SMART and its subsidiaries, taken as a whole;
- i2 shall have received from SMART the necessary documents indicating the
shares of capital stock of SMART do not constitute "United States real
property interests" under Section 897(c) of the Internal Revenue Code;
- The directors and officers of SMART in office immediately prior to the
closing date, other than Michael J. Feinstein and Michelle Schwalbach,
shall have resigned as directors and officers, as applicable, of SMART
effective as of the effective time of the merger;
- SMART shall have provided i2 with a certificate from the Secretary of
State of Delaware, and from each other jurisdiction in which SMART or any
subsidiary is qualified to do business, as to SMART's good standing and
payment of all applicable taxes;
- SMART shall have terminated the SMART 401(k) Plan in the manner described
in the merger agreement;
- i2 shall have received a written opinion of SMART's legal counsel as to
certain legal matters;
- i2 shall have received a letter of Arthur Andersen LLP, independent
auditors, to the effect that the merger qualifies for pooling of
interests accounting treatment if consummated in accordance with the
merger agreement;
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- SMART shall have received a letter of Ernst & Young LLP, independent
auditors, to the effect that no conditions exist that would preclude
SMART from accounting for the merger as a pooling of interests as those
conditions relate solely to SMART;
- All provisions of all agreements among SMART and any of its
securityholders or optionholders, or among any SMART securityholders or
optionholders, providing for registration rights, rights of first refusal
or rights of co-sale, relating to the voting of SMART securities,
requiring SMART to obtain the consent or approval of any such
securityholders or optionholders prior to taking or failing to take any
action, shall have been terminated effective immediately prior to the
effective time of the merger, except to the extent that such provisions
would otherwise cease to apply to SMART and i2 securities upon the
closing date;
- Each person who is an affiliate of SMART shall have delivered to i2 an
affiliate agreement as described below; and
- SMART shall have received its legal counsel's opinion as to certain tax
matters.
Indemnification by SMART; Escrow of Portion of Merger Consideration
In the merger, 10% of the aggregate number of shares of i2 common stock
issued in exchange for outstanding shares of SMART capital stock upon completion
of the merger will be issued to an escrow agent for deposit into an escrow
account with the escrow agent. These escrow shares shall be contributed on
behalf of each SMART stockholder in proportion to the aggregate number of shares
of i2 common stock such holder would otherwise receive by virtue of the merger.
These escrow shares will be held in the escrow account for one year from the
effective time of the merger as security for any losses incurred by i2 in the
event of breaches by SMART of any of its representations, warranties, covenants
and agreements contained in the merger agreement. Any shares remaining after the
one-year escrow period will be delivered to the stockholders proportionately.
Escrow Agreement
As a condition to the closing of the merger, i2, William P. Wood, as the
SMART stockholders' agent, and Chase Bank of Texas, N.A., as the escrow agent,
will enter into an escrow agreement providing for the escrow of 10% of the
aggregate number of shares of i2 common stock issued in exchange for outstanding
shares of SMART capital stock upon completion of the merger. The escrow
agreement is attached to this document as Appendix B and is incorporated herein
by this reference. Your consent to approve the merger agreement also constitutes
acceptance of Chase Bank of Texas, N.A. as the escrow agent. These shares shall
be held in escrow for a period of one year after the effective time of the
merger. Pursuant to the terms of the escrow agreement, Chase Bank of Texas, N.A.
will hold and safeguard the escrow shares and, after the one-year period,
deliver to the former SMART stockholders that number of escrow shares in the
escrow fund in excess of any shares which are required to satisfy any successful
claim made by i2 prior to the expiration of the one-year escrow period. Such
claims could include reimbursement for fees and expenses incurred by SMART in
connection with the merger in excess of $275,000, as described below in "Fees
and Expenses."
The escrow agreement sets forth the duties of the escrow agent, which
include (1) the safeguarding of the escrow shares during the one-year escrow
period, (2) the voting of the escrow shares in accordance with the instructions
received from the beneficial owners of such shares and (3) the delivery at the
expiration of the one-year escrow period of all escrow shares in excess of any
shares necessary to cover any successful claim made by i2. The escrow agreement
also provides that i2 will pay all of the escrow agent's fees.
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Termination, Amendments and Waivers
At any time prior to the effective time of the merger, the merger agreement
may be terminated:
- By written consent of the Board of Directors of SMART and i2;
- By either SMART or i2 if the closing shall not have occurred on or before
July 30, 1999 (provided a later date may be agreed upon in writing by
SMART and i2, and provided further that the right to terminate the merger
agreement shall not be available to any party whose action or failure to
act has been the cause of or resulted in the failure of the merger to
occur on or before such date and such action or failure to act
constitutes a breach of the merger agreement, and in such an event the
non-breaching party shall have the right to extend this date to August
31, 1999);
- By i2 if (a) SMART breaches in any material respect any representation,
warranty, obligation or agreement under the merger agreement and such
breach shall not have been cured within five business days of receipt by
SMART of written notice of such breach; provided, that this right to
terminate the merger agreement by i2 shall not be available if i2 is at
the time in breach in any material respect of the merger agreement, or
(b) the Board of Directors of SMART shall have withdrawn or modified its
recommendation of the merger agreement or the merger in a manner adverse
to i2 or shall have resolved to do any of the foregoing;
- By SMART if i2 breaches in any material respect any representation,
warranty, obligation or agreement under the merger agreement and such
breach shall not have been cured within five business days of receipt by
i2 of written notice of such breach; provided, that this right to
terminate the merger agreement shall not be available if SMART is at the
time in breach in any material respect of the merger agreement;
- By i2 if (a) any permanent injunction or other order of a court or other
competent authority preventing the merger shall have become final and
nonappealable or (b) any required approval of the stockholders of SMART
shall not have been obtained by reason of the failure to obtain the
required vote or consent upon a vote or consent held at a duly held
meeting of stockholders or at any adjournment thereof or an effective
action by written consent in lieu thereof; or
- By SMART if any permanent injunction or other order of a court or other
competent authority preventing the merger shall have become final and
nonappealable.
Fees and Expenses
Whether or not the merger is completed, all costs and expenses incurred in
connection with the merger agreement and the merger will be paid by the party
incurring the expense. However, any out-of-pocket expenses incurred by SMART in
connection with the merger in excess of $275,000, including fees and expenses of
legal counsel, accountants and financial advisors, shall remain an obligation of
SMART's stockholders and reduce the aggregate merger consideration by the amount
such expenses exceed $275,000. If SMART or i2 receives any invoices for amounts
in excess of said amounts and such excess was not reflected in a reduction in
the aggregate merger consideration, SMART may, with i2's written approval, pay
such fees. However, these payments by SMART shall, if not properly reimbursed by
the stockholders of SMART at i2's request, constitute damages recoverable under
the escrow agreement described above.
RELATED AGREEMENTS
Stockholder Agreements
Certain officers, directors and holders of more than 10% of the outstanding
capital stock of SMART, collectively holding approximately 79% of the
outstanding capital stock of SMART capital stock, including holders of more than
51% of each series of SMART preferred stock, have each entered into a
stockholder agreement with i2. The terms of each stockholder agreement provide
that the SMART stockholder signing
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the stockholder agreement will vote or consent to approve the merger and grants
an irrevocable proxy to this effect.
SMART Affiliate Agreements
As a condition to the merger, various SMART stockholders and holders of
SMART stock options, each identified by SMART as an affiliate prior to the
execution of the merger agreement, have entered into an agreement with i2
restricting sales, dispositions or other transactions that would reduce their
risk of investment with respect to the shares of SMART capital stock held by
them prior to the merger and the shares of i2 common stock to be received by
them in the merger to help ensure that the merger will be treated as a pooling
of interests for financial reporting purposes.
Employment and Non-Competition Agreements
Certain employees of SMART Technologies, Inc. (including Bryan E. Plug and
Muneer Hirji) have entered into employment and non-competition agreements with
i2 pursuant to which they will be employed, effective as of the effective time
of the merger, in positions comparable to their current position with SMART.
The terms of the employment agreements are for one year from the closing
date unless terminated earlier (1) by the employee for any reason upon 30-days
written notice of such termination, (2) by i2 without cause upon 30-days written
notice of such termination or (3) by i2 at any time upon the occurrence of
certain described events deemed to be sufficient cause. If the employee's
employment is terminated without cause prior to the expiration of their
employment agreement, then i2 will continue to pay employee's base salary for a
certain period as a severance payment. If the employee voluntarily terminates
their employment or the employment is terminated for cause prior to the
expiration of their employment agreement, then the employee will be paid all
salary and benefits through the date of termination of employment, but nothing
else. The employment agreement also prohibits the employee from (1) for a period
of 18 months, engaging or participating in a business that directly or
indirectly competes with any of the products of either SMART or i2, (2) for a
period of 18 months, soliciting or hiring employees of either SMART or i2 or
soliciting customers of either SMART or i2 and (3) during the term of the
employee's employment and any period during which the employee receives any
severance payment, undertaking the planning for or organization of any business
that would directly or indirectly compete with any of the products of either
SMART or i2, or conspire with agents, employees, consultants or other
representatives of the SMART or i2 for the purpose of organizing any such
business.
REGULATORY MATTERS
Based on information available to them, SMART and i2 believe that the
merger will not violate federal or state antitrust laws. However, SMART and i2
cannot assure you that a challenge to the completion of the merger on antitrust
grounds will not be made or that, if such a challenge were made, SMART and i2
would prevail or would not be required to accept certain conditions, possibly
including certain divestitures or hold-separate arrangements, in order to
complete the merger.
APPRAISAL RIGHTS
Under the Delaware General Corporation Law, or DGCL, notwithstanding the
approval of the merger by the requisite number of shares of SMART, you will be
entitled to assert rights in connection with the merger and obtain payment of
the "fair value" for your shares, provided that you held shares as of May 12,
1999 and you comply with the requirements of Section 262 of the DGCL. If you
consent to the merger, however, you are precluded from invoking such appraisal
rights.
The following is a summary of the statutory procedures that you must follow
if you elect to exercise your appraisal rights. This summary is qualified in its
entirety by reference to Section 262, the full text of which is attached to this
document as Appendix C and is incorporated here by this reference. If you wish
to assert your appraisal rights or wish to preserve the right to do so, you
should review Section 262
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carefully. Failure to strictly comply with the procedures set forth in Section
262 may result in the loss of your appraisal rights. If you are interested in
perfecting your appraisal rights, you should consult legal counsel as to the
procedures required to be followed.
If you elect to exercise your appraisal rights, you must satisfy each of
the following conditions:
- You must deliver to SMART, within 20 days of the mailing date of the
Notice to Stockholders of Written Consent Pursuant to Section 228(d) of
the DGCL and the schedules and exhibits attached thereto, a written
notice of your demand of payment of the fair value for your shares; and
- You must not have consented to the adoption of the merger agreement
pursuant to Section 228 of the DGCL.
If you fail to comply with either of these conditions, you will have no
appraisal rights with respect to your shares. All written notices should be
addressed to: SMART Technologies, Inc., 11701 Stonehollow Drive, Austin, Texas
78758, Attention: Michael Feinstein. All written notices must be executed by, or
with the consent of, the holder of record. The notice must identify you and
indicate your intention to demand payment of the fair value for your shares. In
the notice, your name should be stated as it appears on your stock
certificate(s). If your shares are owned of record in a fiduciary capacity, such
as by a trustee, guardian or custodian, your demand must be executed by or for
the fiduciary. If you own the shares with another person, such as in a joint
tenancy or tenancy in common, your demand must be executed by or for all joint
owners. An authorized agent, including an agent for two or more joint owners,
may execute your demand for appraisal. However, the agent must identify you and
any other owners of the shares and expressly disclose the fact that, in
exercising the demand, he or she is acting as agent for you and any other
owners.
If you are considering seeking appraisal for your shares, you should note
that the fair value of your shares determined under Section 262 could be more,
the same or less than the consideration you would receive pursuant to the merger
agreement if you did not seek appraisal of your shares. The costs of the
appraisal proceeding may be determined by the Delaware Court of Chancery and
allocated among the parties as the Delaware Court of Chancery deems equitable
under the circumstances. Upon your application for appraisal, the Delaware Court
of Chancery may order all or a portion of the expenses incurred by you in
connection with the appraisal proceeding, including, without limitation,
reasonable attorney's fees and the fees and expenses of experts, to be charged
pro rata against the value of all shares entitled to appraisal. In the absence
of such a determination or assessment, you will bear your own expenses.
i2's obligation to complete the merger is subject to the condition,
waivable at the discretion of i2, that the holders of not more than 10% of the
outstanding shares of SMART capital stock shall have validly exercised statutory
appraisal rights.
IF YOU ARE CONTEMPLATING THE EXERCISE OF THE RIGHTS SUMMARIZED ABOVE IN
CONNECTION WITH THE MERGER, YOU ARE URGED TO CONSULT WITH YOUR OWN LEGAL
COUNSEL. THE DESCRIPTION OF DGCL SECTION 262 CONTAINED IN THIS DOCUMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPENDIX C ATTACHED TO THIS DOCUMENT
AND THE DGCL. FAILURE TO FOLLOW PRECISELY ALL OF THE STEPS REQUIRED BY SECTION
262 OF THE DGCL WILL RESULT IN THE LOSS OF YOUR APPRAISAL RIGHTS.
ANY DEMANDS, NOTICES, CERTIFICATES OR OTHER DOCUMENTS REQUIRED TO BE
DELIVERED IN CONNECTION WITH YOUR EXERCISE OF APPRAISAL RIGHTS SHOULD BE SENT TO
SMART, NOT TO I2.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the SMART Board of Directors with
respect to the merger, you should be aware that certain officers and directors
of SMART have interests in the merger, including those referred to below, that
are in addition to your interests as a holder of SMART capital stock generally.
The SMART Board of Directors was aware of these potential conflicts and
considered them in approving the merger.
EMPLOYMENT AGREEMENTS
Certain directors, executive officers and employees of SMART have entered
into employment and non-competition agreements with i2, pursuant to which they
will be employed, effective as of the effective time of the merger, with
responsibilities at SMART comparable to their current position with SMART. These
agreements generally provide that if the employment of those executive officers
or employees were terminated by i2 without cause or if the executive officers
were to resign with good cause, then i2 would continue the executive officer's
or employee's base salary for a certain period as a severance payment. Each of
Bryan E. Plug, who serves as SMART's Chairman of the Board, President and Chief
Executive Officer, and Muneer Hirji, who serves as SMART's Vice President of
Sales, have entered into such employment agreements with i2.
The employment agreement for Mr. Plug provides that if Mr. Plug's
employment is terminated without cause, i2 must pay Mr. Plug (1) his base salary
through the end of the initial term or renewal term then in effect or (2)
severance payments equal to one year of his then-current base salary, whichever
is greater. If Mr. Plug's employment is terminated with cause, as defined in the
agreement, i2 will owe him only his base salary or other compensation accrued
through the date of his termination.
Mr. Hirji's employment agreement provides that if Mr. Hirji's employment is
terminated without cause, i2 must pay Mr. Hirji severance payments equal to his
then-current base salary through the end of the first anniversary of closing of
the merger, or six months base salary, whichever is greater. If Mr. Hirji's
employment is terminated for cause, as defined in the agreement, i2 will owe him
only his base salary or other compensation accrued through the date of his
termination.
STOCK OPTIONS
All options granted by SMART under its 1996 Stock Option/Stock Issuance
Plan contain provisions that provide for full acceleration of such options if
the employment of any option holder is involuntarily terminated within 18 months
following the merger. Under the terms of the 1996 Stock Option/Stock Issuance
Plan, involuntary termination is deemed to include voluntary termination by the
employee following a material change in the employee's position with SMART which
materially reduces the employee's level of responsibility or a reduction in the
employee's compensation by more than fifteen percent. Mr. Plug, Mr. Hirji, Mark
S. Benson, Director and Vice President of Product Development and Chief
Information Officer, Peter A. Solvik, Director, and David Mackie, Vice President
of Marketing, have all received option grants under the 1996 Stock Option/Stock
Issuance Plan which include this special acceleration provision. The unvested
portion of such grants and the average exercise price per share for such
unvested options are as follows:
<TABLE>
<CAPTION>
UNVESTED AVERAGE
NAME OPTION SHARES EXERCISE PRICE
---- ------------- --------------
<S> <C> <C>
Bryan E. Plug............................................. 1,343,750 $0.60
Muneer Hirji.............................................. 300,000 0.60
Mark S. Benson............................................ 9,334 0.60
Peter A. Solvik........................................... 41,667 0.29
David Mackie.............................................. 177,085 0.60
</TABLE>
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The accelerated vesting of these options upon an involuntary termination of
employment following the merger, together with any severance payments received
by Messrs. Plug and Hirji, may result in "excess parachute payments" as defined
in Section 280G of the Internal Revenue Code. Excess parachute payments are not
deductible in accordance with Section 280G. As a result, i2 would not be
entitled to a tax deduction for any amounts determined to be excess parachute
payments. The amount of any lost deduction will depend upon the value of the
shares at the time of the merger and the number of option shares being
accelerated.
INDEMNIFICATION ARRANGEMENTS
Under the merger agreement, i2 has agreed that the certificate of
incorporation and bylaws of SMART will contain the indemnification provisions
that are set forth in SMART's certificate of incorporation and bylaws as of the
date of the merger agreement. i2 has further agreed that these indemnification
provisions will not be amended, repealed or otherwise modified for a period of
six years from the effective time of the merger in any manner that would affect
adversely the rights of individuals who were directors or officers of SMART at
or at any time prior to the effective time of the merger.
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i2 BUSINESS
GENERAL
i2 is the leading provider of electronic business process optimization, or
eBPO, software solutions, licensed as part of the RHYTHM family of products.
eBPO represents a new class of decision-intelligence software solutions that
optimize and integrate core business processes, while driving intelligent
collaboration with trading partners. These processes include supply chain
management, customer management, product lifecycle management as well as
inter-process planning and strategic planning. i2 also provides related services
such as consulting, training and maintenance.
Supply chain management encompasses the planning and scheduling of
manufacturing and related logistics, including demand forecasting, raw materials
procurement, work-in-process, distribution and transportation across multiple
enterprises. Customer management maximizes customer satisfaction and optimizes
return on sales, marketing and customer service investments. Product lifecycle
management will optimize the management of products from concept, design and
test, to phase-out and replacement. Inter-process planning will balance resource
requirements among these processes to achieve enterprise-wide efficiency and
responsiveness. Strategic planning is intended to be used by senior executives
to perform competitive analyses, set company objectives and make long-term
finance, product portfolio and supply chain decisions.
i2's products enable businesses to optimize their business processes 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 the market for supply chain planning solutions may
grow from $1.4 billion in 1998 to $6.8 billion in 2002. 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.
i2's software enables its customers to benefit from the growth of the Internet
by supporting new Internet/online customer facing applications and enabling
re-engineering of supply chains to facilitate and fulfill e-commerce
transactions. Independent industry analysts estimate the market for goods and
services transacted via e-commerce over the Internet to be as much as $80
billion in 1998 and may increase to as much as $3.2 trillion in 2003.
INDUSTRY BACKGROUND
Today's increasingly competitive business environment has forced many
companies to increase efficiency while improving their flexibility and
responsiveness to changing market conditions. In addition to facing higher
competitive standards with respect to product quality, variety and price,
businesses also recognize the need to shorten lead times, adjust production for
frequent changes in customer requirements and quote more accurate and reliable
delivery dates. Furthermore, a company's supply chain may span multiple
continents, tying suppliers in one part of the world with a plant in another to
serve customers in yet a third location. These forces are prompting companies to
collaborate with a broad range of suppliers and customers to improve
efficiencies across multi-enterprise supply chains. The growth of the Internet
and intranets and the proliferation of middleware applications and integration
expertise are accelerating these changes by enabling a ubiquitous,
platform-independent communications network. The combination of these forces has
created a dynamic, complex and highly interdependent business environment. In
response to these evolving market forces, many companies have sought to
reengineer their business processes to reduce manufacturing cycle times, shift
from mass-production to order-driven manufacturing, increase use of outsourcing
and share information with vendors and customers. The implementation of software
solutions to optimize business processes has become a key component of these
reengineering initiatives.
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THE TRADITIONAL APPROACH
Companies have traditionally applied information technology to supply chain
management through Manufacturing Resource Planning, or MRP, systems, which
provide limited flexibility to accommodate rapidly changing business conditions
and customer requirements. In order to respond to an increasingly competitive
business environment and related complex supply chain issues, many companies
have adopted Enterprise Resource Planning, or ERP, systems, which integrate MRP
solutions with other enterprise management applications such as financial,
accounting and human resources. Although ERP systems provide substantial
benefits primarily by integrating financial and other controls with multi-plant
manufacturing coordination, the capabilities of many ERP systems remain limited
by the planning and scheduling methodologies utilized in their MRP modules.
Various ERP vendors are mitigating these limitations by internally developing,
or by acquiring or partnering with independent developers of, advanced planning
and scheduling software. Traditionally, enterprises in many industries have not
focused on utilizing advanced optimization technology in other business
processes such as customer management and product lifecycle management.
Enterprises also do not have the technologies to integrate these business
processes. Some of the significant limitations of traditional MRP systems and
the MRP modules of ERP systems are as follows:
Designed for Transaction Processing and Reporting; Limited
Decision-Support. Traditional solutions were designed to collect and report
large amounts of historical transaction data, rather than provide
sophisticated analysis of relevant information to support critical business
decisions in real-time. While these solutions help customers unify
disparate information resources within the enterprise and contribute to
business process reengineering efforts, i2 believes that they are not
well-suited to enable customers to make rapid, highly complex business
decisions. Traditional solutions were also not designed to access and
integrate data from disparate transaction systems, legacy systems,
databases and other data repositories, limiting their utility in business
planning activities.
Limited Representation of Business Processes. i2 believes that
traditional solutions lack the flexibility and functionality needed to
create a highly accurate model of business processes because they often
employ fixed assumptions regarding critical operating constraints such as
available production capacity and supplier lead times. Since this approach
cannot adequately capture complex real-world constraints and
interdependencies, it may result in the development of infeasible or
suboptimal plans. In addition, traditional solutions calculate plans and
schedules for individual, local segments of the production and supply
process, without considering the consequences to the entire process. For
example, an increase in customer demand might result in the purchase of
additional raw materials without determining whether manufacturing capacity
is available to process those materials. This approach incorrectly assumes
that optimizing production for an individual step within the production
process will lead to an optimal result for the manufacturing operation or
supply chain as a whole.
Sequential Planning. Traditional planning methodologies model business
processes such as supply chain management as a sequence of discrete steps.
For example, traditional solutions begin by developing a demand forecast
from which a distribution plan is developed to determine the distribution
center, warehouse or factory source which will be used to
manufacture/distribute the products without regard to transportation or
manufacturing constraints. A transportation plan is then generated to
determine the optimal methods to ship the products without addressing the
constraints of the remaining parts of the supply chain. A master production
schedule is then generated which is used to develop a materials requirement
plan, which in turn is used to arrive at a capacity requirements plan. A
financial plan is then often generated independently. Because the process
does not address all constraints simultaneously, the initial planning cycle
is rarely feasible or optimal. Moreover, as resources become constrained,
sequential planning requires that the entire supply chain model be
completely regenerated from the beginning to identify and resolve
conflicts. As a result, the planning process often requires numerous manual
iterations to develop a feasible solution. Once an initial plan has been
developed, the time-consuming nature of sequential planning limits a
manager's ability to rapidly evaluate subsequent changes, such as material
shortages and revisions in customer
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orders. Accordingly, a manager's ability to respond to changes and to
effect corrective action may be delayed.
Limited Integration and Functionality. Traditional solutions may
provide selected business process planning modules, but generally do not
provide integrated functionality across all business processes. For
example, several ERP vendors have acquired planning products which address
specific supply chain challenges, but fail to provide global visibility and
optimization across demand forecasting, manufacturing planning, plant
scheduling, distribution and transportation. In addition, traditional
solutions often offer only limited functionality within these areas. For
example, MRP and ERP systems often provide limited "available-to-promise"
functionality by simply processing orders on a "first-come, first-served"
basis, without considering other constraints or business objectives.
Furthermore, traditional solutions typically assume complete independence
of supply and demand and financial goals. Often, however, the overabundance
or scarcity of a certain product can directly or indirectly impact demand
for that product and related products. Complex interrelationships and
interdependencies are not adequately accounted for in traditional planning
methodologies, leading to potentially inaccurate conclusions and
recommendations.
Lengthy Implementation Cycles. Due to the broad scope, complexity and
associated re-engineering requirements of ERP systems, many companies have
found the implementation of such systems to be costly and time consuming.
Such factors often delay or limit the realization of benefits associated
with the implementation of ERP systems.
THE i2 SUPPLY CHAIN MANAGEMENT SOLUTION
i2's original product thrust was its RHYTHM supply chain management suite
of products. These products are designed to provide customers with an end-to-end
solution, enabling customers to model complex, multi-enterprise supply chains to
rapidly generate integrated solutions to challenges such as demand volatility,
production bottlenecks, supply interruptions and distribution alternatives.
RHYTHM utilizes a unique, constraint-based methodology, which simultaneously
considers a broad range of factors -- from changing revenue forecasts to machine
capacities to individual customer commitments -- to optimize all aspects of the
supply chain. RHYTHM's advanced decision-support capabilities enable companies
to make more timely and better informed planning, scheduling and resource
allocation decisions in order to improve throughput, operating efficiency,
customer satisfaction and return on assets. RHYTHM products are designed to help
businesses increase throughput, reduce inventory, decrease cycle times, improve
customer delivery date performance and, consequently, enhance return on assets.
i2's software products are also designed to enable customers to increase
revenues, reduce costs, increase market share and enhance their competitive
advantage. i2's approach to customer relationships is centered on the
identification of potential savings and the creation of value for customers. As
part of this dedication to providing value for customers, i2 has established a
goal of generating more than $50 billion in total value for its customers by the
year 2005 through growth and savings. Although the RHYTHM supply chain
management suite is usually deployed as a stand-alone alternative to MRP
products, it is often implemented in conjunction with, or as a complement to,
existing MRP and ERP solutions. RHYTHM's data structures, methodologies and
application logic differentiate it from existing solutions in the following
ways:
Integrated Decision-Support. RHYTHM's memory-resident, object-oriented
design allows for very rapid analysis and response to planning and
scheduling issues. RHYTHM identifies production and scheduling problems as
circumstances change, proposes optimal solutions and allows for automatic
or manual corrective action. i2's software also allows managers to perform
real-time simulations which gauge the impact of potential local actions on
business processes. i2 believes that this decision-support functionality
enables customers to better manage business processes to reduce costs,
maximize throughput and improve return on assets. In addition, i2's
software enables customers to plan elements of their business processes
collaboratively with business partners.
Accurate Representation of Business Processes. RHYTHM is designed to
incorporate a broad range of specific, real-world constraints and thereby
enhance the accuracy of business process models
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and improve their decision-making utility. RHYTHM distinguishes between
hard constraints, those which are not subject to change or flexibility
(e.g., a machine's maximum rated production capacity), and soft
constraints, those which may be altered in order to arrive at an optimal
solution (e.g., preferred sources for materials). RHYTHM's incorporation of
object-oriented data structures represents a significant advance in the
creation of complex business process models.
Concurrent Planning. In contrast to sequential planning, concurrent
planning views all the steps in the manufacturing and distribution
processes simultaneously. Upon identification of a planning or scheduling
change, RHYTHM immediately propagates the effect of the change upstream and
downstream, from the point of origin, throughout the supply chain model to
derive a revised, optimal solution. For example, an unforeseen loss of
production capacity would automatically signal for a reduction in raw
material procurement as well as the potential rescheduling of customer
delivery dates. Because the RHYTHM supply chain management suite presents
an integrated model of the supply chain, from demand forecasting to raw
material procurement, work-in-process, distribution and transportation to
customer delivery, it is able to provide solutions that optimize the
efficiency of the supply chain as a whole rather than summing a series of
local optimizations.
Global Integration and Advanced Functionality. The RHYTHM supply chain
management suite provides customers with a fully integrated, end-to-end
supply chain management solution, from demand planning to manufacturing
planning, plant scheduling, distribution and transportation. This enables
customers to address a broad range of supply chain issues and to gain
visibility across their entire supply chains to identify, evaluate and
address these issues rapidly and effectively. Additionally, the RHYTHM
supply chain management suite analyzes complex supply/demand
interrelationships in order to more accurately represent real-world supply
chain mechanics. RHYTHM's architecture is designed to enable easy
integration with a broad range of transactional, legacy and other decision-
support software programs, enabling customers to leverage their investments
in these systems.
Ease of Implementation. RHYTHM is designed as a broadly applicable
software solution that is adaptable for customers in a wide range of
industries. In addition, RHYTHM is designed to integrate easily with
certain existing client/server and legacy MRP and ERP systems. i2's goal is
for the customer to realize a significant return on its investment within a
year of licensing.
STRATEGY
i2's objectives are to maintain its leadership position in eBPO software
solutions, help create significant value for its customers and continue to
increase its market share. i2's strategy for achieving these objectives is as
follows:
Expand eBPO Product Offerings. i2 believes that it has gained
significant experience in supply chain management methodologies through its
work with its existing customer base. i2 intends to continue to leverage
this experience, together with its expertise in advanced software
technology, to extend the scope and depth of its suite of RHYTHM products
to enable customers to optimize a broader range of enterprise functions
including customer management, product lifecycle management, inter-process
planning and strategic planning. i2's RHYTHM products are designed to
complement standard ERP solutions. While ERP systems are focused on
transaction processing and reporting, RHYTHM solutions are designed to
optimize various business processes and objectives while simultaneously
addressing supply chain, planning and financial goals.
Enhance Support for Customers' Internet/Electronic Commerce
Initiatives. i2's eBPO solutions, particularly its supply chain
optimization software, have enabled traditional and new businesses to
reengineer their supply chains to realize the efficiency and effectiveness
required by e-business initiatives. i2's solutions will allow its customers
to use the Internet for collaboration and for order fulfillment through
real-time available-to-promise quotes. i2's software also is designed to
support leading Internet/online customer facing applications. Forrester
Research estimates the market for goods and services transacted via
e-commerce over the Internet to be as much as $80 billion in 1998
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and may increase to as much as $3.2 trillion in 2003. i2 believes it is
well positioned to enhance and extend its support of its customers'
e-business initiatives.
Expand Expertise in Multiple Targeted Vertical Markets. i2 is focused
on selected vertical markets such as High Tech, Automotive, Consumer Goods,
Metals, Medical/Pharmaceutical, Paper, Retail and other industries. i2 will
continue to leverage the highly flexible nature of the core RHYTHM business
process optimization software to develop and maintain its family of pre-
configured templates tailored to address the particular requirements of
these existing and new targeted vertical markets.
Invest Aggressively to Build Market Share. i2 has made and continues
to make substantial investments to expand its sales and marketing, research
and development, consulting and administrative infrastructure. i2 believes
that such investments are necessary to increase its market share and to
capitalize on the growth opportunities in the emerging eBPO software
market.
Acquire Complementary Businesses, Products and Technologies. i2
believes that certain acquisitions will provide the opportunity to broaden
its product offerings and provide more comprehensive decision-support and
Intelligent eBusiness. For example, i2's acquisition of Think Systems
Corporation and Optimax Systems Corporation significantly extended its
capabilities in demand planning and manufacturing scheduling, and its
acquisition of InterTrans Logistics Solutions Limited significantly
extended its capabilities in transportation planning. i2 may in the future
pursue additional acquisitions of businesses, products and technologies, or
enter into joint venture arrangements, which complement or expand its
business.
Continue to Develop Collaborative, e-Business Solutions. i2's Global
Decision Support Architecture has been designed to enable RHYTHM to easily
access data from a broad range of customer data repositories, enable
smoother communications and data translations between RHYTHM and disparate
enterprise software systems, provide a multi-dimensional, uniform user
interface and enable a greater level of collaborative planning across the
Internet within and between enterprises. i2 believes that customers must be
able to integrate the variety of applications that they use to run their
business and that, over time, application integration and collaborative,
multi-enterprise planning will be critical to enable customers to derive
significant additional value from eBPO solutions.
Interoperate with a Broad Range of Software Platforms and
Applications. i2 believes that most larger companies operate in
heterogeneous computing environments, with diverse data repositories,
transaction and legacy systems and new Internet/online customer facing
applications. Therefore, i2's software must be able to interact and
interoperate with a broad range of software platforms and products,
including particularly the Internet, in order to successfully manage
complex, multi-enterprise business processes. i2's strategy is to establish
and maintain cooperative relationships with a broad range of hardware and
software vendors while maintaining platform-neutral, Internet compatible
architecture. In this regard, i2 is working with products from legacy and
ERP vendors such as SAP, Oracle, Baan and PeopleSoft to establish and
maintain the necessary complex interfaces between i2's software and such
vendor's transaction-based systems. In addition, i2 strives to balance its
relationships with platform and transaction system vendors to avoid
becoming too closely aligned with any individual vendor.
Build Strategic Alliances and Broaden Distribution Channels. i2
intends to expand and seek additional strategic relationships with ERP and
e-Commerce vendors to integrate RHYTHM with their software products to
create joint-marketing opportunities. In addition, i2 intends to augment
its sales efforts by establishing and expanding relationships with other
complementary business application software vendors and systems consulting
and integration firms. i2 is leveraging third-part implementation services
with large, international consulting firms such as Andersen Consulting,
Deloitte & Touche, Ernst & Young, KPMG Peat Marwick and
PricewaterhouseCoopers to enable it to more rapidly penetrate its target
market. In addition, i2 has established direct sales offices in
international markets and intends to continue to expand its U.S. and
international sales forces.
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PRODUCTS
RHYTHM operates as a flexible, integrated solution and is available in
single- and multi-site configurations. RHYTHM is currently composed of supply
chain management solutions with various extensions and customer management
solutions.
RHYTHM Supply Chain Management. The Supply Chain Management solutions
focus on the basic supply chain backbone. These solutions include Demand
Planner, which forecasts demand, Supply Chain Planner, which coordinates
and optimizes planning and scheduling scenarios, Factory Planner, which
manages complex manufacturing operations, Transportation Planner, which
optimizes transportation routes and vehicle loads, Demand Fulfillment,
which optimizes delivery date commitments, and Scheduler, which determines
the optimum sequence of jobs.
Available extensions to the Supply Chain Management solutions include
the following:
RHYTHM Active Data Warehouse. Active Data Warehouse serves as a
single repository for plans and actual information. It is based upon a
common data model implemented in a relational database, linked to a
multi-dimensional database for On-Line Analytical Processing reporting.
RHYTHM Reporter. Various reporting products provide
multi-dimensional reporting environments for RHYTHM and packages of
predefined reports. These reports include both actual and planned
performance reviews.
RHYTHM Collaboration Planner. Collaboration Planner enables a
company to share product requirements and components with its suppliers.
It continuously updates both plans and requirements based upon the
inputs of supply chain partners.
RHYTHM Demand Collaboration Extension. Demand Collaboration
Extension supports collaborative forecasting between suppliers and
customers. Sales forecasts are generated by the supplier and compared
against future requirements calculated by customers.
RHYTHMLink. RHYTHMLink facilitates communication and data exchange
between RHYTHM and other applications such as databases, report writers
and ERP solutions by using industry accepted standard technologies and
interfaces. RHYTHMLink is designed to enable companies to rapidly
integrate and implement the RHYTHM products with its existing
information resources.
RHYTHM Customer Management. The Customer Management solutions maximize
customer satisfaction and optimize return on sales, marketing and customer
service investments. These solutions focus on customer-specific product and
pricing configurations by enabling fast, accurate sales quotations as well
as the ability to manage diversified product lines. The use of the Internet
to provide business-to-business and business-to-consumer communications,
including advanced personalization capabilities, is a key strategy of the
Customer Management solutions.
All of i2's current products are available in English and selected products
are available in German, French, Japanese and Spanish.
In 1998, i2 announced several other products in various stages of
development, each of which is being developed to more fully address the
business-to-business and business-to-consumer collaboration using new workflow
and Internet standards embodied by eBPO. These products are grouped in the
following manner:
RHYTHM Product Lifecycle Management. The Product Lifecycle Management
solutions are intended to optimize the management of products from concept,
design and test, to phase-out and replacement. These solutions will plan
and optimize product portfolios based on financial objectives, resource
constraints, account supply chain data and other product development
systems. They will provide integrated information about product lifecycles,
demand forecasts, marketing efforts, production capabilities, development
time and resource bottlenecks.
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RHYTHM Inter-Process Planning. The Inter-Process Planning solutions
are intended to balance resource requirements among the supply chain
management, customer management and product lifecycle management processes
to achieve enterprise-wide efficiency and responsiveness.
RHYTHM Strategic Planning. The Strategic Planning solutions will
consist of simulation tools to support supply chain network design
processes such as rationalization of distribution centers, plant closings
and service territory assignments. These solutions are being designed for
use for periodic strategic planning reviews or to optimize the supply chain
when major changes occur, such as mergers or divestitures.
i2 cannot assure you that it will be successful in further developing these
or any other new products, that i2 will not experience difficulties that could
delay or prevent successful development, introduction and sales of these
products or that its new products and enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. See "Risks
Related to the Combined Company -- i2 Faces Risks of a Developing Market" and
"Risks Related to the Combined Company -- i2's Market Experiences Rapid
Technological Change."
During 1998, the sales prices for RHYTHM software products licensed to
individual customers, other than for two significantly large sales, generally
ranged from approximately $100,000 to approximately $11 million. The price for
an individual RHYTHM product license is determined based upon a number of
factors, including the RHYTHM modules and extensions purchased, the number of
servers, users and sites in the customer's system, as well as the complexity of
the customer's business.
RHYTHM is a client/server solution which can operate on hardware platforms
from Digital Equipment, Hewlett-Packard, IBM and Sun Microsystems using
Microsoft's Windows NT operating system or the UNIX variant supported by each
hardware platform. RHYTHM is written in programming languages such as Java and
C++ and utilizes a fully object-oriented data structure for representing
operations, resources and constraints. Once a model is defined, the entire
representation is loaded into random access memory, or RAM, and all processing
by RHYTHM takes place in RAM. A typical model implemented in i2's system may
occupy as much as two gigabytes of RAM. RHYTHM reads and writes data to a wide
variety of databases and data structures, and is operable in conjunction with a
wide variety of ERP systems. i2 believes that the combination of its
object-oriented and memory-resident technologies permit RHYTHM to achieve
accuracy and speed advantages over traditional planning and scheduling
solutions.
PRODUCT DEVELOPMENT
i2 originally introduced its RHYTHM software in 1992 and has subsequently
released a number of product enhancements as well as acquired significant
products. i2 has adopted a strategy of periodically reinventing its products in
order to meet its customers' needs, and strives to ensure that each new
generation of RHYTHM is compatible with previous releases. On-going product
development efforts are focused on broadening the functionality of the RHYTHM
suite of products to more fully address various eBPO initiatives, including
customer management, product lifecycle management, inter-process planning and
strategic planning. See "-- Products."
RHYTHM products have been developed by i2's internal developmental staff
through small project teams focused on independent components of the software
under development. i2 maintains product release planning procedures to ensure
integration, testing and version control among the different project development
teams. i2 maintains significant development centers in Bangalore and Mumbai,
India; Cambridge, Massachusetts; Dallas, Texas; Parsippany, New Jersey; and
Toronto, Ontario.
Research and development expenses have increased significantly in recent
periods as i2 has continued to focus on development of new and enhanced
products. Research and development expenses were $28.0 million and $18.4 million
for the three month periods ending March 31, 1999 and 1998, representing 23.9%
and 25.7% of total revenues, respectively. Research and development expenses
were $84.2 million, $52.7 million and $21.9 million in 1998, 1997 and 1996,
representing 23.2%, 24.7% and 21.8% of total
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revenues, respectively. See "i2 Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations -- Costs
and Expenses -- Research and Development."
CUSTOMER SERVICE AND SUPPORT
i2 believes that providing a high level of customer service and technical
support is necessary to achieve rapid product implementation which, in turn, is
essential to customer satisfaction and continued license sales and revenue
growth. i2 has expanded its service and support centers geographically and now
has support centers across the U.S. and in Australia, Belgium, Canada, Denmark,
France, Germany, India, Japan, Mexico, Singapore, South Africa, Taiwan and the
United Kingdom. Accordingly, i2 is committed to continue recruiting and
maintaining a high-quality technical support team. i2's customer service and
support activities consist of the following:
Training. i2 offers an intensive education and training program for its
customers and its third-party implementation providers. Classes are offered at
in-house facilities at certain of i2's offices and at customer locations. These
classes focus on business process optimization principles as well as the
implementation and use of the RHYTHM suite of products.
Consulting. i2 offers its customers on-site consulting services aimed at
assisting in the implementation of RHYTHM and integration with the customers'
existing systems. Generally, i2 receives hourly fees for these services. These
consulting services are concentrated on making implementation cost-effective for
customers by enabling them to independently perform as many of the integration
tasks as possible. i2 also leverages the use of third-party consulting firms to
more rapidly penetrate its target market.
Maintenance and Product Updates. i2 offers ongoing product maintenance
services under its license agreements. Maintenance contracts are typically sold
to customers for a one-year term at the time of the initial RHYTHM license and
may be renewed for additional periods. Under its maintenance agreements with its
customers, i2 provides, without additional charge, product updates and
enhancements to the RHYTHM products previously purchased by the customer, as
well as telephone support. Customers that do not renew their maintenance
agreements but wish to obtain product updates and new version releases are
generally required to purchase such items from i2 at market prices. Ongoing
support and maintenance services are provided on up to a seven day week, 24 hour
day basis.
SALES AND MARKETING
i2 markets its software and services primarily through its direct sales
organization augmented by other sales channels, including business application
software vendors and systems consulting and integration firms. At December 31,
1998, i2 conducted sales and other related activities through several offices in
the U.S. and additional offices in Australia, Belgium, Brazil, Canada, Denmark,
France, Germany, Italy, Japan, Korea, Singapore, South Africa, Taiwan and the
United Kingdom. i2's direct sales organization consists of regionally based
sales representatives and sales engineers supported by personnel with experience
in the aerospace, apparel, automotive, consumer products, furniture, high-tech,
industrial, metals, paper, pharmaceuticals, process, retail and textiles
industries.
i2 currently has joint marketing agreements with a number of business
application software vendors, including Oracle and System Software Associates,
and several systems consulting and integration firms. These joint marketing
agreements generally provide the vendors with non-exclusive rights to market
RHYTHM products and access to marketing materials and product training.
Furthermore, the vendors receive a specified commission for license revenues
generated by the vendor during the term of the agreement, which commissions vary
from zero to 40% of the sales price of the license. By using these indirect
sales channels, i2 is seeking to capitalize on the installed base of other
software vendors and obtain favorable product recommendations from systems
consulting and integration firms, thereby increasing RHYTHM's market coverage.
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CUSTOMERS
As of March 31, 1999, i2 had licensed RHYTHM products to over 600 customers
since inception. The following is a partial list of companies that have licensed
more than $1.0 million of RHYTHM products:
AUTOMOTIVE/INDUSTRIAL
Ford
Navistar
CONSUMER ELECTRONICS/HIGH TECHNOLOGY
Acer
Altera
Applied Materials
AST Research
Canon
Casio
Compaq Computer
Dell Computer
Fujitsu
Gateway 2000
Hewlett-Packard
IBM
Integrated Device Technology
Iomega
Lucent Technologies
Maxtor
Microage
Motorola
Philips Semiconductors
Quantum
Samsung
Seagate
Sequent
ST Microelectronics
Siemens Semiconductors
Silicon Graphics
Sun Microsystems
Texas Instruments
Thomson Consumer
Toshiba
CONSUMER GOODS
3M
British American Tobacco
Dole
E&J Gallo Winery
Frito-Lay
Lipton
Russell
Sara Lee Knit Products
Sherwin Williams
VF Services
MEDICAL/PHARMACEUTICAL
Abbott Laboratories
Bristol-Myers Squibb
Johnson & Johnson Medical
Medtronic
Tyco Healthcare
METALS
Bethlehem Steel
British Steel
Broken Hill Proprietary
Iscor Limited
National Steel
Sidmar
Timken
US Steel
PAPER
CSS Industries
Fletcher Challenge
Sonoco
OTHER
Con-Way
Dresser Rand
GE Capital
GE Plastics
Haworth
Herman Miller
LFI
Newport News Shipbuilding
Occidental Chemical
Polimeri
Ryder Logistics
Steelcase
i2 provides its software products to customers under non-exclusive,
non-transferable license agreements. As is customary in the software industry,
in order to protect its intellectual property rights, i2 does not sell or
transfer title to its products to its customers. Under i2's current standard
form of license agreement, licensed software may be used solely for the
customer's internal operations.
COMPETITION
The markets for i2's products are highly competitive. i2's 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. i2's competitors
include:
- Enterprise resource application software vendors such as SAP, PeopleSoft,
Oracle and Baan, each currently offering sophisticated enterprise
resource planning solutions that incorporate or may in the future
incorporate competitive applications;
- Supply chain software vendors, including Manugistics and Logility;
- E-commerce software providers and online enterprise relationship
management application providers, including BroadVision, Open Market and
Silknet Software;
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- 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; 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 i2's products as a complement to their own systems. However, as i2
increases its market share and expands its product offerings, and as enterprise
resource planning vendors expand their own product offerings, i2 believes its
relationships with these vendors will become more competitive. Specifically, in
1997, i2's license and distribution agreement with SAP was terminated, and SAP
is currently marketing a suite of advanced planning and scheduling products that
compete with i2's RHYTHM. In addition, Oracle has recently announced an advanced
planning product. i2 believes 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. In addition, i2 expects to experience
increasing price competition as it competes for market share. As i2 further
expands its eBPO strategy, including entering new markets such as the enterprise
relationship management market, i2 expects to encounter new competition in these
markets in which it has limited experience. Therefore, there is greater
uncertainty as to the impact of competition in these markets.
PROPRIETARY RIGHTS AND LICENSES
i2 relies primarily on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
its proprietary rights. In addition, i2 generally licenses RHYTHM products to
end users in object code (machine-readable) format, and i2's license agreements
generally allow the use of RHYTHM products solely by the customer for internal
purposes without the right to sublicense or transfer the RHYTHM products.
However, i2 believes that the foregoing measures afford only limited protection.
i2's believes that its proprietary rights are threatened by:
- Software piracy;
- Differing laws of some foreign countries which do not protect i2's
proprietary rights to the same extent as the laws of the U.S.;
- Technologies independently developed by i2's competitors; and
- Claims of intellectual property infringement which are likely to result
as the number of products and competitors in i2's industry segment grows
and the functionality of products in different industry segments
overlaps.
i2 resells certain software that it licenses from third parties, and may in
the future resell other software of third parties.
EMPLOYEES
As of March 31, 1999, i2 had approximately 2,300 full-time employees,
including over 750 primarily engaged in research and development activities and
almost 600 engaged in sales and marketing activities. i2's future success
depends in significant part upon the continued service of its key technical and
senior management personnel and its continuing ability to attract and retain
highly qualified technical and managerial personnel. Competition for such
personnel is intense. None of i2's employees are represented by collective
bargaining units and i2 has never experienced a work stoppage. i2 believes that
its employee relations are very good.
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FACILITIES
i2's primary offices are located in approximately 121,000 square feet of
space in Irving, Texas and approximately 73,000 square feet in Dallas, Texas
under leases expiring in October 2000 and July 2003, respectively. i2 also
leases space for its other offices in the United States and in Australia,
Belgium, Canada, Denmark, France, Germany, India, Japan, Singapore, South
Africa, Taiwan and the United Kingdom. The majority of these leases expire at
various dates through 2003.
In order to provide for i2's long-term expansion needs, i2 entered into an
agreement effective as of March 24, 1999 with a commercial real estate developer
to lease a new office building of approximately 180,000 square feet at a site
near its current headquarters in Irving, Texas. i2 anticipates to begin taking
occupancy of the new facility in September 1999. Under the agreement, i2 has
options, subject to certain conditions, to lease up to an additional 540,000
square feet of office space in three additional phases. The options for
additional office space, if not terminated sooner pursuant to the agreement,
expire in July 1999, January 2001 and January 2002.
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i2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
i2 is a leading provider of electronic business process optimization, or
eBPO, software solutions, licensed as part of the RHYTHM family of products.
eBPO represents a new class of decision-intelligence software solutions that
optimize and integrate core business processes, while driving intelligent
collaboration with trading partners. These processes include supply chain
management, customer management, product lifecycle management as well as
inter-process planning and strategic planning. i2 also provides related services
such as consulting, training and maintenance.
Supply chain management encompasses the planning and scheduling of
manufacturing and related logistics, including demand forecasting, raw materials
procurement, work-in-process, distribution and transportation across multiple
enterprises. Customer management maximizes customer satisfaction and optimizes
return on sales, marketing and customer service investments. Product lifecycle
management will optimize the management of products from concept, design and
test, to phase-out and replacement. Inter-process planning will balance resource
requirements among these processes to achieve enterprise-wide efficiency and
responsiveness. Strategic planning is intended to be used by senior executives
to perform competitive analyses, set company objectives and make long-term
finance, product portfolio and supply chain decisions.
i2's products enable businesses to optimize their business processes 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. 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.
i2's software enables its customers to benefit from the growth of the Internet
by supporting new Internet/online customer facing applications and enabling
re-engineering of supply chains to facilitate and fulfill e-commerce
transactions.
The following table sets forth, for the periods indicated, the percentages
of total revenues represented by certain items reflected in i2's consolidated
statements of income:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ---------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Software licenses............................ 60.8% 65.4% 63.8% 62.9% 63.1%
Services..................................... 30.4 25.0 24.6 26.3 24.6
Maintenance.................................. 8.8 9.6 11.6 10.8 12.3
----- ----- ----- ----- -----
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Cost of software licenses.................... 0.2 1.3 2.2 3.0 2.7
Cost of services and maintenance............. 21.7 21.5 21.0 21.4 24.7
Sales and marketing.......................... 35.0 34.4 33.7 34.7 34.7
Research and development..................... 21.8 24.7 23.2 25.7 23.9
General and administrative................... 10.4 10.2 9.4 9.3 9.5
In-process research and development and
acquisition-related expenses.............. 1.1 4.4 2.1 -- 0.3
----- ----- ----- ----- -----
Total costs and expenses............. 90.2 96.5 91.6 94.1 95.8
----- ----- ----- ----- -----
Operating income............................... 9.8 3.5 8.4 5.9 4.2
Other income (expense), net.................... 1.7 1.6 1.9 2.0 1.2
----- ----- ----- ----- -----
Income before income taxes..................... 11.5 5.1 10.3 7.9 5.4
Provision for income taxes..................... 4.7 3.2 4.8 3.0 2.2
----- ----- ----- ----- -----
Net income..................................... 6.8% 1.9% 5.5% 4.9% 3.2%
===== ===== ===== ===== =====
</TABLE>
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RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and March 31, 1998
Revenues
i2's 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 ("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." The adoption
of SOP 97-2 and SOP 98-9 did not have a significant impact on i2's revenue
recognition policy. Service revenues are primarily derived from fees for
implementation, consulting and training services and are recognized as the
services are performed. Maintenance revenues are derived from customer support
agreements generally entered into in connection with initial license sales and
subsequent renewals. Maintenance revenues are recognized ratably over the term
of the maintenance period. Payments for maintenance fees are generally made in
advance.
Total revenues increased 64% to $117.2 million in the quarter ended March
31, 1999 from $71.4 million in the quarter ended March 31, 1998. i2 currently
derives substantially all of its revenues from licenses associated with its
RHYTHM suite of software products as well as related services and maintenance.
i2 expects that revenues from the expanded suite of RHYTHM products will
continue to account for substantially all of its revenues in the foreseeable
future. As a result of i2's dependence on the continued market acceptance of
business process optimization software applications, and specifically the RHYTHM
suite of products and enhancements thereto, i2 cannot assure you that total
revenues will continue to increase at the rates experienced in prior periods, if
at all.
Software Licenses. Revenues from software licenses increased 65% to $74.0
million in the quarter ended March 31, 1999 from $44.9 million in the quarter
ended March 31, 1998. The significant increase in software license revenues was
primarily due to an increased customer awareness of the benefits derived from
deploying i2's software products and continued strength in key targeted vertical
markets. To date, sales of software licenses have been derived principally from
direct sales to customers. Although i2's believes that direct sales will
continue to account for a majority of software license revenues, its strategy is
to continue to increase the level of indirect sales activities. i2 expects that
sales of its software products through sales alliances, distributors, resellers
and other indirect channels will continue to increase as a percentage of
software license revenues. However, i2 cannot assure you that its efforts to
expand indirect sales will be successful or that these relationships will
continue in the future.
Services. Revenues from services increased 53% to $28.8 million in the
quarter ended March 31, 1999 from $18.8 million in the quarter ended March 31,
1998. The significant increase in the dollar amount of service revenues was
primarily due to the increase in the number of RHYTHM licenses sold and the
ongoing investment in i2's consulting organization as a result of the increased
demand for its products. The increase was also due to an increase in the use of
third-party consultants to provide implementation services to i2's customers
which has allowed i2 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 86% to $14.4 million in
the quarter ended March 31, 1999 from $7.7 million in the quarter ended March
31, 1998. The significant increase in the dollar amount of maintenance revenues
was primarily due to the continued increase in the number of RHYTHM licenses
sold and a high percentage of maintenance agreement renewals. i2 expects that
maintenance revenues both in dollar amount and as a percentage of total revenues
will continue to increase.
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Concentration of Revenues. i2 generally derives a significant portion of
its software license revenues in each quarter from a small number of relatively
large sales. For example, in the first quarter 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 i2 believes
that the loss of any of these particular customers would not seriously harm its
business, operating results or financial condition, an inability to consummate
one or more substantial license sales in any future period could seriously harm
i2's operating results for that period.
International Revenues. i2's international revenues, primarily generated
from customers located in Europe, Asia and Canada, in the quarter ended March
31, 1999, were approximately 35% of total revenues, compared to approximately
22% of total revenues in the quarter ended March 31, 1998. The increase in
international revenues was due to i2's increased sales and marketing efforts
internationally, primarily in Europe. i2 believes that continued growth and
profitability will require further expansion of its sales in international
markets. In order to successfully increase the level of international sales, i2
has utilized and will continue to utilize substantial resources to expand
existing international operations, establish additional international operations
and hire additional personnel.
Costs and Expenses
Cost of Software Licenses. Cost of software licenses consists primarily of
commissions paid to third parties in connection with joint marketing and other
related agreements, royalty fees associated with third-party software included
with sales of RHYTHM, the cost of user documentation and the cost of
reproduction and delivery of the software. Cost of software licenses was $3.2
million and $2.1 million in the quarters ended March 31, 1999 and 1998,
representing 4% and 5% of software license revenues, respectively. The increase
in the dollar amount of the cost of software licenses was 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 hotline telephone support and
packaging and shipping costs related to new releases of software and updated
user documentation. Cost of services and maintenance was $29.0 million and $15.3
million in the quarters ended March 31, 1999 and 1998, representing 67% and 58%
of total services and maintenance revenues, respectively. The increase in cost
of services and maintenance was primarily due to the increase in the number of
consultants, product support and training staff and the increased use of
third-party consultants to provide implementation services. i2 expects to
continue to increase the number of its consulting, product support and training
personnel in the foreseeable future as a means to expand into different
geographic and vertical markets. To the extent that i2's license sales do not
increase at anticipated rates, the hiring of additional personnel could
seriously harm its 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 $40.7 million and $24.8
million in the quarters ended March 31, 1999 and 1998, representing 35% of total
revenues in both periods. The increase in the dollar amount of sales and
marketing expenses was primarily due to continued expansion of i2's direct sales
force, increased sales commissions as a result of higher revenues, continued
investment in strengthening i2's international selling presence, and increased
marketing and promotional activities as a result of its expanded suite of
products. i2 believes that the dollar amount of sales and marketing expenses
will continue to increase and sales and marketing expenses as a percentage of
total revenues may also increase from the levels attained in the three months
ended March 31, 1999.
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Research and Development. Research and development expenses were $28.0
million and $18.4 million in the quarters ended March 31, 1999 and 1998,
representing 24% and 26% 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 i2's growing strategic product footprint. i2 expects that
the dollar amount of research and development expenses will continue to increase
as it continues 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 i2's products and
general release of such software have substantially coincided. As a result,
software development costs qualifying for capitalization have been
insignificant, and therefore, i2 has not capitalized any software development
costs.
General and Administrative. General and administrative expenses include the
personnel and other costs of i2's 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 $11.1 million and $6.7 million in the quarters ended March 31,
1999 and 1998 representing 9% of total revenues in both periods. The increase in
the dollar amount of general and administrative expenses was primarily the
result of increased staffing and related costs associated with the growth of
i2's business. i2 expects 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 $1.3 million and $1.4 million in the quarters
ended March 31, 1999 and 1998, representing 1% and 2% of total revenues,
respectively. The decrease in other income, net was primarily due to decreased
returns on i2's 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
i2's effective tax rate for the quarter ended March 31, 1999 was 40%,
compared to 38.5% for the quarter ended March 31, 1998. The effective tax rate
for the quarter ended March 31, 1999 varied from the U.S. statutory rate due to
the non-deductibility of certain acquisition-related expenses. Without these
expenses, i2's effective tax rate for the quarter ended March 31, 1999 would
have been 38.5%.
Earnings Per Share
i2's earnings per share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." This method
requires calculation of both earnings per share and earnings per share, assuming
dilution. Earnings per share excludes the dilutive effect of common stock
equivalents such as stock options, while earnings per share, assuming dilution
includes such dilutive effects. Future weighted-average shares outstanding
calculations will be impacted by the following factors:
- The ongoing issuance of common stock associated with stock option
exercises;
- The issuance of common shares associated with i2's employee stock
purchase program;
- Any fluctuations in i2's stock price, which could cause changes in the
number of common stock equivalents included in the earnings per share,
assuming dilution computation; and
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- The issuance of common stock to effect business combinations should i2
enter into such transactions.
Years Ended December 31, 1998, 1997 and 1996
Revenues
Total revenues increased 69.4% to $361.9 million in 1998 from $213.7
million in 1997, and increased 112.7% in 1997 from $100.5 million in 1996. i2
derives substantially all of its revenues from licenses associated with its
RHYTHM suite of software products as well as related services and maintenance.
Software Licenses. Revenues from software licenses increased 65.2% to
$231.0 million in 1998 from $139.8 million in 1997, and increased 128.9% in 1997
from $61.1 million in 1996. Software license revenues constituted 63.8%, 65.4%
and 60.8% of total revenues in 1998, 1997 and 1996, respectively. The
significant increases in the dollar amount of software license revenues were
primarily due to an increased customer awareness of the benefits derived from
deploying i2's decision-support solutions, a substantial investment in i2's
infrastructure to support the growing demand for i2's products and continued
strength in key targeted vertical markets.
Services. Revenues from services increased 66.5% to $89.0 million in 1998
from $53.4 million in 1997, and increased 75.1% in 1997 from $30.5 million in
1996. Service revenues constituted 24.6%, 25.0% and 30.4% of total revenues in
1998, 1997, and 1996, respectively. The significant increases in the dollar
amount of service revenues were primarily due to the significant increase in the
number of RHYTHM licenses sold and a significant investment in i2's consulting
organization as a result of the increased demand for i2's products. The
increases were also due to an increase in the use of third-party consultants to
provide implementation services to i2's customers, which has allowed i2 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, training and
consulting services.
Maintenance. Revenues from maintenance increased 105.2% to $42.0 million in
1998 from $20.5 million in 1997, and increased 130.3% in 1997 from $8.9 million
in 1996. Maintenance revenues constituted 11.6%, 9.6% and 8.8% of total revenues
in 1998, 1997 and 1996, respectively. The significant 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. i2 expects that maintenance revenues both in dollar amount
and as a percentage of total revenues will continue to increase from the levels
achieved in 1998.
Concentration of Revenues. During 1996, one customer accounted for
approximately 11% of total revenues. While on an annual basis, no individual
customer accounted for more than 10% of total revenues in 1998 or 1997, i2
generally derives a significant portion of its software license revenues in each
quarter from a small number of relatively large sales. For example, in the
second, third and fourth quarters of 1998 and in each quarter of 1997, one or
more customers each accounted for at least 15% of total software license
revenues.
International Revenues. i2 recognized $73.2 million, $66.7 million and
$21.8 million of revenues from international sources in 1998, 1997 and 1996,
representing approximately 20%, 31% and 22% of total revenues, respectively.
i2's revenues from international sources were primarily generated from customers
located in Asia-Pacific, Canada and Europe. In 1998, 1997 and 1996, revenues
from customers located in Europe accounted for approximately 11%, 16% and 11% of
total revenues, respectively. The decrease in revenues from international
sources as a percentage of total revenues in 1998 was primarily due to the
strength of sales efforts in the U.S., reorganization of i2's international
management team which resulted in a lower than expected level of sales
execution, and overall weakness in certain international economies, primarily in
the Asia-Pacific region, resulting in decreased levels of customer spending in
those markets.
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Costs and Expenses
Cost of Software Licenses. Cost of software licenses was $8.0 million, $2.7
million and $260,000 in 1998, 1997 and 1996, representing 3.5%, 2.0% and 0.4% of
software license revenues, respectively. The increases in cost of software
licenses were primarily due to an increase in commissions paid to third parties
in connection with joint marketing and other related agreements. i2 expects cost
of software licenses to vary in the future depending upon the amount of
commissions due to other third parties in connection with joint marketing and
other related agreements and the amount of royalty fees associated with
third-party software included with the sales of RHYTHM.
Cost of Services and Maintenance. Cost of services and maintenance was
$76.0 million, $46.0 million and $21.8 million in 1998, 1997 and 1996,
representing 58.1%, 62.3% and 55.2% of total services and maintenance revenues,
respectively. The dollar increases in cost of services and maintenance were due
to the increase in the number of consultants, product support and training staff
and the increased use of third-party consultants to provide implementation
services. In addition, consulting and support centers were established and
expanded in Europe, Canada and Asia-Pacific in the last few years. i2 expects to
continue to increase the number of its consulting, product support and training
personnel in the foreseeable future as a means to expand into different
geographic and vertical markets. Consequently, the cost of services and
maintenance as a percentage of total services and maintenance revenues may
increase in the future. To the extent that i2's license sales do not increase at
anticipated rates, the hiring of additional personnel could harm i2's gross
margins.
Sales and Marketing. Sales and marketing expenses were $122.0 million,
$73.5 million and $35.2 million in 1998, 1997 and 1996, representing 33.7%,
34.4% and 35.0% of total revenues, respectively. The increases in the dollar
amount of sales and marketing expenses were due to continued expansion of i2's
direct sales force, increased sales commissions as a result of the higher
revenue levels, continued investment in strengthening i2's international selling
presence and increased marketing and promotional activities as a result of i2's
expanded suite of products. i2 expects these types of expenses will continue to
increase in the foreseeable future.
Research and Development. Research and development expenses were $84.2
million, $52.7 million and $21.9 million in 1998, 1997 and 1996, representing
23.2%, 24.7% and 21.8% 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 i2's growing strategic product footprint. i2 expects that
the dollar amount of research and development expenses will continue to increase
as i2 continues to invest in developing new products, applications and product
enhancements for new and existing vertical markets.
General and Administrative. General and administrative expenses were $33.8
million, $21.8 million and $10.4 million in 1998, 1997 and 1996, representing
9.4%, 10.2% and 10.4% of total revenues, respectively. The increases in the
dollar amount of general and administrative expenses were primarily the result
of increased staffing and related costs associated with the growth of i2's
business during these periods. The decreases in general and administrative
expenses as a percentage of total revenues were primarily due to the increase in
revenues and i2's ability to leverage its base of resources to support a larger
organization. i2 expects that the dollar amount of general and administrative
expenses will continue to increase in the foreseeable future.
In-Process Research and Development and Acquisition-Related Expenses. From
time to time, i2 has sought to expand the depth of its current product offerings
through various technology or business acquisitions. Some of these business
combinations involve technology that is not yet determined to be technologically
feasible and has no alternative future use in its current stage of development
at the acquisition date. 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 future 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
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based on the initial valuation of the acquired and in-process technologies and
resulting purchase price allocation.
In 1997, i2 incurred approximately $9.3 million in certain
acquisition-related expenses in connection with business combinations, of which
$4.6 million represents the write-off of in-process research and development.
The remaining costs primarily consisted of investment banking, legal and
accounting fees and expenses. In 1998, i2 incurred a total of approximately $7.6
million in certain acquisition-related expenses in connection with business
combinations, of which $4.7 million represents the write-off of in-process
research and development. The remaining costs primarily consisted of investment
banking, legal and accounting fees and expenses.
Other Income, Net
Other income, net was $6.9 million, $3.4 million and $1.7 million in 1998,
1997 and 1996, representing 1.9%, 1.6% and 1.7% of total revenues, respectively.
The increases in the dollar amount of other income, net, were primarily due to
interest earned on higher balances of cash, cash equivalents and short-term
investments resulting from net proceeds of the public offerings of common stock
in 1997 and 1996.
Provision for Income Taxes
i2 recorded income tax expense of $17.3 million, $6.9 million and $4.7
million in 1998, 1997 and 1996, respectively. i2's effective income tax rates
were 46.4%, 63.4% and 40.9% in 1998, 1997 and 1996, respectively. The
fluctuations in i2's effective income tax rate is primarily due to the
non-deductibility of certain of the in-process research and development and
acquisition-related expenses. Excluding the effects of the in-process research
and development and acquisition-related expenses, i2's effective tax rate was
38.5%, 34.2% and 37.2%, in 1998, 1997 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES
i2 has historically financed its operations and met its capital expenditure
requirements primarily through cash flows from operations and sales of equity
securities. i2 maintained a strong liquidity and financial position with $198.5
million of working capital as of March 31, 1999 as compared to $191.3 million as
of December 31, 1998 and $161.0 million at December 31, 1997. The increases in
working capital were primarily related to an increase in cash, cash equivalents
and short-term investments to $176.0 million at March 31, 1999 from $154.9
million at December 31, 1998 and $142.0 million at December 31, 1997. Cash flows
from operations were $21.9 million and $26.3 million for the quarters ended
March 31, 1999 and 1998, respectively, and $25.0 million, $7.9 million and $8.0
million in 1998, 1997 and 1996, respectively. Operating cash flows decreased in
the quarter ended March 31, 1999 as compared to the quarter ended March 31, 1998
primarily due to a decrease in the tax benefit from stock option exercises and
an increase in prepaids and other assets. Operating cash flows increased in 1998
as compared to 1997 primarily due to an increase in net income, deferred
revenues and the tax benefit from stock option activity, offset by an increase
in accounts receivable. The tax benefit from stock option activity is primarily
the result of disqualifying dispositions of stock acquired under i2's stock
plans. Operating cash flows decreased in 1997 as compared to 1996 primarily due
to an increase in accounts receivable partially offset by increases in the tax
benefit from stock option activity, accrued liabilities and accrued compensation
and related expenses.
Accounts receivable, net of allowance for doubtful accounts, decreased to
$124.2 million at March 31, 1999 from $126.0 million at December 31, 1998.
Quarter-end days' sales outstanding decreased to 95 days at March 31, 1999 from
102 days at December 31, 1998. Accounts receivable, net of allowance for
doubtful accounts, increased to $126.0 million at December 31, 1998 from $75.0
million at December 31, 1997, primarily due to strong fourth quarter revenues in
1998. Accounts receivable and days' sales outstanding can fluctuate for a
variety of reasons, including (1) the amount and timing of revenues earned, (2)
i2's collection experience, (3) the amount of receivables generated from
international customers which
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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. i2 believes that the allowance for doubtful accounts at March
31, 1999 is adequate to cover any collection difficulties with respect to
accounts receivable. However, a significant portion of i2's accounts receivable
are derived from sales of large licenses, often to new customers with whom i2
does not have a payment history. Accordingly, i2 cannot assure you that the
allowance will be adequate to cover any receivables that are later determined to
be uncollectible, particularly if one or more large receivables become
uncollectible.
Cash used in investing activities was $6.0 million for the quarter ended
March 31, 1999 as compared to $62.0 million for the quarter ended March 31,
1998. Cash used in investing activities was unusually large in the first quarter
of 1998 due to the investment of the December 1997 equity offering proceeds. At
March 31, 1999, i2 did not have any material commitments for capital
expenditures. Cash used in investing activities was $101.5 million for 1998 as
compared to $16.1 million for 1997. Cash used in investing activities was higher
in 1998 than in 1997 primarily due to the investment of the December 1997 equity
offering proceeds. At the end of 1997, the proceeds from that offering were
invested primarily in financial instruments classified as cash equivalents.
Cash provided by financing activities was $10.6 million for 1998 as
compared to $94.3 million for 1997 and $53.3 million for 1996. Cash provided by
financing activities for 1997 includes i2's net proceeds of $89.4 million from
its December 1997 public offering of common stock. Cash provided by financing
activities for 1996 includes i2's net proceeds of $43.7 million from its May
1996 initial public offering of common stock.
i2 may in the future pursue additional acquisitions of businesses, products
and technologies, or enter into joint venture arrangements, that could
complement or expand i2's business. Any material acquisition or joint venture
could result in a decrease to i2's working capital, depending on the amount,
timing and nature of the consideration to be paid.
In October 1998, i2 entered into a one-year, $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 behalf of i2,
$7.9 million of which were outstanding at March 31, 1999. This facility contains
customary restrictive covenants, including covenants requiring i2 to maintain
certain financial ratios. At March 31, 1999, there were no borrowings
outstanding under this agreement.
i2 believes that existing cash and cash equivalent balances, short-term
investment balances, available borrowings under the revolving credit agreement
and potential cash flow from operations will satisfy its working capital and
capital expenditure requirements for at least the next 12 months. However, any
material acquisitions of complementary businesses, products or technologies
could require i2 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
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uncertainty exists in the software industry concerning the potential effects
associated with such compliance. Based on i2's assessment, i2 believes that its
current versions of its software products are Year 2000 compliant. However, i2
believes some customers are running earlier versions of the software products
developed by acquired companies that are not Year 2000 compliant, and i2 has
been encouraging such customers to migrate to current product versions.
Moreover, i2's products are generally integrated into enterprise systems
involving complicated software products developed by other vendors. Year 2000
problems inherent in a customer's transactional software programs might
significantly limit that customer's ability to realize the intended benefits
offered by RHYTHM. i2 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 i2's products or issues arising from the integration of multiple
products within an overall system. Although i2 has not been a party to any
litigation or arbitration proceeding to date involving its products or services
related to Year 2000 compliance issues, i2 cannot assure you that it will not in
the future be required to defend its products or services in such proceedings,
or to negotiate resolutions of claims based on Year 2000 issues. The costs of
defending and resolving Year 2000-related disputes, and any liability of i2 for
Year 2000-related damages, including consequential damages, could seriously harm
i2's business, operating results and financial condition.
i2 believes 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 i2. Any
of the foregoing could seriously harm i2's business, operating results and
financial condition.
i2's plan to resolve Year 2000 issues includes assessment, remediation and
testing of internal management and other information systems. The completed
assessment indicated that a portion of i2's information systems could be
affected. As of December 31, 1998, remediation and testing of such systems was
75% complete with an expected completion date of September 30, 1999. However,
system compliance testing will continue in conjunction with i2's overall
information systems initiatives throughout 1999. Areas being addressed include
reviews of i2's telephone and voice mail systems, security systems and other
office support systems. No information technology initiatives have been deferred
by i2 as a result of its Year 2000 project. In the first quarter of 1999 and the
year ended December 31, 1998, i2 incurred approximately $150,000 and $50,000,
respectively, of expenses related to correction of Year 2000 issues. i2
currently expects to incur expenses of approximately $100,000 during the
remainder of 1999 in connection with the correction of Year 2000 issues. Such
expenses are being funded through operating cash flows.
Management of i2 believes that an effective plan is in place to resolve the
Year 2000 issues in a timely manner. Although i2 has not yet completed all
necessary phases of its Year 2000 program, i2 does 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 its
business, financial condition or results of operations. i2 currently has no
contingency plans in place in the event it does not complete all phases of its
Year 2000 plan. i2 intends to evaluate the status of completion throughout the
remainder of 1999 to determine whether such a plan is necessary.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange. i2's revenue originating outside the U.S. in the quarters
ended March 31, 1999 and 1998 and the years ended December 31, 1998, 1997 and
1996 was 35%, 22%, 20%, 31% and 22% of total revenues, respectively. Revenues
generated from the European region in the quarters ended March 31, 1999 and 1998
and the years ended December 31, 1998, 1997 and 1996 was 19%, 8%, 11%, 16% and
11% of total revenues, respectively. International sales are made mostly from
i2's foreign sales subsidiaries in the local countries and are typically
denominated in U.S. dollars. These subsidiaries incur most of their expenses in
the local currency.
i2's international business is subject to risks typical of an international
business, including, but not limited to, differing economic conditions, changes
in political climate, differing tax structures, other
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regulations and restrictions and foreign exchange rate volatility. Accordingly,
i2's future results could be seriously harmed by changes in these or other
factors. The effect of foreign exchange rate fluctuations on i2 in the quarters
ended March 31, 1999 and 1998 and the years ended December 31, 1998, 1997 and
1996 was not material.
Interest Rates. i2 invests its cash in a variety of financial instruments,
including bank time deposits, and taxable and tax-advantaged variable rate and
fixed rate obligations of corporations, municipalities, and local, state and
national governmental entities and agencies. These investments are denominated
in U.S. dollars. Cash balances in foreign currencies overseas are operating
balances and are invested in short-term time deposits of the local operating
bank.
Interest income on i2's investments is carried in "Other income, net." i2
accounts for its investment instruments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." All of the cash equivalents and short-term
investments are treated as available-for-sale under this statement.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, i2's future investment income may fall
short of expectations due to changes in interest rates or i2 may suffer losses
in principal if forced to sell securities which have seen a decline in market
value due to changes in interest rates. i2's investment securities are held for
purposes other than trading. While certain of the investment securities had
maturities in excess of one year, i2 intends to liquidate such securities within
one year. The weighted-average interest rate on investment securities at
December 31, 1998 was 5.3%. The fair value of securities held at December 31,
1998 approximated the cost of the securities because the majority of the
securities are held for a short duration. Based on i2's marketable securities
portfolio and current interest rates, a 200 basis point increase or decrease in
interest rates would result in no material decrease or increase in the fair
market value of the marketable securities portfolio.
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QUARTERLY INFORMATION -- UNAUDITED
The following tables set forth unaudited consolidated statement of
operations data for the nine quarters ended March 31, 1999, as well as such data
expressed as a percentage of i2's total revenues for the periods indicated. This
data has been derived from unaudited interim consolidated financial statements
that, in the opinion of management, have been prepared on a basis consistent
with i2's audited consolidated financial statements and include all adjustments
(consisting only of normal recurring adjustments, except as noted otherwise)
necessary for a fair presentation of such information when read in conjunction
with the audited consolidated financial statements and notes thereto. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
1997 1997 1997 1997 1998 1998 1998 1998 1999
------- ------- -------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses.................. $23,517 $34,300 $38,207 $43,774 $44,945 $52,686 $59,775 $ 73,555 $ 73,996
Services........................... 10,961 12,305 14,119 16,052 18,761 21,491 23,324 25,396 28,784
Maintenance........................ 4,020 4,372 5,770 6,295 7,742 9,394 11,082 13,765 14,436
------- ------- ------- ------- ------- ------- ------- -------- --------
Total revenues............... 38,498 50,977 58,096 66,121 71,448 83,571 94,181 112,716 117,216
Costs and Expenses:
Cost of software licenses.......... 1,304 1,218 82 140 2,146 2,002 1,529 2,282 3,159
Cost of services and maintenance... 9,053 10,874 12,819 13,258 15,262 16,719 19,388 24,651 28,963
Sales and marketing................ 14,183 17,743 19,016 22,584 24,817 28,452 31,627 37,082 40,699
Research and development........... 9,183 12,638 15,122 15,798 18,361 19,290 22,054 24,446 28,028
General and administrative......... 4,283 5,796 5,785 5,946 6,674 7,592 8,710 10,869 11,102
In-process research and development
and acquisition-related
expenses......................... -- 5,649 -- 3,657 -- 6,484 560 574 303
------- ------- ------- ------- ------- ------- ------- -------- --------
Total costs and expenses..... 38,006 53,918 52,824 61,383 67,260 80,539 83,868 99,904 112,254
------- ------- ------- ------- ------- ------- ------- -------- --------
Operating income (loss)............. 492 (2,941) 5,272 4,738 4,188 3,032 10,313 12,812 4,962
Other income, net................... 752 702 777 1,122 1,442 1,947 1,774 1,754 1,318
------- ------- ------- ------- ------- ------- ------- -------- --------
Income (loss) before income taxes... 1,244 (2,239) 6,049 5,860 5,630 4,979 12,087 14,566 6,280
Provision (benefit) for income
taxes.............................. 486 (919) 2,782 4,567 2,167 4,413 4,870 5,829 2,534
------- ------- ------- ------- ------- ------- ------- -------- --------
Net income (loss)................... $ 758 $(1,320) $ 3,267 $ 1,293 $ 3,463 $ 566 $ 7,217 $ 8,737 $ 3,746
======= ======= ======= ======= ======= ======= ======= ======== ========
Net income (loss) per share......... $ 0.01 $ (0.02) $ 0.05 $ 0.02 $ 0.05 $ 0.01 $ 0.10 $ 0.12 $ 0.05
======= ======= ======= ======= ======= ======= ======= ======== ========
Net income (loss) per share,
assuming dilution.................. $ 0.01 $ (0.02) $ 0.05 $ 0.02 $ 0.05 $ 0.01 $ 0.10 $ 0.11 $ 0.05
======= ======= ======= ======= ======= ======= ======= ======== ========
Weighted average common shares
outstanding........................ 61,174 61,678 62,724 64,824 68,432 69,484 70,325 71,227 71,906
Weighted average common shares
outstanding, assuming dilution..... 69,848 61,678 71,028 72,596 76,414 76,534 75,233 76,824 78,730
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Software licenses.................. 61.1% 67.3% 65.8% 66.2% 62.9% 63.1% 63.5% 65.3% 63.1%
Services........................... 28.5 24.1 24.3 24.3 26.3 25.7 24.7 22.5 24.6
Maintenance........................ 10.4 8.6 9.9 9.5 10.8 11.2 11.8 12.2 12.3
------- ------- ------- ------- ------- ------- ------- -------- --------
Total revenues............... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and Expenses:
Cost of software licenses.......... 3.4 2.4 0.1 0.1 3.0 2.4 1.6 2.0 2.7
Cost of services and maintenance... 23.5 21.3 22.1 20.1 21.4 20.0 20.6 21.9 24.7
Sales and marketing................ 36.8 34.8 32.7 34.2 34.7 34.0 33.6 32.9 34.7
Research and development........... 23.9 24.8 26.0 23.9 25.7 23.1 23.4 21.7 23.9
General and administrative......... 11.1 11.4 10.0 9.0 9.3 9.1 9.2 9.6 9.5
In-process research and development
and acquisition-related
expenses......................... -- 11.1 -- 5.5 -- 7.8 0.6 0.5 0.3
------- ------- ------- ------- ------- ------- ------- -------- --------
Total costs and expenses..... 98.7 105.8 90.9 92.8 94.1 96.4 89.0 88.6 95.8
Operating income (loss)............. 1.3 (5.8) 9.1 7.2 5.9 3.6 11.0 11.4 4.2
Other income, net................... 2.0 1.4 1.3 1.7 2.0 2.4 1.9 1.5 1.2
------- ------- ------- ------- ------- ------- ------- -------- --------
Income (loss) before income taxes... 3.3 (4.4) 10.4 8.9 7.9 6.0 12.9 12.9 5.4
Provision (benefit) for income
taxes.............................. 1.3 (1.8) 4.8 6.9 3.0 5.3 5.2 5.2 2.2
------- ------- ------- ------- ------- ------- ------- -------- --------
Net income (loss)................... 2.0% (2.6)% 5.6% 2.0% 4.9% 0.7% 7.7% 7.7% 3.2%
======= ======= ======= ======= ======= ======= ======= ======== ========
</TABLE>
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<PAGE> 73
i2 MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of i2:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Sanjiv S. Sidhu............................ 41 Chairman of the Board and Chief Executive
Officer
Sandeep R. Tungare......................... 42 Director and President, Demand Management
Gregory A. Brady........................... 38 President
William M. Beecher......................... 42 Executive Vice President, Operations and
Chief Financial Officer
Hiten D. Varia............................. 42 Executive Vice President, Worldwide
Development
Harvey B. Cash............................. 60 Director
Thomas J. Meredith......................... 48 Director
</TABLE>
Mr. Sidhu founded i2 in 1988 and has served as its Chairman of the Board
since its incorporation in 1989. Mr. Sidhu has served as i2's Chief Executive
Officer since December 1994, and previously served in various other executive
capacities with i2. Before founding i2, Mr. Sidhu held various positions with
Texas Instruments, an electronics manufacturer, most recently as a member of the
technical staff of Texas Instruments' Artificial Intelligence Laboratory. Mr.
Sidhu holds a B.S. in chemical engineering from Osmania University and a M.S. in
chemical engineering from Oklahoma State University.
Mr. Tungare joined i2 in May 1997 as President, Demand Management following
the merger of i2 and Think Systems Corporation. Mr. Tungare founded Think in
1986 and served as its President and Chief Executive Officer until it merged
with i2 in May 1997. Mr. Tungare was appointed to i2's Board of Directors in May
1997 in connection with the Think merger. Mr. Tungare holds a B.S. in science
from Bombay University and an M.B.A. from Rutgers University.
Mr. Brady joined i2 in December 1994 as President, Field Operations, became
President, Worldwide Operations in September 1996, and, effective May 1, 1999,
became President. From 1988 until joining i2, Mr. Brady held a variety of
positions with Oracle, an enterprise application software vendor, most recently
serving as Vice President of Worldwide Applications Marketing. Mr. Brady holds a
B.S. in business from the University of Indiana.
Mr. Beecher joined i2 in May 1997 as Vice President, International
Operations and became Executive Vice President, Operations in September 1998. In
May 1999, Mr. Beecher also became i2's Chief Financial Officer. From April 1996
until joining i2, Mr. Beecher was the Chief Financial Officer of Think Systems
Corporation. Prior thereto, he practiced law at the law offices of Ravin,
Sarasohn, Cook, Baumgarten, Fisch & Rosen. Mr. Beecher is a graduate of the
Cornell Law School and holds a B.S. in Business and Economics from the State
University of New York at Albany.
Mr. Varia joined i2 in July 1995 as Vice President, Worldwide Consulting
and became Executive Vice President, Worldwide Development in July 1998. From
1985 until joining i2, Mr. Varia served in a variety of positions at Electronic
Data Systems. Mr. Varia holds a B.S. in electrical engineering from MS
University in Barode and a M.S. in electrical engineering from the University of
Kentucky.
Mr. Cash has served as a director of i2 since January 1996. Mr. Cash has
served as general or limited partner of various venture capital companies
affiliated with InterWest Partners, a venture capital firm, since 1986. Mr. Cash
currently serves on the board of directors of the following public companies:
AMX Corporation, a manufacturer of remote control systems; Ciena Corporation, a
designer and manufacturer of dense wavelength division multiplexing systems for
fiber optic networks; and Liberte Investors Inc., an investment company. In
addition, Mr. Cash is a director of several privately held companies. Mr. Cash
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<PAGE> 74
holds a B.S. in electrical engineering from Texas A&M University and a M.B.A.
from Western Michigan University.
Mr. Meredith has served as a director of i2 since July 1996. Mr. Meredith
has served as the Senior Vice President and Chief Financial Officer for Dell
Computer Corporation since November 1992. From 1990 until joining Dell, Mr.
Meredith was Vice President and Treasurer of Sun Microsystems, Inc. Prior
thereto, he was co-founder and general manager of Amdahl Capital Corporation, a
captive financing company for Amdahl Corporation, a mainframe computer
manufacturer. Mr. Meredith currently serves on the board of directors of i-Cube,
an information technology business consultancy. Mr. Meredith holds a B.S. in
political science from St. Francis College, a J.D. from Duquesne University of
Law and an L.L.M. in taxation from Georgetown University.
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<PAGE> 75
i2 EXECUTIVE COMPENSATION AND OTHER MATTERS
The executive officers serve at the discretion of the Board of Directors of
i2. i2 does not presently have an employment contract in effect with any of its
executive officers. Although no specific cash compensatory arrangements have
been made for the executive officers of i2, certain provisions of the 1995 Stock
Option/Stock Issuance Plan may have the effect of discouraging, delaying or
preventing a change in control of i2 or unsolicited acquisition proposals. i2
has entered into indemnification agreements with all of its executive officers.
i2 maintains directors' and officers' liability insurance and the i2 Bylaws
provide for mandatory indemnification of officers to the fullest extent
permitted by Delaware law.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the
compensation earned by i2's Chief Executive Officer and the other four most
highly compensated executive officers of i2 (collectively, the "Named
Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
------------------------------------- OPTIONS ALL OTHER
NAME AND POSITION(S) YEAR SALARY BONUS OTHER(1) (# OF SHARES) COMPENSATION(2)
- -------------------- ---- -------- -------- -------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Sanjiv S. Sidhu.............................. 1998 $150,000 $ 75,000 -- -- $1,542
Chairman of the Board and Chief 1997 150,000 75,000 -- -- 1,597
Executive Officer 1996 150,000 75,000 $40,308(3) -- 771
Kanna N. Sharma(4)........................... 1998 150,000 75,000 192,930(5) -- 925
Vice Chairman of the Board, Executive 1997 150,000 75,000 84,100(5) -- 2,214
Vice President and Secretary 1996 150,000 75,000 59,032(5) -- 925
Sandeep R. Tungare(6)........................ 1998 150,000 75,000 -- -- --
President, Demand Management 1997 200,000 25,000 -- -- --
1996 200,000 100,000 -- 34,390(7) --
Gregory A. Brady............................. 1998 150,000 350,000 201,104(8) 550,000 --
President, Worldwide Operations 1997 150,000 349,380 -- 600,000 --
1996 150,000 353,721 -- -- --
David F. Cary(9)............................. 1998 110,004 90,000 -- 20,000 --
Chief Financial Officer 1997 110,004 -- -- 61,428 --
1996 110,004 75,000 -- 50,000 --
</TABLE>
- ---------------
(1) Excludes perquisites and other personal benefits for officers other than
Messrs. Sidhu, Sharma and Brady because the aggregate amounts thereof do not
exceed 10% of such officers' total salary and bonus.
(2) Represents premiums paid by i2 with respect to term life insurance policies
on the lives of Messrs. Sidhu and Sharma. All of the proceeds of such
policies are payable to Messrs. Sidhu's and Sharma's respective designated
beneficiaries.
(3) Includes $34,800 for expenses relating to tax and estate planning.
(4) Mr. Sharma resigned as an officer and director of i2 effective May 17, 1999.
(5) Includes $189,330, $58,302 and $59,032 for expenses relating to tax and
estate planning in 1998, 1997 and 1996, respectively.
(6) Mr. Tungare became an officer of i2 on May 15, 1997 in connection with i2's
merger with Think Systems Corporation. Prior to such date, Mr. Tungare was
employed and compensated by Think. Compensation for 1997 represents
collective compensation from i2 and Think.
(7) These options were granted to Mr. Tungare and subsequently transferred to
the Tungare Manohar Family Foundation, Inc.
(8) i2 has an understanding with Mr. Brady whereby i2 has agreed to pay the
interest incurred in connection with a personal loan to Mr. Brady from a
commercial bank with a principal balance of $4,760,000 at January 31, 1999.
The loan bears interest at one-month LIBOR plus 2%. The total interest paid
by i2 on behalf of Mr. Brady in 1998 was $174,133.
(9) Mr. Cary resigned as Chief Financial Officer of i2 effective May 15, 1999.
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<PAGE> 76
AGGREGATE OPTION EXERCISES IN 1998 AND DECEMBER 31, 1998 OPTION VALUES
The following table sets forth certain information concerning options
exercised during 1998 and option holdings at December 31, 1998 with respect to
each of the Named Officers. No stock appreciation rights, or SARs, were
exercised during 1998 and none were outstanding at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1998(2) DECEMBER 31, 1998(2)(3)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sanjiv S. Sidhu.............. -- -- -- -- -- --
Kanna N. Sharma(4)........... -- -- -- -- -- --
Sandeep R. Tungare........... 34,390 $986,348 -- -- -- --
Gregory A. Brady............. -- -- 150,000 1,000,000 $2,456,250 $15,725,000
David F. Cary(5)............. 11,668 338,063 15,357 66,071 152,610 786,581
</TABLE>
- ---------------
(1) Determined by subtracting the exercise price from the market value of i2
common stock on the exercise date, multiplied by the number of shares
acquired on exercise.
(2) "Exercisable" refers to those options which were both exercisable and
vested, while "Unexercisable" refers to those options which were unvested.
(3) Value is determined by subtracting the exercise price from the fair market
value of i2 common stock at December 31, 1998 ($30.375 per share), based
upon the closing sale price of i2 common stock on The Nasdaq National Market
on such date.
(4) Mr. Sharma resigned as an officer and director of i2 effective May 17, 1999.
(5) Mr. Cary resigned as Chief Financial Officer of i2 effective May 15, 1999.
OPTION GRANTS IN 1998
The following table sets forth certain information concerning stock options
granted to each of the Named Officers during 1998. No SARs were granted to these
individuals during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED STOCK PRICE APPRECIATION
UNDERLYING TO FOR OPTION TERM(3)
OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION ------------------------------
NAME GRANTED(1) IN 1998 PER SHARE(2) DATE 5% 10%
- ---- ---------- ---------- -------------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sanjiv S. Sidhu............. -- -- -- -- -- --
Kanna N. Sharma(4).......... -- -- -- -- -- --
Sandeep R. Tungare.......... -- -- -- -- -- --
Gregory A. Brady............ 50,000 0.52% $27.63 05/31/08 $ 868,818 $ 2,201,755
500,000 5.18% 13.94 10/20/08 4,383,396 11,108,385
David F. Cary(5)............ 20,000 0.21% 13.94 10/20/08 175,336 444,335
</TABLE>
- ---------------
(1) Options vest over a four-year period, and in certain cases may be exercised
prior to vesting subject to a right of i2 to repurchase at cost any unvested
shares purchased prior to vesting in the event of the optionee's termination
of employment. Each option expires on the earlier of ten years from the date
of grant or within a specified period following termination of the
optionee's employment with i2.
(2) The exercise price may be paid in cash or through a promissory note payable
to i2.
(3) Future value assumes appreciation of 5% and 10% per year over the ten-year
option period in the value of i2 common stock as mandated by the rules and
regulations of the SEC and does not represent i2's estimate or projection of
the future value of i2 common stock. The actual value realized may be
greater than or less than the potential realizable values set forth in the
table.
(4) Mr. Sharma resigned as an officer and director of i2 effective May 17, 1999.
(5) Mr. Cary resigned as Chief Financial Officer of i2 effective May 15, 1999.
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<PAGE> 77
DIRECTOR COMPENSATION AND INDEMNIFICATION ARRANGEMENTS
Directors are not paid any fees or additional compensation for services as
members of the i2 Board of Directors or any committee thereof, but are
reimbursed for all out-of-pocket expenses incurred in attending meetings of the
i2 Board of Directors and committees thereof on which such directors serve. In
addition, directors who are not employees of i2 or any of its subsidiaries
periodically receive automatic grants of non-qualified stock options under its
1995 Stock Option/Stock Issuance Plan. i2 maintains directors' and officers'
liability insurance and its Bylaws provide for mandatory indemnification of
directors to the fullest extent permitted by Delaware law. i2 has entered into
indemnification agreements with all of its directors. In addition, i2's Restated
Certificate of Incorporation limits the liability of directors of i2 to i2 or
its stockholders for breaches of the directors' fiduciary duties to the fullest
extent permitted by Delaware law.
EMPLOYMENT CONTRACTS; CHANGE-IN-CONTROL AND INDEMNIFICATION ARRANGEMENTS
The executive officers serve at the discretion of the i2 Board of
Directors. i2 does not presently have an employment contract in effect with any
of its executive officers. Although no specific cash compensatory arrangements
have been made for the executive officers of i2, certain provisions of its 1995
Stock Option/Stock Issuance Plan may have the effect of discouraging, delaying
or preventing a change in control of i2 or unsolicited acquisition proposals. i2
has entered into indemnification agreements with all of its executive officers.
i2 maintains directors' and officers' liability insurance and its Bylaws
provided for mandatory indemnification of officers to the fullest extent
permitted by Delaware law.
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<PAGE> 78
i2 SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of i2's common stock as of January 31, 1999 by (1) each of i2's
executive officers and directors and (2) all executive officers and directors as
a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
NAME OWNERSHIP(1) CLASS
- ---- ------------ -------
<S> <C> <C>
Sanjiv S. Sidhu(2).......................................... 31,890,600(3) 44.4%
Sidhu-Singh Family Investments, Ltd.(2)..................... 6,710,000 9.3
Kanna (Ken) N. Sharma(2).................................... 4,725,968(4) 6.6
Sandeep (Sandy) R. Tungare.................................. 1,889,042(5) 2.6
Gregory A. Brady............................................ 872,003(6) 1.2
David F. Cary............................................... 175,398(7) *
Hiten D. Varia.............................................. 154,039(8) *
William M. Beecher.......................................... 50,002(9) *
Harvey B. Cash.............................................. 44,000(10) *
Thomas J. Meredith.......................................... 40,000(11) *
All executive officers and directors as a group (nine
persons).................................................. 39,841,052(12) 55.2%
</TABLE>
- ---------------
* Indicates less than 1%.
(1) Beneficial ownership is calculated in accordance with the rules of the SEC
in accordance with Rule 13d-3(d)(1). In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of i2 common stock subject to options held by that person that are
currently exercisable or become exercisable within 60 days following
January 31, 1999 are deemed outstanding. However, such shares are not
deemed outstanding for the purpose of computing the percentage ownership of
any other person. Unless otherwise indicated in the footnotes to this
table, the persons and entities named in the table have sole voting and
sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
(2) The address for such person is 909 E. Las Colinas Blvd., 16th Floor,
Irving, Texas 75039.
(3) Includes 6,710,000 shares of i2 common stock held by Sidhu-Singh Family
Investments, Ltd., of which Mr. Sidhu is a general partner. Also includes
200,000 shares of i2 common stock held by the Nathan S. Sharma Exempt 1997
Trust and 200,000 shares of i2 common stock held by the Stefan M. Sharma
Exempt 1997 Trust (collectively, the "Trusts"). Mr. Sidhu serves as the
sole trustee of each of the Trusts, and in such capacity holds the sole
power to vote and dispose of the shares owned by such Trusts. Mr. Sidhu
disclaims beneficial ownership of all shares held by the Trusts.
(4) Mr. Sharma resigned as an officer and director of i2 effective May 17,
1999. Includes 3,049,400 shares of i2 common stock held by The K-B Sharma
Limited Partnership, 977,500 shares of i2 common stock held by Mr. Sharma's
spouse and 44,000 shares of i2 common stock held by the Bianca D. Sharma
Charitable Remainder Trust One. Mr. Sharma's spouse is the sole manager of
the general partner of The K-B Sharma Limited Partnership and the sole
trustee of the Bianca D. Sharma Charitable Remainder Trust One, and in such
capacities holds the sole power to vote and dispose of the shares owned by
such entities.
(5) Includes 875,134 shares of i2 common stock owned by his spouse and 80,610
shares of i2 common stock owned by the Tungare Foundation. Mr. Tungare
serves on the Board of Directors of the Tungare Foundation and, in such
capacity, shares the power to vote and dispose of the shares held by the
Tungare Foundation.
(6) Includes 150,000 shares of i2 common stock subject to options.
(7) Includes 15,357 shares of i2 common stock subject to options. Mr. Cary
resigned as Chief Financial Officer of i2 effective May 15, 1999.
(8) Includes 126,333 shares of i2 common stock subject to options.
(9) Includes 7,085 shares of i2 common stock subject to options.
(10) Includes 44,000 shares of i2 common stock subject to options.
(11) Includes 30,000 shares of i2 common stock subject to options.
(12) See notes (3) through (11).
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<PAGE> 79
SMART BUSINESS
GENERAL
SMART develops, markets and supports software applications for
customer-driven enterprise relationship management, or ERM. SMART's applications
help companies produce and utilize Web content and applications to build and
extend relationships with their customers and channel partners. SMART's
Touchpoint suite of software products provides a company's Web customers with a
dynamic, personalized window into a company, allowing them to shop, receive
support and interact with salespeople and provides a company's distribution
channel partners the ability to order products, track orders, obtain sales leads
and seek service on behalf of their customers on the Web. This suite also
provides a company with the ability to track the contributions of its channel
partners. Additionally, SMART provides the necessary implementation and support
services needed for the successful deployment and integration of these
applications within the businesses of its clients.
SMART, which was incorporated in Delaware in 1996, conducts its business
primarily through its wholly owned subsidiary, SMART Technologies, Inc., a Texas
corporation founded in Austin, Texas in 1995 by the combination of MIS(2), Inc.
and NetTools, Inc. For several years prior to this combination, these two
companies had independently developed and implemented proprietary sales force
automation solutions. This software attempted to make salespeople more effective
and help sales managers track sales activities by recording and presenting
relevant information about sales contacts and customer responses, among other
things. During the first year after the merger, SMART was a consulting services
company that helped other companies create Web-based sales and marketing
solutions.
In late 1996, SMART began transitioning its business model in order to
become a competitive provider of business application solutions. SMART began
hiring personnel qualified in product development disciplines including
documentation, customer support and quality assurance and suspended growth in
its Professional Services department, which had historically provided system
integration services. SMART also successfully began working with leading systems
integrators who agreed to conduct certain joint marketing of SMART software
products.
In 1997, SMART shipped its first version of Touchpoints, a completely
integrated and proprietary e-commerce and self-service application, and SMART
DNA, the predecessor to Touchpoints DNA, which provided the necessary
architectural platform for Touchpoints. SMART is nearing completion of its move
from a consulting services provider to a software application provider. SMART
intends to provide three integrated, but separately packaged, Touchpoints
applications for e-commerce, customer care and channel enablement. Although each
of these three major applications can be purchased separately, the first
Touchpoint purchased must be purchased with Touchpoints DNA (an application
providing certain architectural services). These applications adhere to
programming standards such as Microsoft COM, Java, and J++. Prices for each of
the Touchpoints are competitive with those of the leading providers of each type
of application.
In 1998, SMART initiated a complete re-write of its products to be released
in a new version. This new version is not intended to be commercially available
until the third quarter of 1999. No new licensing agreements are anticipated
from the older product versions.
INDUSTRY BACKGROUND
Supplier versus Customer Bargaining Power
In most markets, suppliers have historically had more bargaining power than
customers when negotiating transactions. This occurred because decision time,
knowledge and distance limited a customer's ability to make optimal purchase
decisions. Customers would often purchase from among a relatively small group of
suppliers located in their particular geographic area because (1) they sought
immediate gratification or (2) their decision-making processes were limited by
time constraints and they did not have a readily available source of information
about alternative product and service offerings in other areas.
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<PAGE> 80
With the advent and maturation of channels like the Internet, bargaining
power has been shifting to the consumer because it now takes little time and
travel for customers to learn about product and service offerings from
geographically distant suppliers. As a result, having the only store in town no
longer provides instant monopoly power. Even the most geographically remote
customers can have a product delivered from across the globe virtually
overnight.
Impacts on Customer Loyalty
Many suppliers now face declining customer loyalty as a result of these
developments. Customers are increasingly becoming accustomed to getting what
they want, when they want it, rather than being subject to what is convenient
for a supplier. Suppliers have attempted to counter this trend by establishing
customer loyalty programs. These programs include discounts, frequent purchase
programs, awards points and referral bonuses. Many businesses have expended
substantial resources on such programs to develop brand loyalty. Suppliers are
also experiencing pressure to demonstrate the extraordinary nature of their
existing product and service offerings in order to create lasting customer
loyalty.
Many suppliers have also opted for a service or relationship-based strategy
to maintain customer loyalty. These suppliers recognize that customers wish to
be favorably approached at every stage of the sales process and not just at the
transaction point, which is typically the only point of supplier/customer
interaction where competition based on price is important to customer loyalty.
In order to maintain customer loyalty, suppliers implementing a
relationship-based strategy must obtain information about potential and existing
customer needs and the timing of such needs, and seek to satisfy their needs at
times convenient to the customer.
Enterprise Relationship Management
While this approach appears simple, the solution has been less
straightforward until the emergence of a new business and technical approach
known as Enterprise Relationship Management, or ERM. The ERM market is in the
formative stages and can be broken down further into two sub-categories,
employee-driven and customer-driven enterprise relationship management.
The employee-driven ERM approach seeks to provide a company's employees a
complete view of the historical interactions with the customer so they can best
service current customer needs. Some employee-driven ERM solutions also
integrate formerly unrelated "front-office" applications, including sales force
automation, customer service, help desk and marketing automation. For example,
employee-driven ERM applications attempt to automate and improve the
effectiveness of employees (1) in the sales department by recording and
presenting data about prior sales contacts and customer responses, (2) in
customer service call centers by providing data about a customer's historical
purchases and preferences and (3) in the marketing department by tracking the
effectiveness of advertising campaigns.
The customer-driven ERM approach is designed to give each customer complete
control over his or her own interactions with a company without necessarily
involving an employee. Just as employee-driven ERM began as a series of
unrelated applications, customer-driven ERM started with applications including:
- Electronic commerce, or on-line shopping and ordering;
- Self-service, or frequently-asked-question and answer lists, knowledge
bases and e-mail service requests;
- Electronic bill presentment and payment;
- Personalized marketing, or presentation of product and service offerings
based upon previously indicated personal preferences; and
- Sales channel enablement, or management and tracking of orders by and
presentation of leads to distributors.
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<PAGE> 81
STRATEGY
SMART Technologies was a pioneer of customer-driven ERM in early 1997.
SMART's objective is (1) to promote the business benefits of a comprehensive,
integrated and relationship-driven approach to building customer loyalty and
reducing costs and (2) to provide solutions consistent with this approach. SMART
is focused exclusively on developing packaged application solutions that enable
customer relationships.
PRODUCTS
SMART Touchpoints
SMART's product family is a series of integrated, customer-oriented
applications known as SMART Touchpoints. The Touchpoints provide
customer-oriented interfaces, process flows and functionality, all logically
grouped around customer processes such as: learning and shopping; merchandising
and buying; and questions and problem solving. The Touchpoints applications can
be used to create dynamic Web pages for many different user types, based on
access level, preferences, relationship to the company and other elements.
Touchpoints DNA
While each of the SMART Touchpoints can be purchased and installed
separately, customers are often most interested in the integration of all of the
Touchpoint products. Touchpoints were designed from the beginning to provide a
complete customer-driven ERM solution, not just a series of unrelated solutions.
This capability is provided by Touchpoints DNA, a reliable, scalable, extensible
and supportable framework for processing customer interactions over the
Internet. Touchpoints DNA includes services that supplement each of the other
Touchpoint products. These architectural services are utilized by all of the
individual applications and include security, personalization, profile
management, trend analysis and presentation and fax/email.
Touchpoints Applications
Touchpoint for Commerce is an e-commerce application that presents products
and services to customers in a clean, clear and intuitive fashion. This
Touchpoint application includes all of the functionality customers expect in an
e-commerce offering, including:
- Customized product catalogs featuring pictures of products and
specifications;
- Shopping lists and carts;
- Price Alerts, which alerts customers to movement in company prices below
a certain customer-specified amount; and
- A transaction engine built on Microsoft Site Server (Commerce Edition)
and its Order Processing Pipeline interfaces, or OPP. The OPP allows
SMART customers to choose from a variety of independent software
solutions for all steps in the ordering process like tax, freight and
payment.
Touchpoint for Customer Care provides self-service customer support
processes. This Touchpoint application provides customer support by using the
company's content knowledge and the customer's preferred self-help processes, as
opposed to processes designed to be convenient for customer service employees.
Specifically, this Touchpoint application allows businesses to provide customers
with the following:
- Order tracking and management;
- Frequently-asked-question and answer lists and knowledge bases;
- Product registration;
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<PAGE> 82
- An electronic help desk for submitting requests; and
- Service representative queue management, which allows managers to
determine which service representative receives each request based not
only upon the order in which help requests are received, but based upon
representatives' skills and the nature of customer problems.
Touchpoint for Channel extends on-line commerce and self-service to a
client's channel partners. Touchpoint for Channel (1) provides sales partners
with a constantly updated window into the company, (2) allows companies to
provide partners with information about their orders from purchase to delivery
and sales leads based upon customer inquiries and (3) allows companies to track
sales by partners and determine which partners most effectively use sales leads.
Touchpoint for Channel also includes the following features:
- Customized catalogs including prices for each partner;
- Shopping lists and carts;
- A transaction engine similar to the Touchpoints for Commerce engine;
- The Dealer Locator, which provides the location of the company's closest
dealer; and
- Price Alerts based on partner-specified prices.
PRODUCT DEVELOPMENT
Given SMART's shift to packaged applications, SMART's research and
development spending has been significant over the last two years. Specifically,
the company invested $14.7 million in research and development over the last two
years, accounting for 39% of SMART's total spending. SMART's research and
development employees work in the areas of applications, framework/architecture,
quality assurance and administration.
The majority of recent research and development efforts have been focused
on redesigning the architecture of the Touchpoints and Touchpoints DNA so that
they are consistent with contemporary industry standards and can be easily
manipulated by popular industry tools. This will enable SMART or SMART customers
to more rapidly deploy, customize and extend the capabilities of Touchpoints
applications using programming languages such as COM, Java and J++.
SMART is currently developing another Touchpoint application, Touchpoint
for Billing, which is intended to enable customers to review and pay bills
online. This Touchpoint will include:
- Electronic bill presentment that will allow users to review current and
recent billing statements;
- Reporting capabilities for in-depth analysis of billing detail;
- E-mail notification that current bill is available for review; and
- Online bill payment capabilities using the Microsoft Site Server
(Commerce Edition) transaction engine.
CUSTOMER SERVICE AND SUPPORT
In support of its core product business, SMART provides education,
consulting and support services to purchasers of its software.
SMART University is the company's in-house training program. SMART
University provides training for developers, consultants and business owners.
SMART Consulting Services provides quality-based design and implementation
services. SMART's deliverables-based methodology focuses on three goals:
accelerating application deployment; creating a foundation for future Touchpoint
implementations; and transferring SMART's knowledge.
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SMART Customer Support provides enterprise-class maintenance and support.
SMART's experienced customer support team has a robust knowledge database and
provides its customers with access to documents containing frequently asked
questions and answers, articles and information related to prior installations
and uses of SMART software.
SALES AND MARKETING
SMART predominantly sells directly, but augments those efforts with
complementary reseller and strategic alliance strategies. SMART's direct sale
organization is divided into two regional teams, one focused on the Western
United States and the other focused on the Eastern United States. Each team
consists of a regional director, account executives and sales engineers. Direct
sales accounted for the majority of SMART's sales in 1998 and 1997.
CUSTOMERS
To date SMART's major U.S. customers have fallen into two broad categories:
those for whom it has created customized solutions and those who license its
packaged products. SMART has created customized solutions for Apple Computer,
ZDNet and Minolta. Customers that have licensed SMART's packaged products
include Nextel Communications, Storage Technology, Compaq Computer and Motorola.
SMART is currently focused on Fortune 1000 companies in the sectors of high
technology, consumer durable goods, telecommunications/utilities and financial
services. While SMART is focusing its selling efforts on these particular
markets, the value of SMART's product offering is market-independent.
Companies in the high technology and consumer durable goods sectors would
especially benefit from SMART's integrated customer relationship solution
because their customers need significant pre-and post-sales information, support
and service. A simple commerce-only solution is not adequate for these markets.
Companies in the telecommunications/utilities and financial services
sectors would benefit from SMART's customer relationship solution because it
reduces customer turnover and call center costs. One explanation commonly cited
for customer turnover is the failure of such companies to provide customers
timely and adequate information about their accounts. SMART's products can
provide customers in these sectors immediate access to such information. Costs
are reduced because customers are handling their own orders, solving their own
problems and checking their own bills.
COMPETITION
Given that SMART's product and service offerings are designed to deliver
customer-driven ERM approaches for every segment of a company's business and
include comprehensive e-commerce, self-service and channel partner solutions,
its initial competitors were projects led by information technology departments
within its potential customers. Fifteen years ago, it was not unusual for
companies to build and integrate custom "back-office" solutions. Few companies
attempt this today because there are too many proven and financially attractive
alternatives. Similarly, the availability of viable turn-key applications is
making internal approaches to customer-driven ERM less viable everyday.
SMART's primary competitor in the e-commerce segment is BroadVision, which
offers a personalized e-commerce solution competing directly with Touchpoints
for Commerce. SMART's primary competitor in the customer service segment is
Silknet Software, which offers a self-service solution competing directly with
Touchpoints for Care.
It is likely that SMART will eventually compete with enterprise resource
planning companies such as SAP and Oracle and employee-driven ERM companies such
as Siebel Systems, Vantive, Clarify and Remedy, assuming they attempt to provide
customer-driven self-service solutions.
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PROPRIETARY RIGHTS AND LICENSES
SMART relies primarily on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
its proprietary rights. The source code for SMART's proprietary software is
protected as a trade secret. SMART makes source code available for certain
portions of its products. In addition, some of SMART's agreements with its
customers contain provisions requiring release of source code for limited,
non-exclusive use by the customer in the event that SMART ceases to do business
or SMART fails to support its products. Providing SMART's source code in this
manner may increase the likelihood of misappropriation by third parties. SMART's
policy is to enter into agreements with its employees, consultants and vendors
that restrict disclosure of its proprietary information and assign new
inventions to SMART and control access to and distribution of its software,
documentation and other proprietary information.
SMART resells certain software that it licenses from third parties, and may
in the future resell other software of third parties.
EMPLOYEES
As of March 31, 1999, SMART had approximately 100 employees, including
approximately 40 engaged in research and development activities and
approximately 20 engaged in sales and marketing activities. Some attrition has
occurred since March 31, 1999. The current employee count is approximately 90.
None of SMART's employees are represented by collective bargaining units and
SMART has never experienced a work stoppage. SMART believes that its employee
relations are adequate.
FACILITIES
SMART's operations occupy approximately 39,000 square feet of space located
in Austin, Texas and 7,000 square feet of space located in Cupertino,
California. The large majority of the space is office space. All of SMART's
facilities are leased.
LEGAL PROCEEDINGS
SMART is not currently involved in any material legal proceedings. SMART is
subject to claims and lawsuits from time to time in the ordinary course of its
business.
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SMART MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
SMART's revenues are principally derived from licenses for software
products and from professional services that include consulting, training,
implementation, technical support and maintenance. SMART generates its license
revenues through direct sales to its customers and sales through its
relationships with systems integrators and consulting firms. There have been no
international revenues generated to date. SMART has only a limited operating
history on which to base an evaluation of its business and prospects.
The following table sets forth, for the periods indicated, the percentages
of total revenues represented by certain items reflected in SMART's consolidated
statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------- ---------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Licenses..................................... 24.4% 46.3% 44.1% 19.6%
Professional services........................ 64.7 41.5 39.6 80.4
Hosting...................................... 10.9 12.2 16.3 --
-------- -------- -------- --------
Total revenues....................... 100.0 100.0 100.0 100.0
-------- -------- -------- --------
Cost and expenses:
Licenses..................................... -- 0.1 0.1 0.3
Professional services........................ 18.8 11.5 1.2 4.1
Hosting...................................... 11.1 8.3 11.3 --
Development costs............................ 57.5 138.8 107.1 600.5
Sales and marketing.......................... 43.9 110.5 73.1 532.5
General and administrative................... 39.3 60.0 44.3 279.8
-------- -------- -------- --------
Total cost and expenses.............. 170.6 329.2 237.2 1,417.2
-------- -------- -------- --------
Loss from operations........................... (70.6) (229.2) (137.2) (1,317.2)
Other income (expense), net.................... (0.5) 25.3 3.1 (62.8)
-------- -------- -------- --------
Net loss....................................... (71.1)% (203.9)% (134.1)% (1,380.0)%
======== ======== ======== ========
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and March 31, 1998
Revenues
SMART's revenues consist of software license revenues and service 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 ("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."
Total revenues for SMART decreased to $382,209 in the quarter ended March
31, 1999 from $2.4 million in the quarter ended March 31,1998. This decrease in
revenues resulted primarily from a product redevelopment effort that is intended
to increase the functionality of SMART's computer software products which the
Company believes has resulted in customer delays in licensing SMART's products
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<PAGE> 86
until the newer versions are completed and reduced customer needs for consulting
services related to customization of software solutions. Completion of certain
modules is expected later this year.
Software Licenses. SMART's software license revenues decreased to $74,910
for the quarter ended March 31, 1999 from $1.1 million in the quarter ended
March 31,1998. This decline in license revenue was due to the redevelopment
efforts on SMART's products, resulting in customer delays in licensing SMART's
products until the newer versions are completed.
Professional Services. Professional services revenues consist of
professional services and maintenance. SMART's professional services include a
consulting group, a training group and a support and maintenance group.
Consulting and training services are generally offered on a time and materials
basis. Support and maintenance revenues are generally derived from annual
service agreements and recognized ratably over the period of the agreement.
Maintenance fees are based on a percentage of the list price for the related
software.
Professional services revenues decreased to $307,299 for the quarter ended
March 31, 1999 from $958,913 for the quarter ended March 31, 1998. This decrease
in professional services revenues resulted from a product redevelopment effort
that increased the functionality of SMART's computer software products and
reduced the need for consulting services related to customization of software
solutions. SMART's professional services revenues as a percentage of total
revenues may continue to decline to the extent SMART's strategy of developing
business alliances with third parties, such as system integrators, continues to
expand.
Hosting. Hosting revenues were derived from Internet hosting services and
bandwidth utilization services. Hosting revenues were $395,385 for the quarter
ended March 31, 1998. However, the hosting business ("SMARTNAP") was sold in
1998 and consequently no further revenues will be reported.
Operating Expenses
Cost of Software Licenses. Cost of software licenses includes royalties
payable to third parties for software that is either embedded in, or bundled and
sold with, SMART's products, and the costs of product media, duplication,
packaging and other associated manufacturing costs. These costs were not
material in either period.
Cost of Professional Services. Cost of professional services consists
primarily of salaries, other employee-related costs, travel expenses and fees of
third-party consultants incurred in providing consulting, post-contract customer
support and training services. In the quarters ended March 31, 1999 and 1998,
cost of services and maintenance was $15,807 and $29,350, or 5% and 3% of
related professional services revenues, respectively. The increase in percentage
of associated revenues was due to the timing of direct support with customers.
SMART expects the cost of professional services to increase in absolute dollars
as SMART continues to expand its services organization to support anticipated
higher levels of business.
Cost of Hosting. No cost of Hosting was reported for the quarter ended
March 31, 1999 as SMARTNAP was sold in December 1998. Cost of Hosting for the
quarter ended March 31, 1998 was $274,727 or 11.3% of revenues.
Development Costs. Development costs consist primarily of salaries, other
employee-related costs and consulting fees relating to the development of
SMART's products. Development costs decreased 12% to $2.3 million for the
quarter ended March 31, 1999 from $2.6 million for the quarter ended March 31,
1998. This decrease in development costs is primarily attributable to lower
headcount. SMART anticipates that development costs will increase in absolute
dollars during 1999 due to recruiting and payroll expense associated with hiring
new employees. Also, higher development costs will be incurred in the research
and development of new software products. These costs are expensed as incurred
until technological feasibility in the form of a working model has been
established, at which time such costs are capitalized, subject to
recoverability. To date, these capitalizable costs have been insignificant.
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Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and other employee-related costs, commissions and other incentive
compensation, travel and entertainment, expenditures for marketing programs such
as collateral materials, trade shows, public relations and creative services.
Sales and marketing expenses increased 15% to $2.0 million for the quarter ended
March 31, 1999 from $1.8 million for the quarter ended March 31, 1998. The
overall increases in expenditures reflects the cost of hiring additional sales
and marketing personnel, developing and expanding sales distribution channels
and expanding promotional activities. SMART expects to continue to expand its
direct sales and marketing efforts to support broadened operations. As a result,
SMART expects that sales and marketing expenses will continue to increase in
absolute dollars.
General and Administrative. General and administrative expenses consist
primarily of salaries and other employee-related costs, travel and entertainment
and professional service fees. General and administrative expenses remained
unchanged at $1.1 million for the quarters ended March 31, 1999 and 1998,
respectively. The quarter ended March 31, 1998 included $314,560 in expenses
associated with the sale of SMARTNAP. SMARTNAP was dissolved in December 1998
and consequently no expenses were incurred for the period ended March 31, 1999.
Therefore, administrative costs were higher for the quarter ended March 31, 1999
as compared to the quarter ended March 31, 1998. Overall increases in
expenditures reflect the cost of hiring additional personnel and the development
of additional infrastructure to support the expansion of SMART's operations.
SMART expects to continue to add administrative staff to support broadened
operations. As a result, SMART expects that general and administrative expenses
will continue to increase in absolute dollars.
Income Taxes. SMART did not report any tax benefit on its pre-tax losses in
either of the first quarter of 1999 or 1998 due to uncertainties regarding the
realization of the associated deferred tax assets.
Years Ended December 31, 1998 and December 31, 1997
Revenues
Total revenues for SMART decreased 10% to $7.2 million in 1998 from $8.1
million in 1997. All revenue to date has been from domestic sources. The 10%
decrease in total revenues for 1998 as compared to 1997 resulted primarily from
significantly lower consulting revenues for the year. This in turn resulted from
a product redevelopment effort that increased the functionality of SMART's
computer software products and reduced customers' need for consulting services
related to customization of software solutions. The product redevelopment also
postponed a number of potential sales during the year. Management expects to
commit significant time and financial resources to the development and
maintenance of direct and indirect international sales and support channels.
Software Licenses. SMART's software license revenues increased 70% to $3.4
million in 1998 from $2.0 million in 1997. SMART achieved significant license
revenue growth with the addition of new customers in 1998.
Professional Services. Professional services revenues decreased 43% to $3.0
million in 1998 from $5.2 million in 1997. The decrease in professional services
revenues for 1998 as compared to 1997 resulted from a product redevelopment
effort that increased the functionality of SMART's computer software products
and reduced the need for consulting services related to customization of
software solutions. SMART's professional services revenues as a percentage of
total revenues may continue to decline to the extent SMART's strategy of
developing business alliances with third parties, such as system integrators,
continues to expand.
Hosting. Hosting revenues were $880,963 in 1998 as compared to $884,562 in
1997. The hosting business, SMARTNAP, was sold in 1998.
Operating Expenses
Cost of Software Licenses. In 1998 and 1997, cost of software licenses were
not material.
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Cost of Professional Services. In 1998 and 1997, cost of professional
services was $836,260 and $1,522,672, or 28% and 29% of related professional
services revenues, respectively. The decrease in absolute costs from 1997 to
1998 mirrored the decrease in professional services revenues that was caused by
SMART focusing on product development rather than custom software development.
Cost of professional services fluctuated in both absolute dollar and percentage
terms during 1998 as compared to 1997 due to the timing of significant sales
contracts and the associated need for consulting services related to
customization of software solutions given SMART's shift towards being a vendor
of software applications.
Cost of Hosting. Cost of Hosting during 1998 as compared to 1997 were
$603,416 and $895,416, or 69% and 101% of related Hosting revenues,
respectively. The higher cost of Hosting as a percentage of revenue is
attributable to start-up costs associated with SMARTNAP in 1997. SMARTNAP was
sold in 1998.
SMART expects that cost of professional services will increase in absolute
dollars as SMART continues to expand its services organization to support
anticipated higher levels of business.
Development Costs. Development costs increased 116% to $10.0 million in
1998 from $4.7 million in 1997. This increase in development costs is primarily
attributable to costs associated with the recruitment and employment of
additional personnel in order to enhance existing products and develop new
products. In addition, development costs increased due to SMART's initiation of
a product redevelopment project that emphasized functionality rather than custom
software development. SMART anticipates that development costs will continue to
increase in absolute dollars during 1999. Development costs incurred in research
and development of new software products are expensed as incurred until
technological feasibility in the form of a working model has been established,
at which time such costs are capitalized, subject to recoverability. As of
December 31, 1998, capitalizable costs were insignificant.
Sales and Marketing. Sales and marketing expenses increased 126% to $8.0
million in 1998 from $3.5 million in 1997. The overall increases in expenditures
reflects the cost of hiring additional sales and marketing personnel, developing
and expanding sales distribution channels, deploying new products and expanding
promotional activities. SMART expects to continue to expand its direct sales and
marketing efforts to support broadened operations. As a result, SMART expects
that sales and marketing expenses will continue to increase in absolute dollars.
General and Administrative. General and administrative expenses consist
primarily of salaries and other employee-related costs, travel and entertainment
and professional service fees. General and administrative expenses increased 37%
to $4.3 million in 1998 from $3.2 million in 1997. The overall increases in
expenditures reflects the cost of hiring additional personnel and the
development of additional infrastructure to support the expansion of SMART's
operations. SMART expects to continue to add administrative staff to support
broadened operations. As a result, SMART expects that general and administrative
expenses will continue to increase in absolute dollars.
Income Taxes. Deferred taxes are recognized as a result of temporary
differences that arise between the tax bases of assets and liabilities and the
related financial statement carrying amounts, as measured using the tax rates
that are expected to be in effect when the temporary differences reverse. During
1998 and 1997, SMART generated pre-tax losses of $14.8 million and $5.8 million,
respectively. SMART has approximately $8.5 million in net deferred tax assets.
However, SMART has not reported any associated income tax benefit because the
net deferred tax assets are fully reserved due to uncertainties regarding the
realization of the assets. Such uncertainty arises from the lack of earnings
history for SMART. See "Risk Factors -- Deferred Tax Assets" and Note 5 to the
Consolidated Financial Statements. At December 31, 1998 and 1997, SMART had net
operating loss carryforwards of approximately $18.0 million and $6.3 million,
respectively. In addition, SMART had research and development credit
carryforwards of approximately $376,000 and $174,000, respectively, available to
offset future tax liabilities. SMART's net operating loss carryforwards begin to
expire in 2011 if not utilized. Utilization of the carryforwards may be subject
to annual limitations due to changes in SMART's ownership resulting from its
preferred stock financings and potential public stock offerings.
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LIQUIDITY AND CAPITAL RESOURCES
SMART has incurred substantial operating losses and has funded its
operations to date primarily through the private placement of equity and debt;
and to a lesser extent bank financing. Through March 1999, private equity
placements provided net proceeds totaling $17.0 million, notes payable to
stockholders totaled $3.5 million, notes payable to i2 totaled $3.0 million and
an outstanding credit facility with a commercial bank totaled $2.0 million. The
i2 loans were repaid in April 1999 with the proceeds of an independent
third-party loan of $3.5 million in April 1999. At March 31, 1999, SMART had
$696,709 in cash and cash equivalents, which represents a decrease of $5.1
million as compared with $5.8 million at March 31, 1998. At December 31, 1998,
SMART had $1.1 million in cash and cash equivalents, which represents a decrease
of $8.8 million as compared with $9.9 million at December 31, 1997. SMART
currently has no significant capital commitments other than obligations under
equipment and operating leases. In December 1998, SMART's commercial bank
increased its credit facility to provide for total borrowings of up to $8.0
million. However, SMART was notified by its commercial bank on February 8, 1999
that it was in default of its credit terms due to violation of a "quick ratio"
covenant for the period ending November 30, 1998. Forbearance was granted for
the default until May 31, 1999 through various waivers. Because it is
anticipated that the merger may not be completed until the third quarter of
1999, SMART has arranged for interim financing through its commercial bank,
which is guaranteed by i2.
Cash used in operating activities was $3.9 million and $3.5 million for the
quarters ended March 31, 1999 and March 31, 1998, respectively, and $12.7
million and $3.9 million in 1998 and 1997, respectively. The primary use of cash
in operating activities was to fund ongoing operations. Cash used in investing
activities was $49,904 and $490,281 for the quarters ended March 31, 1999 and
1998, respectively, and $1.9 million in both 1998 and 1997. This cash was used
for the acquisition of property and equipment. Cash provided by financing
activities was $3.5 million for the quarter ended March 31, 1999, and cash used
in financing activities was $114,317 for the quarter ended March 31, 1998. The
primary source of cash provided by financing activities for the quarter ended
March 31, 1999 resulted from the issuance of $3.5 million in notes. Certain
stockholders provided an additional $500,000 loan in February 1999, and i2
provided a $1.5 million loan in February 1999 and another $1.5 million loan in
March 1999. Cash provided by financing activities was $5.8 million and $15.5
million in 1998 and 1997, respectively. The primary source of cash provided by
financing activities in 1998 resulted from the issuance of notes payable to
stockholders consisting of $3.0 million and, to a lesser extent, borrowings from
a commercial bank. The primary source of cash provided by financing activities
in 1997 resulted from the issuance of preferred stock.
If the merger does not occur, SMART believes that cash generated from
operations and amounts available under its commercial credit facilities will not
be sufficient to meet its expected working capital and capital expenditure
requirements for the next 12 months. SMART will be required to raise additional
funds through private or public sales of securities, bank debt, financing under
leasing arrangements or otherwise, the availability of which cannot be assessed.
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. In less than nine
months, 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 SMART's assessment, SMART believes that its current
versions of its software products are Year 2000 compliant. However, SMART's
products are or may be integrated with enterprise computer systems involving
complicated software products developed by other vendors. As a result, Year 2000
problems inherent in a customer's other software programs might significantly
limit that customer's ability to realize the intended benefits offered by
Touchpoints and Touchpoints DNA. SMART 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 SMART's products or issues
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arising from the integration of multiple products within an overall system.
Although SMART has not been a party to any litigation or arbitration proceeding
to date involving its products or services related to Year 2000 compliance
issues, SMART cannot assure you that it will not in the future be required to
defend its products or services in such proceedings, or to negotiate resolutions
of claims based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, and any liability of SMART for Year 2000-related damages,
including consequential damages, could have a material adverse effect on SMART's
business, operating results and financial condition.
SMART believes 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 SMART.
Any of the foregoing could seriously harm SMART's business, operating results
and financial condition.
SMART's plan to resolve Year 2000 issues includes assessment, remediation
and testing of internal management and other information systems. The completed
assessment indicated that SMART's information systems would not be affected. As
of March 31, 1999, remediation and testing of such systems was largely complete
with an expected completion date of September 30, 1999. However, system
compliance testing will continue in conjunction with SMART's overall information
systems initiatives throughout the remainder of 1999. Areas being addressed
include reviews of SMART's telephone and voice mail systems, security systems
and other office support systems. No information technology initiatives have
been deferred by SMART as a result of its Year 2000 project. SMART currently
expects to incur expenses of approximately $50,000 during the remainder of 1999
in connection with the third-party testing of potential Year 2000 problems. Such
expenses are expected to be less than 6.5% of SMART's information technology
budget for 1999.
SMART believes that an effective plan is in place to resolve its Year 2000
issues in a timely manner. Although SMART has not yet completed all necessary
phases of its Year 2000 program, SMART does 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 its business,
financial condition or results of operations. SMART currently has no contingency
plans in place in the event it does not complete all phases of its Year 2000
plan. SMART intends to evaluate the status of completion throughout 1999 to
determine whether such a plan is necessary.
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QUARTERLY INFORMATION -- UNAUDITED
The following tables set forth unaudited consolidated statement of
operations data for the nine quarters ended March 31, 1999, as well as such data
expressed as a percentage of SMART's total revenues for the periods indicated.
This data has been derived from unaudited interim consolidated financial
statements that, in the opinion of management, have been prepared on a basis
consistent with SMART's audited consolidated financial statements and include
all adjustments (consisting only of normal recurring adjustments, except as
noted otherwise) necessary for a fair presentation of such information when read
in conjunction with the audited consolidated financial statements and notes
thereto. The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
1997 1997 1997 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Licenses.................. $ -- $ 32 $ 376 $ 1,561 $ 1,070
Professional services..... 955 1,270 1,644 1,361 959
Hosting................... 124 140 259 361 395
--------- --------- --------- --------- ---------
Total revenues...... 1,079 1,442 2,279 3,283 2,424
Cost and expenses:
Licenses.................. -- -- -- 2 3
Professional services..... 315 417 511 280 29
Hosting................... 176 207 241 272 275
Development costs......... 487 893 1,216 2,054 2,597
Sales and marketing....... 175 789 1,214 1,368 1,773
General and
administrative.......... 460 648 831 1,233 1,073
--------- --------- --------- --------- ---------
Total cost and
expenses.......... 1,613 2,954 4,013 5,209 5,750
--------- --------- --------- --------- ---------
Loss from operations........ (534) (1,512) (1,734) (1,926) (3,326)
Other income (expense),
net....................... -- (17) (21) (6) 75
Gain from sale of
SMARTNAP.................. -- -- -- -- --
--------- --------- --------- --------- ---------
Net loss.................... $ (534) $ (1,529) $ (1,755) $ (1,932) $ (3,251)
========= ========= ========= ========= =========
Basic net loss per share.... $ (0.06) $ (0.17) $ (0.19) $ (0.20) $ (0.33)
========= ========= ========= ========= =========
Weighted average common
shares outstanding........ 9,137 9,181 9,218 9,524 9,721
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
Licenses.................. --% 2.2% 16.5% 47.5% 44.1%
Professional services..... 88.5 88.1 72.1 41.5 39.6
Hosting................... 11.5 9.7 11.4 11.0 16.3
--------- --------- --------- --------- ---------
Total revenues...... 100.0 100.0 100.0 100.0 100.0
Cost and expenses:
Licenses.................. -- -- -- 0.1 0.1
Professional services..... 29.2 28.9 22.4 8.5 1.2
Hosting................... 16.3 14.4 10.6 8.3 11.3
Development costs......... 45.1 61.9 53.4 62.6 107.1
Sales and marketing....... 16.2 54.7 53.3 41.6 73.1
General and
administrative.......... 42.7 44.9 36.4 37.5 44.3
--------- --------- --------- --------- ---------
Total cost and
expenses.......... 149.5 204.8 176.1 158.6 237.2
--------- --------- --------- --------- ---------
Loss from operations........ (49.5) (104.8) (76.1) (58.6) (137.2)
Other income (expense),
net....................... -- (1.2) (0.9) (0.2) 3.1
Gain from sale of
SMARTNAP.................. -- -- -- ...... -- --
--------- --------- --------- --------- ---------
Net loss.................... (49.5)% (106.0)% (77.0)% (58.8)% (134.1)%
========= ========= ========= ========= =========
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
JUNE 30 SEPT. 30 DEC. 31 MAR. 31
1998 1998 1998 1999
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Licenses.................. $ 1,694 $ 345 $ 246 $ 75
Professional services..... 513 905 629 307
Hosting................... 486 -- -- --
--------- --------- --------- ---------
Total revenues...... 2,693 1,250 875 382
Cost and expenses:
Licenses.................. 1 1 3 1
Professional services..... 89 539 179 16
Hosting................... 329 -- -- --
Development costs......... 2,395 2,674 2,381 2,294
Sales and marketing....... 1,973 2,271 1,982 2,034
General and
administrative.......... 820 982 1,473 1,069
--------- --------- --------- ---------
Total cost and
expenses.......... 5,607 6,467 6,018 5,414
--------- --------- --------- ---------
Loss from operations........ (2,914) (5,217) (5,143) (5,032)
Other income (expense),
net....................... 31 2 (88) (240)
Gain from sale of
SMARTNAP.................. 1,816 -- -- --
--------- --------- --------- ---------
Net loss.................... $ (1,067) $ (5,215) $ (5,231) $ (5,272)
========= ========= ========= =========
Basic net loss per share.... $ (0.11) $ (0.51) $ (0.49) $ (0.49)
========= ========= ========= =========
Weighted average common
shares outstanding........ 9,967 10,299 10,600 10,829
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
Licenses.................. 62.9% 27.6% 28.1% 19.6%
Professional services..... 19.0 72.4 71.9 80.4
Hosting................... 18.1 -- -- --
--------- --------- --------- ---------
Total revenues...... 100.0 100.0 100.0 100.0
Cost and expenses:
Licenses.................. -- 0.1 0.3 0.3
Professional services..... 3.3 43.1 20.5 4.2
Hosting................... 12.2 -- -- --
Development costs......... 88.9 213.9 272.1 600.5
Sales and marketing....... 73.3 181.7 226.5 532.5
General and
administrative.......... 30.5 78.6 168.3 279.8
--------- --------- --------- ---------
Total cost and
expenses.......... 208.2 517.4 687.7 1,417.3
--------- --------- --------- ---------
Loss from operations........ (108.2) (417.4) (587.7) (1,317.3)
Other income (expense),
net....................... 1.2 0.2 (10.1) (62.8)
Gain from sale of
SMARTNAP.................. 67.4 -- -- --
--------- --------- --------- ---------
Net loss.................... (39.6)% (417.2)% (597.8)% (1,380.1)%
========= ========= ========= =========
</TABLE>
86
<PAGE> 92
SMART SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS
Set forth below is information regarding beneficial ownership of SMART's
capital stock as of May 12, by (1) each person or entity who is known to SMART
to own beneficially 5% or more of the outstanding shares of Common Stock, SMART
Series A Preferred, Series B Preferred and Series C Preferred of SMART, (2) each
present director and executive officer of SMART and (3) all SMART directors and
executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF CLASS PERCENT
NAME AND ADDRESS(1) BENEFICIAL OWNERSHIP(2) OF STOCK OF CLASS
- ------------------- ----------------------- -------- --------
<S> <C> <C> <C>
Austin Ventures................................ 5,430,648(3) Common Stock 32.7
William P. Wood 1,304,348 Series A Preferred 90.9
114 W. 7th Street, Suite 1300 1,162,791 Series B Preferred 25.8
Austin, Texas 78701 347,008 Series C Preferred 9.3
Jason Parrish.................................. 2,729,172(4) Common Stock 24.4
Jasiph DeCoux.................................. 2,533,128(5) Common Stock 22.5
Mark Benson.................................... 2,428,867(6) Common Stock 21.7
Goldman Sachs & Co............................. 2,726,652(7) Common Stock 19.7
85 Broad Street 2,666,666 Series C Preferred 71.1
New York, New York 10004
Bryan E. Plug.................................. 2,000,000(8) Common Stock 15.2
Internet Capital Group......................... 1,537,705(9) Common Stock 12.1
Kenneth Fox 1,162,791 Series B Preferred 25.8
44 Montgomery Street, Suite 3705 366,666 Series C Preferred 9.8
San Francisco, California 94104
Technology Development Corp.................... 922,691(10) Common Stock 7.6
1200 Route 22 813,954 Series B Preferred 18.1
The Greymark Building 106,345 Series C Preferred 2.8
Bridgewater, New Jersey 08807
Andrew Heller.................................. 720,000 Common Stock 6.4
Hayden Family Partnership, Ltd................. 679,220(11) Common Stock 5.8
Billy H. Hayden 130,435 Series A Preferred 9.1
c/o Cornerstone Integrated Services 232,558 Series B Preferred 5.2
11802 Stonehollow Drive, Suite 100
Austin, Texas 78758
SAP America, Inc............................... 340,831(12) Common Stock 3.0
950 Tower Lane, 16th Floor 333,333 Series C Preferred 8.9
Foster City, California 94404-2127
Brobeck Phleger & Harrison LLP................. 342,805(13) Common Stock 3.0
301 Congress Avenue, Suite 1200 232,558 Series B Preferred 7.6
Austin, Texas 78701
Muneer Hirji................................... 300,000(14) Common Stock 2.6
David Mackie................................... 280,000(15) Common Stock 2.4
Peter Solvik................................... 100,000(16) Common Stock *
All directors and executive officers as a group
(8 persons).................................. 12,797,220(17) Common Stock 62.7
</TABLE>
87
<PAGE> 93
- ---------------
* Indicates less than 1%.
(1) The address of each owner other than Austin Ventures, Goldman Sachs & Co.,
Internet Capital Group, Technology Development Corp., Hayden Family Trust
Partnership, Ltd. and SAP America, Inc. is c/o SMART Technologies, Inc.,
11701 Stonehollow Drive, Suite 500, Austin, Texas 78758.
(2) Beneficial ownership is calculated in accordance with the rules of the SEC
in accordance with Rule 13d-3(d)(1). In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of SMART common stock subject to options held by that person that
are currently exercisable or become exercisable within 60 days following
May 12, 1999 are deemed outstanding. However, such shares are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person. Unless otherwise indicated in the footnotes to this table,
the persons and entities named in the table have sole voting and sole
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable.
(3) Includes 1,263,090 shares of SMART common stock subject to issuance upon
conversion of 421,030 shares of Series A Preferred Stock, 375,349 shares of
SMART common stock subject to issuance upon conversion of 375,349 shares of
Series B Preferred Stock, 110,017 shares of SMART common stock subject to
issuance upon conversion of 107,597 shares of Series C Preferred Stock and
4,514 shares of SMART common stock subject to issuance upon conversion of
4,415 shares of Series C Preferred Stock, which are subject to issuance
upon exercise of a Bridge Warrant held by Austin Ventures IV-A, L.P., of
which William P. Wood, a director of SMART, is General Partner, and as to
which Mr. Wood disclaims beneficial ownership. Also includes 2,649,954
shares of SMART common stock subject to issuance upon conversion of 883,318
shares of Series A Preferred Stock, 787,442 shares of SMART common stock
subject to issuance upon conversion of 787,442 shares of Series B Preferred
Stock, 230,814 shares of SMART common stock subject to issuance upon
conversion of 225,736 shares of Series C Preferred Stock and 9,468 shares
of SMART common stock subject to issuance upon conversion of 9,260 Series C
Preferred Stock subject to issuance upon exercise of a warrant held by
Austin Ventures IV-B, L.P., of which Mr. Wood is General Partner, and as to
which Mr. Wood disclaims beneficial ownership.
(4) Includes 1,500 shares of SMART common stock held by Lisa Parrish, Mr.
Parrish's wife, as to which Mr. Parrish disclaims beneficial ownership.
(5) Includes 100,000 shares of SMART common stock subject to options. Also
includes 3,375 shares of SMART common stock held by Monica DeCoux, Mr.
DeCoux's wife, as to which Mr. DeCoux disclaims beneficial ownership.
(6) Includes 13,867 shares of SMART common stock subject to options.
(7) Includes 1,710,780 shares of SMART common stock subject to issuance upon
conversion of 1,673,143 shares of Series C Preferred Stock held by GS
Capital Partners II, L.P., 680,105 shares of SMART common stock subject to
issuance upon conversion of 665,143 shares of Series C Preferred Stock held
by GS Capital Partners II Offshore, L.P., 63,102 shares of SMART common
stock subject to issuance upon conversion of 61,714 shares of Series C
Preferred Stock held by Goldman Sachs & Co. Verwaltung GmbH, 183,544 shares
of SMART common stock subject to issuance upon conversion of 179,506 shares
of Series C Preferred Stock held by Stone Street Fund 1997, L.P., and
89,121 shares of SMART common stock subject to issuance upon conversion of
87,160 shares of Series C Preferred Stock held by Bridge Street Fund 1997,
L.P.
(8) Includes 2,000,000 shares of SMART common stock subject to options held by
Mr. Plug, who is Chairman of the Board of Directors, President, and Chief
Executive Officer of SMART. All of these options are currently exercisable.
However, if unvested shares are exercised, SMART has the right to
repurchase such shares upon certain events.
(9) Includes 1,162,791 shares of SMART common stock subject to issuance upon
conversion of 1,162,791 shares of Series B Preferred Stock, 170,415 shares
of SMART common stock subject to issuance upon conversion of 166,666 shares
of Series C Preferred Stock and 204,499 shares of SMART common stock
subject to issuance upon conversion of 200,000 shares of Series C Preferred
Stock subject to issuance upon exercise of a Bridge Warrant held by
Internet Capital Group, of which Mr. Fox, a director of SMART, is Managing
Director, and as to which Mr. Fox disclaims beneficial ownership. Also
include 30,000 shares, 10,000 of which are held by each of Douglas
88
<PAGE> 94
Alexander, Walter Buckley and Robert Pollan, who are the Managing Directors
of Internet Capital Group, and as to which Mr. Fox disclaims beneficial
ownership.
(10) Includes 813,954 shares of SMART common stock subject to issuance upon
conversion of 813,954 shares of Series B Preferred Stock, 81,999 shares of
SMART common stock subject to issuance upon conversion of 80,195 shares of
Series C Preferred Stock and 26,738 shares of SMART common stock subject to
issuance upon conversion of 26,150 shares of Series C Preferred Stock
subject to issuance upon exercise of a Bridge Warrant.
(11) Includes 391,305 shares of SMART common stock subject to issuance upon
conversion of 130,435 shares of Series A Preferred Stock and 232,558 shares
of SMART common stock subject to issuance upon conversion of 232,558 shares
of Series B Preferred Stock held by Hayden Family Partnership, Ltd., of
which Billy H. Hayden is General Partner, and as to which Mr. Hayden
disclaims beneficial ownership.
(12) Includes 340,831 shares of SMART common stock subject to issuance upon
conversion of 333,333 shares of Series C Preferred Stock.
(13) Includes 116,279 shares of SMART common stock subject to issuance upon
conversion of 116,279 shares of Series B Preferred Stock held by Brobeck
Investment Company, V, L.P., 110,247 shares of SMART common stock held by
Brobeck SMART Investors II, L.P., 29,070 shares of SMART common stock
subject to issuance upon conversion of 29,070 shares of Series B Preferred
Stock held by Robert DeBeradine, a partner of Brobeck, and 87,209 shares of
common stock subject to issuance upon conversion of 87,209 shares of Series
B Preferred Stock held by a limited partnership of which Carmelo M.
Gordian, a partner of Brobeck, is the general partner, as to which Brobeck
disclaims beneficial ownership.
(14) Includes 300,000 shares subject to options.
(15) Includes 265,000 shares subject to options.
(16) Includes 100,000 shares of SMART common stock subject to options.
(17) Includes 1,263,090 shares of SMART common stock subject to issuance upon
conversion of 421,030 shares of Series A Preferred Stock, 375,349 shares of
SMART common stock subject to issuance upon conversion of 375,349 shares of
Series B Preferred Stock, 110,017 shares of SMART common stock subject to
issuance upon conversion of 107,597 shares of Series C Preferred Stock and
4,514 shares of SMART common stock subject to issuance upon conversion of
4,415 shares of Series C Preferred Stock subject to issuance upon exercise
of a fully-exercisable warrant held by Austin Ventures IV-A, L.P., of which
Mr. Wood is General Partner, and as to which Mr. Wood discloses beneficial
ownership. Also includes 2,649,954 shares of SMART common stock subject to
issuance upon conversion of 883,318 shares of Series A Preferred Stock,
787,442 shares of SMART common stock subject to issuance upon conversion of
787,442 shares of Series B Preferred Stock, 230,814 shares of SMART common
stock subject to issuance upon conversion of 225,736 shares of Series C
Preferred Stock and 9,468 shares of SMART common stock subject to issuance
upon conversion of 9,260 Series C Preferred Stock subject to issuance upon
exercise of a warrant held by Austin Ventures IV-B, L.P., of which Mr. Wood
is General Partner, and as to which Mr. Wood disclaims beneficial
ownership. Also includes 2,278,867 shares of SMART common stock subject to
options held by Messrs. Benson and Solvik, who are each directors of SMART,
Mr. Mackie, who is Vice-President of Marketing of SMART and Mr. Plug. Also
includes 300,000 shares of SMART common stock owned by Mr. Hirji, who is
the Vice-President of Sales of SMART. Also includes 1,162,791 shares of
SMART common stock subject to issuance upon conversion of 1,162,791 shares
of Series B Preferred Stock, 170,415 shares of SMART common stock subject
to issuance upon conversion of 166,666 shares of Series C Preferred Stock
and 204,499 shares of SMART common stock subject to issuance upon
conversion of 200,000 shares of Series C Preferred Stock subject to
issuance upon exercise of a Bridge Warrant held by Internet Capital Group,
of which Mr. Fox is Managing Director, and as to which Mr. Fox disclaims
beneficial ownership. Also includes 30,000 shares, 10,000 of which are held
by each of Douglas Alexander, Walter Buckley and Robert Pollan, who are the
Managing Directors of Internet Capital Group, and as to which Mr. Fox
disclaims beneficial ownership.
89
<PAGE> 95
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
present the effect of the proposed merger between SMART and i2 to be accounted
for as poolings of interests. The unaudited pro forma combined condensed balance
sheet presents the combined financial position of SMART and i2 as of March 31,
1999, assuming that the proposed merger had occurred as of such date. Such pro
forma information is based upon the historical consolidated balance sheet data
of SMART and i2 as of such date. The unaudited pro forma combined condensed
statements of operations give effect to the proposed merger of SMART and i2 by
combining the results of operations of SMART and i2 for the years ended December
31, 1998, 1997 and 1996, and the three month periods ended March 31, 1999 and
1998 on a pooling of interests basis. The unaudited pro forma combined condensed
financial statements are based on the estimates and assumptions set forth in the
notes to such statements, which are preliminary and have been made solely for
purposes of developing such pro forma information.
The unaudited pro forma combined condensed financial statements are not
necessarily an indication of the results that would have been achieved had such
transactions been consummated as of the dates indicated or that may be achieved
in the future.
SMART and i2 estimate that they will incur direct transaction costs of
approximately $2.0 million in connection with the proposed merger, which will be
charged to operations in the quarter in which the merger is completed. This
amount is a preliminary estimate and is therefore subject to change. i2 cannot
assure you that it will not incur additional charges in subsequent quarters to
reflect costs associated with the proposed merger.
These unaudited pro forma combined condensed financial statements should be
read in conjunction with the historical consolidated financial statements and
notes thereto of SMART and i2, "i2 Management's Discussion and Analysis of
Financial Condition and Results of Operations," "SMART Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Risk
Factors."
90
<PAGE> 96
i2 AND SMART
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
i2 SMART ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..................... $ 79,278 $ 697 $ -- $ 79,975
Short-term investments........................ 96,740 -- -- 96,740
Accounts receivable, net...................... 124,173 570 -- 124,743
Other current assets.......................... 15,533 392 (3,000)(C) 12,925
Deferred tax asset............................ 6,793 -- -- 6,793
-------- -------- -------- --------
Total current assets.................. 322,517 1,659 (3,000) 321,176
Furniture and equipment, net.................... 28,632 2,241 -- 30,873
Deferred income taxes and other assets.......... 16,165 59 -- 16,224
-------- -------- -------- --------
Total assets.......................... $367,314 $ 3,959 $ (3,000) $368,273
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities...... $ 61,289 $ 2,134 $ 2,000(B) $ 65,423
Deferred revenues............................. 58,198 3,721 -- 61,919
Short-term debt............................... -- 8,532 (3,000)(C) 5,532
Other current liabilities..................... 4,508 -- -- 4,508
-------- -------- -------- --------
Total current liabilities............. 123,995 14,387 (1,000) 137,382
Deferred income taxes........................... 325 -- -- 325
-------- -------- -------- --------
Total liabilities..................... 124,320 14,387 (1,000) 137,707
Series A preferred stock...................... -- 1,629 (1,629)(A) --
Series B preferred stock...................... -- 3,853 (3,853)(A) --
Series C preferred stock...................... -- 11,211 (11,211)(A) --
Stockholders' equity (deficit):
Common stock.................................. 18 11 (11)(A) 18
Additional paid-in capital.................... 202,231 279 16,704(A) 219,214
Retained earnings (deficit)................... 40,745 (27,411) (2,000)(B) 11,334
-------- -------- -------- --------
Total stockholders' equity
(deficit)........................... 242,994 (27,121) 14,693 230,566
-------- -------- -------- --------
Total liabilities and stockholders'
equity (deficit).................... $367,314 $ 3,959 $ (3,000) $368,273
======== ======== ======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
91
<PAGE> 97
i2 AND SMART
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
i2 SMART ADJUSTMENTS COMBINED
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software licenses................................ $61,073 $ 990 -- $ 62,063
Services......................................... 30,515 54 -- 30,569
Maintenance...................................... 8,881 -- -- 8,881
------- ------- ---------- --------
Total revenues........................... 100,469 1,044 -- 101,513
------- ------- ---------- --------
Costs and expenses:
Cost of software licenses........................ 260 -- -- 260
Cost of services and maintenance................. 21,761 -- -- 21,761
Sales and marketing.............................. 35,182 302 -- 35,484
Research and development......................... 21,886 1,673 -- 23,559
General and administrative....................... 10,425 683 -- 11,108
In-process research and development and
acquisition-related expenses.................. 1,133 -- -- 1,133
------- ------- ---------- --------
Total costs and expenses................. 90,647 2,658 -- 93,305
------- ------- ---------- --------
Operating income (loss).......................... 9,822 (1,614) -- 8,208
Other income (expense), net...................... 1,681 (10) -- 1,671
------- ------- ---------- --------
Income (loss) before income taxes................ 11,503 (1,624) -- 9,879
Provision for income taxes....................... 4,705 -- -- 4,705
------- ------- ---------- --------
Net income (loss)................................ $ 6,798 $(1,624) -- $ 5,174
======= ======= ========== ========
Net income (loss) per share(2)................... $ 0.12 $ (0.24) $ 0.09
======= ======= ========== ========
Net income (loss) per share, assuming
dilution(2)................................... $ 0.10 $ (0.24) -- $ 0.08
======= ======= ========== ========
Weighted average common shares outstanding....... 58,000 6,899 -- 59,758
Weighted average common shares outstanding,
assuming dilution............................. 65,974 6,899 -- 68,116
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
92
<PAGE> 98
i2 AND SMART
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
i2 SMART ADJUSTMENTS COMBINED
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software licenses............................... $139,798 $ 1,968 -- $141,766
Services........................................ 53,437 4,781 -- 58,218
Maintenance..................................... 20,457 1,335 -- 21,792
-------- ------- ---------- --------
Total revenues.......................... 213,692 8,084 -- 221,776
-------- ------- ---------- --------
Costs and expenses:
Cost of software licenses....................... 2,744 2 -- 2,746
Cost of services and maintenance................ 46,004 2,418 -- 48,422
Sales and marketing............................. 73,526 3,545 -- 77,071
Research and development........................ 52,741 4,651 -- 57,392
General and administrative...................... 21,810 3,174 -- 24,984
In-process research and development and
acquisition-related expenses................. 9,306 -- -- 9,306
-------- ------- ---------- --------
Total costs and expenses................ 206,131 13,790 -- 219,921
-------- ------- ---------- --------
Operating income (loss)........................... 7,561 (5,706) -- 1,855
Other income (expense), net....................... 3,353 (44) -- 3,309
-------- ------- ---------- --------
Income (loss) before income taxes................. 10,914 (5,750) -- 5,164
Provision for income taxes........................ 6,916 -- -- 6,916
-------- ------- ---------- --------
Net income (loss)(2).............................. $ 3,998 $(5,750) -- $ (1,752)
======== ======= ========== ========
Net income (loss) per share(2).................... $ 0.06 $ (0.62) -- $ (0.03)
======== ======= ========== ========
Net income (loss) per share, assuming dilution.... $ 0.06 $ (0.62) -- $ (0.03)
======== ======= ========== ========
Weighted average common shares outstanding........ 62,652 9,265 -- 64,410
Weighted average common shares outstanding,
assuming dilution............................... 70,932 9,265 -- 64,410
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
93
<PAGE> 99
i2 AND SMART
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
i2 SMART ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software licenses............................... $230,961 $ 3,355 -- $234,316
Services........................................ 88,972 2,754 -- 91,726
Maintenance..................................... 41,983 1,132 -- 43,115
-------- -------- --------- --------
Total revenues.......................... 361,916 7,241 -- 369,157
-------- -------- --------- --------
Costs and expenses:
Cost of software licenses....................... 7,959 8 -- 7,967
Cost of services and maintenance................ 76,020 1,439 -- 77,459
Sales and marketing............................. 121,978 8,000 -- 129,978
Research and development........................ 84,151 10,048 -- 94,199
General and administrative...................... 33,845 4,346 -- 38,191
In-process research and development and
acquisition-related expenses................. 7,618 -- -- 7,618
-------- -------- --------- --------
Total costs and expenses................ 331,571 23,841 -- 355,412
-------- -------- --------- --------
Operating income (loss)......................... 30,345 (16,600) -- 13,745
Gain on sale of business........................ -- 1,816 -- 1,816
Other income, net............................... 6,917 20 -- 6,937
-------- -------- --------- --------
Income (loss) before income taxes............... 37,262 (14,764) -- 22,498
Provision for income taxes...................... 17,279 -- -- 17,279
-------- -------- --------- --------
Net income (loss)............................... $ 19,983 $(14,764) -- $ 5,219
======== ======== ========= ========
Net income (loss) per share(2).................. $ 0.29 $ (1.46) -- $ 0.07
======== ======== ========= ========
Net income (loss) per share, assuming
dilution(2).................................. $ 0.26 $ (1.46) -- $ 0.07
======== ======== ========= ========
Weighted average common shares outstanding...... 70,004 10,147 -- 71,762
Weighted average common shares outstanding,
assuming dilution............................ 76,388 10,147 -- 78,530
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
94
<PAGE> 100
i2 AND SMART
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
i2 SMART ADJUSTMENTS COMBINED
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software licenses................................. $44,945 $ 1,070 -- $46,015
Services.......................................... 18,761 1,219 -- 19,980
Maintenance....................................... 7,742 135 -- 7,877
------- ------- --------- -------
Total revenues............................ 71,448 2,424 -- 73,872
------- ------- --------- -------
Costs and expenses:
Cost of software licenses......................... 2,146 3 -- 2,149
Cost of services and maintenance.................. 15,262 304 -- 15,566
Sales and marketing............................... 24,817 1,773 -- 26,590
Research and development.......................... 18,361 2,597 -- 20,958
General and administrative........................ 6,674 1,073 -- 7,747
------- ------- --------- -------
Total costs and expenses.................. 67,260 5,750 -- 73,010
------- ------- --------- -------
Operating income (loss)............................. 4,188 (3,326) -- 862
Other income, net................................... 1,442 75 -- 1,517
------- ------- --------- -------
Income (loss) before income taxes................... 5,630 (3,251) -- 2,379
Provision for income taxes.......................... 2,167 -- -- 2,167
------- ------- --------- -------
Net income (loss)................................... $ 3,463 $(3,251) -- $ 212
======= ======= ========= =======
Net income (loss) per share(2)...................... $ 0.05 $ (0.33) -- $ 0.00
======= ======= ========= =======
Net income (loss) per share, assuming dilution(2)... $ 0.05 $ (0.33) -- $ 0.00
======= ======= ========= =======
Weighted average common shares outstanding.......... 68,432 9,721 -- 70,190
Weighted average common shares outstanding, assuming
dilution.......................................... 76,414 9,721 -- 78,556
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
95
<PAGE> 101
i2 AND SMART
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
i2 SMART ADJUSTMENTS COMBINED
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software licenses................................ $ 73,996 $ 75 -- $ 74,071
Services......................................... 28,784 -- -- 28,784
Maintenance...................................... 14,436 307 -- 14,743
-------- ------- --------- --------
Total revenues........................... 117,216 382 -- 117,598
-------- ------- --------- --------
Costs and expenses:
Cost of software licenses........................ 3,159 1 -- 3,160
Cost of services and maintenance................. 28,963 16 -- 28,979
Sales and marketing.............................. 40,699 2,034 -- 42,733
Research and development......................... 28,028 2,294 -- 30,322
General and administrative....................... 11,102 1,069 -- 12,171
In-process research and development and
acquisition-related expenses.................. 303 -- -- 303
-------- ------- --------- --------
Total costs and expenses................. 112,254 5,414 -- 117,668
-------- ------- --------- --------
Operating income (loss)............................ 4,962 (5,032) -- (70)
Other income, net.................................. 1,318 (240) -- 1,078
-------- ------- --------- --------
Income (loss) before income taxes.................. 6,280 (5,272) -- 1,008
Provision for income taxes......................... 2,534 -- -- 2,534
-------- ------- --------- --------
Net income (loss).................................. $ 3,746 $(5,272) -- $ (1,526)
======== ======= ========= ========
Net income (loss) per share(2)..................... $ 0.05 $ (0.49) -- $ (0.02)
======== ======= ========= ========
Net income (loss) per share, assuming
dilution(2)...................................... $ 0.05 $ (0.49) -- $ (0.02)
======== ======= ========= ========
Weighted average common shares outstanding......... 71,906 10,829 -- 73,664
Weighted average common shares outstanding,
assuming dilution................................ 78,730 10,829 -- 73,664
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
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<PAGE> 102
i2 AND SMART
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The pro forma combined condensed financial statements combine the financial
position of i2 and SMART at March 31, 1999 and the results of SMART's and i2's
operations for the three month periods ended March 31, 1999 and 1998 and the
years ended December 31, 1998, 1997 and 1996. Certain SMART amounts have been
reclassified to conform to the i2 presentation.
2. UNAUDITED PRO FORMA COMBINED NET INCOME (LOSS) PER SHARE
The unaudited pro forma combined net income (loss) per share is based on
the combined weighted average number of common and common equivalent shares of
SMART and i2 common stock for each period. SMART's weighted average common
equivalent shares are based upon the assumed average share exchange ratio of
.07337 shares of i2 common stock. This assumed average share exchange ratio is
calculated based on the number of shares of SMART common stock and options to
purchase SMART common stock outstanding as of March 31, 1999, assuming
conversion or liquidation of all convertible preferred stock. However, in
computing pro forma net income per share, assuming dilution for all periods
presented, dilutive common stock equivalent shares, which were excluded from the
calculation of SMART's net loss per share, were included in pro forma combined
net income per share, assuming dilution, when their impact would have been
dilutive.
3. PRO FORMA ADJUSTMENTS
(A) Reflects the exchange of i2 shares in exchange for all of the
outstanding capital stock of SMART after giving effect to the conversion or
liquidation of all SMART convertible preferred stock.
(B) SMART and i2 estimate they will incur direct transaction costs of
approximately $2.0 million in connection with the merger, consisting of
transaction fees for investment bankers, attorneys, accountants, financial
printing and other related charges. These nonrecurring transaction costs will be
charged to operations upon completion of the merger. There can be no assurance
that SMART and i2 will not incur additional charges to reflect costs associated
with the merger or that management will be successful in its efforts to
integrate the operations of the two companies. The unaudited pro forma combined
condensed balance sheet gives effect to estimated direct transaction costs as if
such costs and expenses had been incurred as of March 31, 1999. These costs and
expenses are assumed to be nondeductible for income tax purposes. These costs
and expenses are not reflected in the unaudited pro forma combined condensed
statements of operations.
(C) Reflects the elimination of a $3.0 million loan from i2 to SMART.
Subsequent to March 31, 1999, these loans were repaid to i2.
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<PAGE> 103
DESCRIPTION OF i2 CAPITAL STOCK
IN GENERAL
As of the date of this document, the authorized capital stock of i2
consists of 500,000,000 shares of i2 common stock, par value $.00025 per share,
and 5,000,000 shares of i2 preferred stock, par value $.001 per share.
COMMON STOCK
As of April 23, 1999, there were 72,303,030 shares of i2 common stock
outstanding held of record by approximately 519 persons. Holders of i2 common
stock are entitled to one vote per share on all matters to be voted upon by the
stockholders except that, upon giving of a notice required by law, stockholders
may cumulate votes in elections of directors. Subject to the preferences that
may be applicable to any outstanding i2 preferred stock, the holders of i2
common stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the i2 Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
i2, the holders of i2 common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior liquidation rights of
i2 preferred stock, if any, then outstanding. i2 common stock has no preemptive
or conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to i2 common stock. All outstanding shares of
i2 common stock are fully paid and non-assessable.
PREFERRED STOCK
As of April 23, 1999, there were no shares of i2 preferred stock
outstanding. The i2 Board of Directors has the authority to issue up to
5,000,000 shares of i2 preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon any
unissued shares of i2 preferred stock, and to fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the i2 stockholders. The i2 Board of Directors, without
stockholder approval, can issue i2 preferred stock with voting and conversion
rights that could adversely affect the voting power of the holders of i2 common
stock. The issuance of i2 preferred stock may have the effect of delaying,
deferring or preventing a change in control of i2. i2 has no present plans to
issue any of i2 preferred stock.
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<PAGE> 104
COMPARISON OF RIGHTS OF STOCKHOLDERS OF i2 AND SMART
The rights of both SMART's and i2's stockholders are governed by SMART's
and i2's respective Certificates of Incorporation, their Bylaws, each as amended
and restated to date, and the laws of the State of Delaware. After the close of
the merger, the SMART stockholders will become i2 stockholders and their rights
and obligations as stockholders will be governed by the i2 Certificate of
Incorporation (the "i2 Certificate"), the i2 Amended and Restated Bylaws (the
"i2 Bylaws") and the laws of the State of Delaware.
While the rights and privileges of stockholders of SMART are, in many
instances, comparable to those of stockholders of i2, there are certain
differences. The following is a summary of the material differences between the
rights of stockholders of SMART and the rights of stockholders of i2 as of the
date of this document. These differences arise from differences between the
SMART Restated Certificate of Incorporation (the "SMART Certificate") and the
SMART Bylaws and the i2 Certificate and the i2 Bylaws.
The following discussions of certain similarities and material differences
between the rights of i2 stockholders and the rights of SMART stockholders under
the respective Certificates and Bylaws is only a summary of certain provisions
and does not purport to be a complete description of such similarities and
differences. The following discussions are qualified in their entirety by
reference to the Delaware General Corporation Law, or DGCL, the common law
thereunder and the full text of the SMART Certificate, the SMART Bylaws, the i2
Certificate and the i2 Bylaws.
ADVANCE NOTICE OF STOCKHOLDER PROPOSALS
The SMART Bylaws provide that written notice of an annual meeting of
stockholders must be given to each SMART stockholder entitled to vote at such
meeting not less than ten nor more than 60 days before the date of the meeting
which states the place, date and hour of the meeting.
For business to be properly before a meeting, business must be (1)
specified in the notice of the meeting (or any supplement thereto) given to the
appropriate stockholders, (2) properly brought by the SMART Board of Directors
or (3) properly brought by a SMART stockholder. For business to be properly
brought by a SMART stockholder, the SMART stockholder must have given timely
notice of the business in writing to the Secretary of SMART. To be timely, this
notice must be delivered to or mailed and received at the principal place of
business of SMART not less than 30 days nor more than 60 days prior to the
meeting. However, if less than 40 days notice or prior public disclosure of the
date of the meeting was given or made to SMART stockholders, such notice, to be
timely, must be received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made.
The i2 Bylaws also provide that notice of an i2 stockholder meeting shall
be in writing and shall not be delivered less than ten days nor more than 60
days before the date of the meeting. Under the i2 Bylaws, for business to be
properly brought before any annual meeting, such business must either be (1)
specified in the notice given by or at the direction of the Chairman of the
board of directors, (2) brought by the full board of directors or (3) properly
brought by an i2 stockholder. For business at an annual meeting to be properly
brought by an i2 stockholder, such i2 stockholder must comply with applicable
laws and must provide the Secretary of i2 with notice not later than 120 days
nor earlier than 150 days prior to the date that the prior year's proxy was
delivered to i2 stockholders in connection with the preceding year's annual
meeting.
VOTING REQUIREMENTS AND QUORUM OF STOCKHOLDER MEETINGS
The SMART Bylaws provide that the holders of a majority of the stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business, except as otherwise provided by statute or by the SMART
certificate.
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<PAGE> 105
The holder of each share of SMART preferred stock has the right to one vote
for each share of SMART common stock into which such holder's shares of SMART
preferred stock could then be converted. With respect to such vote, such holder
(1) has full voting rights and powers equal to the voting rights and powers of
the holders of SMART common stock, except as otherwise provided by law or as
expressly provided in the SMART Certificate, (2) is entitled to notice of any
SMART stockholders' meeting in accordance with the SMART Bylaws, and (3) is
entitled to vote, together with holders of SMART common stock, with respect to
any question upon which holders of SMART common stock have the right to vote.
Fractional votes are not permitted and any fractional voting rights available on
an as-converted basis, after aggregating all shares into which shares of SMART
preferred stock held by each holder could be converted, are rounded to the
nearest whole number, with 0.5 being rounded upward.
So long as any shares of either series of preferred stock are outstanding,
SMART may not, without first obtaining the approval, by vote or written consent,
as provided by law, of the holders of at least a majority of the then
outstanding shares of each series of SMART preferred stock, with each series of
SMART preferred stock voting or acting, as the case may be, separately and not
as a single class:
- Amend or modify any provision of the SMART's Certificate or Bylaws so as
to affect adversely the rights, preferences or privileges of either
series of SMART preferred stock;
- Authorize or issue, or authorize or effect any reclassification of, or
obligate itself to issue, any equity security, other than the SMART
Series C Preferred Stock or up to 36,047 shares of SMART Series B
Preferred Stock upon the exercise of warrants outstanding as of a certain
date, including any other security convertible into or exercisable for
any equity security, so as to cause such security to have a preference
over, or be on a parity with, either series of SMART preferred stock with
respect to voting, redemption, dividends or upon liquidation;
- Engage in any merger, sale or other similar reorganization, other than a
merger, sale or other similar reorganization in which the SMART
stockholders of record as constituted immediately prior to such
transaction will, immediately after such transaction, hold at least 50%
of the voting power of the surviving or acquiring entity, in which the
consideration to be received by SMART and/or its stockholders in such
transaction has a value of less than $130 million;
- Increase or decrease (other than by redemption or conversion) the total
number of authorized shares of either series of SMART preferred stock;
- Redeem or repurchase any shares of SMART preferred stock; or
- Amend any of the provisions set forth above.
So long as any shares of any series of SMART preferred stock are
outstanding, SMART may not, without first obtaining the approval, by vote or
written consent, as provided by law, of the holders of at least a majority of
the voting power, as determined on an as-converted basis, of all then
outstanding shares of SMART preferred stock, voting or acting, as the case may
be, together as a single and collective class:
- Amend the SMART bylaws to increase, or otherwise take any action that
would have the effect of increasing, the authorized number of directors
of SMART to more than eight;
- Redeem, purchase or otherwise acquire (or pay into or set aside for a
sinking fund for such purpose) any share or shares of SMART common stock;
provided, however, that this restriction shall not apply to the
repurchase of shares of SMART common stock from employees, officers,
directors, consultants or other persons performing services for SMART or
any subsidiary pursuant to agreements under which SMART has the option to
repurchase such shares at cost or at cost upon the occurrence of certain
events, such as the termination of employment;
- Engage in any merger, sale or similar reorganization (other than a
merger, sale or similar reorganization in which the SMART stockholders of
record as constituted immediately prior to such transaction will,
immediately after such transaction, hold at least 50% of the voting power
of
100
<PAGE> 106
the surviving or acquiring entity) in which the consideration to be
received by SMART or its stockholders in such transaction has a value of
$130 million or more;
- Create any subsidiary of SMART, other than a wholly owned subsidiary, or
permit any wholly owned subsidiary of SMART to issue or sell, except to
SMART or any other wholly owned subsidiary of SMART, any equity security,
including any other security convertible into or exercisable for any
equity security, of such subsidiary;
- Authorize or issue, or obligate itself to issue, any equity security,
including any other security convertible into or exercisable for any
equity security, of SMART to any employee of the Corporation, other than
up to 5,520,315 shares of SMART common stock that may be reserved for
issuance or otherwise issued under any stock option or other plan or
agreement of SMART, including, but not limited to, SMART's 1996 Stock
Option/Stock Issuance Plan, together with options granted thereunder to
purchase such shares; or
- Amend any of the provisions set forth above.
The i2 Bylaws also provide that at any meeting of i2 stockholders, the
holders of a majority of the stock issued and outstanding and entitled to vote
shall constitute a quorum for the transaction of any business. i2 stockholders
may not take action by written consent in lieu of a meeting but must take any
actions at a duly called annual or special meeting. In most matters, the
affirmative vote of the holders of shares of stock representing a majority of
the votes cast is required, except in the cases where the affirmative vote of
two-thirds of the then outstanding shares of i2 entitled to vote is required,
such as to alter, amend, or repeal the seventh, eleventh, thirteenth or
fourteenth articles of the i2 Certificate, unless such amendment shall be
approved by a majority of the directors of i2 not affiliated or associated with
any person or entity holding (or which has announced an intention to obtain) 26%
or more of the voting power of i2's outstanding capital stock.
SIZE OF THE BOARD OF DIRECTORS
The SMART Bylaws provides that the number of directors constituting the
SMART Board of Directors shall not be less than one or more than seven. The
minimum or maximum number of directors may be changed, or a definite number
fixed without provision for an indefinite number, by a bylaw duly adopted by the
SMART Board of Directors or by the affirmative vote of a majority of the
outstanding shares entitled to vote.
The i2 Bylaws provide that the authorized number of directors of the
corporation is fixed at five. The i2 Board of Directors is made up of three
classes with each class serving staggered three-year terms.
ELECTING DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS; REMOVAL OF
DIRECTORS
Under the DGCL, cumulative voting in the election of directors is not
permitted unless the corporation specifically provides for it in its certificate
of incorporation. Without cumulative voting, the holders of a majority of the
shares present or represented at a duly held annual meeting are able to elect
all the directors to be elected at that meeting, and no person could be elected
without the support of a majority of such stockholders. Thus, a person or
persons holding shares or proxies representing less than a plurality of the
shares present would not be able to elect any directors as he, she or they might
if cumulative voting were applicable. Neither the SMART or i2 Certificate
provides for cumulative voting.
The SMART Bylaws provide that the directors of SMART are elected at the
annual meeting of the SMART stockholders by a plurality vote of the shares
represented in person or by proxy and each director elected holds office until
his successor is elected and qualified unless he resigns, becomes disqualified,
disabled or otherwise removed. Directors need not be SMART stockholders.
The SMART Bylaws also provide that vacancies and newly-created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director. The directors so chosen serve for the
remainder of the term of the vacated directorship being filled and until their
successors are duly elected
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and shall qualify, unless sooner displaced. If there are no directors in office,
then an election of directors may be held in the manner provided by the DGCL.
SMART directors or the entire SMART Board of Directors may be removed, with or
without cause, by the holders of a majority of the shares entitled to vote at an
election of directors. If at any time a class or series of shares is entitled to
elect one or more directors, a director or directors may be removed by the
holders of a majority of the shares of such class or series. No reduction of the
authorized number of directors shall have the effect of removing any director
prior to the expiration of such director's term of office.
The i2 Bylaws do not provide for the election or nomination of directors by
any individual class or series of stock. The i2 Bylaws provide that vacancies
occurring on the i2 Board of Directors for any reason may be filled by vote of a
majority of the remaining members of the i2 Board of Directors, although less
than a quorum, at a meeting of the i2 Board of Directors. A person so elected by
the i2 Board of Directors to fill a vacancy shall hold office until the next
succeeding annual meeting of i2 stockholders and until his or her successor
shall have been duly elected and qualified. Any director or the entire board of
directors may be removed, with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors. If at any time a
class or series of shares is entitled to elect one or more directors, this
provision will apply to the vote of that class or series and not to the vote of
the outstanding shares as a whole. No reduction of the authorized number of
directors shall have the effect of removing any director prior to the expiration
of such director's term of office.
EXPERTS
The consolidated balance sheets of i2 Technologies, Inc. as of December 31,
1998 and 1997 and the consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998, contained in this document, have been included herein in reliance on
the report of Ernst & Young LLP, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
The consolidated balance sheets of Sales Marketing Administration Research
Tracking Technologies, Inc. as of December 31, 1998 and 1997 and the
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998, contained in this
document, have been included herein in reliance on the report of Ernst & Young
LLP, independent accountants, given on the authority of that firm as experts in
accounting and auditing.
On April 16, 1999, i2 announced that it plans to pursue a strategic
consulting agreement with Ernst & Young LLP to jointly market and deliver i2's
eBPO solutions worldwide. Given the potential conflict of interests this
proposed new agreement could present, Ernst & Young resigned their role as i2's
independent audit firm effective April 16, 1999.
Ernst & Young's report on i2's financial statements during the past two
years contained no adverse opinion or disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the i2's two most recent years and subsequent interim periods
preceding the date hereof, there was no disagreement with Ernst & Young on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement, if not resolved to Ernst &
Young's satisfaction, would have caused Ernst & Young to make reference to the
subject matter of the disagreement in connection with its report. In addition,
none of the "reportable events" described in Item 304(a)(1)(v) of Regulation S-K
occurred with respect to i2 during the two most recent fiscal years and the
subsequent interim periods to the date hereof.
Effective April 16, 1999, i2 engaged Arthur Andersen LLP to audit its
consolidated financial statements for the fiscal year ending December 31, 1999.
The engagement of Arthur Andersen LLP as i2's auditors has been approved by i2's
Audit Committee.
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LEGAL MATTERS
Certain legal matters with respect to validity of the shares of i2 common
stock offered hereby and the federal income tax consequences in connection with
the merger will be passed upon for i2 by Brobeck, Phleger & Harrison LLP,
Austin, Texas. Certain legal matters with respect to federal income tax
consequences in connection with the merger will be passed upon for SMART by Gray
Cary Ware & Freidenrich LLP, Austin, Texas. As of May 12, 1999, 116,279 shares
of SMART Series B Preferred Stock and 110,247 shares of SMART common stock were
owned by investment entities related to Brobeck, Phleger & Harrison LLP and
116,279 shares of Series B Preferred Stock were owned directly or indirectly by
partners of Brobeck, Phleger & Harrison LLP.
WHERE YOU CAN FIND MORE INFORMATION
i2 files annual, quarterly and special reports, proxy statements and other
information with the SEC. These materials can be read and copied at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
facilities. i2's filings are also available to the public from commercial
document retrieval services and on the Web site maintained by the SEC at
www.sec.gov.
i2 has filed a registration statement on Form S-4 with the SEC to register
i2 common stock to be issued to SMART stockholders in the merger. This document
is a part of that Registration Statement. Other parts of the Registration
Statement are omitted from this document, as allowed by the SEC's rules. For
further information, reference is hereby made to the Registration Statement.
Copies of the Registration Statement, including the exhibits to the Registration
Statement and other material that is not included here, may be inspected without
charge at the offices of the SEC referred to above, or obtained through
commercial document retrieval services.
You should rely only on the information provided in this document. i2 has
not authorized anyone to provide you with different information. You should not
assume that the information in this document is accurate as of any date other
than that on the front of the document.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
i2 TECHNOLOGIES, INC. AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Report of Independent Auditors.............................. F-2
Covered by Report of Independent Auditors:
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1997 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998.......................... F-6
Notes to Consolidated Financial Statements (except Notes 12
and 13)................................................... F-7
Not Covered by Report of Independent Auditors:
Notes 12 and 13 of the Notes to Consolidated Financial
Statements................................................ F-18
i2 TECHNOLOGIES, INC. UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31,
1998 and March 31, 1999................................... F-21
Condensed Consolidated Statements of Income for the Three
Months Ended March 31, 1998 and 1999...................... F-22
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1999................ F-23
Notes to Condensed Consolidated Financial Statements........ F-24
SALES MARKETING ADMINISTRATION RESEARCH TRACKING
TECHNOLOGIES, INC. AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. F-26
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-27
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1998................................ F-28
Consolidated Statements of Changes In Stockholders' Equity
(Deficit) for the Years Ended December 31, 1997 and
1998...................................................... F-29
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998................................ F-30
Notes to Consolidated Financial Statements.................. F-31
Not Covered by Report of Independent Auditors:
Notes 14 and 15 of the Notes to Consolidated Financial
Statements................................................ F-41
SALES MARKETING ADMINISTRATION RESEARCH TRACKING
TECHNOLOGIES, INC. UNAUDITED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31,
1998 and March 31, 1999................................... F-44
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1998 and 1999................ F-45
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1999................ F-46
Notes to Condensed Consolidated Financial Statements........ F-47
</TABLE>
F-1
<PAGE> 110
i2 TECHNOLOGIES, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Board of Directors i2 Technologies, Inc.
We have audited the accompanying consolidated balance sheets of i2
Technologies, Inc. and its subsidiaries (the Company) as of December 31, 1997
and 1998, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedule listed in
the index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of i2
Technologies, Inc. and its subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 18, 1999
F-2
<PAGE> 111
i2 TECHNOLOGIES, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $127,433 $ 61,491
Short-term investments.................................... 14,538 93,387
Accounts receivable, net of allowance for doubtful
accounts of $4,263 and $8,406, respectively............ 75,037 126,033
Prepaids and other current assets......................... 3,836 9,164
Income tax receivable..................................... 1,097 --
Deferred income taxes..................................... 3,823 5,070
-------- --------
Total current assets.............................. 225,764 295,145
Furniture and equipment, net................................ 20,895 29,116
Deferred income taxes and other assets...................... 3,604 14,963
-------- --------
Total assets...................................... $250,263 $339,224
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,712 $ 10,814
Accrued liabilities....................................... 11,284 22,146
Accrued compensation and related expenses................. 15,357 21,165
Revolving line of credit.................................. 657 --
Deferred revenue.......................................... 29,713 47,463
Income taxes payable...................................... -- 2,213
-------- --------
Total current liabilities......................... 64,723 103,801
Deferred income taxes....................................... 1,780 448
-------- --------
Total liabilities................................. 66,503 104,249
-------- --------
Commitments and contingencies
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, 67,810,274 and 71,471,762 shares issued and
outstanding, respectively.............................. 17 18
Additional paid-in capital................................ 166,727 197,958
Retained earnings......................................... 17,016 36,999
-------- --------
Total stockholders' equity........................ 183,760 234,975
-------- --------
Total liabilities and stockholders' equity........ $250,263 $339,224
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 112
i2 TECHNOLOGIES, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Software licenses......................................... $ 61,073 $139,798 $230,961
Services.................................................. 30,515 53,437 88,972
Maintenance............................................... 8,881 20,457 41,983
-------- -------- --------
Total revenues.................................... 100,469 213,692 361,916
-------- -------- --------
Costs and expenses:
Cost of software licenses................................. 260 2,744 7,959
Cost of services and maintenance.......................... 21,761 46,004 76,020
Sales and marketing....................................... 35,182 73,526 121,978
Research and development.................................. 21,886 52,741 84,151
General and administrative................................ 10,425 21,810 33,845
In-process research and development and
acquisition-related expenses........................... 1,133 9,306 7,618
-------- -------- --------
Total costs and expenses.......................... 90,647 206,131 331,571
-------- -------- --------
Operating income............................................ 9,822 7,561 30,345
Other income, net........................................... 1,681 3,353 6,917
-------- -------- --------
Income before income taxes.................................. 11,503 10,914 37,262
Provision for income taxes.................................. 4,705 6,916 17,279
-------- -------- --------
Net income.................................................. $ 6,798 $ 3,998 $ 19,983
======== ======== ========
Net income per share........................................ $ 0.12 $ 0.06 $ 0.29
Net income per share, assuming dilution..................... $ 0.10 $ 0.06 $ 0.26
Weighted average common shares outstanding.................. 58,000 62,652 70,004
Weighted average common shares outstanding, assuming
dilution.................................................. 65,974 70,932 76,388
</TABLE>
See accompanying notes.
F-4
<PAGE> 113
i2 TECHNOLOGIES, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............ 53,768 $13 $ 4,145 $ 6,220 $ 10,378
Exercise of stock options and issuance
under stock purchase plan.......... 1,038 -- 1,816 -- 1,816
Common stock issued, net of offering
costs of $4,288.................... 4,780 2 43,714 -- 43,716
Tax benefit of stock options.......... -- -- 1,353 -- 1,353
Amortization of deferred
compensation....................... -- -- 784 -- 784
Issuance of Think preferred stock
which was exchanged for i2 common
stock in merger.................... 554 -- 5,100 -- 5,100
Issuance of ITLS preferred stock which
was exchanged for i2 common stock
in merger.......................... 786 -- 5,269 -- 5,269
Net income............................ -- -- -- 6,798 6,798
------ --- -------- ------- --------
Balance at December 31, 1996............ 60,926 15 62,181 13,018 75,214
Exercise of stock options and issuance
under stock purchase plan.......... 2,884 1 4,273 -- 4,274
Common stock issued, net of offering
costs of $3,573.................... 4,000 1 89,427 -- 89,428
Tax benefit of stock options.......... -- -- 10,106 -- 10,106
Amortization of deferred
compensation....................... -- -- 740 -- 740
Net income............................ -- -- -- 3,998 3,998
------ --- -------- ------- --------
Balance at December 31, 1997............ 67,810 17 166,727 17,016 183,760
Exercise of stock options and issuance
under stock purchase plan.......... 3,585 1 11,254 -- 11,255
Common stock issued in acquisition.... 77 -- 2,708 -- 2,708
Tax benefit of stock options.......... -- -- 16,669 -- 16,669
Amortization of deferred
compensation....................... -- -- 600 -- 600
Net income............................ -- -- -- 19,983 19,983
------ --- -------- ------- --------
Balance at December 31, 1998............ 71,472 $18 $197,958 $36,999 $234,975
====== === ======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 114
i2 TECHNOLOGIES, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 6,798 $ 3,998 $ 19,983
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-off of acquired in-process research and
development.......................................... -- 4,564 4,674
Depreciation and amortization.......................... 3,052 5,194 10,809
Provision for losses on receivables.................... 1,085 3,903 4,640
Amortization of deferred compensation.................. 784 740 600
Deferred income taxes.................................. (348) (4,169) (10,709)
Tax benefit from stock option exercises................ 1,353 10,106 16,669
Changes in operating assets and liabilities:
Accounts receivable, net............................. (24,701) (42,670) (55,636)
Income tax receivable................................ 1,151 (1,097) 1,097
Prepaids and other assets............................ (1,397) (1,306) (5,194)
Accounts payable..................................... 3,107 2,754 3,102
Accrued liabilities.................................. 3,967 5,417 9,186
Accrued compensation and related expenses............ 2,594 11,452 5,808
Deferred revenue..................................... 10,470 9,978 17,750
Income taxes payable................................. 99 (996) 2,213
-------- -------- ---------
Net cash provided by operating activities......... 8,014 7,868 24,992
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable -- stockholders.......................... (1,000) 1,000 --
Business acquisitions..................................... -- (4,826) (4,148)
Purchases of furniture and equipment...................... (8,978) (15,751) (18,535)
Net (purchases) sales of short-term investments........... (18,031) 3,493 (78,849)
-------- -------- ---------
Net cash used in investing activities............. (28,009) (16,084) (101,532)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit.................... -- 1,542 943
Payments on revolving line of credit...................... -- (885) (1,600)
Proceeds from long-term debt.............................. 400 -- --
Payments on long-term debt................................ (1,653) (100) --
Advances from stockholders, net........................... (1,385) -- --
Issuance of Think and Optimax preferred stock which was
exchanged for i2 common stock in merger................ 5,100 -- --
Issuance of ITLS preferred stock which was exchanged for
i2 common stock in merger.............................. 5,269 -- --
Net proceeds from sale of common stock.................... 43,716 89,428 --
Net proceeds from sale of common stock to employees and
exercise of stock options.............................. 1,816 4,274 11,255
-------- -------- ---------
Net cash provided by financing activities......... 53,263 94,259 10,598
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 33,268 86,043 (65,942)
Cash and cash equivalents at beginning of period............ 8,122 41,390 127,433
-------- -------- ---------
Cash and cash equivalents at end of period.................. $ 41,390 $127,433 $ 61,491
======== ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 115
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
i2 is the leading provider of client/server based eBPO software products
for supply chain management and related business process optimization
applications. i2's advanced supply chain management solutions include demand
forecasting, raw materials procurement, work-in-process, distribution and
transportation planning, optimization and collaboration within and between
enterprises. i2 has enabled businesses to re-engineer their supply chains to
realize significant increases in revenues, 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.
As the Internet becomes an increasingly significant global medium for
business-to-business and business-to-consumer online commerce, existing and new
businesses in a wide variety of vertical markets are seeking to capitalize on
this growth. The Company believes its software enables its customers to benefit
from the growth of the Internet by supporting new Internet/online storefronts
and enabling re-engineering of supply chains to facilitate e-commerce
transactions.
In May 1997, the Company acquired Think Systems Corporation, a demand
planner software company and Optimax Systems Corporation, a scheduling and
sequencing software company. In April 1998, the Company acquired InterTrans
Logistics Solutions Limited, a transportation and logistics software company.
Each of these business combinations was accounted for as a pooling of interests,
and accordingly, the accompanying consolidated financial statements give
retroactive effect to the combinations (see Note 3). Also, see Note 3 for
discussion of business acquisitions in 1997 and 1998 accounted for as purchases.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents and Short-Term Investments. Cash equivalents
include highly liquid investments with maturity periods of three months or less
at the date of purchase. Short-term investments include those investments with
maturities in excess of three months. Certain debt securities have maturity
dates beyond one year. However, the Company's intent is to liquidate such
securities within one year. All of the Company's cash equivalents and short-term
investments are classified as available-for-sale. The difference between cost
and fair value of these investments was immaterial at December 31, 1997 and
1998. Therefore, no adjustment has been made to the historical carrying value of
the investments and no unrealized gains or losses have been recorded as a
separate component of stockholders' equity. Realized gains and losses to date
have not been material. The cost of debt securities sold is based on the
specific identification method.
F-7
<PAGE> 116
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's debt securities include the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
U.S. Government......................................... $ 11,500 $ 1,449
State and Local Municipalities.......................... 55,000 21,440
Corporations............................................ 40,600 104,884
-------- --------
$107,100 $127,773
======== ========
</TABLE>
At December 31, 1997 and 1998, $92.6 million and $34.4 million,
respectively, of debt securities were included in cash and cash equivalents.
Interest income earned in 1996, 1997 and 1998 was $1.9 million, $3.1 million and
$7.3 million, respectively.
Financial Instruments. Financial instruments that potentially subject the
Company to a concentration of credit risk consist principally of investments and
accounts receivable. Cash, cash equivalents and short-term investments are held
with financial institutions with high credit standings. As of December 31, 1997
and 1998, approximately 29% and 22%, respectively, of accounts receivable were
concentrated with three customers. The Company generally does not require
collateral on accounts receivable as the Company's customers are generally
large, well-established companies. The Company's customer base consists of
geographically diverse companies dispersed across many industries. The Company
periodically performs credit evaluations of its customers and maintains reserves
for potential losses. The Company has used in the past and expects to use in the
future foreign exchange contracts to hedge the risk that receivables denominated
in foreign currencies may be adversely affected by changes in foreign currency
exchange rates. Risk of non-performance by counterparties to such contracts is
minimal due to the size and credit standings of the financial institutions used.
The Company's foreign exchange contracts outstanding at December 31, 1997 and
1998 were not material. Gains and losses on foreign exchange contracts have not
been material to date.
Depreciation and Amortization. Furniture and equipment are recorded at cost
and are depreciated using the straight-line method over seven years for office
furniture and fixtures and three years for computer equipment. Leasehold
improvements are amortized over the shorter of their useful lives or the
remaining lease terms.
Software Development Costs. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed," ("FAS 86") software
development costs are expensed as incurred until technological feasibility has
been established, at which time such costs are capitalized until the product is
available for general release to customers. To date, the establishment of
technological feasibility of the Company's products and general release of such
software have substantially coincided. As a result, software development costs
qualifying for capitalization under FAS 86 have been insignificant and
therefore, the Company has not capitalized such costs.
Revenue Recognition. The Company's revenues consist of software license
revenues, service revenues and maintenance revenues. Software license revenues
consist of sales of software licenses, which are recognized upon execution of a
contract and delivery of the 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.
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.
F-8
<PAGE> 117
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Customer payment terms vary. Amounts received in advance of satisfying
revenue recognition criteria are classified as deferred revenue in the
accompanying consolidated balance sheets.
The Company generally warrants that its products will function
substantially in accordance with documentation provided to customers for
approximately six to twelve months following initial shipment to the customer.
As of December 31, 1998, the Company had not incurred any significant expenses
related to warranty claims.
Net Income Per Share. The Company computes net income per share in
accordance with the provisions of 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 issuable upon
exercise of stock options. Net income per share, assuming dilution, includes the
effect of dilutive potential common stock issuable upon exercise of stock
options using the treasury stock method. Share and per share amounts for all
periods presented have also been adjusted to reflect a stock split during 1998
effected as a dividend (see Note 7). The computations give retroactive effect to
the exchange of common shares in connection with the Think, Optimax and ITLS
acquisitions (see Note 3). Reconciliations of the net income per share
computations for the years ended December 31, 1996, 1997 and 1998 are included
in Note 7.
Stock-Based Compensation Plans. The Company accounts for its stock-based
compensation plans utilizing the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," because, as
discussed in Note 7, the alternative fair value accounting provided for under
SFAS No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. However, SFAS No. 123 requires disclosure of pro forma information
regarding net income and net income per share based on fair value accounting for
stock-based compensation plans.
Foreign Currency Translation. The functional currency for the majority of
the Company's foreign subsidiaries is the local currency. Assets and liabilities
are translated at rates in effect at the balance sheet date and the resulting
translation adjustments are recorded directly to stockholders' equity. Income
statement amounts are translated at average rates for the period. Transaction
gains and losses are recorded in other income, net in the statement of income.
To date, translation adjustments and foreign currency gains and losses have not
been significant and accordingly, have not been separately presented.
Reclassifications. Certain prior year financial statement items have been
reclassified to conform to the current year's format.
Recent Accounting Pronouncements. There have been recent pronouncements by
the Financial Accounting Standards Board and the AICPA that may require certain
changes in accounting policies of the Company and which may also affect
disclosure requirements. These recent pronouncements do not affect the current
year's accounting or reporting requirements and are mentioned here for
informational purposes only.
SFAS No. 133: "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 is effective beginning in 2000. The adoption of SFAS 133 is
not expected to have a material impact on the financial position or results of
operations of the Company.
SOP 98-1: "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 requires companies to capitalize qualifying
computer software costs that are incurred during the application development
stage and amortize them over the software's estimated useful life.
F-9
<PAGE> 118
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SOP 98-1 is for the Company effective January 1, 1999. The adoption of SOP 98-1
is not expected to have a material impact on the financial position or results
of operations of the Company.
SOP 98-9: "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions" which modifies certain provisions of SOP 97-2.
The Company's accounting policy on software revenue recognition is currently in
compliance with SOP 97-2, as amended by SOP 98-9, and adoption of these SOPs, as
currently issued, is not expected to have a material impact on the financial
position or results of operations of the Company.
3. BUSINESS COMBINATIONS
In 1997, the Company acquired Think Systems Corporation ("Think") and
Optimax Systems Corporation ("Optimax"). Under the terms of these agreements,
the Company agreed to issue up to 7.7 million shares and 2.7 million shares of
its common stock for all the outstanding capital stock and all unexpired and
unexercised options of Think and Optimax, respectively.
During 1997, the Company incurred approximately $9.3 million in certain
acquisition-related expenses in connection with the business combinations
involving Think, Optimax and others, of which $4.6 million represents the
write-off of in-process research and development. The remaining costs included,
among other things, investment banking, legal and accounting fees and expenses.
In April 1998, the Company acquired InterTrans Logistics Solutions Limited
("ITLS"). ITLS provides software designed to manage both the daily operations
and the tactical and strategic planning aspects of transportation and logistics
activities across the supply chain. Under the terms of the agreement, the
Company agreed to issue up to 3.3 million shares of its common stock for all of
the outstanding capital stock and all unexpired and unexercised options of ITLS.
Also in 1998, the Company acquired certain other businesses for purchase
prices that aggregate $9.2 million, which included cash, stock, assumed
liabilities and acquisition costs. The total purchase price payable to the
shareholders of certain of the acquired companies may increase in the future
depending upon the achievement of certain revenue targets associated with the
acquired or in-process technologies. These acquisitions were accounted for using
the purchase accounting method. Accordingly, the Company allocated the purchase
prices based on the fair value of assets acquired and liabilities assumed,
including the estimated fair value of intangible assets. These intangible assets
include $4.7 million for acquired in-process research and development
("in-process R&D"). This allocation represents the estimated fair value based on
risk-adjusted cash flows related to the in-process R&D projects. The revenue
projections used to value the in-process R&D are based on estimates of relevant
market sizes and growth factors, expected trends in technology and the nature
and expected timing of new product introductions by the Company and its
competitors. At the date of each acquisition, the products under development had
not reached technological feasibility and had no alternative future use.
Accordingly, these costs were expensed as of each respective acquisition date.
Because estimating the fair value of in-process R&D involves many uncertain
factors including the difficulty of completing development of certain projects
and technological uncertainties, there can be no assurance that in-process R&D
projects will attain either technological feasibility or commercial success.
During 1998, the Company incurred a total of approximately $7.6 million in
certain acquisition-related expenses in connection with the business
combinations involving ITLS and others, of which $4.7 million represents the
write-off of in-process R&D. The remaining costs included, among other things,
investment banking, legal and accounting fees and expenses.
The Think, Optimax and ITLS acquisitions were each accounted for as a
pooling of interests, and accordingly, the consolidated financial statements
give retroactive effect to the acquisitions and include the combined operations
of i2 Technologies, Think, Optimax and ITLS for all periods presented.
F-10
<PAGE> 119
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Computer equipment...................................... $ 26,289 $ 40,850
Furniture and fixtures.................................. 5,256 9,230
-------- --------
31,545 50,080
Less accumulated depreciation........................... (10,650) (20,964)
-------- --------
$ 20,895 $ 29,116
======== ========
</TABLE>
5. BORROWINGS
At December 31, 1998, the Company had a $15.0 million revolving credit
agreement that expires in October 1999, is unsecured and contains customary
restrictive covenants, including covenants requiring the Company to maintain
certain financial ratios. The revolving credit agreement is not subject to a
borrowing base limitation and the borrowings thereunder bear interest at the
lenders' prime lending rate. This facility contains customary restrictive
covenants, including covenants requiring the Company to maintain certain
financial ratios. The maximum borrowings available under the facility are
reduced by the value of outstanding letters of credit issued by the lender on
behalf of the Company, $6.7 million of which were outstanding at December 31,
1998. At December 31, 1998, there were no borrowings outstanding under this
agreement. The Company is currently considering various alternatives for
obtaining additional equity or debt financing.
6. COMMITMENTS
The Company leases its office facilities and certain office equipment under
operating leases that expire at various dates through 2003. The Company has
renewal options for most of its operating leases. Total rent expense incurred
during 1996, 1997 and 1998 was approximately $2.4 million $4.9 million and $8.6
million, respectively.
Future minimum lease payments under all noncancellable operating leases as
of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................... $ 8,936
2000............................................... 6,815
2001............................................... 4,603
2002............................................... 3,797
2003 and thereafter................................ 2,809
-------
Total minimum lease payments............. $26,960
=======
</TABLE>
7. STOCKHOLDERS' EQUITY
Public Offerings. In May 1996, the Company completed the initial public
offering of 5,060,000 shares of its common stock. A total of 4,780,800 of those
shares of common stock were sold by the Company resulting in net proceeds to the
Company of $43.7 million after deducting offering expenses and the underwriting
discount of $4.3 million. In December 1997, the Company completed a public
offering of 6,000,000 shares of its common stock. A total of 4,000,000 of those
shares of common stock were sold by the Company resulting in net proceeds to the
Company of $89.4 million after deducting offering expenses and the underwriting
discount of $3.6 million.
F-11
<PAGE> 120
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Split. On April 22, 1998, the Company's Board of Directors (the
"Board") approved a two-for-one stock split of the Company's common stock. The
stock split was approved by the Company's stockholders at the Company's 1998
annual meeting of stockholders. The stock split was paid as a 100-percent stock
dividend on June 2, 1998 to stockholders of record on May 26, 1998. All share
and per share amounts included herein have been restated to reflect the stock
split as though it had occurred at the beginning of the initial period
presented.
Net Income per Share. Reconciliations of the net income per share and net
income per share, assuming dilution, computations for the years ended December
31, 1996, 1997 and 1998 are as follows (amounts in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
NET INCOME PER SHARE:
Weighted-average common shares outstanding.............. 58,000 62,652 70,004
Net income.............................................. $ 6,798 $ 3,998 $19,983
======= ======= =======
Net income per share.................................... $ 0.12 $ 0.06 $ 0.29
======= ======= =======
NET INCOME PER SHARE, ASSUMING DILUTION:
Weighted-average common shares outstanding.............. 58,000 62,652 70,004
Common shares issuable on exercise of stock options, net
of shares assumed to be repurchased at the average
market price.......................................... 7,974 8,280 6,384
------- ------- -------
Weighted-average common shares outstanding, assuming
dilution.............................................. 65,974 70,932 76,388
======= ======= =======
Net income.............................................. $ 6,798 $ 3,998 $19,983
======= ======= =======
Net income per share, assuming dilution................. $ 0.10 $ 0.06 $ 0.26
======= ======= =======
</TABLE>
Employee Stock Purchase Plan. In March 1996, the Board adopted and the
stockholders approved an Employee Stock Purchase Plan. In November 1996, the
Board adopted an International Employee Stock Purchase Plan for employees of its
wholly-owned subsidiaries. The Employee Stock Purchase Plan and the
International Employee Stock Purchase Plan (collectively, the "Purchase Plans")
are designed to allow eligible employees of the Company to purchase shares of
Common Stock through periodic payroll deductions. The Company has reserved
1,000,000 shares of Common Stock for issuances under the Purchase Plans.
Payroll deductions may not exceed the lesser of 15% of a participant's base
salary or $25,000 per year, and employees may purchase a maximum of 2,000 shares
per purchase period under the Purchase Plans. The purchase price per share will
be 85% of the lesser of the fair market value of the Common Stock on the start
of the purchase period or the fair market value at the end of the purchase
period. Participation may be terminated at any time by the employee and
automatically ends upon termination of employment with the Company.
1992 Stock Plan. Under the Company's 1992 Stock Plan, the Board granted
incentive stock options to employees of the Company and nonqualified options to
a consultant of the Company. The options generally vest over a four-year period
commencing on or before the date of grant.
1995 Stock Option/Stock Issuance Plan. In September 1995, the stockholders
and the Board approved the 1995 Stock Option/Stock Issuance Plan (the "1995
Plan") which replaced the 1992 Stock Plan. All options outstanding under the
1992 Stock Plan were incorporated into the 1995 Plan. Under the 1995 Plan, the
amount of shares of Common Stock originally reserved for issuance was 20,000,000
shares
F-12
<PAGE> 121
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which was subsequently increased to 24,000,000 shares in 1996. The amount of
shares of Common Stock reserved for issuance was again increased to 31,000,000
shares in 1997. The 1995 Plan is divided into the following three equity
programs: (i) the Discretionary Option Grant Program, (ii) the Stock Issuance
Program and (iii) the Automatic Option Grant Program.
The Discretionary Option Grant Program provides for the grant of incentive
stock options ("Incentive Options") to employees of the Company and for the
grant of nonqualified stock options to employees, directors and consultants of
the Company. Exercise prices may not be less than 100% and 85% of the fair
market value at the date of grant for Incentive Options and nonqualified
options, respectively. Options granted under the Discretionary Option Grant
Program generally vest in four equal annual increments and expire after ten
years. Some options granted under the Discretionary Option Grant Program are
immediately exercisable, subject to a right of repurchase by the Company at the
original exercise price for all unvested shares.
Under the Stock Issuance Program, the Board or a committee of the Board
(the "Plan Administrator") may grant shares of the Company's Common Stock to any
person at any time, at such price and on such terms as established by the Plan
Administrator. The purchase price per share cannot be less than 85% of the fair
market value of the Company's Common Stock on the issuance date.
Under the Automatic Option Grant Program, each person who is first elected
or appointed as a non-employee Board member shall automatically be granted a
nonqualified option to purchase 2,000 shares of the Company's Common Stock at
the fair market value on the date of grant. On the date of each Annual Meeting
of Stockholders, each non-employee Board member shall automatically be granted
an additional option to purchase 2,000 shares of the Company's Common Stock,
subject to certain conditions.
Think Stock Option Plans. Think's Board of Directors adopted and its
shareholders approved stock option plans for employees, directors and
consultants of Think (the "Think Plans"). Under the Think Plans, the Think Board
of Directors granted incentive and nonqualified stock options to employees,
directors and consultants at prices not less than the estimated fair market
value of Think's common stock at the date of grant. In connection with the
acquisition of Think, all of the options outstanding under the Think Plans were
assumed by the Company.
Optimax Stock Option Plan. During 1996, Optimax's Board of Directors
adopted and its shareholders approved the Optimax Systems Corporation Stock
Option Plan (the "Optimax Stock Option Plan"). Under the Optimax Stock Option
Plan, the Optimax Board of Directors granted nonqualified stock options to
employees of Optimax at prices equal to the estimated fair market value of
Optimax's common stock on the date of grant. The options generally vest over a
five-year period commencing on or before the date of grant. In connection with
the acquisition of Optimax, all such options were assumed by the Company.
ITLS Stock Option Plan. During 1997, ITLS' Board of Directors adopted and
its shareholders approved the ITLS 1997 Stock Option Plan (the "ITLS Stock
Option Plan"). Under the ITLS Stock Option Plan, the ITLS Board of Directors
granted incentive and nonqualified stock options to employees of ITLS at prices
equal to the estimated fair market value of ITLS' common stock on the date of
grant. The options generally vest over a four-year period commencing on date of
grant. In connection with the acquisition of ITLS, all such options were assumed
by the Company.
F-13
<PAGE> 122
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES -----------------------------
AVAILABLE NUMBER WEIGHTED-AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
---------- ---------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1995................... 1,294,642 7,298,874 $ 0.09
Authorized................................. 5,366,250 -- --
Granted.................................... (3,212,634) 3,212,634 4.86
Issued..................................... (1,230) -- 7.17
Exercised.................................. -- (916,116) 0.83
Canceled................................... 175,344 (175,344) 5.86
---------- ----------
Balance, December 31, 1996................... 3,622,372 9,420,048 1.54
Authorized................................. 7,706,698 -- --
Granted.................................... (6,241,990) 6,241,990 15.37
Exercised.................................. -- (2,744,388) 0.62
Canceled................................... 565,272 (565,272) 15.21
---------- ----------
Balance, December 31, 1997................... 5,652,352 12,352,378 8.11
Authorized................................. -- -- --
Granted.................................... (9,655,587) 9,655,587 17.54
Exercised.................................. -- (3,312,895) 1.69
Canceled................................... 4,147,638 (4,147,638) 23.06
---------- ----------
Balance, December 31, 1998................... 144,403 14,547,432 11.57
========== ==========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
----------------------------
NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
December 31, 1996......................................... 6,104,824 0.54
=========
December 31, 1997......................................... 6,061,520 0.89
=========
December 31, 1998......................................... 4,322,573 3.93
=========
</TABLE>
In October 1998, the Board approved a plan to reprice a portion of the
Company's outstanding stock options, excluding options held by executive
officers. As a result, 3,757,685 options with exercises prices ranging from
$14.00 to $32.81 per share were repriced at $13.94 per share, the fair market
value on the date of repricing. For any unvested options included in this
repricing, the vesting schedule was restarted with a vesting period of four
years. The repricing has been reflected in the above table as part of the
options granted and canceled during 1998.
Under the 1995 Plan, each outstanding option and unvested stock issuance
will be subject to accelerated vesting under certain circumstances upon an
acquisition of the Company in a merger or asset sale, except to the extent the
Company's repurchase rights with respect to the underlying shares are to be
assigned to the successor corporation. In addition, the Plan Administrator has
the discretion to accelerate vesting of outstanding options upon consummation of
any other transaction that results in a change in control of the Company.
All options outstanding at December 31, 1998 are Incentive Options except
for 5,456,182 options, which are nonqualified options.
F-14
<PAGE> 123
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other information regarding options outstanding and options exercisable as
of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ --------------------------
WEIGHTED
AVERAGE
WEIGHTED REMAINING WEIGHTED
RANGE OF EXERCISE NUMBER OF AVERAGE CONTRACTUAL NUMBER OF AVERAGE
PRICES SHARES EXERCISE PRICE LIFE (YEARS) SHARES EXERCISE PRICE
- ----------------- ---------- -------------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.01-$ 6.06 3,539,740 $ 0.72 5.0yrs. 3,380,241 $ 0.72
9.74- 13.94 6,565,332 13.35 9.7 160,196 11.87
13.94- 27.84 4,442,360 17.58 8.7 782,136 16.19
---------- ---------
Total 14,547,432 11.57 8.3 4,322,573 3.93
========== =========
</TABLE>
The Company recorded deferred compensation expense of $2.7 million in 1995
and the first quarter of 1996 for the difference between the grant price and the
deemed fair market value of the Company's Common Stock underlying certain
options granted. This amount is being amortized over the vesting period of the
individual options, generally four years. The income tax benefits from
disqualifying dispositions related to employee stock transactions have been
recorded as an increase in additional paid-in capital.
Pro Forma Net Income and Net Income per Share. Pro forma information
regarding net income and net income per share has been determined as if the
Company had accounted for its employee stock options and shares issued under the
Purchase Plans using the fair value method of SFAS No. 123. The fair value for
the stock options issued under the 1995 Plan was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998, respectively: risk-free interest rates of
6.2%, 6.2% and 5.2%; volatility factors of the expected market price of the
Company's Common Stock of 0.46, 0.66 and 0.75; a weighted-average expected life
of the options of 4, 4 and 3 years; and no dividend yields. The fair value of
the stock options issued under the Think Plans was estimated at the date of
grant using the minimum value method for non-public companies permitted by SFAS
No. 123 with the following assumptions for 1996 and 1997, respectively:
weighted-average risk-free interest rates of 6.5% and 6.2%; no dividends; and a
weighted-average expected life of the options of 7 years. The fair values of
stock options issued under the Optimax Stock Option Plan and the ITLS Stock
Option Plan are not presented as the impact is immaterial.
The fair value for the shares issued under the Purchase Plans was estimated
as of the initial day of the purchase period using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1996, 1997 and
1998, respectively: risk free interest rates of 5.2%, 5.4% and 5.0%; volatility
factors of the expected market price of the Company's Common Stock of 0.46, 0.66
and 0.75; a weighted-average expected life of the purchase right of 0.5 years;
and no dividend yields. The weighted-average fair values of the purchase rights
granted under the Purchase Plans during 1996, 1997 and 1998 were $6.15, $12.12
and $9.20, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and Purchase Plan
shares.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period and the
estimated fair value of the Purchase Plan shares is amortized to expense over
the purchase period.
F-15
<PAGE> 124
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's pro forma information follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- ------
<S> <C> <C> <C>
Pro forma net income (loss)............................... $5,877 $(1,683) $5,532
Pro forma net income (loss) per share..................... 0.10 (0.03) 0.08
Pro forma net income (loss) per share, assuming
dilution................................................ 0.09 (0.03) 0.08
</TABLE>
Information regarding exercise prices and fair values of options granted is
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Number of options issued at fair market value of
stock.......................................... 2,592,094 6,241,990 9,655,587
Weighted-average exercise price per share........ $ 5.58 $ 15.37 $ 17.54
Weighted-average fair value of options........... $ 2.28 $ 8.45 $ 9.23
Number of options issued at less than fair market
value of stock................................. 620,540 -- --
Weighted-average exercise price per share........ $ 1.85 -- --
Weighted-average fair value of options........... $ 2.11 -- --
</TABLE>
8. INCOME TAXES
The Company's provision for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Current:
Federal................................................ $3,630 $ 9,702 $21,982
State.................................................. 390 1,224 2,490
Foreign................................................ 414 158 3,278
Deferred
Federal................................................ 272 (1,629) (4,752)
State.................................................. (79) (40) (185)
Foreign................................................ 78 (2,499) (5,534)
------ ------- -------
Total.......................................... $4,705 $ 6,916 $17,279
====== ======= =======
</TABLE>
The Company's provision for income taxes reconciles to the amount computed
by applying the statutory U.S. federal rate of 34% for 1996, 35% for 1997 and
35% for 1998 to income before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Expense computed at statutory rate........................ $3,911 $3,820 $13,041
Non-deductible in-process research and development and
acquisition costs....................................... 385 3,164 2,635
State taxes, net of federal tax benefit................... 266 770 1,536
Stock option compensation................................. 215 200 205
Research and development tax credits...................... (414) (584) (1,375)
Other..................................................... 342 (454) 1,237
------ ------ -------
Provision for income taxes...................... $4,705 $6,916 $17,279
====== ====== =======
</TABLE>
F-16
<PAGE> 125
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities at December 31, 1997 and 1998 are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Foreign tax credits....................................... $ 617 $ 2,685
Deferred revenue.......................................... 578 402
Accrued liabilities....................................... 570 2,348
Bad debt allowance........................................ 1,349 2,735
Research and development tax credits...................... 868 2,066
Net operating losses...................................... 1,712 7,273
Other..................................................... 295 1,700
------- -------
Total deferred tax asset.......................... 5,989 19,209
------- -------
Deferred tax liabilities:
Depreciation.............................................. (379) (317)
Acquired intangible assets................................ -- (469)
Other..................................................... (663) (3,005)
------- -------
Total deferred tax liability...................... (1,042) (3,791)
------- -------
Net deferred tax asset............................ $ 4,947 $15,418
======= =======
</TABLE>
The Company considers the earnings of foreign subsidiaries to be
permanently reinvested outside the U.S. Accordingly, no U.S. income tax on these
earnings has been provided. The Company believes that any U.S. income taxes due
upon the repatriation of such earnings would be fully offset by foreign tax
credits.
At December 31, 1998, certain subsidiaries of the Company had approximately
$1.0 million of federal net operating loss carryforwards and $19.4 million of
foreign net operating loss carryforwards available to offset future taxable
income of the subsidiaries. The federal net operating loss carryforwards expire
in the years 2010 through 2013 and are subject to certain annual limitations.
Approximately $2.1 million of the foreign net operating loss carryforwards
expire in the years 2003 through 2005 while the remaining net operating loss
carryforwards have no expiration.
The Company paid income taxes of approximately $2.0 million, $2.8 million
and $5.9 million in 1996, 1997 and 1998, respectively.
9. EMPLOYEE RETIREMENT PLAN
The Company has established 401(k) retirement plans (the "Retirement
Plans") that cover a majority of the Company's employees. Eligible employees may
contribute up to 18% of their compensation, subject to certain limitations, to
the Retirement Plans. The Company may make contributions to the Retirement Plans
at the discretion of the Board. As of December 31, 1998, no contributions had
been made by the Company.
10. SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an
F-17
<PAGE> 126
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions how to allocate resources and assess performance. The Company's
chief decision maker, as defined under SFAS 131, is the Chief Executive Officer.
To date, the Company has viewed its operations as principally one segment,
software sales and associated services. As a result, the financial information
disclosed herein, materially represents all of the financial information related
to the Company's principal operating segment.
Revenues from international sources were approximately $21.8 million, $66.7
million and $73.2 million in 1996, 1997 and 1998, respectively. The Company's
revenues from international sources were primarily generated from customers
located in Asia-Pacific, Canada and Europe. In 1996, 1997 and 1998, revenues
from customers located in Europe accounted for 11%, 16% and 11% of total
revenues, respectively.
11. MAJOR CUSTOMERS
For the years ended December 31, 1997 and 1998, no individual customer
accounted for more than 10% of total revenues. For the year ended December 31,
1996, one customer accounted for approximately 11% of total revenues.
12. YEAR 2000 ISSUES -- UNAUDITED
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 the Company's
assessment, the Company believes that its current versions of its software
products are Year 2000 compliant. However, the Company believes some customers
are running earlier versions of the software products developed by acquired
companies that are not Year 2000 compliant, and the Company has been encouraging
such customers to migrate to current product versions. Moreover, the Company's
products are generally integrated into enterprise systems involving complicated
software products developed by other vendors. Year 2000 problems inherent in a
customer's transactional software programs might significantly limit that
customer's ability to realize the intended benefits offered by RHYTHM. The
Company may in the future be subject to claims based on Year 2000 problems in
others' products, custom scripts created by third parties to interface with the
Company's products or issues arising from the integration of multiple products
within an overall system. Although the Company has not been a party to any
litigation or arbitration proceeding to date involving its products or services
related to Year 2000 compliance issues, there can be no assurance that the
Company will not in the future be required to defend its products or services in
such proceedings, or to negotiate resolutions of claims based on Year 2000
issues. The costs of defending and resolving Year 2000-related disputes, and any
liability of the Company for Year 2000-related damages, including consequential
damages, could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company believes that 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
the Company. Any of the foregoing could result in a material adverse effect on
the Company's business, operating results and financial condition.
The Company's plan to resolve Year 2000 issues includes assessment,
remediation and testing of internal management and other information systems.
The completed assessment indicated that a portion of
F-18
<PAGE> 127
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's information systems could be affected. As of December 31, 1998,
remediation and testing of such systems was 75% complete with an expected
completion date of September 30, 1999; however, system compliance testing will
continue in conjunction with the Company's overall information systems
initiatives throughout 1999. Areas being addressed include reviews of the
Company's telephone and voice mail systems, security systems and other office
support systems. No information technology initiatives have been deferred by the
Company as a result of its Year 2000 project. In 1998, the Company incurred
approximately $50,000 of expenses related to correction of Year 2000 issues. The
Company currently expects to incur expenses of approximately $250,000 during
1999 in connection with correction of Year 2000 issues. Such expenses are being
funded through operating cash flows, and are expected to be less than 2.5% of
the Company's information technology budget for 1999.
Management of the Company believes that an effective plan is in place to
resolve the Year 2000 issues in a timely manner. Although the Company has not
yet completed all necessary phases of its Year 2000 program, the Company does
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 have a material adverse effect on its business, financial condition or
results of operations. The Company currently has no contingency plans in place
in the event it does not complete all phases of its Year 2000 plan. The Company
intends to evaluate the status of completion throughout 1999 to determine
whether such a plan is necessary.
13. QUARTERLY INFORMATION -- UNAUDITED
The following tables set forth unaudited consolidated statement of
operations data for the eight quarters ended December 31, 1998. This data has
been derived from unaudited interim consolidated financial statements that, in
the opinion of management, have been prepared on a basis consistent with the
Company's audited consolidated financial statements and include all adjustments
(consisting only of normal recurring adjustments, except as noted otherwise)
necessary for a fair presentation of such
F-19
<PAGE> 128
i2 TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
information when read in conjunction with the audited consolidated financial
statements and notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
1997 1997 1997 1997 1998 1998 1998 1998
------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software licenses........................ $23,517 $34,300 $38,207 $43,774 $44,945 $52,686 $59,775 $ 73,555
Services................................. 10,961 12,305 14,119 16,052 18,761 21,491 23,324 25,396
Maintenance.............................. 4,020 4,372 5,770 6,295 7,742 9,394 11,082 13,765
------- ------- ------- ------- ------- ------- ------- --------
Total revenues..................... 38,498 50,977 58,096 66,121 71,448 83,571 94,181 112,716
------- ------- ------- ------- ------- ------- ------- --------
Costs and Expenses:
Cost of software licenses................ 1,304 1,218 82 140 2,146 2,002 1,529 2,282
Cost of services and maintenance......... 9,053 10,874 12,819 13,258 15,262 16,719 19,388 24,651
Sales and marketing...................... 14,183 17,743 19,016 22,584 24,817 28,452 31,627 37,082
Research and development................. 9,183 12,638 15,122 15,798 18,361 19,290 22,054 24,446
General and administrative............... 4,283 5,796 5,785 5,946 6,674 7,592 8,710 10,869
In-process research and development and
acquisition-related expenses........... -- 5,649 -- 3,657 -- 6,484 560 574
------- ------- ------- ------- ------- ------- ------- --------
Total costs and expenses........... 38,006 53,918 52,824 61,383 67,260 80,539 83,868 99,904
------- ------- ------- ------- ------- ------- ------- --------
Operating income (loss).................... 492 (2,941) 5,272 4,738 4,188 3,032 10,313 12,812
Other income, net.......................... 752 702 777 1,122 1,442 1,947 1,774 1,754
------- ------- ------- ------- ------- ------- ------- --------
Income (loss) before income taxes.......... 1,244 (2,239) 6,049 5,860 5,630 4,979 12,087 14,566
Provision (benefit) for income taxes....... 486 (919) 2,782 4,567 2,167 4,413 4,870 5,829
------- ------- ------- ------- ------- ------- ------- --------
Net income (loss).......................... $ 758 $(1,320) $ 3,267 $1,293 $3,463 $ 566 $ 7,217 $ 8,737
======= ======= ======= ======= ======= ======= ======= ========
Net income (loss) per share................ $ 0.01 $(0.02) $ 0.05 $ 0.02 $ 0.05 $ 0.01 $ 0.10 $ 0.12
======= ======= ======= ======= ======= ======= ======= ========
Net income (loss) per share, assuming
dilution................................. $ 0.01 $(0.02) $ 0.05 $ 0.02 $ 0.05 $ 0.01 $ 0.10 $ 0.11
======= ======= ======= ======= ======= ======= ======= ========
Weighted average common shares
outstanding.............................. 61,174 61,678 62,724 64,824 68,432 69,484 70,325 71,227
Weighted average common shares outstanding,
assuming dilution........................ 69,848 61,678 71,028 72,596 76,414 76,534 75,233 76,824
</TABLE>
F-20
<PAGE> 129
i2 TECHNOLOGIES, INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 61,491 $ 79,278
Short-term investments.................................... 93,387 96,740
Accounts receivable, net.................................. 126,033 124,173
Prepaids and other current assets......................... 9,164 15,533
Deferred income taxes..................................... 5,070 6,793
-------- --------
Total current assets.............................. 295,145 322,517
Furniture and equipment, net................................ 29,116 28,632
Deferred income taxes and other assets...................... 14,963 16,165
-------- --------
Total assets...................................... $339,224 $367,314
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 10,814 $ 11,178
Accrued liabilities....................................... 43,311 50,111
Deferred revenue.......................................... 47,463 58,198
Income taxes payable...................................... 2,213 4,508
-------- --------
Total current liabilities......................... 103,801 123,995
Deferred income taxes....................................... 448 325
-------- --------
Total liabilities................................. 104,249 124,320
-------- --------
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 72,121,426 shares issued and
outstanding, respectively.............................. 18 18
Additional paid-in capital................................ 197,958 202,234
Retained earnings......................................... 36,999 40,745
-------- --------
Total stockholders' equity........................ 234,975 242,994
-------- --------
Total liabilities and stockholders' equity........ $339,224 $367,314
======== ========
</TABLE>
See accompanying notes.
F-21
<PAGE> 130
i2 TECHNOLOGIES, INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Revenues:
Software licenses......................................... $44,945 $73,996
Services.................................................. 18,761 28,784
Maintenance............................................... 7,742 14,436
------- -------
Total revenues.................................... 71,448 117,216
------- -------
Costs and expenses:
Cost of software licenses................................. 2,146 3,159
Cost of services and maintenance.......................... 15,262 28,963
Sales and marketing....................................... 24,817 40,699
Research and development.................................. 18,361 28,028
General and administrative................................ 6,674 11,102
In-process research and development and
acquisition-related expenses........................... -- 303
------- -------
Total costs and expenses.......................... 67,260 112,254
------- -------
Operating income............................................ 4,188 4,962
Other income (expense), net................................. 1,442 1,318
------- -------
Income before income taxes.................................. 5,630 6,280
Provision for income taxes.................................. 2,167 2,534
------- -------
Net income.................................................. $ 3,463 $ 3,746
======= =======
Net income per share........................................ $ 0.05 $ 0.05
======= =======
Net income per share, assuming dilution..................... $ 0.05 $ 0.05
======= =======
Weighted average common shares outstanding.................. 68,432 71,906
Weighted average common shares outstanding, assuming
dilution.................................................. 76,414 78,730
</TABLE>
See accompanying notes.
F-22
<PAGE> 131
i2 TECHNOLOGIES, INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
I2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1999
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,463 $ 3,746
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,370 3,649
Provision for doubtful accounts........................ 1,013 2,221
Deferred income taxes.................................. (4,232) (2,266)
Tax benefit of stock options........................... 4,281 1,830
Changes in operating assets and liabilities:
Accounts receivable, net............................. 2,475 (363)
Income tax receivable/payable........................ 2,284 2,295
Prepaid and other assets............................. 1,517 (7,602)
Accounts payable..................................... 2,582 364
Accrued liabilities.................................. 3,329 7,282
Deferred revenue..................................... 7,173 10,735
-------- -------
Net cash provided by operating activities......... 26,255 21,891
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment...................... (2,262) (2,669)
Net purchases of short-term investments................... (59,711) (3,353)
-------- -------
Net cash used in investing activities............. (61,973) (6,022)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit.................... 943 --
Net proceeds of short-term investments.................... 1,303 1,918
-------- -------
Net cash provided by financing activities......... 2,246 1,918
-------- -------
Net increase (decrease) in cash and cash equivalents........ (33,472) 17,787
Cash and cash equivalents at beginning of period............ 127,433 61,491
-------- -------
Cash and cash equivalents at end of period.................. $ 93,961 $79,278
======== =======
</TABLE>
See accompanying notes.
F-23
<PAGE> 132
i2 TECHNOLOGIES, INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of i2 Technologies, Inc. and its wholly-owned subsidiaries. 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 months ended March 31, 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 net income per share in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." Net income per share is based upon the weighted-average number of common
shares outstanding and excludes the effect of dilutive potential common stock
from the exercise of stock options. Net income per share, assuming dilution,
includes the effect of dilutive potential common stock from the exercise of
stock options using the treasury stock method.
Reconciliations of net income per share and net income per share, assuming
dilution, computations for the three months ended March 31, 1998 and 1999 are as
follows (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
NET INCOME PER SHARE:
Weighted-average common shares outstanding.................. 68,432 71,906
======= =======
Net income.................................................. $ 3,463 $ 3,746
======= =======
Net income per share........................................ $ 0.05 $ 0.05
======= =======
NET INCOME PER SHARE, ASSUMING DILUTION:
Weighted-average common shares outstanding.................. 68,432 71,906
Common shares issuable upon exercise of stock options, net
of shares assumed to be repurchased....................... 7,982 6,824
------- -------
Weighted-average common shares outstanding, assuming
dilution.................................................. 76,414 78,730
======= =======
Net income.................................................. $ 3,463 $ 3,746
======= =======
Net income per share, assuming dilution..................... $ 0.05 $ 0.05
======= =======
</TABLE>
F-24
<PAGE> 133
i2 TECHNOLOGIES, INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. SUBSEQUENT EVENT
On May 12, 1999, i2 announced that it entered into an agreement to acquire
Austin-based SMART Technologies, Inc., a leading developer of Internet-based
customer relationship solutions. Pursuant to the agreement, i2 will acquire all
of the outstanding capital stock of SMART and will assume all outstanding stock
options of SMART in exchange for approximately 2.1 million shares of i2 common
stock, which includes the shares issuable upon exercise of assumed stock
options. The merger is intended to be accounted for as a pooling of interests.
F-25
<PAGE> 134
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AUDITED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Sales Marketing Administration Research Tracking Technologies, Inc.
(dba) SMART Technologies
We have audited the consolidated balance sheets of Sales Marketing
Administration Research Tracking Technologies, Inc. and Subsidiary (the
"Company") as of December 31, 1998 and 1997, and the related consolidated
statements of operations, changes in Redeemable Convertible Preferred Stock and
stockholders' equity (deficit) and cash flows for the years ended December 31,
1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sales Marketing
Administration Research Tracking Technologies, Inc. and Subsidiary at December
31, 1998 and 1997, and the consolidated results of their operations and their
cash flows for the years ended December 31, 1998 and 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring operating losses, has negative working capital
and a net capital deficiency. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1.
/s/ ERNST & YOUNG LLP
February 12, 1999,
except for the third paragraph of Note 4
and Note 16 as to which the date is
April 20, 1999
F-26
<PAGE> 135
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AUDITED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,120,745 $ 9,918,450
Accounts receivable, net of allowance of $145,000 and
$315,127 at December 31, 1998 and 1997, respectively.... 1,644,943 1,578,916
Prepaid expenses and other assets......................... 241,588 211,066
------------ -----------
Total current assets................................ 3,007,276 11,708,432
Equipment, furniture and fixtures:
Computer equipment including $115,555 and $308,920 of
assets under capital leases in 1998 and 1997,
respectively............................................ 3,552,026 3,302,815
Furniture and fixtures.................................... 719,750 555,397
Leasehold improvements.................................... 189,804 92,785
------------ -----------
4,461,580 3,950,997
Accumulated depreciation and amortization................. (1,949,473) (1,061,940)
------------ -----------
Equipment, furniture and fixtures, net...................... 2,512,107 2,889,057
Other assets................................................ 65,548 63,119
------------ -----------
Total assets........................................ $ 5,584,931 $14,660,608
============ ===========
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 861,158 $ 270,793
Payroll related accruals.................................. 759,417 490,879
Other accrued liabilities................................. 306,339 540,596
Deferred revenue.......................................... 3,766,135 2,030,752
Notes payable to stockholders............................. 3,000,000 64,908
Line of credit............................................ 2,031,665 --
Current maturities of capital leases...................... 16,546 190,974
Current maturities of long-term debt...................... -- 873,149
------------ -----------
Total current liabilities........................... 10,741,260 4,462,051
Long-term capital leases, less current maturities........... -- 30,613
Long-term debt, less current maturities..................... -- 584,139
------------ -----------
Total liabilities................................... 10,741,260 5,076,803
Redeemable Convertible Preferred Stock -- Series A: $.001
par value; 1,434,783 shares authorized, issued and
outstanding in 1998 and 1997; liquidation preference of
$1,650,000 in 1998 and 1997............................. 1,629,030 1,629,030
Redeemable Convertible Preferred Stock -- Series B: $.001
par value; 4,534,653 shares authorized in 1998 and 1997;
4,498,606 shares issued and outstanding in 1998 and
1997; liquidation preference of $3,869,000 in 1998 and
1997.................................................... 3,853,205 3,853,205
Redeemable Convertible Preferred Stock -- Series C: $.001
par value; 3,833,333 shares authorized in 1998 and 1997;
3,749,999 shares issued and outstanding in 1998 and
1997; liquidation preference of $11,250,000 in 1998 and
1997.................................................... 11,211,351 11,211,351
Stockholders' equity (deficit):
Common Stock, $.001 par value; 30,000,000 authorized in
1998 and 1997; 11,124,244 shares and 11,087,605 shares
issued and outstanding in 1998 and 1997................. 11,124 11,088
Additional paid-in capital................................ 277,823 253,530
Accumulated deficit....................................... (22,138,862) (7,374,399)
------------ -----------
Total stockholders' equity (deficit)................ (21,849,915) (7,109,781)
------------ -----------
Total liabilities and stockholders' equity
(deficit)........................................... $ 5,584,931 $14,660,608
============ ===========
</TABLE>
See accompanying notes.
F-27
<PAGE> 136
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AUDITED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
Revenues:
License................................................... $ 3,354,965 $ 1,968,123
Professional services..................................... 3,005,466 5,231,223
Hosting................................................... 880,963 884,562
------------ -----------
Total revenue..................................... 7,241,394 8,083,908
Cost of revenues:
License................................................... 8,305 2,106
Professional services..................................... 836,260 1,522,672
Hosting................................................... 603,416 895,416
------------ -----------
Total cost of revenues............................ 1,447,981 2,420,194
------------ -----------
Gross profit................................................ 5,793,413 5,663,714
Development costs........................................... 10,047,746 4,650,633
Sales and marketing......................................... 8,000,054 3,545,050
General and administrative.................................. 4,345,672 3,174,017
------------ -----------
Total operating expenses.......................... 22,393,472 11,369,700
------------ -----------
Loss from operations........................................ (16,600,059) (5,705,986)
Interest income (expense), net.............................. 52,326 (44,197)
Gain from sale of SMARTNAP.................................. 1,816,320 --
Other expenses, net......................................... (33,050) --
------------ -----------
Net loss.................................................... $(14,764,463) $(5,750,183)
============ ===========
Basic net loss per share.................................... $ (1.46) $ (0.62)
============ ===========
Shares used in computing basic net loss per share........... 10,146,962 9,265,126
</TABLE>
See accompanying notes.
F-28
<PAGE> 137
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AUDITED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED SERIES A PREFERRED SERIES B PREFERRED SERIES C
---------------------- ---------------------- -----------------------
SHARES $ AMOUNT SHARES $ AMOUNT SHARES $ AMOUNT
--------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996...... 1,434,783 $1,629,030 -- $ -- -- $ --
Issuance of common stock......... -- -- -- -- -- --
Issuance of series B preferred
stock.......................... -- -- 4,498,606 3,853,205 -- --
Issuance of series C preferred
stock.......................... -- -- -- -- 3,749,999 11,211,351
Exercise of stock options........ -- -- -- -- -- --
Repurchase and cancellation of
unvested common stock.......... -- -- -- -- -- --
Net loss......................... -- -- -- -- -- --
--------- ---------- --------- ---------- --------- -----------
Balance at December 31, 1997...... 1,434,783 1,629,030 4,498,606 3,853,205 3,749,999 11,211,351
--------- ---------- --------- ---------- --------- -----------
Exercise of stock options........ -- -- -- -- -- --
Repurchase and cancellation of
unvested common stock.......... -- -- -- -- -- --
Net loss......................... -- -- -- -- -- --
--------- ---------- --------- ---------- --------- -----------
Balance at December 31, 1998...... 1,434,783 $1,629,030 4,498,606 $3,853,205 3,749,999 $11,211,351
========= ========== ========= ========== ========= ===========
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES $ AMOUNT CAPITAL DEFICIT TOTAL
---------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996...... 9,178,008 $ 9,178 $110,022 $(1,624,216) $ (1,505,016)
Issuance of common stock......... 45,000 45 1,980 -- 2,025
Issuance of series B preferred
stock.......................... -- -- -- -- --
Issuance of series C preferred
stock.......................... -- -- -- -- --
Exercise of stock options........ 1,924,077 1,924 143,841 -- 145,765
Repurchase and cancellation of
unvested common stock.......... (59,480) (59) (2,313) -- (2,372)
Net loss......................... -- -- -- (5,750,183) --
---------- ------- -------- ------------ ------------
Balance at December 31, 1997...... 11,087,605 11,088 253,530 (7,374,399) (7,109,781)
---------- ------- -------- ------------ ------------
Exercise of stock options........ 455,371 455 66,466 -- 66,921
Repurchase and cancellation of
unvested common stock.......... (418,732) (419) (42,173) -- (42,592)
Net loss......................... -- -- -- (14,764,463) (14,764,463)
---------- ------- -------- ------------ ------------
Balance at December 31, 1998...... 11,124,244 $11,124 $277,823 $(22,138,862) $(21,849,915)
========== ======= ======== ============ ============
</TABLE>
See accompanying notes.
F-29
<PAGE> 138
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AUDITED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(14,764,463) $(5,750,183)
Depreciation and amortization............................... 1,402,893 821,531
Gain in sale of SMARTNAP.................................... (1,816,320) --
Loss from disposal of fixed assets.......................... 74,346 --
Changes in assets and liabilities:
Accounts receivable....................................... (65,677) (1,148,242)
Prepaids and other........................................ (32,951) (262,992)
Accounts payable and accrued liabilities.................. 775,495 680,104
Deferred revenue.......................................... 1,735,383 1,749,501
------------ -----------
Cash used in operating activities........................... (12,691,294) (3,910,281)
INVESTING ACTIVITIES
Purchase of equipment, furniture and fixtures............... (1,935,168) (1,943,323)
------------ -----------
Cash used in investing activities........................... (1,935,168) (1,943,323)
FINANCING ACTIVITIES
Proceeds from sale of SMARTNAP.............................. 2,500,000 --
Proceeds from issuance of debt.............................. 2,031,665 799,949
Payments on debt............................................ (1,457,288) (358,333)
Proceeds from issuance of notes payable to stockholders..... 3,000,000 --
Payments on notes payable to stockholders................... (64,908) (64,908)
Payments on capital lease obligations....................... (205,041) (87,333)
Proceeds from issuance of preferred stock, net of issuance
costs..................................................... -- 15,064,556
Proceeds from issuance of common stock and options to
purchase common stock..................................... -- 2,025
Proceeds from exercise of stock options..................... 66,921 145,765
Repurchase of unvested common stock......................... (42,592) (2,372)
------------ -----------
Cash provided by financing activities....................... 5,828,757 15,499,349
------------ -----------
Increase (decrease) in cash and cash equivalents............ (8,797,705) 9,645,745
Cash and cash equivalents at beginning of period............ 9,918,450 272,705
------------ -----------
Cash and cash equivalents at end of period.................. $ 1,120,745 $ 9,918,450
============ ===========
NON-CASH TRANSACTIONS:
Cash interest paid.......................................... $ 140,363 $ 99,261
Acquisition of equipment in exchange for notes payable...... $ -- $ 415,672
Acquisition of equipment under capital leases............... $ -- $ 308,920
</TABLE>
See accompanying notes.
F-30
<PAGE> 139
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sales Marketing Administration Research Tracking Technologies, Inc.
("SMART") and its subsidiary, SMART Technologies, Inc., is a developer of
customer-driven Enterprise Relationship Management software. The Company's
revenues are generated via technology licensing; professional services,
consisting of consulting, training, software maintenance and support; and
hosting of web sites.
The consolidated financial statements include SMART and its wholly owned
subsidiary, SMART Technologies, Inc. (collectively, the "Company").
GOING CONCERN
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has incurred substantial
operating losses, has negative working capital, a net capital deficiency and is
in default of a loan agreement for the year ended December 31, 1998.
For the years ended December 31, 1998 and 1997, the Company reported net
losses of $14,764,463 and $5,750,183, respectively. The Company was notified by
the holder of the Company's line of credit that the Company was in default of
certain financial covenants. The Company has recorded the line of credit as a
current liability on the financial statements.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meets its
financing requirements, and the success of its future operations. See Note 16
for discussion of management's plans.
SALE OF SMARTNAP
On July 24, 1998, the Company sold SMARTNAP, a provider of bandwidth,
co-location and hosting for the Company's customers. SMARTNAP was sold for cash
consideration of $2.5 million. The net book value of assets sold less
liabilities conveyed was $683,680, resulting in a gain of $1,816,320.
RECOGNITION OF REVENUE
As of January 1, 1998, the Company adopted AICPA SOP 97-2, Software Revenue
Recognition (SOP 97-2), which was effective for transactions that the Company
entered into in 1998. The impact of the adoption was not significant.
The Company licenses software under noncancellable license agreements and
provides services including maintenance, training, installation, consulting and
support services. Beginning January 1, 1998, software revenue for all new
revenue agreements is recognized in accordance with SOP 97-2, when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collectible, and significant contractual obligations have been
satisfied. When any of these criteria are not met, the revenue is deferred.
For all transactions prior to January 1998, license fee revenues are
generally recognized when a noncancellable license agreement has been signed,
the product has been shipped, there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable and collection is considered
probable. The Company allocates a portion of contractual license fees to
post-contract support activities covered
F-31
<PAGE> 140
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
under the contract including first year maintenance and product support
services, installation assistance and limited training services.
Revenues from maintenance agreements for maintaining, supporting and
providing periodic upgrades are recognized ratably over the maintenance period,
which in most instances is one year. Revenues for training, hosting of web sites
and consulting services are recognized as services are performed. Revenue and
profits under contracts requiring significant customization are recognized using
the percentage-of-completion method of contract accounting based on the ratio of
incurred costs to total estimated costs or based upon output measures such as
contract milestones.
CASH EQUIVALENTS
Cash and cash equivalents primarily consist of cash deposits and liquid
investments with original maturities of three months or less when purchased and
are stated at cost.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets (two to seven years). Amortization of
leasehold improvements and assets under capital leases is computed using the
straight-line method over the shorter of the estimated useful lives of the
assets or the lease term.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. This
statement prescribes the use of the liability method whereby deferred tax asset
and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED
The Company capitalizes eligible computer software cost upon achievement of
technological feasibility subject to net realizable value considerations. The
Company has defined technological feasibility as the completion of a working
model. As of December 31, 1998 and 1997, such capitalizable costs were
insignificant.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation (FAS 123), which prescribes accounting and reporting
standards for all stock-based compensation plans, including employee stock
options. As allowed by FAS 123, the Company has elected to continue to account
for its employee stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the financial statements and accompanying notes. Actual
results could differ from those estimates.
F-32
<PAGE> 141
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense for the
year ended December 31, 1998 and 1997 was approximately $637,000 and $297,000,
respectively.
RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
NET LOSS PER SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128). Basic net loss per share is
computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted net loss
per share has not been presented as the effect of the assumed exercise of stock
options, warrants and contingently issued shares is antidilutive due to the
Company's net loss.
The following table presents the calculation of basic net loss per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
Net loss.................................................... $(14,764,463) $(5,750,183)
Weighted-average common shares outstanding.................. 10,146,962 9,265,126
Basic net loss per share.................................... $ (1.46) $ (0.62)
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed for or Obtained for Internal Use. The Company plans
to adopt the SOP on January 1, 1999. The SOP will require the capitalization of
certain costs incurred after the date of adoption in connection with developing
or obtaining software for internal use. The Company currently expenses such
costs as incurred. The Company is currently evaluating the impact that the
adoption of SOP 98-1 will have on their financial condition or results of
operations in 1999.
During 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income (FAS 130), which establishes standards for
reporting comprehensive income and its components in a full set of financial
statements. The adoption of FAS 130 did not have an affect on the current
financial statements presentation as the Company has no items of comprehensive
income.
F-33
<PAGE> 142
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Note payable to a financial institution, bearing interest at
the financial institution's prime rate (8.5% at December
31, 1997). Refinanced by a line of credit with the same
financial institution in May 1998 (see Note 3). Note was
collateralized by substantially all the assets of the
Company................................................... $ -- $ 666,616
Advances under a $600,000 equipment note, bearing interest
at the financial institution's prime rate (8.5% at
December 31, 1997). Refinanced by a line of credit with
the same financial institution in May 1998 (see Note 3)... -- 415,672
Note payable to a bank, bearing interest at the bank's prime
rate (8.5% at December 31, 1997). Refinanced by a line of
credit with the same financial institution in May 1998
(see Note 3). Note was collateralized by substantially all
the assets of the Company................................. -- 375,000
---------- ----------
1,457,288
Less, current maturities of long-term debt.................. -- (873,149)
---------- ----------
Long-term debt, less current maturities..................... $ -- $ 584,139
========== ==========
</TABLE>
3. LINE OF CREDIT
The Company has a $8,000,000 line of credit with a financial institution
bearing interest at the financial institution's prime rate (8.5% at December 31,
1998). Interest is due monthly and the line matures in October 2001. The
advances on the line are collateralized by all the assets of the Company. As of
December 31, 1998, the outstanding balance was $2,031,665.
As of December 31, 1998, the Company was in default of certain liquidity
related covenants as defined in the line of credit agreement. Accordingly, the
financial institution retains certain rights and remedies including the options
to make all outstanding principal and interest owed to the financial institution
immediately due and payable. Therefore, the outstanding balance is classified as
a current liability (see also Note 16).
4. NOTES PAYABLE TO STOCKHOLDERS
In 1996, the Company purchased computer equipment from two stockholders in
exchange for notes payable in the amounts of $109,441 and $20,375, respectively.
The notes bear interest at 6% per annum, which is payable monthly. In 1997, the
repayment terms were extended through December 1998, payable in equal
installment terms beginning in January 1998. The notes were unsecured and
subordinate to the Company's long-term debt and advances on its line of credit.
All outstanding balances were paid off during 1998.
On October 13, 1998, the Company issued subordinated convertible promissory
notes with an aggregate principal amount of $3,000,000 bearing interest at 7%
and, 250,000 warrants to purchase Series C or D Preferred Stock, maturing on
January 22, 1999. If the Company consummates the sale of shares of its Series D
Preferred Stock prior to the maturity date of the notes in a transaction or
series of transactions resulting in gross proceeds to the Company of at least
$6,000,000 (a "Qualified Financing"), then the principal of the notes will
automatically convert into shares of the Series D Preferred Stock at the lowest
price per share paid for the Series D Preferred Stock in the Qualified
Financing. The warrants expire October 13, 2003. The value of the warrants at
issuance was immaterial.
F-34
<PAGE> 143
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to December 31, 1998, the Company amended the terms of the
notes, extending the maturity date to June 12, 1999 and increasing the interest
rate to 18% per annum for the period from December 13, 1998 to June 12, 1999. At
December 31, 1998, the Company accrued $46,667 for interest payable.
5. INCOME TAXES
As of December 31, 1998 and 1997, the Company had federal net operating
loss carryforwards of approximately $18,018,000 and $6,347,000 and research and
development credit carryforwards of approximately $376,000 and $174,000,
respectively. The net operating loss carryforwards will begin to expire in 2011
if not utilized. The research and development credit carryforward will begin to
expire in 2012, if not utilized.
Utilizations of the net operating losses will be subject to an annual
limitation due to the "change in ownership" provisions of the Internal Revenue
Code of 1986. The annual limitation may result in the expiration of net
operating losses before utilization. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred taxes as of December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciable assets........................................ $ (11,000) $ --
Deferred tax assets:
Depreciable assets........................................ -- 11,000
Tax carryforwards......................................... 7,043,000 2,522,000
Deferred revenue.......................................... 1,321,000 --
Accrued liabilities....................................... 118,000 219,000
Reserves and other........................................ 48,000 106,000
----------- -----------
Net deferred tax assets..................................... 8,519,000 2,858,000
Valuation allowance for net deferred tax asset.............. (8,519,000) (2,858,000)
----------- -----------
Net deferred taxes.......................................... $ -- $ --
=========== ===========
</TABLE>
The Company has established a valuation allowance equal to the net deferred
tax assets due to uncertainties regarding the realization of deferred tax assets
based on the Company's lack of earnings history. The valuation allowance
increased by approximately $5,661,000 during 1998.
The Company's provision for income taxes differs from the expected tax
expense (benefit) amount computed by applying the statutory federal income tax
rate of 34% to income before income taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Tax at U.S. statutory rate.................................. 34.0% 34.0%
State taxes, net of federal benefit......................... 3.0% 2.9%
Permanent items............................................. (0.2)% (1.3)%
Increase in valuation allowance............................. (38.4)% (35.6)%
Other....................................................... 1.6% --
----- -----
0.0% 0.0%
===== =====
</TABLE>
F-35
<PAGE> 144
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMON STOCK
At December 31, 1998, officers and/or founders of the Company held
7,572,425 shares of common stock which were subject to Stock Restriction
Agreements. Under these agreements, each such officer is fully vested in 50% of
his shares, and the remaining 50% vests in a series of 48 equal monthly
installments beginning in May 1996. At December 31, 1998, 1,262,071 shares of
common stock were unvested. The Stock Restriction Agreements grant the Company
the right to repurchase any unvested shares within the 90-day period following
the date the officer ceases to be employed by the Company, and prohibits the
transfer of any unvested shares without the prior written consent of the
Company. The repurchase rights and transfer restrictions terminate upon the
occurrence of certain Corporate Transactions, as defined, or in the event of the
involuntary termination of the officer, or at the expiration of the 90-day
period.
Holders of 8,292,425 shares of common stock have entered into a Co-Sale and
First Refusal Agreement which grants the Company the right of first refusal, for
a ten-day period, to purchase any shares offered for sale by the stockholders
subject to the Second Amended and Restated Co-Sale and First Refusal Agreement.
Any such shares not purchased by the Company may then be purchased by each
stockholder, in proportion to his ownership interest in the common stock. The
stockholders' right of repurchase expires twenty days from the date upon which
the shares were originally offered for sale.
If a stockholder does not fully exercise his repurchase right, any
remaining shares may be subscribed by the other stockholders. If the number of
shares available for subscription is less than the number of shares subscribed,
the shares will be subscribed on a pro-rata basis.
7. REDEEMABLE, CONVERTIBLE PREFERRED STOCK
The holders of each series of Redeemable Convertible Preferred Stock
(hereafter referred to as Convertible Preferred Stock) are entitled to one vote
for each share of common stock into which the Convertible Preferred Stock may be
converted. Dividends on the Series A, B and C Convertible Preferred Stock are
payable at a rate of $0.081, $0.06 and $0.21, per share per annum, respectively,
payable quarterly when, as and if declared by the Board of Directors. Until
January 1, 2002, such dividends are non-cumulative; from and after such date,
such dividends shall be cumulative and shall accrue daily whether or not
declared. Declared or cumulative dividends with respect to each share of
Convertible Preferred Stock which are accrued, payable and/or in arrears, upon
conversion of such share to common stock, are to be paid at the option of the
Company in cash or shares of common stock at the fair market value as determined
by the Company.
Each share of Series A, B and C Preferred Stock is convertible, at the
option of the holder, into such number of shares of common stock as determined
by dividing $1.15, $0.86 and $3.00, respectively, the Original Issue Price, by
the Conversion Price (as defined) per share in effect on the date of conversion,
rounded to the nearest whole share. At December 31, 1998, the conversion price
is $0.38, $0.86 and $2.934 per share, respectively. Each share of Series A
Convertible Preferred Stock is convertible into three shares of common stock.
Each share of Series B and C Convertible Preferred Stock is converted into equal
shares of common stock. In addition, each share of Convertible Preferred Stock
shall be converted into shares of common stock at the Conversion Price at the
time in effect immediately upon the earlier of the following: (1) the Company's
sale of its common stock in a public offering in which the price per share is no
less than $6.00 per share, as adjusted to reflect stock dividends, stock splits,
combinations, recapitalizations or the like, and with the gross proceeds to the
Company and selling stockholders therein of $20 million; (2) the closing of a
public offering in which (a) the valuation of the Company, based on the initial
offering price of its shares of common stock, exceeds $130 million and (b) the
holders of a majority in voting power of the outstanding shares of Series A,
Series B and Series C Convertible Preferred Stock approve the public offering;
or (3) the closing of a Corporate Transaction, as defined, in
F-36
<PAGE> 145
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which (a) the consideration of the Company or its stockholders exceeds $130
million and (b) the holders of a majority in voting power of the outstanding
shares of Convertible Preferred Stock approve the Corporate Transaction.
The Company has reserved 12,672,335 shares of common stock for future
issuance upon conversion of the Convertible Preferred Stock. If the Series A and
Series B Convertible Preferred Stock have not been converted by October 30,
2004, the holders of a majority of the then-outstanding shares of Series A and
Series B Convertible Preferred Stock may demand that the Company redeem all such
outstanding shares. If such demand is made, the holders of a majority of the
then-outstanding shares of Series C Convertible Preferred Stock may similarly
demand that the Company redeem all of the outstanding shares of Series C
Preferred Stock in conjunction with the redemption of the Series A and Series B
Convertible Preferred Stock. The Series A, Series B and Series C Convertible
Preferred Stock is redeemable at $1.15, $0.86 and $3.00 per share, respectively,
plus all accrued but unpaid, and declared but unpaid, dividends. On the first
anniversary of the Redemption Date, the Company shall redeem, on a pro-rata
basis, 50% of the outstanding shares of Series A, Series B and, if applicable,
Series C Convertible Preferred Stock, and redeem the remaining 50% on the second
anniversary of the Redemption Date. All rights of the holders of Series A,
Series B and, if applicable, Series C Convertible Preferred Stock designated for
redemption, except the right to receive the redemption payment, cease upon the
Redemption Date, and such shares are deemed canceled. Any shares of Series A,
Series B and, if applicable, Series C Convertible Preferred Stock redeemed or
converted are deemed canceled, and may not be reissued by the Company.
As long as any shares of the Convertible Preferred Stock are outstanding,
the Company is prohibited from paying dividends to common stockholders or
redeeming or repurchasing shares of common stock without prior approval of a
majority of the Convertible Preferred Stockholders.
Under the terms of the Second Amended and Restated Investors Rights
Agreement, the majority of the holders of the outstanding common stock issuable
or issued upon conversion of the Series A and B Convertible Preferred Stock or
the majority of the holders of the outstanding common stock issuable or issued
upon the conversion of the Series C Convertible Preferred Stock may require the
Company to register a minimum of 50% of such common stock under the Securities
Act of 1933.
On October 30, 1997, the Company, certain holders of its common stock (the
"Common Stockholders") and certain holders of its Preferred Stock (the
"Preferred Stockholders") entered into a voting agreement (the "Voting
Agreement"). Among other things, the Voting Agreement provided that, in
subsequent elections of directors, the Common Stockholders and Preferred
Stockholders would vote their respective shares so that the Company's Board of
Directors would consist of six directors, of which two would be designated by
the Common Stockholders, two by the Preferred Stockholders and two by mutual
agreement.
8. STOCK PURCHASE WARRANTS
In connection with the issuance of the Series B Preferred Stock in 1997,
the Company issued warrants to purchase 18,605 shares and 17,442 shares of
Series B Preferred Stock at an exercise price of $0.86 per share, expiring in
March 2002 and August 2002, respectively.
No amount was allocated to the value of the above warrants as such amounts
were not significant.
In connection with the issuance of the October 13, 1998 subordinated
convertible promissory notes, the Company issued warrants to purchase 250,000
shares of Series C or D Preferred Stock if the Company has completed a Series D
financing of $6,000,000 or more on or before October 13, 2003. If the Company
sold its Series D Preferred Stock at a price per share less than $3.00 per
share, then the exercise price shall equal the lowest price per share at which
the Series D Preferred Stock was sold. If the Company
F-37
<PAGE> 146
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sold its Series D Preferred Stock at a price greater than $3.00 per share, then
the exercise price shall equal $3.00 per share.
FAS 123 requires that the Company account for the warrants under the fair
value method of that Statement. The fair value of the warrants was estimated at
the date of grant using the Black-Scholes model. Using the Black-Scholes model,
an assumed volatility of 65%, a risk-free interest rate of 5.18%, an expected
life of 1/2 year and a dividend rate of 0%, the fair value of the warrants at
the date of grant was determined to not be material. Accordingly, no value has
been allocated to the warrants.
9. STOCK OPTIONS
The Company's 1996 Stock Option/Stock Issuance Plan (the "Plan") was
established to promote the interests of the Company by providing employees and
non-employee Board members and consultants with the opportunity to acquire or
increase proprietary interest in the Company as an incentive to remain in the
service of the Company.
The Plan allows for the grant of options to purchase shares of common
stock. The Plan provides for the options to be either Incentive Options or
Non-Statutory Options and approves issuance of up to 8,720,315 shares of common
stock over the term of the Plan. The exercise price per share of Incentive
Options shall not be less than 100% of the fair market value of the shares of
common stock. The vesting schedule and term of each grant is determined by the
Board. The term of each option is no more than ten years from the date of grant.
The Plan provides the grantee the right to exercise prior to vesting.
Options exercised prior to an employee becoming fully vested in such options are
subject to repurchase by the Company should the employee be terminated or leave
the Company prior to becoming fully vested in such options. At December 31,
1998, 408,279 shares that were exercised by optionees remained unvested and
subject to repurchase.
Pro forma information regarding net income and earnings per share is
required by FAS 123. At December 31, 1998 and 1997, the fair value for options
was estimated at the date of grant using a minimum value option pricing model
with the following weighted-average assumptions: weighted-average risk free
interest rate of 6.00% and 6.09% respectively; a dividend yield of 0.0% and a
weighted-average expected life of the option of five years.
Based upon the minimum value pricing model and assumptions used, the pro
forma net loss from operating activities would not differ materially from the
net loss as reported.
F-38
<PAGE> 147
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's Plan activity and related information for the
year ended December 31, 1998 follows:
<TABLE>
<CAPTION>
RANGE OF WEIGHTED-
EXERCISE AVERAGE
OPTIONS PRICES EXERCISE PRICE
---------- -------------- --------------
<S> <C> <C> <C>
Options outstanding, December 31, 1996....... 1,034,009 $0.04 to 0.045 $0.04
---------- -------------- -----
Granted.................................... 4,345,814 0.04 to 0.60 0.11
Exercised.................................. (1,969,077) 0.04 to 0.09 0.08
Forfeited.................................. (194,480) 0.04 to 0.09 0.07
---------- -------------- -----
Options outstanding, December 31, 1997....... 3,216,266 0.04 to 0.60 0.11
---------- -------------- -----
Granted.................................... 3,618,714 0.60 0.60
Exercised.................................. (453,986) 0.04 to 0.60 0.15
Forfeited.................................. (1,303,056) 0.04 to 0.60 0.19
---------- -------------- -----
Options outstanding and exercisable, December
31, 1998................................... 5,077,938 $0.04 to 0.60 $0.43
========== ============== =====
</TABLE>
Options available for grant at December 31, 1998 were 1,638,841.
At December 31, 1998 and 1997, the weighted-average remaining contractual
life of outstanding options is 9.23 and 9.0 years, respectively. The
weighted-average grant-date fair value of options granted during the year was
approximately $0.13 and $0.03, respectively. The Plan also allows for stock
issuances for purchase or as a bonus for services rendered to the Company.
Issuances may vest immediately, or in one or more installments, at the
discretion of the Board. Shares issued under the plan have the same rights as
all other common stock, regardless of whether such shares are vested. Upon
termination, all unvested shares must be surrendered to the Company for
cancellation and any proceeds received by the Company with the respect to
issuance of the surrendered shares must be repaid to the participant. No shares
were issued under this Plan in 1998 and 1997.
10. LEASE COMMITMENTS
The Company is obligated under capital and operating lease agreements
covering certain facilities and computer equipment. Total rental expense was
approximately $620,000 and $471,000 for the year ended December 31, 1998 and
1997, respectively. Included in total rent expense is to approximately $498,000
and $381,000 of rent expense for properties leased from related parties for the
years ended December 31, 1998 and 1997, respectively. Accumulated amortization
relating to capital leases amounted to approximately $101,000 and $62,000 in
1998 and 1997, respectively.
F-39
<PAGE> 148
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments for all noncancelable capital and operating leases
with initial terms of one year or more consist of the following at December 31,
1998:
<TABLE>
<CAPTION>
OPERATING
CAPITAL LEASE LEASE
------------- ----------
<S> <C> <C>
1999........................................................ $ 16,840 $ 674,725
2000........................................................ -- 690,516
2001........................................................ -- 649,927
2002........................................................ -- 296,277
----------
Total minimum lease payments................................ 16,840 $2,311,395
==========
Less: amount representing interest.......................... 294
--------
Present value of net minimum lease payments................. 16,546
Less: current maturities.................................... (16,546)
--------
$ --
========
</TABLE>
The Company had capital lease agreements with related parties for computer
equipment that amount to $72,560 as of December 31, 1997.
11. CONCENTRATIONS OF CREDIT RISK
At December 31, 1998, the financial instruments which subject the Company
to significant concentrations of credit risk consist principally of cash
investments and trade receivables. Although the Company has a concentration of
credit risk, the Company has experienced a high degree of receivable
collectability.
Sales to individual customers constituting 10% or more of revenue for the
year ended December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Customer A.................................................. $2,263,875 $ --
Customer B.................................................. 2,022,750 1,876,700
Customer C.................................................. 1,191,539 --
Customer D.................................................. 880,963 --
Customer E.................................................. -- 3,161,806
Customer F.................................................. -- 1,596,757
</TABLE>
At December 31, 1998 and 1997, accounts receivable from Customers No. A, B,
C, D, E and F total approximately $695,980 and $1,717,000, or approximately 39%
and 91%, respectively, of gross accounts receivable.
12. EMPLOYEE RETIREMENT PLAN
The Company has established a 401(k) Retirement Plan (the "Plan") that
covers a majority of the Company's employees. Eligible employees may contribute
up to 15% of their compensation, subject to certain limitations, to the Plan.
The Company may make contributions to the Plan at the discretion of the Board.
As of December 31, 1998, no contributions had been made by the Company.
F-40
<PAGE> 149
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"), in the fiscal year ended December 31, 1998. SFAS 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions how to allocate resources and assess performance. The Company's
chief decision maker, as defined under SFAS 131, is the Chief Executive Officer.
To date, the Company has viewed its operations as principally one segment,
software sales and associated services. As a result, the financial information
disclosed herein, materially represents all of the financial information related
to the Company's principal operating segment. The Company had no revenues from
international sources in 1998 and 1997.
14. YEAR 2000 COMPLIANCE (UNAUDITED)
The Year 2000 issue is a result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions and engage in normal
business activities. Because the Company has been aware of the Year 2000 issue
since its inception, the Company believes that it has already taken most of the
necessary steps to comply with Year 2000 requirements. The Company determined
that it will be required to modify or replace portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 and thereafter. The Company presently believes that with modifications to
existing software, the Year 2000 issue will not pose significant operational
problems for its computer systems. However, if such modifications are not made,
or are not completed in a timely manner, the Year 2000 issue would only have an
immaterial impact on the operations of the Company. The historical and estimated
cost of remediation has been minimal.
The Company has initiated communications with all of its significant
suppliers to determine the extent to which the Company's systems are vulnerable
to those third parties' failure to remediate their own Year 2000 issues.
F-41
<PAGE> 150
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY INFORMATION (UNAUDITED)
The following table sets forth unaudited consolidated statement of
operations data for the eight quarters ended December 31, 1998. This data has
been derived from unaudited interim consolidated financial statements that, in
the opinion of management, have been prepared on a basis consistent with the
Company's audited consolidated financial statements and include all adjustments
(consisting only of normal recurring adjustments, except as noted otherwise)
necessary for a fair presentation of such information when read in conjunction
with the audited consolidated financial statements and notes thereto. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
1997 QUARTER ENDED 1998 QUARTER ENDED
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(IN THOUSANDS EXCEPT SHARE DATA) (IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Licenses.............................. $ -- $ 32 $ 375 $ 1,561 $ 1,070 $ 1,694 $ 345 $ 246
Professional services................. 955 1,270 1,644 1,361 959 513 905 628
Hosting............................... 124 140 259 361 395 486 -- --
------ ------- ------- ------- ------- ------- ------- -------
TOTAL REVENUES.......................... 1,079 1,442 2,278 3,283 2,424 2,693 1,250 874
COST OF REVENUES:
Licenses.............................. -- -- -- 2 3 1 1 3
Professional services................. 315 417 511 280 29 89 539 179
Hosting............................... 176 207 240 272 275 328 -- --
------ ------- ------- ------- ------- ------- ------- -------
TOTAL COST OF REVENUES.................. 491 624 751 554 307 418 540 182
------ ------- ------- ------- ------- ------- ------- -------
GROSS PROFIT............................ 588 818 1,527 2,729 2,117 2,275 710 692
Product development..................... 487 893 1,216 2,054 2,597 2,395 2,674 2,381
Sales & marketing....................... 175 789 1,214 1,368 1,773 1,973 2,271 1,982
General & administrative................ 460 648 831 1,233 1,073 820 982 1,473
------ ------- ------- ------- ------- ------- ------- -------
1,122 2,330 3,261 4,655 5,443 5,188 5,927 5,836
------ ------- ------- ------- ------- ------- ------- -------
LOSS FROM OPERATIONS.................... (534) (1,512) (1,734) (1,926) (3,326) (2,913) (5,217) (5,144)
Other income and (expense), net....... -- (17) (21) (6) 75 31 2 (88)
Gain from sale of SMARTNAP............ -- -- -- -- -- 1,816 -- --
------ ------- ------- ------- ------- ------- ------- -------
NET LOSS................................ $ (534) $(1,529) $(1,755) $(1,932) $(3,251) $(1,066) $(5,215) $(5,232)
====== ======= ======= ======= ======= ======= ======= =======
BASIC NET LOSS PER SHARE................ $(0.06) $ (0.17) $ (0.19) $ (0.20) $ (0.33) $ (0.11) $ (0.51) $ (0.49)
====== ======= ======= ======= ======= ======= ======= =======
Weighted average common shares
outstanding........................... 9,137 9,181 9,218 9,524 9,721 9,967 10,299 10,600
</TABLE>
16. SUBSEQUENT EVENTS
On February 8, 1999, the Company received notice from the lender of its
Line of Credit that it was in violation of certain financial covenants and was
therefore in default under the Credit Agreement. Pursuant to a letter agreement
between the Company and the bank dated April 9, 1999, the bank agreed that,
until April 30, 1999, it would forebear on taking action on any covenant
defaults by the Company provided that there was no material adverse change in
the financial condition of the Company prior to such time.
On February 18, 1999, the Company issued subordinated promissory notes (the
"notes") with an aggregate principal amount of $500,000 to certain stockholders.
The interest rate on the notes is 7% per annum and the maturity date was
February 19, 1999. On March 29, 1999, the Company amended the terms of the notes
to extend the maturity date to May 19, 1999 and to increase the interest rate on
the notes to 18% per annum for the period February 20, 1999 to May 19, 1999.
F-42
<PAGE> 151
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
AND SUBSIDIARY (DBA SMART TECHNOLOGIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 19, 1999, the Company filed a Restated Certificate of
Incorporation (the "Restated Certificate") with the Secretary of State of the
State of Delaware, which amended and restated the Company's certificate of
incorporation. The primary amendment effected by the Restated Certificate was to
authorize and designate 24,275,379 shares of a new Series D Preferred Stock of
the Company ("Series D Stock"). No shares of Series D stock have been issued.
On February 22, 1999, the Company issued a subordinated promissory note
with an aggregate principal amount of $1,500,000 to a potential acquirer of the
Company. The interest rate on the Note is 8% per annum and the maturity date is
February 21, 2000.
On March 4, 1999, the Board ratified a non-binding term sheet with the same
potential acquirer that holds the February 22, 1999 promissory note. The Board
approved a letter agreement providing, among other things, that the Company
would not negotiate or enter into agreements with third parties regarding
issuances of the Company's stock or business combinations involving the Company
and that the potential acquirer would loan the Company an additional $1,500,000
to fund working capital requirements. On March 5, 1999, the Company issued an
additional subordinated promissory note for the $1,500,000 at an 8% per annum
interest rate and maturing in March 4, 2000.
On April 20, 1999, the Company and the majority holder of the October 13,
1998 Promissory Notes agreed to amend the notes effective December 13, 1998 so
as to extend the maturity date of such notes to June 12, 1999 and to increase
the interest rate on the Notes to 18% per annum for the period December 13, 1998
to June 12, 1999.
F-43
<PAGE> 152
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
INTERIM FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 696,709 $ 1,120,745
Accounts receivable, net.................................. 570,029 1,644,943
Prepaid and other assets.................................. 391,807 241,588
------------ ------------
Total current assets................................ 1,658,545 3,007,276
Equipment, furniture and fixtures:
Computer equipment including $115,555 of assets under
capital leases as of March 31, 1999 and December 31,
1998.................................................... 3,596,311 3,552,026
Furniture and fixtures.................................... 725,369 719,750
Leasehold improvements.................................... 189,804 189,804
------------ ------------
4,511,484 4,461,580
Accumulated depreciation and amortization................. (2,270,030) (1,949,473)
------------ ------------
Equipment, furniture and fixtures, net...................... 2,241,454 2,512,107
Other assets................................................ 58,985 65,548
------------ ------------
Total assets........................................ $ 3,958,984 $ 5,584,931
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 669,879 $ 861,158
Payroll related accruals.................................. 665,105 759,417
Other accrued liabilities................................. 564,798 306,339
Accrued interest.......................................... 229,361 --
Deferred revenue.......................................... 3,721,327 3,766,135
Notes payable to stockholders............................. 3,500,000 3,000,000
Notes payable to third party.............................. 3,000,000 --
Line of credit............................................ 2,031,665 2,031,665
Current maturities of capital leases...................... 4,180 16,546
------------ ------------
Total current liabilities........................... 14,386,315 10,741,260
Total liabilities................................... 14,386,315 10,741,260
Redeemable Convertible Preferred Stock -- Series A: $.001
par value; 1,434,783 shares authorized, issued and
outstanding; liquidation preference of $1,650,000....... 1,629,030 1,629,030
Redeemable Convertible Preferred Stock -- Series B: $.001
par value; 4,534,653 shares authorized; 4,498,606 shares
issued and outstanding; liquidation preference of
$3,869,000.............................................. 3,853,205 3,853,205
Redeemable Convertible Preferred Stock -- Series C: $.001
par value; 3,833,333 shares authorized; 3,749,999 shares
issued and outstanding; liquidation preference of
$11,250,000............................................. 11,211,351 11,211,351
Stockholders' equity (deficit):
Common Stock, $.001 par value; 30,000,000 authorized in
1998 and 1997; 11,073,579 shares and 11,124,244 shares
issued and outstanding as of March 31, 1999 and December
31, 1998................................................ 11,074 11,124
Additional paid-in capital................................ 278,663 277,823
Accumulated deficit....................................... (27,410,654) (22,138,862)
------------ ------------
Total stockholders' equity (deficit)................ (27,120,917) (21,849,915)
------------ ------------
Total liabilities and stockholders' equity
(deficit)........................................... $ 3,958,984 $ 5,584,931
============ ============
</TABLE>
See accompanying notes.
F-44
<PAGE> 153
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
INTERIM FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenues:
License................................................... $ 74,910 $ 1,069,700
Professional services..................................... 307,299 958,913
Hosting................................................... -- 395,385
----------- -----------
Total revenues.................................... 382,209 2,423,997
Cost of Revenues:
Licenses.................................................. 1,100 2,957
Professional Services..................................... 15,807 29,350
Hosting................................................... -- 274,727
----------- -----------
Total cost of revenues............................ 16,907 307,034
----------- -----------
Gross Profit................................................ 365,302 2,116,963
Development costs........................................... 2,293,839 2,597,023
Sales and marketing......................................... 2,034,243 1,773,496
General and administrative.................................. 1,069,334 1,072,255
----------- -----------
Total operating expenses.......................... 5,397,416 5,442,774
----------- -----------
Loss from operations........................................ (5,032,114) (3,325,811)
Other income (expense), net................................. (239,682) 74,743
----------- -----------
Net loss.................................................... $(5,271,796) $(3,251,068)
=========== ===========
Basic net loss per share.................................... $ (0.49) $ (0.33)
=========== ===========
Shares used in computing basic net loss per share........... 10,828,999 9,721,259
</TABLE>
F-45
<PAGE> 154
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
INTERIM FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(5,271,794) $(3,251,068)
Depreciation and amortization............................... 320,557 382,125
Changes in assets and liabilities:
Accounts receivable....................................... 1,074,914 12,197
Prepaids and other........................................ (143,656) (72,613)
Accounts payable and accrued liabilities.................. 202,229 353,394
Deferred revenue.......................................... (44,808) (898,512)
----------- -----------
Cash used in operating activities........................... (3,862,558) (3,474,477)
INVESTING ACTIVITIES
Purchase of equipment, furniture and fixtures............... (49,904) (490,280)
----------- -----------
Cash used in investing activities........................... (49,904) (490,280)
FINANCING ACTIVITIES
Proceeds from issuance of debt.............................. 3,000,000 184,328
Payments on debt............................................ -- (225,000)
Proceeds from issuance of notes payable to stockholders..... 500,000 --
Payments on notes payable to stockholders................... -- (19,308)
Payments on capital lease obligations....................... (12,366) (56,623)
Proceeds from exercise of stock options..................... 792 2,286
----------- -----------
Cash provided by (used in) financing activities............. 3,488,426 (114,317)
----------- -----------
Decrease in cash and cash equivalents....................... (424,036) (4,079,074)
Cash and cash equivalents at beginning of period............ 1,120,745 9,918,450
----------- -----------
Cash and cash equivalents at end of period.................. $ 696,709 $ 5,839,376
=========== ===========
NON-CASH TRANSACTIONS:
Cash interest paid.......................................... $ 39,539 $ 38,232
</TABLE>
See accompanying notes.
F-46
<PAGE> 155
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
INTERIM FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. UNAUDITED INTERIM INFORMATION
The accompanying financial information as of March 31, 1999 and 1998 and
for the three month periods then ended have been prepared by the Company without
an audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. The financial statements reflect all adjustments, consisting of
normal recurring accruals which are, in the opinion of management, necessary to
fairly present such information in accordance with generally accepted accounting
principles.
2. NET LOSS PER SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128). Basic net loss per share is
computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted net loss
per share has not been presented as the effect of the assumed exercise of stock
options, warrants and contingently issued shares is antidilutive due to the
Company's net loss.
The following table presents the calculation of basic net loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net loss.................................................... $(5,271,796) $(3,251,068)
Weighted-average common shares outstanding.................. 10,828,999 9,721,259
Basic net loss per share.................................... $ (0.49) $ (0.33)
=========== ===========
</TABLE>
3. NOTES PAYABLE
The Company has a $2,031,665 note from a commercial bank bearing interest
at the financial institution's prime rate (8.0% at March 31, 1999). On February
8, 1999, the Company received notice from this lender that it was in violation
of certain financial covenants and was therefore in default under the Credit
Agreement. Pursuant to a letter agreement between the Company and the bank dated
March 5, 1999, the bank agreed that, until April 9, 1999, it would forebear on
taking action on any covenant defaults by the Company provided that there was no
material adverse change in the financial condition of the Company prior to such
time. The forbearance granted on March 5, 1999 has since been extended to May
31, 1999.
The Company has subordinated convertible promissory notes with an aggregate
principal amount of $3,000,000 bearing interest at 7% and 250,000 warrants to
purchase Series C or D Preferred Stock, maturing on January 22, 1999. If the
Company consummated the sale of shares of its Series D Preferred Stock prior to
the maturity date of the notes in a transaction or series of transactions
resulting in gross proceeds to the Company of at least $6,000,000 (a "Qualified
Financing"), then the principal of the notes would automatically convert into
shares of the Series D Preferred Stock at the lowest price per share paid for
the Series D Preferred Stock in the Qualified Financing. The warrants expire
October 13, 2003. The value of the warrants at issuance was immaterial. The
Company subsequently amended the terms of the notes, extending the maturity date
to June 12, 1999 and increasing the interest rate to 18% per annum for the
period from December 13, 1998 to June 12, 1999. The proposed Series D round of
financing was not consummated.
On February 18, 1999, the Company issued subordinated promissory notes with
an aggregate principal amount of $500,000 to certain stockholders. The interest
rate on the notes is 7% per annum and the maturity date was February 19, 1999.
On March 29, 1999, the Company amended the terms of the notes
F-47
<PAGE> 156
SALES MARKETING ADMINISTRATION RESEARCH TRACKING TECHNOLOGIES, INC.
INTERIM FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
to extend the maturity date to May 19, 1999 and to increase the interest rate on
the notes to 18% per annum for the period February 20, 1999 to May 19, 1999.
On February 22, 1999, the Company issued a subordinated promissory note
with an aggregate principal amount of $1,500,000 to i2. The interest rate on the
Note was 8% per annum and the maturity date was February 21, 2000.
On March 5, 1999, the Company issued a subordinated promissory note with an
aggregate principal amount of $1,500,000 to i2. The interest rate on the Note
was 8% per annum and the maturity date was March 4, 2000.
4. YEAR 2000 COMPLIANCE
The Year 2000 issue is a result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions and engage in normal
business activities. Because the Company has been aware of the Year 2000 issue
since its inception, the Company believes that it has already taken most of the
necessary steps to comply with Year 2000 requirements. The Company determined
that it will be required to modify or replace portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 and thereafter. The Company presently believes that with modifications to
existing software, the Year 2000 issue will not pose significant operational
problems for its computer systems. However, if such modifications are not made,
or are not completed in a timely manner, the Year 2000 issue would only have an
immaterial impact on the operations of the Company. The historical and estimated
cost of remediation has been minimal.
The Company has initiated communications with all of its significant
suppliers to determine the extent to which the Company's systems are vulnerable
to those third parties' failure to remediate their own Year 2000 issues.
5. SUBSEQUENT EVENTS
On April 28, 1999, the Company issued a subordinated promissory note with
an aggregate principal amount of $3,500,000 to an independent funding source.
The interest rate on the note is 8% per annum and the maturity date is July 27,
1999.
On April 29, 1999, the Company repaid two subordinated promissory notes
with an aggregate principal amount of $3,000,000 (two notes at $1,500,000 each)
to i2.
On May 12, 1999, the Company issued a subordinated promissory note with an
aggregate principal amount of $500,000 to an independent funding source. The
interest rate on the note is 8% per annum and the maturity date is August 12,
1999.
On May 12, 1999 the Company entered into an agreement to be acquired by i2
Technologies, Inc., subject to certain closing conditions, including SMART
stockholder approval.
F-48
<PAGE> 157
APPENDIX A
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
i2 TECHNOLOGIES, INC.
INTELLIGENT ACQUISITION CORP.
AND
SALES MARKETING ADMINISTRATION
RESEARCH TRACKING TECHNOLOGIES, INC.
DATED AS OF
MAY 12, 1999
A-1
<PAGE> 158
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
TABLE OF CONTENTS.................................................... A-2
INDEX OF SCHEDULES................................................... A-4
INDEX OF EXHIBITS.................................................... A-4
ARTICLE I THE MERGER
1.1 The Merger.................................................. A-5
1.2 Closing; Effective Time..................................... A-6
1.3 Effect of the Merger........................................ A-6
1.4 Certificate of Incorporation; Bylaws........................ A-6
1.5 Directors and Officers...................................... A-6
1.6 Taking of Necessary Action; Further Action.................. A-6
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
2.1 Total Consideration......................................... A-6
2.2 Effect on Capital Stock; Conversion of Securities........... A-7
2.3 Exchange of Certificates.................................... A-8
2.4 Stock Transfer Books........................................ A-10
2.5 Dissenters' Right........................................... A-10
ARTICLE III REPRESENTATIONS AND WARRANTIES OF TARGET
3.1 Organization, Standing and Power; Subsidiaries.............. A-11
3.2 Capital Structure........................................... A-12
3.3 Authority................................................... A-13
3.4 Financial Statements........................................ A-13
3.5 Absence of Certain Changes.................................. A-13
3.6 Absence of Undisclosed Liabilities.......................... A-14
3.7 Litigation.................................................. A-14
3.8 Governmental Authorization.................................. A-14
3.9 Title to Property........................................... A-14
3.10 Intellectual Property....................................... A-15
3.11 Environmental Matters....................................... A-17
3.12 Taxes....................................................... A-18
3.13 Employee Benefit Plans...................................... A-19
3.14 Certain Agreements Affected by the Merger................... A-20
3.15 Employee Matters............................................ A-21
3.16 Interested Party Transactions............................... A-21
3.17 Insurance................................................... A-21
3.18 Compliance With Laws........................................ A-21
3.19 Minute Books................................................ A-22
3.20 Complete Copies of Materials................................ A-22
3.21 Brokers' and Finders' Fees.................................. A-22
3.22 Stockholder Agreement; Irrevocable Proxies.................. A-22
3.23 Vote Required............................................... A-22
3.24 Stockholders Agreements..................................... A-22
3.25 Board Approval.............................................. A-22
3.26 Accounts Receivable......................................... A-22
3.27 Customers and Suppliers..................................... A-22
3.28 Material Contracts.......................................... A-23
3.29 No Breach of Material Contracts............................. A-23
3.30 Pooling of Interests and Certain Tax Matters................ A-23
3.31 Affiliates.................................................. A-24
3.32 Preliminary Pooling Letter.................................. A-24
</TABLE>
A-2
<PAGE> 159
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.33 Third Party Consents........................................ A-24
3.34 Export Control Laws......................................... A-24
3.35 Product Releases............................................ A-24
3.36 Proxy/Consent Information and S-4........................... A-24
3.37 Representations Complete.................................... A-24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ACQUIROR
4.1 Organization, Standing and Power............................ A-25
4.2 Capital Structure........................................... A-25
4.3 Authority................................................... A-25
4.4 SEC Documents; Financial Statements......................... A-26
4.5 Absence of Undisclosed Liabilities.......................... A-26
4.6 Broker's and Finders' Fees.................................. A-26
4.7 Preliminary Pooling Letter.................................. A-27
4.8 Proxy/Consent Information and S-4........................... A-27
ARTICLE V CONDUCT PRIOR TO THE EFFECTIVE TIME
5.1 Conduct of Business of Target and Acquiror.................. A-27
5.2 Conduct of Business of Target............................... A-27
5.3 No Solicitation............................................. A-29
ARTICLE VI ADDITIONAL AGREEMENTS
6.1 Consent of Stockholders..................................... A-30
6.2 Access to Information....................................... A-30
6.3 Confidentiality............................................. A-30
6.4 Public Disclosure........................................... A-30
6.5 Consents; Cooperation....................................... A-30
6.6 Target Affiliate Agreements................................. A-31
6.7 Legal Requirements.......................................... A-31
6.8 Blue Sky Laws............................................... A-31
6.9 Employee Benefit Plans...................................... A-31
6.10 Escrow Agreement............................................ A-32
6.11 Form S-8.................................................... A-32
6.12 Listing of Additional Shares................................ A-32
6.13 Expenses.................................................... A-32
6.14 Further Assurances.......................................... A-32
6.15 Form S-4.................................................... A-32
6.16 Termination of 401(k) Plan.................................. A-33
6.17 Funding by Acquiror......................................... A-33
6.18 Directors' and Officers' Indemnification.................... A-33
6.19 Non-Solicitation of Employees............................... A-34
6.20 Tax-Free Transaction; Pooling............................... A-34
6.21 Employment Agreements....................................... A-34
6.22 Shelf Registration Statement................................ A-34
ARTICLE VII CONDITIONS TO THE MERGER
7.1 Conditions to Obligations of Each Party to Effect the
Merger...................................................... A-34
7.2 Additional Conditions to Obligations of Target.............. A-35
7.3 Additional Conditions to the Obligations of Acquiror and
Merger Sub.................................................. A-36
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER
8.1 Termination................................................. A-38
8.2 Effect of Termination....................................... A-38
8.3 Amendment................................................... A-39
8.4 Extension; Waiver........................................... A-39
</TABLE>
A-3
<PAGE> 160
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE IX ESCROW AND INDEMNIFICATION
9.1 Escrow Fund................................................. A-39
9.2 Exclusive Remedy............................................ A-39
9.3 Damage Thresholds........................................... A-40
9.4 Escrow Period............................................... A-40
9.5 Claims upon Escrow Fund..................................... A-40
9.6 Objections to Claims........................................ A-40
9.7 Resolution of Conflicts; Arbitration........................ A-40
9.8 Stockholders' Agent......................................... A-41
9.9 Actions of the Stockholders' Agent.......................... A-42
9.10 Third-Party Claims.......................................... A-42
9.11 No Claims Based on Consented Changes........................ A-42
ARTICLE X GENERAL PROVISIONS
10.1 Survival of Representations, Warranties and Agreements...... A-42
10.2 Notices..................................................... A-42
10.3 Interpretation.............................................. A-43
10.4 Counterparts................................................ A-43]
10.5 Entire Agreement; Nonassignability; Parties in Interest..... A-43
10.6 Severability................................................ A-43
10.7 Remedies Cumulative......................................... A-44
10.8 Governing Law............................................... A-44
10.9 Rules of Construction....................................... A-44
</TABLE>
<TABLE>
<S> <C> <C>
EXHIBITS:
Exhibit A -- Stockholder Agreement
Exhibit B -- Certificate of Merger
Exhibit C -- Letter of Transmittal
Exhibit D -- Target Affiliate Agreements
Exhibit E -- Escrow Agreement
Exhibit F -- Legal Opinion of Brobeck, Phleger & Harrison LLP
Exhibit G -- FIRPTA Notice
Exhibit H -- Legal Opinion of Gray Cary Ware & Freidenrich LLP
</TABLE>
A-4
<PAGE> 161
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "Agreement") is
made and entered into as of May 12, 1999 by and among i2 Technologies, Inc., a
Delaware corporation ("Acquiror"), Intelligent Acquisition Corp., a Delaware
corporation ("Merger Sub"), and Sales Marketing Administration Research Tracking
Technologies, Inc., a Delaware corporation ("Target").
R E C I T A L S:
WHEREAS, the board of directors of Parent, Merger Sub and Target have
determined that it is advisable and in the best interests of their respective
companies and stockholders to enter into a business combination by means of the
merger of Merger Sub with and into Target (the "Merger") and have approved and
adopted this Agreement;
WHEREAS, pursuant to the Merger, among other things, each outstanding share
of capital stock of Target ("Target Capital Stock") shall be converted into
shares of Acquiror Common Stock (as defined in Section 4.2 below), at the
conversion rates set forth herein;
WHEREAS, the Board of Directors of Target has determined that the Merger is
in the best interests of Target and its stockholders and has recommended
approval and adoption of this Agreement by the stockholders of Target;
WHEREAS, concurrently with the execution of this Agreement and as an
inducement to Acquiror to enter into this Agreement, certain stockholders of
Target have entered into an agreement (each, a "Stockholder Agreement") to vote
the shares of Target Capital Stock owned by such person or entity in the manner
set forth in the Stockholder Agreement referenced herein and attached hereto as
Exhibit A;
WHEREAS, upon the terms and subject to the conditions of this Agreement and
in accordance with the General Corporation Law of the State of Delaware (the
"DGCL"), Parent will acquire all of the Target Capital Stock through the merger
of Merger Sub with and into Target;
WHEREAS, for financial reporting purposes, the parties intend that the
Merger be accounted for as a "pooling of interests" under United States
generally accepted accounting principles ("U.S. GAAP") and the accounting
standards of the United States Securities and Exchange Commission (the "SEC");
and
WHEREAS, for United States Federal income tax purposes, it is intended that
the Merger shall qualify as a tax-free reorganization under Section 368(a) of
the Internal Revenue Code of 1986, as amended (together with the rules and
regulations promulgated thereunder, the "Code"), and that this Agreement shall
be, and hereby is, adopted as a plan of reorganization for purposes of Section
368 of the Code.
A G R E E M E N T :
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the receipt and sufficiency of which is hereby acknowledged, and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the DGCL, at the Effective Time (as
defined in Section 1.2), Merger Sub shall be merged with and into Target. As a
result of the Merger, the separate corporate existence of Merger Sub shall cease
and Target shall continue as the surviving corporation of the Merger (the
"Surviving Corporation")
A-5
<PAGE> 162
1.2 Closing; Effective Time. The closing of the transactions contemplated
hereby (the "Closing") shall take place as promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in Article
VII hereof or at such other time as the parties hereto agree (the "Closing
Date"). The Closing shall take place at the offices of Brobeck, Phleger &
Harrison LLP, 301 Congress Avenue, Suite 1200, Austin, Texas or such other
location as the parties hereto agree. In connection with the Closing, the
parties hereto shall cause the Merger to be consummated by filing a certificate
of merger substantially in the form attached hereto as Exhibit B (the
"Certificate of Merger") with the Secretary of State of the State of Delaware,
executed in accordance with the relevant provisions of the DGCL (the date and
time of such filing, or such other date and time specified in such filing for
the effective time, being the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of Merger Sub and Target shall vest in the
Surviving Corporation, and all debts, liabilities and duties of Merger Sub and
Target shall become the debts, liabilities and duties of the Surviving
Corporation.
1.4 Certificate of Incorporation; Bylaws. At the Effective Time, the
Certificate of Incorporation of Merger Sub, as in effect immediately prior to
the Effective Time and as may be amended by the Certificate of Merger shall be
the Certificate of Incorporation of the Surviving Corporation until thereafter
amended. The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. The directors of Merger Sub immediately prior
to the Effective Time shall be the directors of the Surviving Corporation, each
to hold office in accordance with the Certificate of Incorporation and Bylaws of
the Surviving Corporation, and the officers of the Merger Sub immediately prior
to the Effective Time shall be the officers of the Surviving Corporation, in
each case until their respective successors are duly elected or appointed and
qualified.
1.6 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, the Surviving Corporation shall consider or be advised that any
deeds, bills of sale, assignments, assurances, or any other actions or things
are necessary or desirable to vest, perfect or confirm, of record or otherwise,
in the Surviving Corporation its rights, title or interest in, to or under any
of the rights, properties or assets of either Merger Sub or Target acquired or
to be acquired by the Surviving Corporation as a result of, or in connection
with, the Merger or otherwise to carry out this Agreement, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of each of Merger Sub and Target, all such
deeds, bills of sale, assignments and assurances and to take and do, in the name
and on behalf of each of Merger Sub and Target or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect or confirm
any and all right, title and interest in, to and under such rights, properties
or assets of the Surviving Corporation or otherwise to carry out this Agreement.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
2.1 Total Consideration. An aggregate maximum of 2,141,603 shares of
Acquiror Common Stock (the "Total Merger Shares") will be exchanged for the
acquisition by Acquiror of all outstanding shares of Target Capital Stock and
all unexpired and unexercised options (subject to Section 2.2(a)) and certain
warrants to acquire Target Capital Stock.
A-6
<PAGE> 163
2.2 Effect on Capital Stock; Conversion of Securities.
(a) At the Effective Time, by virtue of the Merger and without any action
on the part of Merger Sub or Target or the holders of any of Target's
securities:
(i) Each share of Series C Preferred (as defined in Section 3.2) of
Target issued and outstanding immediately prior to the Effective Time,
other than any shares to be canceled pursuant to Section 2.2(b) and any
Dissenting Shares (as defined in Section 2.5), shall be converted into the
right to receive such number of shares of Acquiror Common Stock as is equal
to the Series C Conversion Ratio (as defined below).
(ii) Each share of Target Common Stock (including shares of Target
Common Stock issued to the holders of Series A Preferred (as defined in
Section 3.2) and Series B Preferred (as defined in Section 3.2) upon
conversion of the Series A Preferred and Series B Preferred prior to the
Closing) issued and outstanding immediately prior to the Effective Time,
other than any shares to be canceled pursuant to Section 2.2(b) and any
Dissenting Shares, shall be converted into the right to receive such number
of shares of Acquiror Common Stock as is equal to the Common Stock
Conversion Ratio (as defined below).
A portion of the aggregate number of shares of Acquiror Common Stock
to be issued in each of the foregoing clauses and the number of shares of
Acquiror Common Stock to be issued to each of the holders of Target Capital
Stock, shall be subject to the escrow and indemnification provisions of
Article IX hereof.
The "Series C Conversion Ratio" shall be equal to such fraction as is
obtained by dividing the number of Series C Merger Shares by the number of
issued and outstanding shares of Series C Preferred and such fraction shall
be used for purposes of this Agreement by calculating the quotient
(expressed to six decimal places) of such fraction. The "Series C Merger
Shares" shall be equal to such number of shares of Acquiror Common Stock as
is equal to the number obtained by dividing the aggregate liquidation
preference for the shares of Series C Preferred outstanding immediately
prior to the Effective Time (at $3.00 per share) by the Series C Valuation
Price. The "Series C Valuation Price" shall be the average closing price
per share of Acquiror Common Stock as quoted on the Nasdaq Stock Market
over the thirty (30) calendar day period ending three (3) days immediately
prior to the Closing.
The "Common Stock Conversion Ratio" shall be equal to such fraction as
is obtained by dividing the Common Merger Shares by the Total Common
Shares, and such fraction shall be used for purposes of this Agreement by
calculating the quotient (expressed to six decimal places) of such
fraction. The "Common Merger Shares" shall be equal to 2,141,603 less the
Series C Merger Shares. The "Total Common Shares" shall be equal to the sum
of (i) the number of all issued and outstanding shares of Target Common
Stock as of the Effective Date and (ii) the number of whole shares of
Target Common Stock issuable upon exercise of all options and warrants to
purchase shares of Target Capital Stock that are outstanding as of the
Effective Time (other than the Bridge Loan Warrants (as defined on Schedule
3.2 to the Target Disclosure Statement) and outstanding options for
unvested option shares held by persons that have ceased to be employees of
Target prior to the Closing Date).
(iii) Adjustment to Exchange Ratio. The number of shares of Acquiror
Common Stock which each share of Target Capital Stock and other securities
shall be converted into a right to receive pursuant to this Section 2.2(a)
shall be adjusted to reflect fully the effect of any stock split, reverse
split, stock dividend (including any dividend or distribution of securities
convertible into Acquiror Common Stock or Target Capital Stock),
reorganization or recapitalization with respect to Acquiror Common Stock
occurring after the date hereof and prior to the Effective Time.
(b) Cancellation of Target Capital Stock Owned by Target. At the Effective
Time, all shares of Target Capital Stock that are owned by Target as treasury
stock shall be canceled and extinguished without any conversion thereof.
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(c) Target Stock Option Plan and Options. At the Effective Time, Target's
1996 Stock Option/ Stock Issuance Plan (the "Target Stock Option Plan"), and all
options to purchase Target Common Stock then outstanding under the Target Stock
Option Plan shall be assumed by Acquiror in accordance with Section 6.9.
(d) Warrants. At the Effective Time, all outstanding warrants exercisable
for shares of Target Capital Stock (as set forth on Schedule 3.2 of the Target
Disclosure Statement) a ("Target Warrant") shall be assumed by Acquiror and
exchangeable for a new warrant to purchase Acquiror Common Stock having the same
terms and subject to the same conditions set forth in the agreement providing
for the terms and conditions of the Target Warrant immediately prior to the
Effective Time, except that (i) each such Target Warrant to purchase Series B
Preferred will be exercisable for that number of whole shares of Acquiror Common
Stock equal to the product of the number of shares of Target Common Stock that
were issuable upon conversion of the Series B Preferred issuable upon exercise
of such Target Warrant immediately prior to the Effective Time multiplied by the
Common Stock Conversion Ratio and rounded down to the nearest whole number of
shares of Acquiror Common Stock, (ii) the per share exercise price for the
shares of Acquiror Common Stock issuable upon exercise of such assumed Target
Warrant to purchase Series B Preferred will be equal to the quotient determined
by dividing the exercise price per share of Target Common Stock at which such
Target Warrant was exercisable immediately prior to the Effective Time by the
Common Stock Conversion Ratio, rounded up to the nearest whole cent, (iii) each
such Target Warrant to purchase Series C Preferred will be exercisable for that
number of whole shares of Acquiror Common Stock equal to the product of the
number of shares of Series C Preferred issuable upon exercise of such Target
Warrant immediately prior to the Effective Time multiplied by the Series C
Conversion Ratio and rounded down to the nearest whole number of shares of
Acquiror Common Stock and (iv) the per share exercise price for the shares of
Acquiror Common Stock issuable upon exercise of such assumed Target Warrant to
purchase Series C Preferred will be equal to the quotient determined by dividing
the exercise price per share of Series C Preferred at which such Target Warrant
was exercisable immediately prior to the Effective Time by the Series C
Conversion Ratio, rounded up to the nearest whole cent. Within 20 business days
after the Effective Time, Acquiror will issue to each person who, immediately
prior to the Effective Time, was a holder of an outstanding Target Warrant a
document evidencing the assumption of such Target Warrant by Acquiror pursuant
to this Section 2.2(d).
(e) Capital Stock of Merger Sub. At the Effective Time, each share of
common stock of Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into and exchanged for one validly issued,
fully paid and nonassessable share of common stock of the Surviving Corporation.
Each stock certificate of Merger Sub evidencing ownership of any such shares
shall continue to evidence ownership of such shares of common stock of the
Surviving Corporation.
2.3 Exchange of Certificates.
(a) Exchange Agent. Promptly after the Effective Time, Acquiror shall
deposit, or shall cause to be deposited, with a bank or trust company designated
by Acquiror (the "Exchange Agent"), for the benefit of the holders of shares of
Target Capital Stock for exchange in accordance with this Article II, through
the Exchange Agent, (i) certificates evidencing such number of shares of
Acquiror Common Stock issuable pursuant to Section 2.2 in exchange for shares of
Target Capital Stock outstanding immediately prior to the Effective Time less
the number of shares of Acquiror Common Stock to be deposited in an escrow fund
(the "Escrow Fund") pursuant to the requirements of Article IX and (ii) cash in
the amount sufficient to permit payment of cash in lieu of fractional shares
pursuant to Section 2.3(h) (such certificates for shares of Acquiror Common
Stock together with any dividends or distributions with respect thereto and such
cash, being hereinafter referred to as the "Exchange Fund").
(b) Exchange Procedures. Promptly after the Effective Time, Acquiror will
instruct the Exchange Agent to mail to each holder of record of a certificate or
certificates, which immediately prior to the Effective Time evidenced
outstanding shares of Target Capital Stock (other than Dissenting Shares) (the
"Certificates"), (i) a letter of transmittal in substantially the form attached
hereto as Exhibit C (the "Letter of Transmittal") and (ii) instructions for use
in effecting the surrender of the Certificates in
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exchange for certificates evidencing shares of Acquiror Common Stock and/or cash
in lieu of fractional shares. Upon surrender of a Certificate for cancellation
to the Exchange Agent together with a Letter of Transmittal, duly completed and
validly executed in accordance with the instructions thereto, and such other
customary documents as may be required pursuant to such instructions, the holder
of such Certificate shall be entitled to receive in exchange therefor (A) a
certificate or certificates evidencing that number of whole shares of Acquiror
Capital Stock which such holder has the right to receive in respect of the
shares of Target Capital Stock (less the number of shares of Acquiror Common
Stock to be deposited in the Escrow Fund on such holders behalf pursuant to this
subsection (b) and Article IX hereof) formerly evidenced by such Certificate in
accordance with Section 2.2, (B) cash in lieu of fractional shares of Acquiror
Common Stock to which such holder is entitled pursuant to Section 2.3(h), and
(C) any dividends or other distributions to which such holder is entitled
pursuant to Section 2.3(c) (the shares of Acquiror Common Stock, dividends,
distributions and cash described in clauses (A), (B) and (C) being collectively,
the "Merger Consideration") and the Certificate so surrendered shall forthwith
be canceled. Until so surrendered, each outstanding Certificate that prior to
the Effective Time represented shares of Target Capital Stock will be deemed
from and after the Effective Time, for all corporate purposes, other than the
payment of dividends, to evidence the ownership of the number of full shares of
Acquiror Common Stock into which such shares of Target Capital Stock shall have
been so converted and the right to receive an amount in cash in lieu of the
issuance of any fractional shares in accordance with Section 2.3(h). As soon as
practicable after the Effective Time, and subject to and in accordance with the
provisions of Article IX hereof, Acquiror shall cause to be distributed to the
Escrow Agent (as defined in Article IX hereof) a certificate or certificates
representing the number of shares of Acquiror Common Stock issued in the Merger
specified in Section 9.1 which shall be registered in the name of the Escrow
Agent as nominee for the holders of Certificates representing shares of Target
Capital Stock canceled pursuant to this Section 2.3(b). Such shares shall be
beneficially owned by such holders and shall be held in escrow and shall be
available to compensate Acquiror for certain damages in the manner provided and
subject to the limitations contained in Article IX. To the extent not used for
such purposes, such shares shall be released to the holders of Certificates
representing shares of Target Capital Stock canceled pursuant to this Section
2.3(b), all as provided in Article IX hereof.
(c) Distributions with Respect to Unexchanged Shares of Acquiror Common
Stock.No dividends or other distributions declared or made with respect to
Acquiror Common Stock with a record date on or after the Effective Time shall be
paid to the holder of any unsurrendered Certificate with respect to the shares
of Acquiror Common Stock represented thereby, and no other part of the Merger
Consideration shall be paid to any such holder, until the holder of such
Certificate shall surrender such Certificate. Subject to applicable law,
following surrender of any such Certificate, there shall be paid promptly to the
holder, whole shares of Acquiror Common Stock issued in exchange therefor, the
amount of any cash payable with respect to a fractional share of Acquiror Common
Stock to which such holder is entitled pursuant to Section 2.3(h) and the amount
of dividends or other distributions with a record date on or after the Effective
Time theretofore paid with respect to such whole shares of Acquiror Common
Stock, and at the appropriate payment date, the amount of dividends or other
distributions, with a record date after the Effective Time but prior to
surrender and a payment date occurring after surrender, payable with respect to
such whole shares of Acquiror Common Stock. No interest shall be paid on the
Merger Consideration.
(d) Transfers of Ownership. If any certificate for shares of Acquiror
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Acquiror or any agent designated by it any transfer
or other taxes required by reason of the issuance of a certificate for shares of
Acquiror Common Stock in any name other than that of the registered holder of
the Certificate surrendered, or established to the reasonable satisfaction of
Acquiror or any agent designated by it that such tax has been paid or is not
payable.
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(e) No Liability. None of the Exchange Agent, Acquiror, Merger Sub or the
Surviving Corporation shall be liable to any holder of shares of Target Capital
Stock for any such shares of Acquiror Common Stock (or dividends or
distributions with respect thereto) or cash delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(f) Dissenting Shares. The provisions of this Section 2.3 shall also apply
to Dissenting Shares (defined in Section 2.5 below) that lose their status as
such, except that the obligations of Acquiror under this Section 2.3 shall
commence on the date of loss of such status and the holder of such shares shall
be entitled to receive in exchange for such shares the number of shares of
Acquiror Common Stock to which such holder is entitled pursuant to Section 2.2
hereof and the amount of cash, if any, to which such holder is entitled pursuant
to Sections 2.3(c) and 2.3(h) hereof.
(g) No Further Rights in Target Capital Stock. All shares of Acquiror
Common Stock issued and cash paid, if any, including cash paid in lieu of
fractional shares upon conversion of the shares of Target Capital Stock in
accordance with the terms hereof shall be deemed to have been issued or paid in
full satisfaction of all rights pertaining to such shares of Target Capital
Stock.
(h) No Fractional Shares. No certificates or scrip evidencing a fraction of
a share of Acquiror Common Stock shall be issued upon the surrender for exchange
of Certificates, and such fractional share interests will not entitle the owner
thereof to vote or to any rights of a stockholder of Acquiror. In lieu of any
fractional shares remaining after aggregating all such fractional shares of a
holder, each holder of Target Common Stock upon surrender of a Certificate for
exchange pursuant to this Section 2.3 shall be paid an amount in cash (without
interest), rounded to the nearest cent, equal to the product of (i) such
fraction, multiplied by (ii) the Series C Valuation Price.
(i) Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue and
pay, as appropriate, in exchange for such lost, stolen or destroyed
Certificates, upon the making of an affidavit of that fact by the holder
thereof, such shares of Acquiror Common Stock and cash in lieu of fractional
shares as may be required pursuant to Sections 2.2, 2.3(c) and 2.3(h); provided,
however, that Acquiror may, in its reasonable discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed Certificates to deliver a bond in such sum as it may reasonably direct
as indemnity against any claim that may be made against Acquiror, the Surviving
Corporation or the Exchange Agent with respect to the Certificates alleged to
have been lost, stolen or destroyed.
(j) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Target Capital Stock twelve (12) months
after the deposit thereof by Acquiror with the Exchange Agent shall be delivered
to Acquiror, upon demand, and any holders of Target Capital Stock who have not
theretofore complied with this Article II shall thereafter look only to Acquiror
for the Merger Consideration to which they are entitled.
(k) Withholding Rights. Acquiror shall be entitled to deduct and withhold
from the consideration otherwise payable pursuant to this Agreement to any
holder of shares of Target Capital Stock such amounts as Acquiror is required to
deduct and withhold with respect to the making of such payment under the Code,
or any provision of state, local or foreign tax law. To the extent that amounts
are so withheld by Acquiror, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
Target Capital Stock in respect of which such deduction and withholding was made
by Acquiror.
2.4 Stock Transfer Books. At the Effective Time, the stock transfer books
of the Target shall be closed and there shall be no further registration of
transfers of shares of Target Capital Stock thereafter on the records of the
Target. On or after the Effective Time, any Certificates presented to the
Exchange Agent or Acquiror for any reason shall be converted into the Merger
Consideration and canceled as provided by this Article II.
2.5 Dissenters' Rights. Notwithstanding any other provisions of this
Agreement to the contrary, shares of Target Capital Stock that are outstanding
immediately prior to the Effective Time and which are
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held by stockholders who shall have not voted in favor of the Merger or
consented thereto in writing and who shall have demanded properly in writing
appraisal for such shares in accordance with Section 262 of the DGCL
(collectively, the "Dissenting Shares") shall not be converted into or represent
the right to receive the Merger Consideration. Such stockholders shall be
entitled to receive payment of the appraised value of such shares of Target
Capital Stock held by them in accordance with the provisions of such Section
262, except that all Dissenting Shares held by stockholders who shall have
failed to perfect or who effectively shall have withdrawn or lost their rights
to appraisal of such shares of Target Capital Stock under such Section 262 shall
thereupon be deemed to have been converted into and to have become exchangeable,
as of the Effective Time, for the right to receive, without any interest
thereon, the Merger Consideration, upon surrender, in the manner provided in
Section 2.3, of the certificate or certificates that formerly evidenced such
shares of Target Capital Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TARGET
In this Agreement, any reference to any event, change, condition or effect
being "material" with respect to any entity or group of entities means any
material event, change, condition or effect related to the condition (financial
or otherwise), properties, assets (including intangible assets), liabilities,
business, operations or results of operations of such entity or group of
entities. In this Agreement, any reference to a "Material Adverse Effect" with
respect to any entity or group of entities means any event, change or effect
that is materially adverse to the condition (financial or otherwise),
properties, assets, liabilities, business, operations or results of operations
of such entity and its subsidiaries, taken as a whole.
In this Agreement, any reference to a party's "knowledge'means actual
knowledge of such party's officers and directors provided that such persons
shall have made due and diligent inquiry of those current employees of such
party whom such officers and directors reasonably believe would have actual
knowledge of the matters represented.
Except as disclosed in a document of even date herewith and delivered by
Target to Acquiror prior to the execution and delivery of this Agreement (the
"Target Disclosure Statement"), Target represents and warrants to each of
Acquiror and Merger Sub as follows:
3.1 Organization, Standing and Power; Subsidiaries. Target and each of its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization. Schedule 3.1 to the
Target Disclosure Statement contains a list of each direct or indirect
subsidiary of Target, the jurisdiction of organization of such subsidiary, such
subsidiary's authorized and issued capital stock or other ownership interests,
and Target's percentage ownership of such subsidiary. Target and each of its
subsidiaries has the corporate power to own its properties and to carry on its
business as now being conducted and as currently proposed to be conducted and is
duly qualified to do business and is in good standing in each jurisdiction in
which the failure to be so qualified and in good standing would have a Material
Adverse Effect on Target. Target has delivered or made available to Acquiror a
true and correct copy of the Certificate or Articles of Incorporation and Bylaws
or equivalent organizational documents, as applicable, of Target and each of its
subsidiaries, each as amended to date. Neither Target nor any of its
subsidiaries is in violation of any of the provisions of its Certificate or
Articles of Incorporation or Bylaws or equivalent organizational documents.
Target is the owner of all outstanding shares of capital stock or other
ownership interests of each of its subsidiaries and all such shares and other
ownership interests are duly authorized, validly issued, fully paid and
nonassessable. All of the outstanding shares of capital stock or other ownership
interests of each subsidiary are owned by Target free and clear of all liens,
charges, claims, security interests or encumbrances or rights of others. There
are no outstanding subscriptions, options, warrants, puts, calls, rights,
exchangeable or convertible securities or other commitments or agreements of any
character relating to the issued or unissued capital stock or other ownership
interests of any such subsidiary, or otherwise obligating Target or any such
subsidiary to issue, transfer, sell, purchase or redeem or otherwise acquire any
such securities. Target does not directly or indirectly own any equity or
similar interest in, or any interest convertible or exchangeable
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or exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
3.2 Capital Structure. The authorized capital stock of Target consists of
35,000,000 shares of Preferred Stock, par value $0.001 per share (the "Target
Preferred Stock") consisting of 1,434,783 shares of Series A Preferred Stock
(the "Series A Preferred"), 4,534,653 shares of Series B Preferred Stock (the
"Series B Preferred"), 4,083,333 shares of Series C Preferred Stock (the "Series
C Preferred"), 24,275,379 shares of Series D Preferred Stock (the "Series D
Preferred"), and 65,000,000 shares of Common Stock, par value $0.001 per share
(the "Target Common Stock"), of which there are currently issued and outstanding
1,434,783 shares of Series A Preferred that are convertible into 4,304,349
shares of Target Common Stock, 4,498,606 shares of Series B Preferred that are
convertible into 4,498,606 shares of Target Common Stock, 3,749,999 shares of
Series C Preferred that are convertible into 3,834,374 shares of Target Common
Stock, 11,178,281 shares of Common Stock and no shares of Series D Preferred
have been issued or are outstanding nor is there any obligation for Target to
issue any shares of Series D Preferred. Other than the promissory notes and
warrants listed on Schedule 3.2 to the Target Disclosure Statement, which are
convertible or exercisable for the number of shares of Target Capital Stock at
the conversion or exercise prices set forth on Schedule 3.2, there are no other
authorized or outstanding shares of the Target Capital Stock or voting
securities or commitments to issue any shares of capital stock or voting
securities of Target other than pursuant to the exercise of Target Stock Options
(as defined in Section 6.9) outstanding under the Target Stock Option Plan.
Schedule 6.9 to the Target Disclosure Statement lists the name, address and
stock and option holdings of each record holder of Target Capital Stock and
Target Stock Options. To Target's knowledge, except as set forth in Schedule 6.9
of the Target Disclosure Statement, each person listed owns all of the rights
with respect to such shares, options and the shares underlying such options and
no such holder of Target Stock Options has violated any non-compete or
confidentiality or similar agreement with Target or any of its subsidiaries. All
outstanding shares of Target Capital Stock are duly authorized, validly issued,
fully paid and non-assessable and are free of any liens, charges, claims,
security interests or encumbrances, other than liens, charges, claims, security
interests and encumbrances created by or imposed upon the holders thereof, and
are not subject to preemptive rights or rights of first refusal created by
statute, the Certificate of Incorporation or Bylaws of Target or any agreement
to which Target is a party or by which it is bound. Target has reserved
sufficient shares of Target Common Stock for issuance upon conversion of the
shares of Target Preferred Stock and for issuance to holders of options pursuant
to the Target Stock Option Plan, of which 2,114,273 shares have been issued
pursuant to option exercises of which 268,226 shares are subject to repurchase
rights of the Company and 5,423,292 shares are subject to outstanding,
unexercised Target Stock Options. Except for (i) the rights created pursuant to
this Agreement, (ii) the Target Stock Options and (iii) as described on Schedule
3.2 to the Target Disclosure Statement, there are no options, warrants, calls,
rights, commitments or agreements of any character to which Target is a party or
by which it is bound obligating Target to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of capital stock of Target or obligating Target to grant, extend,
accelerate the vesting of, change the price of, or otherwise amend or enter into
any such option, warrant, call, right, commitment or agreement. There are no
other contracts, commitments or agreements relating to voting, purchase or sale
of Target's capital stock (i) between or among Target and any of its
stockholders and (ii) to Target's knowledge, between or among any of Target's
stockholders. The terms of the Target Stock Option Plan permit the assumption or
substitution of options to purchase Acquiror Common Stock as provided in this
Agreement, without the consent or approval of the holders of such securities,
the Target stockholders, or otherwise. True and complete copies of all
agreements and instruments to which Target is a party relating to the Target
Stock Option Plan and the Target Stock Options issued thereunder as listed on
Schedule 6.9 have been made available to Acquiror, and such agreements and
instruments have not been amended, modified or supplemented, and there are no
agreements to amend, modify or supplement such agreements or instruments in any
case from the forms made available to Acquiror. To Target's knowledge, all
outstanding shares of Target Capital Stock and Target Stock Options were issued
in compliance with all applicable securities laws.
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3.3 Authority. Target has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Target, subject only to the approval of the
Merger by Target's stockholders as contemplated by Sections 3.23 and 7.1(a).
This Agreement has been duly executed and delivered by Target and constitutes
the valid and binding obligation of Target enforceable against Target in
accordance with its terms. The execution and delivery of this Agreement by
Target does not, and the consummation of the transactions contemplated hereby
will not, conflict with, or result in any violation of, or default under (with
or without notice or lapse of time, or both), or give rise to a right of
termination, cancellation or acceleration of any obligation or loss of any
benefit under (i) any provision of the Certificate of Incorporation or Bylaws of
Target, as amended, (ii) any Material Contract (as defined in Section 3.28), or
(iii) any mortgage, indenture, lease, license or other agreement or instrument,
or any permit, concession, franchise, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Target or any of its properties or
assets, except as to (iii) only where such conflicts, violations, defaults,
terminations, cancellations, accelerations or losses would not, individually or
in the aggregate, cause a Material Adverse Effect on Target. No consent,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other governmental
authority or instrumentality (each, a "Governmental Entity") is required by
Target in connection with the execution and delivery of this Agreement by Target
or the consummation by Target of the transactions contemplated hereby, except
for (i) the filing of the Certificate of Merger as provided in Section 1.2; and
(ii) such consents, approvals, orders, authorizations, registrations,
declarations and filings (x) as may be required under applicable federal and
state securities laws and the securities laws of any foreign country or (y) if
not obtained by Target, would not have a Material Adverse Effect on Target.
3.4 Financial Statements. Target has delivered to Acquiror its audited
financial statements (balance sheet, statement of operations and statement of
cash flows) on a consolidated basis for the fiscal year ended December 31, 1998,
and its unaudited financial statements (balance sheet, statement of operations
and statement of cash flows) as at, and for the two-month period ended, March
31, 1999 (collectively, the "Financial Statements"). The Financial Statements
have been prepared from the books and records of accounts of Target and its
subsidiaries and in accordance with generally accepted accounting principles
(except that the unaudited financial statements do not have notes thereto and
are subject to normal year-end audit adjustments) applied on a consistent basis
throughout the periods indicated and with each other. Except as set forth on
Schedule 3.4 to the Target Disclosure Statement, the Financial Statements fairly
present in all material respects the financial condition and operating results
of Target as of the dates, and for the periods, indicated therein, subject in
the case of the unaudited financial statements to normal year-end audit
adjustments which are not material individually or in the aggregate. Target
maintains and will continue to maintain prior to the Effective Date an adequate
system of internal controls established and administered in accordance with
generally accepted accounting principles.
3.5 Absence of Certain Changes. Since March 31, 1999 (the "Target Balance
Sheet Date"), Target and its subsidiaries have conducted their business in the
ordinary course consistent with past practice and, except as expressly
contemplated by this Agreement, there has not occurred: (i) any change, event or
condition (whether or not covered by insurance) that has resulted in, or would
reasonably be expected to result in, a Material Adverse Effect to Target; (ii)
any acquisition, sale or transfer of any material asset of Target; (iii) any
change in accounting methods or practices (including any change in depreciation
or amortization policies or rates) by Target or any revaluation by Target of any
of its assets; (iv) any issuance or sale by Target of any shares of its capital
(or any option or right to acquire same) or of any other equity securities or
any declaration, setting aside, or payment of a dividend or other distribution
with respect to the shares of Target, or any direct or indirect redemption,
purchase or other acquisition by Target of any of its shares of capital stock;
(v) any Material Contract (as defined in Section 3.28) entered into by Target or
any of its subsidiaries, other than in the ordinary course of business and made
available to Acquiror, or any material amendment of any Material Contract; (vi)
any amendment or change to the Certificate of Incorporation or Bylaws or
equivalent organizational documents of Target or any of its subsidiaries; (vii)
any increase in or modification of the compensation or benefits payable or to
become
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payable by Target to any of its directors or employees other than in the
ordinary course of business in accordance with past practice and as disclosed on
Schedule 3.5 to the Target Disclosure Statement; or (viii) any agreement by
Target to do any of the things described in the preceding clauses (i) through
(vii) (other than negotiations with Acquiror and its representatives regarding
the transactions contemplated by this Agreement).
3.6 Absence of Undisclosed Liabilities. Except as set forth in Schedule
3.6 to the Target Disclosure Statement, Target and its subsidiaries have no
material obligations or liabilities of any nature (matured or unmatured, fixed
or contingent) other than (i) those set forth or adequately provided for in the
Balance Sheet included in the Financial Statements as of March 31, 1999 (the
"Target Balance Sheet"); (ii) those incurred in the ordinary course of business
and not required to be set forth in the Target Balance Sheet under U.S. GAAP;
(iii) those incurred in the ordinary course of business since the Target Balance
Sheet Date and consistent with past practice; none of which in the case of
clauses (ii) and (iii) is material to Target either individually or in the
aggregate, or (iv) except as expressly contemplated by this Agreement.
3.7 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation (each, an "Action") pending
before any agency, court or tribunal, foreign or domestic, or, to the knowledge
of Target, threatened against Target or its subsidiaries or any of their
respective properties or any of their respective officers or directors (in their
capacities as such). There is no judgment, injunction, decree or order (each, an
"Order") against Target, or, to the knowledge of Target or any of its
subsidiaries, or any of their respective directors or officers (in their
capacities as such), that could prevent, enjoin, or materially alter or delay
any of the transactions contemplated by this Agreement, or that could be
reasonably expected to have a Material Adverse Effect on Target. All Actions and
Orders to which Target or its subsidiaries, or to the knowledge of Target, any
of their respective directors or officers (in their capacities as such) is a
party or subject (or, to the knowledge of Target, threatened to become a party
or subject), or any facts which reasonably could be expected to result in
litigation or the threat thereof, are disclosed in Schedule 3.7 to the Target
Disclosure Statement.
3.8 Governmental Authorization. Target and each of its subsidiaries has
obtained each federal, state, county, local or foreign governmental consent,
license, permit, grant, or other authorization of a Governmental Entity (i)
pursuant to which Target or any of its subsidiaries currently operates or holds
any interest in any of its properties or (ii) that is required for the operation
of Target's or any of its subsidiaries' business or the holding of any such
interest in its properties (the items referenced in clauses (i) and (ii) herein
collectively called "Target Authorizations"), and all of such Target
Authorizations are in full force and effect, except for such authorizations if
not obtained by Target would not have a Material Adverse Effect on Target.
3.9 Title to Property. Target and each of its subsidiaries has good and
marketable title to (or, with respect to leased properties and assets, to its
knowledge, valid leasehold interests in) all of its owned properties, interests
in properties and assets, real and personal, reflected in the Target Balance
Sheet or acquired after the Target Balance Sheet Date (except properties,
interests in properties and assets sold or otherwise disposed of since the
Target Balance Sheet Date in the ordinary course of business), free and clear of
all mortgages, liens, pledges, charges or encumbrances of any kind or character,
except (i) as reflected in the Financial Statements, (ii) the lien of current
taxes not yet due and payable, and (iii) such imperfections of title, liens and
easements as do not and will not materially detract from or interfere with the
use of the properties subject thereto or affected thereby, or otherwise
materially impair business operations involving such properties. All material
(individually or in the aggregate) plants, property and equipment of Target and
each of its subsidiaries that are used in the operations of its business are in
good operating condition and repair. All properties used in the operations of
Target and its subsidiaries are reflected in the Target Balance Sheet to the
extent generally accepted accounting principles require the same to be
reflected. Schedule 3.9 to the Target Disclosure Statement also identifies each
parcel of real property owned or leased by Target or any of its subsidiaries.
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3.10 Intellectual Property.
(a) Target and each of its subsidiaries owns or otherwise possesses legally
enforceable rights or licenses to all patents, trademarks, trade names, service
marks, maskworks, copyrights (including but not limited to moral rights), and
any applications for any of the foregoing, net lists, schematics, diagrams,
circuitry, technology, know-how, show-how, trade secrets, inventory, inventions,
ideas, discoveries, improvements, designs, concepts, techniques, algorithms,
formulas, methods, processes, apparatus, products, devices, systems, networks,
data, plans, libraries, works of authorship, media, pictorial works, graphic
works, audiovisual works, hardware, firmware, computer interfaces (including but
not limited to programming interfaces), computer languages, computer protocols,
computer software programs or applications (in both source code and object code
form), and tangible or intangible proprietary information or material
(collectively, the "Target Intellectual Property"), irrespective of whether
patentable that, as of the date hereof, are used, have been used or are proposed
to be used in the business of Target as currently conducted or as currently
proposed to be conducted by Target. Except as specifically described on Schedule
3.10 to the Target Disclosure Statement, Target or a subsidiary of Target is the
sole and exclusive owner of all right, title and interest in and to all Target
Intellectual Property. Target and its subsidiaries have not (i) licensed or
provided any of the Target Intellectual Property in source code form to any
party or (ii) entered into any exclusive agreements relating to any Target
Intellectual Property with any party.
(b) Schedule 3.10 to the Target Disclosure Statement lists: (i) all patents
and patent applications, and registered and unregistered trademarks, trade names
and service marks, registered copyrights, and applications for copyright
registration and registered maskworks and applications for maskwork registration
made by Target or any of its subsidiaries which are included in the Target
Intellectual Property, including the jurisdictions in which each such Target
Intellectual Property right has been issued or registered or in which any
application for such issuance and registration has been filed; (ii) all
licenses, sublicenses and other agreements as to which Target or any of its
subsidiaries is a party and pursuant to which any other person is authorized to
use any Target Intellectual Property; and (iii) all licenses, sublicenses and
other agreements as to which Target or any of its subsidiaries is a party and
pursuant to which Target or any such subsidiary is authorized to use any
intellectual property rights, including software (collectively, "Third Party
Intellectual Property Rights") which are incorporated in, is, or forms (or in
each of the foregoing instances which is currently contemplated to be
incorporated in, be or form) a part of any current version of any Target product
(or the most current version of any Target product being used by existing
customers), product under development, service or service under development, as
well as any third-party intellectual property or software used by Target or its
subsidiaries (other than commercially available software having a value or
license fee of less than $5,000) and the amount of any license fees, royalties
or other amounts paid for or payable for such use.
(c) To the knowledge of Target, there is no unauthorized use, disclosure,
infringement, violation or misappropriation of any Target Intellectual Property
or violation of any non-competition agreements by any third party, including any
employee or former employee of Target or any subsidiary and there is no
unauthorized use, disclosure, infringement, violation or misappropriation of any
Third Party Intellectual Property Rights by Target or any subsidiary, including
any employee or former employee of Target or any subsidiary. Neither Target nor
any of its subsidiaries has entered into any agreement to indemnify (or hold
harmless) any other person against any charge of misuse, unauthorized
disclosure, infringement, violation or misappropriation of any intellectual
property or violation of any non-competition agreement, other than
indemnification against infringement as contained in license agreements arising
in the ordinary course of business.
(d) Neither Target nor any of its subsidiaries is, nor will they be as a
result of the execution and delivery of this Agreement or the performance of its
obligations under this Agreement, in breach of any license, sublicense or other
agreement, to which the Target or any of its subsidiaries is a party relating to
Target Intellectual Property or Third Party Intellectual Property Rights. To the
best of Target's knowledge, no third party is in breach of any license,
sublicense or other agreement (as to which Target or any of its subsidiaries is
a party) relating to Target Intellectual Property or Third Party Intellectual
Property Rights.
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(e) All issued patents and registered trademarks, trade names, service
marks, maskworks and copyrights owned by Target or any of its subsidiaries are
valid, subsisting, in full force and effect, and not abandoned. Neither Target
or any of its subsidiaries (i) is a party to any suit, action or proceeding, nor
to Target's knowledge is any such suit, action or proceeding threatened which
involves a claim of misuse, unauthorized disclosure, infringement, violation or
misappropriation by Target or any of its subsidiaries (including Target or its
subsidiaries' employees, stockholders and affiliates) of any Third Party
Intellectual Property Right; (ii) has no knowledge that the development,
manufacturing, use, marketing, distribution, licensing or sale of any of its
products or services misuses, discloses without authorization, infringes,
violates or misappropriates any Third Party Intellectual Property Right; and
(iii) has neither brought nor currently intends to bring any suit, action or
proceeding for misuse, unauthorized disclosure, infringement, violation or
misappropriation of Target Intellectual Property or breach of any license,
sublicense or agreement involving Target Intellectual Property against any third
party.
(f) With regard to consultants and employees of Target or its subsidiaries
who contributed to conception, reduction to practice, creation or development of
Target Intellectual Property in the course of providing services to Target or
its subsidiaries, Target or its subsidiaries secured valid written assignments
from all such consultants and employees of all rights to such Target
Intellectual Property (including waivers of any moral rights) to the extent that
Target or its subsidiaries would not have already owned such rights by operation
of law. True and correct copies of all such assignments have been provided or
made available to Acquiror. Each current and former employee and consultant of
Target or its subsidiaries has executed a proprietary information and inventions
agreement substantially containing the terms set forth in the form attached as
Schedule 3.10 to the Target Disclosure Statement.
(g) "Confidential Information" shall mean Target Intellectual Property not
otherwise protected by patents, patent applications, trademarks or copyrights
that is not in the public domain as of the Closing. With respect to Confidential
Information owned by Target or any of its subsidiaries, Target or such
subsidiary has taken all reasonable steps to protect and preserve the
confidentiality of such Confidential Information, and all accessibility,
receipt, use, disclosure, delivery, dissemination, reproduction or appropriation
of such Confidential Information by or to a third party has been subject to, and
properly entitled to receive the benefit of, the terms of a written agreement
between Target or such subsidiary and such third party providing for
confidentiality obligations. With respect to Confidential Information known by
Target or any of its subsidiaries at the time of disclosure to be confidential
and not owned by Target or such subsidiary, all accessibility, receipt, use,
disclosure, delivery, dissemination, reproduction or appropriation of such
Confidential Information by Target or such subsidiary has been pursuant to the
terms of a written agreement between Target or such subsidiary and the owner of
such Confidential Information, or is otherwise lawful.
(h) Except as specifically described on Schedule 3.10 to the Target
Disclosure Statement, to the best of Target's knowledge, no third party has
claimed invalidity of, or superior rights to, any one or more parts of Target
Intellectual Property owned by Target. Except as specifically described on
Schedule 3.10 to the Target Disclosure Statement and except for possible claims
for infringement of which Target has no knowledge of any such claims, Target or
each of its subsidiaries has full legal right and authority to license,
sublicense, sell, assign, transfer and convey good, valid and marketable title
to all Target Intellectual Property owned by Target or such subsidiary, (i) free
and clear of any and all ownership rights (and ownership interests) of any one
or more third parties, (ii) free and clear of any and all liens, charges,
security interests, restrictions, encumbrances or claims, (iii) without
requiring any consent, authorization or approval of any one or more third
parties, and (iv) without violation of, breach of, default under, conflict with,
or acceleration of the performance required by any agreement, obligation or
legal restrictions (e.g., law, statute, regulation, order, award, judgment,
writ, injunction or decree), irrespective of whether with or without notice,
irrespective of whether with or without lapse of time, and irrespective of
whether judicial, administrative or arbitration.
(i) With respect to all software included in Target Intellectual Property
owned by Target or any of its subsidiaries, Target or such subsidiaries maintain
documentation and commented source code. Such
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software operates in accordance with the current product specification therefor
without material operating defects, except as specifically described on Schedule
3.10(i) to the Target Disclosure Statement.
Target has provided or made available to Acquiror either (i) a written
summary description of all problems related in any way to the functionality of
all such software or the provision of related services to customers of Target or
any of its subsidiaries experienced by Target or any subsidiary, or reported to
Target or any subsidiary by any third party, in the past twelve (12) months or
(ii) a written statement that Target and its subsidiaries have not experienced
any such problems with such software in the past twelve (12) months, nor have
any such problems been reported to Target or any subsidiary by any third party.
(j) The software included in Target Intellectual Property is "year 2000
compliant" in that (x) it is designed to be used prior to, during and after
January 1, 2000 and (y) the occurrence of the date January 1, 2000 will not, by
itself, cause such software to fail to operate in accordance with the published
specifications for such software. Specifically, the occurrence in or use by the
programs of Target or any of its subsidiaries included in Target Intellectual
Property of dates on or after January 1, 2000 (the "Millennium Dates") will not
adversely affect the performance of the software or the hardware into which it
is incorporated or with which it is to be used, with respect to date dependent
data, computations, or other functions (including without limitation,
calculating, computing and sequencing) and the software will create, store and
generate output data related to or including Millennium Dates without errors or
omissions.
3.11 Environmental Matters.
(a) The following terms shall be defined as follows:
(i) "Environmental Laws" shall mean any federal, state or local laws,
ordinances, codes, regulations, rules and orders that are intended to
assure the protection of the environment, or that regulate, call for the
remediation of, or require reporting with respect to, air, water,
groundwater, solid waste, hazardous or toxic substances, materials, wastes,
pollutants or contaminants, or which are intended to protect employees,
workers or other persons, including the public, from exposure to hazardous
or toxic substances, materials or waste.
(ii) "Hazardous Materials" shall mean any toxic or hazardous
substance, material or waste or any pollutant or contaminant, or infectious
or radioactive substance or material, including without limitation, those
substances, materials and wastes defined in or regulated under any
Environmental Laws.
(iii) "Property" shall mean all real property leased or owned by
Target or its subsidiaries either currently or in the past.
(iv) "Facilities" shall mean all buildings and improvements on the
Property of Target.
(b) Target represents and warrants as to itself and any of its subsidiaries
as follows: (i) it has not used at or released from the Facilities any methylene
chloride or asbestos, and, to its knowledge, no methylene chloride or asbestos
is present at or is used at or has been released from the Facilities by any
third party; (ii) it has disposed of all Hazardous Materials and wastes
generated or used by Target in accordance with all Environmental Laws; (iii) it
has not received notice (oral or written) of any noncompliance of the Facilities
or Target's past or present operations with Environmental Laws; (iv) no notices,
administrative actions or suits are pending or, to Target's knowledge,
threatened relating to a violation of any Environmental Laws by it; (v) during
it's occupation of the Facilities, the Property has not had a release of
Hazardous Materials which requires or will reasonably be expected to require any
investigation or remediation by it under applicable Environmental Laws; (vi) to
its knowledge, there have not been in the past any Hazardous Materials on, under
or migrating to or from the Facilities or Property, and there are not now any
Hazardous Materials on, under or migrating to or from the Property; (vii) there
are not now any Hazardous Materials on or migrating from the Facilities; (viii)
to its knowledge, there have not been in the past, and there are not now, any
underground tanks or underground improvements at,
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on or under the Property including without limitation, treatment or storage
tanks, pumps, or water, gas or oil wells; (ix) to its knowledge, there are no
polychlorinated biphenyls ("PCBs") deposited, stored, disposed of or located on
the Property or Facilities or any equipment on the Property containing PCBs at
levels in excess of 50 parts per million; (x) to its knowledge, there is no
formaldehyde on the Property or in the Facilities, nor any insulating material
containing urea formaldehyde in the Facilities; (xi) the Facilities and its use
of the Facilities and activities therein, and to its knowledge all third
parties' use and possession of the Facilities and activities therein, have at
all times materially complied with all Environmental Laws; and (xii) it has all
the permits and licenses required to be issued under applicable Environmental
Laws for the operation of its business as currently conducted and is in full
compliance with the terms and conditions of those permits.
3.12 Taxes. Target (and including any consolidated, combined or unitary
group for Tax (as defined below) purposes of which Target is or has been a
member) has timely filed all Tax Returns (as defined below) required to be filed
by law. Such returns were correct and complete as filed and reflect accurately
all liability for Taxes for the periods covered thereby. Target has paid all
Taxes due with respect to periods covered by such Tax Returns whether or not
shown thereon to be due. The Target Financial Statements (i) fully accrue all
actual and contingent liabilities for Taxes with respect to all periods through
the Target Balance Sheet Date and Target has not incurred and will not incur any
Tax liability in excess of the amount reflected on the Target Financial
Statements with respect to such periods, and (ii) properly accrue all
liabilities for Taxes payable after the Target Balance Sheet Date with respect
to all transactions and events occurring on or prior to such date, except as
specifically described on Schedule 3.12 to the Target Disclosure Statement. No
Tax liability since the Target Balance Sheet Date has been or will be incurred
by Target other than in the ordinary course of business consistent with past
practices and adequate provision has been made in Target's financial statements
for all Taxes since the Target Balance Sheet Date on at least a quarterly basis.
Target has withheld and paid when due to the applicable financial institution or
Tax Authority (as defined below) all amounts required to be withheld. No notice
of deficiency or similar document of any Tax Authority has been received or, to
Target's knowledge, is expected to be received by Target, and there are no
liabilities for Taxes with respect to issues that have been raised (and are
currently pending) by any Tax Authority that could, if determined adversely to
Target, result in any liability of Target for Taxes not provided for in the
Target Balance Sheet. There is (i) no claim for Taxes not reflected in the
Target Balance Sheet; (ii) no Tax Return of Target that has been audited by a
Tax Authority, and Target has not received notification of any audit of any Tax
Return of Target being conducted, pending or threatened by a Tax Authority and
no examination of any Tax Return is in progress; (iii) no extension or waiver of
the statutory period with respect to the assessment or reassessment of Taxes or
the filing of any Tax Return or payment of any Taxes is currently in effect; and
(iv) no agreement, contract or arrangement to which Target or any of its
subsidiaries is a party that may result in the payment of any amount that would
not be deductible by reason of Section 162(m), 280G (without regard to the
exceptions in paragraph (b)(4) or (b)(5) thereof) or 404 of the Code. Target
will not be required to include any adjustment in Taxable income for any Tax
period (or portion thereof) pursuant to any provision of applicable Tax laws as
a result of transactions, events or accounting methods employed prior to the
Closing. Target is not a party to any tax sharing or tax allocation agreement
nor does Target owe any amount under any such agreement. Schedule 3.12 to the
Target Disclosure Statement lists each power of attorney which is currently in
force granted by Target with respect to any Tax matter. No Tax Authority has
asserted, orally or in writing, that Target is subject to any jurisdiction in
which Target has not filed all required Tax Returns. For purposes of this
Agreement, the following terms have the following meanings: "Tax" (and, with
correlative meaning, "Taxes" and "Taxable") means (i) any net income,
alternative or add-on minimum tax, gross income, gross receipts, sales, use,
capital, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other tax governmental fee
or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty, addition to tax or additional amount imposed by any
Governmental Entity (a "Tax Authority") responsible for the imposition of any
such tax, (ii) any liability for the payment of any amounts of the type
described in (i) as a result of being a member of an affiliated, consolidated,
combined or unitary group for any Taxable
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period and (iii) any liability for the payment of any amounts of the type
described in (i) or (ii) as a result of any express or implied obligation to
indemnify any other person. As used herein, "Tax Return" shall mean any return,
statement, report or form, including, without limitation, estimated Tax returns
and reports, withholding Tax returns and reports and information reports and
returns required to be filed with respect to Taxes. Target is not subject to any
Tax exemptions or other Tax-sparing agreement or order of any Tax Authority or
Governmental Entity applicable to it and the consummation of the Merger shall
not have any adverse effect on the continued validity and effectiveness of any
such Tax exemptions or other Tax-sparing agreement or order.
3.13 Employee Benefit Plans.
(a) Schedule 3.13 to the Target Disclosure Statement lists, with respect to
Target and its subsidiaries, within the meaning of Section 414(b), (c), (m) or
(o) of the Code: (i) all material employee benefit plans (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"); (ii) each loan to a non-officer employee in excess of $10,000, loans
to officers and directors and any stock option, stock purchase, phantom stock,
stock appreciation right, supplemental retirement, severance, sabbatical,
medical, dental, vision care, disability, employee relocation, cafeteria benefit
(Code Section 125) or dependent care (Code Section 129), life insurance or
accident insurance plans, programs or arrangements; (iii) all bonus, pension,
profit sharing, savings, deferred compensation or incentive plans, programs or
arrangements; (iv) other fringe or employee benefit plans, programs or
arrangements that apply to senior management of Target and that do not generally
apply to all employees; and (v) any current or former employment or executive
compensation or severance agreements, written or otherwise, as to which
unsatisfied obligations of Target or its subsidiary of greater than $10,000
remain for the benefit of, or relating to, any present or former employee,
consultant or director of Target or its subsidiary (together, the "Target
Employee Plans").
(b) Target has furnished or made available to Acquiror a copy of each of
the Target Employee Plans and related plan documents (including trust documents,
insurance policies or contracts, employee booklets, summary plan descriptions
and other authorizing documents, and any material employee communications
relating thereto) and has, with respect to each Target Employee Plan which is
subject to ERISA reporting requirements, provided or made available copies of
the Form 5500 reports filed for the preceding five years. Any Target Employee
Plan intended to be qualified under Section 401(a) of the Code has either
obtained from the Internal Revenue Service a favorable determination letter as
to its qualified status under the Code, including all amendments to the Code
effected by the Tax Reform Act of 1986 and subsequent legislation, or has
applied to the Internal Revenue Service for such a determination letter prior to
the expiration of the requisite period under applicable Treasury Regulations or
Internal Revenue Service pronouncements in which to apply for such determination
letter and to make any amendments necessary to obtain a favorable determination.
Target has also furnished Acquiror with the most recent Internal Revenue Service
determination letter issued with respect to each such Target Employee Plan, and
nothing has occurred since the issuance of each such letter which would
reasonably be expected to cause the loss of the tax-qualified status of any
Target Employee Plan subject to Code Section 401(a). Target has also furnished
or made available to Acquiror with all registration statements and prospectuses
prepared in connection with each Target Employee Plan.
(c) (i) None of the Target Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person; (ii) there has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code, with respect to any Target Employee Plan, which would
reasonably be expected to have, in the aggregate, a Material Adverse Effect on
Target; (iii) each Target Employee Plan has been administered in accordance with
its terms and in compliance with the requirements prescribed by any and all
applicable statutes, rules and regulations (including ERISA and the Code),
except as would not have, in the aggregate, a Material Adverse Effect on Target,
and Target has performed all obligations required to be performed by them under,
are not in any material respect in default under or violation of, and have no
knowledge of any material default or violation by any other party to, any of the
Target Employee Plans; (iv) neither Target nor any subsidiary or ERISA Affiliate
is subject to any liability or penalty under Sections 4976 through 4980 of the
Code or Title I of ERISA with respect
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to any of the Target Employee Plans; (v) all material contributions required to
be made by Target to any Target Employee Plan have been made on or before their
due dates and a reasonable amount has been accrued for contributions to each
Target Employee Plan for the current plan year; (vi) with respect to each Target
Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA
(excluding any such event for which the thirty (30) day notice requirement has
been waived under the regulations to Section 4043 of ERISA) nor any event
described in Section 4062, 4063 or 4041 or ERISA has occurred; (vii) no Target
Employee Plan is covered by, and neither Target nor any subsidiary or ERISA
Affiliate has incurred or expects to incur any liability under Title IV of ERISA
or Section 412 of the Code; and (viii) each Target Employee Plan can be amended,
terminated or otherwise discontinued after the Effective Time in accordance with
its terms, without liability to Acquiror (other than ordinary administrative
expenses typically incurred in a termination event and contributions made though
the date of termination). With respect to each Target Employee Plan subject to
ERISA as either an employee pension benefit plan within the meaning of Section
3(2) of ERISA or an employee welfare benefit plan within the meaning of Section
3(1) of ERISA, Target has prepared in good faith and timely filed all requisite
governmental reports (which were true and correct in all material respects as of
the date filed) and has properly and timely filed and distributed or posted all
notices and reports to employees required to be filed, distributed or posted
with respect to each such Target Employee Plan. No suit, administrative
proceeding, action or other litigation has been brought, or to the knowledge of
Target is threatened, against or with respect to any Target Employee Plan,
including any audit or inquiry by the IRS or United States Department of Labor.
No payment or benefit which will or may be made by Target or its subsidiary to
any employee will be characterized as an "excess parachute payment" within the
meaning of Section 280G(b)(1) of the Code.
(d) With respect to each Target Employee Plan, Target has complied with (i)
the applicable health care continuation and notice provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the
regulations thereunder, (ii) the applicable requirements of the Family and
Medical and Leave Act of 1993 and the regulations thereunder, except to the
extent that such failure to comply would not, in the aggregate, have a Material
Adverse Effect on Target, and (iii) the applicable requirements of the Health
Insurance Portability and Accountability Act of 1996 and the regulations
thereunder, except to the extent that such failure to comply would not, in the
aggregate, have a Material Adverse Effect on Target.
(e) There has been no amendment to, written interpretation or announcement
(whether or not written) by Target relating to, or change in participation or
coverage under, any Target Employee Plan which would materially increase the
expense of maintaining such Plan above the level of expense incurred with
respect to that Plan for the most recent fiscal year included in Target's
financial statements.
(f) Pension Plans. Target does not currently maintain, sponsor, participate
in or contribute to, nor has it ever maintained, established, sponsored,
participated in, or contributed to, any pension plan (within the meaning of
Section 3(2) of ERISA) which is subject to Part 3 of Subtitle B of Title I of
ERISA, Title IV of ERISA or Section 412 of the Code.
(g) Multiemployer Plans. Target is not a party to, nor has it made any
contribution to or otherwise incurred any obligation under, any "multiemployer
plan" as defined in Section 3(37) of ERISA.
3.14 Certain Agreements Affected by the Merger. Except as specifically
described on Schedule 3.14 to the Target Disclosure Statement, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) entitle any current or former
employee, director or other service provider of Target or any of its
subsidiaries to severance benefits or any other payment (including, without
limitation, severance, unemployment compensation, golden parachute, bonus or
otherwise) becoming due; (ii) materially increase any benefits otherwise payable
by Target or any of its subsidiaries to any current or former employee, director
or other service provider; or (iii) accelerate the time of payment or vesting,
or increase the amount of compensation due any such employee, director or
service provider.
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3.15 Employee Matters. Schedule 3.15 to the Target Disclosure Statement
lists: (i) (x) all current employees of Target or any of its subsidiaries, their
respective date of hire and current rate of compensation and (y) each person who
has either accepted, has an outstanding offer, or whom Target or any of its
subsidiaries proposes to offer employment and such person's prospective or
proposed date of hire, title and rate of compensation; (ii) each employment and
consulting agreement or arrangement to which Target or any of its subsidiaries
is a party and which is not terminable "at will" or upon such notice as results
by law from the termination of employment of an employee without agreement as to
notice or severance by Target or any of its subsidiaries; and (iii) the names of
each employee of Target or any of its subsidiaries who is subject to a
non-competition, non-solicitation or similar agreement, true and correct copies
of agreements for (ii) above have been provided to Acquiror and true and correct
copies for agreements described in (iii) above have been made available to
Acquiror. Target and its subsidiary are in compliance in all material respects
with all currently applicable laws and regulations respecting employment,
discrimination in employment, terms and conditions of employment, wages, hours
and occupational safety and health and employment practices, and is not engaged
in any unfair labor practice. Target and its subsidiaries have withheld all
amounts required by law or by agreement to be withheld from the wages, salaries,
and other payments to employees; and are not liable for any arrears of wages or
any taxes or any penalty for failure to comply with any of the foregoing.
Neither Target nor any of its subsidiaries is liable for any payment to any
trust or other fund or to any governmental or administrative authority, with
respect to unemployment compensation benefits, social security or other benefits
or obligations for employees (other than routine payments to be made in the
normal course of business and consistent with past practice). There are no
pending claims against Target or any of its subsidiaries under any workers
compensation plan or policy or for long term disability. There are no disputes
pending or, to the knowledge of Target, threatened, between Target or its
subsidiary and any employees, which controversies have or would reasonably be
expected to result in an action, suit, proceeding, claim, arbitration or
investigation before any agency, court or tribunal, foreign or domestic. Neither
Target nor any of its subsidiaries is a party to any collective bargaining
agreement or other labor unions contract nor does Target know of any activities
or proceedings of any labor union to organize any such employees. Except as set
forth on Schedule 3.15 to the Target Disclosure Statement, to Target's
knowledge, no employees of Target or any of its subsidiaries are in violation of
any term of any employment contract, patent disclosure agreement, noncompetition
agreement, or any restrictive covenant to a former employer relating to the
right of any such employee to be employed by Target or any of its subsidiaries
because of the nature of the business conduced or presently proposed to be
conducted by Target or its subsidiaries or to the use of trade secrets or
proprietary information of others. No employees of Target or any of its
subsidiaries have given notice to Target or any of its subsidiaries, nor does
Target otherwise have knowledge, that any such employee intends to terminate his
or her employment with Target or any of its subsidiaries.
3.16 Interested Party Transactions. Neither Target nor any of its
subsidiaries is indebted to any director, officer, employee or agent of Target
or any of its subsidiaries (except for amounts due as normal salaries and
bonuses and in payment of ordinary fees and expenses), and no such person is
indebted to Target or any of its subsidiaries, except as set forth in Schedule
3.16 to the Target Disclosure Statement.
3.17 Insurance. Target and its subsidiaries have policies of insurance and
bonds of the type and in amounts customarily carried by persons conducting
businesses or owning assets similar to those of Target and its subsidiaries.
There is no material claim pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. All premiums due and payable under all such policies and
bonds have been paid and Target or the subsidiary, as applicable, is otherwise
in compliance with the terms of such policies and bonds. Target has no knowledge
of any threatened termination of, or material premium increase with respect to,
any of such policies.
3.18 Compliance With Laws. Target and its subsidiary have complied with,
are not in violation of, and have not received any notices of violation with
respect to, any federal, state, local or foreign statute, law or regulation with
respect to the conduct of their business, or the ownership or operation of its
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business, except for such violations or failures to comply as would not be
reasonably expected to have a Material Adverse Effect on Target.
3.19 Minute Books. The minute books of Target and its subsidiaries made
available to Acquiror contain a complete and accurate summary of all meetings of
directors and stockholders or actions by written consent since the time of
incorporation of Target and its subsidiaries.
3.20 Complete Copies of Materials. Target has delivered or made available
to Acquiror true and complete copies of each document set forth on the Target
Disclosure Statement and true and complete copies of all documents requested by
Acquiror as part of its due diligence have been provided or made available to
Acquiror by Target.
3.21 Brokers' and Finders' Fees. Target has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
3.22 Stockholder Agreement; Irrevocable Proxies. Holders of more than
78.65% of the outstanding shares of Target Capital Stock and more than 51% of
each series of the Target Preferred Stock have agreed in writing to vote for
approval of the Merger pursuant to voting agreements contained in the
Stockholder Agreement in the form attached hereto as Exhibit A (the "Stockholder
Agreements"), and pursuant to the Irrevocable Proxies in the form attached
thereto as Exhibit A (the "Irrevocable Proxies").
3.23 Vote Required. The affirmative vote of the holders of at least (i) a
majority of the outstanding shares of each series of Target Preferred Stock,
with each series voting separately as a separate class and (ii) a majority of
the outstanding shares of the Target Capital Stock, in each case outstanding on
the record date set for the special meeting of Target stockholders called for
the purpose of approving the Merger and related matters (the "Target
Stockholders' Meeting") (or any written consent in lieu thereof) is the only
vote (or consent) of the holders of any Target Capital Stock necessary to
approve this Agreement and the transactions contemplated hereby, and Section 203
of the DGCL is inapplicable to the Merger.
3.24 Stockholders Agreements. There are no agreements among Target and any
Stockholder or holder of options or warrants to acquire from Target any shares
of its capital stock providing for registration rights, rights of first refusal,
rights of co-sale, relating to the voting of Target securities or requiring
Target to obtain the consent or approval of any such Stockholders prior to
taking or failing to take any action.
3.25 Board Approval. The Board of Directors of Target has (i) approved and
declared the advisability of this Agreement and the Merger, (ii) has determined
that the Merger is in the best interests of Target and its stockholders and is
on terms that are fair to such stockholders and (iii) will recommend that the
stockholders of Target approve this Agreement and the Merger.
3.26 Accounts Receivable. Subject to any reserves set forth in the
Financial Statements, the accounts receivable shown on the Financial Statements
represent and will represent on the Effective Date bona fide claims against
debtors for sales and other charges, and are not subject to discount except for
normal cash and trade discounts in the ordinary course of business consistent
with past practices. Based on past practice, the amount carried for doubtful
accounts and allowances disclosed in the Financial Statements is sufficient to
provide for any losses which may be sustained on realization of the receivables.
3.27 Customers and Suppliers. No customer which individually accounted for
more than 5% of Target's consolidated gross revenues during the 12-month period
preceding the date hereof, and no supplier of Target during the 12-month period
preceding the date hereof has canceled or otherwise terminated, or made any
written threat to Target to cancel or otherwise terminate its relationship with
Target, or has decreased materially its services or supplies to Target in the
case of any such supplier, or its usage of the services or products of Target in
the case of such customer, and to Target's knowledge, no such supplier or
customer has threatened to cancel or otherwise terminate its relationship with
Target or to decrease materially its services or supplies to Target or its usage
of the services or products of Target, as the case
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may be. Target has not knowingly breached, so as to provide a benefit to Target
that was not intended by the parties, any agreement with, or engaged in any
fraudulent conduct with respect to, any customer or supplier of Target.
3.28 Material Contracts. Except for the contracts described in Schedule
3.28 to the Target Disclosure Statement (collectively, the "Material
Contracts"), Target and its subsidiaries are not a party to or bound by any
material contract (other than contracts that have been terminated), including
without limitation:
(a) any third-party distributor agreement, value-added reseller
agreement, OEM agreement or any agreements providing for third parties to
receive commissions upon sales by Target or its subsidiaries, advertising
or sales agent agreements, agreements providing for imbedding of
third-party software into current or prospective products of Target or its
subsidiary, agreements with third parties for the development of software
and agreements providing for the payment of royalties to third parties;
(b) any continuing contract for the purchase of materials, supplies,
equipment or services obligating, in the case of any such contract, Target
or its subsidiaries to payments of more than $10,000 annually;
(c) any trust indenture, mortgage, promissory note, loan agreement or
other contract for the borrowing of money, currency exchange, commodities
or other hedging arrangement or any leasing transaction of the type
required to be capitalized in accordance with U.S. GAAP;
(d) any contract limiting the ability of Target or any of its
subsidiaries to engage in any line of business or to compete with any other
person or entity or within any geographical area or pursuant to which
Target or any of its subsidiaries is restricted from selling, licensing or
otherwise distributing any of its technology or products to, or providing
services to, customers, potential customers or any class of customers;
(e) any confidentiality, secrecy or non-disclosure contract, other
than non-disclosure agreements entered into in the normal course of
business or in connection with efforts to obtain financing;
(f) any material contract pursuant to which Target or its subsidiary
is a lessor or lessee of (i) any real property or (ii) any machinery,
equipment, motor vehicles, office furniture, fixtures or other personal
property;
(g) any contract with any person for property or services with whom
Target or any of its subsidiaries does not deal at arm's length and as a
result, Target or such subsidiary was negatively impacted; or
(h) any material agreement of guarantee, support, indemnification,
assumption or endorsement of, or any similar commitment with respect to,
the obligations, liabilities (whether accrued, absolute, contingent or
otherwise) or indebtedness of any other person or entity.
3.29 No Breach of Material Contracts. Target or its subsidiary (as
appropriate) has substantially performed all of the obligations required to be
performed by it on or prior to the date hereof, and to Target's knowledge
neither Target nor such subsidiary is alleged to be in default, in respect of
any Material Contract. Each of the Material Contracts is in full force and
effect, unamended, and there exists no default or event of default or event,
occurrence, condition or act, with respect to Target or one of its subsidiaries
or to Target's knowledge with respect to the other contracting party, which,
with the giving of notice, the lapse of the time or the happening of any other
event or condition, would become a default or event of default under any
Material Contract. True, correct and complete copies of all Material Contracts
have been delivered or made available to Acquiror.
3.30 Pooling of Interests and Certain Tax Matters. To the best knowledge
of Target, neither Target nor any of its subsidiaries nor to its knowledge any
of their respective directors, officers, stockholders or affiliates has taken
any action which would (i) interfere with Acquiror's ability to account for the
Merger
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as a pooling of interests in accordance with U.S. GAAP and the accounting
standards of the SEC or (ii) prevent the Merger from constituting a tax-free
reorganization under Section 368 of the Code.
3.31 Affiliates. Schedule 3.31 to the Target Disclosure Statement sets
forth those persons who are, in Target's reasonable judgment, "affiliates" of
Target within the meaning of Rule 144 under the United States Securities Act of
1933, as amended (the "Securities Act").
3.32 Preliminary Pooling Letter. Target has caused Ernst & Young LLP,
Target's independent auditors, to deliver to Acquiror on or prior to the date
hereof a draft letter setting forth the preliminary conclusion of Ernst & Young
LLP that no conditions exist that would preclude Acquiror from accounting for
the Merger as a pooling of interests as those conditions relate solely to
Target.
3.33 Third Party Consents. Schedule 3.33 to the Target Disclosure Statement
lists all Material Contracts that require a consent to a change in control of
Target or pursuant to which the Merger or the transactions contemplated hereby
would constitute a breach.
3.34 Export Control Laws. Target represents and warrants that it and each
of its subsidiaries has conducted its export transactions in accordance with
applicable provisions of United States export control laws and regulations,
including but not limited to the Export Administration Act and implementing
Export Administration Regulations. Without limiting the foregoing, Target
represents and warrants that:
(a) To its knowledge, Target and its subsidiaries have obtained all
export licenses and other approvals required for exports of products,
software and technologies from the United States;
(b) Target and its subsidiary are in material compliance with the
terms of all applicable export licenses or other approvals;
(c) There are no pending or, to Target's knowledge, threatened claims
against Target or its subsidiaries with respect to such export licenses or
other approvals;
(d) To Target's knowledge, there are no actions, conditions or
circumstances pertaining to export transactions of Target or its subsidiary
that may give rise to any future claims; and
(e) No consents or approvals for the transfer of export licenses to
Acquiror are required, or such consents and approvals can be obtained
expeditiously without material cost.
3.35 Product Releases. Target has provided Acquiror a Schedule of Product
Releases, which Schedule is attached as Schedule 3.35 to the Target Disclosure
Statement. Target believes there is a reasonable basis for achieving the release
of products on the schedule described in Schedule 3.35 to the Target Disclosure
Statement and is not aware of any change in circumstances or other fact that has
occurred that causes it to believe that Target or its subsidiaries will be
unable to meet such release schedule.
3.36 Proxy/Consent Information and S-4. The information with respect to
Target, its officers, directors and affiliates in the proxy statement or consent
solicitation to be furnished to the stockholders of Target that will form part
of the S-4 (the "Proxy/Consent Information") or in the S-4 will not, in the case
of the Proxy/Consent Information, on the date the Proxy/Consent Information is
first mailed to the stockholders of Target or on the date of the stockholders'
meeting or effective date of the stockholders' consent in lieu thereof, or in
the case of the S-4, at the time it becomes effective and at the Effective Time,
as such Proxy/Consent Information or S-4 is then amended and supplemented,
contain any untrue statement of material fact, or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
3.37 Representations Complete. None of the representations or warranties
made by Target or its subsidiaries herein or in any Schedule hereto, including
the Target Disclosure Statement, or certificate furnished by Target pursuant to
this Agreement, when all such documents are read together in their entirety,
contains any untrue statement of a material fact, or omits or will omit at the
Effective Time to
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state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Except as disclosed in a document of even date herewith and delivered by
Acquiror to Target prior to the execution and delivery of this Agreement (the
"Acquiror Disclosure Statement"), Acquiror and Merger Sub represent and warrant
to Target as follows:
4.1 Organization, Standing and Power. Acquiror and Merger Sub are
corporations duly organized, validly existing and in good standing under the
laws of the State of Delaware. Each of Acquiror and Merger Sub has the corporate
power to own its properties and to carry on its business as now being conducted
and as proposed to be conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified and
in good standing would have a Material Adverse Effect on Acquiror. Acquiror has
delivered or made available to Target true and complete copies of the
Certificate of Incorporation and Bylaws of each of Acquiror and Merger Sub.
Neither Acquiror nor Merger Sub is in violation of any of the provisions of its
Certificate of Incorporation or Bylaws.
4.2 Capital Structure. The authorized capital stock of Acquiror consists of
200,000,000 shares of Common Stock, par value $0.00025 per share (the "Acquiror
Common Stock"), and 5,000,000 shares of preferred stock, par value $0.001 per
share, of which there were issued and outstanding as of May 7, 1999, 73,287,504
shares of Acquiror Common Stock and no shares of preferred stock. There are no
other authorized or outstanding shares of capital stock of Acquiror or voting
securities or commitments to issue any shares of capital stock or voting
securities of Acquiror other than pursuant to stock option or stock purchase
plans of Acquiror. The shares of Acquiror Common Stock to be issued pursuant to
the Merger (including upon exercise and payment of the applicable exercise price
of assumed Target Stock Options and assumed warrants) will be duly authorized,
validly issued, fully paid and non-assessable, free of any liens, charges,
claims, security interests or encumbrances (other than liens, charges, claims,
security interests or encumbrances created by or imposed upon the holders
thereof and other than as contemplated by this Agreement) and free of preemptive
rights or rights of first refusal created by statute, Acquiror's Certificate of
Incorporation or Bylaws or any agreement to which Acquiror is a party or by
which it is bound, other than Acquiror's right of repurchase with respect to
unvested options and restrictions under applicable state and federal securities
laws, and will be issued in compliance with applicable federal and state
securities laws. The authorized capital stock of Merger Sub consists of 1,000
shares of Common Stock, $0.01 par value, and 1,000 shares of common stock of
Merger Sub are issued and outstanding and held by Acquiror.
4.3 Authority. Each of Acquiror and Merger Sub has all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Acquiror and Merger
Sub. This Agreement has been duly executed and delivered by Acquiror and Merger
Sub and constitutes the valid and binding obligation of each of Acquiror and
Merger Sub, enforceable against each of Acquiror and Merger Sub in accordance
with its terms. The execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby will not, conflict with, or
result in any violation of, or default under (with or without notice or lapse of
time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a benefit under (i) any provision of
the Certificate of Incorporation or Bylaws of Acquiror or Merger Sub or (ii) any
material mortgage, indenture, lease, contract or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Acquiror or Merger Sub or their
properties or assets. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity, is required
by or with respect to Acquiror or Merger Sub in connection with the execution
and delivery of this Agreement by Acquiror and Merger Sub or the consummation by
Acquiror and Merger
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Sub of the transactions contemplated hereby, except for: (i) the filing of the
Certificate of Merger, as provided in Section 1.2; (ii) the filing of a Form 8-K
with the SEC within 15 days after the execution of this Agreement and 15 days
after the Effective Time and any required amendments thereto; (iii) the filing
of the S-4 in accordance with Section 6.15; (iv) any filings as may be required
under applicable federal and state securities laws and the securities laws of
any foreign country; (v) the filing with the Nasdaq Stock Market of a
Notification Form for Listing of Additional Shares with respect to the shares of
Acquiror Common Stock issuable as a result of the Merger; (vi) the filing of a
registration statement on Form S-8 with the SEC, or other applicable form
covering the shares of Acquiror Common Stock issuable pursuant to outstanding
options under the Target Stock Option Plan assumed by Acquiror; and (vi) such
other consents, authorizations, filings, approvals and registrations which, if
not obtained or made, would not have a Material Adverse Effect on Acquiror or
Merger Sub and would not prevent, materially alter or delay any of the
transactions contemplated by this Agreement.
4.4 SEC Documents; Financial Statements. Acquiror has made available to
Target each statement, report, registration statement (with the prospectus in
the form filed pursuant to Rule 424(b) of the Securities Act), definitive proxy
statement, and other filing filed with the SEC by Acquiror since January 1, 1998
(collectively, the "Acquiror SEC Documents"). In addition, Acquiror has made
available to Target all exhibits to the Acquiror SEC Documents filed prior to
the date hereof, and will promptly make available to Target all exhibits to any
additional Acquiror SEC Documents filed prior to the Effective Time. As of their
respective filing dates, the Acquiror SEC Documents were filed on a timely basis
and complied in all material respects with the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the Securities Act,
and none of the Acquiror SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
in which they were made, not misleading, except to the extent corrected by a
subsequently filed Acquiror SEC Document. The financial statements of Acquiror,
including the notes thereto, included in the Acquiror SEC Documents (the
"Acquiror Financial Statements") were complete and correct in all material
respects as of their respective dates, complied as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto as of their respective dates,
and have been prepared in accordance with U.S. GAAP applied on a basis
consistent throughout the periods indicated and consistent with each other
(except as may be indicated in the notes thereto or, in the case of unaudited
statements included in Quarterly Reports on Form 10-Qs, as permitted by Form
10-Q of the SEC). The Acquiror Financial Statements fairly present the
consolidated financial condition and operating results of Acquiror and its
subsidiaries at the dates and for the periods indicated therein (subject, in the
case of unaudited statements, to normal, recurring year-end adjustments). Since
December 31, 1998, Acquiror has not changed its accounting methods or practices
(including any change in depreciation or amortization policies or rates) in any
material respect or materially revalued any of its assets and to Acquiror's
knowledge no events have occurred which would require Acquiror to restate its
prior reported earnings.
4.5 Absence of Undisclosed Liabilities. Acquiror has no material
obligations or liabilities of any nature (matured or unmatured, fixed or
contingent) other than (i) those set forth or adequately provided for in the
Balance Sheet included in Acquiror's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (the "Acquiror Balance Sheet"), (ii) those incurred
in the ordinary course of business and not required to be set forth in the
Acquiror Balance Sheet under U.S. GAAP, (iii) those incurred in the ordinary
course of business since the Acquiror Balance Sheet Date and consistent with
past practice and (iv) those incurred in connection with or arising as a result
of the execution of this Agreement.
4.6 Broker's and Finders' Fees. Acquiror and Merger Sub have not incurred,
nor will they incur, directly or indirectly, any liability for brokerage or
finders' fees or agents' commissions or investment bankers' fees or any similar
charges in connection with this Agreement or any transaction contemplated
hereby, except for fees arising from Acquiror's engagement of BancBoston
Robertson Stephens as financial advisor.
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4.7 Preliminary Pooling Letter. Acquiror has caused Arthur Andersen & Co.,
Acquiror's independent auditors, to deliver to Acquiror on or prior to the date
hereof a draft letter setting forth the preliminary conclusion of Arthur
Andersen & Co. that, assuming Target is a corporation eligible to be a party to
a transaction seeking pooling of interests accounting treatment and that the
participation of Target in the Merger will not, in and of itself, disqualify the
Merger from qualifying for pooling interests accounting treatment, the Merger
will qualify for pooling of interests accounting treatment if consummated in
accordance with this Agreement.
4.8 Proxy/Consent Information and S-4. The information with respect to
Acquiror, its officers, directors and affiliates in the Proxy/Consent
Information or in the S-4 will not, in the case of the Proxy/ Consent
Information, on the date the Proxy/Consent Information is first mailed to the
stockholders of Target or on the date of the stockholders' meeting or effective
date of the stockholders' consent in lieu thereof, or in the case of the S-4, at
the time it becomes effective and at the Effective Time, as such Proxy/Consent
Information or S-4 is then amended and supplemented, contain any untrue
statement of material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
ARTICLE V
CONDUCT PRIOR TO THE EFFECTIVE TIME
5.1 Conduct of Business of Target and Acquiror. Subject to the limitations
set forth in Section 5.2, the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, each of Target and Acquiror agrees (except to the extent
expressly contemplated by this Agreement or as consented to in writing by the
other), to carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted. Subject to the
limitations set forth in Section 5.2, Target further agrees to pay debts when
commercially reasonable and pay Taxes when due subject (i) to good faith
disputes over such debts or Taxes and (ii) to Acquiror's consent to the filing
of material Tax Returns, if applicable, to pay or perform other obligations when
due, and to use all reasonable efforts consistent with past practice and
policies to preserve intact its present business organizations, and use its
reasonable efforts to keep available the services of its present officers and
key employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with it,
to the end that its goodwill and ongoing businesses shall be unimpaired at the
Effective Time.
5.2 Conduct of Business of Target. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
or the Effective Time, except as set forth in the Target Disclosure Statement or
as expressly contemplated by this Agreement, Target shall not do, cause or
permit any of the following, or allow, cause or permit any of its subsidiaries
to do, cause or permit any of the following, without the prior written consent
of Acquiror:
(a) Charter Documents. Cause or permit any amendments to its
Certificate of Incorporation or Bylaws or other equivalent organizational
documents;
(b) Dividends; Changes in Capital Stock. Declare or pay any dividends
on or make any other distributions (whether in cash, stock or property) in
respect of any of its capital stock, or split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock (other than any issuance of Target Common Stock upon exercise
of outstanding options therefor or upon exercise of outstanding warrants,
in each case outstanding as of the date of this Agreement except for
issuances of options contemplated hereby) or repurchase or otherwise
acquire, directly or indirectly, any shares of its capital stock except
from former employees, directors and consultants in accordance with
agreements providing for the repurchase of shares in connection with any
termination of service to it;
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(c) Stock Option Plans, Etc. Accelerate, amend or change the period of
exercisability or vesting of options or other rights granted under its
stock plans, or lower the exercise price of such options or authorize cash
payments in exchange for any options or other rights granted under any of
such plans;
(d) Material Contracts. Enter into any contract or commitment which
would be required to be set forth as a Material Contract on Schedule 3.28
to the Target Disclosure Statement if it had been entered into prior to the
date hereof, or violate, amend or otherwise modify or waive any of the
terms of any of any such material contracts, other than in the ordinary
course of business consistent with past practice or except as disclosed on
Schedule 5.2 to the Target Disclosure Statement;
(e) Issuance of Securities. Issue, deliver or sell or authorize or
propose the issuance, delivery or sale of, or purchase or propose the
purchase of, any shares of its capital stock or securities convertible
into, or subscriptions, rights, warrants or options to acquire, or other
agreements or commitments of any character obligating it to issue any such
shares or other convertible securities, other than (x) the issuance of
shares of its Common Stock pursuant to the exercise of stock options
therefor outstanding as of the date of this Agreement or pursuant to the
exercise of warrants outstanding as of the date of this Agreement, (y) upon
conversion of the Series A Preferred and Series B Preferred, and (z) the
issuance of options to purchase up to 250,000 shares of Target Common Stock
to employees hired after the date hereof or for additional issuances to
existing employees (not to exceed 30,000 shares to any individual) with
exercise prices not less than the fair market value for Target Common Stock
on the date of the option grant, and Acquiror will not unreasonably
withhold consent for option issuances in excess of these amounts.
(f) Intellectual Property. Transfer to any person or entity any rights
to Target Intellectual Property other than in the ordinary course of
business consistent with past practice;
(g) Exclusive Rights. Enter into any agreements pursuant to which any
other party is granted exclusive marketing or other exclusive rights of any
type or scope with respect to any of its products or technologies or,
except as disclosed on Schedule 5.2 to the Target Disclosure Statement,
amend any such agreement (but in any case with no extension of the scope of
such agreements);
(h) Dispositions. Sell, lease, license or otherwise dispose of or
encumber any of its properties or assets which are material, individually
or in the aggregate, to its business, taken as a whole, except for sales or
licenses of products in the ordinary course of business consistent with
past practice;
(i) Indebtedness. Incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
guarantee any debt securities of others, otherwise than in connection with
a loan from Acquiror;
(j) Leases. Enter into any operating lease in excess of $10,000;
(k) Payment of Obligations. Pay, discharge or satisfy in an amount in
excess of $5,000 in any one case or $15,000 in the aggregate, any claim,
liability or obligation (absolute, accrued, asserted or unasserted,
contingent or otherwise) arising other than in the ordinary course of
business, other than the payment, discharge or satisfaction of liabilities
reflected or reserved against in the Target Financial Statements or
disclosed on Schedule 5.2 to the Target Disclosure Statement;
(l) Capital Expenditures. Make any capital expenditures, capital
additions or capital improvements except in the ordinary course of business
and consistent with past practice;
(m) Insurance. Materially reduce the amount of any material insurance
coverage provided by existing insurance policies;
(n) Termination or Waiver. Terminate or waive any right or rights
which individually or in the aggregate would reasonably be expected to be
material in value to Target, other than in the ordinary course of business;
(o) Employee Benefit Plans; New Hires; Pay Increases. Adopt or amend
any employee benefit or stock purchase or option plan (except as expressly
contemplated by this Agreement), or hire any
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new director level or officer level employee, pay any special bonus or
special remuneration to any employee or director or increase the salaries
or wage rates of its employees other than pursuant to normal adjustments in
accordance with past practice or except as provided on Schedule 5.2 to the
Target Disclosure Statement;
(p) Severance Arrangements. Grant, pay or agree to any provisions
regarding severance or termination pay to any director, officer or other
employee except as provided on Schedule 5.2 to the Target Disclosure
Statement;
(q) Lawsuits. Commence a lawsuit or take any action in connection with
any existing or threatened lawsuit, administrative proceeding, mediation,
arbitration or other similar proceeding other than (i) for the routine
collection of bills, (ii) in such cases where it in good faith determines
that failure to commence suit or take such action would result in the
material impairment of a valuable aspect of its business, the waiver of any
right or claim, and/or the violation of any statute of limitations,
statutory or judicial deadline, provided that it consults with Acquiror
prior to the filing of such a suit or taking of such action, or (iii) for
breach of this Agreement or any other agreement between Acquiror and
Target.
(r) Acquisitions. Acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to its business;
(s) Taxes. Other than in the ordinary course of business, make or
change any material election in respect of Taxes, adopt or change any
accounting method in respect of Taxes, file any material Tax Return or any
amendment to a material Tax Return, enter into any closing agreement,
settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(t) Revaluation. Revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or
accounts receivable other than in the ordinary course of business; or
(u) Other. Take or agree in writing or otherwise to take, any of the
actions described in Sections 5.2(a) through (t) above, or any action which
would make any of its representations or warranties contained in this
Agreement untrue or incorrect or prevent it from performing or cause it not
to perform its covenants hereunder.
5.3 No Solicitation. During the period from the date of this Agreement and
continuing until the earlier of: (i) the termination of this Agreement; (ii) the
Effective Time; and (iii) the Drop-Dead Date (as defined in, and subject to the
right to extend provided in, Section 8.1(b)), Target and the officers,
directors, employees or other agents of Target will not, directly or indirectly,
solicit, initiate, engage or participate in any discussions or negotiations or
enter into any agreement or arrangement regarding the sale of a material amount
of the assets of Target or its subsidiary, or any merger, business combination,
restructuring, recapitalization, liquidation or similar transaction involving
Target or its subsidiary, or the sale or transfer of shares of Target Capital
Stock, or enter into any new strategic or marketing alliance except as disclosed
on Schedule 5.3 to the Target Disclosure Statement, or afford access to the
properties, books or records of Target to any person that has advised Target
that it may be considering making, or that has made, a proposal for such a
transaction, except to the extent required pursuant to Section 220 of the DGCL
and except with respect to Acquiror. Target will promptly notify Acquiror after
receipt of any such proposal and will keep Acquiror fully informed of the status
and details of any such proposal, request or any correspondence or
communications related thereto.
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ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Consent of Stockholders. Target shall promptly after the date hereof
take all commercially reasonable actions necessary in accordance with the DGCL
and its Certificate of Incorporation and Bylaws, as amended, to secure the
written consent of its stockholders as soon as practicable after the date of
this Agreement. Target shall use its commercially reasonable efforts to solicit
from stockholders of Target proxies or written consent in favor of the Merger
and shall take all other commercially reasonable action necessary or advisable
to facilitate the vote or consent of stockholders required to effect the Merger.
To the extent Acquiror holds proxies directing Acquiror to vote in favor of the
Merger, Acquiror shall do so in any such meeting or written consent in lieu
thereof; provided that the requirement to vote in favor of the Merger shall not
be deemed to be, or to require, a waiver by Acquiror of the satisfaction of any
of the conditions to Acquiror's obligation to consummate this Agreement and the
transactions contemplated hereby and Acquiror's obligation to consummate and
effect the Agreement and the transactions contemplated hereby shall continue to
be subject to the satisfaction of all such conditions.
6.2 Access to Information.
(a) Target shall afford Acquiror and its accountants, counsel and other
representatives, reasonable access during normal business hours during the
period prior to the Effective Time to (i) all properties, books, contracts,
commitments and records of Target and its subsidiary, and (ii) all other
information concerning the business, properties and personnel of Target and its
subsidiary as Acquiror may reasonably request. Target agrees to provide to
Acquiror and its accountants, counsel and other representatives copies of
internal financial statements promptly upon request.
(b) Subject to compliance with applicable law, from the date hereof until
the Effective Time, each of Acquiror and Target shall confer on a regular and
frequent basis with one or more representatives of the other party to report
operational matters of materiality and the general status of ongoing operations
and transitional matters relating to employees.
(c) No information or knowledge obtained in any investigation pursuant to
this Section 6.2 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
6.3 Confidentiality. The parties acknowledge that Acquiror and Target have
previously executed a Mutual Non-Disclosure Agreement dated October 30, 1998
(the "Confidentiality Agreement"), which Confidentiality Agreement shall, except
as set forth in Section 6.2 above, continue in full force and effect in
accordance with its terms and is incorporated herein by reference.
6.4 Public Disclosure. Target understands that Acquiror is a public
company, and that until the transactions contemplated by this Agreement are made
public, Target and those whom they advise of this transaction (which shall only
be on a "need to know basis" or as otherwise agreed to by Acquiror) may be privy
to material inside information; accordingly, Target understands, and Target has
apprised those of its respective officers, directors, stockholders and agents
who know of the potential transaction, of the need for confidentiality and the
potential consequences of any trading in the securities of Acquiror. Unless
otherwise permitted by this Agreement, Acquiror and Target shall consult with
each other before issuing any press release or otherwise making any public
statement or making any other public (or non-confidential) disclosure (whether
or not in response to an inquiry) regarding the terms of this Agreement and the
transactions contemplated hereby, and neither shall issue any such press release
or make any such statement or disclosure without the prior approval of the other
(which approval shall not be unreasonably withheld), except as may be required
by law or by obligations pursuant to any listing agreement with any national
securities exchange, or the Nasdaq Stock Market. To the extent practicable,
Acquiror will consult with Target prior to issuing any such release, statement
or disclosure.
6.5 Consents; Cooperation. Each of Acquiror and Target shall promptly
apply for or otherwise seek, and use its commercially reasonable efforts to
obtain, all consents and approvals required to be obtained by
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it for the consummation of the Merger, and shall use commercially reasonable
efforts to obtain all necessary consents, waivers and approvals under any of its
material contracts in connection with the Merger for the assignment thereof or
otherwise.
6.6 Target Affiliate Agreements. Target shall cause to be delivered prior
to the Effective Time to Acquiror a Target Affiliate Agreement (the "Target
Affiliate Agreements") in the form attached hereto as Exhibit D from all
affiliates of Target listed on Schedule 3.31 to the Target Disclosure Statement
and any person who to the knowledge of Target, may be deemed to have become an
affiliate of Target after the date of this Agreement and prior to the Effective
Time. The foregoing notwithstanding, Acquiror shall be entitled to place legends
as specified in the Target Affiliate Agreement on the certificates evidencing
any of the Acquiror Common Stock to be received by (i) any affiliate of Target
or (ii) any person Acquiror reasonably identifies (by written notice to Target)
as being a person who may be deemed an "affiliate" within the meaning of Rule
145 promulgated under the Securities Act, and to issue appropriate stop transfer
instructions to the transfer agent for such Acquiror Common Stock, consistent
with the terms of the Target Affiliate Agreement, regardless of whether such
person has executed a Target Affiliate Agreement and regardless of whether such
person's name and address appear on Schedule 3.31 to the Target Disclosure
Statement.
6.7 Legal Requirements. Each of Acquiror and Target will, and will cause
their respective subsidiaries (if any) to, take all reasonable actions necessary
to comply promptly with all legal requirements which may be imposed on them with
respect to the consummation of the transactions contemplated by this Agreement
and will promptly cooperate with and furnish information to any party hereto
necessary in connection with any such requirements imposed upon such other party
in connection with the consummation of the transactions contemplated by this
Agreement and will take all reasonable actions necessary to obtain (and will
cooperate with the other parties hereto in obtaining) any consent, approval,
order or authorization of, or any registration, declaration or filing with, any
Governmental Entity or other person, required to be obtained or made in
connection with the taking of any action contemplated by this Agreement.
6.8 Blue Sky Laws. Acquiror shall take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Acquiror Common Stock in connection with the
Merger, and shall be responsible for any filing fees and expenses associated
with such steps. Target shall use its best efforts to assist Acquiror as
reasonably requested by Acquiror to comply with the securities and blue sky laws
of all jurisdictions which are applicable in connection with the issuance of
Acquiror Common Stock in connection with the Merger.
6.9 Employee Benefit Plans.
(a) Assumption of Options. At the Effective Time, the Target Stock Option
Plan and each outstanding option to purchase shares of Target Common Stock under
the Target Stock Option Plan ("Target Stock Options"), whether vested or
unvested, will be assumed by Acquiror in accordance with the provisions
described below. Schedule 6.9 to the Target Disclosure Statement sets forth a
true and complete list as of the date hereof of all holders of outstanding
options under the Target Stock Option Plan including the number of shares of
Target Capital Stock subject to each such option, the exercise or vesting
schedule, the exercise price per share and the term of each such option. On the
Closing Date, Target shall deliver to Acquiror an updated Schedule 6.9 current
as of such date. Each such option so assumed by Acquiror under this Agreement
shall continue to have, and be subject to, the same terms and conditions set
forth in the Target Stock Option Plan and the applicable stock option agreement
immediately prior to the Effective Time, except that (i) such option will be
exercisable for that number of whole shares of Acquiror Common Stock equal to
the product of the number of shares of Target Common Stock that were issuable
upon exercise of such option immediately prior to the Effective Time multiplied
by the Common Stock Conversion Ratio and rounded down to the nearest whole
number of shares of Acquiror Common Stock, and (ii) the per share exercise price
for the shares of Acquiror Common Stock issuable upon exercise of such assumed
option will be equal to the quotient determined by dividing the exercise price
per share of Target Common Stock at which such option was exercisable
immediately prior
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to the Effective Time by the Common Stock Conversion Ratio, rounded up to the
nearest whole cent. In addition, for any Target Stock Options which provide for
the acceleration of vesting in the event a certain fair market value per share
is established for a share of Target Common Stock (the "FMV Target"), the FMV
Target for the assumed options shall be equal to the quotient determined by
dividing such fair market value by the Common Stock Conversion Ratio, rounded up
to the nearest whole cent. Consistent with the terms of the Target Stock Option
Plan and the documents governing the outstanding options under such plan, the
Merger in and of itself will not terminate any of the outstanding options under
the Target Stock Option Plan or accelerate the exercisability or vesting of such
options or the shares of Acquiror Common Stock which will be subject to those
options upon the Acquiror's assumption of the options in the Merger. Within 20
business days after the Effective Time, Acquiror will issue to each person who,
immediately prior to the Effective Time was a holder of an outstanding option
under the Target Stock Option Plan a document evidencing the assumption of such
option by Acquiror.
(b) Assignment of Repurchase Rights. All outstanding rights of Target which
it may hold immediately prior to the Effective Time to repurchase unvested
shares of Target Common Stock (the "Repurchase Rights") shall be assigned to
Acquiror in the Merger and shall thereafter be exercisable by Acquiror upon the
same terms and conditions in effect immediately prior to the Effective Time,
except that the shares purchasable pursuant to the Repurchase Rights, and the
exercise price per share shall be adjusted to reflect the Common Stock
Conversion Ratio.
6.10 Escrow Agreement. On or before the Effective Time, the Escrow Agent
and the Stockholders' Agent (as defined in Article IX hereto) will execute the
Escrow Agreement contemplated by Article IX in substantially the form attached
hereto as Exhibit E (the "Escrow Agreement").
6.11 Form S-8. Acquiror agrees to file, as soon as reasonably practicable
after the Closing, a registration statement on Form S-8 covering the shares of
Acquiror Common Stock issuable pursuant to outstanding options under the Target
Stock Option Plan assumed by Acquiror, to the extent such shares are permitted
by Forms S-8 to be so registered. Target shall cooperate with and assist
Acquiror in the preparation of such registration statement.
6.12 Listing of Additional Shares. Prior to the Effective Time, Acquiror
shall file with the Nasdaq Stock Market a Notification Form for Listing of
Additional Shares with respect to the shares of Acquiror Common Stock issuable
in the Merger and upon exercise of the options under the Target Stock Option
Plan and warrants assumed by Acquiror.
6.13 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred by the Acquiror or Target in connection with this Agreement
and the Merger and the transactions contemplated hereby and thereby shall be
paid by the party incurring such expense; provided, however, that any out-of-
pocket expenses incurred by Target in connection with the Merger in excess of
$275,000 including fees and expenses of legal counsel, accountants and financial
advisors shall remain an obligation of Target's stockholders and reduce the
aggregate Merger Consideration by the amount such expenses exceed $275,000. If
Acquiror, Target or the Surviving Corporation receives any invoices for amounts
in excess of said amounts and such excess was not reflected in a reduction in
the aggregate Merger Consideration, it may, with Acquiror's written approval,
pay such fees; provided, however, that such payment shall, if not promptly
reimbursed by the stockholders of Target at Acquiror's request, constitute
"Damages" recoverable from the Escrow Fund pursuant to Article IX hereof.
6.14 Further Assurances. Each of the parties to this Agreement shall use
its commercially reasonable efforts to effectuate the transactions contemplated
hereby and to fulfill and cause to be fulfilled the conditions to closing under
this Agreement. Each party hereto, at the reasonable request of another party
hereto, shall execute and deliver such other instruments and do and perform such
other acts and things as may be necessary or desirable for effecting completely
the consummation of this Agreement and the transactions contemplated hereby.
6.15 Form S-4. Acquiror and Target shall cooperate in preparing and filing
with the SEC, as soon as is reasonably practicable after the date hereof, a
registration statement on Form S-4 (the "S-4"), and
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they shall cooperate in using all commercially reasonable efforts to have the
S-4 declared effective by the SEC as promptly as practicable thereafter. The S-4
shall constitute a disclosure document for the offer and issuance of the shares
of Acquiror Common Stock to be received by the holders of Target Capital Stock
in the Merger and for the stockholders of Target to approve the Merger in
accordance with Section 6.1 hereof. Acquiror and Target shall use their
respective best efforts to cause the S-4 to comply with applicable federal and
state securities laws requirements. Each of Acquiror and Target agrees to
provide promptly to the other such information concerning its business and
financial statements and affairs as, in the reasonable judgment of the providing
party or its counsel, may be required or appropriate for inclusion in the S-4,
or in any amendments or supplements thereto, and to cause its counsel and
auditors to cooperate with the other's counsel and auditors in the preparation
of the S-4. Target will promptly advise Acquiror, and Acquiror will promptly
advise Target, in writing if at any time prior to the Effective Time either
Target or Acquiror shall obtain knowledge of any facts that might make it
necessary or appropriate to amend or supplement the S-4 in order to make
statements contained or incorporated by reference therein not misleading or to
comply with applicable law. The S-4 shall contain the recommendation of the
Board of Directors of Target that the Target stockholders approve the Merger and
this Agreement and the conclusion of the Board of Directors of Target that the
terms and conditions of the Merger are fair and reasonable to the stockholders
of Target; provided, however, that the Board of Directors of Target shall submit
this Agreement to the stockholders of Target whether or not at any time
subsequent to the date hereof such board determines that it can no longer make
such recommendation. Target shall cause Gray Cary Ware & Freidenrich LLP to
deliver an opinion supporting the disclosure of the tax matters and tax
consequences to the stockholders of Target as set forth in the S-4. In addition,
Acquiror and Target will furnish each other with all information concerning
themselves, their subsidiaries, directors, officers and stockholders and such
other matters as may be necessary or advisable (as determined by their
respective counsel) for the S-4, the proxy or information statement which forms
a part thereof, filings under the blue sky laws of any states, and any other
statement or application made by or on behalf of Acquiror or Target with respect
to such filings.
6.16 Termination of 401(k) Plan. Target shall, prior to the Closing Date,
take all actions necessary and appropriate to terminate SMART Technologies,
Inc.'s 401(k) Retirement Savings Plan (the "Target 401(k) Plan") in form and
substance reasonably satisfactory to Acquiror and no further contributions shall
be made to the Target 401(k) Plan after such termination. Each employee of
Target or SMART Technologies, Inc. who continues their employment after the
Effective Time shall be eligible to participate in Acquiror's 401(k) Retirement
Savings Plan (the "Acquiror 401(k) Plan") and shall be given credit, for the
purposes of any service requirements for participation or vesting, for his or
her period of service with Target or SMART Technologies, Inc. credited under the
Target 401(k) Plan prior to the Effective Time, subject to appropriate break in
service rules.
6.17 Funding by Acquiror. Acquiror agrees until the earlier of: (i) the
Effective Time or (ii) the termination of this Agreement, to timely loan to
Target such funds as necessary to fund continuing normal operating expenses
only, but not to refinance or repay any outstanding indebtedness for borrowed
money, except for payment under the non-default terms of the original agreements
with Imperial Bank with no prepayment of principal or interest. Target and
Acquiror agree that each funding shall be kept to the minimum amount necessary
consistent with this Section 6.17 and the obligations of each of them pursuant
to Section 6.20 hereof.
6.18 Directors' and Officers' Indemnification. The certificate of
incorporation and bylaws of the Surviving Corporation shall contain the
provisions with respect to indemnification that are set forth, as of the date of
this Agreement, in the certificate of incorporation and bylaws of Target, which
provisions shall not be amended, repealed or otherwise modified for a period of
six years from the Effective Time in any manner that would affect adversely the
rights thereunder of individuals who at or at any time prior to the Effective
Time were directors or officers of Target or in the event such provisions are
modified or amended prior to the expiration of such six-year period. Acquiror
shall indemnify and hold harmless each present and former director and officer
of Target (the "Indemnified Parties"), against any costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages or
liabilities (collectively,
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"Costs") incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of or pertaining to matters relating to their service as such an officer or
director existing or occurring at or prior to the Effective Time, whether
asserted or claimed prior to, at or after the Effective Time, to the fullest
extent that Target would have been permitted under the DGCL and its charter
documents (each as in effect on the date hereof), to indemnify such Indemnified
Parties.
6.19 Non-Solicitation of Employees. Each of Target and Acquiror agrees
that neither it nor its subsidiaries will, directly or indirectly, at any time
from the date this Agreement is terminated until the date six (6) months from
such termination, solicit for employment any employee of the other party (other
than as contemplated by this Agreement).
6.20 Tax-Free Transaction; Pooling. From and after the date of this
Agreement, each party hereto shall use all reasonable efforts to cause the
Merger to qualify, and shall not knowingly take actions or cause actions to be
taken which could reasonably be expected to prevent the Merger from (i)
qualifying, as a tax-free reorganization under Section 368(a) of the Code, or
(ii) being treated for financial accounting purposes as a "pooling of interests"
in accordance with U.S. GAAP and the accounting standards of the SEC.
6.21 Employment Agreements. Target shall use reasonable efforts to assist
Acquiror in obtaining written employment agreements with certain individuals
identified by Acquiror, in form and substance satisfactory to Acquiror.
6.22 Shelf Registration Statement. Acquiror shall prepare and file a shelf
registration statement pursuant to Rule 415 under the Securities Act providing
for the registration and resale on a continuous or delayed basis by the holders
of Target Warrants assumed by Acquiror pursuant to Section 2.2(d) of the shares
of Acquiror Common Stock issued upon exercise of such warrants, and shall use
its best efforts to cause such registration statement to become or be declared
effective as soon as practicable after the Effective Time. Acquiror shall notify
each such holder to the extent a material event with respect to Acquiror exists
which would necessitate such holder suspending the offer or sale of such shares.
Acquiror's obligations pursuant to this Section 6.22 shall cease with respect to
shares: (i) disposed of in accordance with such registration statement; (ii)
sold pursuant to Rule 144; or (iii) which may be disposed by a holder within a
single three (3) month period pursuant to Rule 144(k) under the Securities Act.
ARTICLE VII
CONDITIONS TO THE MERGER
7.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to consummate and effect
this Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived only in writing signed by all the parties
hereto:
(a) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted (including by written consent) by the holders of
at least 90% of the outstanding shares of Target Capital Stock (or such
other percentage necessary for pooling of interests accounting treatment),
and holders of no more than 10% of the outstanding shares of Target Capital
Stock (or such other percentage necessary for pooling of interests
accounting treatment) shall have voted against the Merger or demanded
appraisal rights under the DGCL (it being understood that the period in
which stockholders may demand appraisal rights may not have expired prior
to the Closing Date) and the holders of Series A Preferred and Series B
Preferred shall have voted to convert such shares of preferred stock into
Target Common Stock.
(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any
court of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect,
nor
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shall any proceeding brought by an administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign,
seeking any of the foregoing be pending; nor shall there be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger, which makes the consummation of the
Merger illegal under applicable law. In the event an injunction or other
order shall have been issued, each party agrees to use its commercially
reasonable efforts to have such injunction or other order lifted.
(c) Governmental Approval. Acquiror and Target and their respective
subsidiaries shall have timely obtained from each Governmental Entity all
approvals, waivers and consents (including the satisfaction of any
applicable waiting period), if any, necessary for consummation of or in
connection with the Merger and the several transactions contemplated
hereby, including such approvals, waivers, consents and waiting periods as
may be required under the Securities Act, and under state Blue Sky laws.
(d) Escrow Agreement. Acquiror, Target, the Escrow Agent and the
Stockholder's Agent (as defined in Article IX hereto) shall have entered
into an Escrow Agreement substantially in the form attached hereto as
Exhibit E.
(e) S-4. The S-4 shall have been declared effective by the SEC under
the Securities Act and no stop order suspending the effectiveness of the
S-4 shall have been issued by the SEC and no proceeding for that purpose
shall have been initiated by the SEC and not concluded or withdrawn.
7.2 Additional Conditions to Obligations of Target. The obligations of
Target to consummate and effect this Agreement and the transactions contemplated
hereby shall be subject to the satisfaction at or prior to the Closing Date of
each of the following conditions, any of which may be waived only in writing
signed by Target:
(a) Representations, Warranties and Covenants. Except as disclosed in
the Acquiror Disclosure Statement dated the date of this Agreement, (i) the
representations and warranties of Acquiror in this Agreement shall be true
and correct in all material respects (except for such representations and
warranties that are qualified by their terms by a reference to materiality
which representations and warranties as so qualified shall be true in all
respects) on and as of the Closing Date as though such representations and
warranties were made on and as of such date and (ii) Acquiror shall have
performed and complied in all material respects with all covenants,
obligations and conditions of this Agreement required to be performed and
complied with by them as of the Closing Date.
(b) Certificate of Acquiror. Target shall have been provided with a
certificate executed on behalf of Acquiror by its President and its Chief
Financial Officer to the effect that, as of the Closing Date:
(i) except as disclosed in the Acquiror Disclosure Schedule dated
the date of this Agreement, all representations and warranties made by
Acquiror under this Agreement are true and complete in all material
respects (except for such representations and warranties that are
qualified by their terms by reference to materiality which
representations and warranties as so qualified are true in all
respects); and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Acquiror on or before such date have been so performed
in all material respects.
(c) Nasdaq Additional Shares Application. The Notification Form for
Listing of Additional Shares referred to in Section 6.12 above shall have
been filed by Acquiror.
(d) Legal Opinion. Target shall have received the legal opinions from
Brobeck, Phleger & Harrison LLP, counsel to Acquiror, in substantially the
form attached hereto as Exhibit F. Acquiror shall have received a written
opinion of Brobeck, Phleger & Harrison LLP to the effect that the Merger
will constitute a reorganization within the meaning Section 368(a) of the
Code. In connection with providing such opinion, counsel shall be entitled
to rely upon certificates of Acquiror, Target and other applicable persons
in such form and substance as is customary in giving such opinions.
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(e) No Material Adverse Changes. There shall not have occurred any
event which has had a Material Adverse Effect with respect to Acquiror,
after the date hereof; provided, however, that for the purposes of this
Section 7.2(e) a Material Adverse Effect shall not be deemed to include
fluctuations in the market price of Acquiror's common stock (unless based
on events which in and of themselves have had a Material Adverse Effect
with respect to Acquiror), changes in general economic or market conditions
or developments which are not unique to Acquiror but also affect other
entities which participate or are engaged in the lines of business in which
Acquiror participates or is engaged.
7.3 Additional Conditions to the Obligations of Acquiror and Merger
Sub. The obligations of Acquiror and Merger Sub to consummate and effect this
Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, by Acquiror:
(a) Representations, Warranties and Covenants. Except as disclosed in
the Target Disclosure Statement dated the date of this Agreement (i) the
representations and warranties of Target in this Agreement shall be true
and correct in all material respects (except for such representations and
warranties that are (x) qualified by their terms by a reference to
materiality which representations and warranties as so qualified shall be
true in all respects or (y) not then true and correct solely as a result of
the taking of actions permitted by this Agreement, which representations
and warranties shall be true and correct but for the taking of permitted
actions) on and as of the Closing Date as though such representations and
warranties were made on and as of such time and (ii) Target shall have
performed and complied in all material respects with all covenants,
obligations and conditions of this Agreement required to be performed and
complied with by it as of the Closing Date.
(b) Certificate of Target. Acquiror shall have been provided with a
certificate executed on behalf of Target by its President and its current
principal accounting officer to the effect that, as of the Closing Date:
(i) except as set forth in the Target Disclosure Statement dated
the date of this Agreement, all representations and warranties made by
Target under this Agreement are true and complete in all material
respects (except for such representations and warranties that are (x)
qualified by their terms by reference to materiality which
representations and warranties as so qualified are true in all respects
or (y) not then true and correct solely as a result of the taking of
actions permitted by this Agreement, which representations and
warranties shall be true and correct but for the taking of permitted
actions); and
(ii) all covenants, obligations and conditions of this Agreement to
be performed by Target on or before such date have been so performed in
all material respects.
(c) Third Party Consents. Acquiror shall have been furnished with
evidence satisfactory to it of the consent or approval of those persons
whose consent or approval shall be required in connection with the Merger
as set forth on Schedule 3.33 to the Target Disclosure Statement.
(d) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other Governmental Entity
limiting or restricting Acquiror's conduct or operation of the business of
Target following the Merger shall be in effect, nor shall any proceeding
brought by an administrative agency or commission or other Governmental
Entity, domestic or foreign, seeking the foregoing be pending.
(e) No Material Adverse Changes. After the date hereof, there shall
not have occurred any event which has had a Material Adverse Effect with
respect to Target.
(f) FIRPTA Certificate. Target shall, prior to the Closing Date,
provide Acquiror with a properly executed FIRPTA Notification Letter,
substantially in the form of Exhibit G attached hereto, which states that
shares of capital stock of Target do not constitute "United States real
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property interests" under Section 897(c) of the Code, for purposes of
satisfying Acquiror's obligations under Treasury Regulation Section
1.1445-2(c)(3). In addition, simultaneously with delivery of such
Notification Letter, Target shall have provided to Acquiror, as agent for
Target, a form of notice to the Internal Revenue Service in accordance with
the requirements of Treasury Regulation Section 1.897-2(h)(2) and
substantially in the form of Exhibit G attached hereto along with written
authorization for Acquiror to deliver such notice form to the Internal
Revenue Service on behalf of Target upon the Closing of the Merger.
(g) Resignation of Directors and Officers. The directors and officers
of Target in office immediately prior to the Effective Time, other than
Michael J. Feinstein and Michelle Schwalbach, shall have resigned as
directors and officers, as applicable, of Target effective as of the
Effective Time, unless otherwise provided in separate employment agreements
between such individual and Acquiror.
(h) Certificates of Good Standing. Target shall, prior to the Closing
Date, provide Acquiror a certificate from the Secretary of State of
Delaware, and from each other jurisdiction in which Target or any
subsidiary is qualified to do business, as to Target's or any subsidiary's
good standing and payment of all applicable taxes.
(i) Termination of 401(k) Plan. Target shall have terminated the
Target 401(k) Plan in accordance with Section 6.16.
(j) Legal Opinions. Acquiror shall have received a legal opinion from
Gray Cary Ware & Freidenrich LLP as counsel to Target, in substantially the
form attached hereto as Exhibit H.
(k) Letters of Accountants. Acquiror shall have received a letter of
Arthur Andersen & Co., independent auditors, to the effect that the Merger
qualifies for pooling of interests accounting treatment if consummated in
accordance with this Agreement. Target shall have received a letter of
Ernst & Young, independent auditors, to the effect that no conditions exist
that would preclude Acquiror from accounting for the Merger as a pooling of
interests as those conditions relate solely to Target.
(l) Termination of Stockholder Agreements. All provisions of all
agreements among Target and any of its securityholders or optionholders, or
among any Target securityholders or optionholders, providing for
registration rights, rights of first refusal, rights of co-sale, relating
to the voting of Target securities, requiring Target to obtain the consent
or approval of any such securityholders or optionholders prior to taking or
failing to take any action (other than the Stockholder Agreements executed
pursuant to this Agreement), shall have been terminated effective
immediately prior to the Effective Time, except to the extent that such
provisions would otherwise cease to apply to Target and Acquiror securities
upon Closing.
(m) Fairness Opinion. BancBoston Robertson Stephens shall have
delivered to Acquiror their written opinion, which shall not have been
withdrawn, that the Merger is fair to the Acquiror's stockholders from a
financial point of view.
(n) Affiliates. Each person who is an "affiliate" of Target shall have
delivered to Acquiror an Affiliate Agreement in accordance with Section 6.6
hereof.
(o) Tax Opinion. Target shall have received a written opinion of Gray
Cary Ware & Freidenrich LLP to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code. In
connection with providing such opinion, counsel shall be entitled to rely
upon certificates of Acquiror, Target and other applicable persons in such
form and substance as is customary in giving such opinions.
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ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. At any time prior to the Effective Time, whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of Target, this Agreement may be terminated:
(a) by mutual consent duly authorized by the Board of Directors of
Acquiror, Merger Sub and Target;
(b) by either Acquiror or Target, if the Closing shall not have
occurred on or before July 30, 1999 (the "Drop-Dead Date") (provided, that
a later date may be agreed upon in writing by the parties hereto, and
provided further that the right to terminate this Agreement under this
Section 8.1(b) shall not be available to a party in the event an action or
failure to act on the part of the other party or its stockholders has been
the cause or resulted in the failure of the Merger to occur on or before
such date and such action or failure to act constitutes a breach of this
Agreement, and in such event the non-breaching party shall have the right
to extend the Drop-Dead Date to August 31, 1999);
(c) by Acquiror, if: (i) Target shall breach in any material respect
any representation, warranty, obligation or agreement hereunder (unless any
such representation, warranty, obligation or agreement is qualified by
materiality, then such breach shall be deemed to have occurred if Target
breached such provision in any respect) and such breach shall not have been
cured within five (5) business days of receipt by Target of written notice
of such breach (provided that the right to terminate this Agreement by
Acquiror under this Section 8.1(c) shall not be available to Acquiror where
Acquiror is at that time in breach in any material respect (unless any such
representation, warranty, obligation or agreement is qualified by
materiality, then such breach shall be deemed to have occurred if Acquiror
breached such provision in any respect) of this Agreement); or (ii) the
Board of Directors of Target shall have withdrawn or modified its
recommendation of this Agreement or the Merger in a manner adverse to
Acquiror or shall have resolved to do any of the foregoing;
(d) by Target, if Acquiror shall breach in any material respect any
representation, warranty, obligation or agreement hereunder (unless any
such representation, warranty, obligation or warranty is qualified by
materiality, then such breach shall be deemed to have occurred if Acquiror
breached such provision in any respect) and such breach shall not have been
cured within five (5) business days following receipt by Acquiror of
written notice of such breach (provided that the right to terminate this
Agreement by Target under this Section 8.1(d) shall not be available to
Target where Target is at that time in breach in any material respect
(unless any such representation, warranty, obligation or agreement is
qualified by materiality, then such breach shall be deemed to have occurred
if Target breached such provision in any respect) of this Agreement);
(e) by Acquiror if (i) any permanent injunction or other order of a
court or other competent authority preventing the consummation of the
Merger shall have become final and nonappealable or (ii) if any required
approval of the stockholders of Target shall not have been obtained by
reason of the failure to obtain the required vote or consent upon a vote or
consent held at a duly held meeting of stockholders or at any adjournment
thereof or an effective action by written consent in lieu thereof; or
(f) by Target if any permanent injunction or other order of a court or
other competent authority preventing the consummation of the Merger shall
have become final and nonappealable.
8.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Acquiror or Target or their
respective officers, directors, stockholders or affiliates, except to the extent
such termination results from the intentional breach by a party hereto of any of
its representations, warranties, covenants or other agreements set forth in this
Agreement and provided that the provisions of Section 6.3
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(Confidentiality) and this Section 8.2 shall remain in full force and effect and
survive any termination of this Agreement.
8.3 Amendment. The boards of directors of the parties hereto may cause
this Agreement to be amended at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto; provided that an
amendment made subsequent to adoption of the Agreement by the stockholders of
Target shall not (i) alter or change the amount or kind of consideration to be
received on conversion of the Target Capital Stock, (ii) alter or change any
term of the Certificate of Incorporation of the Surviving Corporation to be
effected by the Merger, or (iii) alter or change any of the terms and conditions
of this Agreement if such alteration or change would materially adversely effect
the holders of Target Capital Stock.
8.4 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
ARTICLE IX
ESCROW AND INDEMNIFICATION
9.1 Escrow Fund.
(a) As soon as practicable after the Effective Time, ten percent (10%) of
the aggregate number of shares of Acquiror Common Stock issuable in the Merger
pursuant to Section 2.2(a) hereof (the "Escrow Shares") shall be registered in
the name of, and deposited with, Chase Bank of Texas, N.A., as escrow agent (the
"Escrow Agent"), such deposit (together with any shares of Acquiror capital
stock received upon a stock split or stock dividend thereon) to constitute the
Escrow Fund (the "Escrow Fund") and to be governed by the terms set forth herein
and in the Escrow Agreement attached hereto as Exhibit E. The stockholders of
Target shall be deemed to have approved the appointment of the Escrow Agent as
escrow agent upon approval of this Agreement and the Merger in accordance with
Section 7.1(a). Such Escrow Shares shall be set aside out of the shares of
Acquiror Common Stock issuable upon conversion of Target Capital Stock in the
Merger, pro rata for each holder of Target Capital Stock based on the number of
shares of Acquiror Common Stock issuable to such holder in the Merger and the
total number of shares of Acquiror Common Stock issuable to all such persons in
the Merger. The Escrow Fund shall be available to compensate Acquiror for any
and all losses, costs, damages, liabilities and expenses arising from claims,
demands, actions, and causes of action, including, without limitation,
reasonable legal fees (collectively, "Damages") arising out of any
misrepresentation or breach of or default in connection with any of the
representations, warranties, covenants and agreements given or made by Target in
this Agreement, the Target Disclosure Statement, any exhibit or schedule to this
Agreement or any certificate or other written instrument of Target delivered in
connection herewith, or arising pursuant to Section 6.13 hereof. Acquiror and
Target each acknowledge that such Damages, if any, would relate to unresolved
contingencies existing at the Effective Time, which if resolved at the Effective
Time would have led to a reduction in the total number of shares Acquiror would
have agreed to issue in connection with the Merger. Nothing in this Agreement
shall limit the liability of any Target stockholder in connection with any
breach by such stockholder of the Stockholder Agreement or the Irrevocable
Proxy.
9.2 Exclusive Remedy. Except as provided in this Section 9.2, the rights
of Acquiror pursuant to this Article IX and the Escrow Agreement shall be the
sole and exclusive remedy of Acquiror for Damages arising out of any breach of
any of the representations, warranties, covenants or other obligations given or
made by Target in this Agreement or the Schedules hereto, including the Target
Disclosure Statement, or certificate or written instrument delivered by Target
in connection herewith and recovery
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from the Escrow Fund shall be the sole and exclusive means of recovery for such
Damages, except Damages for any claims based on fraud or intentional
misrepresentation shall not be so limited and Acquiror shall have all other
remedies available under law or in equity.
9.3 Damage Thresholds. Acquiror shall not be entitled to recover any
Damages from the Escrow Fund unless and until an Officer's Certificate or
Certificates (as defined in Section 9.5 below) satisfying the requirements of
Section 9.5(a)(i) and (ii) and identifying Damages the aggregate amount of which
exceeds $150,000 has been delivered to the Escrow Agent as provided in Section
9.5 below and subject to the provisions of Sections 9.6 and 9.7, in which case
Acquiror shall be entitled to recover any such Damages in excess of $150,000;
provided this Damage threshold shall not apply to claims based on fraud or
intentional misrepresentation.
9.4 Escrow Period. The "Escrow Period" shall terminate at the expiration
of twelve (12) months after the Effective Time and upon such termination the
Escrow Shares remaining in the Escrow Fund shall be released and delivered to
the former holders of Target Capital Stock, pro rata for each former holder of
Target Capital Stock based on the number of Escrow Shares deposited with respect
to such holder and the total number of Escrow Shares deposited into the Escrow
Fund.
9.5 Claims upon Escrow Fund.
(a) Upon receipt by the Escrow Agent on or before the last day of the
Escrow Period of a certificate signed by any officer of Acquiror (an "Officer's
Certificate"):
(i) stating that Damages exist and the amount thereof, and
(ii) specifying in reasonable detail the individual items of such
Damages included in the amount so stated, the date each such item was paid,
or properly accrued or arose, the nature of the misrepresentation, breach
of warranty or claim to which such item is related,
the Escrow Agent shall, subject to the provisions of Sections 9.6 and 9.7 below,
deliver to Acquiror out of the Escrow Fund, as promptly as practicable, Acquiror
Common Stock or other assets held in the Escrow Fund having a value equal to the
amount such aggregate Damages exceed $150,000.
(b) For the purpose of compensating Acquiror for its Damages pursuant to
this Agreement, the Acquiror Common Stock in the Escrow Fund shall be valued at
the closing price of a share of Acquiror Common Stock as quoted on the Nasdaq
Stock Market on the day of the Closing.
9.6 Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such Officer's Certificate
shall be delivered to the Stockholders' Agent (defined in Section 9.8 below) and
for a period of thirty (30) days after such delivery to the Escrow Agent of such
Officer's Certificate, the Escrow Agent shall make no delivery of Acquiror
Common Stock or other property pursuant to Section 9.5 hereof unless the Escrow
Agent shall have received written authorization from the Stockholders' Agent to
make such delivery. After the expiration of such thirty (30) day period, the
Escrow Agent shall make delivery of the Acquiror Common Stock or other property
in the Escrow Fund in accordance with Section 9.5 hereof, provided that no such
payment or delivery may be made if the Stockholders' Agent shall object in a
written statement to the claim made in the Officer's Certificate, and such
statement shall have been delivered to the Escrow Agent and to Acquiror prior to
the expiration of such thirty (30) day period.
9.7 Resolution of Conflicts; Arbitration.
(a) In case the Stockholders' Agent shall so object in writing to any claim
or claims by Acquiror made in any Officer's Certificate, Acquiror shall have
thirty (30) days after receipt by the Escrow Agent of an objection by the
Stockholders' Agent to respond in a written statement to the objection of the
Stockholders' Agent, which written statement shall be delivered to Acquiror and
the Escrow Agent. If after such thirty (30) day period there remains a dispute
as to any claims, the Stockholders' Agent and Acquiror shall attempt in good
faith for thirty (30) days thereafter to agree upon the rights of the respective
parties with respect to each of such claims. If the Stockholders' Agent and
Acquiror should so
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agree, a memorandum setting forth such agreement shall be prepared and signed by
both parties and shall be furnished to the Escrow Agent. The Escrow Agent shall
be entitled to rely on any such memorandum and shall distribute or withhold the
Acquiror Common Stock or other property from the Escrow Fund in accordance with
the terms thereof.
(b) If no such agreement can be reached after good faith negotiation after
expiration of the second 30-day period provided above, either Acquiror or the
Stockholders' Agent may, by written notice to the other, demand arbitration of
the matter unless the amount of the damage or loss is at issue in pending
litigation with a third party, in which event arbitration shall not be commenced
until such amount is ascertained or both parties agree to arbitration; and in
either such event the matter shall be settled by arbitration conducted by three
arbitrators. Within fifteen (15) days after such written notice is sent,
Acquiror and the Stockholders' Agent shall each select one arbitrator, and the
two arbitrators so selected shall select a third arbitrator. The decision of the
arbitrators as to the validity and amount of any claim in such Officer's
Certificate shall be binding and conclusive upon the parties to this Agreement,
and notwithstanding anything in Section 9.7 hereof, the Escrow Agent shall be
entitled to act in accordance with such decision and make or withhold payments
out of the Escrow Fund in accordance therewith.
(c) Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any such arbitration shall be held in Dallas
County, Texas under the commercial rules then in effect of the American
Arbitration Association. For purposes of this Section 9.7(c), in any arbitration
hereunder in which any claim or the amount thereof stated in the Officer's
Certificate is at issue, Acquiror shall be deemed to be the "Non-Prevailing
Party" unless the arbitrators award Acquiror more than three-fifths (3/5) of the
amount in dispute, plus any amounts not in dispute; otherwise, the Target
stockholders for whom shares of Target Common Stock otherwise issuable to them
have been deposited in the Escrow Fund shall be deemed to be the "Non-Prevailing
Party."The Non-Prevailing Party to an arbitration shall pay its own expenses,
the fees of each arbitrator, the administrative fee of the American Arbitration
Association, and the expenses, including without limitation, attorneys' fees and
costs, reasonably incurred by the other party to the arbitration.
9.8 Stockholders' Agent.
(a) William P. Wood shall be constituted and appointed as agent (the
"Stockholders' Agent") for and on behalf of the Target stockholders to give and
receive notices and communications, to authorize delivery to Acquiror of the
Acquiror Common Stock or other property from the Escrow Fund in satisfaction of
claims by Acquiror, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, and demand arbitration and comply with
orders of courts and awards of arbitrators with respect to such claims, and to
take all actions necessary or appropriate in the judgment of the Stockholders'
Agent for the accomplishment of the foregoing. Such agency may be changed by the
holders of a majority in interest of the Escrow Fund from time to time upon not
less than 10 days' prior written notice to Acquiror. No bond shall be required
of the Stockholders' Agent, and the Stockholders' Agent shall receive no
compensation for his services. Notices or communications to or from the
Stockholders' Agent shall constitute notice to or from each of the Target
stockholders. The stockholders of Target shall be deemed to have approved the
appointment of William P. Wood as the Stockholders' Agent upon approval of this
Agreement and the Merger in accordance with Section 7.1(a).
(b) The Stockholders' Agent shall not be liable for any act done or omitted
hereunder as Stockholders' Agent while acting in good faith and in the exercise
of reasonable judgment, and any act done or omitted pursuant to the advice of
counsel shall be conclusive evidence of such good faith. The Target stockholders
shall severally indemnify the Stockholders' Agent and hold him harmless against
any loss, liability or expense incurred without gross negligence or bad faith on
the part of the Stockholders' Agent and arising out of or in connection with the
acceptance or administration of his duties hereunder.
(c) The Stockholders' Agent shall have reasonable access to information
about Target and the reasonable assistance of Target's officers and employees
for purposes of performing its duties and exercising its rights hereunder,
provided that the Stockholders' Agent shall treat confidentially and not
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disclose any nonpublic information from or about Target to anyone (except on a
need to know basis to individuals who agree to treat such information
confidentially).
9.9 Actions of the Stockholders' Agent. A decision, act, consent or
instruction of the Stockholders' Agent shall constitute a decision of all Target
stockholders for whom shares of Acquiror Common Stock otherwise issuable to them
are deposited in the Escrow Fund and shall be final, binding and conclusive upon
each such Target stockholder, and the Escrow Agent and Acquiror may rely upon
any decision, act, consent or instruction of the Stockholders' Agent as being
the decision, act, consent or instruction of each and every such Target
stockholder. The Escrow Agent and Acquiror are hereby relieved from any
liability to any person for any acts done by them in accordance with such
decision, act, consent or instruction of the Stockholders' Agent.
9.10 Third-Party Claims. In the event Acquiror becomes aware of a
third-party claim which Acquiror believes may result in a demand against the
Escrow Fund, Acquiror shall promptly notify the Stockholders' Agent of such
claim, and the Stockholders' Agent and the Target stockholders for whom shares
of Acquiror Common Stock otherwise issuable to them are deposited in the Escrow
Fund shall be entitled, at their expense, to participate in any defense of such
claim. Acquiror may not effect the settlement of any such claim without the
consent of the Stockholders' Agent, which consent shall not be unreasonably
withheld. In the event that the Stockholders' Agent has consented to any such
settlement, the Stockholders' Agent shall have no power or authority to object
under Section 9.7 or any other provision of this Article IX to the amount of any
claim by Acquiror against the Escrow Fund for indemnity with respect to such
settlement.
9.11 No Claims Based on Consented Changes. The indemnification obligations
of the holders of Target Common Stock immediately prior to the Effective Time
pursuant to this Article IX shall not apply to any Damages arising out of any
misrepresentation, breach or default in connection with any of the
representations, warranties, covenants or agreements given or made by Target in
this Agreement, the Target Disclosure Statement or any exhibit or schedule to
this Agreement to the extent such misrepresentation, breach or default has been
specifically identified and explained in writing by Target, certified by the
President of Target and delivered by Target to, and been accepted by, the Chief
Financial Officer of Acquiror prior to the Closing Date.
ARTICLE X
GENERAL PROVISIONS
10.1 Survival of Representations, Warranties and Agreements. The
representations, warranties and agreements of each party hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any person controlling any such party or
any of their officers or directors, whether prior to or after the execution of
this Agreement. The representations, warranties and agreements of each party
hereto shall survive the execution and delivery of this Agreement until the
expiration of the Escrow Period; provided, however, that the representations and
warranties of Target in Section 3.12 hereof and for claims of either party
involving fraud or intentional misrepresentation shall survive for a period
equal to the statute of limitations for such matters.
10.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the following address (or at such other address for a party as shall be
specified by like notice):
(a) if to Acquiror or Merger Sub, to:
i2 Technologies, Inc.
909 E. Las Colinas Blvd., 16th Floor
Irving, Texas 75039
Attention: Legal Department
Facsimile: (214) 860-6060
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with a copy to:
Brobeck, Phleger & Harrison LLP
301 Congress Avenue, Suite 1200
Austin, Texas 78701
Attention: Ronald G. Skloss
Facsimile: (512) 477-5813
(b) if to Target, to:
Sales Marketing Administration Research
Tracking Technologies, Inc.
11701 Stonehollow Drive
Austin, Texas 78758
Attention: Bryan Plug
Facsimile: (512) 719-9105
with a copy to:
Gray Cary Ware & Freidenrich LLP
100 Congress Avenue, Suite 1440
Austin, Texas 78701
Attention: J. Nixon Fox, III
Facsimile: (512) 457-7070
10.3 Interpretation. When a reference is made in this Agreement to
Exhibits, such reference shall be to an Exhibit to this Agreement unless
otherwise indicated. The words "include," "includes" and "including" when used
herein shall be deemed in each case to be followed by the words "without
limitation." The phrase "made available" in this Agreement shall mean that the
information referred to has been made available or in the case of the Acquiror
SEC Documents, that such documents were furnished or available on the SEC's
website. The phrases "the date of this Agreement", "the date hereof", and terms
of similar import, unless the context otherwise requires, shall be deemed to
refer to the date first written above. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
10.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
10.5 Entire Agreement; Nonassignability; Parties in Interest. This
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits and the
Schedules, including the Target Disclosure Statement and the Acquiror Disclosure
Statement: (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof; (b) are not intended to confer upon any other person any rights or
remedies hereunder; and (c) shall not be assigned by operation of law or
otherwise except as otherwise specifically provided.
10.6 Severability. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
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10.7 Remedies Cumulative. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
10.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without reference to such
state's principles of conflicts of law. Each of the parties hereto irrevocably
consents to the exclusive jurisdiction of any court located within the State of
Texas, in connection with any matter based upon or arising out of this Agreement
or the matters contemplated herein, agrees that process may be served upon them
in any manner authorized by the laws of the State of Texas for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and such process.
10.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation, preparation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
IN WITNESS WHEREOF, Acquiror, Merger Sub and Target have caused this
Agreement and Plan of Merger and Reorganization to be executed and delivered by
their respective officers thereunto duly authorized, all as of the date first
written above.
i2 TECHNOLOGIES, INC.
By: /s/ DAVID F. CARY
----------------------------------
Name: David F. Cary
Title: Chief Financial Officer
INTELLIGENT ACQUISITION CORP.
By: /s/ DAVID F. CARY
----------------------------------
Name: David F. Cary
Title: Chief Financial Officer
SALES MARKETING ADMINISTRATION
RESEARCH TRACKING
TECHNOLOGIES, INC.
By: /s/ BRYAN E. PLUG
----------------------------------
Name: Bryan E. Plug
Title: Chairman, President and
Chief Executive Officer
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APPENDIX B
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") is made as of [ ], 1999,
by and among Chase Bank of Texas, N.A. ("Escrow Agent"), i2 Technologies, Inc.,
a Delaware corporation ("Acquiror"), and William P. Wood as agent
("Stockholders' Agent") of the former stockholders of Sales Marketing
Administration Research Tracking Technologies, Inc., a Delaware corporation
("Target"). Terms not otherwise defined herein shall have the meaning set forth
in the Merger Agreement (as defined below).
WITNESSETH
WHEREAS, Acquiror, Intelligent Acquisition Corp., a Delaware corporation,
("Merger Sub") and Target have entered into an Agreement and Plan of Merger and
Reorganization, dated as of May 12, 1999 (the "Merger Agreement"), providing for
the merger of Merger Sub with and into Target (the "Merger");
WHEREAS, pursuant to Article IX of the Merger Agreement, a copy of which is
attached hereto as Annex A ("Article IX"), an escrow fund (the "Escrow Fund")
will be established to compensate Acquiror for certain Damages (as defined in
Article IX) in connection with the Merger Agreement;
WHEREAS, the Stockholders' Agent has been constituted as agent for and on
behalf of the former holders of shares of common stock of Target (individually a
"Stockholder" and collectively the "Stockholders") to undertake certain
obligations specified in Article IX;
WHEREAS, Article IX provides for an Escrow Fund of ten percent (10%) of the
aggregate number of shares of Acquiror Common Stock issuable in the Merger
pursuant to Section 2.2(a) of the Merger Agreement, such escrow to be held by
the Escrow Agent; and
WHEREAS, the parties hereto desire to set forth further terms and
conditions in addition to those set forth in Article IX relating to the
operation of the Escrow Fund.
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants contained herein, and intending to be legally bound, hereby agree as
follows:
1. Escrow and Escrow Shares. Pursuant to Article IX, Acquiror shall deposit
in escrow with the Escrow Agent, as escrow agent, promptly after the Effective
Time of the Merger, a stock certificate or certificates representing ten percent
(10%) of the aggregate number of shares of Acquiror Common Stock issuable in the
Merger pursuant to Section 2.2(a) of the Merger Agreement (the "Escrow Shares")
which shall be registered in the name of the Escrow Agent as escrow agent. The
Escrow Shares shall be held and distributed by the Escrow Agent in accordance
with the terms and conditions of Article IX and this Agreement. The approximate
number of Escrow Shares beneficially owned by each Stockholder, the percentage
interest of each Stockholder in the Escrow Fund, the address of each Stockholder
and the taxpayer identification number of each Stockholder are set forth in
Annex B attached hereto.
2. Rights and Obligations of the Parties. The Escrow Agent shall be
entitled to such rights and shall perform such duties of the escrow agent as set
forth herein and in Article IX (collectively, the "Duties"), in accordance with
the terms and conditions of this Agreement and Article IX. Acquiror, Target and
the Stockholders' Agent shall be entitled to their respective rights and shall
perform their respective duties and obligations as set forth herein and in
Article IX, in accordance with the terms and conditions of this Agreement and
Article IX. In the event that the terms of this Agreement conflict in any way
with the provisions of Article IX, Article IX shall control.
3. Escrow Period. The Escrow Period shall terminate at the expiration of 12
months after the effective time of the Merger (the "Effective Time"). Acquiror
shall provide the Escrow Agent with a written notification of the Effective
Time.
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4. Duties of Escrow Agent. In addition to the Duties set forth in Article
IX, the Duties of the Escrow Agent shall include the following:
(a) The Escrow Agent shall hold the Escrow Shares during the Escrow
Period, shall treat such Escrow Fund as a segregated escrow in accordance
with the terms of this Agreement and Article IX and not as the property of
Acquiror, and shall hold and dispose of the Escrow Shares only in
accordance with the terms hereof.
(b) The Escrow Shares shall be voted by the Escrow Agent in accordance
with the instructions received by the Escrow Agent from the beneficial
owners of such shares. In the absence of such instructions, the Escrow
Agent shall be under no obligation to vote such shares. The Escrow Agent
need not forward proxy information, annual or other reports or other
information received from Acquiror with respect to the Escrow Shares.
(c) Promptly following the date 12 months after the Effective Time,
the Escrow Agent shall deliver to the Acquiror's stock transfer agent
(which is currently ChaseMellon Shareholder Services, L.L.C.) instructions
to deliver, and such stock transfer agent in turn shall deliver, to the
Stockholders the number of Escrow Shares and other property in the Escrow
Fund remaining after (i) satisfaction of Damages, if any, properly claimed
by Acquiror in accordance with Article IX and, if objected to by the
Stockholders' Agent, properly resolved in accordance with Article IX and
(ii) payment of expenses as provided in Section 11(b) hereof. Each
Stockholder shall receive that number of Escrow Shares remaining in the
Escrow Fund after the satisfaction of such claims and payment of such
expenses equivalent to such Stockholders' percentage interest in the Escrow
Fund as set forth as Annex B hereto; provided, however, that in no event
shall any Stockholder be entitled to any fractional shares. In lieu of the
fractional interest not distributed, Acquiror shall furnish to the Escrow
Agent, and the Escrow Agent in turn will furnish to Acquiror's stock
transfer agent for distribution to the Stockholders, cash equal to such
fractional interest multiplied by [insert the closing price of a share of
Acquiror Common Stock as quoted on the Nasdaq National market on the day of
the Closing]. Acquiror shall be deemed to have purchased such fractional
interests with respect to which it has furnished funds to the Escrow Agent.
Accordingly, the Escrow Agent, upon receipt of such funds, shall deliver
instructions to Acquiror's transfer agent to deliver the resulting whole
number of shares deemed to have been repurchased with respect to such
fractional interests to Acquiror. Any cash so received from Acquiror and
not so immediately distributed by the Escrow Agent shall be retained by the
Escrow Agent as part of the Escrow Fund, but need not be invested.
(d) To the extent directed to do so by the Stockholders' Agent, the
Escrow Agent shall sell shares of Acquiror Common Stock held in the Escrow
Fund (or such greater number as consented to in writing by Acquiror, which
consent shall not be unreasonably withheld) and shall apply the proceeds of
such sale to pay expenses incurred by the Stockholders' Agent on behalf of
the Stockholders as provided in Section 11(b) hereof.
(e) Pursuant to Section 9.5(b) of Article IX, for the purpose of
compensating Acquiror for its Damages pursuant to this Agreement, each
share of the Acquiror Common Stock in the Escrow Fund shall be valued at
[insert the closing price of a share of Acquiror Common Stock as quoted on
the Nasdaq Stock Market on the day of the Closing.]. If the value to be
distributed to Acquiror (or to any Stockholder upon a termination of the
escrow) is not evenly divisible by the Acquiror Stock Price, the Escrow
Agent shall round down the number of shares to be distributed to the next
highest whole number of shares and shall distribute that number.
5. Distribution. Any cash dividends, dividends payable in securities or
other distributions of any kind (but excluding any shares of Acquiror capital
stock received upon a stock split or stock dividend) with respect to the Escrow
Shares shall be promptly distributed by the Escrow Agent to the beneficial
holder of the Escrow Shares to which such distribution relates at the address
set forth in Annex B. Any shares of Acquiror Common Stock received by the Escrow
Agent upon a stock split made in respect of any securities in the Escrow Fund
shall be added to the Escrow Fund and become a part thereof. Any provision
hereof or of Article IX shall be adjusted to appropriately reflect any stock
split or reverse stock
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split. Before any distribution is made to any stockholder, such stockholder
shall furnish to the Escrow Agent an IRS Form W-9 or any other documentation the
Escrow Agent may reasonably require.
6. Exculpatory Provisions.
(a) The Escrow Agent shall be obligated only for the performance of such
Duties as are specifically set forth herein and in Article IX and may rely and
shall be protected in relying or refraining from acting on any instrument
reasonably believed to be genuine and to have been signed or presented by the
proper party or parties. The Escrow Agent shall not be liable for forgeries or
false personations. The Escrow Agent shall not be liable for any act done or
omitted hereunder as escrow agent, and shall not be liable for any lost profits,
lost savings or any other special, exemplary, consequential or incidental
damages in excess of the Escrow Agent's fee hereunder, except for gross
negligence or willful misconduct. The Escrow Agent shall in no case or event be
liable for any representations or warranties of Target or Acquiror. Any act done
or omitted pursuant to the advice or opinion of counsel shall be conclusive
evidence of the good faith of the Escrow Agent.
(b) The Escrow Agent is hereby expressly authorized to disregard any and
all warnings given by any of the parties hereto or by any other person,
excepting only orders or process of courts of law or arbitrations as provided in
Section 9.7 of Article IX, and is hereby expressly authorized to comply with and
obey orders, judgments or decrees of any court or rulings of any such
arbitrators. In case the Escrow Agent obeys or complies with any such order,
judgment or decree of any court or such ruling of any arbitrator, the Escrow
Agent shall not be liable to any of the parties hereto or to any other person by
reason of such compliance, notwithstanding any such order, judgment, decree or
arbitrators' ruling being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
(c) The Escrow Agent shall not be liable in any respect on account of the
identity, authority or rights of the parties executing or delivering or
purporting to execute or deliver the Merger Agreement or any documents or papers
deposited or called for thereunder.
(d) The Escrow Agent shall not be liable for the outlawing of any rights
under any statute of limitations with respect to the Merger Agreement or any
documents deposited with the Escrow Agent.
7. Alteration of Duties. The Duties may be altered, amended, modified or
revoked only by a writing signed by all of the parties hereto.
8. Resignation and Removal of the Escrow Agent. The Escrow Agent may resign
as Escrow Agent at any time with or without cause by giving at least 30 days'
prior written notice to each of Acquiror and the Stockholders' Agent, such
resignation to be effective 30 days following the date such notice is given. In
addition, Acquiror and the Stockholders' Agent may jointly remove the Escrow
Agent as escrow agent at any time with or without cause, by an instrument (which
may be executed in counterparts) given to the Escrow Agent, which instrument
shall designate the effective date of such removal. In the event of any such
resignation or removal, a successor escrow agent which shall be a bank or trust
company organized under the laws of the United States of America or of the State
of Texas having (or if such bank or trust company is a member of a bank company,
its bank holding company has) a combined capital and surplus of not less than
$50,000,000, shall be appointed by the Stockholders' Agent with the approval of
Acquiror, which approval shall not be unreasonably withheld. Any such successor
escrow agent shall deliver to Acquiror and the Stockholders' Agent a written
instrument accepting such appointment, and thereupon it shall succeed to all the
rights and duties of the escrow agent hereunder and shall be entitled to receive
the Escrow Fund.
9. Further Instruments. If the Escrow Agent reasonably requires other or
further instruments in connection with performance of the Duties, the necessary
parties hereto shall join in furnishing such instruments.
10. Disputes. It is understood and agreed that should any dispute arise
with respect to the delivery and/or ownership or right of possession of the
securities held by the Escrow Agent hereunder, the Escrow
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Agent is authorized and directed to act in accordance with, and in reliance
upon, the terms hereof and of Article IX.
11. Escrow Fees and Expense.
(a) Acquiror shall pay the Escrow Agent such fees as are established by the
Fee Schedule attached hereto as Annex C.
(b) Any out-of-pocket fees and expenses incurred by the Stockholders' Agent
shall be paid out of the Escrow Fund in preference to other distributions from
such Escrow Fund; provided, however, that the aggregate of such payments shall
not exceed the proceeds of sales of shares made pursuant to Section 4(d) hereof,
and provided further that under no circumstances will the Stockholders' Agent
have personal liability for any such fees and expenses.
12. Indemnification. In consideration of the Escrow Agent's acceptance of
this appointment, the other parties hereto, jointly and severally, agree to
indemnify and hold the Escrow Agent harmless as to any liability incurred by it
to any person, firm or corporation by reason of its having accepted such
appointment or in carrying out the terms hereof and of Article IX, and to
reimburse the Escrow Agent for all its costs and expenses, including, among
other things, fees and expenses of counsel, reasonably incurred by reason of any
matter as to which an indemnity is paid; provided, however, that no indemnity
need be paid in case of the Escrow Agent's negligence, willful misconduct or
breach of this Agreement.
13. General.
(a) Any notice given hereunder shall be in writing and shall be deemed
effective upon the earlier of personal delivery or the third day after mailing
by certified or registered mail, postage prepaid as follows:
To Acquiror:
i2 Technologies, Inc.
909 E. Las Colinas Boulevard, 16th Floor
Irving, Texas 75039
Attention: Robert Donohoo
with a copy to:
Brobeck, Phleger & Harrison LLP
301 Congress Avenue, Suite 1200
Austin, Texas 78701
Attention: Ronald G. Skloss
To Stockholders' Agent:
William P. Wood
[ ]
[ ]
with a copy to:
Gray, Cary Ware & Freidenrich LLP
100 Congress Avenue, Suite 1440
Austin, Texas 78701
Attention: Nick Fox
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To the Escrow Agent:
Chase Bank of Texas, N.A.
[ ]
[ ]
[ ]
or to such other address as any party may have furnished in writing to the other
parties in the manner provided above. Any notice addressed to the Escrow Agent
shall be effective only upon receipt.
(b) The Officer's Certificate as defined in Article IX may be signed by the
President, Vice President or Chief Financial Officer of Acquiror.
(c) The captions in this Agreement are for convenience only and shall not
be considered a part of or affect the construction or interpretation of any
provision of this Agreement.
(d) This Agreement may be executed in any number of counterparts, each of
which when so executed shall constitute an original copy hereof, but all of
which together shall constitute one agreement.
(e) No party may, without the prior express written consent of each other
party, assign this Agreement in whole or in part. This Agreement shall be
binding upon and inure to the benefit of the respective successors and assigns
of the parties hereto.
(f) This Escrow Agreement shall be governed by and construed in accordance
with the laws of the State of Texas as applied to contracts made and to be
performed entirely within the State of Texas excluding, however, its choice of
law rules and the portions of the Texas Trust Code, Sections 111.001, et. seq.
of the Texas Property Code, concerning fiduciary duties and liabilities of
trustees. The parties to this Agreement hereby agree to submit to personal
jurisdiction in the State of Texas.
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IN WITNESS WHEREOF, each of the parties has executed this Agreement as of
the date first above written.
ESCROW AGENT:
CHASE BANK OF TEXAS, N.A.
By:
----------------------------------
Name:
------------------------------------
Title:
------------------------------------
ACQUIROR:
i2 TECHNOLOGIES, INC.
By:
----------------------------------
William M. Beecher
Chief Financial Officer
STOCKHOLDERS' AGENT:
By:
----------------------------------
William P. Wood
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ANNEX A
ARTICLE IX OF THE MERGER AGREEMENT
ESCROW AND INDEMNIFICATION
9.1 Escrow Fund.
(a) As soon as practicable after the Effective Time, ten percent (10%) of
the aggregate number of shares of Acquiror Common Stock issuable in the Merger
pursuant to Section 2.2(a) hereof (the "Escrow Shares") shall be registered in
the name of, and deposited with, Chase Bank of Texas, N.A., as escrow agent (the
"Escrow Agent"), such deposit (together with any shares of Acquiror capital
stock received upon a stock split or stock dividend thereon) to constitute the
Escrow Fund (the "Escrow Fund") and to be governed by the terms set forth herein
and in the Escrow Agreement attached hereto as Exhibit E. The stockholders of
Target shall be deemed to have approved the appointment of the Escrow Agent as
escrow agent upon approval of this Agreement and the Merger in accordance with
Section 7.1(a). Such Escrow Shares shall be set aside out of the shares of
Acquiror Common Stock issuable upon conversion of Target Capital Stock in the
Merger, pro rata for each holder of Target Capital Stock based on the number of
shares of Acquiror Common Stock issuable to such holder in the Merger and the
total number of shares of Acquiror Common Stock issuable to all such persons in
the Merger. The Escrow Fund shall be available to compensate Acquiror for any
and all losses, costs, damages, liabilities and expenses arising from claims,
demands, actions, and causes of action, including, without limitation,
reasonable legal fees (collectively, "Damages") arising out of any
misrepresentation or breach of or default in connection with any of the
representations, warranties, covenants and agreements given or made by Target in
this Agreement, the Target Disclosure Statement, any exhibit or schedule to this
Agreement or any certificate or other written instrument of Target delivered in
connection herewith, or arising pursuant to Section 6.13 hereof. Acquiror and
Target each acknowledge that such Damages, if any, would relate to unresolved
contingencies existing at the Effective Time, which if resolved at the Effective
Time would have led to a reduction in the total number of shares Acquiror would
have agreed to issue in connection with the Merger. Nothing in this Agreement
shall limit the liability of any Target stockholder in connection with any
breach by such stockholder of the Stockholder Agreement or the Irrevocable
Proxy.
9.2 Exclusive Remedy. Except as provided in this Section 9.2, the rights
of Acquiror pursuant to this Article IX and the Escrow Agreement shall be the
sole and exclusive remedy of Acquiror for Damages arising out of any breach of
any of the representations, warranties, covenants or other obligations given or
made by Target in this Agreement or the Schedules hereto, including the Target
Disclosure Statement, or certificate or written instrument delivered by Target
in connection herewith and recovery from the Escrow Fund shall be the sole and
exclusive means of recovery for such Damages, except Damages for any claims
based on fraud or intentional misrepresentation shall not be so limited and
Acquiror shall have all other remedies available under law or in equity.
9.3 Damage Thresholds. Acquiror shall not be entitled to recover any
Damages from the Escrow Fund unless and until an Officer's Certificate or
Certificates (as defined in Section 9.5 below) satisfying the requirements of
Section 9.5(a)(i) and (ii) and identifying Damages the aggregate amount of which
exceeds $150,000 has been delivered to the Escrow Agent as provided in Section
9.5 below and subject to the provisions of Sections 9.6 and 9.7, in which case
Acquiror shall be entitled to recover any such Damages in excess of $150,000;
provided this Damage threshold shall not apply to claims based on fraud or
intentional misrepresentation.
9.4 Escrow Period. The Escrow Period shall terminate at the expiration of
twelve (12) months after the Effective Time and upon such termination the Escrow
Shares remaining in the Escrow Fund shall be released and delivered to the
former holders of Target Capital Stock, pro rata for each former holder of
Target Capital Stock based on the number of shares of Escrow Shares deposited
with respect to such holder and the total number of Escrow Shares deposited into
the Escrow Fund.
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9.5 Claims upon Escrow Fund.
(a) Upon receipt by the Escrow Agent on or before the last day of the
Escrow Period of a certificate signed by any officer of Acquiror (an "Officer's
Certificate"):
(i) stating that Damages exist and the amount thereof, and
(ii) specifying in reasonable detail the individual items of such
Damages included in the amount so stated, the date each such item was paid,
or properly accrued or arose, the nature of the misrepresentation, breach
of warranty or claim to which such item is related,
the Escrow Agent shall, subject to the provisions of Sections 9.6 and 9.7 below,
deliver to Acquiror out of the Escrow Fund, as promptly as practicable, Acquiror
Common Stock or other assets held in the Escrow Fund having a value equal to the
amount such aggregate Damages exceed $150,000.
(b) For the purpose of compensating Acquiror for its Damages pursuant to
this Agreement, each share of Acquiror Common Stock in the Escrow Fund shall be
valued at the closing price of a share of Acquiror Common Stock as quoted on the
Nasdaq Stock Market on the day of the Closing.
9.6 Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such Officer's Certificate
shall be delivered to the Stockholders' Agent (defined in Section 9.8 below) and
for a period of thirty (30) days after such delivery to the Escrow Agent of such
Officer's Certificate, the Escrow Agent shall make no delivery of Acquiror
Common Stock or other property pursuant to Section 9.5 hereof unless the Escrow
Agent shall have received written authorization from the Stockholders' Agent to
make such delivery. After the expiration of such thirty (30) day period, the
Escrow Agent shall make delivery of the Acquiror Common Stock or other property
in the Escrow Fund in accordance with Section 9.5 hereof, provided that no such
payment or delivery may be made if the Stockholders' Agent shall object in a
written statement to the claim made in the Officer's Certificate, and such
statement shall have been delivered to the Escrow Agent and to Acquiror prior to
the expiration of such thirty (30) day period.
9.7 Resolution of Conflicts; Arbitration.
(a) In case the Stockholders' Agent shall so object in writing to any claim
or claims by Acquiror made in any Officer's Certificate, Acquiror shall have
thirty (30) days after receipt by the Escrow Agent of an objection by the
Stockholders' Agent to respond in a written statement to the objection of the
Stockholders' Agent, which written statement shall be delivered to Acquiror and
the Escrow Agent. If after such thirty (30) day period there remains a dispute
as to any claims, the Stockholders' Agent and Acquiror shall attempt in good
faith for thirty (30) days thereafter to agree upon the rights of the respective
parties with respect to each of such claims. If the Stockholders' Agent and
Acquiror should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties and shall be furnished to the Escrow Agent.
The Escrow Agent shall be entitled to rely on any such memorandum and shall
distribute or withhold the Acquiror Common Stock or other property from the
Escrow Fund in accordance with the terms thereof.
(b) If no such agreement can be reached after good faith negotiation after
expiration of the second 30-day period provided above, either Acquiror or the
Stockholders' Agent may, by written notice to the other, demand arbitration of
the matter unless the amount of the damage or loss is at issue in pending
litigation with a third party, in which event arbitration shall not be commenced
until such amount is ascertained or both parties agree to arbitration; and in
either such event the matter shall be settled by arbitration conducted by three
arbitrators. Within fifteen (15) days after such written notice is sent,
Acquiror and the Stockholders' Agent shall each select one arbitrator, and the
two arbitrators so selected shall select a third arbitrator. The decision of the
arbitrators as to the validity and amount of any claim in such Officer's
Certificate shall be binding and conclusive upon the parties to this Agreement,
and notwithstanding anything in Section 9.7 hereof, the Escrow Agent shall be
entitled to act in accordance with such decision and make or withhold payments
out of the Escrow Fund in accordance therewith.
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(c) Judgment upon any award rendered by the arbitrators may be entered in
any court having jurisdiction. Any such arbitration shall be held in Dallas
County, Texas under the commercial rules then in effect of the American
Arbitration Association. For purposes of this Section 9.7(c), in any arbitration
hereunder in which any claim or the amount thereof stated in the Officer's
Certificate is at issue, Acquiror shall be deemed to be the "Non-Prevailing
Party" unless the arbitrators award Acquiror more than three-fifths (3/5) of the
amount in dispute, plus any amounts not in dispute; otherwise, the Target
stockholders for whom shares of Target Common Stock otherwise issuable to them
have been deposited in the Escrow Fund shall be deemed to be the "Non-Prevailing
Party." The Non-Prevailing Party to an arbitration shall pay its own expenses,
the fees of each arbitrator, the administrative fee of the American Arbitration
Association, and the expenses, including without limitation, attorneys' fees and
costs, reasonably incurred by the other party to the arbitration.
9.8 Stockholders' Agent.
(a) William P. Wood shall be constituted and appointed as agent (the
"Stockholders' Agent") for and on behalf of the Target stockholders to give and
receive notices and communications, to authorize delivery to Acquiror of the
Acquiror Common Stock or other property from the Escrow Fund in satisfaction of
claims by Acquiror, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, and demand arbitration and comply with
orders of courts and awards of arbitrators with respect to such claims, and to
take all actions necessary or appropriate in the judgment of the Stockholders'
Agent for the accomplishment of the foregoing. Such agency may be changed by the
holders of a majority in interest of the Escrow Fund from time to time upon not
less than 10 days' prior written notice to Acquiror. No bond shall be required
of the Stockholders' Agent, and the Stockholders' Agent shall receive no
compensation for his services. Notices or communications to or from the
Stockholders' Agent shall constitute notice to or from each of the Target
stockholders. The stockholders of Target shall be deemed to have approved the
appointment of William P. Wood as the Stockholders' Agent upon approval of this
Agreement and the Merger in accordance with Section 7.1(a).
(b) The Stockholders' Agent shall not be liable for any act done or omitted
hereunder as Stockholders' Agent while acting in good faith and in the exercise
of reasonable judgment, and any act done or omitted pursuant to the advice of
counsel shall be conclusive evidence of such good faith. The Target stockholders
shall severally indemnify the Stockholders' Agent and hold him harmless against
any loss, liability or expense incurred without gross negligence or bad faith on
the part of the Stockholders' Agent and arising out of or in connection with the
acceptance or administration of his duties hereunder.
(c) The Stockholders' Agent shall have reasonable access to information
about Target and the reasonable assistance of Target's officers and employees
for purposes of performing its duties and exercising its rights hereunder,
provided that the Stockholders' Agent shall treat confidentially and not
disclose any nonpublic information from or about Target to anyone (except on a
need to know basis to individuals who agree to treat such information
confidentially).
9.9 Actions of the Stockholders' Agent. A decision, act, consent or
instruction of the Stockholders' Agent shall constitute a decision of all Target
stockholders for whom shares of Acquiror Common Stock otherwise issuable to them
are deposited in the Escrow Fund and shall be final, binding and conclusive upon
each such Target stockholder, and the Escrow Agent and Acquiror may rely upon
any decision, act, consent or instruction of the Stockholders' Agent as being
the decision, act, consent or instruction of each and every such Target
stockholder. The Escrow Agent and Acquiror are hereby relieved from any
liability to any person for any acts done by them in accordance with such
decision, act, consent or instruction of the Stockholders' Agent.
9.10 Third-Party Claims. In the event Acquiror becomes aware of a
third-party claim which Acquiror believes may result in a demand against the
Escrow Fund, Acquiror shall promptly notify the Stockholders' Agent of such
claim, and the Stockholders' Agent and the Target stockholders for whom shares
of Acquiror Common Stock otherwise issuable to them are deposited in the Escrow
Fund shall be entitled, at their expense, to participate in any defense of such
claim. Acquiror may not effect the settlement of any such claim without the
consent of the Stockholders' Agent, which consent shall not be
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unreasonably withheld. In the event that the Stockholders' Agent has consented
to any such settlement, the Stockholders' Agent shall have no power or authority
to object under Section 9.7 or any other provision of this Article IX to the
amount of any claim by Acquiror against the Escrow Fund for indemnity with
respect to such settlement.
9.11 No Claims Based on Consented Changes. The indemnification obligations
of the holders of Target Common Stock immediately prior to the Effective Time
pursuant to this Article IX shall not apply to any Damages arising out of any
misrepresentation, breach or default in connection with any of the
representations, warranties, covenants or agreements given or made by Target in
this Agreement, the Target Disclosure Statement or any exhibit or schedule to
this Agreement to the extent such misrepresentation, breach or default has been
specifically identified and explained in writing by Target, certified by the
President of Target and delivered by Target to, and been accepted by, the Chief
Financial Officer of Acquiror prior to the Closing Date.
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APPENDIX C
DELAWARE GENERAL CORPORATION LAW
SECTION 262 -- APPRAISAL RIGHTS
262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely and include what is ordinarily meant by those words and also membership
or membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
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d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
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need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation
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or by any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings and
may proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not entitled
to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the Delaware General Corporation Law (the
"DGCL") empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect to any claim issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful on the merits or otherwise in the
defense of any such action, suit or proceeding referred to in subsections (a)
and (b) of Section 145 or in the defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith; that the indemnification
provided for by Section 145 shall not be deemed exclusive of any other rights
which the indemnified party may be entitled; that indemnification provided by
Section 145 shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of such person's heirs, executors and
administrators; and empowers the corporation to purchase and maintain insurance
on behalf of a director or officer of the corporation against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of the director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
Article Eleventh of the Registrant's Charter provides that, to the fullest
extent permitted by the DGCL as the same exists or as it may hereafter be
amended, no director of the Registrant shall be personally liable to the
Registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director.
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<PAGE> 216
Section 6.1 of the Registrant's Bylaws further provides that the Registrant
shall, to the maximum extent and in the manner permitted by the DGCL, indemnify
each of its directors and officers against expenses (including attorneys' fees),
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any proceeding, arising by reason of the fact that such
person is or was an agent of the Registrant.
The Registrant has entered into indemnification agreements with each of its
directors and executive officers.
The Registrant maintains officers' and directors' liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith or incorporated by reference
herein:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
2.1* -- Agreement and Plan of Merger and Reorganization dated
as of May 12, 1999, by and among i2 Technologies, Inc.
("i2"), Intelligent Acquisition Corp. and Sales
Marketing Administration Research Tracking
Technologies, Inc. ("SMART") (attached as Appendix A to
the consent solicitation/prospectus contained in this
Registration Statement).
2.2* -- Escrow Agreement to be entered into by and among Chase
Bank of Texas, N.A., i2 and William P. Wood (attached as
Appendix B to the consent solicitation/prospectus
contained in this Registration Statement).
3.1 -- Restated Certificate of Incorporation of i2 as
currently in effect (incorporated by reference to Exhibit
3.2 to i2's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (the "Form 10-Q")).
3.2 -- Amended and Restated Bylaws of i2 (incorporated by
reference to Exhibit 3.1 to the Form 10-Q).
4.1 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 of i2's Registration Statement
of Form S-1 (Reg. No. 333-1752).
5.1* -- Opinion of Brobeck, Phleger & Harrison LLP regarding
the legality of the securities being issued.
8.1* -- Opinion of Brobeck, Phleger & Harrison LLP regarding
certain tax matters.
8.2* -- Opinion of Gray Cary Ware & Freidenrich LLP regarding
certain tax matters.
10.1 -- Form of Registration Rights Agreement dated April 1,
1996, by and among i2, Sanjiv S. Sidhu and Sidhu-Singh
Family Investments, Ltd. (filed as Exhibit 10.2 to i2's
Registration Statement on Form S-1 (Reg. No. 333-1752)
(the "Form S-1"))
10.2 -- 1995 Stock Option/Stock Issuance Plan (filed as Exhibit
10.3 to i2's Registration Statement on Form S-8 (Reg. No.
333-53667) (the "1998 S-8")).
10.3 -- Form of Indemnification Agreement by and between i2 and
each of its officers and directors (filed as Exhibit 10.4
to the Form S-1).
10.4 -- Form of Employee Proprietary Information Agreement by
and between i2 and each of its employees (filed as
Exhibit 10.9 to the Form S-1).
10.5 -- Lease Agreement dated July 14, 1995, by and between i2
and TRST Irving, Inc. (filed as Exhibit 10.10 to the Form
S-1).
10.6 -- Lease Agreement dated June 29, 1990, as amended, by and
between i2 and Park West E-2 Associates (filed as Exhibit
10.11 to the Form S-1).
10.7# -- Software License Agreement dated August 31, 1995, by
and between i2 and Minnesota Mining and Manufacturing
(filed as Exhibit 10.12 to the Form S-1).
</TABLE>
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<PAGE> 217
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.8 -- Second Amendment of Lease Agreement dated as of
February 23, 1996, by and between i2 and TRST Irving,
Inc. (filed as Exhibit 10.1 to i2's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996).
10.9 -- Third Amendment to Lease Agreement dated as of July 25,
1996, by and between i2 and TRST Irving, Inc. (filed as
Exhibit 10.1 to i2's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 (the "September
1996 10-Q")).
10.10 -- Fifth Amendment to Lease Agreement dated as of August
29, 1996, by and between i2 and Principal Mutual Life
Insurance Company (filed as Exhibit 10.2 to the
September 1996 10-Q).
10.11 -- Fourth Amendment to Lease Agreement dated as of
December 19, 1996, by and between i2 and TRST Irving,
Inc. (filed as Exhibit 10.17 to i2's Annual Report on
Form 10-K for the year ended December 31, 1996).
10.12 -- Registration Rights Agreement dated May 15, 1997, by
and among i2 and each of the former stockholders of Think
Systems Corporation (filed as Exhibit 99.3 to i2's
Current Report on Form 8-K dated May 15, 1997 (the "May
1997 8-K")).
10.13 -- Registration Rights Agreement dated May 15, 1997, by
and between i2 and each of the former stockholders of
Optimax Systems Corporation (filed as Exhibit 99.4 to
the May 1997 8-K).
10.14 -- Employee Stock Purchase Plan (filed as Exhibit 99.8 to
i2's Registration Statement on Form S-8 (Reg. No.
333-03703)).
10.15 -- International Employee Stock Purchase Plan (filed as
Exhibit 99.1 to i2's Registration Statement on Form S-8
(Reg. No. 333-27009)).
10.16 -- Think Systems Corporation 1996 Incentive Stock Plan
(filed as Exhibit 99.3 to i2's Registration Statement on
Form S-8 (Reg. No. 333-28147) (the "Think/Optimax
S-8")).
10.17 -- Think Systems Corporation 1997 Incentive Stock Plan
(filed as Exhibit 99.1 to the Think/Optimax S-8).
10.18 -- Optimax Systems Corporation Stock Option Plan (filed as
Exhibit 99.10 to the Think/ Optimax S-8).
10.19 -- InterTrans Logistics Solutions Limited 1997 Stock
Incentive Plan (filed as Exhibit 99.7 to the 1998 S-8).
16.1 -- Letter from Ernst & Young LLP dated April 16, 1999
(filed as Exhibit 16.1 to i2's Current Report on Form 8-K
dated April 21, 1999).
21.1 -- List of Subsidiaries of i2 (filed as Exhibit 21.1 to
i2's Annual Report on Form 10-K for the year ended
December 31, 1998).
23.1* -- Consent of Ernst & Young LLP with respect to i2's
financial statements.
23.2* -- Consent of Ernst & Young LLP with respect to SMART's
financial statements.
23.3* -- Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1 and Exhibit 8.1).
23.4* -- Consent of Gray Cary Ware & Freidenrich LLP (included
in Exhibit 8.2).
24.1* -- Power of Attorney (see page II-5).
27.1 -- Financial Data Schedule of i2 (filed as Exhibit 27.1 to
i2's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999).
99.1* -- Form of Written Consents for holders of SMART Common
Stock.
99.2* -- Form of Written Consents for holders of SMART Series A
Preferred Stock.
</TABLE>
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<PAGE> 218
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
99.3* -- Form of Written Consents for holders of SMART Series B
Preferred Stock.
99.4* -- Form of Written Consents for holders of SMART Series C
Preferred Stock.
</TABLE>
- ---------------
*Filed herewith.
# Confidential treatment previously granted.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) that, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) of the Securities Act, such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by person who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
(2) that every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to this Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
(3) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of Form
S-4, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of this Registration Statement through the date of
responding to the request; and
(4) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in this Registration Statement
when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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<PAGE> 219
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irving,
State of Texas, on this 28 day of May, 1999.
i2 TECHNOLOGIES, INC.
By: /s/ SANJIV S. SIDHU
----------------------------------
Sanjiv S. Sidhu,
Chairman of the Board and Chief
Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Sanjiv S. Sidhu and William M. Beecher
and each of them acting individually, as such person's true and lawful
attorneys-in-fact and agents, each with full power of substitution, for such
person, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file same,
with all exhibits thereto and other documents in connection therewith, with the
SEC, granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his or her substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ SANJIV S. SIDHU Chairman of the Board and Chief May 28, 1999
- ----------------------------------------------------- Executive Officer (Principal
Sanjiv S. Sidhu Executive Officer)
/s/ WILLIAM M. BEECHER Executive Vice President, May 28, 1999
- ----------------------------------------------------- Operations, and Chief
William M. Beecher Financial Officer (Principal
Financial and Accounting
Officer)
/s/ SANDEEP R. TUNGARE President, Demand Management and May 28, 1999
- ----------------------------------------------------- Director
Sandeep R. Tungare
/s/ HARVEY B. CASH Director May 28, 1999
- -----------------------------------------------------
Harvey B. Cash
/s/ THOMAS J. MEREDITH Director May 28, 1999
- -----------------------------------------------------
Thomas J. Meredith
</TABLE>
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<PAGE> 220
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
2.1* -- Agreement and Plan of Merger and Reorganization dated
as of May 12, 1999, by and among i2 Technologies, Inc.
("i2"), Intelligent Acquisition Corp. and Sales
Marketing Administration Research Tracking
Technologies, Inc. ("SMART") (attached as Appendix A to
the consent solicitation/prospectus contained in this
Registration Statement).
2.2* -- Escrow Agreement to be entered into by and among Chase
Bank of Texas, N.A., i2 and William P. Wood (attached as
Appendix B to the consent solicitation/prospectus
contained in this Registration Statement).
3.1 -- Restated Certificate of Incorporation of i2 as
currently in effect (incorporated by reference to Exhibit
3.2 to i2's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (the "Form 10-Q")).
3.2 -- Amended and Restated Bylaws of i2 (incorporated by
reference to Exhibit 3.1 to the Form 10-Q).
4.1 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 of i2's Registration Statement
of Form S-1 (Reg. No. 333-1752).
5.1* -- Opinion of Brobeck, Phleger & Harrison LLP regarding
the legality of the securities being issued.
8.1* -- Opinion of Brobeck, Phleger & Harrison LLP regarding
certain tax matters.
8.2* -- Opinion of Gray Cary Ware & Freidenrich LLP regarding
certain tax matters.
10.1 -- Form of Registration Rights Agreement dated April 1,
1996, by and among i2, Sanjiv S. Sidhu and Sidhu-Singh
Family Investments, Ltd. (filed as Exhibit 10.2 to i2's
Registration Statement on Form S-1 (Reg. No. 333-1752)
(the "Form S-1"))
10.2 -- 1995 Stock Option/Stock Issuance Plan (filed as Exhibit
10.3 to i2's Registration Statement on Form S-8 (Reg. No.
333-53667) (the "1998 S-8")).
10.3 -- Form of Indemnification Agreement by and between i2 and
each of its officers and directors (filed as Exhibit 10.4
to the Form S-1).
10.4 -- Form of Employee Proprietary Information Agreement by
and between i2 and each of its employees (filed as
Exhibit 10.9 to the Form S-1).
10.5 -- Lease Agreement dated July 14, 1995, by and between i2
and TRST Irving, Inc. (filed as Exhibit 10.10 to the Form
S-1).
10.6 -- Lease Agreement dated June 29, 1990, as amended, by and
between i2 and Park West E-2 Associates (filed as Exhibit
10.11 to the Form S-1).
10.7# -- Software License Agreement dated August 31, 1995, by
and between i2 and Minnesota Mining and Manufacturing
(filed as Exhibit 10.12 to the Form S-1).
10.8 -- Second Amendment of Lease Agreement dated as of
February 23, 1996, by and between i2 and TRST Irving,
Inc. (filed as Exhibit 10.1 to i2's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996).
10.9 -- Third Amendment to Lease Agreement dated as of July 25,
1996, by and between i2 and TRST Irving, Inc. (filed as
Exhibit 10.1 to i2's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 (the "September
1996 10-Q")).
</TABLE>
<PAGE> 221
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.10 -- Fifth Amendment to Lease Agreement dated as of August
29, 1996, by and between i2 and Principal Mutual Life
Insurance Company (filed as Exhibit 10.2 to the
September 1996 10-Q).
10.11 -- Fourth Amendment to Lease Agreement dated as of
December 19, 1996, by and between i2 and TRST Irving,
Inc. (filed as Exhibit 10.17 to i2's Annual Report on
Form 10-K for the year ended December 31, 1996).
10.12 -- Registration Rights Agreement dated May 15, 1997, by
and among i2 and each of the former stockholders of Think
Systems Corporation (filed as Exhibit 99.3 to i2's
Current Report on Form 8-K dated May 15, 1997 (the "May
1997 8-K")).
10.13 -- Registration Rights Agreement dated May 15, 1997, by
and between i2 and each of the former stockholders of
Optimax Systems Corporation (filed as Exhibit 99.4 to
the May 1997 8-K).
10.14 -- Employee Stock Purchase Plan (filed as Exhibit 99.8 to
i2's Registration Statement on Form S-8 (Reg. No.
333-03703)).
10.15 -- International Employee Stock Purchase Plan (filed as
Exhibit 99.1 to i2's Registration Statement on Form S-8
(Reg. No. 333-27009)).
10.16 -- Think Systems Corporation 1996 Incentive Stock Plan
(filed as Exhibit 99.3 to i2's Registration Statement on
Form S-8 (Reg. No. 333-28147) (the "Think/Optimax
S-8")).
10.17 -- Think Systems Corporation 1997 Incentive Stock Plan
(filed as Exhibit 99.1 to the Think/Optimax S-8).
10.18 -- Optimax Systems Corporation Stock Option Plan (filed as
Exhibit 99.10 to the Think/Optimax S-8).
10.19 -- InterTrans Logistics Solutions Limited 1997 Stock
Incentive Plan (filed as Exhibit 99.7 to the 1998 S-8).
16.1 -- Letter from Ernst & Young LLP dated April 16, 1999
(filed as Exhibit 16.1 to i2's Current Report on Form 8-K
dated April 21, 1999).
21.1 -- List of Subsidiaries of i2 (filed as Exhibit 21.1 to
i2's Annual Report on Form 10-K for the year ended
December 31, 1998).
23.1* -- Consent of Ernst & Young LLP with respect to i2's
financial statements.
23.2* -- Consent of Ernst & Young LLP with respect to SMART's
financial statements.
23.3* -- Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1 and Exhibit 8.1).
23.4* -- Consent of Gray Cary Ware & Freidenrich LLP (included
in Exhibit 8.2).
24.1* -- Power of Attorney (see page II-5).
27.1 -- Financial Data Schedule of i2 (filed as Exhibit 27.1 to
i2's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999).
99.1* -- Form of Written Consents for holders of SMART Common
Stock.
99.2* -- Form of Written Consents for holders of SMART Series A
Preferred Stock.
99.3* -- Form of Written Consents for holders of SMART Series B
Preferred Stock.
99.4* -- Form of Written Consents for holders of SMART Series C
Preferred Stock.
</TABLE>
- ---------------
*Filed herewith.
# Confidential treatment previously granted.
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD OF BROBECK, PHLEGER & HARRISON LLP]
May 28, 1999
i2 Technologies, Inc.
909 E. Las Colinas Boulevard, 16th Floor
Irving, Texas 75039
Re: i2 Technologies, Inc. Registration Statement on Form
S-4 for Issuance of Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to i2 Technologies, Inc., a Delaware
corporation (the "Company"), in connection with the proposed issuance and sale
of the Company's Common Stock (the "Shares") as described in the Company's
Registration Statement on Form S-4 (the "Registration Statement") filed on the
date hereof with the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Act").
This opinion is being furnished in accordance with the
requirements of Item 21 of Form S-4 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the
corporate proceedings taken by the Company in connection with the issuance and
sale of the Shares. Based on such review and assuming the Registration Statement
becomes and remains effective, and all applicable state and federal laws are
complied with, we are of the opinion that the Shares when issued in accordance
with the Registration Statement and the related prospectus (as amended and
supplemented through the date of issuance) will be validly issued, fully paid
and nonassessable shares of the Common Stock of the Company.
We consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus which is part of the Registration
Statement. In giving this consent, we do not thereby admit that we are within
the category of persons whose consent is required under Section 7 of the Act,
the rules and regulations of the Securities and Exchange Commission promulgated
thereunder, or Item 509 of Regulation S-K.
This opinion letter is rendered as of the date first written
above and we disclaim any obligation to advise you of facts, circumstances,
events or developments which hereafter may be brought to our attention and which
may alter, affect or modify the opinion expressed herein. Our opinion is
expressly limited to the matters set forth above and we render no opinion,
whether by implication or otherwise, as to any other matters relating to the
Company or the Shares.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
EXHIBIT 8.1
[BROBECK PHLEGER & HARRISON LLP LETTERHEAD]
May 28, 1999
i2 Technologies, Inc.
909 E. Las Colinas Boulevard, 16th Floor
Irving, Texas 75039
Ladies and Gentlemen:
This opinion is being delivered to you in connection with (i) the
Agreement and Plan of Merger and Reorganization (the "Agreement") dated as of
May 12, 1999, among i2 Technologies, Inc., a Delaware corporation ("Acquiror"),
Intelligent Acquisition Corp., a Delaware corporation ("Sub"), and Sales
Marketing Administration Research Tracking, Inc., a Delaware corporation
("Target"), and (ii) the preparation and filing with the Securities and Exchange
Commission of a Form S-4 Registration Statement relating to the Merger (the
"Registration Statement"). Pursuant to the Agreement, Sub will merge with and
into Target (the "Merger"), and Target will become a wholly owned subsidiary of
Acquiror.
Except as otherwise provided, capitalized terms referred to herein have
the meanings set forth in the Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as legal counsel to Acquiror in connection with the
Merger. As such, and for the purpose of rendering this opinion, we have examined
and are relying upon (without any independent investigation or review thereof)
the truth and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in the following documents (including
all schedules and exhibits thereto):
1. The Agreement;
2. The Registration Statement;
3. Such other instruments, documents, information and representations
related to the formation, organization and operation of Acquiror, Target and Sub
and to the intended consummation of the Merger and the other transactions
contemplated by the Agreement as we have deemed necessary or appropriate.
<PAGE> 2
i2 Technologies, Inc. May 28, 1999
Page 2
In connection with rendering this opinion, we have assumed that:
A. Original documents submitted to us (including signatures) are
authentic, documents submitted to us as copies conform to the original
documents, and there has been (or will be by the Effective Time) due execution
and delivery of all documents where due execution and delivery are prerequisites
to the effectiveness thereof; and
B. The Merger will be consummated in accordance with the Agreement
without any waiver or breach of any material provision thereof, and the Merger
will be effective under applicable state law.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that the statements regarding United States federal income tax
consequences set forth in the Registration Statement under the heading "Federal
Income Tax Considerations," insofar as they constitute statements of law or
legal conclusions, are correct in all material respects. We express no opinion
as to any federal, state or local, foreign or other tax consequences, other than
as set forth in the Registration Statement under the heading "Federal Income Tax
Considerations."
In addition to the assumptions and representations described above,
this opinion is subject to the exceptions, limitations and qualifications set
forth below.
(1) This opinion represents and is based upon our best judgment
regarding the application of federal income tax laws arising under the Code,
existing judicial decisions, administrative regulations and published rulings
and procedures. Our opinion is not binding upon the Internal Revenue Service or
the courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial or administrative changes, on either a
prospective or retroactive basis, will not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
(2) No opinion is expressed as to any transaction other than the Merger
(whether or not undertaken in connection with the Merger) or as to any
transaction whatsoever, including the Merger, if all the transactions described
in the Agreement are not consummated in accordance with the terms of such
Agreement and without waiver or breach of any material provision thereof or if
all of the representations, warranties, statements and assumptions upon which we
relied are not true and accurate at all relevant times. In the event any one of
the statements, representations, warranties or assumptions upon which we have
relied to issue this opinion is incorrect, our opinion might be adversely
affected and may not be relied upon.
<PAGE> 3
i2 Technologies, Inc. May 28, 1999
Page 3
This opinion is rendered to you solely in connection with the filing of
the Registration Statement. We hereby consent to the filing of this opinion as
an exhibit to the Registration Statement. We also consent to the references to
our firm name wherever appearing in the Registration Statement with respect to
the discussion of the federal income tax consequences of the Merger, including
any amendments to the Registration Statement. This opinion may not be relied
upon for any other purpose, and may not be made available to any other person,
without our prior written consent.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
EXHIBIT 8.2
[LETTERHEAD OF GRAY CARY WARE & FREIDENRICH LLP]
May 28, 1999
Sales Marketing Administration
Research Tracking Technologies, Inc.
11701 Stonehollow Drive
Austin, Texas 78758
Ladies and Gentlemen:
We have acted as counsel to Sales Marketing Administration Research
Tracking Technologies, Inc., a Delaware corporation ("SMART"), in connection
with the transactions described in the Agreement and Plan of Merger and
Reorganization dated as of May 12, 1999 (the "Merger Agreement"), by and among
i2 Technologies, Inc., a Delaware corporation ("i2"), Intelligent Acquisition
Corp., a Delaware corporation and wholly owned subsidiary of i2 ("Sub"), and
SMART. Capitalized terms not otherwise defined herein shall have the same
meanings as set forth in the Merger Agreement.
i2 has filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), a registration
statement on Form S-4 (the "Registration Statement") with respect to the common
stock of i2 to be issued to the SMART stockholders in the Merger in exchange for
their (i) common stock of SMART (the "SMART common stock"), and (ii) SMART
Series C Preferred Stock.
If the Merger is consummated on the terms and subject to the conditions
set forth in the Merger Agreement, then (i) Sub will merge with and into SMART,
with SMART being the surviving corporation, (ii) the holders of shares of SMART
common stock will be entitled to receive for each share of SMART common stock
held by them, other than cash in lieu of a fractional share or shares as to
which dissenters rights have been perfected under applicable law, the number of
shares of i2 common stock as determined pursuant to the Common Stock Conversion
Ratio, and (iii) the holders of shares of SMART Series C Preferred Stock will be
entitled to receive for each share of SMART Series C Preferred Stock held by
them, other than cash in lieu of a fractional share or shares as to which
dissenters rights have been perfected under applicable law, the number of shares
of i2 common stock as determined pursuant to the Series C Conversion Ratio.
This opinion is being rendered pursuant to the requirements of Item
21(a) of Form S-4 under the Securities Act. In connection with this opinion, we
have examined, and are familiar with: (i) the Merger Agreement (including all
exhibits and schedules attached thereto), (ii) the Registration Statement and
the Consent Solicitation/Prospectus dated May 28, 1999 which is contained in and
made part of the Registration Statement (the "Consent Solicitation/Prospectus"),
and (iii) such other presently existing documents, records and matters of law as
we have deemed appropriate in order to enable us to render this opinion.
In rendering this opinion, we have assumed the following (without any
independent investigation or review thereof):
1. The legal capacity of all natural persons, the authenticity
of original documents submitted to us, the conformity to original
documents of all documents submitted to us as copies and the
authenticity of the originals of such copies, the genuineness of all
signatures and the due execution and delivery of all documents;
<PAGE> 2
2. The truth and accuracy at all relevant times of the
representations, warranties and statements of fact made or to be made
by i2, Sub, SMART and their respective management, employees, officers,
directors and stockholders in connection with the Merger, including,
but not limited to, those set forth in the Merger Agreement;
3. The due execution and delivery on or before the Effective
Time of the tax certificates to be received from both i2 and SMART;
4. The Merger will be consummated in accordance with the
Merger Agreement without any waiver or breach of any material provision
thereof, and the Merger will be effective under applicable state law;
and
5. The Merger will be reported by i2, Sub and SMART on their
respective federal income tax returns in a manner consistent with
treatment of the Merger as a "reorganization" within the meaning of
Section 368(a) of the Code.
Based upon and subject to (i) the Merger being consummated in the
manner described in the Merger Agreement, (ii) the accuracy of the Registration
Statement and Consent Solicitation/Prospectus and the facts concerning the
Merger that have come to our attention during our engagement, and (iii) certain
representations made or to be made by i2, Sub and SMART pursuant to the Merger
Agreement or in connection with the issuance of our opinion, we are of the
opinion that the discussion in the Consent Solicitation/Prospectus included as
part of the Registration Statement under the caption "The Merger--Federal Income
Tax Considerations" (the "Tax Section"), insofar as it relates to statements of
law or legal conclusions, is correct in all material respects. We express no
opinion as to whether such description addresses all of the United States
federal income tax consequences of the Merger that may be applicable to i2, Sub,
SMART, or to any particular i2 or SMART stockholder. In addition, we express no
opinion as to United States federal, state, or local, or foreign or other tax
consequences, other than as set forth in the Tax Section. Because this opinion
is being delivered prior to the Effective Time of the Merger, it must be
considered prospective and dependent upon future events. There can be no
assurance that changes in the law will not take place which could affect the
United States federal income tax consequences of the Merger or that contrary
positions may not be taken by the Internal Revenue Service.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to our firm name in
the Tax Section. By giving this consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder (the "Rules"), nor do we hereby admit that we are experts
with respect to any part of the Registration Statement within the Securities Act
or the Rules.
No opinion is expressed as to any federal income tax consequence of the
Merger or the other transactions contemplated by the Merger Agreement except as
specifically set forth herein. This opinion may not be relied upon except with
respect to the consequences specifically discussed herein. By rendering this
opinion, we undertake no responsibility to update this opinion after the date
hereof for any reason, including but not limited to, any new or changed facts or
law which come to our attention after the date hereof. This opinion is being
delivered to you solely in connection with the Consent Solicitation/Prospectus
and is intended solely for the benefit of SMART and SMART stockholders. This
opinion may not be relied upon or utilized for any other purpose or by any other
person or entity without our prior written consent.
Very truly yours,
/s/ GRAY CARY WARE & FREIDENRICH LLP
GRAY CARY WARE & FREIDENRICH LLP
<PAGE> 1
EXHIBIT 23.1
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated January 18, 1999, in the Registration Statement
on Form S-4 and the related Prospectus of i2 Technologies, Inc. for the
registration of 2,141,603 shares of its common stock.
/s/ Ernst & Young LLP
May 27, 1999
Dallas, Texas
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated February 12, 1999 (except for the third paragraph
of Note 4 and Note 16, as to which the date is April 20, 1999), with respect to
the financial statements and schedules of Sales Marketing Administration
Research Tracking Technologies, Inc. and Subsidiary (dba Smart Technologies)
included in the Registration Statement on Form S-4 and the related Prospectus of
i2 Technologies, Inc. for the registration of 2,141,603 shares of its common
stock.
/s/ Ernst & Young LLP
May 27, 1999
Austin, Texas
<PAGE> 1
EXHIBIT 99.1
ACTION BY WRITTEN CONSENT
OF THE HOLDERS OF
COMMON STOCK OF
SALES MARKETING ADMINISTRATION RESEARCH
TRACKING TECHNOLOGIES, INC.
-------------------------
The undersigned, being the holders of a majority of the issued and
outstanding shares of Common Stock, par value $0.001 per share ("Common Stock")
of Sales Marketing Administration Research Tracking Technologies, Inc., a
Delaware corporation (the "Corporation"), pursuant to the Bylaws of the
Corporation and Section 228 of the General Corporation Law of the State of
Delaware (the "DGCL"), hereby adopt the following resolutions by written
consent:
Approval of Merger and Agreement and Plan of Reorganization.
WHEREAS, the Corporation has entered into that certain Agreement and
Plan of Reorganization, dated as of May 12, 1999, by and among the
Corporation, i2 Technologies, Inc., a Delaware corporation ("i2"), and
Intelligent Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of i2 ("Merger Sub"), in the form attached hereto as Exhibit
A (together with all exhibits and schedules attached thereto, the
"Merger Agreement"), providing for the merger of Merger Sub with and
into the Corporation upon the terms and conditions stated in the Merger
Agreement (the "Merger");
WHEREAS, the Board of Directors of the Corporation has adopted and
approved the Merger Agreement and Merger, and submitted the same to the
holders of capital stock of the Corporation for approval by executing
this Consent, among other written consents.
NOW, THEREFORE, BE IT RESOLVED, that the Merger, the Merger Agreement
and the other transactions, documents and instruments contemplated by
the Merger Agreement be and they hereby are, authorized and approved.
Termination of Stockholder Agreements.
WHEREAS, Section 7.3(l) of the Merger Agreement requires that all
agreements among the Corporation and any of its securityholders or
optionholders, or among and of the Corporation's securityholders or
optionholders, providing for registration rights, rights of first
refusal, rights of co-sale, rights relating to the voting of the
Corporation's securities, rights requiring the Corporation to obtain
the consent or approval of any such securityholders or optionholders
prior to taking or failing to take any action, shall be terminated
effective immediately prior to the Closing, except to the extent that
such provisions would otherwise cease to apply to the Corporation and
i2 securities upon Closing;
WHEREAS, the Corporation, certain officers and managers of the
Corporation, and certain holders of Preferred Stock entered into that
certain Second Amended and Restated Co-Sale and First Refusal
Agreement, dated October 30, 1997 (the "Co-Sale Agreement"), pursuant
to which the officers and managers that are parties thereto provided
the other parties with a right of first refusal to purchase any shares
proposed to be transferred by such officers and managers and a right of
co-sale in connection with any such transfer; and
<PAGE> 2
WHEREAS, the Corporation, certain holders of Common Stock, and certain
holders of Preferred Stock entered into that certain Voting Agreement,
dated October 30, 1997 (the "Voting Agreement"), pursuant to which the
parties thereto agreed to vote their respective shares for the election
to and removal from the SMART Board of Directors of persons designated
by certain groups, and the Corporation agreed to enter into
indemnification agreements with such director designees.
NOW, THEREFORE, BE IT RESOLVED, that effective immediately prior to and
conditioned upon the Closing (as defined in the Merger Agreement), the
undersigned holders who are party to the Co-Sale Agreement and the
Voting Agreement hereby acknowledge and agree that such Co-Sale
Agreement and the Voting Agreement shall be terminated and shall
thereafter have no further force or effect; provided, however, that in
the event that the Merger Agreement is terminated prior to the Closing,
this resolution shall have no force or effect and the each of the
aforementioned agreements shall continue in full force and effect in
accordance with their respective terms and conditions.
This Consent shall be filed with the Minutes of the proceedings of the
Board of Directors and stockholders.
This Consent may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 3
IN WITNESS WHEREOF, the party hereto has caused this Consent to be
executed as of the day and year identified below.
Date: By:
------------------- ------------------------------
Printed Name:
--------------------
IMPORTANT: The printed name on this Consent must correspond with the name as
written on the face of the certificate(s) representing the shares of Common
Stock of the Corporation held by the signator hereto.
<PAGE> 1
EXHIBIT 99.2
ACTION BY WRITTEN CONSENT
OF THE HOLDERS OF
SERIES A PREFERRED STOCK OF
SALES MARKETING ADMINISTRATION RESEARCH
TRACKING TECHNOLOGIES, INC.
-------------------------
The undersigned, being the holders of a majority of the issued and
outstanding shares of Series A Preferred Stock, par value $0.001 per share (the
"Series A Stock") of Sales Marketing Administration Research Tracking
Technologies, Inc., a Delaware corporation (the "Corporation"), pursuant to the
Bylaws of the Corporation and Section 228 of the General Corporation Law of the
State of Delaware (the "DGCL"), hereby adopt the following resolutions by
written consent:
Approval of Merger and Agreement and Plan of Reorganization.
WHEREAS, the Corporation has entered into that certain Agreement and
Plan of Reorganization, dated as of May 12, 1999, by and among the
Corporation, i2 Technologies, Inc., a Delaware corporation ("i2"), and
Intelligent Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of i2 ("Merger Sub"), in the form attached hereto as Exhibit
A (together with all exhibits and schedules attached thereto, the
"Merger Agreement"), providing for the merger of Merger Sub with and
into the Corporation upon the terms and conditions stated in the Merger
Agreement (the "Merger");
WHEREAS, the Board of Directors of the Corporation has adopted and
approved the Merger Agreement and Merger, and submitted the same to the
holders of capital stock of the Corporation for approval by executing
this Consent, among other written consents.
NOW, THEREFORE, BE IT RESOLVED, that the Merger, the Merger Agreement
and the other transaction documents and instruments contemplated by the
Merger Agreement be and they hereby are, authorized and approved.
Termination of Stockholder Agreements.
WHEREAS, Section 7.3(l) of the Merger Agreement requires that all
agreements among the Corporation and any of its securityholders or
optionholders, or among and of the Corporation's securityholders or
optionholders, providing for registration rights, rights of first
refusal, rights of co-sale, rights relating to the voting of the
Corporation's securities, rights requiring the Corporation to obtain
the consent or approval of any such securityholders or optionholders
prior to taking or failing to take any action, shall be terminated
effective immediately prior to the Closing, except to the extent that
such provisions would otherwise cease to apply to the Corporation and
i2 securities upon Closing;
WHEREAS, the Corporation and the holders of Preferred Stock of the
Corporation (the "Preferred Stock") entered into that certain Second
Amended and Restated Investors' Rights Agreement, dated October 30,
1997 (the "Rights Agreement"), which provides these holders, among
other things, registration rights, indemnification with respect to
registration, market stand-off obligations, rights to receive certain
financial statements from the Corporation, a right to inspect the books
and records of the Corporation, and
<PAGE> 2
a right of first offer to purchase new equity securities issued by the
Corporation after the date of the agreement;
WHEREAS, the Corporation, certain officers and managers of the
Corporation, and certain holders of Preferred Stock entered into that
certain Second Amended and Restated Co-Sale and First Refusal
Agreement, dated October 30, 1997 (the "Co-Sale Agreement"), pursuant
to which the officers and managers that are parties thereto provided
the other parties with a right of first refusal to purchase any shares
proposed to be transferred by such officers and managers and a right of
co-sale in connection with any such transfer; and
WHEREAS, the Corporation, certain holders of Common Stock, and certain
holders of Preferred Stock entered into that certain Voting Agreement,
dated October 30, 1997 (the "Voting Agreement"), pursuant to which the
parties thereto agreed to vote their respective shares for the election
to and removal from the Corporation's Board of Directors of persons
designated by certain groups, and the Corporation agreed to enter into
indemnification agreements with such director designees.
NOW, THEREFORE, BE IT RESOLVED, that effective immediately prior to and
conditioned upon the Closing (as defined in the Merger Agreement), the
Rights Agreement, the Co-Sale Agreement and the Voting Agreement shall
be terminated and shall thereafter have no further force or effect;
provided, however, that in the event that the Merger Agreement is
terminated prior to the Closing, this resolution shall have no force or
effect and the each of the aforementioned agreements shall continue in
full force and effect in accordance with their respective terms and
conditions.
Conversion of Series A Stock.
WHEREAS, pursuant to Section 4(b) of Article V of the Restated
Certificate of Incorporation of the Corporation, each share of Series A
Stock shall automatically be converted into shares of Common Stock at
the then effective rate immediately upon the date specified by written
consent of the holders of at least a majority of the then outstanding
shares of Series A Stock; and
WHEREAS, each share of Series A Stock is convertible into three (3)
shares of the Corporation's Common Stock, par value $0.001 per share.
NOW, THEREFORE, BE IT RESOLVED, that the undersigned holders of the
Series A Stock hereby elect to convert, immediately prior to, and
conditioned upon the Closing of, the Merger, each share of Series A
Stock into three (3) shares of Common Stock; provided, however, that in
the event that the Merger Agreement is terminated prior to the Closing,
this election to convert shall be null and void and have no force or
effect and such Series A Stock shall remain outstanding with the same
rights, preferences and privileges as the rights, preferences and
privileges they have as of the date hereof.
This Consent shall be filed with the Minutes of the proceedings of the
Board of Directors and stockholders.
This Consent may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 3
IN WITNESS WHEREOF, the party hereto has caused this Consent to be
executed as of the day and year identified below.
AUSTIN VENTURES IV-A, L.P.
By: AV Partners IV, L.P.
By:
------------------------------------
William P. Wood
Partner
AUSTIN VENTURES IV-B, L.P.
By: AV Partners IV, L.P.
By:
------------------------------------
William P. Wood
Partner
HAYDEN FAMILY PARTNERSHIP, LTD.
By:
------------------------------------
Billy H. Hayden
General Partner
<PAGE> 1
EXHIBIT 99.3
ACTION BY WRITTEN CONSENT
OF THE HOLDERS OF
SERIES B PREFERRED STOCK OF
SALES MARKETING ADMINISTRATION RESEARCH
TRACKING TECHNOLOGIES, INC.
-------------------------
The undersigned, being the holders of a majority of the issued and
outstanding shares of Series B Preferred Stock, par value $0.001 per share (the
"Series B Stock") of Sales Marketing Administration Research Tracking
Technologies, Inc., a Delaware corporation (the "Corporation"), pursuant to the
Bylaws of the Corporation and Section 228 of the General Corporation Law of the
State of Delaware (the "DGCL"), hereby adopt the following resolutions by
written consent:
Approval of Agreement and Plan of Reorganization.
WHEREAS, the Corporation has entered into that certain Agreement and
Plan of Reorganization, dated as of May 12, 1999, by and among the
Corporation, i2 Technologies, Inc., a Delaware corporation ("i2"), and
Intelligent Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of i2 ("Merger Sub"), in the form attached hereto as Exhibit
A (together with all exhibits and schedules attached thereto, the
"Merger Agreement"), providing for the merger of Merger Sub with and
into the Corporation upon the terms and conditions stated in the Merger
Agreement (the "Merger");
WHEREAS, the Board of Directors of the Corporation has adopted and
approved the Merger Agreement and Merger, and submitted the same to the
holders of capital stock of the Corporation for approval by executing
this Consent.
NOW, THEREFORE, BE IT RESOLVED, that the Merger be, the Merger
Agreement and the other transaction documents and instruments
contemplated by the Merger Agreement be, and they hereby are,
authorized and approved.
Termination of Stockholder Agreements.
WHEREAS, Section 7.3(l) of the Merger Agreement requires that all
agreements among the Corporation and any of its securityholders or
optionholders, or among and of the Corporation's securityholders or
optionholders, providing for registration rights, rights of first
refusal, rights of co-sale, rights relating to the voting of the
Corporation's securities, rights requiring the Corporation to obtain
the consent or approval of any such securityholders or optionholders
prior to taking or failing to take any action, shall be terminated
effective immediately prior to the Closing, except to the extent that
such provisions would otherwise cease to apply to the Corporation and
i2 securities upon Closing;
WHEREAS, the Corporation and the holders of Preferred Stock of the
Corporation (the "Preferred Stock") entered into that certain Second
Amended and Restated Investors' Rights Agreement, dated October 30,
1997 (the "Rights Agreement"), which provides these holders, among
other things, registration rights, indemnification with respect to
registration, market stand-off obligations, rights to receive certain
financial statements from the Corporation, rights to inspect the books
and records of the Corporation, and
<PAGE> 2
a right of first offer to purchase new equity securities issued by the
Corporation after the date of the agreement;
WHEREAS, the Corporation, certain officers and managers of the
Corporation, and certain holders of Preferred Stock entered into that
certain Second Amended and Restated Co-Sale and First Refusal
Agreement, dated October 30, 1997 (the "Co-Sale Agreement"), pursuant
to which the officers and managers that are parties thereto provided
the other parties with a right of first refusal to purchase any shares
proposed to be transferred by such officers and managers and a right of
co-sale in connection with any such transfer;
WHEREAS, the Corporation, certain holders of Common Stock, and certain
holders of Preferred Stock entered into that certain Voting Agreement,
dated October 30, 1997 (the "Voting Agreement"), pursuant to which the
parties thereto agreed to vote their respective shares for the election
to and removal from the Corporation's Board of Directors of persons
designated by certain groups, and the Corporation agreed to enter into
indemnification agreements with such director designees.
NOW, THEREFORE, BE IT RESOLVED, that effective immediately prior to and
conditioned upon the Closing (as defined in the Merger Agreement), the
Rights Agreement, the Co-Sale Agreement and the Voting Agreement shall
be terminated and shall thereafter have no further force or effect;
provided, however, that in the event that the Merger Agreement is
terminated prior to the Closing, this resolution shall have no force or
effect and the each of the aforementioned agreements shall continue in
full force and effect in accordance with their respective terms and
conditions.
Conversion of Series B Stock.
WHEREAS, pursuant to Section 4(b) of Article V of the Restated
Certificate of Incorporation of the Corporation, each share of Series B
Stock shall automatically be converted in shares of Common Stock at the
then effective rate immediately upon the date specified by written
consent of the holders of at least a majority of the then outstanding
shares of Series B Stock; and
WHEREAS, each share of Series B Stock is convertible into one (1) share
of the Corporation's Common Stock, par value $0.001 per share.
NOW, THEREFORE, BE IT RESOLVED, that the undersigned holders of the
Series B Stock hereby elect to convert immediately prior to and
conditioned upon the Closing of the Merger each share of Series B Stock
into one (1) share of Common Stock; provided, however, that in the
event that the Merger Agreement is terminated prior to the Closing,
this election to convert shall be null and void and have no force or
effect and the Series B Stock shall remain outstanding with the same
rights, preferences and privileges as the rights, preferences and
privileges they have as of the date hereof.
This Consent shall be filed with the Minutes of the proceedings of the
Board of Directors and stockholders.
This Consent may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 3
IN WITNESS WHEREOF, the party hereto has caused this Consent to be
executed as of the day and year identified below.
AUSTIN VENTURES IV-A, L.P. AUSTIN VENTURES IV-B, L.P.
By: AV Partners IV, L.P. By: AV Partners IV, L.P.
By: By:
---------------------------- ----------------------------
William P. Wood William P. Wood
Partner Partner
HAYDEN FAMILY PARTNERSHIP, LTD. IMPERIAL VENTURES, INC.
By: By:
---------------------------- ----------------------------
Billy H. Hayden Name:
General Partner Title:
BROBECK INVESTMENT COMPANY V, L.P. INTERNET CAPITAL GROUP
By:
----------------------------
By:
---------------------------- ----------------------------
Kenneth A. Fox
By: Vice President
----------------------------
Name:
Title:
TECHNOLOGY DEVELOPMENT CORP. KITYCHCO, INC.
By: By:
---------------------------- ----------------------------
Name: Name:
Title: Title:
IMPERIAL BANCORP
By:
----------------------------
Name:
Title:
SIGNATURE PAGE TO CONSENT OF SERIES B PREFERRED STOCKHOLDERS
<PAGE> 4
- ---------------------------- ----------------------------
DAVID H. CAROLL GRAYDON H. CRAIN
- ---------------------------- ----------------------------
ROBERT DEBERARDINE CARMELO M. GORDIAN
- ---------------------------- ----------------------------
RICHARD E. ANDERSON D. KENT LANCE, JR.
- ---------------------------- ----------------------------
JUANITA WILTZ DANIEL WILTZ
- ---------------------------- ----------------------------
BILLY ROSE JAMES MICHAEL PARRISH
- ----------------------------
CHARLES A. ANDERSON
SIGNATURE PAGE TO CONSENT OF SERIES B PREFERRED STOCKHOLDERS
<PAGE> 1
EXHIBIT 99.4
ACTION BY WRITTEN CONSENT
OF THE HOLDERS OF
SERIES C PREFERRED STOCK OF
SALES MARKETING ADMINISTRATION RESEARCH
TRACKING TECHNOLOGIES, INC.
-------------------------
The undersigned, being the holders of a majority of the issued and
outstanding shares of Series C Preferred Stock, par value $0.001 per share (the
"Series C Stock") of Sales Marketing Administration Research Tracking
Technologies, Inc., a Delaware corporation (the "Corporation"), pursuant to the
Bylaws of the Corporation and Section 228 of the General Corporation Law of the
State of Delaware (the "DGCL"), hereby adopt the following resolutions by
written consent:
Approval of Merger and Agreement and Plan of Reorganization.
WHEREAS, the Corporation has entered into that certain Agreement and
Plan of Reorganization, dated as of May 12, 1999, by and among the
Corporation, i2 Technologies, Inc., a Delaware corporation ("i2"), and
Intelligent Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of i2 ("Merger Sub"), in the form attached hereto as Exhibit
A (together with all exhibits and schedules attached thereto, the
"Merger Agreement"), providing for the merger of Merger Sub with and
into the Corporation upon the terms and conditions stated in the
Agreement (the "Merger");
WHEREAS, the Board of Directors of the Corporation has adopted and
approved the Merger Agreement and Merger, and submitted the same to the
holders of capital stock of the Corporation for approval by executing
this Consent, among other written consents.
NOW, THEREFORE, BE IT RESOLVED, that the Merger, the Merger Agreement
and the other transaction documents and instruments contemplated by the
Merger Agreement be and they hereby are, authorized and approved.
Termination of Stockholder Agreements.
WHEREAS, Section 7.3(l) of the Merger Agreement requires that all
agreements among the Corporation and any of its securityholders or
optionholders, or among and of the Corporation's securityholders or
optionholders, providing for registration rights, rights of first
refusal, rights of co-sale, rights relating to the voting of the
Corporation's securities, rights requiring the Corporation to obtain
the consent or approval of any such securityholders or optionholders
prior to taking or failing to take any action, shall be terminated
effective immediately prior to the Closing, except to the extent that
such provisions would otherwise cease to apply to the Corporation and
i2 securities upon Closing;
WHEREAS, the Corporation and the holders of Preferred Stock of the
Corporation (the "Preferred Stock") entered into that certain Second
Amended and Restated Investors' Rights Agreement, dated October 30,
1997 (the "Rights Agreement"), which provides these holders, among
other things, registration rights, indemnification with respect to
registration, a market stand-off obligations, rights to receive certain
financial statements from the Corporation, rights to inspect the books
and records of the Corporation, and a right of first offer to purchase
new equity securities issued by the Corporation after the date of the
agreement;
<PAGE> 2
WHEREAS, the Corporation, certain officers and managers of the
Corporation, and certain holders of Preferred Stock entered into that
certain Second Amended and Restated Co-Sale and First Refusal
Agreement, dated October 30, 1997 (the "Co-Sale Agreement"), pursuant
to which the officers and managers that are parties thereto provided
the other parties with a right of first refusal to purchase any shares
proposed to be transferred by such officers and managers and a right of
co-sale in connection with any such transfer;
WHEREAS, the Corporation, certain holders of Common Stock, and certain
holders of Preferred Stock entered into that certain Voting Agreement,
dated October 30, 1997 (the "Voting Agreement"), pursuant to which the
parties thereto agreed to vote their respective shares for the election
to and removal from the Corporation's Board of Directors of persons
designated by certain groups, and the Corporation agreed to enter into
indemnification agreements with such director designees.
WHEREAS, the Corporation and certain holders of the Series C Preferred
Stock of the Corporation entered into that certain Letter Agreement,
dated October 13, 1997 (the "Letter Agreement"), regarding board
observation rights and inspection rights in favor of such holders of
Series C Preferred Stock.
NOW, THEREFORE, BE IT RESOLVED, that effective immediately prior to and
conditioned upon the Closing (as defined in the Merger Agreement), the
Rights Agreement, the Co-Sale Agreement, the Voting Agreement and the
Letter Agreement shall be terminated and shall thereafter have no
further force or effect; provided, however, that in the event that the
Merger Agreement is terminated prior to the Closing, this resolution
shall have no force or effect and the each of the aforementioned
agreements shall continue in full force and effect in accordance with
their respective terms and conditions.
This Consent shall be filed with the Minutes of the proceedings of the
Board of Directors and stockholders.
This Consent may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
[Remainder of Page Intentionally Left Blank]
<PAGE> 3
IN WITNESS WHEREOF, the party hereto has caused this Consent to be
executed as of the day and year identified below.
AUSTIN VENTURES IV-A, L.P. AUSTIN VENTURES IV-B, L.P.
By: AV Partners IV, L.P. By: AV Partners IV, L.P.
By: By:
---------------------------- ----------------------------
William P. Wood William P. Wood
Partner Partner
SAP AMERICA, INC. IMPERIAL VENTURES, INC.
By: By:
---------------------------- ----------------------------
Name: Name:
Title: Title:
HAMBRECHT & QUIST CALIFORNIA INTERNET CAPITAL GROUP
By: By:
---------------------------- ----------------------------
Name: Kenneth A. Fox
Title: Vice President
TECHNOLOGY DEVELOPMENT CORP. KITYCHCO, INC.
By: By:
---------------------------- ----------------------------
Name: Name:
Title: Title:
CORNERSTONE INTEGRATED SERVICES, INC.
By:
----------------------------
Billy H. Hayden
Chief Operating Officer
SIGNATURE PAGE TO CONSENT OF SERIES C PREFERRED STOCKHOLDERS
<PAGE> 4
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P., its general partner
By: GS Advisors, Inc., its general partner
By:
-----------------------------------
Name:
Title:
GOLDMAN SACHS & CO. VERWALTUNGS GMBH
By:
-----------------------------------
Name:
Title:
GS CAPITAL PARTNERS II OFFSHORE, L.P.
By: GS Advisors II (Cayman), L.P., its general partner
By: GS Advisors II, Inc., its general partner
By:
-----------------------------------
Name:
Title:
THE GOLDMAN SACHS GROUP, L.P.
By: The Goldman Sachs Corporation, its general partner
By:
-----------------------------------
Name:
Title:
SIGNATURE PAGE TO CONSENT OF SERIES C PREFERRED STOCKHOLDERS
<PAGE> 5
- ---------------------------- ----------------------------
D. KENT LANCE, JR. CHARLES A. ANDERSON
- ---------------------------- ----------------------------
RICHARD E. ANDERSON GARY VOLLEN
- ---------------------------- ----------------------------
CHRISTINA MORGAN JAMES PICKREL
BILLY ROSE PARRISH AND JAMES MICHAEL PARRISH
- ----------------------------
BILLY ROSE PARRISH
- ----------------------------
JAMES MICHAEL PARRISH
SIGNATURE PAGE TO CONSENT OF SERIES C PREFERRED STOCKHOLDERS
