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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission file number 0 - 28030
i2 TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2294945
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
909 E. LAS COLINAS BLVD., 16TH FLOOR,
IRVING, TEXAS 75039
(Address of principal executive offices) (Zip code)
(214) 860-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
--- ---
As of May 7, 1999, the Registrant had outstanding 73,287,504 shares of Common
Stock, $0.00025 par value.
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i2 TECHNOLOGIES, INC.
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1999 3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1999 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II OTHER INFORMATION
Item 2. Changes in Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
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(unaudited)
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ASSETS
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
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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
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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
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Total current liabilities................................... 103,801 123,995
Deferred income taxes.................................................. 448 325
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Total liabilities........................................... 104,249 124,320
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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....................................... 197,958 202,231
Retained earnings................................................ 36,999 40,745
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Total stockholders' equity.................................. 234,975 242,994
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Total liabilities and stockholders' equity.................. $ 339,224 $ 367,314
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</TABLE>
See accompanying notes.
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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
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Three Months Ended March 31,
----------------------------------
1998 1999
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Revenues:
Software licenses ........................ $ 44,945 $ 73,996
Services ................................. 18,761 28,784
Maintenance .............................. 7,742 14,436
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Total revenues ...................... 71,448 117,216
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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
Acquisition-related expenses ............. -- 303
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Total costs and expenses ............ 67,260 112,254
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Operating income ............................... 4,188 4,962
Other income, net .............................. 1,442 1,318
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Income before income taxes ..................... 5,630 6,280
Provision for income taxes ..................... 2,167 2,534
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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.
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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
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Three Months Ended March 31,
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1998 1999
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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
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Net cash provided by operating activities ..... 26,255 21,891
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and equipment ........................ (2,262) (2,669)
Net purchases of short-term investments ..................... (59,711) (3,353)
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Net cash used in investing activities ......... (61,973) (6,022)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit ...................... 943 --
Net proceeds from exercise of stock options ................. 1,303 1,918
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Net cash provided by financing activities ..... 2,246 1,918
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Net increase (decrease) in cash and cash equivalents .............. (33,472) 17,787
Cash and cash equivalents at beginning of period .................. 127,433 61,491
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Cash and cash equivalents at end of period ........................ $ 93,961 $ 79,278
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</TABLE>
See accompanying notes.
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i2 TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of i2 Technologies, Inc. and its wholly-owned subsidiaries.
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>
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Three Months Ended March 31,
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1998 1999
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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
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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
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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>
3. SUBSEQUENT EVENT
On May 12, 1999, we announced that we have entered into an agreement to
acquire Austin-based SMART Technologies, Inc., a leading developer of
Internet-based customer relationship solutions. Pursuant to the agreement, we
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 our 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that involve risks and uncertainties, such as statements
concerning: growth and future operating results; developments in our markets and
strategic focus; new products and product enhancements; potential acquisitions
and the integration of acquired businesses, products and technologies; strategic
relationships; and future economic, business and regulatory conditions. Such
forward-looking statements are generally accompanied by words such as "plan,"
"estimate," "expect," "believe," "should," "would," "could," "anticipate," "may"
or other words that convey uncertainty of future events or outcomes. These
forward-looking statements and other statements made elsewhere in this report
are made in reliance on the Private Securities Litigation Reform Act of 1995.
The section below entitled "Factors That May Affect Future Results" sets forth
and incorporates by reference certain factors that could cause our actual future
results to differ materially from these statements.
OVERVIEW
We are the leading provider of electronic Business Process Optimization
("eBPO") software products, a new class of decision-intelligence software that
optimizes and integrates 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. We also provide services such as
consulting, training and maintenance related to these products.
Supply chain management encompasses the planning and scheduling of
manufacturing and related logistics, including demand forecasting, raw
materials procurement, work-in-process, distribution and transportation across
multiple enterprises. Customer management maximizes customer satisfaction and
optimizes return on sales, marketing and customer service investments. Product
lifecycle management optimizes the management of products from concept, design
and test, to phase-out and replacement. Inter-process planning balances
resource requirements among these processes to achieve enterprise-wide
efficiency and responsiveness. Strategic planning is used by senior executives
to perform competitive analyses, set company objectives and make long-term
finance, product portfolio and supply chain decisions.
We have enabled businesses to re-engineer their business processes to
realize significant 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 commerce, existing and new
businesses in a wide variety of vertical markets are seeking to capitalize on
this growth. Our software enables our 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that selected items in the unaudited Condensed Consolidated
Statements of Income bear to total revenues. The period to period comparisons of
financial results are not necessarily indicative of future results.
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<TABLE>
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Three Months Ended March 31,
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1998 1999
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Revenues:
Software licenses.................. 62.9% 63.1%
Services........................... 26.3 24.6
Maintenance........................ 10.8 12.3
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Total revenues............. 100.0 100.0
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Costs and expenses:
Cost of software licenses.......... 3.0 2.7
Cost of services and maintenance... 21.4 24.7
Sales and marketing................ 34.7 34.7
Research and development........... 25.7 23.9
General and administrative......... 9.3 9.5
Acquisition-related expenses....... -- 0.3
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Total costs and expenses... 94.1 95.8
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Operating income....................... 5.9 4.2
Other income, net...................... 2.0 1.1
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Income before income taxes............. 7.9 5.4
Provision for income taxes............. 3.0 2.2
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Net income............................. 4.8% 3.2%
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</TABLE>
REVENUES
Our revenues consist of software license revenues, service revenues and
maintenance revenues. Software license revenues consist of sales of software
licenses which are recognized in accordance with the American Institute of
Certified Public Accountants' Statement of Position ("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." We believe
we are currently in compliance with SOP 97-2, as modified by SOP 98-9. Service
revenues are primarily derived from fees for implementation, consulting and
training services and are recognized as the services are performed. Maintenance
revenues are derived from customer support agreements generally entered into in
connection with initial license
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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. We
currently derive substantially all of our revenues from licenses associated with
our RHYTHM suite of software products as well as related services and
maintenance. We expect that revenues from the expanded suite of RHYTHM products
will continue to account for substantially all of our revenues in the
foreseeable future. As a result of our dependence on the continued market
acceptance of business process optimization software applications, and
specifically the RHYTHM suite of products and enhancements thereto, there can be
no assurance that total revenues will continue to increase at the rates
experienced in prior periods, if at all.
SOFTWARE LICENSES. Revenues from software licenses increased 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 our 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 we believe that direct
sales will continue to account for a majority of software license revenues, our
strategy is to continue to increase the level of indirect sales activities. We
expect that sales of our software products through sales alliances,
distributors, resellers and other indirect channels will continue to increase as
a percentage of software license revenues. However, there can be no assurance
that our efforts to expand indirect sales will be successful. There can also be
no assurance that these relationships will continue in the future.
SERVICES. Revenues from services increased 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 our consulting organization as a result of the increased
demand for our products. The increase was also due to an increase in the use of
third-party consultants to provide implementation services to our customers
which has allowed us to more rapidly penetrate international markets. Service
revenues as a percentage of total revenues have fluctuated, and are expected to
continue to fluctuate on a period to period basis, based upon the demand for
implementation, consulting and training services.
MAINTENANCE. Revenues from maintenance increased 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. We expect that
maintenance revenues both in dollar amount and as a percentage of total revenues
will continue to increase.
CONCENTRATION OF REVENUES. We generally derive a significant portion of
our software license revenues in each quarter from a small number of relatively
large sales. For example, in the first quarter of 1999 and and the second, third
and fourth quarters of 1998, one or more customers each accounted for at least
15% of total software license revenues. In recent periods, these large
transactions have tended to be follow-on licenses with existing customers.
While we believe that the loss of any of these particular customers would not
seriously harm our business, operating results or financial condition, an
inability to consummate one or more substantial license sales in any future
period could seriously harm our operating results for that period.
INTERNATIONAL REVENUES. Our international revenues, primarily generated
from customers located in Europe, Asia and Canada, in the 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 our increased sales and marketing efforts
internationally, primarily in Europe. We believe that continued growth and
profitability will require further expansion of our sales in international
markets. In order to successfully increase the level of international sales, we
have utilized and will continue to utilize substantial resources to expand
existing international operations, establish additional international operations
and hire additional personnel.
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COSTS AND EXPENSES
COST OF SOFTWARE LICENSES. Cost of software licenses consists primarily
of (i) commissions paid to third parties in connection with joint marketing and
other related agreements, (ii) royalty fees associated with third-party software
included with sales of RHYTHM, (iii) the cost of user documentation and (iv) the
cost of reproduction and delivery of the software. Cost of software licenses was
$3.2 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. We expect to
continue to increase the number of our consulting, product support and training
personnel in the foreseeable future as a means to expand into different
geographic and vertical markets. To the extent that our license sales do not
increase at anticipated rates, the hiring of additional personnel could
seriously harm our gross margins.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel costs, commissions, office facilities, travel, promotional events such
as trade shows, seminars and technical conferences, advertising and public
relations programs. Sales and marketing expenses were $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 our direct sales
force, increased sales commissions as a result of higher revenues, continued
investment in strengthening our international selling presence, and increased
marketing and promotional activities as a result of our expanded suite of
products. We believe that the dollar amount of sales and marketing expenses will
continue to increase and sales and marketing expenses as a percentage of total
revenues may also increase from the levels attained in the three months ended
March 31, 1999.
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 our growing strategic product footprint. We expect that the
dollar amount of research and development expenses will continue to increase as
we continue to invest in developing new products, applications and product
enhancements for existing and new vertical markets.
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers. To
date, the establishment of technological feasibility of our products and general
release of such software have substantially coincided. As a result, software
development costs qualifying for capitalization have been insignificant, and
therefore, we have not capitalized any software development costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
the personnel and other costs of our finance, human resources, information
systems, administrative and executive departments and the fees and expenses
associated with legal, accounting and other requirements. General and
administrative expenses were
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$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 our business.
We expect that the dollar amount of general and administrative expenses will
continue to increase in the foreseeable future.
OTHER INCOME, NET
Other income, net consists primarily of interest income on short-term
investments and overnight repurchase agreements partially offset by interest
expense. Other income, net was $1.3 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 our cash, cash equivalents and short-term investment balances due to
the overall lower interest rate environment in 1999 as compared to the same
period in 1998.
PROVISION FOR INCOME TAXES
Our effective tax 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, our effective tax rate for the quarter ended March 31, 1999 would have
been 38.5%.
EARNINGS PER SHARE
Our 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: (i) the ongoing issuance
of common stock associated with stock option exercises; (ii) the issuance of
common shares associated with our employee stock purchase program; (iii) any
fluctuations in our stock price, which could cause changes in the number of
common stock equivalents included in the earnings per share, assuming dilution
computation; and (iv) the issuance of common stock to effect business
combinations should we enter into such transactions.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have primarily financed our operations and met our
capital expenditure requirements through cash flows from operations, long-term
borrowings and sales of equity securities. We 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. The increase in working
capital was 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. Cash flows from operations were $21.9 million and $26.3
million for the quarters ended March 31, 1999 and 1998, respectively. Operating
cash flows decreased primarily due to a decrease in the tax benefit from stock
option exercises and an increase in prepaids and other assets. The tax benefit
from stock option exercises is primarily the result of disqualifying
dispositions of stock acquired under our stock plans.
Accounts receivable, net of allowance for doubtful accounts, 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 and days' sales outstanding
can fluctuate for a variety of reasons including (i) the amount and timing of
revenues earned; (ii) our collection experience; (iii) the amount of receivables
generated from international customers which generally have longer payment terms
compared to customers in the U.S. and (iv) the number of large sales for which
some amounts may not be due upon execution of the contract. We believe that the
allowance for doubtful accounts at March 31, 1999 is adequate to cover any
collection difficulties with respect to accounts receivable. However, a
significant portion
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of our accounts receivable are derived from sales of large licenses, often to
new customers with whom we do not have a payment history. Accordingly, there can
be no assurance that the allowance will be adequate to cover any receivables
which are later determined to be uncollectible, particularly if one or more
large receivables 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, we did not have any material commitments for
capital expenditures.
We may in the future pursue additional acquisitions of businesses,
products and technologies, or enter into joint venture arrangements, that could
complement or expand our business. Any material acquisition or joint venture
could result in a decrease to our working capital depending on the amount,
timing and nature of the consideration to be paid.
In October 1998, we 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 us, $7.9 million of which were outstanding at March 31, 1999. This
facility contains customary restrictive covenants, including covenants requiring
us to maintain certain financial ratios. At March 31, 1999, there were no
borrowings outstanding under this agreement.
On May 12, 1999, we announced that we have entered into an agreement to
acquire Austin-based SMART Technologies, Inc., a leading developer of
Internet-based customer relationship solutions. Pursuant to the agreement, we
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 our 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.
We believe 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 our working capital and
capital expenditure requirements for at least the next twelve months. However,
any material acquisitions of complementary businesses, products or technologies
could require us to obtain additional equity or debt financing. There can be no
assurance that such financing will be available on acceptable terms, if at all.
YEAR 2000 ISSUES
Many older computer systems and software products currently in use are
coded to accept only two-digit entries in the date code field. These date code
fields will need to accept four-digit entries to distinguish 21st century dates
from 20th century dates. As a result, computer systems and/or software used by
many companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists in the software industry concerning
the potential effects associated with such compliance. Based on our assessment,
we believe that current versions of our software products are Year 2000
compliant. However, we believe some customers are running earlier versions of
the software products developed by acquired companies that are not Year 2000
compliant, and we have been encouraging such customers to migrate to current
product versions. Moreover, our products are generally integrated into
enterprise systems involving complicated software products developed by other
vendors. Year 2000 problems inherent in a customer's transactional software
programs might significantly limit that customer's ability to realize the
intended benefits offered by RHYTHM. We may in the future be subject to claims
based on Year 2000 problems in others' products, custom scripts created by third
parties to interface with our products or issues arising from the integration of
multiple products within an overall system. Although we have not been a party to
any litigation or arbitration proceeding to date involving our products or
services related to Year 2000 compliance issues, there can be no assurance that
we will not in the future be required to defend our products or services in such
proceedings, or to negotiate resolutions of claims based on Year 2000 issues.
The costs of defending and resolving Year 2000-related disputes, and any
liability for Year 2000-related damages, including consequential damages, could
seriously harm our business, operating results and financial condition.
We believe that Year 2000 issues may affect the purchasing patterns of
customers and potential customers in a variety of ways. Many companies are
expending significant resources to correct, patch or replace their current
software systems to achieve Year 2000 compliance. These expenditures may result
in reduced funds available to
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<PAGE> 13
purchase products such as those offered by us. Any of the foregoing could
seriously harm our business, operating results and financial condition.
Our plan to resolve Year 2000 issues includes assessment, remediation
and testing of internal management and other information systems. The completed
assessment indicates that a portion of our information systems could be
affected. As of March 31, 1999, remediation and testing of such systems was
substantially complete with an expected completion date of June 30, 1999;
however, system compliance testing will continue in conjunction with our overall
information systems initiatives throughout 1999. Areas being addressed include
reviews of our telephone and voice mail systems, security systems and other
office support systems. We have not deferred any information technology
initiatives as a result of our Year 2000 project. In the first quarter of 1999,
we incurred approximately $150,000 of expenses related to correction of Year
2000 issues. We currently expect 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.
We believe that an effective plan is in place to resolve the Year 2000
issues in a timely manner. Although we have not yet completed all necessary
phases of our Year 2000 program, we do not believe that material exposure to
significant business interruption exists as a result of Year 2000 compliance
issues or that the cost of remedial actions will seriously harm our business,
financial condition or results of operations. We currently have no contingency
plans in place in the event we do not complete all phases of our Year 2000
plan. We continue to evaluate the status of completion throughout the remainder
of 1999 to determine whether such a plan is necessary.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Numerous factors may affect our business and future results of
operations. These factors include, but are not limited to, the potential for
significant fluctuations in quarterly results; dependence on significant
individual sales; competition; management of growth; product concentration;
dependence on product line expansion; integration of acquisitions; potential
future acquisitions; international operations and currency fluctuations; risks
associated with strategic relationships; dependence upon key personnel;
intellectual property and proprietary rights; use of licensed technology;
complexity of software products; rapid technological change and new products;
dependence on technical and implementation personnel; Year 2000 compliance
issues; product liability claims; and volatility of stock price. The discussion
below addresses some of these factors. For a more thorough discussion of these
and other factors that may affect our business and future results, see the
discussion under the caption "Additional Factors That May Affect Future Results"
in our Annual Report on Form 10-K dated February 3, 1999.
OUR FINANCIAL RESULTS MAY VARY SIGNIFICANTLY FROM QUARTER TO QUARTER
Our operating results have varied significantly from quarter to quarter
in the past and will continue to vary from quarter to quarter in the future due
to a variety of factors, many of which are outside of our control. Factors that
could affect quarterly operating results include:
o Volume and timing of customer orders;
o Length of the sales cycle;
o Customer budget constraints;
o Announcement or introduction of new products or product enhancements
by us or our competitors;
o Changes in prices of our products and those of our competitors;
o Foreign currency exchange rate fluctuations;
o Mix of direct and indirect sales;
o Changes in our strategic relationships; and
o Changes in our business strategy.
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<PAGE> 14
Furthermore, customers may defer or cancel their purchases of our
products if they experience a downturn in their business or if there is a
downturn in the general economy. We will continue to determine our investment
and expense levels based on our expected future revenues. A significant portion
of our expenses is not variable in the short term and cannot be quickly reduced
to respond to decreases in revenues. Therefore, if our revenues are below
expectations, our operating results and net income are likely to be adversely
and disproportionately affected. In addition, we may reduce our prices or
accelerate our investment in research and development efforts in response to
competitive pressures or to pursue new market opportunities. Any one of these
activities may further limit our ability to adjust spending in response to
revenue fluctuations. Our revenues may not grow at historical rates in future
periods, or they may not grow at all. Because of this, we may not maintain
positive operating margins in future quarters.
WE EXPERIENCE SEASONAL FLUCTUATIONS IN OPERATING RESULTS
Historically, our operating results have tended to be strongest in the
fourth quarter of the year and to increase only modestly in the first quarter of
the following year. We believe that this seasonality is due to the calendar year
budgeting cycles of many of our customers and our compensation policy that
rewards sales personnel for achieving annual revenue quotas. In future periods,
we expect that these seasonal trends may cause first quarter operating results
to remain consistent with, or decrease from, the level achieved in the preceding
quarter.
OUR MARKETS ARE HIGHLY COMPETITIVE
The markets for our products are highly competitive. Our competitors
offer a variety of solutions directed at various segments of the supply chain as
well as the enterprise as a whole. Our competitors include:
o Enterprise resource application software vendors such as SAP AG,
PeopleSoft, Inc., Oracle Corporation and Baan Company, N.V. Each of
these vendors currently offers sophisticated enterprise resource
planning solutions that currently or may in the future incorporate
applications competitive with our products;
o Supply chain software vendors, including Manugistics Group, Inc. and
Logility, Inc.;
o E-commerce software providers, including BroadVision, Inc. and Open
Market, Inc.;
o Business application software vendors who may broaden their product
offerings by internally developing, or by acquiring or partnering
with independent developers of, advanced planning and scheduling
software;
o Corporate information technology departments which may develop their
own advanced planning and scheduling software; and
o Companies offering standardized or customized products for mainframe
and/or mid-range computer systems.
Historically, a number of enterprise resource planning vendors have
jointly marketed our products as a complement to their own systems. However, as
we attempt to increase our market share and expand our product offerings, and as
enterprise resource planning vendors expand their own product offerings, we
believe our relationships with these vendors will become more competitive.
Specifically, in 1997, our license and distribution agreement with SAP AG was
terminated, and SAP AG is currently marketing a suite of advanced planning and
scheduling products that may compete directly with RHYTHM. In addition, Oracle
has announced an advanced planning initiative. We believe that other enterprise
resource planning vendors are focusing significant resources on increasing the
functionality of their own planning and scheduling modules. At least two other
enterprise resource planning vendors have acquired independent developers of
advanced planning and scheduling software which compete with RHYTHM.
Relative to us, many of our competitors have:
o Longer operating histories;
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<PAGE> 15
o Significantly greater financial, technical, marketing and other
resources;
o Greater name recognition;
o A broader range of products to offer; and
o A larger installed base of customers.
In addition, we expect to experience increasing price competition as we
compete for market share. We may not be able to compete successfully with our
existing or new competitors. If we experience increased competition, it may have
a damaging effect on our business, operating results and financial condition.
WE FACE RISKS OF A DEVELOPING MARKET
We currently derive a substantial portion of our revenues from licenses
for supply chain management software and related services. However, we are
investing significant resources in developing and marketing broader
functionality for eBPO solutions, such as customer management, product lifecycle
management, inter-process planning and strategic planning. The market for this
broader functionality may not develop, competitors may develop superior products
or we may not develop acceptable solutions to address this functionality. Any
one of these events could seriously damage our business, operating results and
financial condition.
OUR MARKET EXPERIENCES RAPID TECHNOLOGICAL CHANGE
Enterprises are increasing their focus on decision support 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 in our market continue to make
rapid technological advances in computer hardware and software technology and
frequently introduce new products and enhancements. We must continue to enhance
our current product line and develop and introduce new products that keep pace
with the technological developments of our competitors. We must also satisfy
increasingly sophisticated customer requirements. If we cannot successfully
respond to the technological advances of others or if our new products or
product enhancements do not achieve market acceptance, our business, operating
results and financial condition could be seriously damaged.
WE MUST INTEGRATE OUR RECENT ACQUISITIONS
In April 1998, we acquired InterTrans Logistics Solutions Limited
("ITLS"). In May 1997, we acquired Think Systems Corporation ("Think") and
Optimax Systems Corporation ("Optimax"). In addition, we have acquired many
smaller businesses and products to help broaden and strengthen our product
portfolio. The success of these acquisitions will depend primarily on our
ability to:
o Retain, motivate and integrate the acquired personnel;
o Integrate multiple information systems; and
o Integrate acquired software with RHYTHM.
We may encounter difficulties in integrating our operations and
products with those of ITLS, Think, Optimax and others. We may not realize the
integration benefits we anticipated when we made these acquisitions. Our failure
to successfully integrate our operations and products with those of ITLS, Think,
Optimax and others could seriously harm our business, operating results and
financial condition.
WE MAY MAKE FUTURE ACQUISITIONS OR ENTER INTO JOINT VENTURES
In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. Management's negotiations of potential acquisitions or
joint ventures and management's integration of acquired businesses, products or
technologies could divert their time and resources. Any future acquisitions
could require us to issue dilutive equity securities, incur debt or contingent
liabilities, amortize goodwill and other intangibles, or write-off in-process
research and development and other acquisition-related expenses. Further, we may
not be able to integrate any acquired
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<PAGE> 16
business, products or technologies with our existing operations. If we are
unable to fully integrate an acquired business, product or technology, we may
not receive the intended benefits of that acquisition.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO SPECIAL RISKS
We derived approximately 35% of our total revenues in the first
quarter of 1999 from customers located outside of the U.S. Further,
approximately 20%, 31% and 22% of our total revenues in 1998, 1997 and 1996,
respectively, was derived from customers located outside of the U.S. To
continue our growth and profitability, we will need to expand our sales in
international markets. Further penetration of international markets will
require us to expand our existing foreign operations, to establish additional
foreign operations and to translate our software and manuals into additional
foreign languages. Expansion may be costly and time-consuming and may not
generate returns for a significant period of time, if at all. If we are unable
to expand our international operations or translate our software and manuals
into foreign languages in a timely manner, our further penetration of
international markets would be limited and our business, results of operations
and financial condition could be seriously damaged. Our international
operations are subject to risks inherent in international business activities,
including:
o Difficulty in staffing and managing geographically disparate
operations;
o Longer accounts receivable payment cycles in certain countries;
o Compliance with a variety of foreign laws and regulations;
o Unexpected changes in regulatory requirements;
o Overlap of different tax structures;
o Greater difficulty in safeguarding intellectual property;
o Import and export licensing requirements;
o Trade restrictions;
o Changes in tariff rates; and
o General economic conditions in international markets.
In particular, countries in the Asia-Pacific and Latin American regions
have recently experienced weaknesses in their currency, banking and equity
markets. These weaknesses could have a damaging effect on the demand for our
products, the U.S. dollar value of our foreign currency denominated sales and,
ultimately, our business, operating results and financial condition.
WE MAY EXPERIENCE CURRENCY FLUCTUATIONS
To date, our international operations revenues have primarily been
denominated in U.S. dollars. The majority of our international operations
expenses and some sales have been denominated in currencies other than the U.S.
dollar. Therefore, our operating results may be adversely affected by changes in
the value of the U.S. dollar. As our international operations expand, our
exposure to exchange rate fluctuations will increase as we use an increasing
number of foreign currencies. We have implemented limited hedging programs to
mitigate our exposure to currency fluctuations. Despite these hedging programs,
exchange rate fluctuations have caused, and will continue to cause, currency
transaction gains and losses. While these gains and losses have not been
material to date, they may have a damaging effect on our business, results of
operations or financial condition in future periods.
OUR SOFTWARE PRODUCTS MAY BE INCOMPATIBLE WITH NEW PLATFORMS
RHYTHM is a client/server solution which can operate on hardware
platforms from Digital Equipment (acquired by Compaq Computer), Hewlett-Packard,
IBM and Sun Microsystems and operating systems from Sun Microsystems and
Microsoft. RHYTHM can access data from most widely used SQL (structured query
language) databases, including Informix, Oracle and Sybase. If additional
hardware or software platforms gain significant market acceptance, we may be
required to port RHYTHM to those platforms in order to remain competitive. Such
platforms may not be architecturally compatible with RHYTHM's software product
design, and we may not be able to port RHYTHM to those additional platforms on a
timely basis, or at all. Any failure to maintain compatibility
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<PAGE> 17
with existing platforms or to port to new platforms that achieve significant
market acceptance would seriously damage our business, operating results and
financial condition.
OUR SOFTWARE IS COMPLEX AND MAY CONTAIN UNDETECTED ERRORS
Our software programs are complex and may contain undetected errors or
"bugs." Despite testing, bugs may be discovered only after our product has been
installed and used by customers. We have on occasion experienced delays in the
scheduled introduction of new and enhanced products because of bugs. Undetected
errors could result in adverse publicity, loss of revenues, delay in market
acceptance or claims against us by customers, any of which could seriously
damage our business, operating results and financial condition.
PENDING RELEASES OF NEW PRODUCTS MAY CAUSE PURCHASING DELAYS
Customers may delay their purchasing decisions in anticipation of new
or enhanced RHYTHM products or products of competitors. Delays in customer
purchasing decisions could seriously damage our business and operating results.
Moreover, significant delays in the general availability of new releases,
significant problems in the installation or implementation of new releases, or
customer dissatisfaction with new releases, could seriously damage our business,
operating results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning market risk is contained on Page 29 of our 1998
Annual Report on Form 10-K and is incorporated by reference to such annual
report.
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<PAGE> 18
i2 TECHNOLOGIES, INC.
PART II
ITEM 2. CHANGES IN SECURITIES.
From January 1 through March 31, 1999, we issued approximately 500,000
shares of our common stock to employees pursuant to exercises of stock options
(with exercise prices ranging from $0.01 to $6.06 per share) under our stock
plans. These issuances were deemed exempt from registration under Section 5 of
the Securities Act of 1933 in reliance upon Rule 701 thereunder. In addition,
the recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view
to, or for sale in connection with, any distribution thereof and appropriate
restrictive transfer legends were affixed to the share certificates issued in
each such transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------ ------------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
During the quarter ended March 31, 1999, we filed the
following Current Reports on Form 8-K:
We filed a Form 8-K dated February 3, 1999 (Item 7)
announcing a proposed offering of convertible securities.
We filed a Form 8-K dated February 22, 1999 (Item 7)
announcing the withdrawal of the proposed offering of
convertible securities.
After March 31, 1999, we filed the following Current Report on
Form 8-K:
We filed a Form 8-K dated April 16, 1999 (Item 4)
reporting a change in our certifying accountants.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
i2 TECHNOLOGIES, INC.
May 12, 1999 /s/ Sanjiv S. Sidhu
------------ -------------------------------------
(Date) Sanjiv S. Sidhu
Chairman of the Board and Chief Executive Officer
(Principal executive officer)
May 12, 1999 /s/ David F. Cary
------------ -------------------------------------
(Date) David F. Cary
Chief Financial Officer
(Principal finance and accounting officer)
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<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 79,278
<SECURITIES> 96,740
<RECEIVABLES> 124,173
<ALLOWANCES> 10,627
<INVENTORY> 0
<CURRENT-ASSETS> 322,517
<PP&E> 52,749
<DEPRECIATION> (24,117)
<TOTAL-ASSETS> 367,314
<CURRENT-LIABILITIES> 123,995
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 242,976
<TOTAL-LIABILITY-AND-EQUITY> 367,314
<SALES> 73,996
<TOTAL-REVENUES> 117,216
<CGS> 3,159
<TOTAL-COSTS> 112,254
<OTHER-EXPENSES> (1,318)
<LOSS-PROVISION> 2,221
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 6,280
<INCOME-TAX> 2,534
<INCOME-CONTINUING> 3,746
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,746
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
